What happen to Milwaukee Road?

[MichaelSol]

The actual producer price index for railroads is at:

http://data.bls.gov/cgi-bin/surveymost?pc

It is obviously a surprise to Ken Strawbridge that such a thing exists, but it does.

[MichaelSol]

Didn't change much between 1974 and 1977. By 1980, the last year the Milwaukee was in place, started inching up to about $1600 per carload, but that is just recollection. I seem to be the only one here who even attempts to offer data. There were huge volume increases, however, in those years. Fleet utilization alone was much higher.

In order for a carload cost in 1980 to equal the equivalent cost in 2003 (the general PPI index with the handy calculator stops there) according to the PPI, the rate in 1980 would have to be $2,026.2. A 1980 figure less than that means that rates have gone up since 1980, not down.

Several of the inflation indexes don't go back beyond 1980 so, for reasons I again reiterate, I am picking a 1980 figure as that represents the last year of Milwaukee in Montana, and fits with available rail rate data as well as available index data.

Rail rates for shippers in Montana, as a special case, have increased significantly over the past 25 years in real terms, in constant terms, in actual terms, however you want to phrase it, using either a rail rate index, a GDP Deflator Index, or the most closely related PPI index.

Rates of other wheat shippers have, in fact declined by those indexes.

[greyhounds]

Now hold on there Mr. Sol.

First you said the rail charge was $1,550 in 1974.

Then you said the rail charge was $1,550 in 1980.

Well, which one was it? Or are you saying there was no change in the rail charge for that six year period? That would seem odd - given the high inflation of the time.

[MichaelSol]

NASA, eh?

The index of inflation specifically applicable to rail rates shows deflation of approximately 50%. Why you wi***o tie rail rates to a CPI index of housing costs, price of autos and tea from China is beyond me.

The CPI is an average of specific rates of increase and decline in purchasing power of a dollar for specific items.

It is not some magical assessment of everything as you seem to believe. Rail rates aren't even included in the CPI, let alone bear any resemblence to it. The specific rate of inflation (deflation) is different for rail rates, markedly so, than for any of a number of indexes you might refer to: CPI, ECI, GDP Deflator, MPI, PPI, as these cumulative indexes themselves are only composed of individual indexes for appropriate commodities, goods, or services.

However, since you like NASA, here's what the results are from their calculator using a GDP Deflator:

1980: $1550.
2004 (est) $3130.30

During that year, actual rail rates at the point discussed ranged from $3,066 to $3,250, averaged $3,158.

Rates went up for Montana wheat shippers according to your choice of NASA's GDP Deflator calculator.

You probably want to stick with the CPI, because it would show that the inflation rate for consumer goods --houses, cars and french fries -- if applied to rail rates, would mean a freight charge in 2004 of $3552.00. Almost $400 more than your GDP index. Why the difference? It's $3771 using the ECI. Why don't you pick that one? It's only $1889 if you use the MPI; you wouldn't want that one, would you? NASA's "new start" inflation index would give you $3862. That's probably more up your alley.

The Producer Price Index, which probably more accurately reflects railroading costs (they are included in that index) -- closer than the french fry index, anyway -- shows that a carload of wheat should cost $2,523 to ship in 2004. Wow, that actual cost of $3,158 seems to show that Montana wheat shippers are really getting screwed, if you refer to a genuine, recognized, industrial price inflation index.

Cherry picking an irrelevant index will give you what you want, if you are interested in houses, cars, or french fries, or in fooling people with the price of french fries and how that really means rail rates, if that is your objective, which I think it is.

For rail rates, I'll stick with a rail rate index .

[greyhounds]

QUOTE: Originally posted by MichaelSol

Looking at Ed's quaery:

Montana
1974: $4.24/bu, 26.5 bu per acre yield (5 year aver), $493,000,000 total winter wheat crop value (4 year aver), 4,795,000 acres planted (4 year average). Cost to ship to Portland, $1550.

2005: $3.60/bu, 28.9 bu per acre, $616,000,000 total winter wheat crop value, 5,417,000 acres planted. Cost to ship to Portland, $3,300.

Well, that pretty much says it all. For anyone wanting to check my math and the following inflation adjustments, here's a good site to use. -
www1.jsc.nasa.gov/bu2/inflateGDP.html

According to NASA the inflation index from 1974 to 2005 was 326.36. This means that it took $3.2636 in 2005 to buy what it only took $1.00 to buy in 1974. Now some goods and services went up more than that, some went up less than that.

The rail rates from Montana to Portland actually went down in constant dollar terms. They would have had to be $5,059 to keep up with inflation. Instead they were only $3,300, which respresents a decline in constatnt 1974 dollars from $1,550 to only $1,011. (previously, Sol had given an inflation index of 415 for the period. I'll take the NASA number over Sol's number.)

So what is the fuss all about? Why is FM making his silly statements that the rates went up because they take a greater percentage of the farmers' income? Well, look what happened to the price of wheat. Similarly adjusted to 1974 dollars it fell in value from $4.24/bu to $1.10/bu. Even with a slight increase in yield per acre, a farmer with 6,000 acres saw his inflation adjusted annual gross fall drastically from $674,160 in 1974 to only $191,273 in 2005. (1974 dollars)

The fact that his gross revenue fell at a faster rate than the rail charges went down caused the rail charges to become a larger percentage of his gross But that doesn't change the fact that the rail charges went down significantly.

The collapse of wheat prices is causing the problem. There's nothing anyone can do about the price of wheat. The farmers are behaving pecularly in the face of this price collapse. According to Sol they brought another 622,000 acres into production in response to a price collapse. Why would they do such a strange thing?

Well, it's my guess that those farm subsidies encourage the farmers to grow more unneeded wheat. The government takes money from the rest of us and pays them to loose money growing wheat that nobody needs.

Anyway, the rail rates did go down in constant dollar terms. That's all anyone can realistically expect the railraod to do? Of course, some people are not realistic.

Ken Strawbridge

[MichaelSol]

Looking at Ed's quaery:

Montana
1974: $4.24/bu, 26.5 bu per acre yield (5 year aver), $493,000,000 total winter wheat crop value (4 year aver), 4,795,000 acres planted (4 year average). Cost to ship to Portland, $1550.

2005: $3.60/bu, 28.9 bu per acre, $616,000,000 total winter wheat crop value, 5,417,000 acres planted. Cost to ship to Portland, $3,300.

[n012944]

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by Murphy Siding

QUOTE: Originally posted by MichaelSol

Well, we disagree. I used the numbers for a specific purpose, and I stand by the purpose. Trying to apply them to a different purpose, to reach a different conclusion, is what I object to.

Fair enough.(shrugs) Then you should have no objections to me, as I still don't understand what you are trying to say.[:)] Carry on.

Murph,

Just out of curiousity, are you using an abacus to derive your lumber sales figures?[;)]

I understand what Michael is saying, as should anyone who has at least a college education. What Ken is alleging is simply untrue, aka his contention that real rail rates for hauling grain out of Montana have gone down, when in fact the real rate has gone up since the consolidation of the Hill Lines into BN and the departure of the Milwaukee. This even you can comprehend, if not be in agreement with, because even you understand the basic economic principles of "competition = lower rates; lack of competition = higher rates". Ken's allegation goes contrary to this basic economic tenet.

The proof is in the percentage of farmers' gross income going to transportation costs to get the grain from farm to market.
In 1980 the percentage of gross income going to pay for transporation was 10%.
In 2000 the percentage of gross income going to pay for transportation was something like 40% or 50%.

From 10% to 40% is what we in fly over country call a rate increase. Ken calls it a rate reduction. Hmmmm........

That argument works...unless the amout of the farmers gross income went down, then of course the percentage would go up.


Bert

[Murphy Siding]

QUOTE: Originally posted by futuremodal

Murph,

Just out of curiousity, are you using an abacus to derive your lumber sales figures?[;)]

I just do the math in my head-doesn't everybody?[;)]

[MichaelSol]

QUOTE: Originally posted by idhull

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by n012944
The artical then quotes MILW trustee Stanley Hillman as saying "Seldom since the Pacific Coast Extension was completed in 1909 has the Milwaukee been able to attract sufficient business to the rout to justify the hundreds of miles of totally unproductive line that are included in it; and never in recent years has it been able to do so." The 1561 route miles west of Butte, Mont., particularly upset the trustee. "Close to 40 per cent of the MILW's route mileage west of Butte gererates only 6 per cent of its revenues west of Butte."

Well, stop, take a deep breath, and consider how much of UP's route mileage between Omaha and Salt Lake generates revenues. You can take close to 40% of any transcontinental, leave out the revenue generated at the terminals, and come up with a ridiculous figure.

Hillman resigned after he saw the real meaning of what he had been talking about.

Trains didn't report that part of the story.

Does this mean that 6% of the freight originated west of Butte or does it mean that the density of traffic on the line was such that the revenue per track mile x the number of track miles west of Butte was only 6% of the total? A railroad propbably operates most efficiently when there are large numbers of miles between origins and destinations as long as the revenue per track mile is sufficient to support the trackage. That is why railroads concentrate on the long haul freight and often neglect the freight inbetween origins and destinations if the volume or price is low.

There were a good number of bizarre statements made in those days, and that was one of them. When I heard the statement, my reaction was, "well, good, the more traffic that originates and terminates at the ports, the better." NP carried more traffic than either the GN or MILW but made less money, because as the first carrier built, NP served everything and everybody all along the way and wandered all over the place trying to do it.

Montana, for instance, was portrayed as a "bridge" state. This was suggested as a negative. W.L. Smith offered that MILW only originated 8% of its traffic in Montana. Why was that odd? Well, Milwaukee served 15 states. The average would be only 6% originating in each state. Montana would have been above the statistical average for any railroad that served 15 states.

Yet, 8% was somehow offered as a negative. I saw it as a positive because the railroad was paid for mileage, and it really racked up miles on those long tangents in Montana, South Dakota and Eastern Washington. Where else would the Company earn 42% of its gross income from 24% of the total carloadings with only 20% of the total company employees on 18% of the track mileage?

To me, it symbolized a terrific economic efficiency of revenue production, compared to Lines East, that 40% of the line generated only 6% of the revenue.

I spoke with Bob Schnoes, Hillman's successor at IC Industries about Hillman and he explained some background, perhaps, behind Hillman's odd remark. "Stanley was a financial guy. He was not an operating man. He didn't understand operations. He could read a balance sheet with the best of them, and arrange stock ratios for a merger, but operations just wasn't his strong suit."

To me, Hillman seemed like he would have been more comfortable with an NP-type operation, where he could see every station "pulling its weight" instead of all these places where the train never stops, just to get to some traffic 1700 miles down the line. I think that is why ICG went downhill under Hillman's management after he fired Allan Boyd. Hillman's background was in the tobacco industry. He saw railroading from a manufacturing process perspective with no background or understanding of the long haul/short haul dilemma of regulated era railroading.

[Anonymous]

QUOTE: Originally posted by Murphy Siding

QUOTE: Originally posted by MichaelSol

Well, we disagree. I used the numbers for a specific purpose, and I stand by the purpose. Trying to apply them to a different purpose, to reach a different conclusion, is what I object to.

Fair enough.(shrugs) Then you should have no objections to me, as I still don't understand what you are trying to say.[:)] Carry on.

Murph,

Just out of curiousity, are you using an abacus to derive your lumber sales figures?[;)]

I understand what Michael is saying, as should anyone who has at least a college education. What Ken is alleging is simply untrue, aka his contention that real rail rates for hauling grain out of Montana have gone down, when in fact the real rate has gone up since the consolidation of the Hill Lines into BN and the departure of the Milwaukee. This even you can comprehend, if not be in agreement with, because even you understand the basic economic principles of "competition = lower rates; lack of competition = higher rates". Ken's allegation goes contrary to this basic economic tenet.

The proof is in the percentage of farmers' gross income going to transportation costs to get the grain from farm to market.
In 1980 the percentage of gross income going to pay for transporation was 10%.
In 2000 the percentage of gross income going to pay for transportation was something like 40% or 50%.

From 10% to 40% is what we in fly over country call a rate increase. Ken calls it a rate reduction. Hmmmm........

[Anonymous]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by n012944
The artical then quotes MILW trustee Stanley Hillman as saying "Seldom since the Pacific Coast Extension was completed in 1909 has the Milwaukee been able to attract sufficient business to the rout to justify the hundreds of miles of totally unproductive line that are included in it; and never in recent years has it been able to do so." The 1561 route miles west of Butte, Mont., particularly upset the trustee. "Close to 40 per cent of the MILW's route mileage west of Butte gererates only 6 per cent of its revenues west of Butte."

Well, stop, take a deep breath, and consider how much of UP's route mileage between Omaha and Salt Lake generates revenues. You can take close to 40% of any transcontinental, leave out the revenue generated at the terminals, and come up with a ridiculous figure.

Hillman resigned after he saw the real meaning of what he had been talking about.

Trains didn't report that part of the story.

Does this mean that 6% of the freight originated west of Butte or does it mean that the density of traffic on the line was such that the revenue per track mile x the number of track miles west of Butte was only 6% of the total? A railroad propbably operates most efficiently when there are large numbers of miles between origins and destinations as long as the revenue per track mile is sufficient to support the trackage. That is why railroads concentrate on the long haul freight and often neglect the freight inbetween origins and destinations if the volume or price is low.

[MichaelSol]

Perhaps it is just best to agree to disagree.

An inflation index is a highly artificial construct. There are many such indexes. The common one happens to have been driven by housing cost increases in recent years.

Does that have anything to do with rail rates?

Not much, but using that as the reference does , in fact, tell you that rail rates have fallen by reference to an index driven by consumer housing costs, plus a basket of other consumer related items.

Comparing changes in rail rates to changes in housing costs ... shows ... what? You tell me. I will agree that it shows that rail rates declined compared to housing costs. So what? They increased compared to other costs. So what again?

There is nothing sacred about this or that index, especially if they have nothing to do with rail rates. Only a rail rate index is relevant to rail rates specifically. That seems to be the point strenuously avoided.

While this seems to be a new idea to members of the thread, in fact, if you examine how these indexes are put together, you will see that comparing unrelated indexes is an opportunity for both confusion and mischief -- literally apples and oranges.

However, since the concept cannot be discussed; there is no point in discussing it further. We simply disagree.

[MP173]

Murph:

I am with you. I dont get it. It must be that we are sales guys and our math is pretty simple...

Cost is x.

Selling price is y(x) whereas y is to be a number greater than 1 if salesman wants to make a buck.

That math has always worked for me.

Michael, I have really tried to follow you...really, I have. But, you have completely lost me. But, it has been fun.

ed

[n012944]

QUOTE: Originally posted by Murphy Siding

MichaelSol: It is not my intention to argue over the price of rice in China, or the price of wheat in Montana. You win....whatever. What I do find humor in, is the fact that you keep throwing numbers around to prove your point. When questioned on those numbers, (for the simple reason that some posters-me included thought they looked suspect), you explain that the numbers can't be used the way you used them. Once again-I agree with you.[;)] You seem to be correct, that you can't use those numbers the way you used them. I accept your explanation of why they wouldn't be valid.[(-D][(-D]
Now, you wi***o use the *Boy-are you stupid, Charlie Brown* technique again, because no one here understands what you're trying to say?[(-D][(-D] You can disagree with me, but the fuzziness of the information seems to be a sending error not a receiving error.

I agree

[Murphy Siding]

QUOTE: Originally posted by MichaelSol

Well, we disagree. I used the numbers for a specific purpose, and I stand by the purpose. Trying to apply them to a different purpose, to reach a different conclusion, is what I object to.

Fair enough.(shrugs) Then you should have no objections to me, as I still don't understand what you are trying to say.[:)] Carry on.

[MichaelSol]

QUOTE: Originally posted by greyhounds

QUOTE: Originally posted by MichaelSol

And, as I have stated three times now, I do not have, in front of me, rail rate numbers for 1974. I have them back to 1980. That was the last year that Milwaukee Road served the PNW and is therefore relevant data. to the contention that rates are lower without the Milwaukee than with it. However, indexing shows that is patently untrue. Compared to ag and general rail rates elsewhere over the same period of time, Montana grain rail rates have increased significantly compared to the index, which demonstrates, I think conclusively, that the absence of the Milwaukee Road caused a rise in grain rates compared to the shipping price index for the commodity over the past 25 years.

For 1974, the only thing to "explain" is that that a rail rate in 1974 expressed in terms of 2005 dollars also needs the commodity expressed in those same dollar terms. And all that does is place that rate into 2005 dollars, not into a comparable 2005 rate index.

Now, for 1980 and later, there is an available rate index. Those have been discussed.

Well you sure had the 1974 figures available on May 25 --

QUOTE: Originally posted by MichaelSol



"a carload would bring $15,750, with a shipping cost to Seattle of $1,550 [1974 dollars]. Just about 10% of the gross revenue went to transportation. Yes, that is $6500 in 2005 dollars, but --"

Where did they go? Delete Key or Wastebasket? They clearly showed that the cost of moving wheat by rail from Montana has gone down significantly from 1974 to 2005 - which is not supportive of your political agenda - and now they're "gone".

Well, this is just simply dishonest. The rail rate study I cited puts rail rates into an overall context. A rate, by itself, is fairly meaningless without an index value. The study goes back to 1980. They don't go back to 1974. So while the 1974 rate expressed in 2005 dollars offers limited probative value regarding changes in rate, a full rate data set as presented in the study does.

Rail rates, measured using an index propelled primarily by housing costs, is absurd. That's what you are doing because you think you've discovered a "gotcha" after your fiasco with gateways, etc.

And that's the essence of your argument: compared to housing costs, rail rates have gone down, but that is the result of using the CPI as your sole index reference.

Compared to an ag index, rail rates have gone up. Compared to an electric energy cost index, rail rates have gone up. Compared to oil they've gone down. Compared to a rail cost index, some rates have gone down, and some have gone up.

You're using the wrong index.

[chad thomas]

[MichaelSol]

Well, we disagree. I used the numbers for a specific purpose, and I stand by the purpose. Trying to apply them to a different purpose, to reach a different conclusion, is what I object to.

The 1974 grain rate expressed in 2005 dollars is still the 1974 grain rate expressed in 2005 dollars. And it still has nothing to do with a 2005 grain rate because the grain rate changes according to a different specific index than does the overall measured value of the dollar which is the result of a basket of such indexes. That may or may not be hard to see.

There is nothing condescending about pointing out that lacking specific rate data for 1974 makes a thorough discussion of that year less useful than 1980, for which a more complete data set exists. Why you might then decided to fasten on 1974 is a puzzler if a legitimate discussion is what you seek.

And yes, it is true that a $1,550 carload wheat rate in 1974 is a $3,300 wheat carload rate to certain shippers in 2005, but a $1,700 rate to other wheat shippers in 2005. And yes, the price of wheat at $4.50 a bushel in 1974 is still $4.50 in 2005. The inflation index is a statistical average that measures the overall value of a dollar in the economy, it does not measure the value of a rate or service notwithstanding that those are expressed in dollar terms.

[chad thomas]

QUOTE: Originally posted by Murphy Siding

Dang! Chad. I thought maybe you were going to explain some math to me.[:P]

Marvin from Pulp Fiction voice, "Hey man, I don't EVEN have an opinion"[;)][8D]

[Murphy Siding]

Dang! Chad. I thought maybe you were going to explain some math to me.[:P]

[chad thomas]

[Murphy Siding]

MichaelSol: It is not my intention to argue over the price of rice in China, or the price of wheat in Montana. You win....whatever. What I do find humor in, is the fact that you keep throwing numbers around to prove your point. When questioned on those numbers, (for the simple reason that some posters-me included thought they looked suspect), you explain that the numbers can't be used the way you used them. Once again-I agree with you.[;)] You seem to be correct, that you can't use those numbers the way you used them. I accept your explanation of why they wouldn't be valid.[(-D][(-D]
Now, you wi***o use the *Boy-are you stupid, Charlie Brown* technique again, because no one here understands what you're trying to say?[(-D][(-D] You can disagree with me, but the fuzziness of the information seems to be a sending error not a receiving error.

For full disclosure, I don't own any wheat farms, but I did eat a sandwich for lunch today-so I got that going for me.[:)]

[greyhounds]

QUOTE: Originally posted by MichaelSol

And, as I have stated three times now, I do not have, in front of me, rail rate numbers for 1974. I have them back to 1980. That was the last year that Milwaukee Road served the PNW and is therefore relevant data. to the contention that rates are lower without the Milwaukee than with it. However, indexing shows that is patently untrue. Compared to ag and general rail rates elsewhere over the same period of time, Montana grain rail rates have increased significantly compared to the index, which demonstrates, I think conclusively, that the absence of the Milwaukee Road caused a rise in grain rates compared to the shipping price index for the commodity over the past 25 years.

For 1974, the only thing to "explain" is that that a rail rate in 1974 expressed in terms of 2005 dollars also needs the commodity expressed in those same dollar terms. And all that does is place that rate into 2005 dollars, not into a comparable 2005 rate index.

Now, for 1980 and later, there is an available rate index. Those have been discussed.

Well you sure had the 1974 figures available on May 25 --

QUOTE: Originally posted by MichaelSol



"a carload would bring $15,750, with a shipping cost to Seattle of $1,550 [1974 dollars]. Just about 10% of the gross revenue went to transportation. Yes, that is $6500 in 2005 dollars, but --"

Where did they go? Delete Key or Wastebasket? They clearly showed that the cost of moving wheat by rail from Montana has gone down significantly from 1974 to 2005 - which is not supportive of your political agenda - and now they're "gone".

Since the 2005 rate ($3,300) was 51% of that $6,500 figure, which you had a week ago, it means in no uncertain terms that the real cost to the farmers of moving thier low value wheat to the export terminal via the BNSF has gone down significantly.

Now you seem to want to link the rail rates to the value of the wheat. Why? The railroad has nothing to do with the world price of wheat. It seems that the real value of the wheat in 2005 is 1/4th what it was in 1974. So is your contention that the BNSF rate should be 1/4th what it was in 1974 so that it takes the same percentage of the the farmers' gross revenues? That's a novel approach - the relative size of cost components can't change?

You're doing this song and dance trying to find a number that supports your false claims. "Oh, we can't compare the rate to this number, use that number for comparison."

No. The real costs of the rail rates on grain from Montana have down big time. You can not escape that fact. They didn't go down as much as the value of the wheat - but that's a big so what. The BNSF doesn't set the world price for the wheat and it certainly isn't obligated to bail out the farmers - nobody should bail out the farmers. Year after year after year they keep growing this wheat, which has lost 75% of its value over the past 32 years, relying on government subsidies and screaching at the BNSF for even lower rates. What indication is there that this will ever turn around? None. Is it their intention to live on the government dole forever?

Ken Strawbridge

Ken Strawbridge

[MichaelSol]

And, as I have stated three times now, I do not have, in front of me, rail rate numbers for 1974. I have them back to 1980. That was the last year that Milwaukee Road served the PNW and is therefore relevant data. to the contention that rates are lower without the Milwaukee than with it. However, indexing shows that is patently untrue. Compared to ag and general rail rates elsewhere over the same period of time, Montana grain rail rates have increased significantly compared to the index, which demonstrates, I think conclusively, that the absence of the Milwaukee Road caused a rise in grain rates compared to the shipping price index for the commodity over the past 25 years.

For 1974, the only thing to "explain" is that that a rail rate in 1974 expressed in terms of 2005 dollars also needs the commodity expressed in those same dollar terms. And all that does is place that rate into 2005 dollars, not into a comparable 2005 rate index.

Now, for 1980 and later, there is an available rate index. Those have been discussed.

[Murphy Siding]

That's why I asked you to explain your numbers. See post at top of this page.[:)]

[MichaelSol]

It's OK to just say you don't understand it. It's not always the other guy's fault.

[Murphy Siding]

[(-D][(-D] I believe you have just used a whole bunch of numbers to justify your opinion on something, then posted a long explanation about why none of those numbers mean anything. OK. I agree.[;)][(-D][(-D]

[MichaelSol]

Well, data is the problem for 1974, as I mentioned above. The analytical study I cited went back to 1980 for rail rates, hence my preference for 1980 as a comparative year, rather than 1974.

Unfortunately, this thread has diverged into Strawbridge's favorite obsession aside from the Milwaukee PCE -- grain rates and Montana's governor. None of which he knows much about, but has ever strong opinions.

In this case, he is confusing index prices with inflation. Generally, an inflation rate is an aggregate of cost changes over time in specific goods and services. Unfortunately, most references are to the Consumer Price Index which often poorly represents price changes in industry or transportation, but there are specific inflation indexes for producers, etc. The Statistical Abstract of the United States generally compiles such indexes.

The problem occurs when an overall dollar index such as the CPI is used to assess econometric changes in a specific industry. Housing costs, for instance, tends to raise the CPI, whereas industries with deflation occuring tend to pull it down. So, while it useful to say that a 1974 figure means something in 2005 dollars, that is as far as it can go. It does not, cannot, mean that the stating of 1974 dollars in terms of 2005 dollars is the same thing as meaning the cost of the good or service should be that in the year 2005. There is absolutely no connection between stating a prior number in 2005 dollars and the price change in the industry over time.

Housing is a good example. The house next door sold in 1968 for $14,500. That represents $80,228 in 2005 dollars. What does that house currently appraise for? $185,000. The dollar conversion from 1968 into 2005 dollars has zilch to do with the value of the house in 2005. It does tell the value in current dollars of $14,500 in 1968. But that's all. Same with railroad rates. Expressing a 1974 figure in 2005 dollars only states the value of the 1974 dollars in current terms. It has nothing, absolutely nothing, to do with current rates.

Both railroading and agriculture have experienced significant deflation in the past 25 years. The deflation has been both steady and relentless. Strawbridge portrays this as a good thing, an almost benevolent disposition of industrial wealth by the BNSF. But deflation is rarely a positive economic event.

The Japanese have not been wildly celebrating their deflation of the past 15 years, and there weren't too many jubilant celebrants during the Great Depression either. In neither case was the deflation voluntary, and it hasn't been with the railroads or with agriculture either.

If the rail index were representative of the overall CPI or Producer Index, then we would be talking in terms of deflation. The $1500 in 1980 would in fact be cheaper in constant dollars than a $900 rate in 2005. It would be clear that a $1500 rate in 1980 would represent an increase in cost if the the rate in 2005 were $1100, because $1100 in 2005 buys more than $1500 in 1980. That's how deflation works.

The rail index is clearly deflationary. While most shippers in 2005, including wheat, are shipping at about the same relative cost on the index as in 1980, Montana shippers are paying approximately 52% above the index amount. That represents a substantial increase.

Taking into account the separate consideration that agriculture has also been suffering from deflationary pressures, the Montana wheat shipper suffers from the combined effects of both deflationary cycles.

For those industries or users who have not had deflationary pressures, but have rather contributed to the general overall inflationary trend of the economy as a whole, rail transportation rates have become a huge bargain. That just simply isn't true for all shippers however.

[MP173]

Michael:

Efficiencies have increased for the railroads dramatically since 1974. Have the same efficiencies occured with the farmers? To a certain degree, farmers are more efficient today than 32 years ago.

Also, I would have to say that the reduction in overall mileage for the railroads (which is also efficiency) has helped. The 1 train per day of 5 cars branch lines are gone.

There is considerable more tons per mile than back in the 70's....OK this is a guess, as I dont have the data. If you can, please pull the data, as you seem to have a never ending supply of data.

Perhaps a better comparison would be to compare:

The revenue for farmer per acre of farmland in 1974 to present and
The revenue per rail mile in 1974 to present.

My guess is that the revenue side of each would tell the story. Farmer's income, based on the $4.50 per bushel, has probably remained extremely level. Perhaps a bit higher as yields per acre might have increased. On the expense side, we all know what has happened.

Compare the farmer's:
Fuel prices 1974 vs 2005
Fixed land costs 1974 vs 2005
Overhead equipment (implements) 1974 vs 2005
Transportation costs 1974 vs 2005
Labor costs 1974 vs 2005
Taxes (!) 1974 vs 2005
Seed 1974 vs 2005
Fertilizer 1974 vs 2005

If possible, Michael, draw up a 1974 and 2005 table of costs for each of the above items, plus any other I am missing. Not "constant" 1974 or 2005 dollars, but real costs per unit in 1974 and 2005.

I repeat my previous comments, the problem is on the top end (revenue) which has not increased.

BTW, for full disclosure...I own a farm and I own shares of transportation companies and I worked in pricing in LTL trucking. I dont have an axe to grind with Montana farmers or anyone else.

ed

[Kevin C. Smith]

QUOTE: Originally posted by MP173

In Leaders Count, the author states that BN originally under priced the cost to move the coal from Wyoming and had to come back with substantial price increases.

Michael...why do you think the coal pricing was so damaging in the beginning? I know the simple answer is that it was priced too low...but I am curious as to WHY it was priced too low.

Did the carriers not account for the additional expenses involved with handling the coal? Since new power and track rebuilding would have been capitalized, I would think that there would have been a severe cash crunch, but not necessarily a spike in operating ratios.

Any thoughts?

ed

If memory serves, the BN rates for PRB area coal was based on coal traffic that was only a part of the general traffic mix. Being far from most large consuming areas, lower rates helped PRB coal to stay competitive since it had to be hauled farther. Once PRB coal became a high demand product (low sulfer, I believe) and volume increased, not only could it bear more of the overhead but with the huge developement of facilities (Gillette-Orin line, engine terminals, yards and don't forget the rebuilding of many miles of connecting lines) those overhead costs skyrocketed. So, PRB coal went from having a bit of a free ride on the backs of the other traffic to being the tail wagging the dog. BN's rates jumped to reflect both the costs and what the traffic would now bear.

It's like a hotel that cuts rates for certain travellers to fill otherwise empty rooms but raises all rates if there is a high demand. The deeper discounted rates will raise the most and if you add onto the building to accomodate a permenent increase, they'll disappear for good.