Study Finds Railways May Be Overcharging For Soy Shipments

Freight rates charged on nearly half of all soybeans carried by the largest U.S. railroads are at levels that would classify as "potentially excessive," resulting in a potential overcharge of $120 million annually, according to a new study.

Any shipping rate that is 180% higher than a railroad's variable cost of transport can be regarded as potentially excessive and subject to U.S. Surface Transportation Board jurisdiction.

The study, conducted by the Soy Transportation Coalition, which is funded by the U.S. soybean industry, found freight rates at least that high were levied on 43% of all soybeans moved via Class I railroads in 2008, involving a total of 338 million bushels in all. A Class I Railroad is a railroad with annual operating revenue exceeding $346.8 million.

"We have been hearing concerns from farmers about high rail rates and how those costs get shifted to farmers in the form of lower basis," said Roy Bardole, an Iowa soybean grower and vice chair of the United Soybean Board's international marketing and global opportunities program.

Basis refers to premiums or discounts that individual grain merchants apply to national futures prices, in order to calculate a local cash bid. Basis levels fluctuate according to regional supply/demand conditions, taking into account such diverse factors as area production levels, grain quality and the cost of transportation.

Bardole theorizes that soybeans are being singled out for higher freight rates simply because of habit.

"You don't need nearly as much soy as corn to mix a basic [livestock] feed ration, so the old feed trains usually only carried one to two cars of [soy]beans...while the rest were corn. Railroads naturally charged higher rates to move the single cars of soybeans than the unit-trains of corn," Bardole explained.

Now, strong soybean demand from China is drawing more soybeans west. Half of all soy moved by rail is going directly to the Pacific Northwest in unit trains out of Kansas, Nebraska, the Dakotas, western Minnesota and Iowa, but the problem is railroads haven't adjusted their old rate structures on soybeans from those areas, he said.

The study also shows that revenue among the largest railroads from transporting soybeans and soy products has nearly tripled to more than $1.5 billion in 2008 from $549 million in 1998. Burlington Northern Santa Fe Corp. (BNI) transports the largest volume of U.S. soybeans, while Union Pacific Corp. (UNP) is the largest transporter of soymeal and soyoil.

"There needs to be a way for railroads and the soybean industry to achieve a better balance so that one is not profiting at the expense of the other," said Mike Steenhoek, executive director of the Soy Transportation Coalition.

"It is prohibitively expensive to take a formal complaint to the STB," Bardole said. "We don't have the financing it takes to do it."

Instead, Bardole said his organization enjoys "really good relations with the Class 1 railroads" and have an ongoing dialogue with the rail industry concerning rate issues.

Railroads currently are also adopting a low-key approach to the issue.

"While Union Pacific does not agree with some of the study's assertions, we have open communications with the Soy Transportation Coalition and prefer to continue to work directly with the STC, rather than publicly debate the study's results," said spokesman Tom Lange. BNI declined to comment.

Funds from the soybean checkoff paid for the study, which was released Jan. 8. The National Soybean Checkoff program collects and invests a mandatory assessment of one-half of one percent of the net market price of soybeans at the first point of sale, typically when a farmer delivers harvested soybeans to a grain elevator.

-By Gary Wulf; Dow Jones Newswires; Gary.Wulf@dowjones.com

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