4

As major railroads continue to restructure through mergers, consolidations and
abandonments, rural rail service has been preserved in many instances by the formation of
small or short line railroads. Throughout the 1980's and continuing today, local and regional
railroads have become increasingly important to agricultural and rural communities by
assuming service which had been discontinued, or which was about to be discontinued by
Class I railroads. Today, over 500 small railroads play a vital role in supplying farm
communities with raw materials and farm inputs and in facilitating the marketing of
agricultural production. With estimates of 10,000 or more miles of track to be sold, leased,
or abandoned within the next several years by Class I railroads, small railroads will become
even more important to the viability of rural agricultural regions and communities.

Because of their heavy dependence on Class I carriers for car supply and service,
small railroads and the small agricultural businesses they serve are concerned over mergers
and consolidations between large railroads. Common concerns with increased consolidation
include a growing number of captive shippers who are only served by one railroad, reduced
service, noncompetitive rates, and car ordering systems that cannot be used effectively by
small businesses, most of which are country grain elevators. For example, USDA is aware of
complaints from some shippers who have waited two months and longer for rail cars. Not
having the resources or marketing power to purchase rail transportation far in advance of their
sales, small grain elevators are unable to participate in the advanced car ordering systems
offered by major railroads which guarantee car service. The inability to load and ship grain

in a timely manner can be economically ruinous to these smail rural businesses.


7

markets would enhance competition and provide rate and service alternatives for agricultural
shippers.

The UP-SP merger request is the largest major railroad consclidation proposal to date.
Approval of this merger will result in only two rail systems controlling the entire Western
half of the Nation. This merger could have substantial impacts on grain production and
marketing in the Midwest and West, particularly the Lower Plains States where a majority of
the wheat grown ts destined to Gulf Ports and Mexican Gateways for export. In its analysis
and decision in this merger proposal, USDA urges the STB to consider the far-reaching
competitive implications of a combined UP-SP rail system.

USDA believes STB should require, as a condition of the merger, that trackage rights
and or line sales be used to ensure competition, and that alternative service by a third Class [
Railroad be considered in the Kansas City, Wichita, and Fort Worth, Texas corridor to Gulf
Ports and to Mexico. USDA believes the transportation interests of agriculture and the Nation
would be best served by retaining as many transportation options as possible in the vast areas

that would be served by a consolidated UP-SP rail system.
Respectively submitted,
Ke OFT

Lon Hatamiya J
Administrator

Agricultural Marketing Service

U.S. Department of Agriculture
Washington, D.C. 20250


3

of grain, grain mill and farm products. Together, the UP and SP rail systems would have
ranked number one among Class I railroads in carloadings of grain, grain mill and other farm
products in 1995 with 683,469 carloads compared to 618,903 carloadings for the combined
BNSF.

A significant amount of grain is transported by rail to Gulf Ports for export to other
countries. Rail is also an important mode of transport for grain exported overland to Mexico.
Mexico is expected to become the largest U.S. market for grain. A combining of the UP and
SP systems would reduce the number of independent railroads available to transport grain and
other agricultural products and commodities to this large and expanding market, thus affecting

the rail service, carrier options, and rates or prices agricultural shippers must pay.

EFFECTS OF CONTINUING RAIL CONSOLIDATION AND CONCENTRATION
The continuing consolidation and concentration of major railroads is dramatically

altering the U.S freight railroad network. Only 9 Class I railroads are operating today,
compared to 33 in 1982. In April of 1995, the Commission approved the merger of two
major grain hauling railroads, the UP and the Chicago and North Western. Also in 1995, the
(BN) acquired the Santa Fe Railway. The BN consistently ranks as the number one railroad
in grain transportation annually. In addition to creating the largest rail system in the U.S., the
BN-Santa Fe merger reduced the number of Class I railroads operating in the western haif of
the United States to three. If the UP-SP merger is approved, there will be only two Class [ or
major freight railroads operating in the vast grain and oilseed production area between the

Mississippi River and the Pacific Ocean.


EXPORT

The limited access to feasible alternative transportation renders wheat shipments from
Lower Plains States to the Gulf very dependent on rail. Because two of the Nation’s largest
wheat hauling railroads were to be consolidated, USDA told the Commission during the BN-
Santa Fe merger proceedings last year that our greatest concern with the merger was the
further reduction in the level of competition that existed between the two carriers in the
transportation of wheat. The Lower Plains States of Kansas, Oklahoma, and Texas, combined
with Colorado, produce more than three-fourths of all U.S. Hard Red Winter wheat. The
combined BNSF is a major carrier in the movement of wheat to Gulf Ports for export from
the Lower Plains States.’

The UP is the other major railroad transporting large volumes of Lower Plains States
wheat to Gulf Ports and Mexican Gateways. While the SP is not currently a significant
carrier in this market, it does have routes to major Gulf Port cities. A combined UP-SP
would result in the control of this important rail-dependent market by the only two major

railroads operating in the Western half of the U.S.

THE NEED FOR A THIRD CLASS ONE RAILROAD ALTERNATIVE
The absence of a feasible alternative transportation mode requires movement by rail

for the tremendous volumes of wheat produced in the Plains States. This wheat must move

>The Lower Plains, for the purpose of this discussion, include Kansas, Oklahoma, and
Texas.


CERTIFICATE OF SERVICE

I, Paul E. Kepler, certify that, on this 29th day of March, 1996, I caused a copy
of the forgoing document to be served by first-class mail, postage prepaid, or by a .

more expeditious manner of delivery on all parties of record in Finance Docket No.

32760, and on
Director of Operations Premerger Notification Office
Antitrust Division Bureau of Competition
Room 9104-TEA Room 303
Department of Justice Federal Trade Commission
Washington, D.C. 20530 Washington, D.C. 20580

( Le (2. Kel vw

~~ Paul E. Kepler’



BEFORE THE

SURFACE TRANSPORTATION BOARD

FINANCE DOCKET No. 32760

UNION PACIFIC CORPORATION, UNION PACIFIC RAILROAD
COMPANY, AND MISSOURI PACIFIC RAILROAD COMPANY
----CONTROL AND MERGER----

SOUTHERN PACIFIC RAIL CORPORATION, SOUTHERN
PACIFIC TRANSPORTATION COMPANY, ST. LOUIS
SOUTHWESTERN RAILWAY COMPANY, SPCSL CORP.,
AND THE DENVER AND RIO GRANDE WESTERN
RAILROAD COMPANY

COMMENTS OF THE

UNITED STATES DEPARTMENT OF AGRICULTURE

Lon Hatamiya
Administrator

Agricultural Marketing Service

U.S. Department of Agriculture -
Washington, D.C. 20250

Date: March 29, 1996


6

long distances to reach domestic markets, coastal ports and Mexican Gateways for export.
USDA believes a third Class I Railroad alternative in the important corridor between the
Lower Plains States and the Gulf and Mexican wheat markets would enhance competition and
provide 4 measure of assurance to grain and other agricultural shippers concerned over the
dominance in this market by two giant rail systems. A third Class I Railroad operating in this
corridor may be needed to satisfy the service concems and provide a competitive balance for
shippers in the Nation’s main winter wheat region which includes Kansas, Oklahoma, and
Texas. .

USDA also believes that gains in trade, expected as a result of the North American
Free Trade Agreement, largely depend on maintaining competitive transportation options and
gateway access into Mexico. A third Class I Railroad serving strategic gateways to Mexico
would be beneficial for American wheat and other agricultural shippers, as well as for the

Nation.

CONCLUSIONS
USDA does not oppose this proposed merger between the UP and SP railroads.
However, continuing consolidation and concentration of the Nation’s Class I railroads
concerns USDA and agriculture in general because much of agricultural production moves to
market by rail. A UP-SP combination, along with the recently merged BNSF, would result in
control of movements of wheat from the Lower Plains States to Gulf Ports and Mexican
Gateways for export by two huge rail systems. USDA believes a third Class I rail carrier

operating between the wheat producing Lower Piains States and the Gulf and Mexican


BEFORE THE

SURFACE TRANSPORTATION BOARD

FINANCE DOCKET No. 32760

UNION PACIFIC CORPORATION, UNION PACIFIC RAILROAD
COMPANY, AND MISSOURI PACIFIC RAILROAD COMPANY
----CONTROL AND MERGER----

SOUTHERN PACIFIC RAIL CORPORATION, SOUTHERN
PACIFIC TRANSPORTATION COMPANY, ST. LOUIS
SOUTHWESTERN RAILWAY COMPANY, SPCSL CORP.,
AND THE DENVER AND RIO GRANDE WESTERN
RAILROAD COMPANY

COMMENTS OF THE

UNITED STATES DEPARTMENT OF AGRICULTURE

These comments are filed on behalf of the United States Department of Agriculture
(USDA) and are in response to the former Interstate Commerce Commission’s (Commission)

decision served December 27, 1995, setting forth the procedural schedule for this control and

merger proceeding.

AUTHORITY AND INTEREST
Through the Agricultural Adjustment Act of 1938 (7 U.S.C. 1291) and the Agricultural
Marketing Act of 1946 (7 U.S.C. 1622 (j)}, Congress has directed and authorized the
Secretary of Agriculture to participate in proceedings before the Commission to “assist in

improving transportation services and facilities...for agricultural products and farm supplies”


2

and to make “complaint or petition to the Commission...with respect to rates, charges, tariffs,
practices, and services...” In addition, USDA, through the operations of the Commodity
Credit Corperation, is a major participant in the markets for agricultural products.

Rail service is critical to the economic well-being of this Nation’s agricultural and
rural economies. Reliable. cost-effective transportation of agricultural products is essential in
order for U.S. agricultural products and shippers to maintain competitive viability in domestic
and export markets. Nearly half of all grain produced in the U.S. moves to market by rail.’
In 1995, grain, grain mill products, and other farm products accounted for more than
2,140,898 rail car loadings.* This amounts to an 8.8 percent increase over 1994 car loadings.
These figures indicate that.an adequate and efficient rail infrastructure is essential for the
marketing of the huge volumes of U.S. agricultural products.

A Union Pacific (UP)}-Southern Pacific (SP) Railroad merger would surpass the 1995
merger between the Burlington Northern (BN) and the Atchison, Topeka and Santa Fe
Railroads (Santa Fe) as the largest ever consolidation of rail systems. Together a UP-SP
system wouid operate over 31,000 miles of track extending from Canada to Mexico and from
the Midwest to the Pacific Ocean. During calendar year 1995, the UP and its Chicago and
North Westem Railroad affiliate hauled 599, 469 carloads of grain, grain mill and other farm

products, ranking them among the top two Class I Railroads. The SP carried 84,000 carloads

‘Jerry D. Norton, Paut J. Bertels, and Freeman K. Buxton, Transportation of U.S. Grain:
A Modal Share Analysis, (Washington, DC: U.S. Department of Agriculture, Agricultural
Marketing Service), July 1992.

*Association of American Railroads, Weekly Railroad Traffic: Revenue Freight Traffic
Statistics of Major Railroads, (Washington, DC: Association of American Railroads;
Economics, Policy, and Statistics Department), 1996.