Regular readers of the U.S. Wheat Associates (USW) Price Report have clearly seen “basis” levels increase sharply for wheat originating in the northern plains over the past year. For reference, basis is the difference between the relevant futures price and the price quoted at a specific time and location, which usually reflects the transportation and elevation costs to move grain to that location. For shipments from the northern plains to export terminals, the basis has been increasing primarily due to record high rail freight costs. A significant increase in crude oil shipments from the region, severe winter weather and expectations for large grain crops, have all stressed rail capacity and pushed freight prices higher.
Capacity issues have affected hard red spring (HRS) and northern durum prices the most. Basis levels has swung widely because of the volatile rail market. As of Aug. 1, the basis for September HRS averaged $3.50/bu ($129/MT) for shipment from the Pacific Northwest (PNW) and $3.00/bu ($110/MT) for shipment from the Gulf of Mexico. That is more than double the basis levels for the same week last year at both ports. While not fully offsetting the higher basis, lower futures prices have helped keep HRS export prices in a competitive range with wheat from other origins. The Minneapolis Grain Exchange (MGEX) HRS September futures contract closed at $6.16/bu ($226/MT) on Aug. 1, $1.26/bu ($46/MT) lower than a year earlier.
Durum prices are reported on a cash basis as there is no corresponding futures market. The average bid for durum from the Gulf of Mexico on Aug. 1 was $12.33/bu ($453/MT), compared to $10.83/bu ($398/MT) last year. Bids from the Great Lakes are up 54 cents per bushel ($20/MT) from last year to $10.61/bu ($390/MT). Farmers’ ability to control durum supply with on-farm storage has also contributed to higher durum export prices.
The skyrocketing cost of shuttles trains, which move grain from inland elevators to export terminals, is primarily responsible for higher grain export prices. There is a published, standard shuttle train tariff established by railroad companies, but the majority of shuttle trains are traded in a secondary market. According to Mike Krueger, president of the advisory firm The Money Farm, shuttle trains historically have traded between $500 per car under the tariff and $1,000 per car over the tariff. For reference, Krueger estimated that a rate of $1,000 per car over tariff typically adds about 29 cents per bushel to the cost. However, Krueger reported the cost per car in the last year has averaged between $4,000 and $5,000 over tariff, adding significant cost.
The unprecedented demand for engines and track use to transport crude oil from the Bakken oil fields of western North Dakota is the main cause of these unusually higher secondary market prices. According to the North Dakota Industrial Commission, Oil and Gas Division, crude oil production began rising in 2012 and daily output has more than tripled since then. Almost all of the oil is shipped to refineries outside the region. It has been challenging for railroads to adjust to the unprecedented demand, which has pushed railcar prices ever higher and tested the limits of the track capacity. Shippers of other commodities, including wheat, that also rely on rail to move their stocks to port are fighting for capacity and paying a heavy price.
The strain on capacity was complicated by one of the coldest and snowiest winters on record in the region. Weather-related delays caused a significant backlog of trains in early 2014 and railroad companies are still working to catch up. Harvest is just beginning for what could be a large spring wheat crop, followed closely by large predicted corn and soybean crops, putting even more stress on the rail capacity. The backlog is even worse in Canada, where the government just announced an extension of its regulation requiring Canadian rail companies to ship a minimum of 1.07 million metric tons (MMT) of grain each week or face financial penalties.
Farmers and country elevators in the region are pushing hard for a fair shot at available rail capacity. While it is unlikely the congestion problem will be completely resolved in the next year, rail companies say they are working to create more capacity.BNSF, the dominant freight railroad in the northern plains region, says it has invested $180 million in 2014 to date to expand track lines and hired 2,000 additional employees.
As always, we encourage wheat buyers to contact their local USW representatives at any time for more information and trade service support.