By R. Bruce Striegler

Against the backdrop of the United States Department of Agriculture (USDA) release in mid-September of World Agricultural Supply and Demand Estimates, the Journal of Commerce launched its fall series of webcasts addressing key industries driving U.S. trade, the first dealing with agriculture. Since agricultural exports account for about 25 per cent of U.S. containerized exports to Asia, disruptions can hit shippers and carriers hard, so the September 12 web-discussion focused on the latest trends in agricultural freight, transportation problems that the industry faces, as well as impacts that drought conditions will have on trade.

Moderator Bill Mongelluzzo, Associate Editor of the Journal of Commerce, outlined a number of factors that have impacted American agricultural exports, listing the recession in Europe (a major U.S. market), slowing Asian economies, the worst U.S. drought in more than 50 years, and the International Longshoremen’s Association negotiations. Other webcasts in the series include Autos and Auto Parts (October 2) and  Forest Products (October 10.)

Increasing global competition

Dr. William Wilson, Professor and Agricultural Economist, North Dakota State University, began by saying. “Worldwide demand is fairly robust relative to agriculture productivity. Generally, demand is growing at a faster rate than our productivity, giving rise to reduced stocks. Dramatic changes are taking place, both in the U.S and worldwide, which have affected trade and logistics, and biotechnology is changing the geography of agriculture radically, particularly in North America.”

The biofuels sector is having a significant impact in North America, Europe and Brazil, exemplified by the U.S. where 35 per cent of the country’s corn area supports ethanol production. He says that the combination of all these factors creates increased demand and tighter stocks, giving rise to greater volatility. “Looking forward, I expect we’ll see fairly bullish agricultural trade for at least 8 to10 years, by which time I expect we’ll see new technological breakthroughs, but the result of all this is greater investment in agriculture throughout the entire sector.”

He points out that agricultural prices are correlated closely to that of oil, remarking that energy is an input to agriculture while agriculture, especially corn, is a major input into energy through high levels of cultivation of corn for ethanol. “Average growth rate demand for most grains or oil seeds is between two and four per cent, across all countries.”

In the third year of the worst drought that the U.S. has experienced in over 50 years, more damage to corn and soybean crops has happened than expected, producing yields lower than the trend line. “We expected a yield this year of 160 bushels per acre, but the numbers show 122 per acre. This is very dramatic and will have a long-lasting impact on the U.S. and world marketplaces. There have been calls for suspension of ethanol quotas to head-off a global food crisis, although I think this highly unlikely.”

Changes that have global impact

Dr. Wilson enumerated recent changes by American competitors that will impact future logistics and trade, touching on factors including the deregulation of the Canadian Wheat Board and Australia’s grain marketing deregulation, as well as Russia’s increased competition for a larger share of the world market. Since 2000, Russia has moved aggressively to expand exports to Asia – including the Philippines and Indonesia – and Latin America, with prices typically much lower than North American suppliers.

“Genetic modification (GM) in grain crops is a game-changer in world agriculture. It does two things: it changes the technological growth rate and the geography of production.” Dr. Wilson thinks GM has a bigger impact on the United States than elsewhere because most agribiotech companies chose to invest first in North America, and he says there are advantages of four to five years in those countries or regions where agribiotech companies invest.

Growth patterns of corn and soybeans have changed due to GM. Both crops have shifted in North and Westerly directions in the U.S. “Ten years ago in my North Dakota county, we were the largest producer of spring wheat and barley in the U.S. and soybeans were considered a specialty crop. This year, we hardly produced any wheat or barley, and instead have become the largest producer of soybeans in the country. We’re now producing soybeans on the Canadian border and there’s about a million acres of soybeans growing in Southern Manitoba.”

Innovations and improvements in U.S. grain rail logistics

“We’ve gone through a significant revolution in shipping grain by rail. The modifications may seem subtle, but are something we’ve done that other countries are just beginning to figure out how to do: improve productivity and efficiency in rail shipping.” In recent years, terminal operators have been building ‘shuttle grain elevators.’ Built to load 110 railcars within 10 to15 hours, trains move the product, unload and return, thus the term “shuttle.” Shuttle terminals are about three times as efficient as non-shuttles with efficiency rates approaching that of other rail-shipped products such as coal and reduce cost by about 20 per cent. The system improves returns on investment while encouraging further investment, and at the same time delivering a capacity increase of 18 per cent between 2006 and 2010.

The American Pacific Northwest has seen strong growth in rail shipments, the share increasing from about 16 per cent to 26 per cent for all three grains. Infrastructure improvements in the Pacific Northwest include the new export terminal at Longview, Washington, a joint venture between EGT Development LLC, Bunge North America, Japan’s Itochu Corp and Korean-based STX Pan Ocean. It is the first export grain terminal built in the U.S. in more than 20 years, and opened earlier this year. The new terminal has direct access to the BNSF and Union Pacific main lines.

Further capacity increases include United Grain Corp.’s US$ 72 million project to boost the company’s exports of corn and soybeans through its facility at Vancouver, Washington through a new 24-silo storage facility with capacity for an additional 60,000 tonnes, giving the terminal a total capacity of nearly 2 million bushels.

Dr. Wilson concluded by pointing out that the growth in container shipping from the U.S. Pacific Northwest has grown from a relatively negligible volume in 2001 to more than 500,000 TEUs in 2011, and observed that this is still a small share of the overall agricultural market, but a significant and growing share.

Outlook for U.S. agricultural export trade and shipping

Bruce Abbe, Executive Director, Midwest Shippers Association, opened by saying that USDA is forecasting a record for American agricultural exports next year. “The forecast expects values of total exports to hit US$143.5 billion, with record imports of US$117 billion, so the outlook for shipping looks good.” The Midwest Shippers Association is a regional trade cooperative from Minnesota, North and South Dakota, Iowa and Wisconsin. The organization represents grain and soybean processors, exporters, traders, seed suppliers, grain quality and logistics service providers.

Like Dr. Wilson, Mr. Abbe says drought conditions have taken a huge toll on production of key grain and oil seed production. “The drought is going to impact shipping patterns in the near-term, however West Coast agricultural exports do look quite strong, particularly fruits, vegetables and high-value specialty crops. Corn, soybeans and wheat exports will decline as a result of the drought.” Abbe says that, when one grain production region in the world has severe weather problems, other regions usually make up for it. “Not this year, though. Russia has also been hit with drought, constricting Black Sea production, and South America is also not having a good year.”

Abbe says that high grain prices will likely reduce global demand, and that livestock and poultry industries are expecting to shrink due to the high cost of feed. China, however, seems unfazed, with rising middle-class expectations of better diets, increasing demand for meat, poultry and other products.

Rates for containerized grain shipping disadvantage Midwest

Containerized grain exports remain a small but steadily growing segment of grain exports accounting for anywhere from five to nine per cent. “In 2011, U.S. container grain exports reached a new level, up 11 per cent at 538,000 TEUs. Again, drought impacts are likely to reduce containerized grain exports from Chicago, the major inland container transloading and agricultural hub, with Kansas City also experiencing declines.

He explains that the Dried Distillers Grains with Solubles (DDGS) export market has been a dominant grain product shipped in containers but is not likely to grow in the near future as high corn prices continue to reduce ethanol production.  “A few years ago, DDGS saw a huge export increase by container.” DDGS is a co-product of the distillery industries, with about 98 per cent of DDGS in North America derived from ethanol plants for oxygenated fuels. The remaining one to 2 per cent is produced by the alcoholic beverage industry. Approximately 3.2 to 3.5 million tonnes of DDGS are produced annually in North America.

Abbe says that container grain exports could be strengthened, but only if the shipping industry, including rail and ocean carriers, responds to the need for improved and more competitive service in the Upper Midwest region. “We face difficulties with the favoured rates from the Chicago inbound hub and the back haul to Los Angeles and Long Beach. The cost for shipping from Minneapolis to Asian market rates is often $500 to $900 and more above Chicago rates per box.”

Infrastructure improvements in the Midwest

The Northern Plains region is seeing exceptional growth, particularly in Western North Dakota and Eastern Montana, driven by oil and natural gas. “The boom in the Bakken oil fields and from the natural gas drilling industry is projected to drive 20 to 30 years of dependable growth and resource supply.” To serve the resource industries, North Dakota Port Services of Minot, ND launched a container rail yard served by BNSF, operational in 2010.

Port Services acquired 3,200 acres for rail infrastructure that began as a container rail yard. The scope increased due to the high demand for container shipments of ceramic proppant – also called ceramic sand – used in shale-fracking operations. “The prospect of increased import containers offers more cost-competitive, two-way shipping for agricultural exports. The challenge now is how to best serve a broader region, from Southern Saskatchewan, North Dakota, Montana and South Dakota.”

In other improved transportation developments, Abbe says that CN Rail has become a major new container player in the Midwest, and its operations may be models for future service for agriculture. “They seem to be much more willing to tailor operations to serve exporters, and in smaller locations.” He says CN’s new satellite intermodal ramp at Chippewa Falls, Wisconsin, has transload facilities offering shippers direct access to containers for self-loading. CN’s Arcadia, Wisconsin’s intermodal operation provides rail service to privately owned Ashley Furniture near to a transloading facility operated by the local co-op.

“Our frequent demand for, and inadequate supply of containers needed for agriculture and grain exports in the upper Midwest and Plains must be dealt with,” says Abbe. “We need to address the high cost for repositioning of containers, and we need to deal with the price disparities for some regions compared to areas favoured by Class One railroads and with ocean carriers.” He concluded by noting that the rates in the Pacific Northwest are higher than Southern California, making it difficult or impossible for some areas to ship containers from inland points to the prime Southern ­California ports.

Trans-Pacific Westbound export market

Ed Zaninelli, Vice-President, Trans-Pacific Westbound, OOCL (USA), Inc., began by reviewing Trans-Pacific Westbound trade market volumes noting that exports were slightly improved by 1.28 per cent from April 2012, although they were still sliding compared to 2011. “Let me try and bring some perspective from the carriers’ side. North America is a difficult market. The scope doesn’t correspond to any other shipping area in the world. We have to do everything intermodally, our big volumes are inland, we don’t have the Eastbound containers matching up with the Westbound containers because the equipment is located where people are, and agricultural production is where people are not.”

He says carriers overall costs are significant, and continue to climb, pointing to rising fuel prices and trucking rates or surcharges of agricultural products by railroads of up to $300 a 40-foot container, saying, “The export rate out of Chicago due to supply and demand of equipment is well below the actual cost of getting the equipment back to the West Coast. This is something that must be addressed long- term if the industry is to support the export of agricultural products from the Midwest.” Fuel costs continue to be a problem for ocean carriers and the new requirements for low-sulphur fuel within North American ports have added further cost. “The $600 per tonne we pay for fuel rises to between $1,200 and $1,400 per tonne for low-sulphur fuel, adding about $38 per container.” Among the increased costs is equipment, which Zaninelli says is now twice that of 2009, adding about $100 per TEU for every move.

He comments that, while there are many new orders for larger and more efficient ships, many of the very large vessels will not be able to come to North America partly because ports are not yet configured for them, and partly because of the U.S. labour situation which prevents economical and timely working of the big vessels. “A 13,000-TEU ship costs about $125 million, and most will go into the Asia-Europe trade. But, 13,000-TEU ships will come to the West Coast within the next three to four years as terminals are upgraded and, hopefully, as we work with labour so we can actually work those ships.”

Zaninelli says operational zones are more complex in North America. ”In Asia or Europe you’ll quote cargo, book cargo, deal with sales and all the other operational issues from one office right next to the port that services the area. In North America you’re booking, handling and transporting from a variety of cross-continental locations. It’s a much more complex and costly system.” He explained how the weight of agricultural products impact operational issues. “We actually weigh the trains from Chicago. A 220-container train inbound, which only has 10 tonnes per container is no problem, but we can only load 170 24-tonne outbound containers. We actually have to ship empty equipment we need in the Midwest, back to the West Coast empty because of the weight.” He says this naturally adds to the cost of actually moving agricultural product, but adds that it is weight of all products shipped from the Midwest, not simply agricultural.

Zaninelli believes that the market share focus by carriers drives rates well below actual costs, and is detrimental. “We can only go so many years loosing money and over the last few years we’ve lost a lot of money, even with the impact of 2010 when everybody was profitable. Low-cost pricing has become normal, so one may wonder why we even carry agricultural products.”

He says that part of the answer is repositioning savings on equipment that is already in place. “There have been times when agri-rates were at higher levels, where they paid their own way and we hope those conditions can be recaptured. In order to increase agri-exports we need considerable infrastructure improvements, notably in ports like Los Angeles and Long Beach which will allow more use of containers for agriculture. Breakbulk facilities are improving and I think the Gulf [of Mexico] will be challenged by infrastructure development in the Pacific Northwest.”

He emphasized that the key to greater utilization of containerized shipments of agricultural products is better access to containers for Midwestern growers. “We need to have improved access to the stacks of containers on-dock in the Los Angeles / Long Beach basin; we need large trains and very high-speed transloaders. Unless the government gets behind this and captures the land required for this infrastructure and sets that up, we’re wasting all the equipment that sits down there.” He also notes that port infrastructure improvements need to happen faster.

Agricultural rates must cover costs, he says, suggesting they will when supply and demand starts to change. “We’re not talking about profitability on exports, we’re talking about cost-recovery. Agricultural and all the other commodities moving intermodally are at this point at some of the lowest rates they’ve been at for years, and are not close to covering costs. “Everything should be on the table to do a better job than we do.”