Riding the Rails

The railroad has become the preferred method for transporting ethanol from plants in the Midwest, where much of the renewable fuel is produced, to new and rapidly expanding markets on the east and west coasts. The stronger focus on rail has had a positive impact on businesses along the tracks, from ethanol marketers and tank car builders to railroad track builders and even railcar movers.
By Holly Jessen | October 26, 2006
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Train, truck, and barge. Those are the options that ethanol producers and marketers have to get the renewable fuel from its various points of origin to the market in which it will be blended and consumed. In 2004, the transportation equation was almost evenly balanced, with each method of transportation hauling about a third of the total ethanol supply, according to Jim Redding, vice president of external affairs for Aventine Renewable Energy Inc., a company that produces and markets ethanol. Only a year later, rail transportation clearly dominated ethanol transportation by hauling an estimated 75 percent of the product. "It definitely has been a fundamental change," Redding tells EPM.

Ethanol has enjoyed good market penetration in the Midwest, which has the highest concentration of ethanol production facilities. Now, the growth markets are on the East Coast, in the southwestern United States, and, most recently, the West Coast, Redding says. As the market grows, ethanol producers have taken a closer look at transportation options, and rail isin most casesthe best choice for long-distance transportation.

Informa Economics Inc., a food and agriculture research and consulting company, has seen the shift toward transporting more ethanol via rail, as well, according to Ken Eriksen, vice president of the company's transportation service. He points to the phaseout of MTBE as a factor. Ethanol consumption broadened nationally with that change, as traditionally small ethanol markets opened up to become large markets.

Ethanol, unlike MTBE, is not produced near the refineries, according to Rob Zmudka, vice president and general manager of national accounts for GATX Rail. The renewable fuel is produced predominately in the Corn Belt, not near the large population bases where ethanol is now in demand to replace MTBE, which has been found to contaminate groundwater.

With the need to transport ethanol farther, truck transport just isn't as feasible, Eriksen says. Statistically, when moving one ton of any commodityliquid or dry bulkrail transport is more economical than truck and barge is more economical than rail.

On a single gallon of fuel, a truck can transport one ton of ethanol or other commodity 59 miles. Railroads transport it much farther at 386 miles, followed by 522 miles via barge, Eriksen tells EPM. On that one gallon of fuel, rail transportation can take goods 6.5 times farther than truck.

As the ethanol market widens geographically, transporting ethanol by rail will likely continue to grow, agrees Scott Richman, vice president of consulting for Informa. At the same time, that doesn't mean that barge and truck traffic will completely fade into the background. "Destination ethanol plants," for example, will continue to be served by trucks. In other cases, such as unit trains operated by CSX Transportation, barges can be combined with rail to get the product to its final destination, Richman says.

Small, Yet Significant
Ethanol makes up a very small portion of the total goods shipped by rail, according to Tom White, spokesman for The Association of American Railroads. In 2004, out of more than 30 million carloads, a total of 68,960 carloads of ethanol were shipped in North America. Figures for 2005 were not yet available at press time. "I'm sure there was an increase, but I am not sure to what extent," White says.

Though small, it's an expanding market that railroads consider significant. Since 2000, ethanol-related business for Union Pacific Railroad has experienced tremendous growth. "It is definitely one of our largest growing areas right now," says Katie Hadenfeldt, senior business manager for biofuels for Pacific Union Railroad.

In all, Pacific Union serves 43 ethanol plants, either directly or indirectly through short lines. It also operates a 75-car unit train for transportation of ethanol and distillers grains, Hadenfeldt says.

The company has spent $60 million in capitol improvements just to handle the additional volume of ethanol and distillers grains. The funds were used to handle demand in areas like Iowa and Minnesota, where several ethanol plants are located.

Burlington Northern Santa Fe (BNSF) has also watched its ethanol-related business grow significantly, according to Suann Lundsberg, BNSF spokeswoman. As is the case with other railroads, ethanol may not be the largest sector of BNSF's business, but it's growing.
In 2000, the company transported 9,500 carloads of ethanol. By 2005, that number had gone up to 31,700 carloads. From the first half of 2005, compared with the first half of 2006, volume is up nearly 14 percent, Lundsberg says.

The company operates a 90-car Ethanol Express program, which moves ethanol from the Midwest to California. It's also interested in expanding its unit-train service to other areas if market demand keeps increasing, Lundsberg says.

Of course, it's not just ethanol transportation that is increasing for BNSF. The company's capital goal for 2006 calls for $2.6 billion, up from $2.179 billion in 2005, Lundsberg says. About $400 million of the $2.6 billion is earmarked for an expansion project that would parallel its existing track network. In addition, BNSF plans to add 362 locomotives and hire additional staff, in 2006. "Rail is growing throughout all of our business units," she says.

Down the Track
As the railroads pick up more ethanol traffic, other rail-related businesses have experienced a trickle-down effect. Demand has increased for everything from tank cars and railcar movers to rail line construction.

Tank car builders have, "without question," been impacted, according to Bill Snelgrove, vice president of sales and customer service for Union Tank Car Company (UTLX). While most railcars are provided by the railroad company to the shipper, tank cars are one of the few exceptions. To ship ethanol by rail, more than 75 percent of customers lease tank cars from companies like UTLX. Some very large companies, such as Archer Daniels Midland Co., have the resources to buy the tank cars outright, Snelgrove says.

In total, there are about 1.6 million railcars in North America, with 300,000 of those being tank cars, Snelgrove says. The bourgeoning ethanol industry has recently increased the demand for tank cars. For about 10 years, demand for new railcars was about 10,000 tank cars yearly, with only a small portion of them used to transport ethanol.

In 2006, demand went up sharply. "We're probably going to see something in the range of 15,000 tank cars built, and out of that, about 50 percent will be for ethanol tank cars," Snelgrove says.

By 2007, that number will probably be more than 20,000 tank cars. As a result, all three tank car builders in North AmericaUTLX, American Railcar Industries Inc. (ARI) and Trinity Railare sold out until about the middle of 2008.

In response, UTLX opened its third manufacturing facility in Alexandria, La., this summer. ARI also announced it would be doubling its capacity, and Trinity is working toward a significant expansion as well. "As the ethanol market has grown, so have we as an industry," he says.

That growth is why it's so important for potential ethanol producers to plan ahead in terms of the tank cars it will need. According to Snelgrove, a typical 110 MMgy ethanol plant needs about 300 tank cars. At a cost of about $100,000 per car, that would be a total investment of about $30 million for lessors, such as UTLX.

Ethanol-related business is also booming at Volkmann Railroad Builders Inc., which builds in-plant railroad tracks. So far in 2006, tracks for ethanol plants have made up about 50 percent of the company's business, according to President Rick Volkmann. By 2007, it will probably be more like 75 percent of its total projects. "The biggest problem we have is getting the track material in a timely manner," he says. "There's a big demand for rail and ties, not just in the ethanol field but throughout the rail industry."

Railcar movers have also seen brisk business to ethanol facilities. Rail King Mobile Railcar Movers, based in Houston, Texas, has sold a product that moves railcars to and from railroad tracks, to the ethanol industry, says Regional Sales Manager James Lyon. Again, the company considers it a small but successful part of its overall business activity.

Herc-U-Lift of Maple Plain, Minn., has also seen significant "action" in sales to the ethanol industry, according to Sales Manager Duane Oestreich. Besides its railcar moverthe Trackmobilethe company sells an aerial lift that is utilized during the construction phase of an ethanol plant and also for maintenance.

Combating Congestion
One of the drawbacks of rail transportation is, of course, congestion. "There's only so much track and only so many locomotives," says Steve Markham, merchandiser for Commodity Specialists Co.

In 2006, the seven Class 1 railroads invested a total of $8 billion in capital improvements to handle the expected increases in volume. "Even with all we are doing, it may not be enough to meet the expected demand," White says.

The Freight Rail Infrastructure Capacity Expansion Act could ease some of the pressure. If the federal legislation passed, it would provide a 25 percent tax credit that could be used to increase rail infrastructure or the number of locomotives, White says.
That tax incentive would be a huge boost, Markham says. It could drive customers, like ethanol plants, and those purchasing products to install better rail infrastructure.

As the ethanol industry grows, utilizing unit trains or shuttles is a good way to save money and time, he says. Currently, the industry ships several single cars of ethanol and distillers grains. If producers work toward using unit trains to ship the same product, they can get discounts and decrease shipping time.

Redding believes greater utilization of unit trains will be very important to the ethanol industry. "That will be the key but you have to have major markets to support unit-train logistics," he says. Currently, there are only three ethanol unit trains. However, more will be developed as the industry grows, he says.

While there is an opportunity to capture savings with the use of unit trains, there are a few drawbacks to shipping ethanol, corn or distillers grains via rail, says Paul Bertels, director of biotechnology and economic analysis for the National Corn Growers Association. Timeliness of service is one. To get better service, some customers are paying guaranteed car rates, which temporarily rose $588 per car above regular shipping rates after Hurricane Katrina last year.

Ethanol marketers and producers will likely continue to rely heavily on the nation's rail service, as the geography of ethanol demand widens and shifts.

"As the industry grows, it's going to more and more be railed out into these bigger markets," Redding says.

Holly Jessen is an Ethanol Producer Magazine staff writer. Reach her at hjessen@bbibiofuels.com or (701) 746-8385.