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Sunday, June 13, 2010

Farmers, Railroads Renew Rivalry Over Rates

The race to profit from Asia's growing appetite for corn, soybeans and other crops is resurrecting once-dormant disputes between two mainstays of the nation's economy: Farmers and railroads.

Farmers and their allies contend that railroads are taking advantage of their dominance to boost rates for carrying goods to shipping ports. Railroads counter that they have increased rates because of rising fuel and other costs, and say they needed to restore the nation's rail network to financial health.

In Congress, farmers, grain merchants and other rail shippers are seeking tougher regulation after the government found freight rates for many crops rose almost 50% from 2003 to 2007. They have won some support: a Senate bill introduced in December would give federal regulators at the Surface Transportation Board new powers to police rates, a bill opposed by railroads.

Two of the biggest names in the business also are duking it out before those regulators. Commodities giant Cargill Inc. has accused Warren Buffett's Burlington Northern Santa Fe of effectively double dipping on fuel charges by including that expense in its base rate, then adding a fuel surcharge. Burlington Northern disputes the claim, which is similar to complaints in a pending lawsuit against railroads by other customers.

At stake are billions of dollars in potential revenue to be earned from an anticipated jump in U.S. crop exports to Asian nations, particularly China. U.S. farmers already send about $20 billion of corn, soybeans and wheat to Asia annually, up from $6 billion a decade ago.

Railroads are well-positioned because in many parts of the country they are the sole mode of transport for getting grains from certain farmland states to coastal ports. It isn't just grains shippers—coal customers and chemical makers also are pushing for changes.

In some cases, railroads are charging more to farmers who are isolated from other economically viable means of transport like barges.

The railroads critics say that is a sign of the industry's pricing power. It costs more to ship corn from Edgeley, N.D., to Seattle on Burlington Northern—$1.18 a bushel—than it does from Hanley Falls, Minn.—$1.17 a bushel. That is even though Edgeley is 185 miles closer to Seattle, according to the railroad. Hanley Falls is far closer to the Mississippi River, making barge shipments to the Gulf Coast a more competitive alternative for farmers there.

Railroads are able to do this in part because of rules established when the industry was deregulated in the early 1980s. In March, 14 state attorneys general called for new rules "to prevent abuse of captive shippers served by a dominant railroad."

Both sides remain financially vulnerable after troubles in recent decades, when many railroads went bankrupt and a farming crisis forced many farmers off the land.

"You had a network that was fragile at best," said John Gray, head of policy and economics for the Association of American Railroads, which lobbies for Burlington Northern and other big railroads. "The situation has improved. … It is getting closer to adequacy."

Many farmers say they are hurt by shipping rates they can't pass on to customers in their own fiercely competitive commodities markets.

"We're price-getters, not price-setters," said Bart Schott, who farms 4,000 acres in Kulm, N.D., and is vice president of the National Corn Growers Association, which is preparing its own study of rail rates. "Every time your expenses go up, it takes away from your bottom line."

Burlington Northern, of Fort Worth, Texas, has a bigger bet riding on crop shipments than most big railroads. It carried 42% of grain shipments in 2007, according to the Agriculture Department, and generated 21% of its revenue from agriculture in 2009. That kind of market position is what enticed Mr. Buffett this year to buy the piece of Burlington Northern that he didn't already own.

Agriculture "has tremendous upside in this country, from an export standpoint," said Kevin Kaufman, who heads Burlington Northern's agriculture business. But, he adds, "Without a viable transportation system, it won't make a difference."

The high stakes in the disputes mean that striking the right balance between railroads and shippers will be critical, said Jason Seidl, a railroad analyst at Dahlman Rose & Co.

Railroads and farmers have been battling over similar issues since the 1800s. The latest round stems in part from the Democratic takeover of the Senate in 2009, when longtime farming ally Sen. John D. Rockefeller (D., W.Va.) became head of the commerce committee.

In December, Sen. Rockefeller introduced a bill that would make it easier to challenge rates before the Surface Transportation Board and let the board launch its own rate probes instead of solely responding to complaints. The bipartisan bill is in its formative stages and it is unclear what the final version could look like.

The Congressional Budget Office said the cost to railroads from the bill "could be substantial."

While railroads raised rates 46% for key crops in the four years ended in 2007, costs for all other commodities rose 32%, according to an April study by the Agriculture Department. The study pinned higher rates on rising railroad costs and infrastructure investments, as well as "billions in merger premiums, which causes higher rates for shippers."

Rates have fluctuated since then. Rates generally rose about 15% in 2008, according to another study, prepared for federal regulators by consultant Laurits R. Christensen Associates.

Preliminary data indicate that rates fell in 2009 amid the financial crisis, the Christensen study found. The report concluded that lowering shipping costs for one group of customers could mean railroads would have to raise the cost to other customers, otherwise it would put the railroads in financial jeopardy.

Burlington Northern made peace with some of the nation's most land-locked shippers in January 2009, agreeing with Montana farmers to arbitrate disputes rather than battle through regulators.

posted by CASFS 2006 @ 9:05 PM

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