In 1974, the Iowa Legislature created the Iowa Rail Assistance Program and appropriated $3 million to rehabilitate Iowa’s rail network. The program began under control of the Iowa Energy Policy Council (IEPC) but was transferred to the Iowa Department of Transportation (IDOT) in 1975. IEPC developed the following point system to analyze potential branch rail line candidates for financial assistance to upgrade rail lines:

Category --------------------------Maximum Points

Number of cars per mile -------------------------15

Potential cars per mile ---------------------------20

Derailments ----------------------------------------20

Track condition ------------------------------------20

Shipper Funding ----------------------------------20

Railroad Funding ---------------------------------15

Total ------------------------------------------------100

The higher the number of points, the higher the priority assigned to the rail line. The IEPC used this system to allocate $3.4 million to upgrade six branch lines, with shippers and railroad companies allocating $2.8 million. These six branch lines were upgraded with 90-pound rail and new ties to carry the new covered hopper car grain trains.

In 1975, the Iowa Rail Assistance Program was transferred to the newly formed IDOT. The IDOT used a benefit-cost model to estimate the potential profitability of a given branch line. The IDOT model was used to allocate $27.7 million in state funds and $35.7 million in federal funds to 35 branch lines. Shippers added $35 million and railroad companies added $52.2 million to these 35 branch lines.

Table 1 shows that 1,984 miles of Iowa branch rail lines were upgraded under both programs. Fourteen percent of the lines were upgraded under the IEPC and 86% under the IDOT. The IEPC paid 54% of the cost of the 271 miles of upgraded track while the IDOT paid only 18% of the total cost. Railroad companies paid one-fourth to one-third of the costs and shippers paid almost one-fourth of the costs under both programs. However, shipper contributions were loans to the railroads and were reimbursed on a per-car shipped. The federal government paid none of the costs under the IEPC program and about one-fourth of the costs under the IDOT program. The IEPC contributions were grants to the railroads for upgrading the selected lines.

A major difference between the two programs was that 59% of the upgraded lines under the IEPC program were abandoned after being upgraded whereas only 14% were abandoned under the IDOT program.

The total Iowa cost per mile of upgraded lines that remain in operation was almost 1.6 times higher under the IEPC program than under the IDOT program. One reason for the lower IDOT cost per mile of remaining upgraded lines was that the IDOT contributed only 18% of the total upgrading cost while the IEPC program contributed 54% of the total cost. In addition, the IEPC funds were grants to the railroad company. Initially the IDOT funds were grants to the railroads. In July 1984, the IDOT changed the grant program to a no-interest loan program.

In summary, the IDOT program was more efficient than the IEPC program. First, the IDOT decisions were based on an economic model. The IEPC program was based on a point system. Second, the Iowa contributions under the IEPC program were gifts to the railroads whereas, after July 1984, the IDOT funds became no-interest loans to the railroads. Third, over half of the upgraded lines in the IEPC program were abandoned while only 14% of the lines in the IDOT program were abandoned.

The purpose of the programs was to preserve the selected rail lines; the IEPC program only preserved 41% of the subsidized lines while the IDOT program preserved 86% of the subsidized lines.

A false assumption

The fundamental assumption behind preserving Iowa branch rail lines was that Iowa corn and soybean exports would continue to grow and that railroads would be the major carrier of Iowa’s agricultural output. Branch rail lines would be needed to transport grain to the main lines for shipment to export ports. This assumption turned out to be false.

U.S. corn exports peaked in 1979 and, except for a temporary spike in 2007, have trended downward since then. Iowa corn exports trended downward even faster. Two reasons why Iowa corn exports declined rapidly were that large amounts of corn were used as feedstock for ethanol production and to feed the growth in swine and egg production.

There is a belief that it is more efficient to export meat than corn and soybeans. Growth in ethanol, swine and egg production would use a higher percent of Iowa’s corn and soybeans. Yet, per acre yields of corn and soybeans continue to grow. Technology also makes automobiles more fuel efficient and use less ethanol. At the same time, there is an effort to increase the blend of ethanol in gasoline from 10% to 15%. The net result is that corn and soybean exports may increase but the rate of increase is uncertain.

A growing local demand for corn means that the need for branch lines will decline. The reasons are that major changes are occurring in the Iowa grain distribution system.

The size of Iowa farms has been increasing with many farmers operating 3,000 acres or more. Many farmers have purchased used semi tractor-trailer trucks to increase their capacity to move their corn and soybeans to on-farm storage and to commercial storage sites. Some farmers own up to five semi-trucks.

Depending on price differentials, semis, hauling up to 1,000 bushels per load, can economically haul grain 100 miles or more. This enables farmers to bypass local grain elevators located on branch rail lines, and haul their grain directly to ethanol plants, feed mills and to grain elevators on main lines.

Iowa grain cooperatives have under gone mega mergers. As of April 2016, there were only 55 grain cooperatives in Iowa, down from about 300 cooperatives in 1980. This means that most cooperatives own and operate multiple grain elevators. The largest Iowa cooperative operates 65 grain elevators and is served by seven railroads. Its 7,000 members can choose to deliver grain at any of the 65 elevators.

Grain bids vary among the elevators depending on the available markets. Some of its elevators without rail service have expanded their receiving and storage facilities to enable them to serve nearby markets. The function of the new addition is to offer grain storage to farmers and provide corn and soybeans to local truck markets. Thus, grain elevators can function profitably without rail service and there is no need for governmental programs to preserve rail service to grain shippers in Iowa.

On the other hand, railroads are shifting to 286,000-pound cars that can only move safely at standard operating speeds over 112-pound rail. Increasing shipments of ethanol and DGS (dried grains from the production of ethanol) by rail have partially offset the decline in corn shipped by rail. Ethanol and DGS are increasingly shipped in 286,000-pound cars, which would increase the benefits of upgrading branch lines with 112 pounds per 36 inches of rail.

Class I railroads have made major progress in upgrading their track. Only 484 miles of Iowa rail lines are unable to carry 286,000-pound cars. Seventy one percent are located on Class I railroads while the remaining 141 miles are located on Class II and III railroads. Class I railroads are generally considered capable of funding their own capital projects. However, self-funding is more challenging for Class II and III railroads. Two Iowa ethanol plants are located on Class III rail lines that are not capable of carrying these heavy cars. If these railroads are not financially strong enough to finance the upgrading of the two lines, one method of financing the upgrading is for the shippers to loan money to the railroads to upgrade the track. The railroads could use the efficiency gains to repay the loans.

Conclusions

Declining grain exports and financially strong railroad companies mean that it is unlikely that government programs are or will be needed to preserve branch rail lines in Iowa and probably in other Corn Belt states. If exports become the major market for corn, and if Class II and III railroads are unable to finance the upgrading of their lines to carry 286,000 pound loaded cars, alternative sources of capital include:

• Shippers located on those lines could loan the needed funds to the railroad. Class II and III railroads could then use the efficiency gains from the upgrading to repay their loans.
• Short lines could try to become part of a holding company.
• Short lines could be repurchased by Class I railroads.

If these alternatives are impossible, these lines should be evaluated to see if they are economically viable. Improved economic models should be developed so that no lines upgraded with government funds would likely be abandoned.

If upgrading is uneconomic, the line should be abandoned.