Getting A Move On

The United States has more than 200 years of experience in rail, so efficiency and optimization should come naturally—and for many it does. But with a rail system that is growingly congested, it's often impossible to give customers what they want when they want it. Fortunately, some Class 1 and short line railroad companies are investing with the ethanol industry in mind.
By Ron Kotrba | March 01, 2006
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Switchyard layovers, late deliveries and slow turnaround times: These are the usual suspects of rail system congestion and precisely the kind of transportation setbacks that sporadically beleaguer the U.S. ethanol industry.

America's crowded rail system is the target of frequent ethanol industry criticism and, of late, the subject of Internet market reports, one of which recently identified "snarled rail service" as the culprit of supply-threatening delays and higher ethanol prices. When rail deliveries get "snarled," it can quickly add up to what Art Wiselogel of BBI International calls a "logistics nightmare." He tells EPM, "If something gets delayed by an hour, the whole thing gets backed up."

Byron Stewart is all too familiar with that type of dilemma. As director of ingredient trading and transportation for United Bio Energy (UBE), one of the nation's largest ethanol and distillers grains marketers, Stewart has a good handle on the challenges of running a business that depends on rail. He says rail logistics, especially going out West have been extremely tight lately. "Going to California on Union Pacific, specifically [has been problematic]," Stewart tells EPM. "Weather problems in December increased transit times four to 10 days each way." These delays were specifically reported in editions of the OPIS Daily Ethanol & Biodiesel Report around the turn of the new year through mid-January. A representative from Union Pacific chose not to comment on these repeated reports of congestion.

UBE, which markets about 350 million gallons of ethanol annually and expects to double that capacity by the end of the year, would like to see to see a 50 percent improvement in railcar "turn" (i.e., the time it takes to get a railcar to its market destination, unload it and get it back to its point of origination). It's not only ethanol; in addition to railing approximately 8 percent of the nation's ethanol down the lines, UBE rails 1.5 million tons of distillers grains annually, too.

"What we would typically like to see is for our cars to move one turn a month, but we're seeing one turn every six weeks now," Stewart says. "Transit times are up, and there's an increased number of cars on the tracks."

Notably, the U.S. rail system is defined not just by more traffic, but more traffic controlled by few companies. A half century of industry consolidation has left the nation's rail lines in the hands of a small number of Class 1 providers. Fewer big players, some say, equals less competition—and that's rarely good for service.

According to Daniel Sabin, president of Iowa Northern Railway Co., 60 years ago there were approximately 200 Class 1 carriers in the United States. Now there are only eight. Sabin is among those who say the lack of Class 1 competition is a legitimate concern. If a single line is a company's only option for rail, for example, it will be in a less-than-ideal position to negotiate rates—or much of anything at all. "There needs to be an increase in competition," says a source who agrees with Sabin but asked to remain anonymous. "And there are more short lines showing up."

Short line, Class 1 solutions
There's a common "misconception" out there that short line railroads raise the cost of transporting products. "Short lines do add something to the cost structure," EPM's unnamed source says. "But the overall economics must be weighed out."

Sabin understands the issue as good as anyone, and he says the idea that utilizing short line railroads add to transportation costs is a myth. "The real case is exactly the opposite," he says. "On top of that, the level of service and attention to detail is an enormous added value for our customers."

In a state like Iowa, where Sabin says most ethanol plants are serviced directly by Union Pacific, his short line rail company, Iowa Northern, is giving options to those plants experiencing delays in the Hawkeye State and destinations beyond. "If you run an Iowa ethanol plant built on Union Pacific rail, you are limited in your destination points," Sabin says. "What customers of Iowa Northern enjoy is that we have multiple connections. We treat everyone equally. If there's a better market for your ethanol in New Jersey, for example, then we give the choice of five different routes to Chicago." In fact, virtually all eastbound freight must go through Chicago, and Iowa Northern offers several paths to get there.

Iowa Northern has several different ways to help expedite freight delivery. "Say, for example, you have a 100 MMgy ethanol plant [in Iowa]," Sabin poses. "You produce about 10 to 15 tank cars full of ethanol per day. When Union Pacific picks those cars up—either then or two weeks later—those cars are brought to the switching yard, where they are held until enough cars are accumulated for the duration of the haul."

On the other hand, Iowa Northern will consolidate traffic on its own lines, not in a switching yard. "We would consolidate on our lines until we get a 75-car unit train to Union Pacific. Of course, we would give them notice, so Union Pacific could be ready to receive those cars," Sabin says.

The point of all this, of course, is to cut costs, and Sabin argues that it does. He says the short line railcar consolidation option results in lower rental expenses for ethanol tanker cars. When cars are being rented for a given amount each month, time is money. Less congestion on the lines, in the terminals or switching yards means the faster these cars can be shipped out, received, emptied and shipped back down the line. In other words, if two hauls can be made in the time it typically takes to make one, then that capital expense for the car rental just went down relative to the company's overall income during that month's time. It would also reduce crew costs in knowing how many crew members are needed when, rather than bulking up the crew in anticipation of possible freight car handoffs.

Here's another idea: To help maintain fluidity on its rail lines as the ethanol industry continues to grow, Iowa Northern wants to develop a staging yard for railcar accumulation. Iowa Northern would ask each ethanol plant on the line to contribute to its construction. In turn, the contributing plants would not only reap the benefits of its operation, but they would also get reimbursed from Iowa Northern on a per car basis through its use. "For example, it could cost $4 million for a plant to build its own [staging yard], or they could contribute $2 million into a pool that they'd get paid back [on]," Sabin tells EPM. "This is unique because, by consolidating traffic in one yard, we'll be able to accumulate volume quicker."

Iowa Northern isn't afraid to spend its own money to enhance its rail infrastructure. "We just recently put down $20 million in track improvements, and we plan to put another $59 million down in the next couple of years," Sabin says. "In our five-year plan, we plan to spend more money per mile on tracking than any of the Class 1s out there."

Perhaps Sabin has the right idea. It takes discipline for a rail company to invest steadily in its infrastructure—essentially amounting to a rail company's bread and butter.

Burlington Northern Santa Fe Railroad Co. (BNSF) has stayed out of recent media reports on rail congestion circulating around the industry—and it's not by sheer luck. "We are proud to have maintained our fluidity," says Suann Lundsberg, manager of media relations for BNSF. "We invest in our network—the right amounts at the right times. You can't just keep throwing capital at it."

Surely capital helps, but it must be strategically placed when, where and how it's needed. "You know, when you put it all together, it's all about anticipation and action," says Bob Kelly, BNSF director of Bulk Foods. Accurate analysis on behalf of the railroad companies to precisely forecast exactly what parts of the infrastructure will need certain improvements, expansions or upgrades is critical, and it's something that BNSF prides itself in doing. "We've got a whole team of analysts that just do this type of projection forecasting," Lundsberg says.

One might suggest that BNSF maintains fluidity because its lines don't see as much traffic as other Class 1 providers—but they'd be mistaken. "In 2004, we did 10 percent more volume than in 2003," Lundberg tells EPM. "And in 2005, we did 5.1 percent more volume than in 2004. We've had growth in every division of the company."

In 2005, BNSF made $2.1 billion worth of investment in shared track improvements. In 2006, BNSF will spend $2.4 billion more in capital expenditures for rail infrastructure improvements.

"We now have access to 85 percent of the ethanol production in the U.S.," says Angela Caddell, BNSF manager of Ethanol and Sweeteners. "Our network extends from Chicago to New Orleans and everything west."

BNSF has also moved to covered hopper cars, allowing more product to be transported in each car, Kelly says. Iowa Northern, too, has interesting ideas for its hopper cars.

According to Sabin, Iowa Northern is trying to incentivize its customers to use its DDGS cars for inbound corn, after which the plant could load its DDGS right onto the empty car. "There would be a freight rate reduction on the inbound corn," Sabin says. "But the cars can only be filled up to about 80 percent," mainly due to the difference in car sizes for corn and distillers grains. However, Sabin says this opportunity would open the door to advantageous alliances for corn origination, continuing to help set low costs for feedstock procurement.

Evaluating options
Although ethanol supply shortages stemming from late rail deliveries look to be a double-edged sword—meaning that ethanol prices rise when supplies are tight—that might be one way to boost profits that producers and marketers want to steer clear of. "On the other side (of higher ethanol prices), that could mean if the oil companies can't get consistent supplies domestically, they might start looking into barging some ethanol in from Brazil, or somewhere like that," Wiselogel forewarns.

Of course, rail line congestion caused by weather or terminal delays—whether that's at intermodal terminals or not—is likely to worsen as more and more ethanol plants come on line in the next five years. That's not taking into consideration projected growth in other industries requiring even more freight rail cars on the tracks. One option for new ethanol plants, or plants in existence looking to reevaluate their transportation arrangements, is to hire a rail consulting company like Antioch International Inc. "We are a civil engineering firm," says Blane Pound, director of Antioch's business development team. "We go in and work on the rail infrastructure for an ethanol plant, which will allow for receiving and loading, and moving those railcars out. We also coordinate between the plant owner and the railroad carrier."

Another option, if it's viable, is simply to truck ethanol and distillers grains to nearby markets when available. The point at which trucking ethanol is no longer an economical option is often found between 500 and 600 miles from the plant.

Ultimately though, an entirely new infrastructure may be the best option. An integrated pipeline/rail system is entirely feasible in the near future, especially as U.S. production numbers increase. "In certain parts of the country like in Minnesota, for example, there's an ethanol plant almost every 30 miles or so. A pipeline running down that type of corridor is definitely a possibility," Wiselogel tells EPM. There's chatter that the Big Oil companies are making a push to get a pipeline system for ethanol going. In this design, ethanol plants could transport their denatured fuel virtually trouble-free to a common pickup point, after which a large Class 1 carrier could efficiently load unit trains full of ethanol for those long hauls down the line.

Ron Kotrba is an Ethanol Producer Magazine staff writer. Reach him at [email protected] or (701) 746-8385.