I

n the summer of 1997, the Union

Pacific Railroad (UP) suffered a cascading service failure that snarled 

traffic and brought freight shipments in

some areas to a complete halt. It proved

to be the beginning of the worst rail service crisis in 20 years (AO March 1998).

Early optimism that the service problems

might quickly be resolved proved premature, and only since mid-August 1998,

after more than a year of substandard service, has rail service in the western U.S.

returned to stability. But many steps taken

by UP early in the crisis, although slowing its recovery in the short term, will add

to overall rail capacity in the western U.S.

for many years to come.

The recent improvements in rail service

should allow carriers to handle the 1998

grain and soybean harvest, which promises

to be the largest in history. Yet despite the

UP recovery and overall improvements in

rail service in the western U.S., grain shippers this fall encountered many of the same

storage problems experienced last year.

Bumper crops of grain and soybeans have

combined with large carryin stocks to

push grain storage capacity beyond its

limits in many regions. Particularly hardpressed for storage are areas in the Corn

Belt and corn-producing regions of the

Northern and Central Plains. This fall’s

ground piles of grain, however, are not

the result of transportation snags but of

large crops, worldwide economic problems, and increased competition that have

reduced demand for U.S. grain, particularly at Pacific Northwest export facilities.

UP’s service problems in 1997 originated

in the Houston/Gulf Coast region, which

elicited little surprise among those in the

rail and grain industry familiar with operations in that area. Houston is a key node in

the U.S. rail network, with direct links to

Los Angeles, Kansas City (via Dallas/Ft.

Worth), St. Louis, Chicago, New Orleans,

and the Mexican border crossings, and

Houston has long been considered one of

the most troublesome spots in the U.S. rail

network. A congestion problem similar to

the 1997/98 event occurred there in 1978.

Rail traffic patterns in the Houston region

are complex and difficult to manage

because Houston’s importance is threefold: the region is at once a key transit

point in the U.S. rail network, a critical

port, and home to many important petrochemical facilities. Consequently, Houston originates a significant amount of rail

traffic (particularly chemical traffic), terminates a considerable volume of traffic

(particularly agricultural traffic), and

serves as an important transit point for

other traffic. 

The extent of rail traffic moving to,

through, or from Houston make the configuration of rail infrastructure in the

Houston/Gulf Coast region both complicated and fragile. It is complicated by

virtue of geography and because much of

this rail complex was developed somewhat haphazardly at a time when Houston

was far less important to the U.S. rail network. It is fragile because for many years

the financial weakness of the Southern

Pacific Railroad (SP) prevented that firm

from making investments in the Houston

area that might have prevented or mitigated some of the problems seen last year.

Problem Solving: One Step Back,

Three Steps Forward

The noticeable improvement in UP’s

rail operations starting in mid-August

1998 came just in time to handle the

1998 fall harvest shipments. Two key

factors laid the foundation for recovery

in the troubled western region. First, the

market found alternatives to UP’s service. Second, slowly but doggedly, UP

pulled itself together by simply going

about its business, unifying its operations after the merger with SP

(approved in 1996), and investing in

much-needed capacity expansion.

At the height of the rail service crisis, many

western livestock and poultry feeders

shifted to truck transportation for their feed

supplies. For example, poultry feeders in

Arkansas and east Texas trucked their feed

products and grains from inland river points

or from as far away as Missouri and Iowa.

Western Plains hog feeders and California

feedlot operators scrambled to secure

steady supplies of feed grains and feed

ingredients normally delivered by rail.

Trucking grain such long distances is a

short-term measure. In a longer term development, shippers have turned away from

UP, which has lost significant market share

to its principal competitor, Burlington

Northern Santa Fe (BNSF).

The rail service recovery was also facilitated by the working out over time of UP’s

service recovery plan. Key elements were

the implementation of the UP/SP merger

and the investment of significant funds by

16 Economic Research Service/USDA Agricultural Outlook/December 1998

Transportation

The Western Rail Service Crisis:

One Year Later
UP to undertake much-needed capacity

expansions in several critical locations. 

Conventional wisdom suggests that the

merger of UP and SP caused the service

failure in Houston. Conventional wisdom

could be right—many railroad observers

believe that UP failed to listen to SP personnel who had critical knowledge of the

yard operations in Houston. But it could be

wrong—while the service failure occurred

after the merger was approved, it began

before UP and SP actually combined operations in the Houston area. SP’s facilities

were inadequate, and a breakdown in

Houston may have been inevitable.

In any case, some of the steps UP took to

implement the merger and restore service

in the long run initially intensified shortterm problems. For example, after a

period of recovery in January 1998, UP

implemented directional running operations across its Southern Tier. Prior to the

merger, the two railroads had a number of

parallel lines running across eastern

Texas, Arkansas, and southern Missouri.

UP switched several of these singletracked mainlines, which had previously

handled two-way traffic, into “one-wayonly” service lanes. 

Directional running increases system

capacity by improving both train speed

and yard efficiency, and was anticipated

to be one of the primary benefits of the

UP/SP merger. However, when UP implemented the system, the result was almost

disastrous. Because former SP engineers

were new to the UP lines, just as UP engineers were unacquainted with the former

SP lines, UP’s locomotive crews needed

to be trained and certified on these unfamiliar routes. This training disrupted rail

operations and reduced the number of

crews available for duty, and service tumbled to unacceptably low levels. 

UP also integrated the SP into its computer

system during the crisis. Railroads are

sophisticated users of information technology, and rail operations as diverse as crew

calling and train dispatching depend on a

railroad’s information and telecommunications technology. UP integrated the SP into

its computer-driven Transportation Control

System (TCS) in four phases. Disruptions

occurred in each case as trains operating

on the SP system were stopped and information on their locations, along with the

contents and routing instructions of each

carload, was entered into UP’s main computer system. The last (and largest) of

these TCS “cutovers” began July 1, 1998,

when the remaining SP lines in the West

were folded into UP’s operations. Shortly

after this TCS cutover, USDA received

numerous complaints from agricultural

shippers in California. But again, the shortterm pain associated with this step was

needed to integrate UP/SP operations and

restore rail service to normal levels.

UP’s service woes demonstrated that its

infrastructure could not adequately handle

major disruption or anticipated traffic

growth. An aggressive capital spending

campaign aimed at increasing system

capacity laid the groundwork for UP’s

recovery while complicating it in the shortterm. UP expects to spend $400 million on

merger-related capital projects in 1998;

much of this investment is in the Houston/Gulf Coast region where UP intends to

spend some $600 million over the next 3-5

years. In addition to these merger-related

capital investments, UP invested an additional $400 million during the summer of

1998 in a massive track maintenance and

capacity expansion project on its Central

Corridor between Chicago and Utah.

Although these capital investment projects

will provide the infrastructure needed for

better service in the years ahead, their initial implementation slowed UP’s service

recovery this spring and summer.

Only since mid-August 1998 has UP’s

service returned to normal. UP’s terminal

performance, grain car movements, and

train velocity have all improved in recent

weeks, and several weather-related disasters confirm that UP’s “recoverability”—

its ability to handle unanticipated

problems with only minor disruptions—

has improved markedly. 

A case in point was UP’s handling of the

effects of Tropical Storm Charlie, which

produced severe flooding in the Rio

Grande Valley in late August. UP’s crucial

Sunset Line from Houston to Los Angeles

was washed out in three dozen places in

Texas, yet UP was able to reroute most of

its trains over other lines during track

repairs. Service was restored within 2

days. Had floods of this magnitude

occurred 3 or 4 months earlier, most analysts believe that UP’s Texas operations

would have been crippled. In March 1998,

problems at the border had halted UP

trains as far away as Kansas and forced

UP to embargo traffic to Laredo.

Transportation

Agricultural Outlook/December 1998 Economic Research Service/USDA 17

Economic Research Service, USDA

5

6

7

8

9

10

11

Jan. 1997 July Jan. 98 July Oct.

Union Pacific

Burlington Northern Santa Fe

1,000 carloads

Union Pacific Lost Market Share of Grain Shipments in 1997

Weekly carloadings (3-week centered average) for western railroads.

Source: Association of American Railroads.
But in the aftermath of Tropical Storm

Charlie, which forced the U.S. Customs

Service to shut down all international

trade by rail and road at the Laredo gateway, traffic resumed without difficulty

once floodwaters ebbed. More recently,

UP has responded to additional weather

crises, including Hurricane Georges,

severe flooding in Texas, and heavy rains

in the middle regions of the country. So

far, UP has maintained and even

improved rail service to most shippers

during these weather disruptions.

Fall Situation for 

Grain Shippers & Railroads

The situation for midwestern grain shippers this fall is, in some ways, much like

last year. Excellent grain and soybean

crops have left many country elevators

and subterminals piling grain on the

ground as available storage capacity was

again pushed beyond its limits. This

year’s grain piles, however, have almost

nothing to do with rail transportation

problems, but resulted from bumper crops

and slack export demand for U.S. grains

and soybeans. Particularly hard hit are the

Northern and Central Plains and the western growing areas of the Corn Belt. Lack

of demand for midwestern grain at Pacific

Northwest ports is affecting shippers and

producers in these regions, as well as the

two western railroads—BNSF and UP—

that serve this market.

U.S. production of grains (excluding

rice) and soybeans for the 1998/99 marketing year is forecast to be an all-time

record at 16.2 billion bushels, up 3 percent from last year and 13 million

bushels higher than the previous record

in 1994/95. With large carryin stocks,

this year’s available supplies are the

largest since the mid-1980’s. September

1 stocks, at 4.4 billion bushels, were up

22 percent from a year ago and the

largest since 1993. This year’s September stocks also mark the third consecutive year in which grain and soybean

stocks have grown, gradually adding to

the demand for storage at a time, when

storage capacity has been trending downward, at least up until this year.

From December 1, 1987 to December 1,

1997, U.S. grain storage capacity has consistently been on the decline, falling more

than 4.4 billion bushels to 18.9 billion in

1997. Most analysts, however, anticipate

that storage capacity will have expanded

during 1998 when USDA’s National Agricultural Statistics Service releases storage

capacity numbers for December 1, in its

January 1999 Grain Stocks report. Even

so, September 1 stocks and fall production

(corn, sorghum, and soybeans) in the Central Plains and eastern and western Corn

Belts reached or surpassed available storage capacity, forcing elevators and farmers

to scramble to put grain into temporary

storage or ground piles. Low harvest-time

prices and a weak basis (difference

between futures market price and local

cash price) have also encouraged farmers

to hold grain at least into the early months

of 1999, adding to the demand for storage.

While many producers continue to hold

grain in anticipation of higher prices, 

Transportation

18 Economic Research Service/USDA Agricultural Outlook/December 1998

Economic Research Service, USDA

1995 1996 1997 1998

0

200

400

600

Million bu.

Million bu.

. . . Reflecting Lower Rail Shipments of All Grain for Export

Other U.S. ports

1995 1996 1997 1998

0

50

100

150

200

250

300

Other U.S. ports

Corn Export Inspections Have Declined at Pacific Northwest Ports . . .

Pacific Northwest ports

Pacific Northwest ports

Quarterly data based on carloads (100 short tons and average bushel weight of 58 pounds).
projected grain and soybean use for

1998/99 suggests that processors, millers,

feeders, and exporters will demand more

grain this marketing year than last.

Domestic use for 1998/99, projected at

11.8 billion bushels, would be up 2 percent from last year and an all-time high.

Export use this marketing year, while not

a record, is also projected up 5 percent

from last year at 3.9 billion bushels. If

these projections hold, 1998/99 grain and

soybean use would total 15.7 billion

bushels, just 6 million bushels short of the

1994/95 record.

Domestic commodity demand is driving

demand for rail grain transportation,

which has strengthened throughout calendar year 1998. Grain carloadings on U.S.

railroads during the first two quarters of

1998 were down 6 percent from the same

period in 1997 and 11 percent from 1996.

Third-quarter grain carloadings this year,

however, were up 2 percent over thirdquarter 1997 and 11 percent over 1996.

Grain carloadings have increased substantially with the beginning of the fourth

quarter, although carloadings through

October continue to be down 2 percent

from last year. As the fall harvest shipping

season went into full swing, grain loadings,

which had averaged 22,100 cars per week

for the first three quarters, jumped to an

average 26,400 cars weekly for October.

This upswing is consistent with the normal

seasonal pattern of grain shipping, but this

year’s October numbers are running ahead

of last year by 3 percent and ahead of the

same weeks in 1996 by 6 percent.

It was strong demand for rail-delivered

grain in the eastern U.S., however, that

kept grain carloadings nationwide from

falling well below last year’s levels. As a

group, the major eastern railroads—Conrail, CSX Transportation, Illinois Central,

and Norfolk Southern—have reported

grain carloadings up each quarter over the

same quarters in 1997. In contrast, the

major western railroads—BNSF, Kansas

City Southern, and UP—have experienced

losses in grain carloadings as a group

every quarter so far this year compared

with last year. Driving these losses in rail

grain traffic in the western U.S. is the loss

of demand for grain from the upper Midwest and Plains at the Pacific Northwest

export facilities along the Columbia River

in Oregon and Washington, and on Puget

Sound in Seattle and Tacoma, Washington.

Rail shipments of grain for export so far

in 1998 have been down nationally for the

third straight year. Carloads of grain

shipped to export position from January

through October were down 12 percent

this year from 1997, down 21 percent

compared with 1996, and down 42 percent from 1995. The loss in export rail

grain demand has occurred despite

stronger-than-expected demand for export

wheat at the Texas Gulf. While shipments

to Texas Gulf ports have been up 17 percent from 1997, shipments to the Pacific

Northwest have been down 30 percent.

The impact of the loss in the Pacific Northwest export rail market is substantial for

shippers and producers in the western

reaches of the corn belt in Nebraska, southwestern Minnesota, and eastern North and

South Dakota. It has also resulted in a serious loss in rail grain traffic for the two 

carriers—BNSF and UP—serving this

market. Rail shipments to the Pacific

Northwest accounted for 60 percent of all

export rail shipments during 1995-97.

Export rail shipments to the next-largest

export rail market—at the Texas Gulf—

during the same years were roughly half

the volume shipped to Pacific Northwest

facilities. But in third-quarter 1998, shipments to the Texas Gulf actually exceeded

shipments to the Pacific Northwest.

Not only have financial problems in

Asian importing countries reduced

demand for U.S. grain, but they have also

reduced total waterborne commerce trade

in the Pacific sea trade lanes, which has

led to a surplus of vessels (AO May

1998). As a result, ocean freight rates for

grain shipments to Japan from U.S. Gulf

ports, for example, are down 44 percent

from the previous three-year average.

Ocean rates from Pacific Northwest

ports, on the other hand, have not fallen

as far, narrowing the ocean rate differential between Gulf and Pacific Northwest

ports enough to make Gulf ports an

attractive option. Since shipping midwestern grain by rail to the Pacific Northwest is generally more expensive than by

barge to the Gulf, the lower ocean freight

rate differential leaves grain exporters little incentive to book sales from Pacific

Northwest ports. Until that differential

widens, shipments through the Pacific

Northwest are likely to remain at current

low levels, keeping rail transportation

demand in this corridor well below normal levels and reducing grain transportation demand on BNSF and UP.

The drop in rail volumes to the Pacific

Northwest has occurred largely because of

reduced demand for the export of corn

from these ports. So far for 1998, Pacific

Northwest ports have accounted for only

13 percent of total corn exports, compared

with 24 percent during 1995-97. While

total U.S. corn exports through September

1998 were down 12 percent from last

year, Pacific Northwest corn exports

plummeted by 58 percent for the same

period. U.S. corn exports have tended to

level off since the second quarter of 1997

and even turned up somewhat in the third

quarter of 1998, but Pacific Northwest

corn exports have continued to fall.

Contrast with earlier years is even more

dramatic. Export inspections of corn at

Pacific Northwest facilities totaled 478

million bushels during the first three quarters of 1995 but reached only 137 million

bushels for the first three quarters of this

year. The difference between the volume

of corn exported from the Pacific Northwest in the first 9 months of 1995 and the

first 9 months of this year is roughly the

equivalent of 100,000 rail carloads of

grain or 2,564 additional carloads per

week for BNSF and UP, the two railroads

that serve this port region. Had volumes

remained the same in 1998 as they were

in 1995, grain traffic for these two railroads would have been 17 percent higher

through September this year.

Lack of demand for midwestern grain at

Pacific Northwest ports hurt not only

shippers and producers who rely on this

market, but also the UP and BNSF. Last

year these railroads struggled to meet

shipper demand; this year their grain business has suffered from lack of export

demand in the Pacific Northwest market.

William J. Brennan (202) 690-4440 and

Jerry D. Norton (202) 720-4211, Agricultural Marketing Service

William_J_Brennan@usda.gov

Jerry_D_Norton@usda.gov AO

Transportation

Agricultural Outlook/December 1998 Economic Research Service/USDA 19