(Bloomberg News circulated the following story by Daniel Goldstein on November 27.)
WASHINGTON, D.C. — Grain suppliers such as Cargill and railroads like Union Pacific face rising costs and shipment delays because of a railcar shortage caused by a record U.S. corn harvest and rising demand in Europe and Asia for wheat and soybeans.
The monthly lease rate for a 120-ton “grain hopper” railcar, capable of carrying 5,150 cubic feet of grain, is about $270 to $325, up from $200 a year ago, according to leasing companies such as CIT Group and RailSolutions, a railroad consulting firm. Some shippers have had to wait almost three weeks for available cars.
“We’ve leased up everything we could lease,” said Union Pacific Chief Executive Richard Davidson. “When there was a surplus, (the cars) were very reasonable. The pricing has gone up as they’ve gotten more scarce.”
Some farmers and exporters have had to stockpile crops to await railcars as demand for wheat, soybeans and corn has surged because drought reduced supplies from Europe and Australia. China, the largest buyer of U.S. soybeans, will boost purchases by 25 percent from last year to 9.5 million tons, according to Li Peng, an analyst with Louis Dreyfus in Beijing.
“The export projections are what’s driving the carloads,” said Oscar Groome, vice president of railcar leasing at GE Capital, a unit of General Electric that is the largest leasing agent for railcars.
Grain sales to Asia mean large railcar shipments to Pacific Northwest ports such as Seattle and Tacoma, Groome said. So far this year, GE’s entire fleet of 25,000 grain cars has been leased to railroad shippers. “All our cars are out,” he said.
Steve McClure, a leasing agent at CIT, said all 12,000 grain railcars the company has “are spoken for and under use.”
“This happens every harvest, but it feels a bit more severe this year,” said Frank Sims, vice president of transportation for Wayzata, Minn.-based Cargill, the world’s largest agricultural company and the second-biggest soybean processor. “It’s affecting the whole industry.”
Record export sales for soybeans are straining the transportation system, said Ron Heck, a soybean farmer in Perry, Iowa, who is president of the St. Louis-based American Soybean Association. “We’ve had big week after big week after big week,” Heck said.
U.S. corn farmers, who have almost completed this year’s harvest, will collect a record 10.28 billion bushels, said the U.S. Department of Agriculture (USDA).
Rising demand for corn, the nation’s biggest crop, has been fueled by a weak dollar that makes the grain more attractive for buyers in Asia and Europe, said Dale Gustafson, a grain analyst with Citigroup in Chicago.
U.S. corn exports in the year that began Sept. 1 will rise 18 percent to 1.88 billion bushels from 1.59 billion a year earlier, the USDA said. Orders for corn are up 26 percent, at 18.3 million metric tons, or 720.4 million bushels.
“We’ve got huge demand for our grain cars,” Union Pacific’s Davidson said. Union Pacific, the largest U.S. railroad, has leased an additional 2,000 railcars to add to its supply of 23,000, the company said.
The grain business was a bright spot for Union Pacific during the third quarter, when profit fell 23 percent because of higher fuel costs and crew shortages that caused service delays. Revenue from shipping grain climbed 10 percent to $411.2 million, or about 7 percent of total sales.
Burlington Northern Santa Fe and Union Pacific, the two largest railroads in the Pacific Northwest, are running as many as 10 days late on shipments, said Emily French, a former Cargill trader who is an analyst with World Perspectives, an agricultural consulting group in Washington, D.C.
“It could slow exports to China,” French said. The longer corn is left in the open, the more chance it has of developing a sour taste that could be imparted to meat from animals that feed on the grain, she said.
Railcar services obtained auction style from a railroad are running four to 20 days late, said Ryan Kelbrants, a grain analyst at Archer Daniels Midland Investor Services in Minneapolis. Local farmers are holding their grain in storage until they can get available railcars, he said.
Farmers in North Dakota are piling grain on the ground, hoping they can get railcars before the crops are damaged by moisture, said Pat Sullivan, a grain trader at Great Lakes Trading in Warsaw, Ind. “They just can’t find railcars,” he said.
The last time farmers and shippers were unable to find railcars when they needed them was in 1997, when monthly lease rates were as high as $450, said Jim Husband, a consultant with RailSolutions in Alexandria, Va. “There’s a lot of scrambling around to find covered railcars for grain,” he said.
The shortage was compounded by the removal of older railcars in recent years.
A decline in the U.S. wheat harvest for four years after the record crop of 1998 led railcar operators to whittle a surplus of covered cars that reached 20,000. Models built in the 1970s have been taken out of service and replaced by cars dubbed “5150s” that are capable of carrying 110 tons, or 5,150 cubic feet of grain.
Many of the older cars, which can carry 100 tons or 4,750 cubic feet of grain, haven’t been maintained. Some were parked on rail sidings amid weeds, gathering rust, and it took too long or too much money to get them back in service when export demand surged, analysts said.
Putting a mothballed car back in service will cost about $2,000 to $5,000, GE Capital’s Groome said. When monthly rates were averaging $150 to $200, it wasn’t profitable to return the older cars, known as “4750s,” to good working order.
Even after the recent rise in prices, “That’s still not going to pay for the repairs,” Groome said.
Delays and inefficiency in the rail system may also be contributing to the rise in railcar prices, said Steven Bobb, vice president for grain operations with Burlington Northern.
Burlington Northern is adding about 1,800 grain railcars to its fleet of about 24,000 to use as part of “shuttle trains” that can handle about 2,900 acres of corn at a time, Bobb said.