Grain shippers brace for tight rail market

US grain exports expected to be higher in 2020-21

As U.S. grain producers prepare for the 2020-21 crop year, one concern is that the Class I railroads won’t have enough network capacity to handle the double whammy of a bountiful harvest and higher export volumes.

Unlike harvests in recent years, there is stronger export demand from China following the Phase One trade deal in which China agreed to buy as much as $80 billion worth of U.S. agricultural goods over the next two years. 

“You’re going to see our supply chain tasked with having to do a lot,” said Soy Transportation Coalition Executive Director Mike Steenhoek. Although this is a good problem to have, “we’re anticipating that rail service will be aggressively used for the remainder of this year,” he said.

At last Thursday’s National Grain Car Council meeting held by the Surface Transportation Board (STB), grain shippers praised the railroads’ service performance, noting that the railroads have been quick to bring railcars and locomotives back online. The railroads had put locomotives in storage in response to depressed rail demand this spring because of the COVID-19 pandemic.

But grain shippers are also concerned that there might not be enough network capacity to handle the volume surge because of the operational changes made as a result of the Class I railroads’ deployment of precision scheduled railroading (PSR), an operational model that seeks to streamline operations. Those operational modifications include changes to service destinations and more frequent trains but with different capacity parameters. All of the Class I railroads except BNSF (NYSE: BRK) have adopted some form of PSR.

“Are we ready for this big surge that we haven’t seen” in a while? asked Chris Boerm, president of ADM Transportation at Archer Daniels Midland. Boerm was one of the presenters at the National Grain Car Council meeting. He noted that one of the challenges to bring train crews back online following the pandemic-related furloughs is the piecemeal lifting of the states’ social distancing restrictions. 

Boerm also said there are other market dynamics at play that could impact the supply chain for grain exports, such as the recent derecho in Iowa and its effect on the corn harvest there, dry weather conditions, concerns over La Niña and changes in the ocean vessel spread between the Pacific Northwest and the U.S. Gulf Coast. 

“Being nimble is so important because things can change quickly,” Boerm said. 

Steenhoek, in an interview with FreightWaves, echoed Boerm’s sentiments. 

“The wild card will be to what extent will weather interfere,” as well as how much grain will have to compete with other commodities such as coal and crude oil for rail service, Steenhoek said. 

Soybean export volumes are also likely to be higher this year through the Pacific Northwest than the Gulf Coast. The Pacific Northwest is geared toward the Chinese export market, while there is more market diversity out of the Gulf Coast, Steenhoek said.

Another factor that can complicate soybean shipments is the interplay between ocean vessel rates and rail rates between the Pacific Northwest and the Gulf Coast, as well as the interplay between barge rates and rail rates to the Gulf Coast, Steenhoek said. Additionally, adverse weather conditions and other factors such as lock rehabilitation on the Illinois River can also impact barge rates. Those factors can divert traffic onto the Mississippi River and to rail, he said. 

At last Thursday’s National Grain Car Council meeting, the freight railroads responded that they have taken measures such as adding covered hoppers, advancing shuttle train starts and adding more locomotives to the fleet. The railroads expect agricultural demand for the remainder of 2020 to be near the peak demand levels of 2016. 

At the end of the meeting, STB Chairman Ann Begeman said shippers and railroads must keep communication lines open, especially as issues inevitably arise. 

“A lot of people and the economy are counting on you to deliver,” Begeman said. 

US grain export estimates

Friday’s report from the U.S. Department of Agriculture on world agricultural supply and demand estimates said U.S. wheat exports will be 975 million bushels in 2020-21, up from an estimated 965 million bushels in 2019-20 and 937 million bushels in 2018-19.

The report also said China’s projected wheat imports in 2020-21 could be as high as 7 million metric tons (MMT), up from an earlier estimate of 6 MMT, based “on an early strong pace of U.S. sales and shipments to China and increased exportable supplies from Australia and Canada. If realized, these would be the largest China wheat imports since 1995-96.”

U.S. corn exports are expected to total around 2.3 billion bushels in 2020-21, up from an estimated 1.8 million bushels in 2019-20 and nearly 2.1 billion bushels in 2018-19.

U.S. soybean exports are expected to total 2.1 billion bushels in 2020-21, up from an estimated 1.7 billion bushels in 2019-20 and nearly 1.8 billion bushels in 2018-19.

These export figures come amid projections for an ample U.S. harvest. For instance, U.S. corn production is estimated at 14.9 billion bushels for 2020-21. Although USDA lowered the estimate because of the derecho, that figure — along with an average U.S. corn yield of 178.5 bushels per acre — would equal the second-largest U.S. corn crop ever produced, according to Steenhoek. 

Click here for more FreightWaves articles by Joanna Marsh.

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.