This article was originally published by Gro Intelligence in the Spring 2017 issue of Dry Bulk magazine.
Railroads have long been considered the backbone of the US economy, moving hundreds of thousands of carloads of commodities each week across America. Despite its vital contribution to the economy, rail transport for US grains has been on the decline since 2008, with only a brief resurgence in 2014. Due to increased export demand in 2016, rail transport of US grains rebounded to 2008 levels, signaling railroads could play a larger role in grains transportation if these export trends continue.
Corn, soybeans, and wheat are the top three grains the US produces and exports each year. Corn and soybeans are primarily grown in the Midwest, while wheat is grown in the Great Plains. Once produced, the grains are transported to domestic processing facilities or to ports for export. Transportation to domestic processing facilities is dominated by trucks and rails while barges and rails primarily compete for the transportation of grains to US ports.
The US has four main coastal port regions from which grains are exported. The busiest port region is the Gulf of Mexico, which provides access to Asian, European, Latin American, and African markets. The Pacific Northwest port is the second busiest and mainly services Asia. Only a small portion of US grains are exported from the Great Lakes and the Atlantic regions. Canada and Mexico can also be served by rail.
Recent Trends in Grains
The number one use of corn in the US is for animal feed, followed by ethanol production, which has rapidly increased in the last decade. A small portion is also used domestically for food and other industrial purposes. Since 2013, the US has exported approximately 15% of the corn that it produces each year to foreign markets.
Despite large increases in corn production between 1984 and 2013, rail transportation of corn has remained relatively stable at approximately 50 million tonnes on average during that time. As most ethanol plants are in a 50-mile range to corn production areas, trucks have gained market share of domestic corn transportation as the use of corn for ethanol gained popularity. Trucks now transport more than 80% of domestic corn compared to 55% in 1984.
Corn for export typically travels to port regions by barge or rail, with 60% of export corn now transported by barge. The growing region of corn in the Midwest provides easy access to the Illinois, Mississippi, Missouri, and Ohio river systems, from where corn can be moved by barge to the Gulf of Mexico.
For the 2016/2017 marketing year, demand for US corn exports shows increases year-over-year due to a severe drought in Brazil leading to its lowest production levels since 2011. As the second largest corn exporter in the world after the US, a contraction in the Brazilian supply of corn helped boost demand for US corn exports. As of mid-January 2017, South Korea, the third largest importer of US corn and a price-conscious consumer, had already committed to importing more than 3.2 million tonnes of corn in the 2016/2017 marketing year, more than four times the amount they had committed to at the same time the previous year.
Growing conditions in Brazil for the 2017 summer corn crop appear to look healthy as of December 2016 through evapotranspiration anomalies, which can provide an early indicator for the health of the crop during planting periods. Evapotranspiration measures the total amount of water that evaporates from soil and water bodies, as well as the amount of water that transpires from plants. Anomalies show the deviation from historical values in order to indicate whether conditions are above or below normal. Though the safrinha winter crop, which accounts for the majority of Brazil’s corn output, had not yet been planted as of December 2016, the strong level of evaporation from the soil in south-central Brazil signals healthy soil conditions for when planting does occur in January 2017. If these robust conditions continue, US corn exports may face renewed competition in the next marketing year.
Total US corn export commitments for the 2016/2017 marketing year, as of mid-January 2017, are approximately 70% higher compared to the 2015/2016 marketing year. As a result of this increased demand, especially from Asia, 4Q 2016 corn inspections in the Pacific Northwest were almost five times higher than 4Q 2015. When comparing 4Q 2016 to 4Q 2015, corn inspections in the Gulf of Mexico were 59% higher and inspections in the Atlantic/Great Lakes regions were 86% higher.
Domestic US soybeans are processed at crushing facilities to be made into either soybean meal or soybean oil. Soybean meal is used for animal feed with demand dependent on the livestock and poultry industries. Over 80% of soybeans bound for domestic destinations are transported by truck to either facilities in the Midwest, close to where they are produced, or to the South and Southeast, where US livestock and poultry operations are concentrated. The rest are transported by rail.
Since 2013, the US has exported approximately half of the soybeans that it produces each year. Approximately 40% to 50% of export transportation occurs by barge to reach port regions, due to the proximity of soybean growing regions to river systems. Approximately 30% to 40% travel by rail while the remaining 10% to 20% are transported by truck. In 2016, 62% of US soybeans were exported from the Gulf of Mexico.
Foreign demand for US soybean exports has risen alongside the rapidly increasing demand for protein from Asia. In 2016, China, the world’s largest importer of soybeans, had a carryover supply of 7.65 weeks for soybeans, the lowest since 2008. The recovery of the Chinese swine and poultry production sectors signals the potential for strong upcoming demand for soybean exports to China.
Soybean exports to Asia in 2016 were 24% higher than the previous year and soybean inspections to China in 4Q 2016 accounted for 71% of all soybean inspections. When compared to 2015, soybean inspections in 4Q 2016 were higher by 10% in the Gulf of Mexico, 15% in the Pacific Northwest, and 13% in the Atlantic and Great Lakes. Inspections through the Interior also increased by 30%, as exports to Mexico, the second largest importer of US soybeans, increased.
US domestic consumption of wheat is primarily driven by the food industry. After production, wheat for domestic consumption is usually transported to flour mills. Compared to corn or soybeans, domestic transportation of wheat favors rail systems over trucks. Milling locations tend to be located far away from wheat production sites to better service a US population concentrated away from the Great Plains. Rails transport approximately 50% to 70% of domestic wheat, and trucks transport the remaining 30% to 50%.
Approximately 50% of US produced wheat is exported each year, but has faced stiff competition from Russian wheat. US export wheat transportation relies more on railways rather than barges compared to corn and soybeans. The Great Plains lack easy access to barge transportation through river systems and so must depend on rail for transport to port regions or waterways. Each year, 50% to 70% of export wheat transportation occurs via railways, while 30% to 40% utilize barges, and approximately 10% use trucks.
US wheat in 4Q 2016 faced decreased demand from Asia but increased demand from Mexico, South America, and Africa compared to 4Q 2015. As a result, wheat exports were up by 15% in 4Q 2016, but inspections in the Pacific Northwest were down 8%. Inspections in the Gulf of Mexico were up 40% and inspections in the Atlantic and Great Lakes region were up 58%. Wheat inspections travelling through the Interior also increased by 44%, boosted by demand from Mexico.
As of mid-January 2017, commitments of wheat exports in the 2016/2017 marketing year have risen for all of the top ten importers of US wheat, except Nigeria. Nigeria recently announced intentions to decrease their wheat exports by 50% starting in 2017. As a result, their wheat commitments as of mid-January 2017 for the 2016/2017 marketing year are approximately 15% lower when compared to the 2015/2016 marketing year.
Impact on Transportation
The increased demand for corn exports was overwhelmingly concentrated in exports out of the Pacific Northwest region with corn inspections in the region 472% higher in 4Q 2016 year-over-year. As the corn crop in Brazil goes through the growing stages, it will be interesting to assess whether this trend continues. The increase in corn exports was offset by a slight decrease in wheat exports in the Pacific Northwest due to the decreased demand for US wheat from Asia. Instead, wheat shipments increased in the Gulf of Mexico by 40% in 4Q 2016 compared to 4Q 2015.
Grain rail traffic rose alongside increased wheat and corn export demand in 4Q 2016 with the former traveling from traditionally rail dominant regions to river systems while the latter travelled via rail to the Pacific Northwest.
Rail prices have been low due to low fuel surcharges and decreased demand for rail transport from the coal industry, thus making rail a competitive method of transportation for grains. In 2016, the number of rail grain deliveries totaled more than 480 thousand carloads, a level that had not been reached since 2008, despite years of high export activity in between. Barge grain movements increased in 2016 by 22%, maintaining yet another year of growth since 2013, while rail grain deliveries improved by 26%, after a decline of 15% in 2015. When compared against 2015, 2016 grain rail deliveries were 38% higher in the Gulf of Mexico and 25% higher in the Pacific Northwest. As a result, the cost of rail transport increased throughout 4Q 2016, but still did not reach the high levels seen in 2013/2014, when the rail industry was plagued by service troubles.
The shifts in the composition of grains exported from each port in late 2016 and low rail prices prompted a resurgence of the rail industry. As demand from Asia for corn grown in the Midwest increased, and demand for wheat sank, more US inland travel was required to economically transport grains to their final destination in 2016. In the upcoming year, the continuance of key export trends could determine whether rail maintains its revitalized position in the US grains trade.