KANSAS CITY, MISSOURI, U.S. — Transportation has been in transition, if not outright turmoil, for the past couple of years amid controversial issues such as Precision Scheduled Railroading (PSR) for trains and Electronic Logging Devices (ELDs) and new Hours of Service (HOS) mandates for trucks. Throw in a severe winter, spring floods and trade issues with China and other countries and it adds up to significant challenges for shippers of agricultural products.
While PSR, ELD and HOS are most likely permanent changes to which both carriers and shippers have adapted to or will adapt to long term, the most significant short-term issue has been weather, and that has had the greatest impact on railroads. The worst of the spring flooding may be over, but the recovery is ongoing.
BNSF Railway and Union Pacific Railroad experienced track outages in Nebraska, Iowa and Missouri in March and early April.
“BNSF teams have made considerable progress in restoring service through areas of the Midwest impacted by unprecedented flooding,” the company said in an April 26 network update. Except for work on a stretch of track between Omaha, Nebraska, U.S., and St. Joseph, Missouri, U.S., which was expected to be completed in late May, BNSF service had been restored in the region, including the removal of a destroyed three-span bridge and construction of a new bridge over the Platte river in Nebraska in 29 days.
“Service performance is improving as train flows on the network continue to normalize,” the April 26 update said. “Velocity for both cars and trains has increased significantly during the past two weeks, terminal dwell has been reduced and the number of trains holding is down by more than 40% from the beginning of the month.”
Total trains held during the week ended April 25 improved 2% from a week earlier and was down 41% from March but was up 14% from April 2018, BNSF said. Car velocity (miles per day) improved 3% in the latest week and 15% from March but was down 6% from April 2018. Train velocity (miles per hour) improved by about 2% for the week and by 9% from March but was down 8% from a year ago.
At Union Pacific, recovery also was being made from the March floods. In an April 18 update, the railway noted that its bridge over the Platte river was expected to reopen in the latter part of May but that “all local customers in the impacted area are receiving rail service.” Work on other track locations was underway or completed, and ongoing conditions were being monitored.
After frequent and sometimes long rail delays of grain shipments during the winter months and renewed delays during the March floods, grain shippers finally noted a significant reduction in secondary freight costs in the last half of April. One Kansas City grain merchandiser commented, “For all intents and purposes, it was $1,000 (per car), and now it’s zero.”
During the worst of the rail service in March and April, some flour mills were forced to buy wheat on the spot market to replace rail cars that were four weeks or more behind scheduled delivery. The double buying supported the cash basis in Kansas City for a while. By late April, the late cars were arriving, and the basis began to recede as mills’ wheat pipelines again were replenished. In some cases recently, mills were seeking to sell some of the wheat they had double bought during the worst of the rail delays as other contracted wheat also was arriving. While there still were some delays, traders said the situation was much improved from a few weeks earlier.
The average shuttle train secondary rate for May was $125 per car below tariff for the week ended April 18, which was down $154 from a week earlier and down $817 from a year ago, the U.S. Department of Agriculture said in its Grain Transportation Report. However, average non-shuttle secondary railcars were $650 above tariff, up $313 from a week earlier. Combined tariff rail rates and fuel surcharges in April for unit and shuttle trains of grain were flat to up 5% from a year ago. The cost of shipping a unit train of wheat from Wichita, Kansas, U.S., to New Orleans was $4,540 per car, or $1.27 per bushel, flat with a year earlier. Shipping a shuttle train of wheat from Wichita to the Texas Gulf cost $4,296 per car, or $1.16 per bushel, up 3%.
Year-to-date rail deliveries of grain to ports totaled 140,174 carloads through April 17, down 9% from the same period a year earlier, the USDA said. Year-to-date deliveries to the Mississippi Gulf were up 102%, to the Texas Gulf were down 27%, to the Pacific Northwest were down 12% and to the Atlantic and East Gulf were even with a year ago.
Overall, the Association of American Railroads (AAR) reported rail traffic during the week ended April 20 down 2.4% from the same week a year ago, with carloads at 262,011, down 0.9%, and intermodal at 264,130, down 3.9%. For the year to date as of April 20, total rail traffic was down 1.8% from the same period last year, with carloads at 3,969,837, down 2.7%, and intermodal units at 4,266,729, down 1%.
Of the 10 carload segments tracked by the AAR, all were down from a year ago except petroleum and petroleum products, which had a year-to-date total of 200,453 cars, up 24% from the same period last year. The segments showing the largest declines from a year ago were coal at 1,241,965 carloads, down 6.4%, and grain at 345,738 carloads, down 5.1%.
Precision Scheduling moving forward
In addition to challenges from wintry weather and spring floods, some rail carriers have added the controversial “Precision Scheduled Railroading” (PSR), an operating model focused on efficiency and cost reductions, into the mix. In a review of PSR in late December 2018, the USDA noted that proponents believe PSR can deliver greater efficiency and service to rail customers. Opponents contend that it results in decreased service “in the form of arbitrary reductions in delivery and pulling of trains from facilities, as the result of major reductions in locomotives, crews and customer service personnel.” Opponents also contend that PSR primarily is designed to appease shareholders seeking higher profits rather than to better serve customers.
But the bottom line, as stated by the USDA, was that “PSR reflects a broader trend in the railroad industry to reduce operating ratios.”
PSR was the brainchild of the late E. Hunter Harrison, who implemented it while at Illinois Central, Canadian National and Canadian Pacific before joining CSX in March 2017 and immediately announcing that CSX also would implement the new model. Harrison died unexpectedly in December 2017. CSX met with extreme customer dissatisfaction during the implementation of PSR that resulted, in part, in greater oversight by the Department of Transportation’s Surface Transportation Board (STB). While metrics for CSX improved significantly in 2018 (a year into PSR), indicating improved rail service, the USDA noted several limitations to the data that in some cases could show up as improved metrics for the railroad but in fact mean worse service for specific shippers.
Union Pacific Railroad began a conversion to the PSR in October 2018, and Norfolk Southern Railway and Kansas City Southern Railway also are in the early stages of transitioning to the PSR operating model.
A key to a railroad’s transition to PSR or any significant operational changes, the USDA said, is the need to “communicate with shippers long before changes happen,” which was a major issue during the CSX transition. While “Wall Street” loves PSR because it improves the bottom line of railroads’ balance sheets, many shippers remain opposed to the model, noting that it hasn’t really been tested during prolonged severe weather or other stresses to the system. The STB continues to closely monitor railroads that already have transitions or are in the process.
Strong demand seen for truck freight
Midwest floods also impacted truck movement at a time of high truck demand. Numerous roads and interstate highways were closed briefly, with a portion of Interstate 29 in Iowa near the Missouri border still closed in late April. But indications are the impact of flooding on truck freight costs were minimal.
Demand for truck freight was strong throughout 2018 and was expected to remain strong in 2019, although at a slower pace.
The American Trucking Associations’ (ATA) seasonally adjusted for-hire truck tonnage index in 2018 was up 6.7% from 2017, the largest annual increase since 1998.
But the gauge has begun to waver in 2019. After rising almost steadily since October 2016, the ATA truck tonnage index declined in the past two months, though still up from a year ago. The index dropped 2.3% in March and was down 1.5% in February. The March index was up 1.6% from March 2018, and February was up 3.9% from a year ago, while total first-quarter tonnage was up 3.8% from a year earlier.
“In March, and really the first quarter in total, tonnage was negatively impacted by bad winter storms throughout much of the U.S.,” said Bob Costello, chief economist at the ATA. “While I expected tonnage to moderate in the first quarter, the late Easter holiday and the winter storms made it worse. It is likely that tonnage will improve in the second quarter, although year-over-year gains will be significantly below the 2018 annual increase of 6.7%.”
Another key metric for the trucking industry is driver availability. A nation-wide driver shortage was exacerbated by the HOS and ELD mandates early in 2018 that put tighter restrictions on truckers’ driving times and in effect meant more trucks and more drivers were needed. The ATA has maintained that a long and significant truck driver shortage has existed as a large number of current drivers “age out” and the younger generation is less inclined to take of the rigors of over-the-road trucking.
The Bureau of Labor Statistics in a March report titled “Is the U.S. labor market for truck drivers broken?” challenged the ATA’s portrayal of a longstanding trucker shortage. The Bureau concluded:
“The overall picture is consistent with a market in which labor supply responds to increasing labor demand over time, and a deeper look does not find evidence of a secular shortage. We modeled exit from and entry into the occupation, finding that occupational migration among drivers is similar in magnitude to that of other blue-collar occupations. Perhaps most surprising, a basic model of moving between occupations shows that truck drivers have lower occupational migration than other workers with similar education levels. This suggests that, in the aggregate, the labor market for truck drivers works about as well as the labor markets for other blue-collar occupations.”
Costello of the ATA responded, “Unfortunately, in their article (the authors) demonstrated some basic misunderstandings about the trucking industry generally and how we at ATA and in the industry discuss the driver shortage.”
One point Costello made was that it was the “ATA’s longstanding contention that at the heart of the shortage is the need for qualified drivers. Unlike other ‘blue collar’ jobs the authors compare truck drivers to — motor carriers cannot simply hire anyone to do the job, there are many barriers to entry for new drivers: age requirements, CDL testing standards, strict drug and alcohol testing regimes and, perhaps most importantly for many fleets safe and clean driving records.”
He noted that carriers have enough applicants for their positions, but not enough qualified applicants.
The ATA in March released data showing driver turnover during the fourth quarter of 2018 for fleets with more than $30 million in annual revenue was at a 78% annualized rate, down 9 percentage points from the third quarter and down 10 points from the same period in 2017, with the full 2018 rate at 89%, up 2 points from 2017. At smaller carriers, the fourth-quarter turnover rate was at 77%, up 5 percentage points from the third quarter but was down 3 points from the fourth quarter of 2017 and for the year was 73%, the lowest since 2011.
Turnover for less-than-truckload fleets was unchanged at 10% in the fourth quarter and averaged 11% in 2018, the ATA said.
“The driver market continues to be tight, but not quite as much as the middle of 2018,” Costello said. “There can be various reasons for this — either freight volumes are decelerating and as such fleets pulled back on recruiting efforts or fleets’ efforts to increase pay are paying dividends in the form of reduced turnover. The truck probably lies somewhere in between, but it is a trend that bears watching.”
Adding to costs for both rail and truck freight carriers, and usually passed on to shippers in the form of fuel surcharges, are rising diesel fuel prices. The U.S. Energy Information Administration reported the average on-highway diesel fuel price at $3.169 per gallon as of April 28, up 9.2¢ a gallon, or 3%, since the first of the year and up 3.6¢ from a year ago. But prices have risen 20.4¢, or 7%, from a one-year low of $2.965 per gallon in early February. Diesel prices have tended to follow crude oil prices, which in late April were near six-month highs.
While the diesel price has the greatest impact on truck carriers, railroads also adjust fuel surcharges based on the EIA on-highway average diesel fuel price. The average fuel surcharge by Class 1 railroads in April was 13¢ per mile per rail car, unchanged from March and from April 2018 but up 8¢ from the three-year April average.
Fuel changes coming for ocean freight
Another fuel issue for ocean freight is fast approaching. The International Maritime Organization, under Annex VI of the International Convention for the Prevention of Pollution from Ships, mandates that ocean-going vessels reduce the amount of sulfur emissions from marine fuel to 0.5% from 3.5% (by weight) by Jan. 1, 2020.
“Some global media sources have called the new IMO 2020 mandate the biggest change in fuel regulations since the elimination of leaded gasoline,” the USDA said.
The Department of Energy expects shifts in petroleum pricing to begin in mid- to late-2019 and that the impact on prices “will be most acute in 2020.” Currently ocean carriers and shippers are uncertain how the mandate will impact freight costs, in part because there is concern about sufficient supply of the new fuel. One estimate puts the added cost at $10 billion to $15 billion annually. As with rail and truck fuels costs, those higher prices almost certainly will be passed on to shippers. Carriers are beginning to add separate fuel surcharges in contract negotiations, the USDA said.
While trade issues and ample global supplies limiting U.S. grain exports have slowed barge movement of grain, floods and highwater levels also have had an impact.
“Intense spring storms with heavy precipitation, combined with snowmelt runoff, continue to cause flood-related navigation disruptions for most of the nation’s river systems,” the USDA said in its April 18 Grain Transportation Report. “For the week of April 13, only two Mississippi river locks (Locks and Dam 26 and 27) reported any grain barge traffic. Year-to-date total grain shipments are 27% lower than the three-year average. Spot barge rates of export grain from major originating points have been declining for three weeks as many shippers are not looking to buy barge services with the constant highwater conditions. In addition, barge operators are reporting that some river elevators are not buying grain, as on-going flood conditions can result in damage to grain stored near the river.”
Because of the sheer size of the Mississippi river and its tributaries, high-water disruptions often linger for weeks if not months as the excess water makes its way to the Gulf.
Barge freight rates at St. Louis were 283% of tariff (1976 = 100%) as of April 16, down 47% from a year earlier, according to the USDA. The rates for May and July were at 300% over the benchmark index.
Ocean freight rates for bulk grains were down from January and from a year ago. The rate for grain shipped from the U.S. Gulf to Japan was $42 per tonne as of April 11, down 11% from Jan. 1 and down 4% from a year ago, the USDA said. The rate for shipping from the Pacific Northwest to Japan was $23.50 per tonne, down 4% from the first of the year and down 3% from a year ago.
“The relatively low rates were due to slow bulk trade caused partly by closure of mines in Brazil, which impacted iron ore supply,” the USDA said. “Coal imports in China are also generally low during April.”
Despite the impact of sharply lower soybean exports to China, aggregate marketing year exports of U.S. wheat, corn and soybeans were down only 8% from a year earlier as of April 11, according to the USDA. Year-to-date exports of all wheat were 19,301,000 tonnes, down 2% from the same period a year earlier, corn exports of 32,248,000 tonnes were up 16% and soybean shipments of 31,364,000 tonnes were down 26%. With only a month remaining in the wheat marketing year, wheat exports had nearly “caught up” after lagging the USDA’s forecast earlier in the year.
Mexico remains by far the largest export market for U.S. corn, with commitments equaling 32% of total export sales as of April 11, with sales to Mexico up 16% from a year earlier despite trade issues.
Mexico also has narrowly become the largest buyer of U.S. wheat, edging out the Philippines and Japan so far this marketing year. Export sales of 3,060,000 tonnes of wheat to Mexico were up 7% from a year ago as of April 11, with sales to the Philippines at 3,050,000 tonnes, up 19%.
Despite the trade war and higher tariffs, China remains the largest buyer of U.S. soybeans, although year-to-date purchases of 12,922,000 tonnes are down 55% from a year ago. China accounted for 29% of U.S. soybean export sales, well down from 53% of the total a year ago. Mexico is the second largest buyer of U.S. soybeans.