High fuel prices push shipping costs up; weather slows Upper Midwest rail traffic

by Ron Sterk
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KANSAS CITY — Soaring fuel prices coupled with increased demand have pushed shipping costs higher in most cases for freight and bulk commodities, including grains and oilseeds, moved by all modes of transportation, especially for products largely delivered by trucks. But some relief appears likely as the result of smaller hard wheat crops and reduced U.S. exports as Russia re-enters the market, and as fuel prices have begun to moderate.

The key national average retail diesel fuel price from the U.S. Department of Energy’s Energy Information Administration peaked in early May at $4.124 a gallon, up $1 from a year earlier and the highest since late August 2008. The price has dropped five consecutive weeks since, falling to $3.94 a gallon on June 6, but was still 99c, or 34%, above the year-ago price of $2.95 a gallon.

“The industry, and the economy at large, should benefit from the recent declines in oil and diesel prices,” said Bob Costello, chief economist of the American Trucking Associations. “Lower fuel costs will help freight volumes and motor carrier bottom lines going forward.”

For the year, the E.I.A. in its June Short-Term Energy Outlook forecast retail diesel fuel prices will average $3.87 a gallon, up 29% from $2.99 in 2010. The E.I.A. forecast diesel would average $3.95 for 2012. In addition to higher crude oil costs, the agency projected U.S. refinery margins for diesel fuel at 59c a gallon in 2011, up 21c, or 55%, from 38c in 2010, and at 53c in 2012, down 6c but still well above the 2010 level.

The E.I.A. forecast the West Texas Intermediate crude oil price to average $102 a barrel in 2011, down $1 from its May forecast but up $23, or 29%, from $79 in 2010. Crude oil was forecast to average $107 a barrel for 2012.

“E.I.A. still expects oil markets to tighten through 2012 given projected world oil demand growth and slowing growth in supply from countries that are not members of the Organization of the Petroleum Exporting Countries,” the agency recently said. In its June outlook the E.I.A. especially noted growing liquid fuels demand in the emerging economies.

But last week OPEC’s decision to keep crude oil production at current levels sent crude oil futures higher with nearby values again pushing above $100 a barrel but holding below the early May high near $115.

Still, OPEC prefers to keep crude oil prices from getting too high, Tim Statts, vice-president of risk management at Summit Energy Services, told participants at the 34th annual Sosland Publishing Purchasing Seminar last week. It’s in their best interest to keep prices at a level that promotes economic growth, and thus increased energy demand, rather than at levels so high as to stymie economic recovery, he said.

The E.I.A.’s average retail diesel price directly affects shipping costs because it is used by railroads to calculate fuel surcharges, which are adjusted monthly. Although surcharges vary by railroad and have begun to moderate, they remain about double year-ago levels.

The Burlington Northern Santa Fe Railway posted its July 2011 fuel surcharge at 70c per rail mile based on the E.I.A.’s average diesel price of $4.047 a gallon in May and using the original strike price of $1.25 per gallon, and at 39c a mile based on the new strike price of $2.50 a gallon that took effect in January 2011, for mileage based and per cent of revenue based programs. Both fuel surcharges were down 1c from June, but the surcharge was up 52% from 46c a year ago when only the $1.25 strike price was offered by B.N.S.F.

But a Kansas City merchandiser noted it doesn’t cost less to ship grain on B.N.S.F. because the underlying tariff was increased, offsetting the lower fuel surcharge.

The Union Pacific Railroad uses $2.30 per gallon as its “strike” price, with a July surcharge of 39c per mile and June at 40c, the same as B.N.S.F. A year ago the U.P. surcharge was 20c per mile. In U.P. data going back to April 2007, the only time there was no surcharge was March to July 2009. The highest was 53c in September 2008, based on record high July 2008 diesel prices.

The Association of American Railroads’ monthly Index of Average U.S. Railroad Fuel Prices stood at 661.6 (July 15, 1990=100) in April, up 33% from December 2010 and up 42% from 466.4 in April 2010.

Grain shipping costs vary by mode

Grain merchandisers indicated mixed results in rail costs for shipping grains, but in general rates were higher than a year ago, in addition to higher fuel surcharges.

“The cost for shipping grain from the Pacific Northwest increased from the previous quarter, pushed up by higher truck rates as diesel prices increased due to unrest in the Middle East,” the U.S. Department of Agriculture said in its June 2 Grain Transportation Report. But the U.S.D.A. also noted, “Transportation costs for shipping corn and soybeans from Minneapolis to Japan through the Gulf decreased during the first quarter 2011 mainly because of significantly lower barge rates.”

While rates vary widely by railroad and by region, reduced demand for cars due to a smaller hard red winter wheat crop in the Southwest and an expected smaller hard red spring wheat crop in the Upper Midwest has curbed prices in some areas.

“No one is concerned about rail car availability due to the small crop,” a Kansas City grain merchandiser said of the smaller hard red winter wheat crop, estimated by the U.S.D.A. last week at 1,450 million bus, down 2% from a year ago. But he noted rail rates in general were up “a couple hundred dollars per car” plus higher fuel surcharges.

Traders noted the B.N.S.F. did not implement a planned June 1 rate increase, unlike some other railroads, but the pass tended to bring B.N.S.F. rates more in line with other railroads’ rates for like routes.

“Shuttle car premiums are way down and were at a discount to tariff,” said Joe Christopher of Crossroads Commodities in Sidney, Neb. “Currently rates are at tariff to about $100 over, depending on the route, but the summer is still at a discount.”

Mr. Christopher expects rail volume will be down because of the drought-reduced hard red winter wheat crop in the Southwest, the late-planted hard red spring wheat crop in the Upper Midwest and reduced foreign demand as Russia re-enters the export market and takes away U.S. share of lower-protein wheat.

In its June 9 World Agricultural Supply and Demand Estimates, the U.S.D.A. projected 2011-12 exports of U.S. wheat at 1,050 million bus, down 19% from 1,295 million bus last year when exports soared 47% from 2009-10. Combined exports of wheat, corn and soybeans for 2011-12 were projected at 4,370 million bus, down 8% from 2010-11. The U.S.D.A. projected Russian wheat exports at 10 million tonnes in 2011-12, up 6 million tonnes from 2010-11.

“Last year rates went into the summer at a discount,” Mr. Christopher said, “but by the end of July they were at a premium due to Russia’s export ban that increased demand for U.S. wheat. Plus we had huge soybean exports to China. The railroads just weren’t prepared.”

Also potentially reducing rail car demand this year will be the big carry in deferred wheat futures prices, which will tend to discourage sales, Mr. Christopher added.

With the exception of the Upper Midwest, grain industry sources indicated railroads were mostly current in placing rail cars and keeping grain shipments on schedule currently and throughout the past winter. Railroads servicing the Upper Midwest fell far behind much of the winter due to heavy snowfall across the region. As many as 8,000 to 9,000 rail cars were three or more weeks late at times in the Upper Midwest, Mr. Christopher noted.

Just as railroads shipments were getting caught up, new delays evolved because of flooding in Montana, the Dakotas, Nebraska, Iowa and Missouri as high water moves down the Missouri river, nearing Kansas City.

“B.N.S.F. continues to experience challenges related to flooding on our northern lines resulting in soft track conditions,” the company posted on its web site last week. “Customers should anticipate slower than normal operating conditions. We are making progress on track restoration but there are still a few carload industries that may not receive service due to

high waters.”

Mr. Christopher noted rail cars from the Dakotas were rerouted through Nebraska to get to Minneapolis due to the flooding. In addition, access to specific elevators or processing plants may be restricted along the Missouri river and its tributaries.

Despite the obstacles in the Upper Midwest, year-to-date rail deliveries of wheat, corn and soybeans to U.S. ports totaled 183,119 carloads as of May 25, up 27% from a year ago, according to the U.S.D.A. Cumulative marketing year-to-date (2010-11) exports of the three commodities were 101.1 million tonnes through May 19, up 12% from the same period a year earlier, the U.S.D.A. said. Wheat exports were 32.1 million tonnes, up 52% for the period, corn exports were 32 million tonnes, down 4%, and soybeans exports were 37 million tonnes, up 3%, the U.S.D.A. said.

The A.A.R. reported cumulative volume of 6,110,554 carloads shipped in the United States during the first 21 weeks of 2011 (ended May 28), up 3.2% from the same period last year and up 8.5% from 2010. Grain carloads originated in the first 21 weeks totaled 492,734, up 7.6% from the same period in 2010. In the week ended May 28, grain shipments were up 18.5% from the same week last year, while farm products excluding grain were down about 20%, the A.A.R. said.

Orders for all types of leased rail cars surged sevenfold in the first quarter of 2011 and were at a 13-year high, according to a report on Bloomberg.com. About 55% of North America’s 1.6 million rail cars are owned by leasing companies.

Trucks take brunt of high fuel prices

Unlike railroads, truckers do not have a fuel surcharge “system” but rather apply fuel surcharges on a company-by-company or even individual operator basis, which makes for a wide variation. But diesel prices also have by far the greatest impact on trucks, which moved an estimated 67% of all U.S. tonnage in 2010, because of the small loads hauled compared with rail or barge. Each 1c per gallon increase in retail diesel fuel costs the trucking industry $356 million a year, Bill Graves, president and chief executive officer of the A.T.A., told Congress earlier this year when diesel prices had not yet peaked and were below current levels.

The American Trucking Associations’ latest monthly Truck Tonnage Index declined in April but remained well above year-ago levels. The seasonally adjusted index was 114.9 (2000=100) in April, down 1.7% from March but up 4.8% from April 2010. In March the index was 115.6, up 1.9% from February and up 6.5% from last year.

“The drop in April is not a concern,” Mr. Costello said. “Since freight volumes are so volatile truck tonnage is unlikely to grow every month. I expect economic activity, and with it truck freight levels, to grow at a moderate pace in the coming months and quarters.”

In its quarterly trucking activity report, the A.T.A. said both hiring and turnover rate for linehaul truckload drivers increased in the fourth quarter of 2010, indicating increased demand as the economy recovers. The association’s survey showed turnover for linehaul drivers at large fleets bottomed at a record low 39% in the first quarter of 2010 but rebounded to 69% in the fourth quarter, the highest since the second quarter of 2008.

“Fleets are clearly hiring more drivers as demand for freight hauling increases,” Mr. Costello said. He also noted rising demand for drivers will heighten the industry’s ongoing struggle with driver shortages.

But the impact of high fuel prices cannot be stressed enough, according to the A.T.A., which said more trucking companies, often small or independent operators, tend to go out of business during times of high fuel prices because the increases are not always able to be passed on. The cost of about $1,200 to fill the fuel tanks of a semi-tractor trailer rig, which averages five or so miles per gallon, is especially burdensome on independent truckers.

Barge traffic declining

In addition to higher fuel costs this spring, barge and ocean shippers also had to contend with record high water levels and intermittent closures on the Mississippi river, which is the largest conduit for U.S. grain and oilseed exports. Current flooding on the Missouri river is expected to have minimal effect since little grain is shipped by barge on that river. But once the high waters of the Missouri reach St. Louis and the Mississippi river, an impact may be felt, one merchandiser said.

“Since mid-April, when flooding closed sections of the upper Mississippi river and slowed barge movements on the lower Mississippi river, barge rates have risen about 17% for grain shipped from St. Louis to New Orleans,” the U.S.D.A. said in its June 2 Grain Transportation Report. “Rates did increase this week at the same time as New Orleans corn bids strengthened, indicating more supplies of grain are needed at the port because of delayed barge movements.” St. Louis barge shipment rates increased to about $13.97 per ton the week ended May 31, up from $13.21 a week earlier and up 34% from $10.43 a year ago, the U.S.D.A. said.

Although export shipments for the three major commodities (wheat, corn, soybeans) at 1.74 million tonnes in the week ended May 28 were up 13.4% from the same week a year earlier, movement by barge for the week was 682,570 tons, down 9% from a week earlier and down 24% from a year ago, according to U.S.D.A. data. Barge shipments in the four weeks ended May 28 were down 33% from the same period in 2010.

Grain loading for export also had slowed with 33 ocean going vessels loading at the Gulf the week ended May 26, down 23% from a year earlier, the U.S.D.A. said.

Also lingering as a threat was the forecast for an active tropical storm season (June 1 to November 1) in the Atlantic region, which includes the Gulf and its offshore rigs and onshore refineries. The National Oceanic and Atmospheric Administration forecast an “above average” number of named storms this season. While the forecast called for slightly fewer storms than in 2010, when no named hurricanes hit the U.S. mainland, the odds of such good fortune were unlikely two consecutive years. Not only could a major hurricane disrupt shipping activity in the Gulf, but it also could affect oil refinery operations, which tend to cause a temporary spike in crude oil and product prices.

Adrian, the first named storm of the season, formed last week in the Pacific off Mexico’s west coast, but did not pose a threat to Gulf shipping or refinery operations.

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