Ag Logistics: Growing Pains
The success of U.S. agriculture depends on a functional transportation and logistics network that combines efficiencies and economies across all modes.
''Do we want to produce for the rest of the world, or do we want to consume from the rest of the world?"
That's the question and argument that Mike Steenhoek presents when discussing the U.S. soybean industry, and agriculture in general. As executive director of the Soy Transportation Coalition (STC), Steenhoek is charged with protecting the interests of his grain-growing constituents across 11 midwestern states—an area that represents more than three-quarters of total U.S. soybean production. The Ankeny, Iowa-based coalition's mission is to stump for cost-effective and reliable transportation investment and planning, especially when it comes to U.S. regulatory policy and decision-making.
Agriculture is a diverse industry comprising a number of different product categories ranging from grains to livestock. It's energy. It's food. It feeds the food consumers buy. While U.S. manufacturing has laid dormant over the past two decades following an exodus of jobs to cheaper offshore locations, an agrarian sensibility remains firmly planted across the United States. In an age where consumption defines U.S. livelihood and commerce, farmers represent a manufacturing ethic that afforded consumers that luxury to begin with.
But agriculture isn't dwelling in the past; instead it has become an export strength in an inbound-centric economy. Agriculture also serves as an important prism for understanding U.S. infrastructure needs. Transportation and logistics excellence makes American-grown product competitive on the global market. Investing in and maintaining a multi-modal network that can deliver quickly and efficiently is critical to sustained growth. Currently, that poses both a challenge and an opportunity.
Drought Brings Problems to the Surface
The drought that swallowed much of the Midwest during the summer of 2012 had a marked impact on U.S. agriculture production. Most crops experienced well-below-average yields that reverberated across global markets.
"U.S. corn production was approximately 25 percent below trend, although in some major producing states such as Illinois it was closer to 40 percent," explains Paul Bertels, vice president of production and utilization for the St. Louis-based National Corn Growers Association (NCGA). "With a short crop, the market has to ration corn."
Grain exports are bearing the brunt of this dearth. The U.S. Department of Agriculture (USDA) predicts corn exports of 950 million bushels in 2013, compared to 2012's crop yield of 1.5 billion bushels. Of the top four crops—corn, soybeans, wheat, and cotton—the latter three rely heavily on export. But each has its nuances. Soybean exports are similar to corn. Wheat is much more reliant on rail. Most ginned cotton is exported via container.
From a domestic consumption perspective, corn's impact is significant because it is used largely as a source for livestock feed. Any change in supply has a direct impact on food prices.
"Assuming the United States returns to normal production in 2013, we will face a significant challenge regaining market share," Bertels says. "While we experienced severe crop problems, our competitors in Brazil, Argentina, and the Ukraine stepped in to fill the void."
The drought had a striking effect on the Mississippi River, according to Paul Wellhausen, president of Granite City, Ill.-based Lewis & Clark Marine. The tugboat line is primarily responsible for switching and fleeting barges on the Mississippi River in the St. Louis area.
"Volumes are off significantly, most noticeably on corn, resulting in a weak pricing environment in the freight market," he says. "Approximately 25 percent of the covered hopper fleet is idledtoday, and this number will increase as we wrap up soybean export shipments in early 2013."
Low water levels have caused significant damage to underwater barge equipment, increasing repair and maintenance costs. They also reduced the number of fleeting spaces by up to 60 percent.
"Steel shippers quickly moved to rail and truck as alternatives to barge, while grain and fertilizer shippers reduced drafts and moved ahead," adds Wellhausen. He expects that by March 2013, South America will be putting beans on the water forChina at a heavily discounted price compared to U.S. product.
The 2012 dry spell demonstrates just how vulnerable global crop cycles are. In 2010, drought and wildfires in Russia, and flooding in Pakistan shook up grain production. U.S. exports spiked as they filled the global deficit. Parts of South America faced their own recent challenges. Now U.S. agriculture finds itself in a similar predicament.
While rising food prices have captured the attention of consumers, receding waters along U.S. navigable rivers raise a more troubling concern—one that is unlikely to reverse course without intervention.
"One big challenge is the inland waterway system, especially the upper Mississippi and Illinois Rivers," Bertels says. "NCGA has long advocated for lock upgrades on these rivers. For more than 20 years, the Army Corps of Engineers has been studying replacing locks that are nearly 30 years beyond their design life."
But current budget shortfalls and delays are pushing these projects farther back in the queue. And without a definitive national plan for fixing and upgrading archaic waterway infrastructure, U.S. agriculture competitiveness is jeopardized.
"Low water levels on navigable river systems are a concern," says Steenhoek. "But what is more concerning is that the United States is not maintaining navigation assets such as locks and dams. We are a spending nation, not an investing nation."
The Fixed Costs of Failing Infrastructure
Compared to other growing regions around the world, U.S. dominance does not lie in a lower cost to production. South America, as one example, can produce grain less expensively. What makes U.S. agriculture stand apart is its ability to deliver more quickly and efficiently. In that regard there is no parity.
"Brazil's main soybean growing regions are about 950 miles away from the country's major ports," explains Steenhoek. "In the United States, soybeans loaded in Davenport, Iowa; Peoria, Ill.; or Owensboro, Ky., travel anywhere from 850 to 1,000 miles south to Louisiana. The distances are similar. But the United States takes advantage of its navigable waterways more than Brazil does. We are able to deliver volume much more efficiently."
In fact, 59 percent of total 2011 soybean exports passed through Mississippi River ports in southern Louisiana. Of that total, 89 percent passed through locks on U.S. inland waterways on the way to the Gulf, according to a recent study funded by the United Soybean Board's Global Opportunities program, in coordination with the STC.
While the United States has always held a competitive advantage over other agriculture regions around the world in terms of infrastructure, it has failed to make the necessary investments to maintain this advantage. And cracks are beginning to show.
In September 2012, Lock 27 on the Mississippi River north of St. Louis closed for five days due to emergency repairs, delaying river movements and incurring millions of dollars in extra costs. More than half of the locks in existence today are at least 50 years old, and the cost of replacement is estimated at about $125 billion, according to Washington, D.C.-based lobby Waterways Council.
"The greatest shortfall is in inland waterway funding," Bertels explains. "The NCGA has advocated for increasing the user fee (fuel tax), which we ultimately pay in the form of lower grain elevator bid prices to try and speed up funding and construction. We are also investigating alternative approaches such as privatization, or changing the cost share of projects."
To this point, the Soy Transportation Coalition recently published a report, New Approaches for U.S. Lock and Dam Maintenance and Funding, in partnership with the Texas Transportation Institute and Center for Ports and Waterways. It outlines possible solutions for fixing and upgrading inland waterway infrastructure and assisting the U.S. Army Corps of Engineers in funding these efforts.
One topic the report raises is the possibility of shifting from a "build and expand" to a "fix and sustain" approach. Given current budget constraints and funding hurdles, industry may have to consider more flexible and lower-cost solutions; and the Army Corps of Engineers will have to work more closely with public-private partnerships.
Aligning Policy and Performance
While U.S. waterway interests need to grow collaboration, transportation and logistics partnership within the agriculture industry at large has always been a key factor to its success. The agriculture supply chain is unique in that it touches all modes of territorial transport, spanning continents as well as import and export markets.
"No perfect proxy says this industry represents the whole U.S. economy," says Steenhoek. "But it's about as close as you can get because it touches on every mode. We are forced to look at the system as a logistics chain. It's only as strong as the weakest link."
Rail transport is another critical piece that dovetails with inland water barge to create an economical and sustainable intermodal transportation chain. Growers in rural areas depend on rail service and economy of scale to keep costs in check.
"Since the Staggers Act passed, the rail industry has undergone major transformation," says Bertels. "Because of rate structure changes, a significant percentage of grain elevators have made capital improvements to handle unit car trains. This has led to a consolidation in the elevator industry. Some areas, such as South Dakota, are still concerned, however, about a lack of rail competition."
That may change as railroads focus more attention and capital on hinterland networks to support the emerging growth of natural gas, and shale oil exploration and mining. Any investment in rural railroad connectivity and infrastructure is a win for captive grain shippers. Much of the rail network established in areas such as North Dakota over the years has been late to serve agriculture.
"Investment certainly will provide more options and more railroad competition, which could have a downward pressure on rates," adds Steenhoek. "Some regions will benefit from that. It's a favorable development."
On the trucking side, agriculture growers and service providers are paying close attention to regulatory policies—both good and bad—that impact infrastructure spending and investment, and transportation performance. The sobering reality is that many state and local budgets are tapped out.
Following the 2012 election cycle, various public sector authorities introduced a flood of new funding proposals—from raising fuel taxes, to pay-per-mileage schemes, to selling transportation naming rights. Some states have responded to budget shortfalls by lowering weight limits on rural bridges, thereby postponing necessary upgrades.
"Reducing weight limits is a de facto road closure for heavy equipment and grain trucks," says Bertels.
Regulations are a moving target, and are the main concern for agriculture shippers, especially as they try to manage costs in a commodity-priced business that is highly vulnerable to begin with, notes Lance Cheney, vice president for Des Moines-based dedicated transportation service provider Ruan Transportation.
"Agriculture and transportation are two of the most highly regulated industries," he says. "Put them together and it's a constant battle."
As such, it forces growers and their supply chain partners to take a more holistic look at how policy and planning in both the transportation and agriculture sectors impact one another. This is certainly the case with regulatory measures aimed at greening the supply chain.
"Farmers are growing more concerned about making sure the climate exists to operate profitably," explains Steenhoek. "We want to strike a balance between being good stewards of the environment and making sure regulations don't move beyond common sense and stifle the ability to produce."
Another example is the Food Safety Modernization Act. The bill passed two years ago, but is still seeking comments from various industries and likely won't be finalized any time soon. One of the legislation's key objectives is to increase traceability and transparency of product and sources in the food supply chain and introduce preventive controls. Compliance will likely incur extra costs.
To date, growers haven't been impacted as much as they had feared, says Bertels. But it still represents a recurring theme in the ag business—markets want product differentiation, but they only want commodity pricing.
Making Infrastructure a Priority
The challenges facing the agriculture industry demonstrate just how important transportation and logistics infrastructure is to U.S. competitiveness. As the United States looks to encourage and grow more manufacturing activity at home, the means to move product to market will be an important consideration as companies evaluate total landed costs.
Steenhoek represents the agriculture industry on a freight advisory committee commissioned by the U.S. Department of Commerce in 2011. The Advisory Council on Supply Chain Competitiveness provides a platform for stakeholders to share ideas and concerns.
"You'd be hard-pressed to find an industry that has a more diverse and elongated supply chain—everything from primitive gravel roads and rural bridges to ports, locks and dams, and freight railroads," he says. "And we export more than half of what U.S. soybean farmers produce, so we are very global."
Groups such as the STC and NCGA are staunch in their advocacy for making transportation infrastructure, and the service providers that empower it, a competitive differentiator for U.S. agriculture—a resource and commodity that stands alone on the global market.
Whether it's developing U.S. ports and harbors and deepening the draught on the lower Mississippi to accommodate larger vessels when the Panama Canal opens, fixing antiquated locks and dams, or ensuring equitable weight limit restrictions on highways, infrastructure investment remains a priority.
"The success of the U.S. economy is not just a function of out-innovating the rest of the world, but a matter of out-delivering the rest of the world," says Steenhoek.