January 21, 2010

US railways may be overcharging for soy transportation

Freight rates charged on soy carried by the largest US railroads are at levels that would be classified as "potentially excessive," resulting in a potential overcharge of US$120 million annually.

Any shipping rate that is 180% higher than a railroad's variable cost of transport can be regarded as potentially excessive, which can be subject to US Surface Transportation Board jurisdiction.

A study, conducted by the Soy Transportation Coalition, which is funded by the US soy industry, found freight rates at least that high were levied on 43% of all soy moved via Class I railroads in 2008, involving a total of 338 million bushels in all. A Class I Railroad is a railroad with annual operating revenue exceeding US$346.8 million.

There were concerns from farmers about high rail rates and how those costs get shifted to them in the form of lower basis, said Roy Bardole, an Iowa soy grower and vice chair of the United Soy Board's international marketing and global opportunities programme.

Basis refers to premiums or discounts that individual grain merchants apply to national futures prices, in order to calculate a local cash bid. Basis levels fluctuate according to regional supply/demand conditions, taking into account such diverse factors as area production levels, grain quality and the cost of transportation.

The study also shows that revenue among the largest railroads from transporting soy and soy products has nearly tripled to more than US$1.5 billion in 2008 from US$549 million in 1998. Burlington Northern Santa Fe Corp. (BNI) transports the largest volume of US soy, while Union Pacific Corp. (UNP) is the largest transporter of soymeal and soyoil.

There needs to be a way for railroads and the soy industry to achieve a better balance so that one is not profiting at the expense of the other, said Mike Steenhoek, executive director of the Soy Transportation Coalition.

Railroads currently are also adopting a low-key approach to the issue.

"While Union Pacific does not agree with some of the study's assertions, we have open communications with the Soy Transportation Coalition and prefer to continue to work directly with the STC, rather than publicly debate the study's results," said spokesman Tom Lange. BNI declined to comment.