KANSAS CITY — Shortages of truck drivers and railroad workers continue to plague the transportation industry and contribute to soaring freight costs for shippers. Fuel prices are up sharply, trade wars have complicated export movement of grain (and other products) and harvest of huge corn and soybean crops is underway. Meanwhile, Hurricane Florence briefly snarled logistics along the East coast.
In a nutshell, so far in 2018, rail grain carloads have been strong with secondary rail freight rates up from a year ago, barge grain movement has been down from a year ago (due mainly to persistent high water levels and lock repairs) but above the three-year average with barge freight rates up sharply, bulk grain ocean freight rates have increased and diesel fuel prices are up 19% from a year ago, which has boosted truck and rail fuel surcharges.
Hurricane Florence was devastating to many areas along the mid-Atlantic coast, shutting down ports, railroads and interstate highways. Port and terminal operations in the path of the storm were operational by the end of September while repairs on rail lines and highways continued. The storm had less of an impact on grain movement than did Hurricane Harvey a year earlier because the Texas and Louisiana Gulf region is a much more important outlet for export grain.
But overall, must of the focus on the transportation sector in 2018 has been, and remains, on the trucking industry. The mandate for the vast majority of trucks to use electronic logging devices (in place of paper “log books”) on Dec. 18, 2017, which was fully implemented as of April 1, 2018, brought to light the simmering problem of a truck driver shortage. While most of the initial chaos caused by E.L.D.s has since subsided, the focus on truck freight availability and costs continues.
Without a doubt, the lack of and the cost of freight, especially truck freight, has had an impact across the food chain. Difficulty in securing truck freight has been a burden from flour mills seeking to deliver millfeed to feed mixers to the “last mile” of delivering food and other goods to retailers. The freight situation affects both incoming ingredients as well as shipments of finished products. Major food manufacturers, including Dean Foods, Tyson, Del Monte, Kellogg and U.S. Foods, have cited rising transportation costs as a drain on earnings this year.
At the beginning of 2018, only one truck was available for every 12 loads that needed moved, the worst ratio since 2005, according to DAT Solutions, L.L.C., an online truck freight marketplace and industry analyst. Spot truck rates increased 20% from a year ago to an average of $2.14 per mile in August, the highest average on record for the month, according to DAT.
Further, driver vacancies were a record 296,311 in the second quarter, according to FTR Transportation Intelligence, a transportation analyst and consultancy.
Long-haul driver turnover (drivers changing the company they work for or the company they contract with) remains around 90%, according to the American Trucking Associations (A.T.A.). In an effort to attract and retain drivers, many companies have boosted pay and offered referral and sign-on bonuses of as much as $10,000.
Walmart, which historically has had low driver turnover for its fleet of about 6,500 trucks, plans to double its spending on attracting and retaining drivers, including $1,500 referral bonuses, reducing the “onboarding” process to 30 days form 70 days and running television ads, according to Bloomberg. New drivers at Walmart earn about $86,000 per year.
Despite the ongoing driver shortage and high freight rates, the worst may be over amid indications that the rate of increase in freight rates has slowed, although the driver shortage will persist. Spot market rates peaked at record highs in June after increasing for 15 consecutive months, according to DAT. Contracted freight rates tend to lag spot rates by a few weeks to a few months. Spot truck freight rates in June were up 29% from a year earlier, with contracted rates up 19%. Still, DAT expects spot rates to continue to rise at single digits in 2019.
The A.T.A. Truck Tonnage Index also declined in August, in part due to comparison with rising year-ago numbers.
“We should all expect smaller year-over-year gains going forward that we witnessed over the last year,” said Bob Costello, A.T.A. chief economist.
And fuel prices continue to rise. After averaging well under $3 a gallon in the prior three years, average on-highway diesel fuel prices calculated by the U.S. Energy Information Administration have been above $3 most of 2018, averaging $3.31 per gallon as of Oct. 1, up 52c, or 19%, from a year ago. The on-highway average price is used by railroads and trucking firms to calculate fuel surcharges that are added to freight rates. The monthly average railroad surcharge was below the three-year monthly average for all of 2017 but has been above the average and widening so far in 2018. The average surcharge in September was 17c per mile, up 14c from September 2017 and 13c above the three-year average, the U.S.D.A. said.
Railroads struggle to stay current
“Throughout the year, grain rail service metrics have been worse than previous years but have recovered some in recent months,” the U.S.D.A. said in its Sept. 20 Grain Transportation Report.
U.S. and Canadian railroads have battled service issues for months, mostly attributing problems to increased demand for freight across all sectors as the result of the strong economy, with freight demand nearing the record level set in 2006.
Rail traffic totaled 20,508,641 (carloads and intermodal) during the first 38 weeks of 2018, up 4% from a year earlier, according to the American Association of Railroads. Seven of the 10 carload commodity groups posted increases in the week ended Sept. 22, including grain, petroleum and coal.
Deliveries of grain to ports by rail totaled 312,176 carloads for the year as of Sept. 19, up 5% from the same period last year, the U.S.D.A. said. Shipments to the Texas Gulf were down 39%, to the Mississippi Gulf were down 13%, to the Pacific Northwest were up 20% and to the Atlantic and East Gulf were up 8%. Year-to-date rail grain originations as of Sept. 15 totaled 852,228 carloads, up 4% from the same period in 2017. By railroad, BNSF Railway originated 459,062 carloads, up 12%, Union Pacific Railway 193,442 carloads, down 8%, Norfolk Southern 95,109 carloads, down 6%, CSX Transportation Co. (CSX or CSXT) 70,120 carloads, up 16%, and Kansas City Southern 34,495 carloads, down 1%. Grain carloads typically increase in late September through October when the corn and soybean harvests are at their peak.
Most railroads are adding power (locomotives), hopper cars and workers, which are hard to find and in some cases are receiving $25,000 hiring bonuses. Rail issues are especially a concern for the grain markets with harvests of large corn and soybean crops underway.
The Canadian National Railway in August published its first public grain plan, outlining its strategy to move expected grain volume for the 2018-19 crop year. The plan includes purchasing 1,000 new hopper cars over a two-year period, buying 200 new locomotives over a three-year period, hiring and training 1,250 new conductors prior to the winter of 2018-19, and spending $3.5 billion on capital expenditures such as line upgrades and double tracking to improve rail capacity.
BNSF, the largest U.S. rail mover of grain, has taken 1,150 locomotives out of storage and is expanding tracks on two major routes and hiring 4,500 crew members, Sam Sexhus, group vice-president of agricultural products at BNSF, said earlier this year.
In his weekly podcast update on Sept. 28, Mr. Sexhus said the railroad continued to move robust freight volumes on the network, with most metrics for the week ended Sept. 27 improved from a week earlier but still trailing year-ago levels. Total trains held for the week dropped by 15% from a week earlier but were up 63% from a year ago, car velocity (miles per day) was up 3% for the week but down 7% from last year, train velocity (miles per hour) was up 6% for the week but down 6.5% for the year, trains on the system were down 1% for the week but up 12% for the year, and terminal dwell was up 2% for the week and up 6% for the year.
Union Pacific, while adding cars and making adjustments similar to other railroads, in September announced its new operating plan called Unified Plan 2020 for phased-in implementation as of Oct. 1. The plan seeks to apply “precision scheduled railroading” (P.S.R.) principles, a highly controversial plan implemented early in 2017 by CSX that was the brainchild of the late Hunter Harrison, who also implemented P.S.R. principals while heading Canadian National and Canadian Pacific railways. While P.S.R. was credited with cutting costs and vastly improving railroad efficiency and financial results, the program often was despised by shippers, at least in early stages.
When CSX implemented the plan last year, it drew sharp ire from grain and other industries because of major service deterioration, among other issues, ultimately resulting in the U.S. Department of Transportation’s Surface Transportation Board stepping in to monitor the process. Under the plan, Union Pacific hopes to shift focus from moving trains to moving cars, minimizing car dwell and improving crew and rail asset utilization. Union Pacific said it would have weekly calls to update the S.T.B. on operating changes and customer impact.
Overall, freight rates for unit and shuttle trains in September mostly were higher from a year ago, according to the U.S.D.A. Unit train tariff plus fuel surcharges for wheat ranged from $1.11 to $1.94 per bu, up 2% to 6% from last year, for corn 58c to $1.60 per bu, up 1% to 11%, and for soybeans $1.18 to $1.75 per bu, up 5% to 19%, all depending on origin and destination. Shuttle train freight and fuel rates for wheat were $1.10 to $1.70 per bu, up 2% to 6%, for corn were 93c to $1.26 per bu, flat to up 11%, and for soybeans were $1.18 to $1.65 per bu, up 3% to 9%.
Grain freight demand remains strong
China typically buys mainly from Brazil during the summer months (when U.S. soybean supplies are lowest) and returns to the U.S. market in the fall and winter months as the new U.S. crop becomes available, although U.S. shipments of corn and soybeans (to all destinations) set monthly records over the summer, while wheat shipments struggled against lower-priced Black Sea region supply. However, total soybean export sales commitments to China as of Sept. 13 totaled 1,454,000 tonnes, down 83% from the same period last year. China has been forced to seek supply from other origins, with Brazil also setting export records in recent months.
For 2018-19, the U.S.D.A. projects the combined production of corn, wheat and soybeans at 21,397 million bus, up 3.2% from 2017-18, with soybeans record high at a time when the largest U.S. export market for the crop is in major limbo. Combined exports at 5,485 million bus are projected up 1.4% from last year based on higher wheat shipments more than offsetting slightly lower corn and soybean exports.
Old-crop soybean stocks on Sept. 1 totaled 438,105,000 bus, up 45% from a year earlier and above trade expectations. Sept. 1 corn stocks were up 7% and all wheat stocks were up 5%, the U.S.D.A. said in its Sept. 28 Grain Stocks report. The soybean harvest in the 18 major states was 23% completed as of Sept. 30, ahead of 20% both last year and as the 2013-17 average for the date. And November soybean futures in Chicago were $8.66 a bu as of Oct. 2, up 7% from contract lows set Sept. 18 but down 18% from the recent high of $10.60½ a bu on May 29.
“U.S. transportation demand for grain could be affected (during harvest) if soybean prices continue to fall and farmers decide to store more grain,” the U.S.D.A. said.