North American grain transportation and NAFTA

by Teresa Acklin
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A Canadian transportation expert examines the North American Mid-Continent Corridor and shipment of grain to Mexico.

By Barry E. Prentice

   The North American Free Trade Agreement has inspired increasing interest in north-south trade corridors for shipping grain. Among the proposed routes is the Mid-Continent Corridor, currently more a notional idea with indistinct boundaries than a physical reality.

   This corridor encompasses the geographic area that is tributary to two major interstate highways in the United States, I-29 and I-35. Winnipeg, Manitoba, Canada, forms the northern gateway that links connecting highway and rail routes east and west in Canada and as far north as the Port of Churchill on Hudson Bay. The southern portion of the corridor passes through Mexican border communities in Tamaulipas, Nuevo Leon and Coahuila states and the Mexican ports on the Gulf of Mexico.

   The rainfall pattern in North America increases from west to east. The I-29/I-35 route traces out the 50-centimeter precipitation boundary. East of the boundary, maize and soybeans dominate agriculture, while to the west, dryland crops such as wheat and sorghum are more prevalent. Cropping patterns bend to the west in the northern plains and to the east in the deep south.

   Most of the rail lines lie to the east of the 50-cm precipitation boundary. West of this line there are very few north-south rail connections. If products are going to move north-south by rail, they will likely take the Mid-Continent Corridor.

Canadian-U.S. Grain Flows

   Figure 1 illustrates the major rail and vessel grain transportation routes among the NAFTA partners. From Winnipeg, grain shipments can move by rail either south through the Mid-Continent Corridor or to eastern or western seaports. Barge shipment to Mexico involves rail/truck shipments to transloading points on the Mississippi River, such as at Minneapolis, Minnesota, for shipment to the port of New Orleans, Louisiana.

   From the port of New Orleans, barge loads can move along the inland barge canal to Matamoros, Mexico. Alternatively, the barges may be transloaded to small ships for movement across the Gulf of Mexico to ports such as Veracruz and Tampico.

   Generally, the most direct route should have the lowest cost. Given that the rail distance to eastern and western seaports from Winnipeg is almost as long as the southern route to Mexico, the additional costs of marine transport from the seaports should make the east or west routes uncompetitive.

    The closest sea route from Winnipeg would be through the northern end of the Mid-Continent Corridor into Hudson Bay. But ironically, most Canadian grain moves by rail to eastern or western ports for shipment to Mexico. Only minor volumes are shipped along the corridor.

   Canada's Western Grain Transportation Act biased the route choice for grain exports because the government paid about two-thirds of the cost of moving product east or west by rail. Under the W.G.T.A., significant volumes of grain moved east to Thunder Bay to collect the W.G.T.A. subsidy before they subsequently returned and then went south to U.S. markets.

   More grain was predicted to go south with the 1995 demise of the W.G.T.A., and the change in freight rates is beginning to affect the direction of trade. In 1996, the Canadian Wheat Board for the first time shipped grain down the Mississippi River to New Orleans. The shipment of durum wheat, relatively small at 3,000 tonnes, was destined for Panama and Costa Rica. The success of this transaction suggests that future movements to Mexico could follow this route.

   A comprehensive 1996 analysis of truck-based traffic on the Mid-Continent Corridor examined cross-border truck movements. The study showed that traffic at the corridor's U.S.-Mexico southern end totaled 4,416 daily crossings, while the volume at the Canada-U.S. northern end was 739.

   The study also showed that truck traffic within the corridor greatly exceeds the movements through the length of the corridor. This is based on the fact that a significant part of the corridor's traffic is east-west flow that moves only a short distance north-south to find better east-west transportation connections.

   North-south traffic along the corridor is important, but certainly is not the mainstay of the route. For example, traffic that moves between Dallas and San Antonio, Texas, is several times the combined volume into Canada and Mexico.

   Grain moving across the Canadian-United States border involves short moves to adjacent areas. Canadian grain moves primarly to Minnesota and North Dakota, while grain entering Canada originates in Minnesota, North and South Dakota and Iowa. Flax and canola from Canada move south, while soymeal and maize move north.

   Along the I-35 segment of the corridor, grain tends to flow from north to south, and as the moves get longer, the proportion that moves by rail increases. In Texas, for example, 75% of the shipments from Iowa and Kansas are by rail, whereas only 5% of deliveries from Oklahoma are by rail.

   This pattern exists because the longer the distance, the lower the cost to ship by rail compared with truck. But this is not the full story; regulations on truck size, weights and configurations inhibit truck moves between jurisdictions within the United States and among the NAFTA partners.

   Weight limits are important because they affect the economics of long haul trucking. The higher the weight limits the more effectively trucks can compete with rail, but that competitiveness is eroded where regulations conflict.

   For example, the U.S. states of Iowa and Missouri have the most restrictive weight regulations with maximum gross vehicle weights of 36 tonnes. Mexico, where no effective enforcement exists, is the most liberal. Manitoba is the next most liberal, at about 62 tonnes.

   Besides differences in weight limits, various jurisdictions may have incompatible regulations regarding truck configurations. Very heavy trucks are permitted in Manitoba, but lighter U.S. trucks may not enter depending on their configuration. Although these trucks may meet all the height, weight and length restrictions, they may be prohibited — or be required to buy a “special permit” — depending on the position of the axles or the existence of a lift axle.

   Differences in truck weights and dimensions pose a great problem for coordinating movements. For example, a shipment of flax from Saskatoon, Saskatchewan, Canada, to a bakery in the U.S. state of Wisconsin had to be transshipped from a “B-train” truck, the most efficient shipping method across the Canadian prairies, to a rail car at Winnipeg because the B-train truck may not enter the United States. Obviously, the shipper is bearing a higher cost than would exist if the Mid-Continent Corridor had uniform vehicle regulations.

   Canadian carriers have separate truck fleets that meet the standards for U.S. movements. Canadian exporters also move grain to Mexico by truck, although cargoes generally are higher value pulse crops such as lentils and beans.

Grain Flows in Mexico

   Figure 2 on page 8 illustrates the movement of grain into Mexico by region of entry. Total grain imports have increased by about 55%, but just as interesting is the change in market share between surface and marine modes; the market share of truck and rail shipments increased to 50% in 1994 from 43% in 1991.

   In terms of individual points of entry, Mexico's Gulf ports of Veracruz and Tampico each handled about 1 million tonnes of grain in 1990. While Veracruz handlings have increased to about 1.8 million tonnes annually, Tampico grain handlings have declined to 400,000, which may reflect the impact of more overland competition in northern Mexico.

   Guayamas and Manzanillo are the major ports on the west coast at about 400,000 tonnes each. The border crossing at Laredo, Texas, U.S., is the dominant overland through point with more than 4.5 million tonnes of grain per year, more than double the volume in 1990.

   Trucks are used to move a high proportion of Mexico's grain from port because of insufficient rail cars. Often, the rail cars that are available are boxcars that are inconvenient to load.

   The modern history of the Mexican railway begins with the 1910-1920 revolution. A large amount of rolling stock, locomotives and track was destroyed in that period. Following the revolution, the foreign-owned rail lines were nationalized and amalgamated into the Ferrocarriles Nacionales (F.N.M.).

   A strong union movement also emerged from the revolution and has burdened the F.N.M. with overstaffing and low labor productivity. State ownership contributed to ineffective management and capital starvation, while poor equipment maintenance and obsolete yards created low quality, inconsistent service.

   Finally, the coordination of the four former railways was hampered by separate administrations and outdated communications. In more recent years, the expectation of privatization has added to the problem because the government has been reluctant to invest new capital.

   The F.N.M. was further hampered by rate setting that made it unprofitable and uncompetitive with trucking. Rail rates in Mexico were set on a distance basis, despite the terrain. Consequently, the per-kilometer rate for shipping grain from Veracruz to Mexico City, a distance of about 200 kilometers, was the same as the per-kilometer rate from Laredo, a distance of more than 700 kilometers.

   But the Veracruz route entails a very difficult climb from sea level to Mexico City with many tight corners, which limits trains to only some 35 cars. The Laredo route to Mexico City can be traversed with 90-car unit trains across a gently sloping plateau. The economic incentive for the railway was to move grain across the plateau, but of course, the shippers wanted to use the coastal route, which was much cheaper because of the shorter distance traveled.

   The weights that the F.N.M. can support also are more limited. Only the link from the border to Monterrey has standards equal to other North American railways. Beyond Monterrey, car weights are much lower, principally because of the bridges.

Old Problems, New Opportunities

   The current pattern of trade is a function of past political decisions. The history of grain transportation in western Canada was shaped by the public involvement that led to the construction of three transcontinental railways. The railways were only made viable by regulations and subsidies that guaranteed grain traffic would flow east and west over the Canadian lines. These policies also provided incentives for investment by the private grain sector at the eastern and western ports.

   Economic forces and new trade agreements, such as NAFTA and the World Trade Organization, provided impetus for the Canadian government to restructure the system. Since 1995, the Canadian government has privatized the Canadian National Railway, liberalized the rail regulations and eliminated the C$600 million (U.S.$436 million) annual transportation subsidy for grain movements under the W.G.T.A.

   Ultimately, these policies will affect the grain transportation system, but for now it retains significant inertia. Regulations continue to govern how grain is marketed. Regulated maximum rail freight rates and indirect subsidies, such as government-owned rail cars, encourage the use of the Canadian system.

   Although the southern route on the Mid-Continent Corridor might be shorter and perhaps less expensive, private grain interests in Canada have no interest in using the southern route because it bypasses their handling systems. Until the Canadian operations acquire facilities in the United States, it is not really in their interest to move grain on the Mid-Continent Corridor because they make more money moving east-west.

   Similarly, the Canadian railways are not terribly interested in handing off rail cars of grain after 160 km of movement for transshipment in the United States when they can carry similar loads 2,400 km to the Canadian seaports.

   CP Rail could move grain to Kansas City, Missouri, via the Soo Line, which may become a viable route in the future. Currently, however, commercial interests do not really favor north-south movements.

   Regulatory constraints still exist, and some of those relate to subsidies. The Canadian government owns a large fleet of rail hopper cars. They are provided without cost for Canadian routes, but users must pay a per diem fee if the cars are used to move products into the United States.

   No record exists that any of these rail cars have ever entered Mexico. The government ownership of the rail cars biases grain movements because the rail cars are essentially captive to the east-west routes.

   Shippers are still influenced by regulations on the rail tariffs for grain shipments. Canadian freight rates for grain are capped until 2000, and the east-west rates are quite a bit lower than the equivalent north-south moves. These commercial and regulatory factors will inhibit north-south moves of grain from Canada for the remainder of the decade.

   But new opportunities are emerging that will make the Mid-Continent Corridor more attractive. One of the most important changes is the privatization of the Mexican railway. In December, the Northeastern rail concession was purchased by T.M.M., which is the largest marine transportation company in Mexico, in a joint venture with the Kansas City Southern railroad.

   A single line can now move products from Kansas City to Mexico City. This would link conveniently with the Soo Line from Canada, handling off at Kansas City, and the same interchange would apply to the two other major U.S. grain-moving railroads, the Burlington Northern Santa Fe and the Union Pacific.

   The U.S. fleets still have to deal with the connecting railway at the Mexican border, but other Mexican rail concessions will be available. The Union Pacific was a bidder on the Northeastern concession and may be interested in other lines. (see related article.)

   The deregulation and privatization of the Mexican ports and grain handling facilities could lead to lower costs and improved service for importers. This favors sea routes over the Mid-Continent Corridor, but the Mississippi barge system will continue to be a strong competitor.

   The greatest hope for improving overland routes is with the U.S. Intermodal Surface Transport Efficiency Act (ISTEA). This act identified priority funding for routes designated as corridors, and the promise of additional funds for highway construction and maintenance immediately captured the attention of state governments in the United States. Work on the ISTEA to date has been mainly focused on identifying the constraints and qualifying the opportunities.

   The future also may hold significant technological advances, such as the “intelligent highway” notion that would streamline documentation and regulatory enforcement. Moreover, the development of consistent truck weight regulations — the so-called “NAFTA truck” — is just a matter of time.

   Barry Prentice is director of the Transport Institute at the University of Manitoba, Winnipeg, Canada. This article is adapted from his presentation at the 1997 Grain Elevator and Processing Society conference in Minneapolis.

   Regulatory differences between NAFTA members can impede grain movement efficiencies. Because the Canadian “B-train” truck at left, the most efficient transport mode through the Canadian prairies, does not conform to U.S. trucking regulations, Canadian flax shipped to a bakery in the U.S. state of Wisconsin had to be transshipped to a rail car at Winnipeg.