Transport Infrastructure Underinvestment Looming Over Export Prospects

BMI view: Although we have not yet had to highlight severe disruptions to grain transportation in North America as can be seen in South America, we caution that suboptimal investment in the past decade will make the US and Canada less reliable grain exporters than they have traditionally been. We believe the US has ramped up investment in its railway and port infrastructure, but its elevator and barge networks have lost efficiency and competitiveness in recent years. For Canada, investment in grain transportation has been below infrastructure-upkeep levels for decades, but the impending end of the monopoly of the Canadian Wheat Board (CWB) should increase competition and efficiency in the sector.

In both the US and Canada, investment in grain elevators has not kept up with increases in production capacity, and could create temporary bottlenecks in times when crop volume outweigh current capacity. In Canada, the decline in the number of licensed country elevators has been particularly significant in the past decade. In 1999-2000, there were 1,004 licensed primary and process elevators on the prairies. By 2010/11, this network had shrunk to a third of its former size, reaching less than 366 facilities. Only the 2011/12 crop year saw a noticeable recovery in the number of elevators with an additional 20 facilities added. However, this upturn could be linked to a change in the licensing requirements of the Canadian Grain Commission (CGC) rather than in the elevator network itself.

For the US, grain elevators are also easily brought over capacity when there is a surprise uptick in production. Also, bottlenecks in the railway or barge network can keep grain output at the elevator level for far longer than expected previously, forcing farmers to stock their production on the ground. Between 2006 and 2008, local industry sources indicated that bountiful harvests meant millions of bushels were stored outside overstuffed grain silos, waiting for shipment and exposed to wind, rain and rats. The ongoing corn and soybean harvests for the 2013/14 season, which is expected to reach record highs, will again test the country's elevator capacities as the USDA reported that, as of the end of October, maximum grain storage capacity was already reached in most growing states, while the harvest still has weeks to go.

Capacity Reached
LHC: Canada Elevators & Delivery Points (units); RHC: US Grain Stocks, Production & Storage In Select States (bn bushels)

BMI view: Although we have not yet had to highlight severe disruptions to grain transportation in North America as can be seen in South America, we caution that suboptimal investment in the past decade will make the US and Canada less reliable grain exporters than they have traditionally been. We believe the US has ramped up investment in its railway and port infrastructure, but its elevator and barge networks have lost efficiency and competitiveness in recent years. For Canada, investment in grain transportation has been below infrastructure-upkeep levels for decades, but the impending end of the monopoly of the Canadian Wheat Board (CWB) should increase competition and efficiency in the sector.

In both the US and Canada, investment in grain elevators has not kept up with increases in production capacity, and could create temporary bottlenecks in times when crop volume outweigh current capacity. In Canada, the decline in the number of licensed country elevators has been particularly significant in the past decade. In 1999-2000, there were 1,004 licensed primary and process elevators on the prairies. By 2010/11, this network had shrunk to a third of its former size, reaching less than 366 facilities. Only the 2011/12 crop year saw a noticeable recovery in the number of elevators with an additional 20 facilities added. However, this upturn could be linked to a change in the licensing requirements of the Canadian Grain Commission (CGC) rather than in the elevator network itself.

Capacity Reached
LHC: Canada Elevators & Delivery Points (units); RHC: US Grain Stocks, Production & Storage In Select States (bn bushels)

For the US, grain elevators are also easily brought over capacity when there is a surprise uptick in production. Also, bottlenecks in the railway or barge network can keep grain output at the elevator level for far longer than expected previously, forcing farmers to stock their production on the ground. Between 2006 and 2008, local industry sources indicated that bountiful harvests meant millions of bushels were stored outside overstuffed grain silos, waiting for shipment and exposed to wind, rain and rats. The ongoing corn and soybean harvests for the 2013/14 season, which is expected to reach record highs, will again test the country's elevator capacities as the USDA reported that, as of the end of October, maximum grain storage capacity was already reached in most growing states, while the harvest still has weeks to go.

On transportation to ports, the US has a strong advantage over Canada as it ships most of its grain production on barges on the Mississippi river. This shipping system has kept transport costs very low for farmers and exporters, and US grain particularly competitive on the global market. However, the river system infrastructure has become largely antiquated by regulatory standards. There has been an extremely slow pace of investment, rehabilitation or replacement, and funding for new projects have always been hard to come by. Greater than 18% of the covered barge fleet is 25 years old or more. This has resulted in long waits at outdated locks and dams on the Mississippi, adding days and dollars to transportation. In 2008, an Army Corps of Engineers' analysis indicated that barge delays alone added an average of US$72.6mn annually to the cost of shipping goods down the Mississippi and Illinois rivers. This number will have increased since then to reach an even higher part of total shipping costs over the country's rivers.

Barge Movements Pick Up
US - Corn and Soybean Monthly Barge Volume ('000 short tons)

On the railroad system, however, we believe the US has stepped up investment, while Canada has only recently pushed for competition and privatisation in its network after the decision to end the monopoly of the CWB on marketing and moving grains around the country. US railroads have received massive investments in infrastructure since network deregulation 40 years ago. In the Eastern part of the country, the Norfolk Southern and the CSXT Railroad have developed a more comprehensive system of train loading and unloading elevators than in the West, even if grain production area and market demand are less significant than in the West. Currently, the two companies have over 150 train loading elevators and 90 train unloading grain facilities on their systems. This compares to 290 shuttle train loading facilities and over 122 shuttle train unloading facilities on the West side, operated by BNSF Railway and Union Pacific Railroad, but a slower pace of replacement.

Moving West
Canada Select Ports - Railway Hopper Car Grain Shipments (mn tonnes)

Similar to the elevator network, the railway network in Canada has contracted over the past decade; a symptom of rationalisation in the sector which has limited capacity in the short term, but which will help the sector's development over the longer term. Between 2000 and 2011, the reduction in western Canadian railway infrastructure amounted to just 8.4%, with the network's total mileage having been reduced to 17,830.3 route-miles overall (compared to 19,468.2 routes-miles of track at the start of the period). However, the recent wave of restructuring in the industry, which transferred some operations from the national companies (CN and CP) to private companies, has limited the decrease in the railway network as low profitability operations could stay open in that context. The 2011/12 crop year is one of the most recent examples of these changes with the formation of Big Sky Rail (BSR), which assumed operation of a 220.5-route-mile cluster of CN track situated in western Saskatchewan.

Increasing Sharply In 2010/11
Canada Ports - Average Vessel Waiting and Loading Times (days)

These bottlenecks and inefficiencies at different stages of the grain supply chain for both countries have impacted waiting and loading time at ports for both countries. For Canada, the impact has been particularly important in the 2010/11 season when waiting and loading times at the country's largest ports increased sharply on the back of bumper wheat and canola crops. Since then, the average waiting and loading time of grain vessels at Canadian ports have improved drastically in 2011/12. Still, the proportion of ships spending more than five days in port actually increased, to 78.6% from 54.5% a year earlier. As a result, we believe waiting and loading times at ports will remain above potential in the coming years and will only come down when improvements in elevators and railway networks will start feeding through the general flow of grains in the country.

For the US, uncertainty is mounting over transportation of the ongoing record corn and soybean harvest and pressure is increasing on railcar and barge movements, resulting in delays to ports, leaving grain vessels waiting for longer than usual to be loaded. Freight on BNSF Railway has traded as high as US$2,400/car this month. This compares to US$600/car for the same freight for December. Mid-Mississippi River barge freight was US$33.57/tonne, 11% above the average.

North America Grain Production & Consumption
United States
2012 2013f 2014f 2015f 2016f 2017f
Wheat Production, '000 tonnes 54413 61755 58470 60181 61986 63791
Wheat Consumption, '000 tonnes 32155 37461 36711 35977 36320 36850
Corn Production, '000 tonnes 313950 275000 340000 345000 350000 340000
Corn Consumption, '000 tonnes 279023 260049 278253 286600 295198 304054
Soybean Production, '000 tonnes 84192 82055 86000 87720 89474 91264
Soybean Consumption, '000 tonnes 48810 48322 48564 49352 50165 51003
Canada
Wheat Production, '000 tonnes 25288 27200 33000 29000 27303 27573
Wheat Consumption, '000 tonnes 9852 9901 10032 10167 10305 10448
Source USDA, Statistics Canada, BMI

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This article is tagged to:
Sector: Freight Transport, Agribusiness, Shipping
Geography: North America, Canada, United States
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