The shipping industry seemingly "can’t win for losing." Fuel prices have plunged from record highs last year, but demand for transportation services has suffered from economic woes domestically and globally.
While most economic indicators for freight are well below year-ago levels, some signs indicate a slowing in the decline, or even a slight upturn. Conditions, of course, vary by mode of transportation (rail, truck, water) and by commodity or type of freight.
One common thread has been sharply lower fuel prices that have resulted in significant shipping cost savings.
Fuel surcharges imposed by rail and trucking companies generally are based on the U.S. Department of Energy’s weekly retail on-high average diesel fuel price. The U.S. average price in the week ended May 4 was $2.185 a gallon, down $1.964, or47%, from $4.149 a year ago. Although the price has edged higher since bottoming at $2.017 a gallon in mid-March, the average has held near $2.20 since early April. At this time last year the U.S. average still was moving toward its mid-July peak of $4.764 a gallon.
Since much of fuel costs are passed on to trucking and railroad customers, lower fuel prices have reduced the total cost of shipping grain, food and freight in general. For example, the fuel surcharge rate for agricultural commodities imposed by the Burlington Northern Santa Fe Railway (B.N.S.F.), based in Fort Worth, Texas, was at a multi-year low of 22c per mile for May, down from a peak of 87c in September and from 66c in May 2008. This surcharge is based on the D.O.E. average diesel price, with a two-month lag. The 44c drop from a year ago equates to a cost reduction of $440 per car for every 1,000 miles, which for a 110-car unit train of grain would be a savings of $48,400. Other railroads have similar fuel surcharge applications.
On an encouraging note to the transportation industry, the D.O.E. recently forecast diesel fuel prices to average $2.27 per gallon from April through September, compared with $4.37 for the same period last year, and to average $2.30 for all of 2009, 40% below the 2008 average of $3.80 a gallon.
In addition to lower fuel prices, also included in the silver lining of the economic downturn is increased availability of trucks, rail cars and vessels. That should be good news, especially in the case of rail cars, as the 2008 major crop harvest begins.
Railroad traffic down sharply
Despite the fuel cost savings, railroads have struggled with reduced volumes because of the recent downturn in the economy.
"Combined North American rail volume for the first 15 weeks of 2009 on 14 reporting U.S., Canadian and Mexican railroads totaled 5,109,437 carloads, down 18.1% from last year, and 3,468,507 trailers and containers, down 15.7% from last year," the Association of American Railroads said. Carload volume on U.S. railroads was down 18% for the period, Canadian was down 21% and Mexican was down 11%.
Railroads reported sharp downturns from a year ago in first-quarter 2009 results.
First-quarter net income at B.N.S.F. was down 34% from 2008, with a 41% reduction in fuel expenses more than offset by a 20% drop in total freight revenue. Revenue from agricultural products declined 22%, including a 35% drop in corn, 31% decline in wheat, 19% drop in soybeans and 24% decline in fertilizer, only partially offset by gains of 2% in bulk foods and 13% in ethanol. The company said it expected similar results in the second quarter.
At the Omaha-based Union Pacific Corp. (U.P.), first-quarter agricultural freight revenue was down 13% from 2008. Average diesel fuel prices for the quarter declined 47%, the company said. Overall, U.P. saw net profit fall 18% and carloads drop 21% from a year earlier, which press reports indicated were better than expected.
"The difficult economic conditions continue to affect our business volumes," Jim Young, chairman and chief executive officer of U.P., said, adding that "decisive steps to reduce costs" had been taken.
Ocean freight available, cheaper
"Ocean freight rates for shipping bulk commodities, including grains, increased during the first quarter," the U.S. Department of Agriculture said in its April 30 Grain Transportation Report. "The rates were relatively low and significantly below what they were during the same period last year. They (ocean freight rates) remained low mainly because bulk vessel supply is still outpacing demand."
Compared with rates in the fourth quarter of 2008, the cost of shipping bulk grain from the U.S. Gulf to Japan was up 18% in the first quarter, and from the Pacific Northwest to Japan was up 4%, the U.S.D.A. said. But compared with the first quarter of 2008, the rates were down 65% and 69%, respectively.
"The freight market has shown a slight improvement from its previous low, but it may be some time before the market reaches the record high rates witnessed during the middle of last year," the U.S.D.A. said. The department noted several factors may affect ocean freight rates, including the addition of new vessels, reduced volume of forward freight agreements, the Argentine government’s proposal to take over grain trade in that country and increased incidence of piracy in the Gulf of Arden (although little grain goes by that route).
Reduced demand for vessels to ship U.S. grain was evident in U.S.D.A. data that showed inspections for export of nine major grains for their respective marketing years to date totaled 4,023 million bus as of April 30, down 21% from the same period last year. Corn inspections totaled 1,109 million bus, down 34%, and wheat was 920 million bus, down 20%. Only soybeans at 1,020 million bus, up 10%, was ahead of last year’s pace.
Trucking industry struggles
The American Trucking Association’s seasonally adjusted for-hire truck tonnage index for March stood at 101.4% (2000 = 100), down 4.5% from February, the first month-to-month decrease in 2009, and the lowest since March 2002. The March index was down 12.2% from March 2008, the second-greatest year-over-year decrease after a 12.5% drop in December 2008 from 2007.
"Many fleets were telling us during March that freight was getting a little better," said Bob Costello, chief economist for the A.T.A. "The problem is that freight should be significantly better in March, which is why the seasonally adjusted index fell. While the industry is desperate for some positive news, it is unfortunate that March’s data suggests the industry has not hit bottom just yet."
Since trucks haul about 70% of tonnage carried by all modes of domestic freight transportation, the A.T.A. index, and trucking in general, serves as a barometer for the economy. Economists have suggested an increase in truck tonnage will be the first sign the economy has turned the corner and is heading upward.
Overland Park, Kas.-based YRC Worldwide Inc. reported a 33% drop in first-quarter 2009 revenue from a year ago with freight volume down 30% for the period.
Trucks also continue to face stout competition from rail. Fruit and vegetable shipments, for example, decreased for trucks but increased for rail in 2008.
"Although trucks are still the preferred method of produce transport, rail shipments have shown an increase, perhaps in response to dedicated rail services and truck shortages," the U.S.D.A. said in its latest Agricultural Refrigerated Truck Quarterly. Fourth-quarter 2008 produce shipments by rail were up 26% compared with the same period a year earlier, the U.S.D.A. said, while truck shipments declined by 4%.
Average truck rates to ship produce in the fourth quarter were $2.14 a mile, up 7% from a year earlier even though the average price of diesel fuel was down 10% from the same period in 2007.
The Department of Transportation’s Bureau of Transportation Statistics said North American Free Trade Agreement surface trade was $47.9 billion in February 2009, down 31% from a year earlier and the largest ever year-over-year drop, although it was up 1% from January. Trade in 2008 was up 4.1% from 2007, the smallest increase since 2003, the B.T.S. said. The majority of NAFTA freight shipments are by truck.
An indication of shippers’ improving but still struggling situation was reflected in the Dow Jones Transportation Index of 20 stocks, which closed at 3,335.70 on May 5, up 57% from a 52-week low of 2121.99 set March 9, 2009, but 39% below the one-year high of 5507.39 set June 5, 2008. The D.J. index consists of six trucking companies, including YRC Worldwide, five railroads, including B.N.S.F. and U.P., two marine based companies, four airlines and three delivery services.
"Despite the current weakness in demand for freight transportation services caused by the nation’s recession, the long-term outlook remains bright for all modes of freight transportation," the A.T.A. said in its recent U.S. Freight Transportation Forecast to 2020. The study projected growth of more than 26% in total freight tonnage and 68% in revenue over the next decade.