Stuck At The Station

Multiple factors, including winter weather and shale oil traffic, presented logistical challenges for dried distillers grains marketers and ethanol producers early this year.
By Chris Hanson | June 09, 2014

Cars, cars everywhere, but not an engine to pull them. This is one way to describe logistical challenges facing commodity producers and marketers during the first half of the year.

The effects of prolonged rail delays are felt across the commodity board, including the ethanol and distillers grains marketing industry. “From a DDG standpoint, it has made us more vigilant about cars continuing to move as we have ever been and avoiding the assumption that cars will move or locomotives will be there once the trains are built,” says Sean Broderick, distillers grains marketing manager at CHS Inc.

Before the congestion issues, Broderick expected an engine to arrive within two or three days. “For the past six months, as soon as I put that [billing] in, I have to start following up right away, because I know the delays we have had, even with the follow-ups, are going to be more than what they were before. There was a time where trains waited as long as 10 days.”

The Renewable Fuels Association started getting calls about poor rail service from member companies in late December and early January. “There were some companies that just couldn’t get any pickups, and, of course, we have limited storage volumes at our ethanol plants,” says Kelly Davis, director of regulatory affairs for the RFA. “So if things don’t run on time, ethanol doesn’t move. When ethanol doesn’t move, people don’t get paid.”

The delay pushed up prices. Between late December and early April, the RFA noticed how expensive ethanol was getting at destinations such as New York Harbor, she says, adding that gas price increases were blamed on the price of ethanol. “We felt that was disingenuous because we knew it was because we couldn’t get our product to market due to the poor rail service,” Davis says. 
Hitting The Brakes
The explanations for the delays can vary depending on the source. “We obviously had a harsh winter, and some of the railroads have pointed to that,” says Chris Bliley, director of regulatory affairs at Growth Energy. “But we continue to see declining service throughout the beginning of the year and it has really impacted supply. You see some plants idle some of their capacity, and whether that’s a backlog from winter or not, but our guys are experiencing problems getting crews out to trains and that’s the main issue.”

Harsh winter weather conditions play a large role in the congestion, especially in the Eastern U.S., where cold weather and deep snow caused delays and technical problems for the railroad companies, says Broderick. For instance, it caused issues with electrical rail switches, which leads to more manual switch operations and maintenance. “They had to have people onsite to make sure the switches were clear enough to work,” he says. 

Some railroad companies claim the longer stretches of sub-zero weather caused limited work hours for rail workers. “They had their service disruption excuses, but we were very upset about it, so the RFA became uniquely involved,” Davis says. “We contacted the American Association of Railroads and testified before the Surface Transportation Board, while at the same time our members continued to work with their rail suppliers for a solution.”

Although the harsh winter climates certainly slowed rail traffic to an extent, there may be larger themes affecting service. “I know there has been some snow in some areas, but certainly not like at the beginning of the year,” says Bliley. “So I’d say it is a bigger problem than just the weather.” 
As the warmer weather settles in, railroads that experienced winter issues come back to life. “I think the eastern railroads are going to be able to clear up their issues faster than the Burlington Northern, Canadian National and Canadian Pacific,” Broderick says. “Most of their issues were attributed to the cold weather. Now that’s behind us, they’re already making headway into most of the backlog they had.”

Increased traffic from North Dakota crude oil production also crowds rail traffic moving East and West, catching disdain from other commodity sectors. With crude oil moving out and oil drilling resources, such as frack sand, moving in, it has caused a bit of congestion, Broderick explains, slowing down trains trying to move through the Dakotas and Minnesota.

“At a certain point, Amtrack complained, coal was complaining, grain trains weren’t moving,” Davis says. “We had a bumper harvest, and if you can’t move grain, you can’t get paid. If it’s a commodity, you can miss the market, so to speak. So all the other commodities weren’t moving, but guess what was moving? Oil out of the Bakken.”

Another source of rail congestion lies among the rail yards of Chicago, one of the biggest interchanges between western and eastern railroads, Broderick says. At this interchange, trains bottleneck and slow movement to eastern markets and ports.

Rail maintenance schedules, especially with the western railroad lines, has the potential to continue rail delays well into warmer seasons. Railroad companies, such as Burlington Northern Sante Fe, use the opportunity to complete its maintenance-of-way programs to upgrade and maintain its systems. “Once we get to warmer weather, where you would ordinarily think [BNSF] might catch up since the cold isn’t causing them issues anymore, they are sort of in a type of road construction season,” Broderick says. “That’s work they do in the summer, at a time you normally expect to make headway. Our expectation is whatever headway they do make will be slowed by these projects.”

One such rail project includes a $400 million BNSF investment to maintain its rail infrastructure in North Dakota, according to an Amtrak press release. Along the routes between Grand Forks and Minot and Fargo and Grand Forks, BNSF will install new turnouts, high-speed surfacing, ballast cleaning, and replace ties, rail relays and signal upgrades.

Working Around The Rails
As railcars sit waiting for an engine to show, distillers grains producers and marketers eye other methods to get their product out. Some plants with the ability to sell into the local markets are certainly taking advantage of the opportunity, Bliley says. But that’s not always possible. “We really rely on the rail service and, unfortunately, some of these plants had to live with the delays.”

Others went to moving more product via truck. “Ethanol plants were doing all kinds of different things to get around delays,” Davis says, adding that different plants have different strategies. “When roughly 70 percent of your product runs by rail, moving by truck increases your costs.”

There was a distinct spread between netbacks to plants moving product by the rail market and those forced to sell into the truck market, Broderick says. “If you’re a guy that’s selling all you can in rail, and suddenly your railcars aren’t coming back and you’re making money grinding corn and making ethanol, you’re going to move the DDG at a price you probably wouldn’t ordinarily take,” he says. “But you’re still making money doing the whole process. It’s worth it for you to take a discount in a truck market and move it at a price lower than you’d like if you can keep the plant running and make up for it on the net dollars from making ethanol.”

For facilities located near river access, specifically around the Mississippi and Illinois Rivers, shipping distillers grains via barge may provide a seasonal option during warmer weather. “If the Gulf prices are such that you can pay a little more freight to load onto the Illinois than the Mississippi, then obviously you will do it. You’ll just have to figure out your best dollar value,” Broderick says. “In the winter, you don’t have the option of loading onto the Mississippi, so you’ll go over to the Illinois River and run down to the south in St. Louis, or you don’t go to the river.”

Facing It Head-On
To address the delay issues, the RFA and Growth Energy are voicing concerns to entities such as the Surface Transportation Board and American Association of Railroads. The RFA sent a letter to the AAR on April 3, pointing to the increase in railcars used to ship Bakken crude as a reason for other commodity rail delays. “We have an excellent relationship with our railroads. This just had to be called out on because of how bad the service was this past winter,” Davis says. “Since pricing has rebounded, cars are now moving. I’m not sure if there are any residual delays, but at the height of it, people were talking about delays lasting until summer.” 

To take pressure off BNSF’s North Dakota maintenance project, Amtrak agreed to detour its westbound Empire Builder train through North Dakota as part of a request from BNSF. “Local community and business leaders prize the Empire Builder and see Amtrak service as an important public transportation link,” says DJ Stadtler, vice president of operations at Amtrak as part of a May announcement. “BNSF needs to speed repairs and upgrades in order to return the Empire Builder to its previous reliability as fast as possible. We fully expect this work to be done by the end of September at the latest.”

Individual producers can also voice their concerns to legislators and railroad service providers. “This is certainly something being debated about in Washington, D.C.,” Bliley says. “You saw the Surface Transportation Board hold a hearing on it, you see some of the discussion in Congress. So I would certainly voice those concerns to members of Congress, and as a customer, I’d certainly talk to the railroads as well.”

Author: Chris Hanson
Staff Writer: Ethanol Producer Magazine
[email protected]