KANSAS CITY, MISSOURI, US — Among many daunting challenges currently facing the grain industry and food ingredient buyers and sellers, logistics remain at the top of the list for many, and it’s been going on for more than two years. Just as it seemed the impact from COVID was winding down in most countries, Russia invaded Ukraine and another round of challenges emerged, not the least of which is soaring fuel prices, and COVID is back in the picture especially affecting shipments from China.
Conditions in the trucking industry are showing signs of improvement since the onslaught of COVID, which is critical since trucks transport more than 70% of US freight and are responsible for nearly all “last mile” deliveries. Railroads have been challenged by labor shortages and other factors that have seriously hurt performance with grain deliveries running weeks behind schedule in the Southwest hard red winter wheat region. The rail industry has experienced a major merger in the past year and averted a prolonged strike in Canada with government intervention. Conditions in the ocean freight market are mixed. Rates have come down from 2020-21 highs but remain well above pre-COVID levels. Fewer ships are waiting at West Coast ports, but port congestion remains a major problem despite government attempts to improve it. Port situations in China are deteriorating due to new COVID-related shutdowns. And a major union contract is nearing expiration on the US West Coast.
One key fundamental affecting all modes of transportation is fuel prices. The Russia-Ukraine war has had a dramatic impact on crude oil and petroleum product prices globally and in the United States, even if the United States received only about 3% of its crude from Russia. Spot prices of West Texas Intermediate crude oil in Cushing, Oklahoma, US, as reported by the Energy Information Administration of the US Department of Energy peaked at $123.64 per barrel on March 8, up more than 100% from a year earlier. Prices have since dropped as low as $94.85 on March 16 before climbing back above $100 in early April. The March 31 announcement by President Joe Biden that an average of 1 million additional barrels per day would be released from US oil reserves for the next six months was welcomed by fuel users.
Weekly average on-highway diesel prices reported by the EIA peaked at $5.25 per gallon the week of March 14, up 67% from a year earlier. Prices in the week of April 11 had pulled back to an average of $5.07 per gallon, still up 62% from a year ago.
Higher fuel costs are passed on to shippers by carriers. In the trucking industry, the surcharges are set by individual carriers and can vary widely. In the rail industry, the surcharges are based on the EIA weekly average on-highway diesel price and are more formalized but still vary and are adjusted monthly. Railroad fuel surcharges in April are zero for Norfolk Southern, 39¢ per car per mile for Burlington Northern and Union Pacific, 45.45¢ for Canadian National, 48¢ for Kansas City Southern, 51¢ for CSXT, and 54¢ for Canadian Pacific. The Union Pacific Railway posted fuel surcharge for April at 39¢ per mile per car, for example, compared with 15¢ in April 2021, and will be 61¢ in May compared with 22¢ in May 2021.
Fuel surcharges in April ranged from zero to $529 per car for unit train shipments of wheat and from zero to $624 per car for shuttle trains depending on route, the US Department of Agriculture said in its April 7 Grain Transportation report. Rail freight rates for wheat in April ranged from $3,658 to $7,290 per car for unit trains and from $4,193 to $6,670 per car for shuttle trains. Fuel surcharges are added to the freight rate per car and in some cases added about 15¢ per bushel to the cost of shipping wheat. Total costs (freight plus fuel surcharge) of shipping wheat by rail ranged from 99¢ per bushel for one of the shortest routes (Grand Forks, North Dakota, US, to Duluth-Superior) to $1.97 per bushel for one of the longest routes (Wichita, Kansas, US, to Los Angeles, California, US), both for unit trains.
Improvement in truck freight
The pandemic exposed weak spots of an already distressed trucking industry afflicted by labor shortages, low salaries, and poor worker retention. After two years of pandemic-related setbacks, the industry is still managing waves of volatility, but data indicate conditions are improving.
“We’ve been looking at all the stats in the data and are starting to see real evidence that demand is subsiding, and all things point to a little bit of a relief,” said Jim Ritchie, president and chief executive officer of Redstone Logistics.
When the pandemic started, consumers were managing an influx of income due to stimulus payments and not buying difficult-to-obtain or shuttered services, resulting in more spending power. But many products consumers had easy access to purchase were items that needed to be shipped and delivered, which added pressure to a beleaguered distribution system managing COVID mitigations and labor shortages. As COVID regulations relaxed, people started turning back to spending money on services, Ritchie said.
Another factor pressuring demand was excess supplies. During the pandemic, companies took to overstocking inventories to safeguard against erratic delivery schedules. But today, Ritchie said companies aren’t moving as many goods, and the overstocked inventories have eased pressure off supply lines.
Before the pandemic started, the American Trucking Associations estimated the industry was short nearly 61,000 truck drivers. In April 2020, a report from the US Department of Labor showed the trucking industry lost almost an additional 90,000 drivers. Fewer drivers on the road to meet the surging demand for delivered goods led to excessive surcharges and delayed deliveries.
But for the past 12 months, Ritchie said employment in the trucking industry has been steadily climbing and now has reached pre-pandemic levels. The increased capacity to manage delivered goods not only eased supply chain strain, but it also cut distribution rates.
“One way to keep the added assets (truck drivers) busy is to lower delivery prices,” Ritchie said.
A year ago, the average rate on a contract basis was $2.50 per mile. Last month, that rate jumped to nearly $3 per mile. But Ritchie said data indicates the rate will drop close to 10% by summer and will continue to fall, and price declines will be noticed most in the spot market, which is market-driven and generally sits above the contract market at a 13% differential.
Shorter contract terms also have helped carriers manage surging transportation fees. Rather than using the standard practice of locking in rates once a year, Ritchie said companies have opted for shorter terms of six months or even 90 days during volatile periods.
“This gives them the ability to get the capacity they need so they can get the product delivered without forcing them into the spot market, which is 13% higher,” he said.
Even with more drivers providing more capacity to deliver goods at a lower rate, Ritchie said he does not expect prices to return to pre-pandemic levels mainly because of an overdue increase in drivers’ salaries.
“Over the last 25 years, we’ve seen how salaries in other blue-collar industries have maintained pace with inflation, but driver wages hadn’t, and that just exacerbated the driver shortage,” he said.
According to the US Census Bureau, full-time truck drivers in 2019 earned a median salary of $43,252 annually. This falls 8% below the average salary of $47,016 for other occupations. And unlike many other occupations, truck drivers are bound by stringently enforced regulations, which restrict their working hours and limit their ability to receive overtime pay. In 2020, the US Bureau of Labor Statistics listed the median salary for truck drivers at $47,130. Recently, Walmart on a blog post announced it was investing in its private fleet, and new truck drivers had the opportunity to make up to $110,000 during their first year.
With carriers increasing salaries and other benefits packages to attract and sustain their fleets, distribution prices may come down in other areas, but it likely won’t come out of the raised salaries.
“Once you impact the wages of an individual, you can’t take that back as the market drops,” Ritchie said.
Another feature keeping costs elevated is the unpredictable price of crude oil. Ritchie said he believes carriers are forced to keep fees somewhat inflated to protect against the wild swings of oil values.
Despite the volatile oil prices and the continued difficulties from the pandemic, the trucking industry looks to be bolstering its weak spots. Fleets have added vehicles, workers have been hired, salaries have been increased, loads are being hauled, and softening demand may translate to lower prices. But the industry isn’t out of the woods, yet. Ritchie said the Dow Jones transportation index recently had the biggest drop ever recorded in its history, which ignited concerns of a potential freight recession.
Struggling with rail service
Grain shippers continued to struggle with poor service from some railroads. The National Grain and Feed Association in a March 24 letter (along with letters from several other groups) described “significant rail service disruption” including facilities that had been unable to ship out or receive grain by rail. Recent Surface Transportation Board data (as of March 23) showed train speeds for grain across four major US Class 1 railroads were down 2% from prior years, origin dwell times were up 60% and the number of unfilled grain car orders were up 152%, the NGFA noted. Premiums, meanwhile, were moving significantly higher.
US Secretary of Agriculture Tom Vilsack in a March 30 letter to the STB requested “urgent action to improve rail service for agricultural commodities in general, and particularly for critical feed markets,” and asked the STB to obtain railroads’ plans to improve service and request weekly updates to ensure follow through by the railroads among other things.
The STB announced it will hold public hearings April 26-27 to address the complaints, with executives from BNSF, CSX, Norfolk Southern and Union Pacific directed to attend, with invitations also to CN, KC Southern and CP.
In a March 30 response to the NGFA, Katie Farmer, president and CEO of BNSF, acknowledged that BNSF was “not currently meeting our customers’ service expectations, and we are undertaking aggressive measures to drive step-level improvements.” Those plans included hiring more employees, adding more power (locomotives) and better managing car inventory.
The number of grain carloads originated year-to-date (through March 26) totaled 281,407, down 7% from the same period last year, according to data from the Association of American Railroads. Year-to-date carloads of grain delivered to ports totaled 117,312, down 12% from last year, the USDA said, with deliveries to the Texas Gulf down 38% compared with deliveries to the Mississippi Gulf down 6%, Pacific Northwest down 7% and Atlantic/East Gulf down 6%.
Ocean freight still dicey
Port congestion continues to garner attention and remains a major hindrance for both exporters and importers, as well as for moving products from ports once offloaded from ocean-going vessels, which includes by truck and train.
“Dry bulk is looking for new direction,” said Jay O’Neil, owner of HJ O’Neil Commodity Consulting. “Freight markets seem to have run up too fast and too far on initial concerns over shipments from the Black Sea. We now find that Russian shipments of crude oil and wheat are continuing despite the war. Ukraine remains a big question mark on production and shipments, but they did manage to execute some March exports. The overall freight outlook remains bumpy.”
He cautioned that Russia and Ukraine should not be put “in the same boat” concerning grain and crude oil shipments.
“The world has not and will not lose Russian wheat and crude oil,” O’Neil said.
But Ukraine has serious issues, he added, noting concerns about replacing corn and oilseed exports from Ukraine.
The disruption to exports from the Black Sea region has added “ton miles” as importers buy grain from origins further away, he noted, and the spike in crude oil prices also has increased ocean shipping costs. Those two factors “will keep dry bulk rates relatively high,” he said.
Further, there is not a surplus of dry bulk ships available to move grain from longer distances, O’Neil said. New bulk ship orders are backed up about two years, with shipbuilders’ focus on ships to move containers, liquid natural gas and trailers. The container industry is building ships “to beat the band,” he said. “We don’t need more container ships; we need better logistics. Adding container ships doesn’t get you through the port any faster.”
“Container markets and logistics continue to show slow but gradual improvement,” O’Neil said. “Fuel costs and labor issues remain the big concerns. China lockdowns are impacting shipments. US West Coast labor negotiations remain a big concern.”
O’Neil said the “big elephant in the room” is the contract between the International Longshore & Warehouse Union (dock and warehouse workers on the West Coast of the United States and Canada, but only the US contract is expiring) and the Pacific Maritime Association (cargo carriers, terminal operators and stevedores) that expires July 1. The current contract is a three-year extension of the previous contract. The union rejected a one-year contract extension in November. Major points of contention include compensation and port automation. Matters are complicated by COVID, port congestion and a backdrop of record-high earnings by ocean freight carriers. The combined ports of Los Angeles and Long Beach handled about 40% of US inbound containers in 2021.
“There will probably be tough negotiations,” O’Neil said. “May is a key month.
“If I were an importer, I would want to take some protection, build up some inventory.”
It should be noted that only about 10% of US waterborne grain exports move by container, but many other ingredients and materials used by food manufacturers arrive in containers, and many ingredients such as dry dairy products are exported in containers.
As has been the case since COVID began, the overall logistics picture remains clouded.