Figure 2 — Percentage of Total Class I Railroad Carloads of Wheat
Originated by Railroad—2004

BNSF
53%

NS Lt
4%
GTC csx UP
he 7% 22%

Source: Association of American Railroads


Commission Termination Act of 1995 (ICCTA) included the preservation of effective
competition as one of the rail transportation policy goals of the United States. Not only
does effective competition promote reasonable rates and minimize the need for regulatory

control, but it also encourages efficient management of railroads.

RAIL-TO-RAIL COMPETITION

Since enactment of the Staggers Act, rail consolidation has reduced rail-to-rail
competition. Rail consolidation has led to a sharp decline in competitive routes and
. options for agricultural shippers. In some cases connecting gateways to other markets
have been closed by railroads. In other cases, the differential prices charged by railroads
have limited economic access to less distant markets and markets on the lines of other
railroads. As a result, many farmers have lost the benefits of geographic competition.

Also, a large proportion of some commodities are often hauled by one railroad.
BNSF, for example, originates 53 percent of all wheat shipments transported by rail (see
figure 2). The reason for this large market share is because BNSF has very limited rail
competition in the Northern Plains states, which is a major wheat production region.
Rail rates

Agricultural producers of grain and oilseed crops are considered “price-takers.”
That is, they have little or no ability to influence the price they receive for their products,
and therefore, are unable to pass increases in costs forward to buyers of their products.
Instead, these individual agricultural producers tend to absorb any cost increases because
of their lack of market power. Consequently, increases in transportation costs typically

result in decreased producer incomes. In turn, lower producer incomes can adversely



addition, USDA has noted errors in the Waybill data that result in questionable revenue-
to-variable cost ratio calculations.

It is ironic that while the consolidation of Class I railroads has resulted in the rise
of new mega-carriers capable of exercising market power over shippers, the amount and
quality of data available on these carriers has fallen dramatically. Because of the many
mergers and consolidations in the U.S. railroad industry over the past twenty years, and
the past five in particular, most localities have service from at most two railroads. With
railroad competition now essentially determined by interaction between pairs of firms, an
increasing amount of oversight is needed so that the pricing and service behavior of these
firms can be monitored. Railroads should be required to provide greater clarity on their
reported shipping rates. The public needs information that can identify possible abuses of

market power and the common carrier obligation.

CONCLUDING REMARKS

USDA, STB, and all interested and affected parties should continue to work
together to ensure that rail transportation is an affordable and reliable option for the
nation’s grain shippers. USDA believes that healthy competition is essential for
encouraging railroads to improve customer service, preserving the economic vitality of
the railroad industry, and for protecting shippers from the abuse of railroad market power
and unfair rail rates. Finally, any system used for determining and reporting rail

shipping charges should be fair, transparent, and easily accessible to the public.



movements of grain, even though the emergence of specialty markets will require
specialized handling in much smaller quantities.

Another example of Class I railroads dictation of service terms involves their
obligation as common carriers. Despite the retention of the Common Carrier Obligation
in the Interstate Commerce Commission Termination Act of 1995 (ICCTA), many
shippers have lost reliable and timely carload service while others have been required to
meet railroad-determined volume requirements to receive rail service. Other changes
have required substantial investments by agricultural shippers.

Due to the lack of adequate rail-to-rail competition, the quality of service
provided by Class I railroads has not been sufficient for some agricultural shippers.
Captive shippers, even though paying the highest rail rates, often receive the worst rail
service because Class I railroads may choose to first serve those shippers having
competitive options. This may result in captive shippers losing equal access to markets —
particularly during those critical periods when the prices for grain are rising.

Rail capacity

Rail capacity for agricultural products has been extremely tight during the last
three years, for a number of reasons, both agricultural and non-agricultural. Non-
agricultural factors include general economic expansion, increased international trade,
increased demand for coal due to high natural gas prices, high fuel prices forcing truck
traffic to railroads, and new hours of service (trucking) regulations increasing rail
intermodal demand. Agricultural factors include strong grain export demand, high prices

for agricultural crops, and back-to-back record. or near-record grain harvests.



affect the ability of individual producers to borrow funds or purchase inputs such as
fertilizer and machinery, potentially reducing economic prosperity in rural areas. Higher
transportation costs also hinder the competitive position of U.S. agricultural products in
highly competitive export markets.

GAO’s analysis states that although many rates have decreased, rates have not
declined uniformly, and rates for some commodities are significantly higher than for
others. [n fact, since 2003, rail rates for grain shippers have increased much more rapidly
than rail rates for other products. The average freight revenue per carload for major
grains has increased 27 percent since 2003 while the average freight revenue for all
commodities (including grain) increased only 13 percent since 2003. Rates on corn,
sorghum, soybeans, and wheat have gone up 25, 23, 39, and 25 percent, respectively,
since 2003 (see figures 3 and 4).

Grain shippers are shouldering greater responsibility for car supply and other
functions railroads formerly provided. Grain shippers now incur additional costs to
obtain guaranteed car service, provide many of their own railcars, and pay increased
demurrage penalties. Also, due to railroad emphasis upon unit-trains, shippers have had
to make significant capital investments in sidings, inventory, storage capacity, and
loading facilities to retain cost-effective rail service.

Rail service

Railroad consolidation has resulted in railroads having the ability to dictate the

terms of rail service — even though those service terms do not meet the present and future

needs of many agricultural shippers. Class I railroads, for example, encourage unit-train



The United States government, as well as private industry, has pursued various
actions to address the subsidies and other trade-distorting practices associated with the
CWB and the grain transportation system. These trade actions have been complicated by
the lack of transparency surrounding both CWB activities and the extensive government
regulation of the Canadian rail system, The United States pursued a WTO challenge
against the CWB and certain aspects of the Canadian treatment of imported grain,
including the revenue cap for grain shipments. The U.S. wheat industry brought a
countervailing and antidumping case against the CWB and other wheat subsidies,
inehiding the rail revenue cap and provision of government-owned rail cars. Both actions
only met limited success, but made clear the distorting nature of the western Canadian
grain marketing and transportation system. The United States continues to pursue

meaningful disciplines for state-trading enterprises in the WTO negotiations.

OPEN ACCESS TO INFORMATION

The GAO report noted that the STB Waybill Sample’ fails to ensure consistent
and accurate reporting of railroad revenues, including revenue from fuel surcharges.
GAO also noted that railroads reporting data for the STB Waybill Sample should have
consistency in the methods used to report revenues and other information. It would be

helpful if railroad revenue reporting in the Waybill Sample reported revenue from fuel

orial ¢

surcharges, sale of guaranteed freight, demurrage, and other a

Lading.
erves as a document
regarding each
nue, all railroads

All freight shipments require a Bill of Lading (Waybill
of title, ontract of carriage, and a receipt of goods.
shipment inchiding the forwarding and receiving stations, the miles hauled, total
handling the shipment, description and weight of the commodity, number of cars in the shipment, ctc.

9



BEFORE THE

SURFACE TRANSPORTATION BOARD

STB EX PARTE NO. 665

RAIL TRANSPORTATION OF GRAIN

REMARKS DURING OPEN HEARING
BY THE
UNDER SECRETARY OF AGRICULTURE

FOR MARKETING AND REGULATORY PROGRAMS

Bruce I. Knight

Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington, D.C. 20250

Date: November 2, 2006


APPENDIX

12



Respectfully,

Ei feo

Bruce I. Knight

Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington, D.C. 20250

11



Allocation of rail capacity
USDA believes that all agricultural shippers, even the smallest, should have

reasonable access to rail capacity. Agricultural shippers have often complained to USDA
regarding grain car allocations that seemingly favor shuttle shippers. The lack of
adequate rail service to smaller grain shippers could reduce competition among grain
shippers as well as place heavier costs on rural road systems. The common carrier

obligation remains and should continue to be enforced.

ABILITY TO COMPETE WITH CANADIAN PRODUCERS IN WORLD MARKETS

The U.S. wheat industry has long complained that the special, government-
enforced privileges afforded the Canadian Wheat Board (CWB), including significant
transportation subsidies, have provided western Canadian wheat and barley competitive
advantages in both export markets and the Canadian domestic market.

The CWB has operated in tandem with the two major Canadian railroads,
Canadian National and Canadian Pacific, to the benefit of Canadian grain exports. For
over 100 years, Canada has subsidized rail rates for agricultural products moving to
export and certain domestic positions. For many years, the subsidies took the form of a
fixed cap on rail rates, which were much below market rates, and direct subsidies to the
railroads. About a decade ago, as a result of the Uruguay Round Agreement on
Agriculture, Canada removed the cap, raised rail rates considerably, and compensated
grain producers with offsetting direct payments. But Canada continues to subsidize rail
rates through a cap on revenue from shipping grain. In addition, the CWB's grain

exports have benefited from preferential access to subsidized rail transportation.



pricing. Thus, railroads are in a position to recover a greater proportion of their costs
from rates charged to shippers with a greater dependency on rail transportation. At the
same time, the Staggers Act gave the Interstate Commerce Commission, and later the
Board, the authority to establish a rate appeals process so that shippers could obtain relief
from unreasonably high rail rates.

Shipper benefits from railroad deregulation include preservation of railroad
service, rate savings, and, in many cases, improved service. Short line railroads have
been able to operate profitably on many rail lines abandoned by the major railroads and
have generally provided more individualized service to shippers.

Benefits, however, have not been distributed uniformly across or within
commodities or communities. The distribution of benefits has tended to favor grain
producers in regions with higher levels of intermodal competition.’ GAO also noted that
rates have not declined uniformly and that rates for some commodities are significantly
higher than rates for others. Despite the overall success of the Staggers Act, agricultural
shippers continue to express concern about decreased rail-to-rail competition, increased
rail rates, poor rail service, rail capacity constraints, and the fair allocation of rail

capacity.

RAIL COMPETITION CONSTRAINS MARKET POWER ABUSES
One of the key assumptions underlying the deregulation of the rail industry was
that there would be sufficient competition to constrain the abuse of railroad market

power. Thus, the authors of the Staggers Act af 1980 and the Interstate Commerce

? John Bitzan, Kimberly Vachal, Tamara VanWechel, and Dan Vinge, The Differential Effects of Rail Rate
Deregulation: U.S. Corn, Wheat, and Soybean Markets, Upper Great Plains Transportation Institute, June
2003.



Figure 3

Average Freight Revenue per Carload, Major Grains

2,200
2,000

1,800

1,400

1,200

Dollars per carload

1,000

800
1

1,600 |

1,785

1,559 1,564 1,618 1,619 1,611

1,609 1,622,

— So

oO ~~ Major grains ap 27.0% over 2003; —
All comniodities up 13.4% over 2003.

2,061

997 1998 1999 2000 2001 2002 2003 2004 2005

(£2 All commodities iim Major grains
Source: Association of American Railroads, Freight Commodity Statistics

Figure 4
Average Freight Revenue per Carload, Four Top Grains
2,200 - ‘
= 3000
g
= 1.80
g 1,600
J
rm
2 40
= £200 _ Corn up 25.1% over 2003;
os ° Sorghum up 22.8% over 2003;
i ‘Wheat up 25.2% over 2003;
1,000 Soybeans up 38.6% over 2003.
800
1997 1998 = 1999 2000» 2001 «2002 2003 20042008
—te— Com —¢e— Sorghum » «tie - Wheat mento SOY DC ATS

Source: Association of American Railroads, Freight Commodity Statistics

a



The Board is holding this hearing to obtain views and information about the
market conditions that led to these observations by GAO and about grain transportation
markets in general. Because U.S. grain producers compete in a broader North American,
and global, marketplace, the Board also requested information regarding the interplay
between the American and Canadian wheat markets, how the Canadian regulatory system
differs from the United States system, and what impact these differences might have on

grain production in the United States.

AGRICULTURE AND RAIL TRANSPORTATION

An affordable and reliable transportation network is necessary to maintain the
strength and competitiveness of American agriculture and our rural communities. Rail
service is a particularly important part of that network for U.S. agriculture, and it is
virtually the only cost-effective bulk shipping alternative available in many rural areas.
Several states - including Arizona, Kansas, Montana, North Dakota, Ohio, Oklahoma,
Texas, and Utah - rely heavily on rail services for the transportation of grains. More than
50 percent of corn, wheat, and soybeans produced in these states are moved by rail

(Figure 1--Appendix).

BENEFITS OF THE STAGGERS ACT

The Staggers Rail Act of 1980 (Staggers Act) significantly reduced regulation in
all phases of railroad operations. Among other reforms, the Staggers Act encouraged
greater reliance on competition to set rates and gave railroads increased freedom to price

their services according to market conditions, including the freedom to use differential



AUTHORITY AND INTEREST

I wish to thank the Surface Transportation Board (Board) for the opportunity to
present the views of the Department of Agriculture (USDA) regarding issues related to
the rail transportation of grain. I believe the Board is providing a valuable service to the
public by initiating this proceeding and I am pleased to present USDA’s concerns for the
Board and all other interested parties to consider.

The Secretary of Agriculture is charged with the responsibility under the

Agricultural Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 to

represent the interests of agricultural shippers and producers in improving transportation
services and facilities by, among other things, initiating and participating in Board
proceedings involving rates, charges, tariffs, practices, and services.

USDA represents U.S. farmers and agricultural shippers, and the vitality of their
livelihood is our primary interest. Our interest is in preserving an efficient and

competitive transportation sector that serves U.S. agriculture effectively.

BACKGROUND

On October 6, 2006, the United States Government Accountability Office (GAO)
released a report that included observations on rates, competition, and capacity issues in
the U. S. rail freight industry.! GAO found that most rail rates have declined since 1985,
but that grain rates diverged from the trends of other industries. In addition, the GAO
reported that the amount of grain traffic with comparatively high markups over variable
cost increased notably between 1985 and 2004.

} Freight Railroads, United States Government Accountability Office, GAO-07-94, October 2006.



Rail/ Production Ratio
Ratio includes corn, wheat, and soybeans

S. Department of Agriculture, 2004

Source: US. Department of Transportation;

Rail Shipments as a
Percent of Grain Production

EX] sounder 10
10-29

ES 3049

ao 50 and Over