U.S. Senator John Thune (R-S.D.), Ranking Member of the Senate Committee on Commerce, Science, and Transportation, will deliver the following prepared remarks, at approximately 2:00 P.M. CT/1:00 P.M. MT with live web video available here, at today’s Surface Transportation Board (STB) public hearing focused on U.S. Rail Service Issues:
Thank you Chairman Elliott and Vice Chairman Begeman for holding today’s hearing on recent service problems in the U.S. rail network, the rail industry’s plans to address these problems, and other options that might be available to improve service. Today’s hearing, and the overall number of speakers, certainly underscores the degree to which rail service and supply problems can have an impact on businesses large and small.
I appreciate the opportunity you extended to me to speak and for the opportunity you provided South Dakota Secretary of Agriculture Lucas Lentsch, Midwest Cooperative General Manager Milt Handcock, South Dakota farmer and producer Dennis Jones, South Dakota farmer DuWayne Bosse, who is here today on behalf of the South Dakota Famers Union, and South Dakota Wheat Growers Board President Hal Clemensen.
Given your roles at the STB, you both hear frequently about how important reliable rail service is to so many in our nation. When the U.S. rail system is operating without impediments, there’s no question that it is the preferred option to move large amounts of goods in a safe and timely manner. As Vice Chairman Begeman knows as a native South Dakotan, our home state is no different when it comes to the critical importance that railroads have – especially for our state’s agriculture sector.
As the former South Dakota Rail Director, I understand that our farmers, ethanol producers, and other small business owners rely on rail service from Burlington Northern Santa Fe Railroad (BNSF) and Canadian Pacific Railway (CP), not only to get their products to domestic and international markets, but also for inputs critical to their businesses.
Unfortunately, the disruptions in rail service they experienced this winter have had a very real impact, not only on short term operations, but also on their planning for the remainder of the year when it comes to making business decisions.
For example, Redfield Energy, located in Redfield, South Dakota, is a 55 million gallon per year ethanol producer served by BNSF. Its ethanol plant processes approximately 20 million bushels of corn a year, which in addition to producing ethanol, also produces 233,000 tons of distillers grain that Redfield sells mostly as feed to local cattle producers. To move its ethanol to market, it leases 200 rail tanker cars and typically expects rail turns on these tankers to take approximately four weeks. At normal production levels, it would fill 40 rail tanker cars per week.
Beginning in mid-December, when Redfield Energy originally reached out to me regarding its service issues, it had been experiencing rail turns averaging up to six weeks—and in one instance, it took eight weeks to complete a turn. When the tank cars are not returned on time and the ones on hand are full, Redfield has few other storage options and is forced to slow the plant’s production.
You may ask why shutting down altogether is not a viable option.
Not only is a complete shutdown inefficient, but it can also jeopardize the entire plant when temperatures are at or below freezing, a common occurrence this winter, where pipes can freeze and explode. To prevent this worst case scenario, Redfield has been forced to run its plant at 60 to 90 percent all winter and has no plans to run at full speed anytime soon due to continued delays and uncertainty with rail service.
Redfield has also been forced to purchase distillers grain at spot market prices, which are higher than market prices, in order to meet obligations. When this happens, there is a cascading impact on other parts of the ethanol plant’s operation, including the inability to pre-sell ethanol or distillers grain to customers because of the uncertainty of the plant’s speed or its ability to transport the product to market.
Rail service has become so uncertain that Redfield Energy has decided to more than double its onsite ethanol storage capacity before next winter, which will provide it an additional 10 or 11 days of operating ability, to protect against plant shutdowns due to delays with rail car delivery in the future.
Redfield Energy has also relayed how poor rail service has led to other problems for those with whom it does business. For example, Redfield has not been able to provide all of its cattle producers with the amount of distillers grain the producers typically rely upon. It has also led to a wider corn basis. While this may be good for Redfield in the short term, because the company receives an essential input for its business at a lower cost, it is seriously impacting agriculture producers who themselves have been faced with rail service issues.
For example, North Central Farmers Elevator, located in Ipswich, South Dakota, is a farmer-owned cooperative that serves over 2,500 producer-members in north and south central South Dakota. Its Ipswich grain elevator placed a rail car order with Canadian Pacific on January 24, 2014, for hopeful delivery to its facility on January 27th. The cars arrived on March 17th, seven weeks late.
This late delivery was made even more frustrating by poor communication from Canadian Pacific, which failed to respond to inquiries about when the cars would arrive. The elevator in Ipswich faced significant economic hardships by these rail delays. When the January 27th cars did not arrive, the grain inventory at the facility reached capacity. In order to meet other outstanding contracts, it had to move that grain by truck to another railroad loading facility.
Between January 27th and March 17th, it moved over 300,000 bushels of grain at a cost of 18 cents a bushel, or $54,000 in additional unplanned transportation expenses. Once at this new facility, it found the cost of rail service had also increased, due to scarcity, with a typical grain shuttle running $6,000 over tariff. These two unexpected costs equate to an additional $1.78 per bushel in unexpected expenses being paid not by the eventual purchaser, but by the farmers and elevator owners.
Another grain elevator, Dakota Mill & Grain, headquartered in Rapid City, with a total of seven rail facilities serving 500 customers, calculated the cost of poor rail service another way. If the poor rail service lasts for six months and during that time producers see grain prices drop by 10 percent and agriculture inputs, like feed and fertilizer increase by 10 percent – something they are expecting – it will cost its customers approximately $3.5 million.
To make matters worse, this loss will be hitting agriculture producers in the spring – the exact time they are usually dependent on grain sales to finance their work.
Elevators located off the rail lines owned by BNSF and CP, such as the rail lines owned by Twin Cities & Western Railroad Company, a short line operating the Sisseton/Milbank rail lines, might be in the worst shape of all.
Instead of having to wait long periods of time for car orders, they have been told that they cannot even place any new car orders until August due to congestion on the main rail lines. Between now and then they can just be added to a waitlist and cars will be delivered as available.
While a concern for many on the rail line, it will become critical for Border States Co-op in Wilmot, South Dakota, if this is not resolved before the end of summer. In August, it starts to receive wheat from local producers, with soybeans arriving in September. At its facility, however, both grains are kept in the same storage bin. This means if Border States is unable to move all of the wheat it has purchased by rail car before the soybean harvest begins, the soybean producers will have no place to sell or store their product. Border States has asked to be added to the rail car wait list for August, but at this point there is no guarantee it will receive a single rail car in time to move wheat before soybeans.
As you can tell by these few examples and the other testimony you have heard today, the rail service constraints being faced by South Dakota shippers are having a huge impact on a wide cross section of producers and shippers in our state and region. They also have an impact on the future economic health of South Dakota and our number one industry, agriculture.
As transportation costs increase, the basis for farmers selling grain is growing larger and larger, which is taking money directly out of farmers’ pockets. What this means for South Dakota is a direct transfer of wealth away from the state, which not only negatively impacts agriculture producers, grain handlers, and the ethanol industry, but also impacts all other main street businesses that rely on equitable prices for South Dakota agricultural products.
It is imperative we find a solution to these very real service problems. I have appreciated the meetings and calls BNSF and CP have had with me and my staff about this issue over the past few months, and particularly the steps BNSF has taken to hire new employees, acquire additional equipment, and invest in necessary maintenance and improvements. I encourage both railroads to double down on these efforts.
Additionally, when rail service begins to improve, I would also encourage both railroads to plan for the future needs of rail shippers in our region, especially in light of the projected growth of crude oil transport in the Bakken and increased demand for coal, to ensure that all rail shippers receive adequate and efficient rail service.
Finally, I request that the Surface Transportation Board approve the pending sale of Canadian Pacific’s rail line in South Dakota to Genesee & Wyoming as soon as possible. While this will not solve South Dakota’s rail service issue, it will bring certainty to the shippers located on the 660 miles of DM&E line and allow the new owner to begin service as soon as possible.Thank you again Chairman Elliott and Vice Chairman Begeman for holding this hearing today and for allowing me to testify. I appreciate the attention you are providing to this matter and look forward to working with you as it relates to other items the Senate Commerce, Science, and Transportation Committee is working on.