Weeks after Hurricane Katrina swept over the Gulf coast, a cloud of uncertainty still swirls, and it extends hundreds of miles upstream to the nation's heartland.
“We're still struggling with the unknown from the hurricane and what its damage will mean for us,” says Dick Cotter, Herscher Grain Co., Herscher, IL. “This year is the most unsure I've been in a long time about exactly what's in the fields and how much farmers will bring in. I've ordered only 20% of my normal rail car supply because I don't know what people are going to do with their crop or where it's going.”
For grain elevator managers like Cotter, finding a way to make room for the 2005 harvest is a major dilemma because much of last year's crop remains in storage.
“There is a lot of corn and beans being carried over,” says Cotter. “Farmers were waiting for a (price) rally that never came.”
After record corn and soybean crops stressed grain storage and transportation systems in 2003 and 2004 (see “Grain Wreck Ahead?” page 6, November 2004), many grain elevator facilities have increased their storage capacity. Herscher Grain Co. is one of them. It built a new, 400,000 bu. grain bin this year to avoid the need to temporarily store grain outside after a large harvest — a practice that can sometimes lead to reduced grain quality and spoilage.
Cotter says he's glad to have the extra permanent storage facility even though limited rainfall has reduced yields in the region. “In this area, our crop will be about 80% of an average corn crop,” he says, “and 80-90% of an average soybean crop.”
The new bin is still needed, he adds, because of all the unknowns. “With the smaller harvest in Illinois this year, there may not be the same demand to ship grain to the Gulf,” says Cotter at press time.
Jerry Fruin, University of Minnesota Extension economist, agrees that any extra grain bin storage space will come in handy this year. “We need to empty out last year's crop, but where is it going to go? It's crunch time,” emphasizes Fruin. “We might not have a massive crop, but where the crops are good, the disruption in grain transportation capabilities sets the stage for more grain storage difficulties. This year, the fall harvest logistics will be much more challenging.”
Demand for grain-bin storage space will likely remain intense for quite some time, says Tim Gubbels, owner/manager, North Side Grain Co., Laurel, NE.
“If you have storage space, it's worth a lot of money,” says Gubbels. “This is the worst basis I've seen in my 25 year history.
“We'll just sit on the grain until the basis improves,” he adds. “The market will come to me sooner or later.”
Increased domestic demand for grain, particularly corn, has helped stabilize local market prices somewhat, concedes Gubbels, but not enough to ease the current grain-storage squeeze. “Ethanol production has helped our market, but our local facility is full right now,” he says. “They're not taking any more grain. The cattle feeders are in the same situation.”
The only alternative to selling grain at low prices now is to keep it in storage and wait for the basis to increase, notes Gubbels. However, keeping grain in storage adds extra costs, and sometimes that extra cost can eat away potential profits.
This season, however, that possibility appears unlikely, adds Gubbels. “Right now you could hold grain for almost a year and make money on it,” he says. “You just sell the futures and sit on the basis. The market is paying us to hold off.”
Farmers might be surprised how much corn could be worth next year, says Gubbels. “As the input costs go up, especially the nitrogen costs, corn acres will probably drop next year,” he points out. “More people will probably plant soybeans, which don't require nitrogen.”
While progress continues in the efforts to restore transportation services in the Gulf, bottlenecks in Louisiana will likely plug storage and transportation systems further north. Ultimately, those bottlenecks could curtail U.S. grain exports.
“About 60% of our grain exports go through Gulf ports,” says Fruin. “We're coming up to the peak months for corn exports. So the worst case scenario is that we'd lose two months of grain business — about half of what you'd normally export.”
Grain shippers will likely attempt to reroute exports through the Pacific Northwest, says Fruin. Yet he points out that the alternative grain transportation systems “can't realistically handle a lot more.”
Nor do railroads have much incentive to ship more grain through the Pacific Northwest. “The railroads won't invest in additional infrastructure now to capture more business that they won't be able to keep next year,” Fruin explains. “The economics don't pencil out.”
Even prior to hurricane Katrina, this year's harvest was shaping up to cause another round of transportation bottlenecks and storage problems, says Ken Eriksen, senior analyst on transportation, Informa Economics, Memphis, TN. Last harvest, there was a grain surplus almost everywhere, and shippers didn't need to go far to find grain for other places that needed it, he says.
“This year, the crop might be good in a non-unit train area, and shippers may have to go further to find corn,” adds Eriksen. “There will probably be longer hauls, more local interruptions, rail car shortages and more stress on the system.”
To ensure better rail service to his grain elevator, Cotter says he's been working on adding 100-car, unit train capacity. “Currently, we still load 25- and 50-unit car trains,” he says. “The CN is traditionally 10-15 days late for us — we call that normal, but the unit trains get turned around faster so they get better service.”
Railroads typically give priority to container shipments over commodities such as grain, notes Cotter. “They tend to think of us as a seasonal business, but gradually it's becoming less of that,” he says. “Cows and chickens are hungry all year long.”
The big question, adds Cotter, is whether there will be affordable transportation to ship grain to those animals when it's needed.
Gulf Export Statistics
How Much Grain Does The Mississippi Move?
The Mississippi Gulf typically ships about 55-65% of annual U.S. raw corn, soybean and wheat exports, says Randy Gordon, vice president, Communications and Government Relations, National Grain and Feed Association, Washington, D.C.
“Of the 50.2 million metric tons (MMT) exported from U.S. ports (as of August 18) in 2005, 29.7 MMT — or 59% — has been exported from the Mississippi Gulf,” says Gordon. “Of this year's total to date, 89% is corn and soybeans.”
In 2004, the Mississippi Gulf exported a total of 55.6 MMT of grain, or about 62% of all U.S. grain exports, according to figures from USDA's Federal Grain Inspection Service. In comparison, the Texas Gulf exported 8 MMT and the Pacific Region exported 26.6 MMT of U.S. grain last year.
Any hindrance to rail or barge transportation systems in the Gulf will likely have major implications for U.S. grain exports overall, points out Ken Eriksen, senior analyst on transportation, Informa Economics, Memphis, TN. “Even before the hurricane hit, the railroads were running behind last year in service to some areas,” he says. “This will likely double the problems going out to the Pacific Northwest.”
Eriksen adds that October is historically the strongest month for U.S. grain exports, representing 17% of U.S. Gulf exports on an annual basis. He adds that any U.S. grain transportation bottlenecks during this key time will likely reduce the nation's grain exports and temporarily cause U.S. corn and soybean farmers to lose their current market share to other countries.
Wide-scale grain transportation bottlenecks will also increase grain storage and handling costs, points out Tim Gubbels, owner/manager, North Side Grain Co., Laurel, NE. The extra costs could prove harmful to U.S. grain exports, he adds.
“Corn is still a commodity and so are beans,” explains Gubbels. “Buyers don't care if your beans come from Brazil or your corn comes from China. They just buy whatever is cheapest.”
— John Pocock