The domestic rail transportation network is vital to the movement of products and goods supplied by America’s farmers and ranchers. In 2019, over 33 million carloads of U.S. goods navigated the nearly 140,000-mile U.S. rail system, generating over $85 billion in total rail revenue. According to the Surface Transportation Board (STB), an independent federal agency tasked with economic regulation of freight rail, farm products contributed nearly 7.4%, or $6.3 billion, of total rail revenue, with an additional 13%, or $11 billion, from the transportation of food, textile mill, wood, and paper and pulp products. This Market Intel dives into the continued upward trend in freight rail rates contributing to heightened farm-level business expenses.
Unlike roadways, U.S. freight railroads are privately owned. As independent businesses they are responsible for the maintenance and efficiency of their railways as well as for selecting competitive rates (tariffs) and formulating contracts. Approximately 94% of the revenue generated by the rail system belongs to seven Class I railroad-operating firms. Class I rail firms are defined as having inflation-adjusted annual carrier operating revenue of $900 million or more and include: Burlington Northern and Santa Fe Railway (BNSF), Canadian National Railway (CN), Canadian Pacific Railway (CP), CSX Transportation, Kansas City Southern Railway (KCS), Norfolk Southern Railway (NS) and Union Pacific Railroad (UP).
An interactive map of Class I railways can be found here: https://www.arcgis.com/apps/mapviewer/index.html?webmap=841e4f742d444a5aa38957cbd84518fc
Non-Class I railroads, or regional and short line railroads, number 584 and 22, respectively, and account for 32% of freight rail mileage. Compared to other freight transportation methods, the combined structure of U.S. railways accounts for nearly 28% of freight movement, the second-largest share behind trucks. Depending on cost and market conditions, competition between transportation options may increase, impacting how product is delivered to its final destination.
Over the last five years, the cost of shipping grain on railways has increased. Rail rates on corn, soybeans and wheat, including fuel surcharges, have gone up 13%, 11% and 7%, respectively, since 2016. Similarly, rates to transport ethanol via rail have increased 18%, or about $0.04/gallon.
USDA’s Agricultural Marketing Service includes tariff data from four Class I railroads responsible for over 80% of 2021 domestic rail-based grain movements: CN, UP, BNSF and CSX. Considering rates individually, since 2016, both UP and CSX reported double-digit rate increases of 10% and 20%, respectively, amounting to an average of $1.23/bu and $1.62/bu. CN has remained fairly stable, hovering around $1.03/bu and BNSF has increased by approximately 5% to $1.41/bu. These numbers signify much of the overall increase in average grain tariff rates may be linked to specific railways and do not necessarily reflect trends across the entire market.
Given increasing fuel prices in the broader economy, one could expect any increase in freight rail rates would be linked. The Association of American Railroads’ three-year fuel price index shows a modest increase in rail fuel prices, though that’s primarily a recovery from COVID-19-related price drops linked to reduced consumption during early 2020 lockdowns. In the first half of 2021, prices have all but returned to 2018 and 2019 levels.
Additionally, railways often adjust for excess fuel costs in the form of fuel surcharges (FSC), reducing the burden of fuel costs on the underlying base rate. Fuel surcharges on grain have increased from an average of 1.6 cents per car-mile in 2016 to 6.5 cents per car-mile in the first half of 2021, which translates to a near 300% increase over five years. It is important to note, fuel surcharges are still drastically below 2010-2015 levels, which averaged 31.8 cents per car-mile, though overall tariff rates during the same timeframe were 18% lower than 2021 levels.
Considering the frequency of rail cars loaded, there is no obvious upward trend that would signify a clear increase in rail demand over the past five years. Overall, the number of grain cars loaded and billed by Class I railways hovered between a low of 286,000 in the first quarter of 2020, likely another COVID-19 related shock, and highs of 419,000 in the fourth quarter of 2016 and 430,000 in the fourth quarter of 2020. Both peaks appear to be linked to periods during which export sales of corn, soybeans and wheat reached record levels; the upward trend in the latter half of 2020 likely relates to record grain purchases by China as a result of the Phase I trade agreement. Keep in mind the significance of harvest, which positively influences carload frequencies in the third and fourth quarters. The proportion of cars loaded and billed by each railway firm remained stable over the period analyzed, with BNSF and UP claiming approximately 68% of the total annually.