Last week, the press caught up on the growing backlog of grain shipments by rail as if it were suddenly news.
Here’s the thing – this has been going on for a while, and the trend is troubling.
RealAg noted that two major railways supplied less than half of the hopper cars that grain shippers had ordered for the week ending February 17. Canadian Railway and Canadian Pacific supplied just 49% of the ordered cars. This was the lowest figure since the industry started tracking the backlog in 2013.
The number of hopper car orders supplied this year (in the wanted week) has trailed last year’s commitments by a pretty stunning amount. RealAgriculture compiled the data from the Ag Transport Coalition, and it’s very apparent that things are not running on time.
This presents a series of challenges along the supply chain.
When railroads aren’t moving as aggressively, grain elevators are going to be less inclined to buy more grain. Since their capacity is increasingly constrained, they are not looking for a product that they do not need. As a result, prices will remain flat. While you might see basis widen, you’re not going to see movement nearby.
What’s Going on with the Trains?
There are two reasons why the trains are not up and running at capacity. The first is the blame on the cold weather. That may be true in some capacity. The Ag Transport Coalition actually raised concerns about delays have given the weather worries and a lack of action in Ottawa to take up legislation to project grain shippers.
But let’s be honest. The reality is that cold weather is a cop out for a lot of these train companies. We are told that they cannot move a lot of grain. But how does it compare to oil shipments?
Oh… crude shipment volumes went up quite a bit in that cold and harsh December.
Turns out that the higher price of oil is fueling more production and more shipments. And, of course, better profitability for the rail companies.
Crude oil and frac sand have taken up more capacity. Demand from Gulf Coast refineries fueled an eye-popping forecast from analysts at Tudor, who said that crude shipments from Canada could surge by 60% this year.
Oil movement is doing rather decent. Net-net, the real takeaway is that oil pays railroads more and they are prioritizing them.
Meanwhile, out west, weather and a labor arbitration case led to a downturn in railcar unloading in Vancouver. With unloading frozen in certain places, that has led to storage shock down the supply chain. The industry has the second largest amount of grain that it has ever needed to move.
But we might not see real improvement for the train companies on grain shipments until the summer.
Naturally, farmers aren’t very thrilled with steep delays to service. Their frustrations have been exacerbated by the stalling of transportation legislation that could help address their concerns.
Bill 49-C in the Canadian House of Commons would provide shippers with the right for grain shipping firms to charge railways with penalties for bad service. It would also increase the reach of the Canadian Transportation Agency and properly define the terms “adequate and suitable” when describing railway service. A lot of people in the industry have been pushing for these changes for the better part of this decade.
Here’s the problem. The longer this goes on, the more farmers may face increasing cash flow issues. In addition, if delays continue and there are no legislative protections in place, we could see these issues press into the new crop year.
The reality is that we just don’t know if and when Ottawa is going to address the concerns of its farmers. And we have long argued that you can’t rely on politicians to get things done in a timely matter.
That’s why we want to ensure that farmers have a plan to break the glass in the event that these delays persist. Let’s dive into our recommendations.
What Should Farmers Do Now?
On Wednesday, I sat down with Brennan for his insight on how to adjust to current railway delays.
Brennan says that there are three scenarios in which farmers likely find themselves when it comes to dealing with this situation.
The first is that you might not care. You aren’t concerned about the situation, and they believe that they will eventually get the price that they received a contract on. That’s a good situation to be in, but that’s not likely the case for the majority of players in this price environment.
The second scenario is that the farmer has cashflow restraints, and they need to move their grain. The reason may be due to the fact that their contracts reflect storage costs. If the grain isn’t moved by a certain date, the farmer will be paying storage fees, like other companies would do to store grain. So long as that grain is still stuck in limbo, firms will be looking to charge them. For this reason, it’s important to think about getting your storage fees in writing and knowing exactly what costs are associated with the transport of grain.
In this situation, farmers might want to consider moving specific amounts. For example, perhaps they are moving 1,000 tonnes. Let’s say that they are shipping 500 MT and another 500 MT later. In this scenario, it’s vital that the farmer negotiate an out close in case their first batch doesn’t move. Or try and negotiate a fee on the second lot of grain should there be a failure of service.
The third scenario is that farmers have turned away from traditional logistics networks and come to FarmLead to find a better deal and more reliable transportation.
While you’re looking to make a deal right now, we can put your grain in the capable hands of our sales team to find a deal on your behalf. We’ll help you negotiate your deal directly, ensure that you have all the documentation you need around storage and other logistical needs, and ensure that your counterparty pays you on time for your grain. We have a 100% payment track record across literally 100s of millions of dollars worth of grain.
US grain rail shipments down 5.8% on year: rail group
US rail transportation of grain products for the week ended February 17 totaled 21,495 cars, down 5.8% compared with the year-ago week, Association of American Railroads data showed Wednesday.
Rail transportation of chemical products rose 3.4% year on year to 33,104 cars, the data showed. AAR designates fuel-grade ethanol as a chemical product.
Cumulatively, grain product shipments have totaled 152,613 in 2018, down 6% compared with 2017. Chemical product shipments totaled 219,268 cars, 1.5% higher than 2017, AAR said.
Total carloads last week saw a 0.6% year-on-year decrease to 260,454 cars, AAR said. Including total carloads and intermodal units — which totaled 279,509 units — total US railroad traffic reached 539,963, 3.1% higher year on year, it said.
Through seven weeks, total 2018 traffic was up 0.7% from 2017, according to AAR.