More on the negative consequences of monopolistic pricing

[Anonymous]

Several items of note -
1. One of the potential responses to monpolistic practices by BNSF is for legislation to allow larger, longer trucks on the highways as a way to force more competitive rates from BNSF. As basic econ theory predicts!
2. The allegation that the profits from every third crop goes to BNSF, if indeed it is credible, would suggest that these monopolistic practices will eventually force these farmers out of business, as such a skewing of the economic fundamentals is not sustainable.


Legislature will face grain shipping woes, other railroad issues

By KAREN OGDEN
Tribune Regional Editor
If the state of Montana were a Monopoly game, one player #8212; the Burlington Northern Santa Fe Railway #8212; would own almost all the railroad cards.

BNSF operates 90 percent of the railroad miles in Montana.

And a coalition of lawmakers, mostly from northcentral Montana, says the railroad has an unfair advantage.

Consider this from a new state study on Montana's lack of railroad competition:

Freight rates for Montana shippers often are 50 percent higher than those in states with railroad competition.

That translates into an extra $60 million a year and devalues Montana's wheat-producing land by $1 billion a year, according to the state study, which was commissioned under a Senate bill sponsored last session by Sen. Trudi Schmidt, D-Great Falls.

In simpler terms, "it costs more to ship (grain) from Minnesota to the West Coast than from Montana," said Sen. Jerry Black, R-Shelby.

Meanwhile, BNSF has made moves to abandon branch lines that link small-town grain elevators to export markets on the West Coast.

BNSF has been frank about its vision for the future, and that vision includes the huge shuttle loaders that are moving into the state. This fall, a BNSF spokesman said, "Our vision and our approach is to focus on what we do best, and we think that is to provide a high-volume, far-reaching mainline trainload network." The spokesman, Pattrick Hiatte, said, "What that means is moving a whole train from one location to another.

Hiatte, who works in Fort Worth, Texas, was talking about the state's high-speed grain elevators, which good for fast, efficient rail traffic, but bad for traditional elevators at the end of branch lines.

Black is among a handful of legislators who plan to tackle Montana's railroad issues as the 59th Legislature gets under way.

However, it probably is more than a one-session job.

"I'm looking at this taking several sessions," said John Witt, R-Carter. "They're so huge, you just don't stop BN and say, 'Now guys, you have to play by our rules.'"

Black and Witt have submitted legislation to create a $4.1 million revolving loan fund to rehabilitate or build branch lines and related switching yards, intermodal freight facilities or other infrastructure.

A state study released this fall identified 10 "at-risk" branch lines in Montana.

One of the most prominent branch lines is the 95-mile line from Great Falls to Helena, which has had virtually no traffic since 2000.

However, most are in northcentral Montana and still are used by farmers to send their grain to market.

Saving the branch lines would prevent costly wear and tear on county roads from truck traffic and create opportunities to ship value-added products out of rural communities, proponents say.

"As Burlington Northern Santa Fe continues to abandon those short branch lines, it puts more pressure on truckers and more wear and tear on our highways, and it decreases the ability for some companies to ship products out of state to market them effectively," Black said.

The proposed fund would provide low-interest loans to railroads, cities, counties, short-line railroads or other entities who want to buy, develop and rehabilitate branch lines.

Many of the branch lines need to be upgraded to handle the larger, 286,000-pound grain cars now used on the BNSF mainline.

Core funding for the proposal would come from a $1.1 million "balloon payment," due in 2006 to the state-administered Federal Local Rail Freight Assistance Program.

The Port of Montana in Butte borrowed the money from the LRFA to expand its grain and rail facilities.

The bill would ask for an additional $3 million from the General Fund to establi***he new revolving loan program, which would ultimately replace the LRFA.

The new program would be administered by the Montana Department of Transportation.

Borrowers would provide matching funds of 30 percent for rehabilitation projects and 50 percent for new projects, Black said.

Although that's the only piece of legislation formally submitted so far, lawmakers are discussing several other ideas.

One is a resolution supporting an alliance with North Dakota, another captive state.

The two states would make a joint appeal to the federal Surface Transportation Board, whose job it is to monitor railroads and resolve rate disputes.

However, such appeals are costly, and an appropriation probably would be required.

Several ideas have come out of the Rail Freight Competition Study, commissioned under Schmidt's Senate Bill 315.

A task force of economists, state transportation officials, producers and others who rely on rail service met in Great Falls earlier this month to decide on a set of recommendations from the study.

One option would attempt to force BNSF to offer more competitive rates by circumventing its tracks.

Under that scenario, the state would appeal to the federal government to allow larger, three-trailer trucks on Interstate 15.

The trucks would haul grain from northcentral Montana's rich grain country to the Canadian Pacific line at Sweet Grass or the Union Pacific Line out of Butte, forcing BNSF to compete for the freight.

However, several questions would have to be answered, Schmidt said, not the least of which is whether the public would support the bigger trucks on the Interstate.

More study also would be needed to determine whether the advantage in better rail rates would outweigh the additional wear-and-tear on the Interstate, Schmidt added.

The task force also supported creating a multi-state coalition to fight for rail competition and the creation of the revolving loan fund for branch lines.

Black also suggests legislation that would support federal Senate Bill 919, the Railroad Competition Act sponsored by Sen. Conrad Burns.

Among other things, the bill would create a more effective system for lodging rate complaints with the federal government, Black said.

The typical Montana farmer sends his or her profits from roughly every third crop to Burlington Northern Santa Fe to pay freight rates, said Black and Witt.

"When you talk about economic development, that's huge," Witt said. "I'd like to figure out some way to keep that in the hands of the local community for infrastructure and schools. ... We're just giving up our tax base, and they're taking it in freight."

--------------------------------------------------------------------------------

[Anonymous]

This sounds like an open invitation for the discussion of the merits between the freedom of commerce and expression vs. responsibility and rights in an open society within a democratic republic. ANY TAKERS?

[MP173]

I quite reading when I came to the line
"it costs more to ship grain from Minnesota to the West Coast than from Montana."

Well, it should, Minnesota is further away than Montana.

I certainly dont understand the article, or at least what I read.

ed

[arbfbe]

Mark,

The common concern here in Montana is BNSF is taking advantage of it's monopoly position and charging a higher rate than it could if there was an alterntive railroad to use. The higher rate for a lower distance is taken as fact amongst the natives out here. Perhaps the hearings in this winter's legislature will bring out the truth of the matter. Maybe you can get an invite to come and testify for one side or the other, Helena is a nice place to be in February, NOT!

The BNSF is very protective of their position and has the ability to influence the location of new flood elevators in Montana. They will destroy millions of dollars in investment in elevators already in service in this state and increase the market concentration of the largest players in the grain marketing game. That will reduce the alternatives to the producers for selling their products. This is probably not good for the family farmer and will prove to be fatal to every branch line in the state. In order to save the branchlines such as the former line between Havre (Pacific Jct) and Great Falls which is now truncated between Big Sandy and Ft Benton someone will have to build a flood elevator for shuttle grain trains on each remaining segment. That could be pretty risky when it's rate will likely be higher than a similar elevator on the BNSF main.

I wonder if the McCarty Farms case will come up or if those plaintiffs will be invited to add their experience to the record.

Alan

[DPD1]

QUOTE: Originally posted by arbfbe


The BNSF is very protective of their position and has the ability to influence the location of new flood elevators in Montana. They will destroy millions of dollars in investment in elevators already in service in this state and increase the market concentration of the largest players in the grain marketing game. That will reduce the alternatives to the producers for selling their products. This is probably not good for the family farmer and will prove to be fatal to every branch line in the state.

Not trying to be a smart a$%, but isn't that the whole reason why companies merge in the first place? I know all of us little people are supposed to believe they don't. Yes, I know... They make a bunch of empty promises about how they won't control the market, and won't take advantage of their power, blah blah blah... The feds wave their finger at them and say they'll get in big trouble if they do, which everybody knows they won't... Then they sign off on the whole deal and turn a blind eye. Sounds like business as usual to me. And speaking as a guy that comes from a family of Midwest farmers, there's certainly nothing new about the family farmer getting screwed either. The smart ones realized years ago that the only way to survive, would be to start merging land, creating agriculture corporations, and then they play the same games as all the other mega mergers. So now guys that use to make a living off their own land, get to drive a tractor for some company... If they're lucky.

In my opinion... We as a nation have lost our collective morality. Everything is always someone else's fault, or someone else's problem. Nobody want's to take responsibility for anything. Companies like Walmart help lower the quality of middle American living... But the people that buy stuff from them? Well, that's not their problem... They just shop there. The guy doing the underhanded accounting at Acme Corp... Well, it's not his fault... He's just doing what his boss told him to do. And it's not his boss's fault, because he's just doing what the CEO told him to do... And of course it's not the CEO's fault, because he's only been there for a year, and he's just trying to make the board happy. So sorry... No fault rests with him. It's like the joke in Shawshank Redemption when he asks all the other prisoners what they're in for, and everybody always answers by saying "Didn't do it". Everybody is innocent in America... Except for Martha Stewart of course. :-)

Dave
-DPD Productions - Home of the TrainTenna RR Monitoring Antenna-
http://eje.railfan.net/dpdp/

[Anonymous]

Monopoly? US rails market share of the Domestic Intercity Traffic Revenue: 9.5%
Trucks: 80.4% Data from Association of American Railroads 2001.
I find the numbers upsetting. Trucks are the monopoly.
tom

[Anonymous]

May I ask why should Minnesota ship to the west coast anyway? I am betting there is the railroads to the east coast and perhaps even the St. Lawrence Seaway. (I may be wrong here)

I dont see the balance between Minnesota and Montana... to me these are two different regions of the United States.

[Anonymous]

Geography does have a certian way in changing the direction of a good discussion.

[Anonymous]

QUOTE: Originally posted by tabiery

Monopoly? US rails market share of the Domestic Intercity Traffic Revenue: 9.5%
Trucks: 80.4% Data from Association of American Railroads 2001.
I find the numbers upsetting. Trucks are the monopoly.
tom

The term "monopoly" here is related to regional dominance of large volume bulk commodities (e.g. cargo ideally moved by rail or barge) by a single railroad, with no competing railroad or waterway in the vicinity, and where the only other alternative is transport by truck. Just because trucking dominates domestic intercity freight doesn't mean it is a monopoly. Only having the ability to price above a competitive rate gives an entity monopolistic powers.

[Anonymous]

arbfbe,
what is a "flood elevator"? is this a term which discribes a "surge bin"?
thank you.

[Anonymous]

Mark: The railroad market share numbers are horrible. Yes intercity market share is 9.5% but the the US railroad share of all freight revenue is just a meager 6.3 percent. And it will decline even further as trucks grow their business exponentially and railroads continue their slow growth model. Doubles and tripples are going to be sharing the highways with all of us in the near future!
What is happening in Montana is no different than what happened here on the East Coast. As industry shrinks, dies and moves off line the rails are pulled up. Trucks can easily out perform rail transport on the short haul. And bulk commodities are not a problem. No law requires a business to provide service at less than cost. And that is what BNSF is facing on many rural lines. Why should they spend millions to upgrade and maintain a rail line than produces little revenue? Revenue is spent on lines that produce traffic.
In the grain states many of the branches have not seen a new tie or ballast in years just for that reason. As the old grain elevators give way to the mega operators traffic decreases to the point where revenue doesn't cover the cost of maintaining each little branch. And many times there is no other traffic to contribute revenue.
The legislators can easily take some of their highway money and get into the railroad business if they want to maintain the staus quo. The Canadian government has helped their agri business. Why not here?
tom

[Anonymous]

thank you. i had never heard the term. appreciate the explanation.

highiron2003ar,
"May I ask why should Minnesota ship to the west coast anyway? I am betting there is the railroads to the east coast and perhaps even the St. Lawrence Seaway. (I may be wrong here)"
generally speaking, only western minnesota and the dakotas hard red spring and durum wheat will actually have a choice in south, east or west movement.
depending on ocean vessel availability the "spread" between PNW freight to asia and NOL freight to corresponding destinations can vary from even money to more than $10 PNW premium. these "pacific" and "gulf" rates also compete with open season lake shipping and grain cost (vis a vis canadian wheat) to europe via the st. lawrence.
no one really cares what the grain cost is per se. the ultimate question for the foreign customer is the final "landed cost" at his port. this is a package price...origin country grain, domestic transport to origin country port, export transport to final destination. these three pieces move independently of eachother and in competition with various country offers (aus'la, usa, canada) and various regional bids ( eu, asia). depending on which seller can offer the best "package delivered" value to the buyer bidding the highest "package delivered" price, there will be routing choices directing traffic east through the lakes (in season), west across the PNW or south to the gulf.

edited note: i had not read the entire thread when i made this entry. i offer my apologies to earlier writers who have already quite fully answered this question.

[Anonymous]

regarding the potential for monopolistic pricing or bnsf's grain business, i would point out for discussion that the u.s.a.'s hard red spring wheat belt is in direct competition with the canadian prairie's dark northern spring wheat crop. this gives the american farmer a very capable north american advisary for foreign markets both in europe and asia. the canadian rail system runs parallel trackage to the west coast, ie, vancover and prince rupert, as well as to the east at both lake superior and the st. lawrence. this wheat/rail alternative in canada is supported by further competition from the mississippi barge system to the gulf and the lake transport system out to the st. lawrence. once canadian dark northern spring and american hard red spring wheat are placed in f.o.b. position at any of the pacific or gulf ports they meet further competition from australian hard wheat originating from the east coast at brisbane, geelong et al. on the face of the situation bnsf has an awful lot of competition in their task of making american grain price competitive in the world export arena. there may be no other rail competitor in some reaches of the minnesota/oregon region, but when considering the full reach of the global and regional marketing competition for the export transportation of wheat bnsf is not in the position of a monopoly price setter.
the railroad's job is to charge what the "traffic will bear". in the classic literature on rates and regulation this is not treated as a pejorative phrase, rather it is intended to explain that the railroad is to charge as much or as little as it will take to position the cargo in the end user's hands with enough profit still accruing to the seller/producer to encourage the producer to continue fully utilizing the railroad's capacity.
it is further context for the discussion of bnsf's market position on the northern tier to point out that spring wheat acres have suffered a 20% decline over the last ten years due to farmer disappointment with fusarium ( scab/vomitoxin) infestations and alternative cropping. if bnsf is pricing in a rational manner they are most likely trying to keep the minnesota, montana and dakota farmer in productive work rather than put the producer of their wheat freight business out of business. as to whether the relative price of montana freight is correct in relation to minnesota freight, the question should consider that foriegn ocean freight competition from the comparably distanced canadian and australian ports into the asian rim is exerting pressure on the "shorter east/west" u.s.a. routes with which the west to east routes do not have to cope. remember west/east competes with fresh water and then only in season.
regarding the relative price of american hard red spring wheat, it should also be remembered that the u.s.a. has acted to restrict canadian dark northern spring wheat from moving into the u.s.a. if our domestic rail charges were penalizing america's domestic producers it would be expected that the depressed prices in the domestic wheat economy would prohibit higher relative priced foreign grain from moving into its region. the fact that cheaper imports had to be restricted by regulation would indicate that domestic prices are not being depressed to "feed the railroad" freight rate.
maintaining a fair and relatively fairly priced competitive market place is worth examining from time to time, but the free market has probably set rates which are all pretty much right where they ought to be. it seems that world buyers and suppliers have ample opportunity to choose among various alternatives for freight and grain procurement.
also, i am uncertain of the news article's alternative of shipping u.s.a. grain north. would this involve movement and loading along canadian export marketing routes? this may not be workable if it is opposed either legally or logistically by the canadian wheat board which may not see it in their interest to commit their port facilities to the shipment of u.s.a. wheat.

[MP173]

Dont know if this means much or not, but BNSF is buying 4000 grain covered hopper cars from Trinity. I really dont know if that is a considerable number or just replacement.

ed

[bobwilcox]

Railroad monopoly pricing is one of the great myths used by lobbying groups to obtain money from railroad workers and stockholders. These groups' lobbyists think if they reapeat the myth often enough it will become true. They forget were not in 1905 anymore-Todo.

[Anonymous]

Those 4000 cars means someone is going to be making employment for a infrastructure needed to build em. Who cares if they are replacement? That order is going to be someone's food on the table for some time this year! =)

Happy new year!

Lee

[jeaton]

Looking at this thread and some observations made about "monopoly" in other threads leads me to think that this might be more of an issue of big vs. small businesses. In the area we are discussing here that would be the high storage capacity elevators with flood loading capacities for the 100 car shuttle trains vs. country elevators. In my mind the "bigs" evolve as a result economies of scale. Our general embrace of free enterprise capitalism argues that the most efficient should reap the rewards of higher profits. Starting at a point not later than Henry Ford's development of the assembly line, big has been the generally accepted way to go.

As far as railroad transportation of grain is concerned, we are actually looking at the end game of something that started in 1967 when the Illinois Central Railroad published what I think was the first unit train rate on corn from Illinois to Gulf Ports for export. This may come as a surprise to some, but this first grain unit train offering was not the result of the railroad just putting out the rate to see what would happen. In fact a major grain merchant, already a big player in the international trade, sought to buy corn from growers beyond the range of the truck-barge sources. After doing the math, the railroad told the shipper that if you can load a cut of about 100 cars in 20 hours or so, we can get your grain to the gulf at a rate competitive with truck-barge routing.

Do you know what might be defined as monopolistic pricing? Refusing to offer any rate lower than the single car rate, no matter how large the consignment.

Jay

[Anonymous]

Who is "we"? Certainly not most of us in the mainsteam. You repeat the talking points of left-of-center academia, who view the world through Keynesian-colored glasses.

What "we" want is for our representative government to maintain a business environment which encourages competition while protecting us from the tendancy toward monopoly. Thus, the government is charged with the dichotomy of providing sustenance when business failures that may affect economic security come to fruition, while at the same time preventing or breaking up monopoly by either regulation or anti-trust action.

What is happening in the railroad genre is that very tendancy toward monopoly empowerment thanks to the shortsightedness of the STB, and this monopolistic action is causing a loss of important infrastructure in large sections of the nation. Thus, the feds have failed us on two fronts, and it's apparent that it will be the states who have to take up the slack in preventing more degradation of the infrastructure, but the states are not as empowered to employ either re-regulation or anti-trust breakup, something that is badly needed and will eventually be forced upon the feds in due time as the complaints amass to a level that cannot be ignored.

What the railroads are doing by raiding and looting their portion of the nation's infrastructure is eventually shooting themselves in the proverbial foot. Railroad management are way to attuned to the "here and now" concerns of the bean counters, while ingoring the intangibles that do not make it into the ledger. No one up there has any foresight to know that you keep and grow your customer base even if it means conducting business at less than the bean-counter-prescribed minimun profit margins. You do not just lop off all but the richest customer connections.

[PNWRMNM]

Dave,

You are the greatest source of economic claptrap I have seen on this forum, but the above post rises you to new heights of inconsistent generalizations unsupported by any fact.

By the way, I love my BNSF Kool Aid. It keeps me strong against the confused.

Mac

[Anonymous]

" that no customer should have an advantage over any other, not for size, not for efficiency, not for volume, and often, not even for geographic location. "

favoring one shipper over another expressly to harm one while helping another is a basic violation of fair business conduct, however, discriminatory pricing based on openly disclosed considerations of volume seems to be a reasonable seller/buyer response. why did / does it meet such opposition? what was / is the regulatory theory behind opposing discriminating on volume basis?

" Our general embrace of free enterprise capitalism argues that the most efficient should reap the rewards of higher profits. Starting at a point not later than Henry Ford's development of the assembly line, big has been the generally accepted way to go.'
source: jeaton
you are quite right in mentioning "not later than henry ford..."
before civil war textiles worked on volume effeciencies. in fact prior to the rail roads textiles were the big business. rail followed the expand to succeed theory next , then steel under carniege, who was raised under the cost accounting tutelege of tom scott (prr). ford had came much later and even adam smith mentioned assembly line theories one hundred years earlier.
for those of us who occasionally dream of a more pastoral past, we should try to imagine just how much productive good has come from the inborn drive to succeed which is evidenced by the startling rise of "big business" in the last 175 years. i for one would not want to spend much more than one winter afternoon in michigan circa 1830.

[Anonymous]

I wonder if "farmers, grain elevators, and shipping costs" really refers to the traditional family farm or to large agri-businesses like ADM and Con-Agra or food companies like General Mills?? If you compare what a small farmer gets for wheat vs. what the food companies sell it for in the grocery stores, it's not the railroads that are screwing the farmer. Companies like ADM have quite a history of lobbying politicians for favorable treatment using the word 'farmer' for sympathy when most of the benefit goes to the large agri-businesses..

[Anonymous]

ADM is the poster child for corporate misconduct. they have seen a legislature for sale and have taken full advantage of the politician's natural propensity to be corrupted.

now before using adm's sorry example as an attack on free markets: are all of adm's customers, farm suppliers, employees, etc. without any form of moral stain? or do they practice their own less public immoralities? i do not mean to be glib. my point is that criminal behavior should be prosecuted as criminal behavior and should not be used as an excuse by critics to taint economic behavior. we all, customers, farmers, employees, function as economic animals when ever we enter into financial exchange of goods and services. the fact that a man may have struck his wife, or embezzeled from his employer is a fine reason for him to be imprisoned, but no reason at all to deny him the right to buy at the lowest price and sell at the highest price when he engages in commerce.

bread wheat costs less than $3.50 per 60lbs. basis the minneapolis grain exchange, with quality premiums maybe in the $4.00 range for 60 lbs. yesterday i paid $2.09 for 1lb and 40z. that's a shocker, but i remind myself that throughout every step of that supply chain of middlemen from farmer to store shelf every single person is competing for the business by negotiating the best possible set of terms that they can. if they could get a bit more of the volume of business away from their competitor by shaving a hair off the price of their product or service they would have done so in a heartbeat.
unhindered economic ingenuity is my best chance at obtaining the lowest price from sellers.

my alternative is to have the post office do the job of providing the finished loaf....turn my welfare over to a group of hard working people harnessed by an intractable bureauracy and a corrupt political oversight.

[Anonymous]

there is certainly a common domain where overlapping interests need to be arbitrated. as you often point out, all of mankind's problems are not amenable to the open auction market. (however, a whole lot of them are if we use the full ingenuity of the market place ,ie, pollution credits etc, et al.) the honest difference in opinion among participants in this thread is as to where and how far the overlap exists. my caution is best expressed by the railroad economist, arthur hadley's warning about "...taking refuge from the excesses of democracy in an enlightened despotism."

many of the writers to this post point to the failure of past and current legislative efforts to have solved the problems we deal with here, yet they ask for more government regulation to cope with the future. when do we decide that the arbitrary and potentially corrupt tools of the regulators should be limited rather than expanded? when will folks admit that "big business" is a relative term for most of the spectrum. a man with a 100 acres of puddled farm envies the big farm wealth of the 500 acre tiled spread down the road. they both feel that something needs to be done about the 5000 acre orange grove owned by an italian millionare. he feels that ted turner has to much range land.... and every body wants the government to do something about it. it is the politics of envy....
beggar thy neighbor.
my grandfather was a poor man, his friends were poor men, yet he always cheered for the successful in our community because he claimed that in his whole life he was never hired by anyone other than a guy with money in his pocket.
i apologize for the diatribe, but this thread is full of well meaning comments which would severely limit economic freedom of choice and will, when their turn comes again, stiffle the engine of wealth creation which has so benefited us all over the last twenty five year cycle of regulation/deregulation.
amen.

[arbfbe]

A long time ago in a class room far away, Dr Lee made the point Economics was the study of surpluses. If you and your neighbors could only provide for your own food shelter and clothing then there was no economic intercourse. Just as soon as one individual could bring home an extra squirrel not needed by his/her family for the next meal and could trade it for a sharp rock someone else had surplus to their needs a trade could happen and Viola, you had Economics!

Pretty soon some folks found out they could make extra arrows and trade them for food instead of hunting and you had specialization of labor. Next thing you know you had a group of two or three craftsmen together doing what they do best with one making shafts and passing them to another who made the best fletching and passed the product ot the one who made and attached the points. Wow, things are pretty much picking up steam here. Pretty soon it is a group of 5-6 specialists who are not hunting but are supporting those that do. But production backs up so someone takes charge and now you have a supervisor to run it all and now you have someone who doesn't do any production, doesn't hunt but gets a cut of what the hunters do in order to survive. Pretty soon someone gets more than he can use for what he provides and you have the formation of CAPITAL! You know this stuff is really getting out of hand.

There is no doubt making cars by large capital institutions is desirable. One only wonders what a craftsman in a black smith shop would have to charge to knock off a Hummer II these days. I'll bet it would make the GM price seem pretty attractive and GM would have a more reliable delivery date projection. If you still want an artisan built vehicle I think Ferrari and Lambroghini are about the closest you can get.

Transportation only adds value to goods. It does not change the form or content of the freight in any way. You can grow some extra corn and if it is more than you can store and eat it will go bad. But if your neighbor wants some he will trade for it. Now you have to deliver it to him. First, there are limits to how much you can haul yourself and what if the neighbor just beyond your neighbor will pay more for what you have to sell? You can only make so many trips in the time you have available to you before you have to get back to working your crops. You can make more trips to your neighbor next door or more trips to the farther neighbor perhaps hauling less grain per trip for more money for each unit of crop. Or, you can hire someone to haul your grain for a cut of the pie. Well, the more the transportation specialist can haul and the farther they can haul it the more money you stand to make from your crop, less the amount you have to pay to have it hauled. Pretty soon the transportation professionals find themselves getting larger and longer and this is good.

So it all starts out pretty simple. Concentration of capital and increasing the size of the companies leads to more effecient and better systems of manufacture and transport. The problem of it all is that for the free market model to work it must allow freedom of entry and exit into the market. When capital concentration reaches a certain level in the cost of the infrastructure entry into the market is stymied and monopolies or oligopolies result. That might not be all bad if the large entities would behave in the interests of their customer but that is not the way to maximize profits and thus the return on capital. The more money you have then the better able you are to defend your position in the market and that is good for the bottom line.

So that is the situation here in Montana with regard to the BNSF and the grain farmers and the politicians. BNSF got big and does not want competition in their own sand box. The large grain companies want the small elevators out of the picture which is fine with the BNSF account they can abandon rail lines and the fixed costs associated with them. The growers want it like it was and a choice of where to sell their crops. Unfortunately, their markets are changing. The new flood (shuttle) elevators are expensive to build and the chances of the local CO-OP raising the capital to build one on their branch is problematic if not impossible. They also need to have a market they can sell more than just a couple of train a year to or their borrowed capital will not make a return and lead to bankruptcy. There is less risk to the farmers to sell to the large marketers and accept the less competitive price. Market concentration will continue for better or worse.

What matters is the price of the grain in the final market. The buyer could care less about the costs of production, transportation and storage. They will generally take the lowest price from the USA, Canada, Argentina, Australia or the EU. That assumes the customer has a surplus to trade for the grain in the first place. Without a surplus or a Sugar Daddy there will be no economic intercourse for the grain anyway.

It will be interesting to see how the Montana legislature deals with the hearings this session. School funding will be top priority account recent court actions regarding state levels of funding and equalization. County boundaries have historically been drawn to spread the railroad tax base wealth to the largest numbers of school districts. Now that property taxes may be forced to play a smaller part in school funding it will be interesting to see what effect that will have on branch lines. The new governor has advanced degrees in agriculture and is anactive farmer/rancher so I am sure he will take a strong personal interest in the hearings. Interesting times, too bad the news media will largely fail to report the debates.

Alan

[Anonymous]

QUOTE: Originally posted by PNWRMNM

Dave,

You are the greatest source of economic claptrap I have seen on this forum, but the above post rises you to new heights of inconsistent generalizations unsupported by any fact.

By the way, I love my BNSF Kool Aid. It keeps me strong against the confused.

Mac

Mac,

The problem is that you and a few others who participate on this forum do not have an understanding of how economics and politics intermingle as it relates to railroads. I'll try and explain it in the simplest terms.

Regulation is good for consumers to the point of price protection, but it inhibits business expansion and innovation.

Monopoly is good for the company to the point of increasing profit margins over the short haul, but it inhibits the customer's range of economic choices, and it also inhibits the desire for innovation due to the risk aversion.

The response to regulation by government depends on the political philosophy of the party in power. If it is a populist oriented body, then regulation will be seen as a necessary evil to counteract the evil of "excess" profit making entities. If it is a pro-business body, then regulation is seen as an inhibitor to economic expansion. It is assumed that as the general population becomes more educated, they will aspire to the latter rather than bury their heads in the former.

Deregulation comes in two disparate forms: Monopoly-inducing deregulation (popularily known as partial deregulation), wherein the supply side of the business is unshackled but the demand side remains locked for the sake of the larger businesses. The more beneficial form of deregulation is anti-trust inspired deregulation, wherein both the supply side and and demand side are unshackled, allowing both unlimited business expansion and unlimited consumer choice, with each acting as the other's deterent.

The response to monopoly-inducing deregulation by populists is to institute reregulation to "protect" the general population. The response by pro-business depends on what part of the business spectrum has the greatest say. If it is the few but most powerful big businesses, then all they can offer is excuses for the monopolists. If it is the many but least powerful small businesses, then they will push for anti-trust actions but not re-regulation, since business regulations can hurt the small as well as the large businesses.

What the Stagger's Act did was to erect the monopoly-inducing partially deregulated rail market, where the railroads were allowed relatively limitless power to control their own market, but the rail consumers were not afforded the necessary deterent of having relatively unlimited market choice among rail service providers. The consequence is short term profiteering among the railroaders, and the eventual long term response by representative governments is to either reinstitute regulations to control pricing, or force full anti-trust deregulation to make the rail market truly competitive on both ends. What is happening in Montana is just the tip of the iceberg, and if the collective leaders in the business and political spectrums do not take the necessary action, what will result is a return to rate regulation, a prospect that is good for neither business or consumers.

But if your reponse is to say that BNSF or some other Class I can do no wrong, then it is pointless to try and explain basic economics. Blind loyalty is not a virtue.

[greyhounds]

QUOTE:

What the Stagger's Act did was to erect the monopoly-inducing partially deregulated rail market, where the railroads were allowed relatively limitless power to control their own market, but the rail consumers were not afforded the necessary deterent of having relatively unlimited market choice among rail service providers. The consequence is short term profiteering among the railroaders, and the eventual long term response by representative governments is to either reinstitute regulations to control pricing, or force full anti-trust deregulation to make the rail market truly competitive on both ends. What is happening in Montana is just the tip of the iceberg, and if the collective leaders in the business and political spectrums do not take the necessary action, what will result is a return to rate regulation, a prospect that is good for neither business or consumers.

If whay you say was true, then the railroads would be earning monoploy profits - but they're not even earning their cost of capital. Q.E.D. - what you say is not true.

Here's what has really happend since the passage of the Staggers Rai Act in 1980, - rail rates fell by 60 percent in real (inflation adjusted) terms between 1981 and 2002. During that same time rail ton-miles increased by 65 percent.

SOURCE: The Metropolis Frieight Plan by Chicago Metropolis 2020.

60 percent is quite a reduction. No monopoly would reduce its charges, let alone reduce them by 60 percent. What do you want? It worked.. Rail deregulation, combined with trucking deregulation, dropped logistics costs from 16 percent of the US GDP to only 8.7 percent of GDP. That's quite a record of success. And that was quite a premium for the US population to be paying to support regulation.

Farming is a risky way to make a living. And I've got a lot of respect for farmers. But they've been complaining about railroad rates ever since there have been railroads. That's part of what they do, they complain. Sometimes their complaints are justified. But the BNSF is modernizing a wheat transport system that is over 100 years old. Expecting BNSF to haul their grain as a "loss leader" is saying that other shippers should subsidize the Montana farmers. Other shippers would have their money transfered to the Montana farmers under this idea. I don't see any justification for that.

[Anonymous]

"The response to regulation by government depends on the political philosophy of the party in power."
source: futuremodal

this is a pretty good reason to offer as an objection to government interference in the market place. political regulation injects a variable into the price finding mechanism which is by definition open to political corruption and political blackmail. why go back to the populist market tampering? rooseveltian commissions? why look to nixonesque price controls? why reenter the contradictory and self cancelling regulatory atmosphere? why not just allow buyers and sellers to sort out values among themselves? make them compete without force or fraud of either a personal or political nature. if one party finds he is at a disadvantage for some variables then let him ammend those weak points or enhance other factors. let competition between buyers and sellers sort it all out. the free market adjusts to new problems much more quickly than a board of regulators can.
economic success is not the full measure of a man. financial success is not a "right". the government is best left out of acting to level the playing field. if i had been guaranteed a level playing field with george westinghouse or jonas salk we would all be sick as dogs and sitting in the dark right now. let successful people and companies succeed.... please. we need them at their tasks. they succeed and grow rich providing products we willingly pay for.
bnsf is certainly a multi billion dollar economic power, but a lot of effort has gone into pointing out that they are not possessed of monopoly pricing power in regard to the
region or global arena in which they need to compete against other billion dollar transport suppliers. big is not per se bad, nor is enormous wealth an indicator of unlimited economic strength. bnsf has limits, they have capable competitors. if you shackle bnsf then you reduce the competition faced by their peers in transport. by harnessing bnsf you quite literally move their competitors closer to monopoly power.

[edblysard]

You should change the "we" at the beginning of your second paragraph to "I", it would better clairfy your own position, because by using "we", you imply you do have a majority concensus backing your opinion, which I havent seen as of yet.

As for breaking up the current railroads back in to their old fallen flags companies, if that were to happen, rates to ship anything, anywhere by rail would skyrocket to the point no one would ship a thing by rail...

You should give thought to answering you first question, (who is "we")...and clairfy what you consider "mainstream" and "us", because that certainly is not descriptive of myself, as represented in your second paragraph.

As a BNSF and UP stock holder, I have no wi***o see either railroad spend the time and my money running all over any state, gathering up ten or twelve cars here and there, be they grain cars, coal, or chemical tankers, at the edge of nowhere.

You strike me as a person who still thinks of railroads as public utilities, but for some odd reason, expect them to make a profit, while still serving anyone who demands it.

You are asking BNSF to spent the same amount of time, effort and money servicing a grain elevator that loads out twenty cars a month from the far reaches of civilization as they would servicing a mega elevator, that loads out a 120 car unit train every 8 hours...why would they do that?

Just because you want to see old time, old fashion peddler freights again?

Not real sure what your beef is with todays railroads, you dont seem to have much to say on their behalf, all I have ever seen you post is your economic voodoo.

Your intentional blindness to the fact that railroads are a for profit business is almost funny.

For all the verbiage you employee, you cant tell me your so silly as to expect any business to charge the same to ship from Hawaii to New York as from Houston to Dallas?

An item of note...
Hawaii is in the middle of the Pacific Ocean, far, far away from anywhere else...
Another item of note....
Most of the grain in Montana is far, far away from anywhere else....

If the growers dont want to pay what BNSF wants to charge, they do have choices, several of them,in fact.

Any business, and farming is a business, faces these choices every day.

One, they could move...

Two, they could merge into big co-ops...

Three, they could buy the tracks and run their own short line, and haul their product to the elevators BNSF wants to service,,,oh, wait, any one of those would cut in to the growers profit...

Wwouldn't want the farmers to have to play by the same rules as the rest of us....you know, pay extra for extra service.

I know, let the goverment subsidise them...wait, it already does that...humm, sounds like the growers have a monpolistic pratice going here, like we should pay what they want to charge to grow the stuff...thats not fair, I want the goverment to make them grow more wheat in Kansas, so the Montana farmers have to charge less....
or better yet, lets make the Texas Wheat growers who grow their crops less than 200 miles from the Gulf of Mexico pay the same shipping charges to Houston as the Montana farmers, who grow their crop 1500 miles from the Gulf of Mexico...that ought to do away with the monpolistic praticies of the Texas wheat growers....

Dont know what college or university issued you a degree in economics, but they ought to send you a refund check, and ask for the degree back...even dumb old 12th grade me can figure out you have social philosophy and applied business economics confused.

Simply put, the sole reason for the exsistence of a business, any business, is to make money, period.
The sole reason for a public utility is to provide the comsumer with a service.
The two rarely operate under the same laws or praticies.

BNSF, and all other railroads, are businesses.

Get over it.

Ed

QUOTE: Originally posted by futuremodal

Who is "we"? Certainly not most of us in the mainsteam. You repeat the talking points of left-of-center academia, who view the world through Keynesian-colored glasses.

What "we" want is for our representative government to maintain a business environment which encourages competition while protecting us from the tendancy toward monopoly. Thus, the government is charged with the dichotomy of providing sustenance when business failures that may affect economic security come to fruition, while at the same time preventing or breaking up monopoly by either regulation or anti-trust action.

What is happening in the railroad genre is that very tendancy toward monopoly empowerment thanks to the shortsightedness of the STB, and this monopolistic action is causing a loss of important infrastructure in large sections of the nation. Thus, the feds have failed us on two fronts, and it's apparent that it will be the states who have to take up the slack in preventing more degradation of the infrastructure, but the states are not as empowered to employ either re-regulation or anti-trust breakup, something that is badly needed and will eventually be forced upon the feds in due time as the complaints amass to a level that cannot be ignored.

What the railroads are doing by raiding and looting their portion of the nation's infrastructure is eventually shooting themselves in the proverbial foot. Railroad management are way to attuned to the "here and now" concerns of the bean counters, while ingoring the intangibles that do not make it into the ledger. No one up there has any foresight to know that you keep and grow your customer base even if it means conducting business at less than the bean-counter-prescribed minimun profit margins. You do not just lop off all but the richest customer connections.

[Anonymous]

Ed: I have made it perfectly clear that I do not want a return to regulated rates e.g. rates set by government fiat. What I and every rail shipper in the U.S. wants is for rail rates to be set by the competitive marketplace, and in order to do that you need to have access to more than one railroad transporter. Also, I recognize the obvious: Railroad ROW's are a public utility in everything but legalase. Electric transmission lines are the "public utility" aspect of electric utilities, fiber optic lines are the public utility aspect of the telecommunications industry, etc. What do you think would happen if an electric utility tried to "abandon" a transmission line and salage the wires for scrap? The FERC would be all over them, because at least in energy markets the government recognizes that the public good would be harmed by the inherent monopolization of such a ROW. You know as well as anyone that there is no freedom of entry and exit from the railroad market due to the high costs of contructing rail lines. That does not mean it should be the same for railroad transporters, that segment of railroading should have a free entry and exit facilitation.
Yeah, I'd be all for allowing Montana farmers to purchase or construct their own rail line, providing they get the same land grants and other incentives that BNSF's predecessors received. After all, fair is fair.
I did not say anything about returning to the days of the fallen flags. I did not say anything about a business charging the same rate for different locales, as you imply. All I've ever promoted is true rail competition. What I desire is for the marketplace to set the rates, not monopolists or government.
Furthermore, I do not begrudge BNSF consolidating grain loading facilities to 100 car loaders. What we begrudge is the fact that BNSF is the only available rail shipper in the area, which makes it a monopoly in that area. To say that those growers have alternatives is to be overly simplistic and blind to transportation economics. Class I's will not let shortline operators run over their tracks to let the shortline haul carloads to the unit train terminal, so that screws them out. Trucks are an expensive mode of last resort, and can only be a viable alternative if GVW's and LCV restrictions are lifted, which is exactly what the Montana legislature is considering as a reaction to BNSF's tactics, and would be far more preferable to a BNSF and UP stockholder such as yourself than if they decide to push for reregulation. Either way, because of BNSF's greed, actions will be taken that will eventually reduce the value of your stock holdings. If you had any real education, you would be berating BNSF at the next stockholders conference call for engaging in actions that are resulting in wholesale customer dissatisfaction. If you think pissing off the customer is good for stockholders' equity, your education is deficient, and you might want to get a refund from that matchbook high school with which you corresponded.

cbt141: BNSF is a monopolist in those areas of the country where they are the only rail service provider. Many other Class I's have the same monopoly power where the online rail shipper is limited to the corresponding Class I or no rail service. Unfortunately, this is one of the contributors to our nation's trade deficit. Most if not all deep water ports where imports are coming in have more than one Class I to provide double stack service, and where these imports are brought in for redistribution by trucks there tends to be a similar access to more than one Class I, therefore imports are not really affected by the owner-operator railroad structure. Exports on the other hand more often than not originate in areas and facilities that have access to only one Class I, so the effect is that U.S. exports are shouldering most of the monopolistic pricing excesses.

greyhounds: Railroads do have monopolistic powers in areas where they are the only rail service provider. In areas where there is either more than one Class I, or where there is viable water-based transportation, there is real competitive rate setting. Depends on the commodity also, as intermodal is very competitive, coal and grain tend to be subject to monopolistic pricing, again where there is only one rail service provider for either the originator of the commodity and/or the recipient. What is happening is that railroads are taking their monopoly profits from the latter and using that to subsidize the former. Look at what's happening in the LA-Chicago corridor, a true intermodal corridor if there ever was one. Both BNSF and UP are spending big bucks to double track those lines. Do you really think the profits from intermodal are paying for this improvement? Of course not, since the margins for intermodal are so low. Therefore, it has to come from those areas where the margins between cost and revenue are more significant, e.g. Montana grain and PRB coal. Not suprisingly, it is those latter two where all the rate disputes are taking place.
As for railroads not covering their costs of capital, that is the result of proprietary ownership of the ROW compared to trucking and waterways, where the ROW is owned and maintained by the government. If railroads would simply divest themselves of ROW ownership (preferably to public-private consortiums) and embrace open access, the transporter companies would more than cover their cost of capital, since capital would be drastically reduced to basically rolling stock, similar in scope to trucking companies and barge lines.
That 60% reduction in rail rates you cite has more to do with increased axle loadings, improved locomotive fuel economy, rationalization and consolidation of terminals, e.g. operating efficiencies that were held back during the regulation era, and it is unlikely such efficiency increases will continue. It has nothing to do with competitive market forces, i.e. the shippers are not the recipient of those rate reductions. Consider the farmer, who at one time only had to haul his wheat 10 or so miles to the nearest railhead. Now he has to truck his wheat a hundred miles to the unit train loading elevator at far greater cost to him. The rail rate may have gone down, but the multimodal rate has gone up. Remember the claim in the news item, that the profits from every third crop are going to transportation costs to the farmer? Transporation costs are getting worse for the farmer, not better.

[Anonymous]

this thread's discussion of monopoly status of one rail regions continues to ignore counterpoints made for "other source competition", ie, competition against any one location's single rail transport option coming from other regions' truck, rail and vessel transport.

one railroad in an area does not mean no transportation competition.

some rail deficeincies may be holding back our foreign trade, but these rail problems are more than likely an insignificant contributor to the problem of usa balance of payments which have been a mess since before staggers.... futuremodal, do you have any numbers on this problem?
my guess is that if there is a way to guage this data, then the answer will be .00000000% with a whole lot of margin of error. should we trust our lives to a politically appointed bureaucrat and a slide rule on this question?

free enterprise and private property rights have made the modern world a great place to live and work. it is a shame that the system is not perfect. however, for the settlement of economic differences between buyers and sellers it is the best system that has come along. it allows us to set a value on work and goods without resorting to the selfinterested opinions of third party regulators.

sometimes the marketplace's disinterested evaluation of our work and product is a real jolt of cold water. everything in the exchange of goods has its price. i would prefer that the "price" be cash in hand rather than politicians in office. i would prefer not " taking refuge from the excesses of democracy in an enlightened despotism." i'll take my losses in my wallet rather than in my freedoms.

this is the great difference of opinion that westerners have struggled with for 200 years, ie, how much government do we want?
both sides have spoken well for themselves here. discussion has remained heated but civil. that makes this a good thread to revisit.