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Food or Fuel? The Rail Car Shortage Conundrum

Are farmers losing out to oil men in the race for rail cars to deliver products to market?

Are farmers losing out to oil men in the race for rail cars to deliver products to market? DEVAAN INGRAHAM / Reuters

Predictions of a second year of record grain harvests in the U.S. should seem like a cause for celebration.

But for grain farmers and grain elevator operators in states like Minnesota and the Dakotas, it's a near disastrous crisis that could continue to cost them tens of millions of dollars.

The reason: A lack of available railroad service—from rail cars to track lines—to ship the grain to market.

While there are various explanations for the difficulties—from severe weather to the enormity of the grain harvest—some suspicion lies with the increase in oil and gas rail shipments at the expense of commodities.

"In 2009, there were 11,000 rail carloads of crude oil but in 2013 there were 400,000 carloads," said Mike Steenhoek, executive director of the Soybean Transportation Coalition.

"It's not all their fault and railroads say they're not favoring oil deliveries but I would like to see that argument substantiated," he said.

"There's no competition between oil and gas and grain for us."

For their part, railroads contend they're doing all they can to improve the situation, no matter the customer.

"There's no competition between oil and gas and grain for us," said Mike Trevino, vice president of communications at BNSF Railway, a subsidiary of Warren Buffett's Berkshire Hathaway and the second-largest freight railroad network in North America.

Trevino admitted that BNSF is behind on some commodity rail deliveries but is doing all it can to catch up.

"We will have more grain shuttles this year than last year and deploy as much capacity as we can for this fall's harvest," he said.

Echo of the Recession

A shortage of rail cars dates back to the Great Recession. As the economy slowed down, railroad operators put thousands of rail cars into storage and laid off staff, according to analysts.

That caused delivery disruptions among many industries like automobiles and chemicals as well as agriculture.

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But the supply of rail cars has picked up in recent years, said experts. So too has the demand for rail freight cargo for energy, however.

Oil production in grain farming states like North Dakota has increased due to exploration in the Bakken shale formation. Just five years ago, around 400,000 barrels of oil and gas were produced each day. Now it's more than 1 million barrels a day.

That increase has to be figured into the rail problem for grain farmers and elevator operators, said Roger Johnson, president of the National Farmers Union.

"The oil production adds to the track congestion that was already there," he said.

Johnson also said it's not just the oil going out but the amount of needed resources shipped in, like steel and sand for oil exploration that adds to the rail problem.

"The issue is not with gas and oil deliveries," said Breanne Feigel, a spokesperson for Canadian Pacific Railway, which operates in the Upper Midwest, Northeastern U.S. and Canada.

Feigel said last year's severe winter weather caused rail car delays. She also said a bigger grain crop than expected and a lack of keeping workers in states like North Dakota slowed down rail deliveries.

"We've heard from farmers and grain operators and we expect to be current with deliveries this harvest season," she said.

Farmers in a Bind

Whatever the reason, farmers and grain elevator operations are in a bind.

"I'm losing money and my hands are tied," said Tim Luken, general manager and grain merchandiser at Oahe Grain, a grain elevator operator in Onida, South Dakota.

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He said his grain elevator has a 5.7 million bushel capacity but can't take any more grain as the harvest season enters a big push.

Luken said that it costs $5,000 a day to keep his operations open and because the crops are not being shipped, he can't make room for new grains to buy or sell them.

"The farmers and grain elevator operators are at the mercy of the railroads

"The farmers and grain elevator operators are at the mercy of the railroads," said Luken. "And with commodity prices falling, profits are very thin."

Some farmers put their loss at half a million dollars from their bottom line—accumulating from the inability to sell their crops to finding alternative but more expensive transportation methods such as trucking or paying for extra rail service.

"It cost around $4,000 for secondary (additional) cars last year but it's up to $5,000 a car for harvest season this year," said Howard O'Neill, an agricultural economist at Kansas State University.

"That roughly comes out to $1.25 a bushel in losses for farmers," he said.

Soybean Transportation Coalition's Steenhoek said any extra costs have to be absorbed by farmers because they can't sell the crop to grain elevators that are full and grain elevators that are full can't get the crops to market.

Added to this, said NFU's Johnson, are often financial penalties for late and nondeliveries of crops to processors.

While both BNSF and Canadian Pacific Railway said they're spending more money and increasing hiring to help alleviate grain deliveries, the backlog has caught the attention of lawmakers in Washington.

The Senate Committee on Commerce, Science and Transportation—the body that handles complaints about rail freight issues and that oversees railroad mergers—approved a bill that would reauthorize the Surface Transportation Board.

Among other ideas, the bill would allow the board to initiate investigations into delay problems instead of waiting for specific complaints. It also requires the setup of a database of complaints. The bill has yet to make it to the full Senate for a vote.

More from Capitol Hill

But some analysts want more from Capitol Hill.

"You have to have public policy to force regulation," said Johnson who added that looking into re-regulating the railroads might be an option because there's such a lack of alternatives when it comes to choosing rail carriers.

Others say it's up to the railroads themselves to get commodities and any other cargo moving.

"There's an economic incentive for the railroads to invest in improvements," said KSU's O'Neill. "I don't think farmers or anyone else wants more regulations."

Analysts agree that any permanent upgrade to the railroad system will take anywhere from four to five years to make an impact.

"I don't think farmers or anyone else wants more regulations."

But farmers and grain elevator operators don't have much time and will likely run out of the money they do have, said NFU's Johnson.

"The only thing that may be saving the farmers now is a number of them sold their crop at an earlier and higher price," he said.

"But even then they will lose because of the situation with the grain elevators and the lack of storage," Johnson contended.

Predictions for this fall's harvest aren't helping.

The United States Department of Agriculture expects that grain production and grain stocks this harvest season will exceed permanent storage capacity by 694 million bushels.