Why your fried chicken ate Brazilian corn

Posted by Fred Frailey
on Wednesday, April 13, 2016

Get this: It’s now cheaper for a hog farmer or chicken raiser in North Carolina to buy corn grown in places like Brazil or Argentina than in the U.S. Midwest. A host of reasons account for this anomaly, but not the least of them is the price charged by American railroads.

The strange occurrence will be seen more frequently in 2016. First of all, the world is awash today with commodities of all kinds, from really hard stuff like iron ore to greasy goo like crude oil to crunchy things like, well, corn. Sticking with corn for another moment, harvests have been of near-record proportion in places like Brazil, not to mention the U.S. itself. Those oversupplies put the price of Brazilian corn last year 10 percent below that in the U.S., according to the Wall Street Journal. Of course, the strong U.S. dollar had a hand in this price discrepancy.

Meanwhile, ocean shipping rates are in freefall due to overcapacity. The Journal of Commerce reported a few weeks ago of rumors that rates between Asia and Europe for container traffic had turned negative—that is, that some traffic was riding the seas for nothing or even a rebate.

So enter American railroads and their GARI. That stands for Guaranteed Annual Rate Increases. These have been as dependable as the snows atop the Colorado Rockies for the past dozen years. The Journal cites rates of 35 to 50 cents a bushel from South America to the U.S., but 80 cents to $1.50 a bushel for movement by rail within the U.S. Put all this together, and you have corn from South America selling for less than that from Illinois in places like North Carolina.

I should provide some perspective. The U.S. Department of Agriculture expects 50 million bushels of corn to be imported this year, up more than half from 2015. That is but a pittance against the more than 13 billion bushels grown by U.S. farmers. So it's not as if American farmers are being held captive to American railroad rates.

Still, my takeaways from this admittedly unusual tale are these: First, going forward, railroads should expect more pushback from shippers over rate hikes—and maybe more agitation for regulars to restrain the GARI. Second, events such as I just described have a way of causing problems for businesses on the wrong side of the story, namely railroads. And third, this is but one more sign of a how weak the environment for the railroad business has become.—Fred W. Frailey

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