United States Grain Transportation Outlook

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United States Grain Transportation Outlook

Authored By

Transportation Consultants Co.

May 31, 2012

Transportation Consultants Co.151313 Rosewood

Leawood, Kansas 66224

(913) 685-4422


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United States Grain Transportation Outlook 2012

Copyright 2012: All Rights Reserved. No reproduction, distribution, or transmission of any portion of this work is permitted without the written

permission of HighQuest Partners, LLC, 300 Rosewood Drive, Danvers, MA 01923 and Transportation Consultants Co. Page 2

The geography of the United States is ideal for grain export transportation. The Corn Belt lies

near an extensive river system, comprised of the Mississippi, Missouri, Ohio and Illinois Rivers

all with barge access to New Orleans and Center Gulf grain export elevators. The PNW export

elevators are severed both by the Columbia River Systems for local grain production and single

line rail service with both Burlington Northern Railway and Union Pacific Railway offeringshuttle train (locomotive power stays with the train) service. East Coast and Gulf Coast export

elevators are served by unit train service by either CSXT Railroad or Norfolk Southern Railway

both of which serve the Eastern Corn Belt.

Grain ElevatorsGrain elevators are basic to grain storage, marketing and transport. Their size and location are

critical to storage and transportation logistics for all grains and beans. Grain elevators store and

consolidate grain to take advantage of economies of scale in consolidating and transporting

grain at the lowest cost. Grain elevators are located either in the country as satellite operations

receiving and shipping via truck; on rail lines for truck receiving and train loading; on the riverfor transfer from truck or rail to barge and at ports for transfer from truck, rail or barge to

ocean vessels for export.

Country elevators are located close to the farm and buy directly from producers. Most do not

have access to a major railroad or river systems. Country elevators primarily ship to markets via

truck or single car rail shipments. Many are small, with limited storage capacity and pay high

transportation costs. With increased yields and now heavier trucks headed to local elevators

and ethanol plants, the increased demand on the rural infrastructure is taxing an already aging

and stressed system. Recently, some country elevators have upgraded to be able to load

shuttle trains (or in the East, trains) within the time constraints set by railroads to capture train

loading incentives and access reduced rail rates.

Elevators located along the inland waterway system receive grain by truck or rail and load

barges. The Mississippi, Ohio, and Columbia/Snake Rivers are the major river systems.

However, river system locks and dams are aging and are in urgent need of both major repairs

and additional locking capacity both for the number of barges per lock and the number of tows

per day.

Export elevators are located at the Gulf of Mexico, on the Atlantic Seaboard or in the Pacific

Northwest (PNW) and receive trains or trucks from inland terminals or, if on a river system,

barges. Export elevators transload extremely large volumes in short time periods. PNW exportelevators receive grains and oilseeds from inland train shuttle loading elevators on either BNSF

or UP railroads. These export elevators have limited storage capacity but can transload several

trains per day to Panamax vessels (55,000 tons/vessel). Center Gulf elevators on the Mississippi

River receive most of their grain via barge from river elevators. Other Gulf and east coast

export elevators receive their grain via shuttle trains at the Texas and Louisiana Gulf and via

train at the Eastern Gulf and East Coast ports. Both Gulf and East Coast ports should benefit


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from the Panama Canal Expansion and see a major improvement in their competitive position

with PNW ports to Pacific Rim markets.

Exports

Transportation costs impact the quantity of U.S. grain exports. Country elevators typically buytruck grain from farmers and may not have the personnel or financial resources to deal directly

with export markets. Consequently they sell to a local train loading elevator, local processing

facility, animal feedlot or ethanol plant. Shuttle train loading facilities have major

transportation cost advantages which provides access to a larger marketing area. The most

competitive location for an elevator is as close to producers as possible, but with rail or river

access. According to the Surface Transportation Boards Waybill Sample, the average rail

shipping distance for grains originating in the Western Corn BeltIowa, Kansas, Minnesota,

Nebraska, North Dakota and South Dakota increased from 906 miles in 2000 to 1,339 miles in

2009. This is partially caused by ethanol processing consuming what would have been local

truck and short haul rail shipments. Railroads can now handle larger cars and longer trains and

this is resulting in larger quantities per shipment. The Waybill data also shows that the average

tonnage/shipment has increased from 12,931 tons in 2000 to 19,347 tons in 2009.

Transportation economics dictate that larger quantities of grain are now shipped from the

production areas to processing markets. Processing companies typically ship 500 to 2,000 tons

per shipment. Most export shipments of grain or soybeans are in 100 or 110 car shuttle trains

(11,000 to 12,000 tons) or barge tow of 10 to 40 barges (22,500 to 60,000 tons). PNW draw

area tends to be the Western corn belt (Montana, the Dakotas, Minnesota, Nebraska and

Western Iowa). BNSF and UP currently have over 300 elevators capable of loading shuttle

trains and at their peak, operated over 200 shuttle trains combined for extended periods of

time. The Eastern Railroads have over 150 train loading facilities and combined have operated

over 80 trains.

The river draw area for grain for barge movement to the Center Gulf export market is normally

within 100 miles of the river system. However, the Panama Canal expansion and resulting

improved ocean freight economics will increase the river draw system by as much as 75 to 100

miles.

U.S. Farm to market road and bridge infrastructure.Maintenance of rural farm to market county roads, bridges and state highways has been

deferred for so many years that many now carry both truck weight restrictions and speed

restrictions. Increased farm yields, heavier truck weights, changing grain marketing patterns tolocal ethanol plants and shuttle train economics have all impacted the rural transportation

system negatively. But, the biggest impact has been the lack of local, county, state and federal

funding for maintenance of the rural truck transportation infrastructure. Some bridges are

becoming unsafe at any weight and speed, local and county roads are so rough that major

repairs or replacement is needed. In fact, many are so bad that counties are considering

diverting trucks and closing some of them. This would permit upgrading fewer bridges and


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roads in an attempt to reduce costs for counties and states. Rural bridge and road

infrastructure is nearing a crisis status.

River Locks and Dams

Under current regulations, the river system infrastructure has become antiquated. There hasbeen an extremely slow pace of added investment, rehabilitation, refurbishment or

replacement. Projects have been authorized yet funding was not appropriated. Even if

appropriations were available, operational status would not improve for 10 to 15 years through

the existing system administering and managing construction contracts. Dredging for both

shallow draft and deep draft barges has been delayed or deferred to such an extent that major

funding is now needed to stay ahead of current problems, and extensive funding will be needed

to improve the overall system. The locks and dams on the Mississippi north of St. Louis is so

inadequate, that there are now two major train to barge transfer facilities in St. Louis south of

lock and dam 26. This provides access to the Mississippi River with larger tows and deeper

drafts. There are many areas for river project funding that need to be implemented, i.e. public

private partnerships, (e.g., BRAC Model, RR Land Grants); means of locks operational

optimization and Improvement; applications of new technology; potential head haul/backhaul

matching impact on grain and oilseeds of other products moving for equipment, transport

capacity, and rates (e.g., coal, cement, minerals, etc.).

Barge EquipmentGreater than 18% of the covered barge fleet is 25 years old and older. Most barges have a nine

foot draft so deeper draft Lower Mississippi River would be suboptimal. Remaining fleet of 12

to 14 foot draft barges are only able to achieve maximize utility downriver from St Louis, MO

and/or Cairo, IL.

RailroadsU.S. railroads have made massive investments in infrastructure since railroad deregulation 40

years ago. The U.S. Eastern Class I rail operators and Western Class I railroads have each

developed somewhat differently. In the East, the Norfolk Southern and the CSXT Railroad, have

had less demand for unit train loading and unloading. Grain production area is less and grain

market demand is smaller than in the West. However, Eastern Railroads have developed a

comprehensive system of train loading and unloading elevators. Currently, combined they have

over 150 train loading elevators and 90 train unloading grain facilities on their systems.

Demand for intermodal transload operations at ports in the East Coast has not driven the

infrastructure development that has occurred on the West Coast.

BNSF Railway and Union Pacific Railroad operate from the Mississippi River to the West Coast

and have over 290 shuttle train loading facilities and over 122 shuttle train unloading facilities

located on their systems. Demand for facilities to transfer between different transportation

modes has driven the building of many new intermodal transload facilities and feeds a growing

appetite of loading containers for export. Both BNSF and Union Pacific face congestion at port


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facilities which could allow East coast opportunities. The Canadian National Railroad operates

from the center of the country down to the Center Gulf, as well as to the Canadian east and

west coast ports.

Shuttle Elevators and Unit TrainsThe existing system of train loading and unloading elevators permits the efficient loading and

unloading of trains with 65 to 120 cars within strict time constraints. This system permits the

movement of extremely large quantities of grain and soybeans from areas of grain production

to ethanol plants, domestic feed, and processing markets and to export elevators on the West

and Gulf Coasts. Incentive payments are made to loading and unloading elevators, if they meet

predetermined time constraints. The train loading system now totals more than 460 facilities

across the corn, bean and wheat producing regions. Additional facilities are in the planning and

constructed stages. The total unit train unloading facilities exceeds 220 elevators.

Agricultural producers have been concerned about increasing rail rates. Between marketing

years 2003 and 2009, rail tariffs per bushel of wheat, corn, and soybeans increased 62, 83, and

83 percent, respectively. In comparison, the average price per bushel of wheat, corn, and

soybeans increased 43, 47, and 31 percent, respectively, over the same time period. Because

grain and oilseeds are bulk commodities with a low value in proportion to their weight, the

costs of rail transportation to market represent a significant percentage of the average on-farm

price of the commodities. Rail transportation as a percentage of on-farm wheat prices ranged

from 11.9 percent during marketing year 2008, when wheat prices were high, to 23.1 percent

during marketing year 1999, when wheat prices were low. Rail transportation costs as a

percentage of on-farm corn prices ranged from 17 percent during marketing year 2007 to 30.2

percent during marketing year 2005. Agricultural producers are price takers rather than price

makers, with little control over the price they receive for their products. They are unable topass cost increases on to customers, and must absorb them because of their lack of market

power. Consequently, increases in transportation costs result in decreased producer profit. Rail,

truck, and barge rates determine the net price the producer receives. Higher transportation

costs also affect the competitive position of U.S. agricultural products in highly competitive

export markets. The rates agricultural shippers pay for transportation determines American

competitiveness in world agricultural markets.

Major railroad capital expenditure investments in the United States during 2011 are expected

to exceed $12 billion, surpassing the 2010 expenditures of $9.8 billion by more than 20 percent.

Although some of the increased expenditures are being spent on the legislatively-mandatedPositive Train Control technology, railroads are increasing investments in rail capacity which are

expected to benefit grain shippers by reducing peak season congestion.


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Railroad / IntermodalRailroad investment strategy has been focused on coal, intermodal and grain and bean facilities

as well as major commitments to intermodal container facilities. Railroads have made major

investments in infrastructure. Agriculture benefits from railroads investments to handle othercommodities. Short line railroads (generally defined as less than 250 miles of track) offer more

flexible service and provide interchange with Class I railroads. Railroads have invested in larger

capacity cars and the road bed improvements may allow even larger and heavier cars. Today

the normal gross weight on rail is 286,000 pounds, but some coal lines have been upgraded to

handle 315,000 gross weight and railroads may upgrade grain lines to handle the higher

weights.

Ethanol ProductionAccording to Iowa State Universities Dr. Martens and Dr. Dooley - the effects of ethanol and

related products on transportation equipment and infrastructure are large. The effects ofincreased truck traffic are felt most in communities and surrounding areas with new ethanol

plants. An ethanol plant producing 100 million gallons per year requires 110 truckloads of corn

per day, while generating 35 truckloads each of ethanol and DDGS. That increase in truck traffic

may strain local highway maintenance budgets -- particularly in regions with infrastructure in

poor condition. Many ethanol plants have relatively little storage for corn and outputs, with as

little as 10 days to two weeks of storage capacity. Because of those limitations, ethanol plants

rely on dependable transportation. Once 13.4 billion gallons of ethanol capacity is reached, the

industry will face the "blending wall," yet the Renewable Fuels Standards mandates

consumption of 35 billion gallons of ethanol by 2022. Achieving this 2022 capacity involves

investment in infrastructure to supply E85 (a blend of 85 percent ethanol with gasoline), and

E85 will require an entirely different system of pumps and alternative fuel vehicles, Dr. Martensopines. While transportation challenges in expanding ethanol production exist, there are

examples of innovative responses to the challenges by entrepreneurs. Among the examples,

Martens cites two transloading ethanol terminals -- Manly Terminal in Manly, Iowa, and

Gateway Terminals LLC in Sauget, Ill. -- that have the ability to load either unit trains or barges

of ethanol.

U.S. Grain and Soybean Export Capacity GrowthExport facility capacity is expanding at about 10% annually for the last five years in the US. The

new Longview, Washington facility and other recent facility expansions will add about 30% toPacific North West elevation capacity. Currently two new facilities are under construction.

Grain and bean shuttle train origination elevators have been developed over the last 20 and

river facilities have increase capacity and added barge loading berths.


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Bulk Ocean Rate Review:

Record New Vessel Deliveries and Sluggish Demand Kept Rates Low in 2011Although higher than during the global financial meltdown of 2008 and 2009, ocean freightrates for shipping bulk commodities, including grain, have been moderately low. Ocean freight

rates were kept low in part by record deliveries of new vessels to the fleet, fueled by a wave of

optimism about the anticipated pace of global economic recovery. In addition, natural disasters

such as flooding in the coal-producing regions of Eastern Australia and cyclones in the iron ore

exporting regions of Western Australia reduced trade volumes and, consequently, rates. In

2011, the rates for shipping bulk grain from the U.S. Gulf to Japan averaged $54.45 per metric

ton (Mt)14 percent lower than the previous year and 24 percent less than the 4-year average.

The rates from the Pacific Northwest (PNW) to Japan averaged $31.17 per mt 13 percent less

than the previous year and 28 percent less than the 4-year average. The transatlantic rates

from the U.S. Gulf to Rotterdam averaged $23.42 per mt, 12 percent less than the previous year

and 41 percent less than the 4-year average. The first quarter of 2011 started with falling rates

after modest increases in 2009-2010, following the improvement in the global economy after

reaching the record lows in the fourth quarter of 2008 at the peak of the global financial crisis

(see figure 40, Ocean Freight rates for Grain). Also, during the early part of the first quarter,

some states in India had put a ban on iron ore exports and China started the year with huge


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iron stockpiles. However, the rates started to rise later during the quarter as demand for bulk

shipments picked up. The market was also supported by healthy South American grain volumes.


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During the second and third quarters of 2011, ocean rates fell and remained relatively low

because of many factors, including persistent disruptions and political and economic turmoil in

some parts of the world that continued to hinder the dry bulk trade. There was continued

unrest in the Middle East and economic problems in the Eurozone, posing risks to the dry bulk

trade. The cost of shipping bulk grain from the U.S. Gulf to Japan during the fourth quarter

averaged $57.13 per metric ton (see figure titled 17)8 percent more than the previousquarter and 2 percent higher than last year. The rates from the PNW to Japan averaged $31.96

per mt5 percent higher than the previous year and 2 percent higher than last year. A new

record was set by the delivery of 1,094 (94.65 million deadweight) new bulk vessels in 2011,

according to a report published by Hellenic Shipping News Worldwide on December 29. The

previous record, set in 2010, was only 174 vessels delivered. The 388 bulkers that were

scrapped in 2011, compared to 262 in 2010, were not enough to offset the growth in the bulk

vessel fleet, which still grew 12 percent from a year earlier.

The Future of Ocean Freight

As of January 27, the ocean freight rate for shipping bulk grain from the Gulf to Japan was $49per mt, 4 percent less than the previous week. The cost of shipping from the PNW to Japan was

$26 per mt4 percent less than the previous week. As indicated by the Baltic Dry Bulk Index

which has been falling recently, ocean freight rates may continue at these low levels. The

Chinese Lunar Year Holidays also contribute to the depressed rates. Most industry analysts are

projecting a bleak future for the freight market, at least in the near term, because bulk vessel

supply continues to outpace demand due to slower than expected global economic recovery.


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Low or moderate ocean freight rates may bode well for U.S. grain shippers by moderating the

landed costs of ocean-going U.S. grain exports. The Panama Canal Expansion will reduce the

Gulf/PNW spread to the benefit of the Gulf export facilities.

ConclusionsThe U.S. river system is permits a very efficient and economical barge transportation system for

the export of grain from the heart of the U.S. grain belt. This is supplemented by seven class

one railroads that have and continue to make massive capital investments in their rail systems

and feeder shortline railroads that serve all major U.S. ports. United States commercial grain

companies have made major expenditures in high speed through-put elevators to load trains

and shuttle trains and to unload the timely at export grain elevators. The U.S. geography is

uniquely suited to grain export business.


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Thomas Williamson

Biography

Williamson has started seven small companies and manages three currently, including Transportation

Consultants Co. and Iron Horse Railcar Management.

Relevant Experience

Williamson owns Transportation Consultants Co. (TCC) which was started in 1984. TCC is usedby many major agriculture firms for the outsourcing of some or all of their corporate

transportation functions. TCC specializes in negotiation of rail service and track agreements;

and rail costing and rate negotiation. TCC charters both barge freight and ocean freight. Tom has

extensive experience in transportation of bulk and consumer commodities on every Class I

railroad and on every navigable river in the U.S.

Iron Horse Railcar Management manages private rail car fleets and tracks cars on a daily basisand provides management reports to control rail fleet costs.

Employment History:

Transportation Consultants Co. 1984 to present.Vice President and General Manager of Transportation Division - AGRI Industries, Des Moines,

Ia., 1981 to 1983.

Asst. Vice President of Transportation - Continental Grain, New York, New York 1974 to 1981.

Manager of Transportation Anaconda Company, New York, New York 1967 to 1974.

Education:

Graduated from Texas Tech University with a Bachelor of Business Administration Degree with a major

in Transportation and Utility Regulation in 1967. Completed MBA course work at Northern Illinois

University, Fairleigh Dickinson University and Columbia University.

Graduated from the New York Academy of Advanced Traffic in 1973.

Family:

Tom grew up on the family farm in West Texas and has one son that is married and lives in Boston, MA.

Documents

United States Grain Transportation Outlook