Repost from Business Insider
[Editor: Significant quote: “Many experts blame an incomplete recovery from last winter’s freight backlogs, coupled with record crops and rising competition with crude oil tankers for track space amid an economic recovery.”  – RS] 

Rail Logjams Are Putting The Whole US Economic Recovery At Risk

Susan Taylor and Solarina Ho, Reuters, Aug. 15, 2014

TORONTO (Reuters) – More than eight months after an extreme winter began snarling North American rail traffic, a Reuters analysis of industry data shows delays lingering, raising the risk of a second winter of chaos on the rails.

Across the continent’s seven largest operators, trains ran almost 8 percent slower on average and sat idle at key terminals for nearly three hours longer in the second quarter than a year earlier, data from the main railroads, known as Class 1, show.

While Canada’s rail operators have nearly recovered, many U.S. operators lag far behind.

The concerns are sharpest in the U.S. Farm Belt, with lawmakers fearful that the biggest crops on record may be slow to reach markets or could even rot.

Rail logjams contributed to the economic slowdown early in the year, rippling across corporate America and affecting everything from car makers to ethanol producers.

Many experts blame an incomplete recovery from last winter’s freight backlogs, coupled with record crops and rising competition with crude oil tankers for track space amid an economic recovery.

“It’s like a sinking ship – you’re bailing out at one end, but it’s coming in the other end just as fast, if not faster,” said Citigroup Global Markets transportation analyst Christian Wetherbee.

Performance fell behind as loads grew: between April and June, U.S. rail carload volumes grew 5.4 percent and intermodal traffic, which include shipments partly by rail, rose 8 percent, Association of American Railroads (AAR) data shows.

At the same time, the industry is producing “tremendous” margins, profit and cash flow, with some companies setting records, said rail analyst Tony Hatch.

The largest operators plan to spend about 18 to 20 percent of annual revenue this year on new terminals, track, sidings and equipment to help boost capacity and efficiency, according to Thomson Reuters data. That is slightly higher than recent average annual spending.

Some shippers complain that spending hasn’t been sufficient to meet demand, especially in bad weather. Still, many investment projects are multi-year improvements that can’t quickly fix traffic jams.

“We’re criticized … because we haven’t put infrastructure in to handle the growth. But then when you try to put infrastructure in, the not-in-my-backyard lobby kicks in and says: We don’t want you here,” Canadian Pacific Railway Ltd Chief Executive Hunter Harrison said on a recent earnings conference call.

Over the four decades to 2000, the nation’s major track system shrank by about half, in terms of miles of rails, according to the U.S. Federal Highway Administration.

Although Berkshire Hathaway’s BNSF Railway Co is spending a record $5 billion this year, its performance lagged those of competitors last quarter.  BNSF trains traveled 11 percent slower than year-ago speeds, and stayed at terminals for 18 percent longer.

Fadi Chamoun, an analyst at BMO Capital Markets, said BNSF is unlikely to recover until mid- to late-2015 due to the amount of work it must do.

In recent years, BNSF accounted for some 50 percent of the entire rail industry’s volume growth, analysts said. The company says it handles up to 15 percent of U.S. intercity freight.

BNSF declined to respond to Reuters’ questions about its performance metrics. The Fort Worth, Texas-based railway has said it is working closely with shippers to clear backlogs and adding track, locomotives and crews.

The other four U.S. Class 1 railroads are CSX Corp, Kansas City Southern, Norfolk Southern Corp and Union Pacific Corp.

Kansas City Southern and Norfolk Southern did not respond to requests for comment. CSX said it was investing in strategic capacity additions and was adding train crews and locomotives to restore performance and support growth. Union Pacific CEO Jack Koraleski told Reuters that the railroad’s performance has been improving even as volumes have been increasing, adding that it has worked hard to address disruptions and customer issues.

Cowen & Co analyst Jason Seidl said winter exacerbated problems for the industry. “As they were trying to dig out, the volumes took off,” he said.

ECONOMIC FALLOUT

In the United States, more than 40 percent of goods, valued at more than $550 billion, are shipped by railroad each year on some 140,000 miles of track. Canada’s 30,100 miles of track carry half of the country’s export goods.

Frozen transportation links contributed to a nearly 3 percent contraction in the U.S. economy during the first quarter, the New York Federal Reserve said last week.

Lawmakers and the $395 billion agricultural industry fear that trains may fail to clear last year’s record-breaking crops in the Midwestern U.S. Farm Belt, which could strand part of this summer’s grain harvest.

“We’re sounding the alarms right now,” North Dakota Senator Heidi Heitkamp told Reuters. “We believe the 2014 crop could be taken off the fields and there won’t be any place to store it, because of the lack of ability to move product by rail.”

BNSF and Canada’s CP Rail operate the main rail networks in North Dakota, where farmers vie for space with some 700,000 barrels per day of crude oil shipped by rail from the state’s Bakken Shale.

“You can’t see these massive increases in crude-by-rail and not appreciate that they are creating problems for moving agricultural products,” Heitkamp said.

Members of Congress, utility companies, the United States Department of Agriculture and others are asking the U.S. rail regulator, the Surface Transportation Board, for help.

“With remaining grain in storage due to the backlog, grain elevators in some locations, such as South Dakota and Minnesota, could run out of storage capacity during the upcoming harvest, requiring grain be stored on the ground and running the risk of spoiling. The projected size of the upcoming harvest creates a high potential for loss,” USDA Under Secretary Edward Avalos wrote to the regulator this month.

Utility Xcel Energy said coal deliveries to a key Midwest facility were behind schedule.

“When we run out of coal, the plant can’t produce electricity. We are right in the middle of summer when air-conditioning load creates our highest levels of electric demand,” Xcel Chief Executive Ben Fowke wrote in a letter to the STB at the end of July.

Since an April 10 hearing on rail service, the STB has issued several orders, primarily involving CP and BNSF. The most recent directive, issued in June, required the two railways to publicly file their plans to resolve their backlog on grain orders and provide a weekly update on grain car service. It declined to comment on complaints or its plans.

Earlier this month, the Canadian government ordered Canadian National Railway Co and CP to further boost regulated grain shipments, in an effort to prevent a repeat of last season’s backlog.

Recent University of Minnesota data showed that transportation bottlenecks cost the state’s soybean, corn and spring wheat farmers nearly $100 million between March and May.

United Parcel Service Inc, the world’s largest courier company, said that “very poor” railroad performance last quarter raised its costs. Even passenger service Amtrak has been affected, with some of the trains it runs on Class 1 tracks falling far behind schedule.

Canada’s biggest rails, CN and CP, operated their trains at speeds 4.7 percent and 3 percent slower in the second quarter than year-ago levels respectively, better than most U.S. rivals.

CN said its ability to avoid Chicago, a hub notorious for bottlenecks, helped its sector-leading recovery. In 2009, CN bought a rail network that encircles Chicago, the Elgin, Joliet and Eastern Railway Co.

CHICAGO BLUES

Chicago’s third-snowiest winter on record severely tangled traffic at a hub that handles one quarter of the nation’s freight-by-rail and has recently become a major conduit for Bakken crude.

Data from Union Pacific shows its trains idled in Chicago for an average 65 hours in February, around double the typical time for much of 2013.

Following a severe 1999 blizzard that paralyzed trains for days, government and railroads launched a $3.8 billion plan to improve the Chicago system.

That’s not a quick solution for the industry’s woes.

“It takes a long time for new lines and new terminals to get built, and additional locomotives to be delivered and additional crews to be trained,” said Steve Ditmeyer, an adjunct professor at Michigan State University’s Railway Management Program.

“There’s a time lag that the railroads cannot snap their finger and, all of a sudden, get out of the current problem.”

(With additional reporting by Joshua Schneyer and Jonathan Leff in New York, and Sagarika Jaisinghani in Bangalore; editing by Joshua Schneyer and Peter Henderson)