BEFORE THE

SURFACE TRANSPORTATION BOARD

_____________________________________

STB FINANCE DOCKET 34342

KANSAS CITY SOUTHERN–CONTROL–THE

KANSAS CITY SOUTHERN RAILWAY COMPANY, GATEWAY EASTERN

RAILWAY COMPANY, AND THE TEXAS MEXICAN RAILWAY COMPANY

________________________________________

REMARKS DURING OPEN HEARING

BY THE

UNDER SECRETARY OF AGRICULTURE

FOR MARKETING AND REGULATORY PROGRAMS

______________________________________________

Bill Hawks

Under Secretary

Marketing and Regulatory Programs

U.S. Department of Agriculture

Washington, D.C. 20250
2

Date: July 31, 2003

Thank you for the opportunity to speak before the Board today regarding Kansas City

Southern Railway’s application to control Texas Mexican Railway. I am presenting my remarks on

behalf of the Secretary of Agriculture. The Department of Agriculture (USDA) supports this control

application and concludes that Board imposition of competitive conditions will not be necessary.

USDA represents the agricultural shippers and U.S. farmers, and the vitality of their livelihood

is our primary interest. Toward that end, we expect that all parties (UP, BNSF, and KCS, as well as

our Mexican colleagues) will uphold their commitments to fair market behavior, providing adequate

service to shippers and, ultimately, agricultural producers. Our interest is in preserving an efficient and

competitive transportation sector that serves U.S. agriculture effectively. To the extent that the parties

can identify their expectations for fair competition, we anticipate they will do so in a public manner that

their customers can also review and understand.

Despite historical skepticism regarding rail mergers and wariness of increased railroad industry

concentration, USDA contends that this transaction will increase competition by allowing a third Class I

railroad to better compete in the vital corridor between the lower Plains States and gateways to

Mexico. Increased rail-to-rail competition reduces the need for regulatory interference because it

promotes efficiency, improves the levels of service provided shippers, and keeps transportation rates

competitive. 

USDA contends this merger would benefit our Nation’s agricultural producers by improving the

efficiency of rail access to Mexican markets and shortening transit times. Subsequent to NAFTA,

Mexico has become one of our Nation’s most important trade partners. U.S. agricultural exports to
1

 USDA, Economic Research Service, Outlook for U.S. Agricultural Trade, May 27, 2003.

3

Mexico amounted to $7.1 billion during fiscal 2002 and are expected to reach $7.6 billion during fiscal

2003.1 During 2001, the United States exported over 18 million tons of corn, sorghum, soybeans, and

wheat to Mexico (table 1). Railroads transported 41 percent of all U.S.-grown grain exported to

Mexico during 2001, and 31 percent of that passed through the Laredo, TX, gateway.

U.S. farmers produce more than our country can consume. Therefore, the ability to export

surplus production is extremely important because the ability to export supports domestic grain and

agricultural product prices, enhancing the vitality of rural economies.

One of the key decisions the Board must make in this proceeding is whether to impose

competitive conditions and, if so, to what extent. Historically, the Board has been conservative in its

application of competitive conditions, applying only those necessary to preserve rail-to-rail competition,

and usually tailoring those conditions to protect shippers rather than competing railroads. Although it

has often requested competitive conditions in prior mergers, USDA is not convinced competitive

conditions on this merger are necessary to protect shippers.

USDA concludes that competitive conditions need not be placed upon this transaction because

the use of railroad market power requires one party to have significantly more market power than the

other parties and for other parties to lack competitive transportation options. USDA contends Kansas

City Southern is unlikely to have the ability to exercise any significant market power because:

• Rail movements to Mexico must compete against cost-effective ocean transportation;

• Kansas City Southern is much smaller than either of its competitors in the U.S.-Mexico trade
4

lane; 

• Both Union Pacific and Burlington Northern Santa Fe control competing gateways into Mexico

that provide competitive transportation options, and 

• Union Pacific has considerable leverage over Kansas City Southern because Tex Mex must

operate over Union Pacific lines in order to connect to Kansas City Southern. 

First, ocean transportation to Mexican markets is extremely competitive with rail movements. 

Ocean shipments comprise 53 percent of all U.S.-grown grain exported to Mexico, whereas rail

transports only 41 percent. The availability of cost-effective ocean transportation to Mexican markets

constrains the ability of Kansas City Southern to impose commercially unreasonable terms at the

Laredo gateway.

Second, NAFTA Rail, as controlled by Kansas City Southern would operate approximately

6,000 miles of road and would have operating revenues of $1.3 billion. In contrast, Union Pacific is the

largest Class I railroad in North America, operating 33,586 miles of road and having operating revenue

exceeding $10.6 billion during 2001. The Burlington Northern Santa Fe Railway is a close second,

operating 33,063 miles of road and having operating revenue exceeding $9.2 billion during 2001. Both

Burlington Northern Santa Fe and Union Pacific shares of U.S. grain exports to Mexico are larger than

that of Tex Mex, and are expected to remain larger.

In addition, both Union Pacific and Burlington Northern Santa Fe control alternative routes to

Mexican markets. Union Pacific controls crossings at Brownsville and Eagle Pass, TX, Calexico, CA,

and Nogales, AZ. Both Union Pacific and Burlington Northern Santa Fe control crossings at El Paso,
5

TX. Burlington Northern Santa Fe has access to Union Pacific controlled crossings at Brownsville and

Eagle Pass, TX. As shown by table 3, the other three Texas border crossings provide significant

competition to the crossing at Laredo. 

Finally, Tex Mex operates over 379 miles of Union Pacific Railroad lines between Robstown

and Beaumont, TX, to connect with Kansas City Southern in Beaumont. The terms and price of these

trackage rights are negotiated by the parties involved without Board interference. Therefore, Union

Pacific has considerable leverage over Kansas City Southern, which should ensure commercially

reasonable terms for rail interchange at Laredo.

In conclusion, USDA supports this control application and concludes that the imposition of

competitive conditions will not be necessary. 

Respectfully submitted,

_________________________

Bill Hawks

Under Secretary

Marketing and Regulatory Programs

U.S. Department of Agriculture

Washington, D.C. 20250
6

Table 1–Railroad Share of Total U.S. Grain Exports to Mexico

Commodity

Total 2001

U.S. exports

(000 tons)

Total 2001

U.S. exports

by railroad

(000 tons)

Percent rail

to total

exports

Rail exports

through

Laredo

 (000 tons)

Percent

Laredo rail

to total rail

exports

Corn 6,165 2,943 48% 715 24%

Sorghum 5,525 1,751 32% 780 45%

Soybeans 4,345 2,197 51% 235 11%

Wheat 2,346 670 29% 436 65%

Other grains 509 279 55% 229 82%

Total grains 18,889 7,792 41% 2,395 31%

Sources: Rail tonnages estimated from the 2001 STB Waybill Sample;

Export data from the Department of Commerce, U.S. Census Bureau.

Notes: Other grains include barley, oats, and rough rice only. 

Canadian-grown grain traveling by rail to Mexico through the United States is excluded.

Some rail shipments to the U.S.-Mexico border region may have been used locally or exported by ocean

vessel at Brownsville, TX, rather than exported across the U.S.-Mexico border by rail.

Quantities are rounded, thus the sum of individual grain tonnages may not equal the total grain tonnage. 

Table 2–Terminating Railroad Share of 2001 U.S. Agricultural Exports to Mexico by Rail

and Share of Rail Exports Through Laredo, Texas

Commodity

BNSF

percent of

total rail

Tex Mex

percent of

total rail

UP percent

of total rail

Tex Mex

percent of

rail through

Laredo

UP percent

of rail

through

Laredo

Corn 37% 8% 56% 32% 68%

Sorghum 30% 23% 47% 51% 49%

Soybeans 20% 2% 78% 19% 81%

Wheat 13% 27% 61% 41% 59%

Other grains 3% 6% 90% 8% 92%

Source: Rail tonnages estimated from the 2001 STB Waybill Sample.

Notes: Other grains include barley, oats, and rough rice.

Canadian-grown grain traveling by rail to Mexico through the United States is excluded.
7

Table 3–Percentage by Port of U.S. Agricultural Exports to Mexico Shipped by Rail

Commodity

Brownsville,

TX

Eagle

Pass,

TX

El Paso,

TX

Laredo,

TX

Calexico,

CA

Nogales,

AZ

Corn 15% 48% 8% 24% 1% 3%

Sorghum 3% 24% 21% 45% 0% 7%

Soybeans 25% 34% 18% 11% n/a 11%

Wheat 6% 3% 19% 65% n/a 8%

Other grains 3% 5% 10% 82% 0% 0%

Source: Rail tonnages estimated from the 2001 STB Waybill Sample.

Notes: Other grains include barley, oats, and rough rice.

Canadian-grown grain traveling by rail to Mexico through the United States is excluded.