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Most Exportable Supplies Moved by Rail with Significant Effect on Basis

As we continue a series of articles on U.S. supply chain logistics, rail is arguably the most important mode of transporting wheat for export.

According to a recent USDA Modal Share Analysis Study, rail accounted for an average of 59% of inland transportation for wheat exports between 2016 and 2020, or an average annual total of 17.0 million metric tons. This article will focus on the importance of rail freight in wheat exports and address current trends in rail performance.

Two vertical bar charts showing the volume of U.S. wheat shipped domestically and to export locations by truck, rail and barge between 2004 and 2020.

Rail and barging are the main modes of transportation for wheat exports, as they can handle large volumes of grain over long distances. Together, they transport 89% of the total wheat export shipments. Source: USDA Modal Share Analysis Study.

An Interesting Year

In 2022, increased demand for railcars and performance issues sent U.S. rail rates soaring, with Secondary Railcar Auction Market Bids hitting their highest since 2014. Since then, rail rates have eased drastically. From March 2023 to July 2023 secondary bids for railcars have been negative, indicating that the current supply of railcars is sufficient for meeting the needs of shippers.

Decreased volumes and the subsequent decrease in rail tariff rates and Secondary Railcar Market Auction Bids have added additional pressure to already low basis levels, helping boost the competitiveness of U.S. wheat to importers. However, as the 2023 soy and corn harvest progresses, we can expect rail rates to rise due to increased demand and a higher volume of grain moving via rail.

This vertical bar and line chart show a comparison of grain carloads average from previous years to the current 4 week period up to 8/25/23.

According to the latest Grain Transportation Report, grain carloads (corn, soybeans, and wheat) moved by Class I railroads were down 3% from the previous week and are sitting 22% below the three-year average. The current decreased volume alleviates pressure on basis as rail companies have a sufficient supply of cars to meet the current demand. Source: September 3, 2023 USDA Grain Transportation Report.

Even so, the outlook for fall logistics appears positive. In a recent interview with “Freightwaves,” transportation export Jay O’Neil indicated that “Weather is always a question mark that makes it [performance] impossible to predict. But overall, I think the railroads… have some excess capacity because of [reduced grain export volumes]. I think [railroads] are very much looking forward to the harvest season … So, I don’t see any particular influences right now that should get in their way and prevent them from providing a decent service for harvest.”

Part of a Reliable System

U.S. Wheat Associates (USW) is committed to sharing transparent and pertinent information to customers about inland logistics issues. It is beneficial for U.S. wheat importers to be aware of transportation trends, as seasonal shifts and potential issues have a direct influence on export basis and the Free-on-Board export price.

Encompassing the largest share of inland logistics, the railroads are a critical component for moving U.S. wheat to export. After last years’ service disruptions, steps have been taken to help address the root issues such as hiring additional crew and investing in infrastructure. U.S. railroads are committed to moving U.S.-grown commodities. With diverse origination options and numerous modes of transportation, regardless of the class or export point, rail helps U.S. wheat remain the most reliable choice for world importers.

This article is part of a series outlining the inland logistics for U.S. wheat, highlighting barge freight, the railroads, infrastructure investments, and maritime transportation trends.

By USW Market Analyst Tyllor Ledford

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CPKS Railroad Merger and U.S. Wheat Exports

On April 18, 2023, Kansas City Southern Railway Company (KCS) and Canadian Pacific Railway Limited (CP) officially merged to create a new Class 1 railroad CPKS, the first single-line service across Canada, the U.S., and Mexico (map above from Trains.com).

CPKC railroad logoRail logistics comprise a sizeable portion of U.S. wheat export basis, encompassing the costs of transporting wheat from the vast growing region in the central U.S. to export hubs in the Great Lakes, Gulf of Mexico, and the Pacific Northwest. The acquisition brings the total number of Class 1 railroads in North America from seven to six and may potentially impact wheat exports as the industry restructures in response to the merger.

In this article, we will summarize the importance of domestic rail for U.S. wheat buyers and look at the current trends in bulk rail as we look ahead to the merger’s implications.

Historical Perspective

Since the 1980s, the railroad industry has seen significant consolidation, going from 33 North American Class 1 railroads in 1980 to six in 2023.

In 2022 the four largest rail companies, Burlington Northern Santa Fe (BNSF), Union Pacific (UP), Canadian Pacific (CP), and Canadian National (CN), held 82% of the market share for grain origination in North America, creating an oligopoly in the U.S. rail transportation sector. The increased consolidation decreased the number of firms in the market competing for business, shifting the market power to favor rail service providers.

Pie chart showing the % market share for the 7 Class 1 railroad companies in North America before the merger of CP and KCS.

The top four Class 1 railroads in North America control 82% of the grain market share. The merger of CP and Kansas City Southern brings the total number of Class I railroads from seven to six. Source: U.S. Department of Agriculture, Agricultural Marketing Service. Grain Transportation Report. April 20, 2023. Web: http://dx.doi.org/10.9752/TS056.04-20-2023

A potential consequence of increased concentration in the industry, tariff rates for all grains have steadily increased over the last 20 years; thus, making transportation costs greater for exporters who, in turn, increase basis for customers. A 2020 study by USDA found that from 2000 to 2014, rail rates increased by 30% for wheat, 31% for corn, and 30% for soybeans. Since 2014 wheat rail tariff rates have increased by an additional 18%. As rates rise, it erodes the competitiveness of U.S. wheat classes in the export market and makes U.S.-origin wheat more expensive for importers.

Line graph showing an increase in railroad tariff rates for corn, soybeans, and wheat from 2010 through 2023 to date.

Rail tariff rates have been on the rise for all bulk grains since 2010. Rates continued to increase even as shippers experience what they considered poor performance through most of 2022. Source: USDA AMS Rail Dashboard

Ongoing Issues

Throughout 2022 rail logistics faced considerable challenges that impacted the quality of performance throughout the bulk rail sector, including service interruptions and crew shortages. In October 2022, Secondary Railcar Auction Market Bids hit their highest level since 2014, reflecting massive demand for rail freight and an insufficient supply to meet the demand.

Graph showing historical secondary auction market railroad rates for grain from 2013 through 2023 to date.

Secondary auction market rates move more quickly than tariff rates and better reflect current supply and demand shifts as shippers buy and sell claims for guaranteed service. If demand is high during a particular period, bids increase, meanwhile when supplies are adequate secondary rates will hover near zero or negative if demand hits a low threshold. In the fall of 2022, Secondary Railcar Auction Market Bids hit their highest level since 2014. Source: USDA AMS Rail Dashboard

Performance issues and subsequent demand for rail cars contributed to elevated export basis throughout the fall of 2022. Strong basis levels and elevated wheat futures, a response to the geopolitical tensions brought on by the Russian invasion, created enormous price risk for U.S. wheat importers and further diminished U.S. wheat’s competitiveness in the world market.

Line graph showing changes in the "basis" for hard red spring wheat to Gulf, PNW and Lakes ports from April 2022 to April 2023 to demonstrate a spike attributed to railroad rates for shipping wheat.

Though wheat basis levels often increase during the fourth quarter of the calendar year as exporters focus on corn and soybean export programs, in the fall of 2022 basis levels skyrocketed. Basis levels jumped to $0.50/bu ($18.40/MT) over the previous five-year average, combined with historically high futures prices. Source: U.S. Wheat Associates Price Report

A Look Ahead

The Surface Transportation Board approved the merger on the grounds of efficiency, positive environmental impacts, improved rail performance, and increased employment; still, the STB necessitated additional oversight to ensure the preservation of competition. Despite the approval, the U.S. wheat industry remains skeptical of the merger’s effects on wheat export competitiveness, taking into account performance issues from major railroads, basis and logistics costs, and the oligopoly of the U.S. railroads.

On the other hand, CPKCS could help increase competition in some regions, due to increased access routes previously unserved by individual companies. Nevertheless, U.S. Wheat Associates will continue to support oversight from the STB and policies such as reciprocal switching that help preserve competition and contribute to our dependable, reliable supply chain.

By USW Market Analyst Tyllor Ledford

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Wheat Industry Helps Build Awareness of Rail Shipping Challenges

In recent months, U.S. grain rail shipping has faced a host of service-related challenges ranging from delayed cars to metered traffic and dramatic spot freight market increases. Those service problems reached such elevated levels that the U.S. rail regulatory body, the Surface Transportation Board (STB), stepped in.

The STB will now require the four largest rail carriers to submit a host of documents and conduct biweekly check-ins with the agency until service levels are restored.

The U.S. wheat industry depends heavily on rail shipping to move the crop from farms and local elevators to domestic customers and to export elevators. And USDA reports that railroads ship 25% of all U.S. grains. That is why U.S. Wheat Associates (USW) and its Transportation Working Group have coordinated with other organizations to highlight the challenges rail shipping has faced.

New Requirements

The move by the STB shows the agency is taking rail shipping concerns seriously. Carriers now must develop service recovery plans and submit regular progress reports. The regulator will also require all Class I railroads to report on customer-centric performance metrics and employment data for a six-month period. According to their published decision, the STB’s actions are “to promote industry-wide transparency, accountability, and improvements in rail service.”

The challenges with rail service are clear. The American Farm Bureau Federation put together an extensive report showing the severity of the shipping disruptions. For example, in the year after the first quarter of 2021, unfilled grain car orders went up 47%. The number of grain cars that were at least 11 days overdue went up 107%. Rates in the secondary rail market increased, and rail delivery speeds declined during the same period.

Shuttle loading system to present rail rates background

A 110-car shuttle train is loaded with grain at an inland elevator. The U.S. wheat industry depends heavily on rail shipping to move the crop to domestic customers and export elevators.

Threats of Service Cuts

In mid-April, the Union Pacific (UP) Railroad announced that it would start metering traffic if shippers did not voluntarily reduce their freight-car inventories. In a statement, UP said it had “experienced some setbacks – including numerous service interruptions, crew shortages…and delays to our network.” UP added that “additional inventory has led to more congestion in yards, an imbalance of our resources, and further slowdown of our operational performance.”

In response, CF Industries, a major fertilizer producer, said such actions by the railroads would put crops at risk by curtailing fertilizer shipments ahead of the spring planting season.

Addressing the Negative Impact

In March 2022, the National Grain and Feed Association (NGFA) urged the Surface Transportation Board (STB) to address “significant rail service disruptions,” which have negatively impacted the nation’s supply chains. Following that letter, the STB was quick to react and scheduled public hearings held in late April. Those hearings featured shippers, rail labor unions and rail company executives.

The Agricultural Transportation Working Group (ATWG), a representative body made up of agriculture-oriented trade groups, including USW, sent a letter to the STB on April 21 and urged an immediate resolution to the “current nationwide freight rail service challenges.” The group urged the STB to take appropriate measures that would “deter, and hopefully prevent future service failures,” which include the establishment of reciprocal switching rules.

Additionally, USW filed joint comments to the STB hearing with the National Association of Wheat Growers (NAWG) and the North American Millers’ Association (NAMA). The USW Transportation Working Group, led by North Dakota Wheat Commission Policy and Marketing Director Jim Peterson, also met with each member of the STB to share concerns regarding the current railroad challenges and to point out the benefits that competition-inducing policies provide, such as reciprocal switching.

A Welcome Sign

The orders issued by the Board last week are a welcome sign that rail customers like wheat farmers are being heard. U.S. Wheat Associates commends the STB’s initial steps and fast action and encourages further measures to improve rail logistics and hold railroads accountable to their customers.

The following are several other USW rail and rail performance stories since early 2020:

USW Transportation Group Supports Proposed Change In Rail Rate Review
Secondary Rail Rates, Tight Elevation Capacity Continue To Support Wheat Export Prices
Rail Merger Proposals Should Improve Competition, Hold Down Wheat Shipping Rates
Rail Rates Directly Affect Basis Values For Wheat Importers
Agriculture Calls On STB To Increase Rail Competition Following Executive Order
USW To Surface Transportation Board: “Uphold The Values Of Competition”

By Michael Anderson, USW Market Analyst

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Reciprocal Switching Policy Would Benefit U.S. Wheat Importers

U.S. Wheat Associates (USW) joined other major shipping groups this week in calling on the U.S. Surface Transportation Board (STB) to adopt policies that have the potential to lower costs and improve service for wheat rail shippers and their customers. The policy proposal, commonly referred to as “reciprocal switching,” has been under the STB’s consideration for some time.

Reciprocal switching seeks to provide rail shippers such as grain elevators who are commonly only served by one railroad access to ship on other railroads, provided they are located within a reasonable switching distance. The desired effect is the creation of competition between railroads, where previously there was none. That competition has the potential to lower costs for USW customers around the world.

What is Reciprocal Switching?

The STB defines reciprocal switching (sometimes referred to as competitive access) as follows: Under reciprocal switching, an incumbent carrier transports a shipper’s traffic to an interchange point, where it switches the rail cars over to the competing carrier. The competing carrier pays the incumbent carrier a switching fee for bringing or taking the cars from the shipper’s facility to the interchange point, or vice versa. The competing carrier’s total rate to the shipper incorporates the switching fee. Reciprocal switching thus enables a competing carrier to offer its own single-line rate to compete with the incumbent carrier’s single-line rate, even if the competing carrier’s lines do not physically reach a shipper’s facility.

Freight Waves, an online publication, defines this concept in simpler terms: reciprocal switching occurs when a shipper has access to one freight railroad but wants access to a nearby competing freight railroad to cultivate a competitive pricing environment. A shipper can get that access at an interchange between the two railroads.

An executive order by President Biden encouraged the STB  to “promote competition and economic opportunity,” and specifically to encourage reciprocal switching.

Seal of the Surface Transportation Board

The Surface Transportation Board is an independent federal agency charged with the economic regulation of various modes of surface transportation, primarily freight rail. STB held a hearing on proposed reciprocal switching regulations March 15 to 16, 2022, 

What USW Advocates

Except for the Pacific Northwest, U.S. wheat production is not close to river transportation, and export facilities are too far away to rely on trucking. As a result, railroads play a key role in the export supply system. Over the last decade, rail rates have increased exponentially, and rates to ship wheat are higher than for other commodities with similar handling characteristics.

USW’s comments filed with the STB noted those higher rates between 22% and 39% for wheat movements compared to corn in four major regions. A June 2017 USDA Agricultural Marketing Service study corroborated these results, finding no underlying cause driving the increases in wheat rates. These premiums relative to other commodities demonstrate the current market power of U.S. railroads and the lack of competition afforded to wheat shippers.

USW also encouraged the STB to consider other relevant factors as it considers a new policy, such as: (1) whether the arrangement would further the rail transportation policies in 49 U.S.C. § 10101; (2) the efficiency of the proposed route; (3) whether the arrangement would allow access to new markets; (4) the impacts, if any, of the arrangement on capital investment, quality of service, and employees; (5) the amount of traffic that would be moved under the arrangement; and (6) the impact, if any, of the arrangement on the rail transportation network.

U.S. Wheat Competitiveness

Reciprocal switching has existed in Canada for many years, called “interswitching.” The situation there makes a compelling comparison to the United States because the spring wheat and durum growing regions are similarly positioned in the country’s interior. And the shipping distances to export facilities are nearly identical. However, despite the similarities, work collected by one of USW’s member state wheat commissions showed comparable origin-to-export point rail moves in Canada were 30% less than similar U.S. moves at the time.

Differing government rail policies (including more favorable terms for reciprocal switching) are one of the few significant differences in market position between the two countries. USW also realizes that the competitive access benefits Canadian farmers enjoy will make the proposed merger of Canada’s CP railroad with the KCS more advantageous for Canadian growers – if the STB does not apply its standard to enhance competition.

More Efficient Competition

USW believes that implementing reciprocal switching will make the rail system more efficient. We hope it will compel the railroads to provide better service and be more prepared by introducing more competition into the rail industry.

By Michael Anderson, USW Market Analyst 

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USW to Surface Transportation Board: “Uphold the Values of Competition.”

In 2021, the Canadian Pacific Railroad (CP) announced plans to purchase the Kansas City Southern Railroad (KCS). After a few sidetracks, the proposed transaction is now under final review by the U.S. Surface Transportation Board (STB) to determine whether the two Class I railroads can merge. If successful, the new system will become the first tri-national railroad in North America.

On Feb. 22, U.S. Wheat Associates (USW) filed comments with the STB, stating opposition to the rail merger as “inconsistent with the public interest.” USW also suggested that, should the merger proceed, the STB should impose certain conditions “to eliminate the adverse impacts this transaction will have on wheat shippers that are large rail shippers in the United States.”

Wheat Depends on Rail

Farmers export approximately 50% of their wheat crop each year. As such, U.S. farmers depend on the railroads to provide reliable and affordable access to export markets. Wheat farmers rely on the railroads in large part because of location. A significant volume of exportable wheat is grown in the Plains stretching from Montana to Texas and the Pacific Northwest (PNW). Rail transportation in the PNW is supported by regional river access to ports. Shippers in the Plains states are captive to rail freight through their distance from any genuine alternative.

In its comments to the Surface Transportation Board, USW noted that the market power held by the Class I railroads* has serious implications for U.S. wheat’s competitiveness compared to other major exporters. Rail rates over the last decade have increased exponentially, and rates for wheat are higher than rates for other commodities despite similar handling characteristics.

“Where combination is possible, competition is impossible.” – George Stephenson, English Civil and Mechanical Engineer, known as “The Father of Railroads.”

Canadian Rail Advantages

The proposed transaction is especially relevant to U.S. wheat farmers as their Canadian competitors enjoy government protections that shippers in the United States do not. For example, the Canadian government enforces a Maximum Revenue Entitlement (MRE) on grain transportation to port facilities. This allows Canadian exporters to undercut U.S. exporters through rates set by statute instead of the market. During times of rail congestion, Canadian grain shippers have successfully lobbied their government to prioritize grain shipments over other sectors and have access to policies such as final offer rate arbitration and competitive switching. USW told the Surface Transportation Board if the merger would extend such treatment to the expanded CP line, Canadian shippers would enjoy an advantage that U.S. shippers under current conditions cannot.

The current KCS rail system also provides a direct link to the largest U.S. wheat importing customer, Mexico. Combining the two proposed rail lines will likely increase traffic and congestion on the combined network. In addition, nearly all Class I railroads have adopted a practice known as Precision Scheduled Railroading (PSR). USW suggested that practice actually created poorer service and higher rates for rail shippers over the last five years.

Map of the U.S. showing the rail system created by the Canadian Pacific Railroad purchase of Kansas City Southern Railroad

If approved by the U.S. Surface Transportation Board, the purchase of Kansas City Southern by Canadian Pacific Railroad would create the first tri-national railroad in North America.

Long History of Seeking Fairness

Arguments about rail competition today would not be unfamiliar across past generations of wheat farmers. Railroads have had a strong hand for a long time. During the industrial age, business interests sparred with the government over how to manage the expanding railroads.

The Interstate Commerce Act of 1887 was the first time Congress stepped in to regulate the railroads with “just and reasonable rate structures.” The railroad industry looks very different today. In 1980, the Staggers Rail Act made big changes to rail regulations. Infrastructure in the U.S. changed significantly in the decades between the two acts, necessitating changes to railroad oversight. Regulatory bodies meant to provide supervision have also changed. The Interstate Commerce Commission was abolished in 1996 and replaced with the Surface Transportation Board.

Enhancing Service

The STB must now answer a question it posed to railroads at the start of the 21st Century: “how to improve profitability through enhancing the service provided to their (railroads) customers.” Last summer, the Biden Administration directed the Surface Transportation Board to “promote competition and economic opportunity and to resist monopolization.”

In its comments filed this week, USW encouraged the STB to uphold the values of competition both for the wider railroad industry and in its oversight of “an economically sound and competitive rail transportation system.”

*There are currently seven Class 1 freight railroads in the U.S., a distinction defined by the railroads’ market capitalization.

By Michael Anderson, USW Market Analyst

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What is Driving Wheat Market Volatility?

Since late December, U.S. wheat futures prices moved down through mid-January and have bounced up and down since then. For example, prices surged early the week of January 24 but lost steam by the end of the week. And the March ’22 hard red winter future price lost 4% as of Wednesday’s close. Such wheat market volatility is a challenge for importers. And there are many elements adding volatility that deserve a closer look.

Chart shows weekly wheat futures closing prices from November 2021 through late January 2022 demonstrating wheat market volatility

There is Wheat Market Volatility in the weekly closing futures prices for soft red winter (CBOT), hard red winter (KCBT) and hard red spring (MGEX) between November 2021 and late January 2022. Source: USW Price Charting Tool.

Russia and Ukraine

The ongoing tension between Russia and Ukraine has certainly added wheat market volatility. Both countries are major grain exporters, and the market seems to accept that any disruption there could have an immediate effect on supply. One grain trader quoted in AgriCensus said, “you cannot ignore [the topic], and [it] makes any trade decision very difficult to make … until things get clearer.”

But not everybody is so skittish. SoveEcon, a Russian agriculture consultancy, raised its forecast for 2021/22 Russian wheat exports by 200,000 metric tons to 34.4 million metric tons. The consultancy pointed out that the last time Russia invaded Ukraine, it did not disrupt grain exports. However, it did spark wheat market volatility as Black Sea wheat prices rose 25% in just two months.

Persistent Drought

Commercial futures trading also plays a role in wheat market volatility. The managed money takes quick profits that pressure the markets. But speculators also appear to be bullish in their wheat outlook primarily because of ongoing weather challenges to the old and new Northern Hemisphere wheat crops.

And yet a forecast for rain and snow in those areas this week prompted that significant drop in HRW futures prices. It is too early to say what the rest of 2022 has in store, but moisture is needed to put new crop winter wheat on a good footing. So, wheat importers can expect the market to continue moving with weather news.

The illustration of the 02022022 NOAA US Drought Monitor map shows persistent drought in key US wheat production areas contributing to wheat market volatility

Drought Persists in much of the U.S. Plains and Pacific Northwest wheat production regions. To help prepare for ongoing wheat market volatility, importers should monitor how this evaluation changes. Source: NOAA.

Logistic Challenges

Grain traders have had a lot to say recently about rail performance and its impact on export basis the last few months. Since December, a slowdown in rail logistics has supported wheat export basis. Fortunately, traders say those issues improved in January, but rail service for the trade is still behind where it was the year before.

According to the Association of American Railroads, U.S. weekly rail traffic for the week ending January 15 was down 7% compared to the same week last year. All grain shipments, including wheat, were down 11% the same week. In the USDA’s weekly Transportation Report, bids for shuttle service in the secondary railcar market have been high, although down significantly from where they were at the beginning of January.

New Pandemic Normal?

Lastly, we look at the persistent presence of COVID-19. This is the third winter of pandemic-induced challenges. Though lockdowns are increasingly rare, pandemic disruptions continue to rattle parts of the marketplace. It continues to be a significant challenge for logistics. That includes worker shortages and increased absences. Supply chain bottle necks will likely continue to be part of the wheat market volatility equation in 2022.

Help is Available

As these forces continue to affect wheat market volatility, importers can be assured that the U.S. wheat store will remain open for efficient delivery of high-quality milling wheat. Our local U.S. Wheat Associates (USW) representatives are available to help buyers navigate the market’s challenges – and opportunities – no matter how much volatility it throws at them.

By Michael Anderson, USW Market Analyst

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Things to Know When Buying U.S. Wheat

U.S. Wheat Associates (USW) works on behalf of U.S. wheat producers to help millers, bakers, wheat food processors and government officials understand the process of buying U.S. wheat at the best value possible.

The U.S. grain marketing system is reliable and transparent but can be complicated. So, USW keeps buyers and wheat food processors informed about the wide variety of U.S. wheat classes, how wheat moves to export markets as well as current crop quality and prices.

Interactive map to help when buying U.S. wheat

USW has developed an interactive map of regional U.S. wheat production by class and how it is transported to export terminals.

As part of a recent seminar for overseas buyers, USW Vice President and West Coast Office Director Steve Wirsching recorded a presentation titled “U.S. Wheat Market Overview.” From how regional climate affects wheat quality and USW’s process for sharing estimated export prices to how export basis regulates the flow of grain to market and the role of the Federal Grain Inspection Service (FGIS), Wirsching provides an important primer for buying U.S. wheat.

Many Resources for Buyers

Click on the image below to see the entire presentation that was used in the buyer’s seminar in July 2021. Additional information is always available online. And most importantly, USW representatives in 13 offices around the world, are always ready to help our customers, through trade service and technical support, making buying U.S. wheat a rewarding experience.

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Freight Markets Ride the Waves of Uncertainty

Look at a line graph that tracks freight markets over the last two years and you may mistake it for the very waves the vessels traverse on the open ocean. Up and down the vessel goes, and so have the rates.

The Baltic Dry Index (BDI), an assessment of the average cost to ship raw materials such as grains, coal and iron ore, hit a 13-year high on October 7 at 5,650, yet three weeks later, it climbed down 28% to 4,056 on October 27.

Disruptions and More

The effects of COVID-19 have turned the traditional flow of sea commerce upside down. And as economies reemerge from the pandemic-induced lull, logistic obstacles have abounded. “Global Supply-Chain Problems Escalate” and “Cargo Piles Up at Ports” are just two of the headlines outlining the shipping industry’s challenges. Disruptions to the supply chain, port congestion, and logistical challenges all add to the run-up in freight markets.

Grains, including wheat, are traditionally shipped using bulk carriers like Panamax, Handymax and Capesize vessels that contain large cargo holds to segregate grains. Cargo ships, the more familiar vessel for the trans-ocean shipping of retail items, only carry small volumes of grain. However, as extraordinary times created the need for more extraordinary efforts, the massive U.S. retailer Walmart recently chartered a dry bulk cargo ship to carry merchandise to circumvent global supply chain disruptions. Other retailers may do the same as the holiday season approaches.

Idled Vessels

That would not be a bargain because 16% of the world’s dry bulk fleet is waiting to unload at various ports around the world, with 6% of those vessels waiting at Chinese ports. The inefficiencies caused by loaded vessels idling outside ports translate directly to tighter supply despite higher demand and, thus, higher prices. Dry bulk shipping rates were below $20,000 per day last January but rates, led by Capesize vessels, hit $85,000 per day in September. Grain buyers still must ship wheat and pay the higher prices, pushing up all rates across dry bulk carriers.

Global import for grain has also increased year-over-year. For example, China’s demand for grains has equated to around 25% of worldwide demand. Looking back, in the mid-2000s, the number of dry bulk carriers outweighed the demand for such vessels. However, an economic boom in China starting around 2006 saturated the dry bulk market leading to greater demand and a soaring BDI. Eventually, shipping companies added to their fleets, and the added capacity helped freight markets to stabilize. Then the global financial crisis reduced the demand for such vessels and slowed shipbuilding. Now a new spike, starting in 2020, has driven demand up again and daily rates for dry bulk shipping. The nearby market remains high while the forward market is much lower, creating a significant inverse. Exporters who need to ship now must pay the higher prices.

Freight Markets Export Elevator

Doubled

Importers in South Korea, the fifth-largest U.S. wheat customer, based on a 5-year average, has seen freight rates double from US$40 per metric ton (MT) in 2020 to around US$80 per MT dollars today, said C.Y. Kang, Country Director for U.S. Wheat Associates (USW) based in Seoul. Kang also noted that the BDI Index in 2020 averaged 1,064 while this year it has averaged 2,941, a 176% increase. Egypt, the world’s largest wheat importer, has suspended the 15% price advantage it offered the state shipping line as GASC, the Egyptian state commodities buyer, tries to find ways to lower the overall cost of wheat imports.

High oil prices are also keeping freight rates elevated. On Tuesday, oil futures hit their highest levels since 2014 but started to slump Thursday, hitting their lowest level in two weeks at $80.58 as U.S. crude inventories rose more than expected. One market analyst said that energy prices are unlikely to weaken for the remainder of the year as supply remains restrained, but demand returns to the 5-year average. Oil sold for around $15 per barrel in April 2020 versus today, a 431% increase.

Seeing the Top?

Jay O’Neil, a commodities consultant, has outlined all today’s obstacles in the export freight supply chain in a video presentation that will be available to U.S. wheat customers in early November. On top of long lines at ports, there is a shortage of vessels, containers, skilled labor at ports, warehouse workers, a 30% shortage of truck drivers, railroad cars and even chassis to attach containers to train cars. In his presentation, O’Neil says that despite the logistical mess, which could extend into mid-2022, the dry bulk market is likely to have hit its top.

As these circumstances change globally, logistical headaches may ease as more workers return and more consistent patterns resume. For now, though, the tight supply of vessels and the consistent appetite for grains is helping keep the global dry bulk business at historic levels.

Stay up to date on U.S. wheat market information at https://www.uswheat.org/market-information/.

By Michael Anderson, USW Market Analyst

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How the U.S. Wheat Export System Delivers Quality and Value

Private grain companies in the U.S. wheat export system in the Pacific Northwest (PNW) overcome challenging logistics to deliver wheat that consistently meets contract specifications to buyers around the world. Grain sellers based in Gulf, Lakes and Atlantic ports operate very similar logistical systems to export wheat and other grains.

We are sharing a video and written look at how these successful companies do their work serving U.S. wheat farmers and overseas wheat buyers.

Sourcing Wheat From the Interior

An overseas buyer contracts with an exporter for wheat of specific class, grade, quality and price. It is then up to the exporter to source that wheat and get it loaded at the contracted price.

They do this reliably through a very efficient, system that moves the wheat to market using trucks, barges and rail to the vessel, often within a two-week shipping window.

U.S. wheat export system starts at country elevators.

U.S. wheat export system starts at interior elevators where wheat purchased from farmers is loaded onto train cars for delivery to export elevators.

In the U.S. wheat export system, grain sellers source U.S. wheat supplies from local elevators close to the farms.

Hard red spring (HRS) wheat comes mainly from the Dakotas and Montana. Hard red winter (HRW) wheat originates mostly in Montana, Wyoming, Nebraska and some from PNW states.

Those classes are loaded onto dedicated 110 car unit trains that haul the wheat over the Rocky Mountains and down the Columbia River Gorge to the export elevators.

Farmers deliver much of the soft white (SW) and white club wheat grown in Washington, Oregon and Idaho to grain facilities on the Snake, Columbia or Willamette Rivers where it is loaded onto barges or trains for the ports.

In the U.S. wheat export system, barge transportation is efficient and safe.

In the U.S. wheat export system, barges are the most cost-efficient transportation method. In the Pacific Northwest, wheat can move by barge to export elevators from as far away as Idaho because of the series of locks and dams that make safe, efficient navigation possible on the Columbia-Snake River System.

Because U.S. wheat is graded and segregated by class and quality at every step of the supply system, the export elevator knows they will receive the wheat they need to fill their customer’s contract.

Highly Automated Process

The receiving process at elevators in the U.S. wheat export system is highly automated. Numerous sensors and cameras allow only a few people to unload the wheat very quickly into temporary holding bins segregated by class, grade and quality.

Barges in this tributary can discharge 600 metric tons of wheat per hour. Unit train cars are opened and unloaded in less than 18 hours.

The export elevator’s shipping system is also automated. One person from a control room can select wheat from different storage bins and blend them together to be loaded onto the bulk vessel the buyer has chartered.

But, under U.S. law, that cannot happen until the wheat is inspected to certify that the quality loaded matches the customer’s specifications.

This highly regulated, standardized process is conducted by the USDA’s Federal Grain Inspection Service, or a state inspection agency supervised by and subject to the same standards as FGIS.

FGIS inspection and certification is required by law in the U.S. wheat export system.

FGIS inspection makes  the U.S. wheat export system uniquely valuable. A random sample of every sub lot of wheat is broken down into specified quantities by FGIS officials and weighing, inspection and certification is standardized and objective. FGIS inspection data also yields information that buyers can use to get the most value from their tenders. 

In this process, a specific amount of wheat is sampled every 15 to 20 seconds as it flows from the elevator into designated shipping bins holding from 1,000 to 2,000 metric tons.

The sample is collected in the FGIS lab at the elevator and the shipping bins remain closed while FGIS inspects each sample.

When the inspectors certify that the sample meets the customer’s contract specifications, FGIS opens the shipping bins, allowing the elevator to load that wheat onto the vessel. If not, the wheat in the shipping bin is returned to the elevator to be re-blended.

Quality Assurance

FGIS saves sub-lot samples from each shipping bin for 90 days in case an issue comes up when the wheat arrives at its destination.

To give the buyer additional quality assurance, about 10 percent of all samples are sent to a national FGIS Board of Appeals and Review to be re-inspected for quality control monitoring.

Those inspections generate valuable data that customers can use to get even more value from their purchases of high-quality U.S. wheat. Your U.S. Wheat Associates (USW) representative can help you make good use of this information as you write your tenders.

In the U.S. wheat export system, grain companies move wheat from inland farms and elevators to deep water ports more efficiently and economically than any wheat supply system in the world.

In the U.S. wheat export system, grain companies move wheat from inland farms and elevators to deep water ports more efficiently and economically than any wheat supply system in the world.

It is very reassuring to wheat importers that U.S. grain handlers segregate wheat by class and quality, and maintain its wholesome character, while moving wheat from inland farms and elevators to deep water ports more efficiently and economically than any wheat supply system in the world.

Learn More

More information about the U.S. wheat export supply system is available from USW online or from your local representative, including an interactive map of the system, a section on “How to Buy U.S. Wheat” and other resources.

 

 

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Agriculture Calls on STB to Increase Rail Competition Following Executive Order

On the heels of a White House Executive Order on competition this month, a large group of agricultural shippers recently wrote to the U.S. Surface Transportation Board (STB) to advocate for several policy proposals in front of the board that can make a significant difference in increasing rail competition in transportation of wheat and other commodities.

The letter was written by a diverse grouping of agricultural organizations, including U.S. Wheat Associates (USW), that created an informal coalition, the Agricultural Transportation Working Group (ATWG), in 2003. The group meets regularly to discuss critical transportation policy issues that affect U.S. agriculture. The group also identifies policy priorities and suggests needed changes to help maintain U.S agriculture’s international competitiveness.

Elevator and train to illustrate rail competition story.

About 70% of U.S. wheat is transported by train from inland country elevators to domestic and export markets, so rail competition is important for the entire supply chain.

More Room for Negotiation Needed

With about 70% of U.S. wheat moving to domestic and export markets by rail, railroads provide an essential logistical function that neither farmers nor grain companies can perform on their own. Yet those shippers are often “captive” because they lack economic alternatives to a single railroad.

The letter specifically encouraged STB to enable “competitive switching” (see below for more information) and urged “the Board to finalize other regulations … to provide rail customers greater ability to negotiate prices and challenge unreasonable rates and fees.” The letter points out that “fees are increasingly becoming a larger source of revenue for railroads and expense for their customers.” Click here to read more about how rail rates affect U.S. wheat export basis.

The President’s Executive Order was particularly broad and focused on proposals to increase competition in many industries, with the transportation portion including rail competition and maritime initiatives,  stating that “robust competition is critical to preserving America’s role as the world’s leading economy … inaction has contributed to these problems, with workers, farmers, small businesses, and consumers paying the price.”

“Competition is critical to the health of the rail industry and the significant role rail serves in the larger economy, and this Executive Order will help focus attention on these important issues.” – Surface Transportation Board Chairman Martin J. Oberman

The Order explicitly states that agencies like the STB and Federal Maritime Commission (FMC) can influence the conditions of competition through their exercise of regulatory authority. In addition to the competitive switching rule, the STB has the latitude to propose or finalize other options such as bottleneck rate rules and Final Offer Rate Review – for which USW has advocated – both of which would start to tip the scales in favor of a level playing field for rail shippers.

Opposition Anticipated

While the rail industry will almost certainly oppose any changes to the current regulatory model that affects rail competition, executive pressure and political initiative may encourage the STB majority to act on these proposals (click here to read STB Chairman Martin J. Oberman’s statement on the President’s Executive Order). Many industry watchers are even speculating that the focus on increasing competition and attention on consolidation will factor into the STB’s consideration of the proposed Canadian National Railways purchase of Kansas City Southern Railroad – something the USW Wheat Transportation Working Group is closely watching.

In USW’s mission “to enhance wheat’s profitability for U.S. wheat producers and its value for their customers,” a potential solution may be found in the President’s directive if it indeed does rebalance the relationship between railroads and their customers.

By Michael Anderson, USW Market Analyst

“Competitive switching” is a policy proposal in which a rail customer such as an inland country grain elevator could seek bids for service from nearby competing railroads even if the customer is not located directly on the competing railroad’s track. It is designed to inject competition into what is otherwise a captive transportation market, where many rail customers, especially grain elevators, have direct access to only a single freight railroad, leaving them with little to no bargaining power over shipping rates. Freight rail reform advocates who have sought such policies for a long time are enthusiastically looking to the President’s “Promoting Competition in the American Economy” executive order to add momentum to the call for greater competition.

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Think Farm Export Programs Don’t Matter? Think Again.

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