BNSF shuttle grain trains, Does this mean that BNSF does not want to serve small elevators?

[Anonymous]

QUOTE: Originally posted by greyhounds

Now once you've got the grain in a truck, does it make sense to take it to a small country elevator, then transfer it to that elevator, hold it there, then transfer it to smaller rail cars for shortline movement, then transfer it again to a larger elevator, hold it there, then transfer it to a main line shuttle train?

Or do you just drive the truck to the large elevator in the first place? It will depend on the specific situation, but if I had to bet ( and I do bet on things ), I'd bet that it will be generally more efficient to just drive the truck to the large elevator.

Greyhounds,

Using this logic, we could take it one step further and say that it would make more sense just to drive the truck to the deep water port instead of transloading from truck to unit train elevator. As Michael pointed out, it's all about equipment utilization, and all other things being equal the optimal economic scenario would involve using (1)truck from farm to nearest elevator, (2)branchline hoppers from that elevator to unit train elevator (wherein the grain is either transloaed from lighter hoppers to 286k hoppers, or the 264k/286k hoppers are added to the nest unit train consist), and finally (3)264k/286k unit train hoppers from unit train elevator to deep water port (or sometimes to nearest barge port, wherein the next step (3a) is barging from river port to deep water port). For those places where the nearest grain elevator has no rail access due to either prior rail abandonment or never having had rail acess, then Step 2 involves transloading from farm truck to highway truck, a much more costly move than the branchline rail option. Sometimes it is possible to load highway trucks directly at the farm, and let the unit train elevator take care of the product quality refinements. Other times it is possible that another step (1a) will be added when grain is transloaded from farm truck to highway truck at the nearest elevator without rail access, wherein the highway truck only goes as far as an intermediate country elevator that has branchline rail access where the grain is then transloaded to the branchline hoppers. It all depends on distances and time constraints involved. Yes, there is always some product degradation when it is transloaded, but I've been told by co-op reps that the product quality losses and extra costs are insignificant compared to transportation costs.

[bobwilcox]

QUOTE: Originally posted by greyhounds

Yes, but.

The grain isn't originating at a country elevator. It's originating in a farm field.

I remember watching a Wisconsin farmer harvest his corn. It was dark and the John Deere combine just went back and forth, it's headlights showing the way through the corn field.

The hopper on the combine would get full, then he'd ( or she'd, I don't know which gender was driving) unload into a semi in the field. Semi's can go into farm fields where the freight originates. Trains can't. When the semi got full, it drove off.

Now once you've got the grain in a truck, does it make sense to take it to a small country elevator, then transfer it to that elevator, hold it there, then transfer it to smaller rail cars for shortline movement, then transfer it again to a larger elevator, hold it there, then transfer it to a main line shuttle train?

Or do you just drive the truck to the large elevator in the first place? It will depend on the specific situation, but if I had to bet ( and I do bet on things ), I'd bet that it will be generally more efficient to just drive the truck to the large elevator.

You have hit the nail on the head. I base this on my experience working with real grain and fertilzer shippers at the Rock Island and C&NW from 1966 to 1982. We facilitated a lot of elevators that wanted to load 25, 50 and 75 car blocks of covered hoppers on branch lines that had a future. The elevators that stuck with single car shipments in 40' boxcars did not have a future.

[greyhounds]

Well, equipment cycle times are important to everyone. It costs money to own equipment and getting the most productive use out of that equipment is vital.

They teach this in MBA classes. If you've got a machine that can perform its process in 240 seconds, and the next machine on the line takes 360 seconds to do its process, what do you do? You can't have the operator of the first machine, and his/her machine, standing idle waiting for the next guy to finish. You've got to "balance the line". In an ideal situation you'd have three of the first machines feeding two of the second machines.

That's like the combine and the trucks. The farmer has to "balance his/her line". He/she has to coordinate the trucks with the combine. If the farmer has to truck his grain farther to the elevator so be it. The farmer needs to hire more trucks. There is no reason that a 105K truck can't go into a field. It's a matter of ground pressure, and that can be solved by putting more axles under the truck.

I have learned that a truck is one of the most flexible machines in the world. You can do just about anything with a truck. It can be a fighting platform for the Army. It can be a work platform for a power company. It can haul produce from California to New York City. It can put out a fire. And, most importanly, it can move to where it is needed easily.

Using trucks to move grain from a field is a once a year thing. Then the trucks, and their drivers, go elsewhere. A rail branch line isn't like that. It's there all the time. Costing money to own and operate.

It is situation specific, but generally the grain gathering operation, which comes from a field, not from a country elevator, will be handled best by truck. Now there's a trade off. At a specific distance, you put the grain in a covered hopper. And that function will be work out best by the market forces, not by lawyers and politicians.

[MichaelSol]

QUOTE: Originally posted by greyhounds[That's like the combine and the trucks. The farmer has to "balance his/her line". He/she has to coordinate the trucks with the combine. If the farmer has to truck his grain farther to the elevator so be it. The farmer needs to hire more trucks. There is no reason that a 105K truck can't go into a field. It's a matter of ground pressure, and that can be solved by putting more axles under the truck.

"Ground pressure."

Field trucks used by grain harvesters represent different economics than over the road trucks.
1) Drivers are exempt from the requirement for commercial classification in most grain producing states. This permits the farmer or his kids to operate the trucks to the elevators.
2) In some states, the farm truck enjoys an agricultural fuel tax exemption that the OTR trucks do not. This is economically significant to the grain industry.
3) Truck must be licensed at its GVW rate. No ag exception. Pretty expensive.
4) Most country roads are not built to handle the loading, many country road bridges are not built to handle the loading, and if an OTR truck exceeded the weight limits, then there's a fine, besides potentially going through a bridge. I've seen that one. Quite a mess. The fact is, OTR trucks simply can't get to many locations.

On the Combine side:
1) the truck follows the Combine, the Combine doesn't come to the truck. OTR trucks are designed to be on highways, not fields.
2) Combines are not built to load OTR trucks. Either the Combine requires modification, or additional equipment, an auger, needs to be "available". "Available" meaning where the Combine needs it, not sitting somewhere else.
3) It would take the truck out of service for a day or more, just putting around the field following the Combine, to get the full load. An extremely poor use of truck time for an expensive OTR truck. Pretty expensive proposition to have a commercial license driver and expensive truck sitting around all day in a field. Not really what its designed to do.

At Lind, Washington a new transloader located on Highway 385 perhaps represents new thinking. It is a small, very small elevator. It is entirely up on stilts, and I wasn't sure what it was when I first saw it. Big steel bins on stilts. Pretty cheap to construct compared to a modern grain elevator. Very modern, very automated. Local trucks bring in the grain and load the elevator. OTR trucks come through, pull underneath, load by gravity and take the grain away. Not a railroad in sight.

I stopped and asked. The locals were apparently quite pleased with the results. "it gets us away from dependence on the railroad," meaning in that instance, the BNSF. "Service was never any good anyway, and this allows us to look for the best rate."

The interesting point to me was that 1) this was not some crummy little branchline somewhere, but an attitude by shippers on a mainline, and 2) the idea that the BNSF had now become the means of last resort, that these shippers would look to barges or UP, or direct trucking all the way, before looking to BNSF. Some hostility there.

I am sure the market will provide a solution to the reluctance of railroads to serve their customers. I'm not sure that the solution will benefit the railroads.

Gives a little different meaning to the twist, "not a railroad in sight."

Best regards, Michael Sol

[Anonymous]

Michael,

Your Lind reference reminds me of an observation I made a few months ago while exploring the back roads of Adams County WA. I followed an empty grain truck up State Highway 23 to Sprague WA, and when he turned into Sprague, I decided to see if he was going to stop at the Sprague elevators right there on the BNSF mainline. Sure enough, that truck plus three others had pulled into the rail side elevator waiting to load. My first inclination of their next destination was that they would simply short haul down the road to the BNSF shuttle train facility in Ritzville, since BNSF no longer provides service to the Sprague elevators despite a nice long siding there. So I waited around until the first truck was loaded and ready to go....

However, instead of heading down the road to Ritzville, this truck turned back down State Highway 23 heading toward Pullman. I followed him at a distance as far as St John, lost sight of him going out of St John, so I doubled back to St John and guessed that he had turned down the county road Endicott. Yep, I caught up with him going toward Endicott. He continued south passed Endicott, crossed over Highway 26, turned down Highway 127, and finally pulled into the riverside elevators at Central Ferry. I turned around to head back toward Sprague (since my intent was to watch the BNSF action at the Fishtrap recreation area), and on the way back I met the other three trucks that had been at the Sprague elevators, all heading the same direction as the first truck.

Okay, enough of the Grandpa Simpson story line.....

The conclusions from this trip is this: BNSF is losing traffic by their refusal to serve the the many mainline elevators. They probably assume that they will simply get that traffic at their Ritzville super terminal. Wrong. BNSF's decision to deny service to the line side elevators in deference to their unit train facility has cause at least some of that traffic to shift to the barge lines way down south. It is a little over 23 miles by I-90 from Sprague to Ritzville, while it is about 90 miles from Sprague to Central Ferry over a combination of State Highways and narrow county roads with alot of curvature and up and down running. My guess is that this traffic shift has more to do with service levels than with elevator price, because the party line around BNSF clones is that the unit train service from the Ritzville elevator can not only match the barge line rates, but beat them.

[MichaelSol]

Well, it's not just a regional problem:

"The Texas elevator and feed mill surveys indicated that one-fifth of the respondents were without rail service because of rail line abandonments, while one-third of the rice driers were located on abandoned rail lines. Further, one-third of the country elevator operators observed that their truck shipments of grain had increased in the past five years by nearly 60 percent, while about 60 percent of elevator operators said that their rail shipments had decreased by about 38 percent. Thus, there is an increase in the use of trucks in the marketing of Texas grain.

"Texas grain handlers believe their motor carrier service is satisfactory. By contrast, most registered some dissatisfaction with rail service. The greatest concern centers on the grain handlers' diffiiculty in obtaining railroad service and on the promptness of railroads in providing service. About half of the country elevator operators indicated that inadequate rail service had at times required them to lower their grain bid to farmers by an average of $0.14 per bushel. Country elevators and feed mills indicated the most dissatisfaction with railroads, while terminal elevators were more nearly satisfied with the service offered by railroads." Texas Grain Transportation Study by Fuller, Yu, Collier, Jamieson and Harrison. Center for Transportation Research, University of Texas at Austin and Department of Agricultural Economics, Texas A&M, January, 2001.

Grain is one of BNSF's most profitable services. This isn't an area they need to cut costs, this is an area they need to haul as much as they can, however the customer wants it hauled. As a product group, ag's average carload revenue is the highest of all product groups, at about $1900. Sprague is a good example. BNSF charges a $1200 carload rate to Portland. Even though a short haul, the revenue is higher than the system wide average of all product groups, some of which are virtually all unit train. Fast cycle time, high revenue freight. The RR wants to aggravate the customers so that it can take a 12% cut in revenue, if the customer will load at a different location, and so the customer takes his grain elsewhere.

Lower revenues AND angry customers. How much more "efficiency" like this can a railroad handle?

Best regards, Michael Sol

[arbfbe]

Trucking becomes a better alternative the closer the producer is to the final market. Texas is a big state but the grower is closer to the export shipping or final producer than the Montana farmer is to the Pacific Northwest Ports. The Washington growers in the Palouse find shipping on the Columbia to be a viable alternative. Sure the Montana farmers can do the same but the costs are going to sky rocket when the back haul to the truck is considered. Rail, meaning BNSF is the only realistic means to move the quantities of grain produced to the final users. There are no large flour mills in the state and so the grain must leave. It is too bad BNSFs service orientation is focused on BNSF's service to itself instead of it's customers. A monopoly position does lead to some market distortions.

Alan

[MichaelSol]

Hi Alan, in a recent grain marketing study I participated in, we looked at Texas grain transportation patterns (hence the above quote). It is a big state. From Brownsville (the big BNSF-served Gulf Port), the most distant elevator is 1282 miles (Anthony Texas) which compares with Montana's most distant elevator, to Portland, Baker at 1272 miles. As you can see, Texas is a squeak larger than Montana in wheat terms. Texas elevator distribution is fairly similar. The median distance to port for Texas elevators is 837 miles, for Montana, it is 909 miles.

However, the trucks, and other railroads have their effect in Texas. Lubbock to Brownsville, 800 miles, single carload rate, $2300. Conrad, MT to Portland, 816 miles, $3031 per carload.

Indeed, if the Conrad farmer trucks his wheat to the big shuttle at Shelby, the elevator there can only get a rate of $2716 per carload for a 110 carload train, $417 MORE than the single carload rate offered to the Texas shipper. Plus, of course, the cost of trucking.

Rates as of 4/15/05.

Best regards, Michael Sol

[Anonymous]

Am going to throw in a point on the fire. First off, am not a farmer, but live in a small farming community in NW ILL. Many of the smaller farmers do not have the storage or drying facilities that are required with the larger yields produced today. The semi drivers take the crop from the field to the elevator. There the farmer is paid after drying and storage fees. Then the same drivers get paid to take the "finished" crop 30 miles to larger facilities like ADM or Bunge Corp. where it is either used (ADM) or shipped out by barge to other larger facilities. All this starts at our local FS elevator which is located 50 feet from the BN Peavine line. Seems a simple siding (which there is plenty of room for) would eliminate a whole lot of semi traffic in the fall. Just my [2c] Willy

[daveklepper]

How much business does BNSF want? Maybe they have decided that getting all the business, and it is seasonal, means capacity constraints and inability to provide the service their year-round customers expect. So they are deliberately loosing the seasonal business to insure keeping the year-round business. Does this make sense?

[CSSHEGEWISCH]

QUOTE: Originally posted by daveklepper

How much business does BNSF want? Maybe they have decided that getting all the business, and it is seasonal, means capacity constraints and inability to provide the service their year-round customers expect. So they are deliberately loosing the seasonal business to insure keeping the year-round business. Does this make sense?

The concept makes perfect sense to me. I've known of several other businesses that turned away additional customers since they were already operating at capacity and did not wi***o alienate their existing customers. Grain traffic cannot be looked at without considering its effect on other traffic. If BNSF is already operating at close to capacity, and this appears to be the situation, I would consider any attempt to go after every last bit of grain traffic to be mismanagement.

[MichaelSol]

Well Dave, that is certainly an interesting way to look at it.

From an expense standpoint, it seems that the railroads have taken an odd view. Grain transportation is already such a streamlined operation compared to industrial or consumer traffic. No congested yards to deal with, no vandalism losses, all the traffic is out in the middle of nowhwere, where the crews stop, get the job done, and move on. Exactly what "costs" these companies are trying to "wring" out of the process is not entirely clear to me.

Matt Rose does say the following: "For several years we've improved our efficiency with longer trains for coal, grain, and other commodities."

Thirty years ago, I sat down with some Milwaukee people who were forward looking, with the idea of trying to envision the most "efficient" rail operation. This was before modelling was a sophisticated art/science. After a few months of chewing it over, we concluded that shorter, faster trains were more profitable than longer, slower trains. The alleged savings in crew costs with longer trains were cancelled out entirely by the increased costs of getting the train from point A to point B, and, at some point in the congestion matrix, crew productivity in the scenario with longer trains began to fall quite dramatically. The longer the trains, at a certain level of business, the more inefficient the railroad became.

The point was, the longer that the trains were on the track, the less efficient the railroad became and the more expensive was overall train operation.

So, BNSF proudly announces that its idea of efficiency is longer trains, on lines that are already pretty congested.

Interestingly, as the Internet became more clearly understood in terms of routing efficiency, the idea was exactly the opposite, break messages and information flow into small and discrete units, send them off, and the assemble them at their destination. Networks are more efficient with small units, rather than large units . Railroads have developed the idea, that is contrary to both models and experience in other industries, that large units are most efficient to move over crowded networks.

And even though its own customers don't like it, and it costs the customers more money, BNSF seems bound and deterrmined to force its customers into this idea of "efficiency."

Is there any "efficiency"?

BNSF grain trains are already among the slowest on the system at an average speed of 23.1 mph. A BNSF grain train of 15,000 tons is not an example of efficiency, rather, it is a slow moving bottleneck. Even though, by industry standards, BNSF is a pretty good mover of grain trains. However, its worst yard for dwell time is Pasco, with an average of 15.9 hours. Not to pick on BNSF, UP is just awful, with yard dwell times of 20-30 hours. But, Pasco happens to be where some of the longest grain trains are routed.

Now, what is the breakeven on trains.? The average carload on the BNSF earned $1074 (2003). It traveled 1045 miles. To breakeven, that carload would earn $924.00 on the same haul. That is, the average carload generates a profit of $150.

What does BNSF earn from a carload of grain on that same line-haul?

Well, Brockton, Montana is 1064 miles from Portland. A carload of wheat brings revenue to the BNSF of $3,938.00. Now, admittedly, Brockton is located in Montana and suffers from that uniquely BNSF policy that, if you ship in Montana, you will pay a lot more. The system average for 1064 miles, shipping grain, is only $2699 per carload. Either way, that is enormously profitable Compared to the BNSF average, Montana wheat is nearly 25 times as profitable per carload as BNSF earns from its typical business.

Compare that to the BNSF Consumer Group which represents 40% of BNSF revenue. The average CG carload brings a yield of $874. Compared to grain, which has no real "handling" needs -- it doesn't break, it doesn't dent -- CG is a high cost operation, serving the most congested yards on the most congested routes. The CG group loses about $50 per carload carried.

The average carload of grain on the BNSF system brings $1969. This compares not only with CG at $874, but with Industrial at $1568/carload, and Coal at $1028 per carload.

Wheat is the most profitable item carried on the BNSF, and is likely the least costly to the Company in terms of associated operating expenses.

Yet, Matt Rose says nothing about improving "efficiency" for the CG group, but only talks about coal, grain and "other commodities." But, as the numbers, and maybe even some common sense should show, "they ain't the problem." The fact is, based on profitability, BNSF should be turning sommersaults to keep those grain customers happy, and carrying as much wheat as possible, rather than losing the business entirely, as its policies have been doing.

What is interesting is that the Company is offering a 12% cut in its own revenue on this profitable commodity. To make longer, most likely less efficient trains which exacerbate congestion delays on the system, increasing operating expenses overall.

Naturally, someone would see it as mismanagement to make an extraordinarily good profit, because it might lead to congestion, but good business practice to carry 40% of the company traffic at a loss, even though that accounts for all of the congestion, and not do anything about it. Why on earth would a "year round customer" that loses money be so important to keep, compared to a customer that, in the season, generates a profit of 200-300%?

Further, and perhaps more significantly, there is not a particular seasonality in grain shipping. Misunderstanding the difference between grain marketing and grain growing is fairly typical. In 2004, for instance, to Pacific Northwest Ports, the quarterly carloads arriving during the week of 12/31/03 were 3500, 3/24/04 -- 5200, 6/15/04 -- 4800, 9/8/04 -- 3000, 12/01/04 -- 5000, carloads. As you will note, the smallest number of carloads was during "the season" of harvest.

Grain shipping is, in fact, a year round business.

However, it is thinking like this, and Instances like this, that go a long way to explaining why this Company cannot earn its own cost of capital.

Best regards, Michael Sol

[Anonymous]

Amen thanks Mike!

[PNWRMNM]

Michael,

Are you quoting revenue per car or revenue per unit? BNSF's web site talks in units, not cars. My take on this is a unit is a car or a trailer or a container. If so, revuenue per trailer/container should be at least doubled to get per car equavalent. Consumer goods is where the intermodal business resides in BNSF's structure, so one would expect low revenue per unit there. In short, I think you may be comparing apples to oranges.

Mac

[MichaelSol]

QUOTE: Originally posted by PNWRMNM

Michael,

Are you quoting revenue per car or revenue per unit? BNSF's web site talks in units, not cars. My take on this is a unit is a car or a trailer or a container. If so, revuenue per trailer/container should be at least doubled to get per car equavalent. Consumer goods is where the intermodal business resides in BNSF's structure, so one would expect low revenue per unit there. In short, I think you may be comparing apples to oranges.

Mac

You may be right, but the stumbling block is the somewhat contradictory way that the Annual Report refers to the unit of measure.

"The increase in average revenue per unit of 4 per cent is primarily related to rate increases and increased fuel surcharges."

"Average revenue per car/unit increased 5 per cent in 2004 to $1,126 from $1,074 in 2003."

"Average revenue per car increased 5 percent in 2004 compared with 2003."

One, or two, of these statements is contradictory to the third, if indeed the "unit" is the intermodal unit, not the carload unit, when referring to :unit" distinct from carload, since the percentage increases would not be the same if the intermodal unit is not a "carload" or vice-versa.

I think you are exactly right, although some of the intermodal as it is classified by BNSF is carload, for others, not. Similarly, some ag and ind is intermodal, but that is not something the annual report describes, so the breakout of those numbers is tough to do. If a person want to get carload rate on the CG, it would be a guess of somewhere between 1.6 and 1.9 the "unit" rate assuming that the contradictions in the above statements are mild mistatements.

Best regards, Michael Sol

[bobwilcox]

QUOTE: Originally posted by MichaelSol

Well Dave, that is certainly an interesting way to look at it.

From an expense standpoint, it seems that the railroads have taken an odd view. Grain transportation is already such a streamlined operation compared to industrial or consumer traffic. No congested yards to deal with, no vandalism losses, all the traffic is out in the middle of nowhwere, where the crews stop, get the job done, and move on. Exactly what "costs" these companies are trying to "wring" out of the process is not entirely clear to me.

Matt Rose does say the following: "For several years we've improved our efficiency with longer trains for coal, grain, and other commodities."

Thirty years ago, I sat down with some Milwaukee people who were forward looking, with the idea of trying to envision the most "efficient" rail operation. This was before modelling was a sophisticated art/science. After a few months of chewing it over, we concluded that shorter, faster trains were more profitable than longer, slower trains. The alleged savings in crew costs with longer trains were cancelled out entirely by the increased costs of getting the train from point A to point B, and, at some point in the congestion matrix, crew productivity in the scenario with longer trains began to fall quite dramatically. The longer the trains, at a certain level of business, the more inefficient the railroad became.

The point was, the longer that the trains were on the track, the less efficient the railroad became and the more expensive was overall train operation.

So, BNSF proudly announces that its idea of efficiency is longer trains, on lines that are already pretty congested.

Interestingly, as the Internet became more clearly understood in terms of routing efficiency, the idea was exactly the opposite, break messages and information flow into small and discrete units, send them off, and the assemble them at their destination. Networks are more efficient with small units, rather than large units . Railroads have developed the idea, that is contrary to both models and experience in other industries, that large units are most efficient to move over crowded networks.

And even though its own customers don't like it, and it costs the customers more money, BNSF seems bound and deterrmined to force its customers into this idea of "efficiency."

Is there any "efficiency"?

BNSF grain trains are already among the slowest on the system at an average speed of 23.1 mph. A BNSF grain train of 15,000 tons is not an example of efficiency, rather, it is a slow moving bottleneck. Even though, by industry standards, BNSF is a pretty good mover of grain trains. However, its worst yard for dwell time is Pasco, with an average of 15.9 hours. Not to pick on BNSF, UP is just awful, with yard dwell times of 20-30 hours. But, Pasco happens to be where some of the longest grain trains are routed.

Now, what is the breakeven on trains.? The average carload on the BNSF earns $1074. It travels 1045 miles. To breakeven, that carload would earn $924.00 on the same haul. That is, the average carload generates a profit of $150.

What does BNSF earn from a carload of grain on that same line-haul?

Well, Brockton, Montana is 1064 miles from Portland. A carload of wheat brings revenue to the BNSF of $3,938.00. Now, admittedly, Brockton is located in Montana and suffers from that uniquely BNSF policy that, if you ship in Montana, you will pay a lot more. The system average for 1064 miles, shipping grain, is only $2699 per carload. Either way, that is enormously profitable Compared to the BNSF average, Montana wheat is nearly 25 times as profitable per carload as BNSF earns from its typical business.

Compare that to the BNSF Consumer Group which represents 40% of BNSF revenue. The average CG carload brings a yield of $874. Compared to grain, which has no real "handling" needs -- it doesn't break, it doesn't dent -- CG is a high cost operation, serving the most congested yards on the most congested routes. The CG group loses about $50 per carload carried.

The average carload of grain on the BNSF system brings $1969. This compares not only with CG at $874, but with Industrial at $1568/carload, and Coal at $1028 per carload.

Wheat is the most profitable item carried on the BNSF, and is likely the least costly to the Company in terms of associated operating expenses.

Yet, Matt Rose says nothing about improving "efficiency" for the CG group, but only talks about coal, grain and "other commodities." But, as the numbers, and maybe even some common sense should show, "they ain't the problem." The fact is, based on profitability, BNSF should be turning sommersaults to keep those grain customers happy, and carrying as much wheat as possible, rather than losing the business entirely, as its policies have been doing.

What is interesting is that the Company is offering a 12% cut in its own revenue on this profitable commodity. To make longer, most likely less efficient trains which exacerbate congestion delays on the system, increasing operating expenses overall.

Naturally, someone would see it as mismanagement to make an extraordinarily good profit, because it might lead to congestion, but good business practice to carry 40% of the company traffic at a loss, even though that accounts for all of the congestion, and not do anything about it. Why on earth would a "year round customer" that loses money be so important to keep, compared to a customer that, in the season, generates a profit of 200-300%?

Further, and perhaps more significantly, there is not a particular seasonality in grain shipping. Misunderstanding the difference between grain marketing and grain growing is fairly typical. In 2004, for instance, to Pacific Northwest Ports, the quarterly carloads arriving during the week of 12/31/03 were 3500, 3/24/04 -- 5200, 6/15/04 -- 4800, 9/8/04 -- 3000, 12/01/04 -- 5000, carloads. As you will note, the smallest number of carloads was during "the season" of harvest.

Grain shipping is, in fact, a year round business.

However, it is thinking like this, and Instances like this, that go a long way to explaining why this Company cannot earn its own cost of capital.

Best regards, Michael Sol

It is sad you will never see the detailed numbers. Oh well.

[Chris30]

QUOTE: Lower revenues AND angry customers. How much more "efficiency" like this can a railroad handle?

I mentioned it before in this thread... revenue gained from serving small elevators on deteriorating branches would have to be spent on maintenance at some point to keep the business and support the heavier cars that most deteriorating midwest grain branches can no longer support. Lower revenues? What $$. Besides, the big railroads are already stretched thin on grain car supply. They're not going to upset their biggest customers to serve the little elevator that could. It's all about $$ and car cycle times.

CC

[MichaelSol]

QUOTE: Originally posted by Chris30

QUOTE: Lower revenues AND angry customers. How much more "efficiency" like this can a railroad handle?

I mentioned it before in this thread... revenue gained from serving small elevators on deteriorating branches would have to be spent on maintenance at some point to keep the business and support the heavier cars that most deteriorating midwest grain branches can no longer support. Lower revenues? What $$. Besides, the big railroads are already stretched thin on grain car supply. They're not going to upset their biggest customers to serve the little elevator that could. It's all about $$ and car cycle times.

In 1998, BNSF had 32,860 covered grain hopper cars. The demand was 408,000 carloads.

On 12/20/03: 26,500 cars. The demand was 416,000 carloads.

During 2004, the demand was for 450,000 carloads. Currently, BNSF fleet has 28,048 covered hopper cars available for service.

Just in the past two months car cycle times have increased from 24 to 26 days. Milwaukee Road's grain car fleet had a 15 day cycle time on its "long" runs in the PNW. Milwaukee's grain car fleet was 1.7 times as profitable to that company as the BNSF fleet is to the BNSF today with shuttle trains because of significantly better utilization by Milwaukee Road without shuttle trains. Milwaukee did have shuttle type service in the Midwest on 6 day cycles.

The big railroads today are "stretched thin" as a matter of policy. They have been cutting back on fleets even as grain shipment needs have been increasing.

The current BNSF cycle time and car fleet size permits transportation of 394,000 carloads of wheat on an annual basis. In 1998, BNSF capacity was 461,000 carloads annually. Yet actual carload needs have steadily increased. Even the BNSF ten year average need is 431,000 carloads. The Year 2004 required 451,000 carloads. Current loadings on BNSF are running 102% of last year's loadings at this time.

Now, BNSF advertises that its shuttle car cycle times are 2.4 times greater than single car, or less than shuttle, carload cycle times. Mr. Rose states that they keep shipping more and more by shuttle. That this is a great success. But overall car cycle times continue to increase, and the BNSF is significantly less able to carry the typical year's grain harvest than it was six years ago.

It is true that railroads have to spend money to keep customers and provide service. Can't argue with that. Chris30, I think you are right on, on that observation. That's why it is worrisome to see examples of mainline customers seeking alternatives. The mainlines are too expensive to provide service to mainline customers? Hmmm.

QUOTE: "Lower revenues?? What $$."

Besides instances of lost customers?

The shuttle rates are lower. The railroad receives less money per carload. Maybe that's not clear. The railroad does not make as much gross revenue off of shuttles as it does off of identical numbers of single carloads. The railroad loses close to $40,000 per train at shuttle train rates over what it would earn at single carload rates.

That's the irony of this: it costs the customer more in increased transportation costs to the shuttle elevators, and increased costs to build and operate shuttle elevators, and the railroad receives less revenue. This is one bright idea. Nobody wins.

If all BNSF grain tonnage were carried in shuttles, last year, compared to earnings if all BNSF grain tonnage were carried at single carload rates, the BNSF would have lost nearly $164 million in potential revenue.

That's fine insofar as cost savings in excess of the reduced revenue can be demonstrated.

But, that's the part that's missing.

Rather, longer, slower trains appear to result in increased system congestion, do result in increased track maintenance expenses, and do result in longer terminal dwell times as a system effect that "suggests" that increased efficiency is not the result, but rather statistically measurable inefficiency is apparently the result. That all trains are affected by the increased congestion resulting from bigger, longer, slower grain trains.

Overall, railroads have spent 20 years seriously converting its sometimes reluctant customers -- because it damages many of those customers economically -- to shuttle train concepts. Corporate careers have been dedicated to the concept, right or wrong. Matt Rose is one of them.

Are the railroads financially better off now than they were, say, in 1998, in the area where the supposed efficiencies are supposed to show up -- the bottom line?

Year _____ 1998____ 2004
Op. Income 24.14% 15.40%
Net income 12.95% 7.23%

OK, BNSF net profit has dropped almost by half.

Where else do these alleged "efficiencies" show up?

Best regards, Michael Sol

[Anonymous]

This is nothing new. BNSF has not had any interest in serving small to medium COOP elevators since day one. This even began in the final yrs of the ATSF era. The policy is if your facility does not have the capicity to load unit trains of atleast 75 cars, you're screwed. I worked in the grain business dealing w/this rr in the 1990's and it wasn't pretty then

[MP173]

Great to have you back Michael.

A little more solid information would be great, as Bob indicated, but unfortunately it will probably not be available to us.

A few questions, if you dont mind:

1. Clarify your use of $924 for breakeven per carload.
2. Does that $924 BE apply to grain? If I read correctly it is a system BE.
3. If that is correct, then the consumer product segment, based on your assumption of 1.6 "units" per carload would then be profitable....on the system BE point, and not unprofitable as you indicated.
4. What is the average mileage for the Ag carload segment? By knowing that number and the average carload revenue of $1969, we can crunch some numbers.
5. Average system carload revenue, as you stated, for 1064 miles of ag products was $2699 per carload. How did you determine that number?
6. What are the cycle times for the grain shuttle trains? You indicated cycle times increased from 24 to 26 days, was this for all system cars, or just grain cars, or grain shuttle cars?
7. Milwaukee Road's short haul grain cycle times were 6 days in the midwest in the 70's. Was that for the entire system? Or broken out for a single move? How far was that move?
8. You indicated that BNSF is driving away ag business. Perhaps it is. Ag carloadings were up 8% in 2004 vs 2003. This is not quite as healthy as the 10% increase systemwide, but not too far below.
9. You lament that the BNSF is throwing away revenue on grain shuttle movements, yet...as we all know " volume is vanity, profit is sanity "... are you saying profitability would have been higher? I dont think we have the data to crunch, again unfortunately. I seriously doubt if we will EVER see segment P&L statements from any publically, or private company.

Finally, you correlate the 1998 operating income ratio of 24% (inverse of the operating ratio) and the decline in that ratio to current level of 17% (trailing 12 months) to "efficiencies" or in this case the ineffieciencies. I would suggest the decline in OI had much more to do with market dynamics than the running of larger shuttle trains.

For example NS's OR dropped from 75% in 1998 to 90% in 2000 before climbing back up to 75% in 2004. Granted the Conrail integration had lots to do with that. UP's OR went frm 102 in 1998 to 89% last year. Yet, I would not say that UP is healthier today than in the late 90's.

The economic slaughter of post 9-11 and the recession had much more to do with the rising OR of BNSF than shuttle trains. Granted, NS is back to where they were, but they are NS. UP keeps bouncing along from disaster to disaster.

I am not an apologist for BNSF. But, they have invested very heavily into their franchise and based on resent revenue and profitability, it seems to have been wise. They are in the middle of a 6000 covered hopper car purchase which will help allieviate future problems.

It would be very interesting to see a complete breakdown on different business segments, but as we know, it aint gonna happen.

Good day.

ed

[MichaelSol]

QUOTE: 5. Average system carload revenue, as you stated, for 1064 miles of ag products was $2699 per carload. How did you determine that number?

6. What are the cycle times for the grain shuttle trains? You indicated cycle times increased from 24 to 26 days, was this for all system cars, or just grain cars, or grain shuttle cars?

Well, I am trying to get out the door for the 4th. I can answer these two the fastest.

The $2699 per carload for the distance comes from entering data for 2250 station points and distances for elevators on the BNSF system on an Excel Spreadsheet, and entering the associated rates for the 1-25, 26-51, 52-109 and 109-120 carload categories, as of tarifffs published 4/15/05.

From this data, linear regressions were run across progressively smaller segments of distances until equations were developed which accurately described the behavior of the tariffs in question within the relevant range of data. The BNSF price structure is actually logarithmic in overall behavior, but no single logarithmic equation accurately describes certain key ranges as well as linear modelling of the same data in small segments

At a given distance, then, an average, a high, and a low tariff number can be derived, as well as standard deviation that will describe the tariffs for 95% of the stations at that distance. The high and low tariffs, it turns out, very accurately describe the BNSF system "behavior" in setting prices: the high tariffs have a 98% correlation strictly with distance, and the low tariffs at a given distance have a 55% correlation with distance, and a high correlation with distance to other railroads, barge systems, etc.

6. The 26 day cycle time is for grain trains. The increase of 2 days over the past couple of months is quite significant as the loss of two days per cycle, on an annual basis, is the net loss of one entire cycle of 28,000 covered hopper cars, or, if you will, the reduction of the effective size of the car fleet to 25,667 cars.

Each day of drop-off in cycle time means a loss of approximately $28,000,000 on the BNSF. Two days loss is a shade over $55 million on an annual basis.

Two days may not sound like much, but It is very big news to suffer a decline like that.

In this case, the increase in cycle times is likely due to very good Hard Red Spring wheat prices at the moment on the Gulf Coast, coupled with BNSF's pricing policy that provides a substantially better rate to the Gulf Coast, $1.71 per mile per 100T hopper car, compared to $3.52 per mile to Portland, both rates from Shelby, Montana (4/15/05 tariffs).

This yields a greater net profit, at the moment, for the shipper in Shelby to ship 2307 miles to the Gulf, than it does to ship 785 miles to Portland, because of the market price differential between the two ports coupled with the BNSF pricing structure.

You can see where the grain car cycle times go right in the dumpster as a result.

The $4189 rate that the BNSF receives for the Gulf traffic, over the $2966 Portland rate is, of course, more than completely negated by the tripling of cycle times, resulting in a net loss of revenue to the BNSF of $4,709. But, that's what they offer, and these rates are considerably below the average BNSF price for a comparable distance, oddly enough.

How this Company remains in business is a remarkable feat.

However, what the cycle times also show is that the increasing reliance on shuttle trains just doesn't actually seem to show up anywhere. The current cycle times show no improvement -- they show deterioration -- over cycle times of 5, 10 or 20 years ago. There is no discernible positive effect.

The BNSF has put a fuel tariff on everything, which is supposed to compensate for oil cost hikes, so how the net profit continues to slide anyway, with all these efficiencies coming on line, is left unexplained by this Company.

I am increasingly inclined to lean to the conclusion that, like generals, railroads are preparing for the last war.

In a different era, of high train crew costs and limited congestion, unit trains and shuttle trains seemed like the way to go.

The new paradigm, where congestion is the enemy, unit trains and shuttle trains are dinosaurs, contributing to congestion and increasing maintenance and labor costs at a time when railroads should be benefitting enormously from crew reductions, insofar as reduced costs of operation are concerned.

For grain in particular, I have yet to find an articulate description of exactly what costs are being saved, nor an explanation of how long, slow, heavy trains are good for the railroad. I do not find the benefits anywhere in the financial statements, and never have.

Best regards, Michael Sol

[MP173]

But, Michael, you are quoting tariff rates. We dont know what the actual rates for the movements are, since we are not a party to the negotiations between BNSF and the owner of the wheat.

I really dont want to re-enter the world of Montana wheat rates, as we did last spring.

Looking at the NS's rates for grain, I find the following for 1064:
rail owned equipment <5000 cf @ $4000 per car
>5000 cf @ $4400 per car

private equipment <5000 cf @ $3422 per car
>5000 cf @ $3764 per car

The rate for BNSF's movement is considerably less than NS's. Plus, the rate for private vs rail owned is quite lower.

In comparing grain vs other commodities, it sure appears the grain rates are much higher....I will use the larger sized cars:

Lumber and panels @ $3431 per car
food oils @ $2414 per car

Something about the transporting of grain by rail results in higher transportation costs than other commodities.....why would that be? Perhaps the answer to that lends itself to the reasons behind this entire debate.

ed

[Anonymous]

QUOTE: Originally posted by MichaelSol

That's the irony of this: it costs the customer more in increased transportation costs to the shuttle elevators, and increased costs to build and operate shuttle elevators, and the railroad receives less revenue. This is one bright idea. Nobody wins.

I'll disagree with you on that last point. Clearly the trucking companies win, and do so at the expense of both the grain marketers and the railroads. Yet another inadvertent gift from the railroads to the so-called "enemy" aka truckers.

Rather, longer, slower trains appear to result in increased system congestion, do result in increased track maintenance expenses, and do result in longer terminal dwell times as a system effect that "suggests" that increased efficiency is not the result, but rather statistically measurable inefficiency is apparently the result. That all trains are affected by the increased congestion resulting from bigger, longer, slower grain trains.

It would appear that this bent toward clogging the tracks with ostensible "efficiency" consists is a disease that is systemic, hard-wired into the railroad management culture. If this idea of product consolidation onto as many cars as will fit onto a siding was developed from an economic model, it is easy to see that it was a model developed with limited variable analysis. Such is the heart and soul of the Staggers Act, on the surface a "no-brainer" while in its long term impacts a "no-brainer" of a different sort. Staggers only partially "deregulated" the railroads, providing independent rate setting and price contracting, but doing nothing to effect head to head rail competition for all rail shippers. The latter is crucially necessary to ensure innovation, the only way to keep the entire industry from homogenizing into a star-crossed bandwagon of eventual economic failure.

Some of you have explicitly or implicitly infered that competition is bad for the rail industry, because if railroads are forced to compete for each and every potential customer they will not be able to achieve revenue adaquacy. This is simply circular reasoning, because without competitve incentives the customer base will be put off (via capacity reductions, service consolidations, service delays, service refusals, et al), and without an ever increasing customer base a company, any company, not just railroads will not be able to achieve revenue adaquacy.

How many more examples of railroad management underachievement will this nation have to put up with before you all will concede that Staggers is ultimately a failure? It's not that deregulation is not a desirable application of government oversight, it's that partial deregulation is sometimes worse than no deregulation at all. Staggers is partial deregulation, evidenced by the railroads' balance sheets, and evidenced by the tremendous loss of railroad employment/trackage/market share over the last two decades.

If we want to do this thing right, then we need to fully deregulate the industry into a competitive venture that pleases both the investors and the customers. You all know my idea for full deregulation (it goes by the initials "o" and "a"), but I am willing to consider any else's ideas for implementing full deregulation in the broadest sense of the word. If anyone has an idea for bringing back the rail saturation of the 1970's, wherein all but a few areas of the country had true head to head rail competition in the form of the private closed access system, then let's hear it.

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