Rail delays and crop price impact

Posted on September 1, 2014 by aviyer2010

An article in the Financial Times (September 1, 2014) titled “Rail Delays Knock north US grain prices” describes speed reductions of 9% for Burlington Northern Railroad (BNSF) and 11% for Canadian Pacific causing shipment delays. The backlog for BNSF was 16,500 movements in April and the lack of alternative access to barges or other options caused inventories for farmers in North Dakota to rise significantly. The impending large soyabean harvest (a growth of 33%) this year is expected to add to the congestion. Will the rising capacity crunch for rail traffic and the projected drop in prices in North Dakota to clear the market cause follow up price pressures for the coming harvest ? Is the drop in speeds the result of risk management practices to transport crude oil from the same region ? Should the rise in the premium for shuttle trains (from 0 to $2000 to $3000 per car) be controlled to assist grain movement or should it be permitted to float to a level that reflects the market capacity conditions ?

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7 Responses to Rail delays and crop price impact

Jonathan Westwood says:

September 1, 2014 at 11:42 am

It looks like there will be a decrease in grain prices in that region. But it’s important to note that the U.S. government creates a price floor for agricultural commodities, so farmers will be affected very little.

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Elizabeth Paulus says:

September 1, 2014 at 7:42 pm

Even though the speeds of the railcars are still lower than in the past, the article notes that BNSF has considerably reduced its backlog from 16,500 to 2,000. This could indicate that the rail capacity crunch may not be quite as severe as some people had previously thought, but it will be interesting to see how the large soyabean harvest affects the railway congestion. Although the railroads have denied that the congestion is due in part to shifting focus on the crude oil industry, it would be interesting to see how much of the railcar capacity is being taken up by crude oil shipments instead of the backlogged grain shipments and other goods.

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Chenghao Qian says:

September 1, 2014 at 11:59 pm

As the U.S. second largest freight railroad, BNSF has conducted a very important role in freight transportation industry. During my internship, I have contacted BNSF couple times to arrange ocean container shipment from Midwest to West coast. However, as a private company, BNSF has a lot of big contracts with many freight forward company, and most of the time, BNSF decides the priority based on the freight rate. In this case, I do believe that somehow the delay in agriculture industry was due to lack of barging power between farmers and BNSF. In this scenario, I think the price will goes up eventually due to the delay. In addition farms should come together as a union to negotiate a good contract with BNSF in order to get on time freight shipping service.

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Rohit Dasari says:

September 2, 2014 at 10:37 pm

The situation will only get worse considering that soybean is usually harvested by the end of September in US (38% of world production of soybean from US). The farmers concern about the backlog seems very valid, as this results in cancelled orders from food giants like General Mills and Cargill, and the grain would be wasted.
A similar problem arose in India, when there was shortage of rail wagons, and other transportation hiccups resulted in resulted in uneven supply of food grains (specially in the monsoon season) to some of the North – Eastern states of India. However, the Food Corporation of India (FCI) stepped up, and ensured that the grains be transported by roadways (and river ways in form of ferryboats to an extent). This ensured timely delivery by being flexible in the mode of transportation.
Similarly, the US Agriculture Department along with the corporate giants should look into other modes of transport to support farmers and save them from such huge losses. A proper study needs to be done to look into other viable options rather than wait and hope that BSNF and Canadian Pacific will clear their backlogs (which are bound to increase considering the growth in harvest, and the rise of crude oil shipments which is obviously more profitable for BSNF and CP)

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Norihiko Hosokawa says:

September 3, 2014 at 7:15 am

I do not think price pressure on soybean occurs due to the rising capacity crunch for rail traffic and the projected drop in prices in North Dakota. First, retail price of soybean would not change because it is supplied by the capacity that railway companies have. Since demand and supply decide price, it would not change with stable supply if demand is stable too. Also, projected drop of soybean price may reduce the production. As a result, supply decreases and railway companies, which have backlog now, can ship the decreased amount of soybean.
I have no idea about whether drop in speed caused by crude oil transportation or not because I do not know the relationship between risk of crude oil transportation and train’s speed.
Premium should be permitted to float to a level that reflects the market capacity conditions because demand is uncertain. It is better to have flexible capacity to react the uncertain demand.

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Yang Junchao says:

September 5, 2014 at 10:20 pm

I do not think there is a direct impact between the decrease in grain prices and BNSF’s speed reduction. There are a lot of elements impacts the prices of the market, including the government’s regulation, weather etc. It indicates that the transportation is not the only element which influences the price of the grain. In addition, the BNSF’s speed reduction does not mean the distribution of grain will be affected. Sometimes,decreasing the speed of the train will add the safety of each transportation. It will increase the efficiency of the transportation. Therefore, I consider that the author is just overdone about an issue.

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Wei QIAN says:

September 13, 2014 at 3:00 pm

I do not think rail traffic has so much to do with the grain prices since the price pressures of the grains are not totally caused by the rising inventory of the farmers. The growing capacity of farms, the government regulation on the crops, and even the weather changes can all contribute to a price increase. However, if possible, the rail traffic will surely need to rise capacity to meet the upcoming large harvest of soybean to reduce the congestion to some extent.
And also to talk about the train premium, I think it should be permitted to float to a level to reflect the market capacity conditions. Again, since agricultural industry is a changeable industry due to many uncertain factors and the demand is usually unstable, I do not see there is a must to put the premium shuttle trains to assist grain movement, otherwise it can be a waste of resource.

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