Railing against prices

Millions of bushels of Midwest corn are the lifeblood that feed Lincolnway Energy’s ethanol plant in central Iowa, but it is the highway of glistening steel rails and brown wooden ties snaking out of the plant that acts as the lifeline of the six-year-old business.

Just like hundreds of other shippers across the United States, Lincolnway Energy is dependent on a single railroad — with no other real transportation options — to ship much of its product from coast to coast.

Shippers say the limited choices many face give railroads too much power, which allows them to dictate price increases or arbitrarily impose extra fees, such as for diesel fuel to power their locomotives. Now, customers fear things could only get worse because of an expected surge in rail traffic.

As rail traffic increases, customers argue, rates may go even higher, and companies with access to one railroad and few other shipping alternatives could be stuck with bigger bills and no place else to go. Currently, 90 percent of the nation’s rail traffic is controlled by four companies.

“We really do not have a choice in price when we are confined to one railroad,” said Kim Supercynski, interim chief executive officer of Lincolnway Energy, a firm that has seen about a dozen rate increases since 2006. “The lack of competitiveness and the price increases we have seen in the last six years pose a challenge for our plant, especially when we are faced with additional pressure of tight ethanol margins.”

This year, Lincolnway Energy will produce about 55 million gallons of ethanol, with 66 percent of it leaving the Nevada plant by train on Union Pacific tracks that sit next to the facility. After the ethanol is produced, the company loads it onto its fleet of black tank cars sitting on the 18,000 feet of track the plant had installed. The remaining 34 percent of ethanol and ethanol byproducts go by truck.

For Supercynski, shipping by rail is not only more convenient, but cheaper than trucking over long distances. If she wanted to ship using another railroad other than Union Pacific, she would have to truck the ethanol 60 miles to a Burlington Northern Santa Fe train southeast of Des Moines in Runnells.

'Only one option'

The plight faced by shippers can be seen in dozens of commodities beyond ethanol. The American Chemistry Council, which represents the nation’s largest chemical manufacturers including DuPont and 3M, estimates nearly two-thirds of its member plants that rely on rail service depend on one railroad.

The result, shippers say, is railroads use their power to hit them with higher rates.

“We don’t think it’s an accident that there are areas of the country, in which there is only one option ... that those areas of the country experience higher (rail) rates than those where there is more competitive pressure,” said Mike Steenhoek, executive director of the Soy Transportation Coalition, a group whose members include the Iowa Soybean Association. “They’ve got an elevated negotiating position with their customers.”

Steenhoek noted that South Dakota grain shippers who depend solely on a single railroad, such as Burlington Northern Santa Fe or Canadian Pacific, face shipping costs 50 percent to even double the rate in states such as Ohio, where customers have two nearby options: Norfolk Southern and CSX.

The railroad industry contends it does not have an unfair advantage. A slew of market forces are instrumental in setting prices and dictating investment in the country’s rail network, said Ed Hamberger, president of the Association of American Railroads, a trade group. Rail companies note that shippers can turn to other options such as truck and, when possible, barge to move their products.

Shippers win 11 of 19 times

Railroads also point out that customers who believe they are being charged too much can file a complaint with the Surface Transportation Board, the regulatory body charged with overseeing the industry, to get the rates reduced and make the rail line pay reparations.

In the past 16 1/2 years, there have been 19 rate decisions by the transportation board, most of them over coal and chemicals, with 11 ruled in favor of the shipper. Nearly two dozen more cases ended with a settlement. For years, the board was viewed as favoring the rail industry, but the regulatory body has taken steps, such as lowering fees, to streamline the rate relief process to make it easier for customers to file complaints.

Despite the advances and newfound praise of the board by some shippers, the rate process can remain a costly and time-consuming effort that turns away some smaller companies such as Lincolnway Energy.

“No customer likes a rate increase, but they continually want to know where and how we are investing to make sure we can serve them now and in the future,” said Tom Lange, director of corporate communications with Union Pacific. “The shippers proposing new rail access remedies, and the regulation that would go with it, really want policies that will shift revenue from railroads to shippers. If that were to happen, Union Pacific would have little option but to reduce the amount we currently invest in our infrastructure, which would be a detriment to all of our customers.”

Big Four dominate

The fight over rail rates has been an ongoing battle between railroads and shippers for decades, but the focus has intensified following a wave of consolidation in the industry. There are seven major railroads, down from dozens more than 30 years ago, with most of the revenue generated today coming from just four: CSX and Norfolk Southern in the east and Burlington Northern Santa Fe and Union Pacific in the west. Last year alone, these four rail giants generated $10 billion in net income.

The railroad industry argues the current system has not led to an increase in what it calls shipper “captivity.” The Association of American Railroads points out that the mergers have benefited the country by consolidating an inefficient rail network, reducing railroad costs and expanding the market for shippers, leading to better service and lower rates for those who move goods by train. Rates are down an average of 45 percent since 1980, but in recent years they have begun to creep higher.

AAR’s Hamberger said the industry has stepped up the amount of money it spends to build new rail yards, purchase new locomotives and maintain the existing rail infrastructure — to the tune of $23 billion this year — which should allow the industry to handle future demand. Since 1980, rail companies have invested more than $500 billion in their equipment and tracks.

“From a customer standpoint, they should want the railroads to do well so we can invest more,” Hamberger said. “There are a lot of factors that go into the marketplace for impacting rail rates; it’s not just whether or not there are two railroads.”

Co-op enjoys choice

Farmers Cooperative, the largest farmer-owned co-op in Iowa, has access to multiple railroads. The firm has 51 grain elevators scattered throughout central Iowa, 13 of which are located next to at least one of several rail lines used to transport corn and soybeans regularly.

Jon Setterdahl, senior vice president of grain marketing at the co-op, said Farmers Cooperative has seen its cost to ship a rail car full of corn on Union Pacific and Burlington Northern Santa Fe from Iowa to the Texas feed-lot market rise from $1,800 in 2000 to $3,400 today.

That does not include fuel surcharges, which can add on as much as $272 more. But because the co-op has access to multiple lines, Setterdahl stressed, it has more power than many other shippers.

“Our most powerful feedback to them on whether they are competitive is simply whether we are loading cars on their railroad or not,” Setterdahl said. “If one railroad is uncompetitive compared to another, we can just elect to not ship on the one railroad for a while. We have more options and more flexibility.”

For the most part, shippers who deal with the railroads say things have improved considerably since the middle of the last decade, when the country’s rail network was bogged down by congestion, too few workers and a failure to sufficiently invest in equipment.

This year’s drought has reduced demand by agricultural companies for rail cars, further easing pressure on the rail system.

Shippers more satisfied

Despite the tension over prices, rail customers say they have a good relationship with the lines. A survey of agricultural shippers by the Soy Transportation Coalition found grain and oilseed shippers are more satisfied with the service received from the railroads compared with widespread frustration they had just five years ago.

The historically acrimonious tug of war between the railroads and shippers has not gone unnoticed by Washington lawmakers, led by outgoing Sen. Herb Kohl, D-Wis., and Sen. John Rockefeller, D-W.Va., who have made numerous attempts to boost competition and eliminate the industry’s antitrust exemptions.

The railroads are required to comply with most antitrust regulations, which are designed to maintain fair competition, but they benefit from a handful of powerful exemptions not found in other industries.

For example, the Surface Transportation Board, not the Department of Justice, is responsible for approving orrejecting a merger.

In addition, individual states cannot challenge business practices they view as unfair or unreasonable. This falls again to the regulatory board. Efforts to remove these protections have languished in the Senate.

Sen. John Thune, R-S.D., said the proposals get “lost in the shuffle” as the Senate always seems to be dealing with more pressing near-term issues.

“It’s an issue we’ve been very involved with in the past and will continue to stay involved with because it’s got real implications economically,” Thune said. “We would die without a way to ship agricultural commodities.”

Source: Des Moines Register