Repost from The Wall Street Journal
[Editor: We missed this significant article from last March. Also on the delays of farming shipments, see the Reuters report of April 15, 2014: Farmers: Oil trains may delay fertilizer shipments. – R]
Surge in Rail Shipments of Oil Sidetracks Other Industries
Pileups at BNSF Railway Is Causing Delays for Shippers of Goods Ranging From Coal to SugarBy Betsy Morris, Jacob Bunge and John W. Miller, March 13, 2014
A major snarl in railroad traffic is ricocheting through the supply chains of businesses across the U.S., causing delays and losses for shippers of goods ranging from coal to sugar.
Many of the problems stem from pileups at BNSF Railway Co. in a critical northern stretch of the country where it is shipping crude oil from North Dakota’s booming Bakken Shale region. The railroad, one of the biggest in North America, was already taxed by the heavy demand for oil transport. But its difficulties multiplied when it ran out of locomotives and crew, as a bitter winter forced it to use smaller trains.
That has caused a ripple effect across the country as shipments have been delayed. Deliveries of empty grain cars to farmers and grain elevators in the Midwest and Great Plains are running about two to three weeks late, the railroad says. The chief of a major sugar producer said he likes to load 50 railcars a day this time of year, but BNSF sometimes brings more than 50 and sometimes 30.
An executive close to big utility companies says coal-fired power plant inventories are running much lower than the usual 30 days. “The railroads tell us they aren’t serving power plants until their inventories are in single-digit days,” he said.
BNSF isn’t the only railroad with capacity problems, but its woes have been aggravated by a big grain harvest and its surging crude business.
The railroad knew it was in trouble when winter hit. “We found ourselves behind the curve,” said Bob Lease, vice president, service design and performance, for BNSF. “Now, we are finding we can’t fill all of the demand” as quickly as usual.
The backlogs could wind up costing shippers hundreds of millions of dollars, says Steve Sharp, president of Consumers United for Rail Equity, a group representing agriculture companies, manufacturers and utilities. His group has been pushing for tougher railroad regulation.
Andrew Walmsley, director of congressional relations for the American Farm Bureau Federation, a trade group for farmers, worries that continued capacity problems could hurt U.S. competitiveness in the world arena. “Our reliability as a trading partner comes into question anytime we can’t provide the most cost-competitive price in a predictable and timely manner,” he said.
BNSF is scrambling. The railroad is leasing and buying locomotives by the hundreds and hiring new crews. In mid-February it began building new track on top of frozen snow-covered ground along its main oil-patch route. It normally wouldn’t have attempted such a project until spring.
Mr. Lease says traffic should become more “normalized” by April 1, but he concedes that the railroad’s challenges will extend through 2014. “It takes a while to unravel,” he said.
BNSF, a unit of Warren Buffett’s Berkshire Hathaway Inc., BRKB +1.19% invented the business of carrying crude oil by rail when it launched its first long oil train, essentially a rolling pipeline, in 2009. The business has sharply exceeded its expectations. Shipments of crude by rail from North Dakota rocketed to a peak of 800,000 barrels a day last October from fewer than 100,000 barrels a day in 2010.
The surge has contributed to a tangle with potentially widespread impact. Larry Stranghoener, chief financial officer of fertilizer maker Mosaic Co. MOS +0.73% , says that transport problems, including the crunch in railroad capacity, could spell “a slower season.”
“The primary preoccupation of our sales force, our supply chain and our customers frankly is getting product to them in time for the spring season,” he told the Minneapolis-area company’s investors Wednesday. Any delays transporting Mosaic’s fertilizer to dealers could cause them to defer additional orders, he said.
Some shippers, eager to move their products, have opted to use trucks. Trucking rates compare with rail costs within a 500-mile radius, but beyond that companies can wind up paying four to five times as much on a per-ton basis, says one shipping official.
At Black Gold Farms, based in Grand Forks, N.D., Chief Executive Gregg Halverson says his company has had to pay more to hire trucks to transport its potatoes, which it sells to chip makers.
“There’s more demand for truck transportation, and that hits us between the eyes,” Mr. Halverson said. “It’s not only the actual availability of the trucks, but trucking firms having trouble getting drivers, because of demand from the oil patch.” He declined to estimate how much more he is paying for trucks.
American Crystal Sugar Co., which says it supplies about 15% of the nation’s sugar, had to slow production at three of its five plants for 11 days in mid-February because it was running out of storage space while waiting for trains to ship its sugar to food companies. That has disrupted the Moorhead, Minn.-based cooperative’s just-in-time delivery system, said David Berg, its chief executive. “The railroad just threw that into complete chaos,” he said.
He said delays in outbound shipments of sugar have interfered with the production schedules of American Crystal’s customers, many of them major food manufacturers.
While he said he wasn’t aware of any food companies that have had to halt production, “They’ve been running on fumes for weeks,” he said. “We’ve been humping trucks all over the U.S. to keep people in supply.” American Crystal supplies General Mills Inc., GIS +1.27% Kraft Foods Group Inc., KRFT +1.30% Nestlé SA, Mars Inc. and Kellogg Co. K +1.09% , among others.
Mr. Berg and Perry Cerminara, director of global sweetener and energy-risk management at Hershey Co. HSY +0.07% , called the problems caused by BNSF “serious” in a March 4 letter to regulators and stressed the “urgent” need to fix them. Mr. Cerminara wrote on behalf of the Sweetener Users Association, representing food manufacturers.
A spokesman for BNSF said it is working with customers individually to address their most critical issues and plans record spending on expansion this year.
Utilities are hoping railroads can improve their capacity before the busy summer season. “We try to build up inventories to around 40 days, so we’re counting on spring,” said one official at a coal-fired power plant. But, he added, “We’re not counting on a magic bullet.”—Tony C. Dreibus, Annie Gasparro, Chester Dawson, David George-Cosh and Laura Stevens contributed to this article.