Since the passage of the Staggers Act in 1980, many railroads have merged.The market share of Class I railroads has increased since then, while the number of Class I railroads has fallen to only seven.Through railroad mergers, rail-torail competition has been reduced, railroad market power has increased, and rail costs have fallen by over half in real terms.Over much of this period, most of these reduced costs were passed on to shippers as savings through lower rates.Since 2004, however, average rail rates per ton-mile for all commodities have climbed 36 percent, negating some of the savings over the period.Although some of these real rail rate increases have contributed to record rail profitability and capital investment, most of the rate increases are the result of increased railroad costs; real rail costs, adjusted for productivity, increased 29 percent during the same period.Although deregulation of railroads in 1980 produced more than 550 regional and local railroads throughout America, the 7 Class I railroads originated well over half the grain and oilseed shipments in 2011.

America’s farmers depend on transportation as the critical link between the fields of growers and the tables of consumers, both here and abroad. Transportation demand is a derived demand because the production and consumption of an agricultural commodity create the demand for transportation services. As such, it is an essential part of marketing; any change in supply or demand of the underlying commodity or commodities that compete for transportation services can affect the transport system’s efficiency by bringing about either shortages or surpluses in transportation capacity. Freight transportation is a critical element of U.S. agricultural competitiveness in the world grain markets. This report examines transportation implications of the recent trends and outlook for U.S. wheat. •Since the mid-1990’s, U.S. wheat production has remained almost unchanged. The number of acres planted with wheat, however, decreased by almost 20 percent. An increase of over 20 percent in yield has offset the drop in acreage. •Despite unchanged production levels, the United States continues to be a major wheat exporter. Between 2009and 2013, the United States claimed an average 20 percent annually of the world wheat trade. •All three major port regions (the Pacific Northwest (PNW), the Mississippi Gulf, and the Texas Gulf) are used to export wheat. In 2013, 36 percent of wheat was exported through the PNW, 27 percent through the Texas Gulf, and 29 percent through the Mississippi Gulf. •The domestic wheat market is not as dynamic as the export market. Unexpected changes in export demand due to changes in world prices and global annual production levels can pose logistical challenges for U.S. grain shippers and carriers. •According to the February 2014 USDA long-term projections that assume normal growing conditions, U.S. wheat exports are projected to increase slightly, by 1 percent over 10 years, and remain above 1 billion bushels per year. Domestic demand, however, is projected to decrease by 3.5 percent over the next 10 years. •Based on these long-term projections, U.S. wheat exporters will continue to rely on rail service to ship the U.S. wheat to the ports for export, according to the USDA modal share analysis. Domestic demand by the livestock and poultry sectors is serviced by truck and rail.

U.S. soybean farmers depend on transportation as the critical link between their fields and markets here and abroad. Since the early 1990s, U.S. soybean farmers have been responding to world demand for more protein feed for the growing meat and poultry sectors in developing economies, especially China. This report examines transportation implications of the recent trends and outlook for U.S. soybeans. Most U.S. soybeans are grown in the Upper Midwest and the Corn Belt. During the last 10 years, over 40 percent of production was exported on average each year, relying on barge and rail transportation to be shipped to port. Domestic demand by the livestock and poultry sectors is serviced by truck and rail. The United States is losing its world market share to South America which has lower cost of production, increasing the importance of U.S. transportation efficiency to competitiveness. The majority of soybean exports are shipped through the Mississippi Gulf Coast (60 percent of 2013 soybean exports), but when the spread of ocean shipping cost between the Mississippi Gulf Coast and the Pacific Northwest (PNW) exceeds $30, it generally leads to a greater proportion of Asia-bound soybeans being shipped by rail to ports in the PNW. The ocean rate is the main driver for the choice of port for export, because inland barge transportation to the Mississippi Gulf is usually more efficient and less expensive than rail.

Grain and railroads have an interdependent relationship. Grain is one of the most important commodities for railroads. It is the primary agricultural commodity moved by rail, comprising 7.9 percent by tons of all commodities, 94 percent by tons of all farm commodities, and 8.4 percent of total rail revenue in 2009. In turn, railroads represent a vital component of the grain network, hauling 33 percent of all grain transported in the United States in 2007. As domestic and export markets have evolved, railroads have continuously made efficiency strides through shuttle trains and the length of haul. Since 1994, grain and oilseed transportation has moved from small shipment sizes to shuttle-size shipments (75 or more railcars) for many grains and oilseeds, reflecting the lower costs of shuttle-size shipments, an increase in the number of domestic destinations capable of unloading shuttle-size shipments, and increased grain and oilseed exports in some years. In addition, the length of haul has increased for grains and oilseeds, reflecting competitive advantages of rail compared to truck on longer hauls, lower rail tariffs per mile for longer hauls, and changing grain and oilseed markets. However, development of the shuttle market has occurred differently among grain types and has not been explored at the individual commodity level. This paper uses the Surface Transportation Board Confidential Waybill Samples to quantify the changes in shipment size and length of haul for each major grain and oilseed (corn, soybean, wheat, sorghum, and barley) from 1994 to 2009. Changes in shipment size and length of haul are compared to production and usage changes for each of the major grains and oilseeds to gain more insight into the underlying reasons behind the changes. This procedure improves upon earlier analyses of the grain shuttle-size market by exploring the changes at the individual commodity level. The shuttle market for each grain has developed differently because exports, production, and usage have been different despite the overall push towards larger and longer hauls by the railroads in order to maximize efficiency. In 1994, the dominant size of shipment for all 5 grains was 6 to 49 railcars. However, there were initial differences in the lengths of haul: corn, soybeans, and barley were hauled mostly between 20 and 500 miles in 1994, but wheat and sorghum were hauled between 501 and 1,000 miles. By 2009, corn and soybeans were mostly hauled more than 1,500 miles, but the predominant category for each of the other grains did not change. Wheat has been the most consistent of the five grains over the period of study with very little change in exports, production, or usage. As such, it has had the fewest changes in shipment size or length of haul; the dominant shipment size and length of haul have remained the same throughout the time period. In contrast, a production increase in corn and soybeans due to corn-based ethanol and soybean exports has led to more shuttle-sized shipments of these commodities. Exports, the rise of large dairies, and a shift in animal production to regions distant from corn and soybean production regions have resulted in lengths of haul in excess of 1,500 miles becoming predominant. Soybeans have had the most dramatic change in length of haul because of increased exports and shipments to large animal feed regions which are not as susceptible to truck competition, as evidenced by rail’s increase in market share. On the other hand, corn’s length of haul has been mostly more than 1,500 miles only since 2008 when more ethanol plants were built, leading to stronger truck competition for the shorter movements to ethanol facilities and taking away some of rail’s share. Shuttle markets have developed differently for sorghum and barley despite decreased production in both. Sorghum for ethanol production and a higher percentage of exports among total usage have led to an increase in shuttle-sized shipments even though less is being exported overall. Barley production has declined due to corn and soybeans being more profitable, and barley exports have declined without a strong export demand. The predominant barley shipment size of 6 to 49 railcars and length of haul between 20 and 500 miles makes rail shipment of barley more susceptible to truck competition and has caused rail to lose market share over the time period.

Since 1994, the lower operating costs of larger railcars (C-114 covered hopper cars) for the shipment of grain have encouraged their increased use.Most of these cost savings have accrued to the major railroads, but some of the savings have been passed on to shippers.As their use has increased, the amount of grain shipped by smaller railcars (C-113 covered hopper cars) has decreased.This shift has prompted changes in the dynamics of railroad economics, including the need for track and bridge upgrades in order to handle the heavier cars and the costs associated with those upgrades.Short-line and regional railroads are at a disadvantage compared to major railroads because they have fewer financial resources available for rail line upgrading.Nevertheless, they have been systematically upgrading their track for the movement of C-114 hopper cars.Some researchers have indicated that State subsidies to assist in upgrading rail branch lines could be used to bring more of the savings from larger cars to more farmers and to reduce maintenance costs on rural roads caused by farmers trucking grain to main-line elevators.

The share of the grain and oilseed harvest moved by rail has been declining since 1980, when the Federal Motor Carrier Act and the Staggers Rail Act were passed. Large structural changes associated with these Acts affected the decline over the following two decades. Yet, even though the large structural changes had already taken place by 2000, the rail market share of grain and oilseed transportation continued to decline. A State-level statistical model for 21 of the top grain-producing States (which produce 86.6 percent of all grain and oilseeds) investigated the major factors responsible for the decrease in the rail market share of grain and oilseed transportation from 2001 to 2010. Although not every factor affecting the rail market share of grain and oilseed transportation could be captured, 10 statistically significant factors were identified. Of these factors, three were the most important: the growth of ethanol production, the growth of biodiesel production, and increases in animal feeding.

The rail industry is an integral part of the agricultural transportation system of the United States. For producers and shippers of bulk commodities, railroads are particularly important for the movement to end users, many of whom are located long distances from the farms. Information on rail shipments from States to regions across the nation, defined as Business Economic Areas, has been aggregated in this report. State rail receipts by origin State, or where shipments originated, has also been collected. Each State that received or shipped a substantial amount of at least one of three major crops (corn, soybeans, and wheat) by rail has been described in this report by its characteristics. A State level breakdown of rail shipments, rail receipts, grain and oilseed production, animal and poultry production, grain and oilseed exports, and grain and oilseed rail rates per ton-mile have been included. This information can help to explain the variations in shipments and shipment size of these commodities. A summary of grain movement in the United States is included, as are descriptions of grain movements in the 30 States that ship substantial amounts of grain.

The share of the grain and oilseed harvest moved by rail has been declining since 1980, when the Federal Motor Carrier Act and the Staggers Rail Act were passed. Large structural changes associated with these acts affected the decline over the following two decades. Yet, even though the large structural changes had already taken place by 2000, the rail market share of grain and oilseed transportation has continued to decline. This paper develops a state-level statistical model for 21 of the top grain-producing states (which produce 86.6% of all grain and oilseeds) to investigate which major factors have been responsible for the decrease in the rail market share of grain and oilseed transportation since 2001. Twenty variables are tested in the model, and 10 are found to have a statistically significant impact on rail market share. Of these, three are most important in the decrease of rail market share: ethanol production, biodiesel production, and the concentration of animal feeding.

Shuttle-train movements of grain and oilseeds increased substantially between 1994 and 2011. During this period, smaller movements decreased, with movements of 6 to 49 cars in particular decreasing significantly. Shuttle-train movements increase railroad efficiencies, leading to lower transportation costs for shippers located near shuttle-train loading facilities. However, many local grain elevators that are unable to accommodate shuttle-train shipments have gone out of business, leading to an increased demand for truck transport, which has increased road wear and upkeep costs. Some transportation researchers have argued that public subsidizations of rail branch lines may be justified to reduce the road upkeep costs caused by increased truck transport. Another option is to use State or Federal funds to improve the roads, lessening the financial impact on local jurisdictions.

An examination of the effects of deregulation and the performance of the Surface Transportation Board (STB) under that deregulation usually includes an analysis of rail rates that have evolved since implementation of the Staggers Act of 1980 (Staggers Act). This paper examines the rail rate structure for agricultural commodities and compares it with rates for other commodities. Changes in agricultural rail rates are evaluated relative to shipment size and distance shipped to understand how they affect agricultural shippers. Railroads transferred costs to agricultural shippers and overrecovered fuel costs with surcharges. Shippers question the reasonableness of rail rates in the light of railroad revenue adequacy data.

Agricultural and other shippers are concerned about the sufficiency in rural areas of transportation capacity, the sufficiency of competition in the transportation system, the reliability of transportation services, and the reasonableness of rates. This paper examines the sufficiency of rail freight competition and the effects of intramodal competition on rail rates. The paper begins with a review of the importance of rail transportation for U.S. agricultural producers. Specific attention is paid to the nature of competition faced by railroads, especially since deregulation, using the analytical tool of inverse Herfindahl-Hirschman Indices (HHI), by USDA Crop Reporting Districts (CRD). As shown by the inverse HHIs, the overall level of rail competition for grains and oilseeds has generally decreased since the 1985-1992 period, even though rail competition has increased for some CRDs. In addition, revenue to variable cost ratios (R/VC) increased in most of the CRDs analyzed, and the analysis found them related to the number of railroads competing in the CRD. Competition is then analyzed relative to the revenue per ton, revenue per ton-mile, and the revenue to variable cost ratios (R/VC) associated with the level of competition for six states with the least rail-to-rail competition, and distant from water transportation, with those for four states having more rail-to-rail competition and close proximity to water transportation.

There are several annual rail rate indices commonly used to depict changes in the prices paid for rail service. While accurate for general analyses, each of these indices falls short in capturing the three major components of total railroad grain rates – tariff rates, fuel surcharges, and secondary railcar market costs. Grain is a rail commodity whereby bids in the secondary railcar market can affect whether the actual rate paid by shippers is above or below the published tariff rate. The seasonality of rates inherent in grain transportation is captured through the secondary market but is neither contained in other grain rail rate indices nor apparent in annualized data. In addition, most grain rate indices do not include fuel surcharges, which have become a major component of the total rate paid for any rail commodity movement. In this paper, we develop new rail rate indices for unit trains and shuttle trains and compare them against a rail cost index. The new indices are an improvement upon past grain rail rate indices by including information from the secondary rail market, fuel surcharges, and tariff rates into a weekly index between the years 1997 and 2011. The improved indices show a higher level of detail when compared to other annualized indices, allowing for a more thorough analysis of grain rates. These indices show grain rail rates generally higher than do other indices with a notable departure from rail costs at the beginning of the economic recession in 2009. A comparison of the rail indices with rail costs calls into question whether earlier conclusions about rail market power still hold.

The PDF is very large (29MB). To download one chapter at a time, go to http://dx.doi.org/10.9752/TS041.04-2010.

The empirical results of the study indicate that the profitability (ROCF) of the grain-dependent short lines in the sample is not very high. A short line with the mean traffic density (all other variables at their mean values) is likely to receive ROCF2 slightly greater than MOW (maintenance of way), interest, and income taxes. This analysis also indicates that about 25 percent of the sample short lines have a high probability of requiring government assistance to continue operating. This study will help state DOTs to allocate assistance to those short line railroads that need aid and are most likely to be profitable. This will enable rural communities to not only avoid the negative impacts of abandonment but to achieve gains in output, income, and employment.

This paper is the first empirical analysis of U.S. short line railroad profitability using primary cost and revenue data. Models of short line profitability are developed using Earnings Before Interest and Taxes (EBIT) as the profitability measure. The sample includes 34 short lines operating in 17 states in the midwest region of the U.S. for the fiscal years 1986–1995. The models are estimated by OLS regression and explain up to 75% of the variation in short line profitability. Nearly all the explanatory variables have the theoretically expected sign and are statistically significant. The variable DENS (number of carloads per mile of main-line track) is the most important influence on EBIT. However, several other variables are identified as important including management ability to control expenses, type of short line ownership, size and ownership of the short line’s network, composition of traffic, and length of haul. The empirical results of the study indicate that a short line operating at the mean values of the explanatory variables is likely to only break even. About 25% of the sample short lines have a high probability of requiring government assistance to continue operating.

This paper is the first empirical analysis of U.S. short line railroad profitability using primary cost and revenue data. The paper develops profitability models for grain-dependent short line railroads and identifies the key factors influencing grain dependent short line profitability through empirical estimation of these models. In addition, the paper develops a quantitative profile of a grain-dependent short line railroad that is likely to be profitable in the long term. The models explain up to 86 percent of the variation in short line profitability and all the explanatory variables have the theoretically expected sign and are statistically significant. The key factors influencing short line profitability are identified through sensitivity analysis as well as the elasticities and t-statistics of the explanatory variables. The most important profitability determined by all three of these criteria is the number of carloads per mile of main-line track.