LEGISLATIVE COMMITTEE HEARS FROM STEVE BOBB (3-20-02)

           Tensions were high as the North Dakota Interim Legislative Agriculture Committee met on February 27 at the State Capitol in Bismarck.  Sole item on the agenda was the committee’s study into railroad rates and practices.  Leadoff witness was BNSF Ag Products Vice President Steve Bobb.  His presentation promoted shuttle trains and attempted to show there were no adverse effects from BNSF’s inverse rates on wheat to the West Coast.

A very revealing point of the hearing came when Richardton area farmer Craig Fisher told of how those inverse rates caused him to truck his wheat 170 miles east to Jamestown for loading on a shuttle train to go back west past his normal delivery point of the Southwest Grain Terminal near Gladstone.  Fisher said he didn’t want to do that, what with time and wear and tear on his equipment involved, and bypassing his local business, but it gave him the best price on his wheat.  Steve Bobb said he would have to look into the matter because he didn’t want to be hauling wheat for less from Jamestown than he could haul those same bushels from Gladstone.

Committee member Senator Bill Bowman of Bowman, ND has been an outspoken critic of the inverse rate, which means farmers and elevators in his west end of the state pay more to ship grain to the West Coast than is charged for grain from eastern North Dakota and western Minnesota.  He says this has robbed western North Dakota farmers of markets they have developed and traditionally served, and has had a significant depressing effect on wheat prices. 

Southwest Grain Cooperative Grain Merchandiser Jim Bobb, a cousin of Steve Bobb, confirmed the market distortion by saying his cooperative’s grain volume is down 20% from a similar period a year ago, which he blames on the inverse rate. 

            Senator Bowman questioned Steve Bobb pointedly about rate-setting by railroads.  Bobb said they had to meet the competition.  Well, asked Bowman, what about where there is no competition, like western North Dakota.  Bobb basically admitted they charge what the traffic will bear. 

Steve Bobb had actually set the stage for a high tension hearing when, in his opening remarks, he said North Dakota is simply against change.  He said North Dakotans opposed unit train rates 20 years ago, the COT program, and now shuttle trains.  Public Service Commissioner Tony Clark rebutted the accusations by stating that a definite pattern was showing, but that it wasn’t of resistance to change; instead it is a monopolistic railroad trying to impose its programs on captive producers and elevators. 

            Grain Dealers Executive Vice President Steve Strege pointed out that on a Fargo area radio talk show the previous Friday, Mr. Bobb had singled out the ND Grain Dealers as opposing change, opposing any innovative concept the railroad had come up with.  Strege thanked Mr. Bobb for the recognition of the key role the Grain Dealers Association had played in resisting changes like wholesale abandonment of branchlines and the car auction program that pits one shipper against another while the railroad controls the car supply faucet.  He said the BN had more money and more lawyers to outlast the grain industry, including the National Grain and Feed Association and some large grain companies in the COT case, and that after seven years the grain industry just quit.

            At one point during the hearing, Bobb said “macroeconomic forces” were driving the conversion to shuttle trains.  He denied BNSF had anything to do with it, or that it was putting in any “upfront capital”.  Committee members seemed unconvinced.  Representative April Fairfield of Jamestown asked Bobb if he was “a pawn or a predator” within the “macroeconomic forces.”  Strege read to the committee from a July 1999 North Dakota newspaper report in which an official with a company building a shuttle facility had stated:  “The railroad is driving this.  Without their incentives this would not have happened.  They’re giving us a hell of a deal.”

            Steve Bobb said that BN had decided back in the 1980’s to get away from secret contracts and go to transparent rate-making.  His intentions were questioned later in the hearing when someone asked why these inverse rates are in secret contract. 

Steve Bobb might have been surprised at the level of discontent these rates have generated.  Upper management, half the Board, and a number of other patrons from Southwest Grain were at the hearing.  Grain Dealers was there in force with five people.  The Governor’s office, Public Service Commission, Ag Commissioner, Wheat Commission and others testified in opposition to what BNSF is doing.  Public Service Commissioner Tony Clark’s testimony is printed elsewhere in this issue. 

Southwest Grain Cooperative General Manager Bob Stevens, with a shuttle facility near Gladstone, ND and another going up at Lemmon, SD, said the railroad is transferring markets developed by western North Dakota and Montana, to the east.  He said there is a difference in the quality and milling characteristics of the production from these areas and that (by trying to fill markets with something different) we risk losing market share to Canada. 

Jim Bobb said the shuttle train concept for spring wheat is a little baby.  He warned easterners that there are few destination markets that take shuttle trains of spring wheat.  He said the BNSF has used the PNW market to keep the eastern shuttle loaders going, robbing western shippers of their usual markets.  If people are building shuttle facilities for spring wheat, they better take a look at destination markets, he said, there are no mill markets in the U.S. that take shuttle trains.  He also said that competing non-shuttle elevators in the east are vulnerable to this use of the shuttle concept. 

Jim Bobb also brought up the significant but unexplained difference in rates between different crops.  Why, he asked, does it cost him $120,000 more to ship a wheat train west than it would for corn or barley.  He said the wheat rates are high enough to allow for the inverse rates.   

From Governor Hoeven’s office, Policy Advisor Ron Rauschenberger said Hoeven has been in contact with other Governors around the region and that a joint letter of concern to the BNSF is being circulated for signatures. 

Ag Commissioner Roger Johnson stated that the National Association of State Departments of Agriculture had addressed rail issues at its meeting the previous weekend and had adopted a resolution calling for equitable treatment of all shippers. 

Wheat Commission Administrator Neal Fisher reported some Asian market complaints about the milling characteristics of wheat they have been receiving off the PNW Coast.  It is not yet confirmed, but Fisher thinks this could be related to eastern North Dakota and western Minnesota wheat moving into those markets, instead of the traditional supply from western North Dakota and Montana.  Fisher emphasized that he wasn’t saying the eastern wheat was of lower quality, but it is a different quality, and mills differently because of the differences in climates under which the two are raised. 

            Steve Bobb claimed that the PNW wanted more wheat than was available in Montana or western North Dakota, and so he had to put in lower rates from the east in order to fill the demand.  He did not mention the Montana Ag Statistics report showing 79 million bushels of spring wheat stored in Montana in December 2001, or the millions of bushels stored in western North Dakota.  State Senator Ron Nichols of Palermo asked if PNW buyers wouldn’t have had to bid up to get more grain had the inverse rates not been put in.  Bobb said the business would have gone to Canada.

            State Representative Mike Brandenburg of Edgeley said he is concerned about BN’s new tactics wiping out elevators, jobs and the tax base.  He cited a widening spread in the rate between his local elevator, of which he is a director, and a shuttle loader 40 miles away.  Bobb said the FOB values are the same and so there had been no impact.  Brandenburg cited volume figures that showed otherwise.  His elevator invested heavily in its station on the Red River Valley and Western Railroad, that feeds the BNSF.  Edgeley could have made these improvements at one of two stations they have on the Dakota, Missouri Valley & Western.   Now, said Brandenburg, the BNSF takes grain away from them with discriminatory rates.  (Steve Bobb had said in a recent newspaper article that Edgeley was a victim of its own poor planning.)

            State Senate Minority Leader Aaron Krauter of Regent accused BNSF of taking over the marketing process and being the exporter and the handler.  Bobb said the majority of their revenue comes from the shipper and it is not BNSF’s place to get in between the shipper and the exporter. 

            At one point during the meeting, Steve Bobb said, “We have not been very good at raising rates.”  This probably didn’t score many points with Committee members.  Bobb said they had cut costs.  This prompted Grain Dealers Association President Keith Brandt to ask why all rates hadn’t been going down.  Brandt also made reference to the many times Steve Bobb talks about taking care of Wall Street and stockholders.  Brandt quoted the new CEO of Ford Motor Co as saying a company should take care of its customers first and then the stock will take care of itself.   Grain Dealers Director Todd Vogel said his elevator at Marion had spent money to upgrade for unit loading on BNSF, later becoming an RRVW line, but then couldn’t remain competitive with high priced COTs.   Lack of volume and serious roadbed problems have since led to the line being abandoned.

            Mr. Bobb told the Committee that BNSF was hauling 40% of its grain volume in the 5,500 cars dedicated to shuttle train service.  The other 20,000 cars picked up the rest.  Strege said that much of this efficiency difference is explained by the railroad’s concentration on shuttle service, while leaving other trains and cars sit at the elevators or on sidings or in rail yards so that shuttle trains can be pushed on through.   It is the railroad that controls the efficiency.  He said if BNSF would spend as much time and effort on working with its current customers, for example co-loading of shuttle trains, as it does on pushing the shuttle concept into areas where it doesn’t make sense, by manipulative rate schemes, the railroad could gain efficiencies and much of the current elevator system could be maintained to service farmers. 

            Bobb said they had tried an extensive program of co-loading in the mid 1990’s, but lost market share to the Union Pacific.  It was later pointed out that the closest Union Pacific tracks are some distance south of North Dakota and so the comparison is invalid.  All other railroads in North Dakota, except BNSF, do co-loading.

            The state’s authority over railroads doing business in interstate commerce is limited.  The Public Service Commission is the designated agency to represent the state in railroad matters such as at the federal Surface Transportation Board.  That does not preclude other state officials such as the Governor or Ag Commissioner or Attorney General from becoming involved. 

Public Service Commissioner Tony Clark stated in his testimony that in the 2001 legislative session a PSC request for $100,000 to look into bringing a rail rate complaint to the STB was turned down.  The railroads had lobbied against it.  Sentiment at the Interim Ag Committee seemed to be that the rejection of that funding had been a mistake, and that getting something going like that should be taken up again.

            State Representative Rod Froelich of Selfridge asked a number of questions about the amount of property taxes BNSF pays in North Dakota.  A representative of the Tax Department was called to the hearing to explain the formulas for assessment.

            State Representative Phil Mueller of Wimbledon said the BNSF is certainly not talking fairness when it put programs in place that bypass its own 52-car loaders.  He also brought up co-loading.  Steve Bobb said he doesn’t know what was said by whom about the duration of 52 car trains being “top dog”. 

            Strege urged continued joint action with other states through Governors, Public Service or Utility Commissions, Ag Commissioners, and the Conference of State Legislatures.  Support of federal legislation to provide more oversight on the railroads is likely necessary, and should be supported by state government and the Congressional delegation he said.

            The Committee plans to meet again in April regarding the railroad issues.  It is scheduled to meet again in March to take up one of its other studies, on genetically modified crops.