The nation's transportation industry is in a capacity crunch, congested and stressed, and looking for ways to increase efficiency without significantly adding to or improving infrastructure. According to Ken Eriksen, vice president, transportation services, Informa Economics (formerly Sparks Companies) in Memphis, the time for change is “beyond the crossroads.”
Eriksen, a speaker at the National Agri-Marketing Association's February meeting in Memphis, says the situation is already affecting U.S. agriculture, as a flood of non-agricultural goods are now competing for space on railcars, trucks and barges. When asked how the situation could directly affect farmers, Eriksen said, “If railcars are late coming, that is an added cost. Or you might lose marketing opportunities because somebody else gets into that market.”
When a shipment is late getting to its destination, “we think five days, when in reality it's 10 days to 16 days. That changes things. You have an elevator full of a commodity waiting to go into an intermodal car or boxcar, things are going to back up. You may not be able to sell your product to your elevator because it's still full. So there's a delay in taking advantage of the marketing chain.”
Hurricanes which damaged port facilities in the Gulf during harvest last year exposed what a stressed-out transportation system can do to farmers' bottom lines, noted Eriksen. “Barge freight rates went through the roof, and what did the river basis do? Cash prices to the farmer went through the floor. The farmer is sitting there and can't put the commodity on the market. Who would want to sell at that price?”
But at the same time, “if you don't have the opportunity to sell, you're going to have some problems with your banker.”
“We pride ourselves in the United States on our ability to move our agricultural commodities to export markets,” added Tim Price, executive vice president of the Southern Cotton Ginners Association. “But now so much of our economy is tied up in non-agricultural products that we no longer can deliver at the speed we once could. Our global competitiveness is being challenged by the transportation situation and our energy costs.”
Eriksen noted that 9/11 slowed the transportation expansion for a while. “The average number of railcars on line each week dropped in September 2001 and went into a trough until January 2003. Then, it rebounded as our economy was restored.”
Americans began consuming again, and at an eye-popping rate. “We started seeing changes internally in the United States as we consumed more. Intermodal traffic (use of containers that can be switched from rail or road transport) started taking off. Higher fuel prices were coming on and people were putting more traffic on rail, and we had more international imports of goods.
“Burlington Northern Santa Fe Railway says that when they have 200,000 cars on line per week on average, they're at maximum capacity. They've been averaging well over 220,000 cars on line for several months.”
As a result of the increased traffic and congestion, average weekly train speed in the United States has dropped 3 to 4 miles per hour, Eriksen noted. “We as a country are getting slower and slower in moving freight.
“For every mile an hour Norfolk Southern Railway loses in average speed, it needs 25 more locomotives to compensate. For every two miles an hour, it needs 200 more locomotives. The railroads are finding that they must invest in more locomotives and labor. But they can't find enough qualified people to be locomotive engineers, despite salaries starting out at around $80,000 per year.”
Fuel surcharges have emerged as a new revenue stream for railroads, according to Eriksen. “Back in March 2002, these fuel surcharges were not even in place. Recently, we've seen a bit of a pullback. But still, today, the railroads are assessing a fuel surcharge of 15.3 percent per railcar. That is significant.”
Eriksen says the railroad companies “are not looking at the fuel surcharge as a way to capture what they've lost due to higher fuel costs. They already have hedging programs in place. To them the fuel surcharge is a revenue base. They starting seeing what these fuel surcharges could do for their revenue.
“Up to January 2004, the surcharges could be negotiated in contract. There is no more negotiating.”
Barge operators are applying surcharges as well. “It's starting to filter through the system, and at the same time freight rates are already higher.”
While barge operators are under pressure to increase capacity, “they don't want to build more barges,” according to Eriksen. “They like the high barge freight rates, and they're controlling it. With high steel costs, high labor costs, it's very expensive to build a barge. Ten years ago, it cost $150,000 to $200,000 to build a dry covered barge. Today, it's $350,000 to $400,000.”
To become more efficient, barges are opting for shorter hauls, which often puts agricultural commodities at a disadvantage. “Grain on average moves 1,200 miles. The barge operators that are non-grain owned are moving away from grain. They're trying to get a long-term contract with other commodities.”
What this means is that more minerals, salt, fertilizer and steel are shipped up the Mississippi River from New Orleans. And coal is also hitting the river system and going shorter distances.
With U.S cotton producers now exporting 70 percent of their raw cotton, the biggest challenge in the coming years is how to move 14 million bales of cotton annually. Eriksen noted that Memphis is becoming a major hub for intermodal traffic, and as a result, “it becomes a collection point for empty containers. There may be opportunities to move lower-value, bulky commodities such as cotton on these containers.”
Ocean-going containerized vessels are getting bigger too, noted Eriksen. If all of the containers in one of these mega-vessels were put end to end, they would measure 60 miles in length.