Pain in Trains Falls Mainly on Grain

(Wall Street Journal) – The worst rail delays in more than a decade are impeding crop shipments in the Midwest, causing grain-storage facilities to fill up and sending pries for corn, soybean and soybean meal up sharply.

Congestion on railroad networks, now threatening to extend into a second year in the U.S. Farm Belt, is forcing some buyers to purchase additional soybean meal, used mainly in animal feed, to ensure a steady supply, analysts said.

That helped push futures prices up 11% in the past week. And soybeans and corn both jumped by around 7% as livestock and poultry operations in the eastern U.S. rushed to avoid feed shortages and speculators bid up the price of the commodities related to soy meal, analysts said.

The delays—the worst for the agriculture industry since 2002, according to Agriculture Department officials—have slowed business for grain companies in the upper Midwest that ship crops to customers who process them into feed and other products or export them overseas.

Analysts worry that unless railroad congestion abates, soybean-meal futures prices could march higher in the weeks ahead, potentially lifting some consumer prices for meat and other animal products. Any impact on baked goods or other processed foods in the U.S. is likely to be very limited, because grains tend to account for a small share of their prices.

For farmers who are able to ship their crops, last week’s commodity-price run-up offered a chance to sell at higher prices after an extended period of decline. Abundant summer rain this year nurtured what is projected to be the biggest U.S. corn and soybean crops in history. That has hammered prices: Even after last week’s surge, corn futures are down 11% since the start of the year at the Chicago Board of Trade, the main global marketplace for agricultural commodity futures. Soybean futures are down 20%.

But for other growers, the recent price gains may not help if they can’t get their product to market. At Oahe Grain Corp., a grain elevator in this central South Dakota town, business has nearly halted at what is normally its busiest time of year because railcars needed to pick up crops have been running about six weeks behind schedule.

The company’s 110-foot silver towers, with several holding hundreds of thousands of bushels of wheat, have been full for most of the past month, said Tim Luken, general manager for Oahe, which markets grain, sunflower seeds and other crops. Last week, Oahe ran out of space in its corn bins, too.

While Oahe waits for railcars to arrive, it can’t buy any more grain because there is no place to put it, Mr. Luken said. “Farmers call me every day … I’m telling people not to bring anything in.”

The rail snarls will cut grain-trading volumes to 8 million to 10 million bushels at Oahe this year, from 12 million to 15 million in a typical year, Mr. Luken said.

The transport problems are caused by several factors: Rail companies are experiencing an overall rise in demand to move goods, including consumer goods, crude oil from the shale fields of the upper Midwest, as well as increased grain from two years of bumper crops. Last year, an unusually harsh winter compounded problems by forcing shippers to run shorter, slower trains.

That overflowing demand has lifted profits for railroad companies such as BNSF Railway, owned by Warren Buffett ’s Berkshire Hathaway Inc., and Canadian Pacific Railway Ltd. , the two primary railroads serving the upper Midwest. Canadian Pacific shares have soared 37% this year, while rival railroads CSX Corp. and Norfolk Southern Corp. have climbed 24% and 19%, respectively.

Rail companies have claimed progress in easing bottlenecks. BNSF earmarked $1 billion for expanded capacity along its northern U.S. tracks this year.

“We’re delivering consistently better performance than we did last year,” said John Miller, BNSF’s vice president of agricultural products, who said the biggest factor influencing grain shipment speeds this fall is the scale of the crop to be moved, rather than rail congestion.

Canadian Pacific is investing $500 million to help boost capacity and upgrade tracks in its U.S. network, Chief Executive Hunter Harrison told U.S. railroad regulators in a September letter. A spokeswoman said its fleet should be able to handle this year’s harvest, but “the entire grain supply chain must function efficiently in order for CP to continue our recent strong performance.”

A spokeswoman for CSX, which operates railroads across the East Coast, said the company is “putting all possible resources toward efficient grain service.”

A spokesman for Norfolk Southern, another major railroad operator in the eastern U.S., said “all traffic is being impacted by unexpected increased volume.”

Track congestion threatens profits for big agricultural traders and processors such as Archer Daniels Midland Co. and Cargill Inc. Logistics problems contributed to profit declines for the companies earlier this year, and Bunge Ltd. cited higher U.S. transport costs among its headwinds after its third-quarter results missed expectations last week.

Analysts expect railroad capacity issues to remain a challenge this winter, with J.P. Morgan Chase warning recently that higher freight costs and congestion will weigh on farmers’ crop prices and agricultural-processing profits.

The logjams have led grain companies to rely more on river barges to move goods, while others are looking at using trucks as a more expensive, but possibly more reliable, option. U.S. barge freight rates in the week ended Oct. 28 ran 60% higher than the past three years’ average, according to a USDA report.

Because grain processors and exporters face higher shipping costs for the crops they buy, grain elevators—the middlemen which gather crops from farmers for transport—are offering some growers in the upper Midwest sharply lower prices.

In South Dakota, some grain elevators are offering to buy corn for 70 to 80 cents below the December futures price, about double the normal discount of about 35 cents, according to Bob Metz, a farmer who grows corn and soybeans near Peever, S.D.

“It’s a huge hit to my balance sheet,” Mr. Metz said.

Futures markets reflect expectations for further snags. Contracts for the price of corn delivered next spring have climbed higher than December contracts. Traders say the move shows that commercial grain buyers are providing a financial incentive for farmers to store crops away for the winter rather than sell them immediately after harvest, partly due to anticipated shipping backlogs.

Corn for December delivery at the Chicago Board of Trade, the front-month contract, rose 0.7% on Friday to $3.7675 a bushel. That compares with higher prices for contracts for March ($3.8925) and May ($3.98).

The price difference “has a lot to do not just with the size of the crop, but the fear it’s not going to get loaded,” says Mike Zuzolo, president of Global Commodity Analytics & Consulting LLC.