(The following story by Dan Piller appeared on the Des Moines Register website on October 2, 2009.)
BOONE, Iowa — Union Pacific Railroad Chairman Jim Young wants Iowa farmers to know that his railroad has 20,000 covered hopper grain cars, 8,000 of them in storage, along with 1,800 locomotives ready to haul the corn and soybean harvest that has begun.
Union Pacific, based in Omaha, plays an important role in export movements because of its links to Pacific Northwest ports, as well as its gateways through Houston and into Mexico.
“Of course, we can’t always get the grain movements exactly when we want them,” Young said Thursday on a visit to dedicate the new Kate Shelley Bridge over the Des Moines River between Ogden and Boone.
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Timing is a problem. Soybean export markets have been good, providing Union Pacific with steady trainloads out of Iowa. But corn export shipments were down 49 percent through midyear. More troublesome, corn prices of less than $3.50 per bushel will make farmers unlikely to want to ship corn anywhere for a while.
But that’s the annual game Union Pacific has to play with world agricultural markets. This year, at least, the huge railroad, which serves 23 states from Chicago and New Orleans to the Pacific Coast, has more equipment at its disposal because of the economic slowdown.
Economic barometer
Two years ago, Union Pacific was running about 200,000 carloads a week. The decline in U.S. and world economies dropped that average to 140,000 carloadings by midsummer of this year.
Young said carloads are edging up, to about 160,000 per week.
“I get calls all the time from Wall Street because railroads are considered about the best economic indicator,” Young said. “I tell them we’ve probably hit the floor and are just starting to edge upward.”
Union Pacific is the nation’s largest hauler of automobiles, and alternates with BNSF Railway for the title of largest hauler of chemicals, coal, industrial product and agricultural goods.
Shipments of all commodity mixes are down this year, but agricultural has held up the best. Ag products – primarily raw corn and soybeans along with feeds, fertilizers, meals and oils and ethanol – are down 17 percent for Union Pacific this year, compared with a 55 percent drop in automobile shipments and a 35 percent drop in industrial products.
Even intermodal shipments, which include the rich traffic from Asia through West Coast ports, is down 22 percent.
“You can see why I love agriculture,” said Young, a Nebraska native. “People have to eat. It is our most stable commodity traffic.”
Revenues take big hit
The recession ended, at least temporarily, a golden decade of profits for Union Pacific and the big railroads that remained from the mergers of the 1970s and ’80s.
For the six months ended June 30, Union Pacific’s revenues were down from $8.4 billion a year ago to $6.4 billion this year. Net income for the six months dropped from $974 million to $830 million.
But from 2004 to the end of last year, Union Pacific saw its annual profits soar from $604 million to $2.3 billion last year. Return on equity climbed from 4.8 percent five years ago to 15.1 percent last year.
The profits in this decade stand in contrast to Union Pacific’s woes a decade ago.
When it took over the Chicago and North Western Railway, which was Iowa’s largest carrier, in 1995 and the Southern Pacific Railroad in 1997, Union Pacific found itself with snarled traffic, lost cars, delays and angry shippers and politicians.
The service problems and related financial losses were a shock to a railroad that had avoided most of the problems of the rest of the industry in earlier decades.
“We learned some hard lessons,” Young said of the 1990s.
Union Pacific essentially invested itself out of trouble, spending an average of $3 billion per year to upgrade its track, equipment and yards. The old North Western main line from Omaha to Chicago, which passes through Denison, Carroll, Boone, Ames, Marshalltown and Cedar Rapids, has gotten new rail and is in the process of getting concrete ties.
The line is the busiest on the system, carrying 60 trains per day. Improved track enables them to move at 70 mph in many places.
The new Kate Shelley Bridge west of Boone was part of that investment. For $55 million, Union Pacific replaced the century-old, 2,800-foot-long bridge with a structure that will enable its trains to maintain the 70 mph speed, instead of slowing to 25 mph, which had been the procedure for decades.
Auto, coal questions
The uncertainties of the coming harvest are the least of Young’s challenges. Union Pacific is the largest shipper for General Motors, and Young has to figure a way to replace a 50 percent decline in auto shipments.
Coal, which Union Pacific ships from the Powder River Basin in Wyoming to Iowa utilities and on east, and its place in the energy firmament is not likely to be improved with proposed climate change legislation.
Union Pacific and other railroads have another political problem in Washington, D.C., from shippers angry at the fuel surcharges imposed in recent years.
“Freight rates in general have dropped by about 10 percent, but we have kept the fuel surcharges on because energy costs are so volatile,” Young said.
A bill introduced in Congress this year would partially reinstate the regulation of the railroads that was largely lifted in 1980.
“We may see a measure of re-regulation,” Young said. “We oppose it because deregulation has worked well for our industry.”