NGFA Commends USDA, DOT for Comprehensive Ag Transportation Study

WASHINGTON - The National Grain and Feed Association today (May 3) commended the U.S. Departments of Agriculture and Transportation (USDA-DOT) for issuing one of the most comprehensive and useful studies to date on agricultural transportation.

Further, the NGFA praised the 550-plus-page study for recommending that federal policymakers take a more systems-based approach when devising transportation policies to recognize the cross-cutting issues that affect all modes, rather than addressing rail, barge, truck and ocean vessel transportation separately and disparately. The study, which took two years to complete, was mandated by Congress under the 2008 farm law.

This in-depth study is a treasure trove of factual information and data on agricultural transportation that will serve as a very useful reference text for many years to come, said NGFA President Kendell W. Keith. It quantifies the importance of each mode to U.S. agriculture's competitiveness, noting that agriculture, with 31 percent of total ton miles in 2007, constituting the largest user of freight transportation in the United States.

The study also presents a balanced and fair review of policies governing each transportation mode, and sheds light on the impacts those policies have had on agricultural shippers, receivers and producers, Keith said. And it emphasizes that the need for competitive agricultural transportation service will continue to increase given the projected future demand growth for U.S. agricultural products in domestic and international markets, projecting that overall freight demand could double by 2035.

Keith also noted the direct link the study establishes between freight transportation costs and the commodity prices paid to agricultural producers. As the study notes, agricultural producers ultimately pay most transportation costs, which directly affects their incomes, Keith said. As pressure continues to mount to trim U.S. government farm program supports because of the federal budget deficit, I fully anticipate national farm and commodity organizations will become even more engaged on transportation policy because of the importance of keeping freight transportation costs reasonable.

Established in 1896, the NGFA consists of more than 1,000 member companies consisting of grain elevators; feed and feed ingredient manufacturers; grain and oilseed processors and millers; integrated livestock and poultry operations; biofuels manufacturers; exporters and other grain-related businesses. NGFA-member companies operate more than 6,000 facilities and handle more than 70 percent of the U.S. grain and oilseed crop.

The NGFA particularly commended the study for pointing out the interrelationship between rail, truck, barge and vessel transportation for agricultural shippers, and for concluding that U.S. agriculture could benefit from a more comprehensive, supply chain approach to transportation policy - beginning with the rural farm road and ending as far away as the other side of the globe. The study emphasized the interconnectedness of U.S. agricultural transportation, and noted that choke points caused by inefficiencies in logistics and infrastructure in one mode can reverberate throughout the entire system.

It said using a systems-based approach also would result in better targeting of transportation investments to improve the interaction between the different modes.

The study also faulted several rail practices for reducing competition to the detriment of agricultural shippers and producers. For instance, it was critical of rail carriers for the following actions, some of which are done in conjunction with mergers and acquisitions among railroads:

¢ Canceling reciprocal switching agreements with competing railroads and shippers, or increasing switching rates dramatically - in some cases to more than $500 per carload.

¢ Restricting or terminating interchanges and closing gateways to markets.

¢ Entering into so-called paper-barrier agreements that preclude a successor railroad from competing in markets served by the carrier selling a rail line. Paper barriers lasting into perpetuity are difficult to defend and the penalties for interchanging with competing carriers are often punitive, serving only to restrict competition, the USDA-DOT study said. Many paper barriers are not transparent to shippers, who bear the increased costs of this practice.

¢ Refusing to quote freight rates on newly created so-called bottleneck rail segments. Under this practice, railroads only quote a rate for mileage represented by the entire distance of a shipment, rather than just the distance it would take to reach a competing carrier. The study faulted a federal Surface Transportation Board's (STB) ruling permitting bottleneck rates, which it said has caused a loss of competition, an increase in rates and a decrease in service.

Among other recommendations, the USDA-DOT study urged policymakers to reevaluate the current antitrust exemption granted to railroads and ocean carriers, saying that such action could improve competition and reduce transportation costs for agricultural shippers. It also called on the STB to review its so-called simplified procedures for challenging the reasonableness of rail rates, noting that agricultural shippers have faulted the existing rules for being prohibitively expensive given the expected economic damages that could be recovered.

The NGFA provided the following observations on what it considered to be among the most important findings in the USDA-DOT study of each of the four transportation modes:

¢ Rail: The study noted the significant decrease in rail-to-rail competition for grains and oilseeds between 1992 and 2007, with nearly 75 percent of agricultural geographic areas losing rail competition and regions in which a rail carrier had a monopoly increasing from 10 to 15 percent. During this 15-year period, the revenue-to-variable-cost ratio (profitability) of rail carriers increased in 83 percent of those agricultural geographic areas, the study found.

The study found freight rail rates for grain and oilseeds were higher than for other commodities, increasing 46 percent between 2003 and 2007 compared to 32 percent for other commodities during the same period. The study noted that rate increases reflected a lack of rail capacity from 2003 through the first half of 2006, as well as the additional investment by carriers in locomotives, freight cars and other infrastructure. It found that 18 percent of revenues generated by railroads between 1980 and 2007 were invested in rail infrastructure improvements. Yet the study noted that despite the economic downturn, grain rail freight rates remained 50 percent higher in the first quarter of 2009 than they were in the third quarter of 2003.

The study also said fuel surcharges imposed by rail carriers were a profit center, ranging from 55 percent to 137 percent higher than the actual incremental increase in the cost of fuel. The study said that in September 2008, when rail fuel surcharges peaked, they varied among the different carriers from 46.58 cents to 87 cents per car mile - a nearly 87 percent difference between railroads. It further noted that the average fuel surcharge per grain carload during the fourth quarter of 2007 was $292.68, while the actual increase in fuel costs to railroads from 2001-2007 was only $188.54 per carload.

However, the study also pointed out that the constraints of pervasive economic regulation prior to enactment of the Staggers Rail Act in 1980 nearly bankrupted the railroad industry. Largely as a result of the deregulation ushered in by that law, the number of Class I railroads (the largest carriers) declined from 40 in 1980 to seven today.

The study also provided an extensive history of railcar ownership patterns, with the percentage of the covered hopper car fleet owned by shippers or lessors - not carriers - increasing to 68 percent by 2007. Further, the study found that achieving the federally mandated renewable fuels standard that calls for the use of 36 billion gallons of biofuels by 2022 will require 40 unit train destinations, up from only 13 currently.

¢ Barge: The study noted that barges remain the most cost-effective mode for transporting grains and fertilizer, but their share of total movements slowly is declining. It cited the declining balance since 2002 of the Inland Waterways Trust Fund, comprised of revenues generated through barge fuel taxes used to finance 50 percent of the cost of lock and dam renovation on rivers, and said that a clear path forward for financing is needed to replenish the fund to rehabilitate the aging infrastructure.

¢ Truck: The study noted that trucks represent a highly competitive mode that transports 70 percent of agricultural, food, forest products, alcohol and fertilizer tonnage. Average operating costs represent 95 percent of operating revenues for trucking firms, it found. The study emphasized the importance of retaining the federal exemption for agriculture, first enacted in 1995, that provides a seasonal 100-air-mile-radius exemption from restrictive hours-of-service commercial truck-driving rules for drivers transporting agricultural commodities, feed and farm supplies. The law also provides an exemption from the commercial driver's license requirement for drivers of farm vehicles used to transport agricultural products or supplies to or from a farm within 150 miles of the owner's farm.

¢ Ocean Vessel: The study found that more than half of U.S. agricultural exports, by value, are transported in ocean shipping containers - from bulk grains to frozen beef. But the availability of such containers has been greatly diminished by the economic downturn, since their availability is dependent upon round-trips of imported cargo. This has resulted in lost sales and unreliable service to overseas buyers, the study said.

The NGFA's membership encompasses all sectors of the industry, including country, terminal and export elevators; feed and feed ingredient manufacturers; cash grain and feed merchants; end users of grain and grain products, including processors, flour millers, and livestock and poultry integrators; commodity futures brokers and commission merchants; and allied industries. Canadian and Mexican firms also are NGFA members, and use its Trade Rules and Arbitration System by specific reference in their contracts.

The NGFA also consists of 35 affiliated state and regional grain and feed associations, as well as two international affiliated associations. It has a strategic alliance with Pet Food Institute and is co-located and has a joint operating and services agreement with the North American Export Grain Association.