Grain Dealers/Alliance Testimony at Dorgan Hearing (3/27/02)

UNITED STATES SENATE

  COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION

HEARING ON RAILROAD ISSUES

SENATOR BYRON L. DORGAN PRESIDING

MARCH 27, 2002
STATE CAPITOL BUILDING, BISMARCK, ND

TESTIMONY OF  

NORTH DAKOTA GRAIN DEALERS ASSOCIATION
and
ALLIANCE TO KEEP RURAL AMERICA ON TRACK

PRESENTED BY
STEVEN D. STREGE, EXECUTIVE VICE PRESIDENT
NORTH DAKOTA GRAIN DEALERS ASSOCIATION
118 BROADWAY, SUITE 606
FARGO, ND  58102
701-235-4184 PHONE
701-235-1026 FAX

Thank you Senator Dorgan, Chairman Hollings and the entire Senate Commerce Committee for holding this hearing on issues so critical to not only this state, but also the region and nation as well. 

My name is Steve Strege.  I am the Executive Vice President of the North Dakota Grain Dealers Association, a 91-year-old voluntary membership trade association in which approximately 90% of our state’s grain elevators hold membership.  I’ve been with the Association since 1976 and have watched railroad matters with keen interest for more than 25 years.  The Alliance To Keep Rural America On Track is a much newer organization.  It was formed in November 2001.  It includes every major farm organization and commodity promotion group in this state, as well as other ag-related organizations, and some groups from other states.  A membership list is attached to this testimony.  Members of the Alliance recognize the adverse long-term consequences of what the Burlington Northern Santa Fe Railway is doing at the present time in this state and region.  The Alliance was formed to alert the public to these dangers, to make a broader appeal to the railroad to change its ways for the betterment of its customers, and to bring local, state and federal elected officials such as yourself into this situation.  If prodding the BNSF to change its ways does not work, this group will be forced to consider other measures such as federal legislation or a formal complaint to the Surface Transportation Board, or the courts. 

INVERSE RATES

Our primary focus today is on inverse rates, the unusual concept that grain elevators and farmers who ship their grain a shorter distance should pay more than those who ship a longer distance.  Inverse rates distort markets and traditional grain flows, period.  They cannot be explained away by calling them “differential pricing.”  The BNSF claims no market distortion.  It is hard for us to believe that reversing the normal mileage-based rates, to create a disadvantage for western shippers for westbound movements, doesn’t distort markets.  It is also hard to believe that changing the cross-country freight differentials between two elevators from five cents per bushel to around 30 cents per bushel over a distance of 40 miles (Edgeley, ND – Jamestown, ND), or from 15 cents to around 35 cents across a distance of 20 miles (Portland, ND – Alton, ND), doesn’t distort markets.   Adversely affected elevators managers can tell you it definitely does.

The BNSF says these inverse rates from eastern locations are necessary to supply needs of the PNW export market.  That is simply not true.  According to the Montana Grain Growers Association, quoting the Montana Ag Statistics Service, there were 79 million bushels of spring wheat in Montana on December 1, 2001.  Millions more bushels are in western North Dakota.  But yet these areas are the very ones disadvantaged by BNSF’s inverse rate scheme.  If the Pacific Northwest market actually needed more bushels, then let it bid up the price to get them.  This BNSF manipulation of rail rates has a price-depressing effect for farmers and elevators normally serving that market. 

We believe there is a more sinister motive at BNSF for its inverse rates.  That is to artificially promote the building of shuttle train loading facilities in other parts of this state and western Minnesota, with the eventual goal of closing other grain elevators in those areas and abandoning branch lines and short lines.  The process goes as follows:  Give a super special rate to a selected few shuttle train loaders in eastern North Dakota and western Minnesota, and prioritize their service.  This takes grain volume away from existing elevators, jeopardizing their very future.  Then when the volume from those elevators goes down, the railroad will say it can no longer operate the branch line, and so it will be abandoned.  Some elevators will close, some others may exist as receiving stations for the shuttle train loader.  The end result is less competition out in the country for the farmers’ grain, longer hauls for everybody, a huge impact on roads and the taxpayers who fund them, and further deterioration in rural communities.  Meanwhile the grain in western North Dakota is held hostage to much higher rates.

DISHARMONY WITH CUSTOMERS AND MARKETS

BNSF is being irresponsible to its present customers.  BN encouraged investments in unit train facilities of 26/27 or 52/54-car capacity.  The larger ones were the cream of the crop.  Now they are second-class citizens because BNSF wants to emphasize shuttles.  We are not against shuttles, or reasonable and consistent rate spreads between shipment sizes.  What we oppose is the artificial manipulation of incentives and rates to benefit a very few at the expense of the very many. 

In round numbers, of the 230-some North Dakota grain elevators served by BNSF and its shortline affiliate the Red River Valley and Western Railroad, about 60 load 52/54-car trains and another 50 load 26/27-car trains.  Only nine load shuttle trains.  Although the details are kept secret, it is commonly understood in the grain trade that only three of the nine have the special inverse shuttle rate.   The BNSF caters to a couple percent of its grain elevator customers, to the disadvantage of all others. 

Our domestic milling market is primarily for 26-car trains or less.  It is not for the shuttle trains BNSF is pushing.  BNSF has said that it will always have single, 26-car and 52-car rates for niche markets.  (Niche markets don’t take 52-car trains.) But if BNSF continues to push grain to shuttle train loaders through its discriminatory rates and service priorities, these other elevators can’t exist on the dribblings. 

There is sometimes a misconception that the struggle in our state over inverse rates and shuttle train loading is between modern shuttle loading facilities and small dilapidated elevators that have had their day and are no longer useful.  This is not true.  Many of the grain elevators being jeopardized by BNSF’s new schemes are huge modern facilities that have kept themselves up to date for not only their own efficiency, but also for the railroad’s.  Millions of farmer dollar investments in their local cooperatives will be lost if these are put out of business. 

EFFICIENCIES

BNSF claims great efficiency for its shuttle trains, and says other trains cycle much more slowly from origin to destination and back again.  Well, whose fault is that?  It is the railroad’s!  When the railroad lets unit trains and other smaller shipments sit loaded for days or weeks at the elevator or in rail yards, while pushing shuttle trains on through, the cycle time differences are grossly exaggerated.   It is nearly all under railroad control.  In fact, according to the BNSF’s Fleet Performance Report, available on its website, the loader and unloader actually have control of a railcar about two days each, while the railroad has it the other 22 days of, for instance, a 26 day cycle time. 

DELAYS AND DEMURRAGE

Another aspect of efficiency is demurrage, a charge to shippers for delaying railroad equipment.   We agree with the railroads that there have to be limits on how long a shipper or receiver can hold a railcar.  But there should also be responsibility on the railroad to pull the cars in a timely manner once they are released.  Elevator managers and employees are all-too-familiar with loading cars on weekends or holidays, sometimes in terrible weather conditions, only to see the loaded cars or train sit for five or seven or 10 days before being pulled away.   The BNSF might say these trains or cars are waiting for “matches” of other trains or cars to go off to destination.   If more effort was made, and more sophisticated computer technology and management time was applied to this situation, we believe it could be improved significantly.  And, if shippers must pay penalties to the railroad for delay, then the opposite should be true also.

CO-LOADING

The BNSF could cooperate with its present elevator system and gain shuttle train efficiencies by allowing co-loading of shuttle trains.  This means allowing two or more elevators to contribute loaded cars to that long train.  Four of the five railroads operating in North Dakota do co-loading.  Only BNSF does not.  The Canadian Pacific and its two short line affiliates work with their customers in co-loading.  The BNSF has allowed the Red River Valley and Western short line affiliate to co-load for about the past three years.  But that ends on June 30, by order of BNSF.  We’re told there is co-loading of BNSF equipment on the Dakota, Minnesota and Eastern, and the CN-IC.  That too may be expiring.

RATES AND PROFITS

Our Association and Alliance favor lower rates.  But we think they should be spread around so that everyone can benefit.  The BNSF’s current plan for elevator industry concentration will result in relatively few farmers, who are close to those remaining facilities, maybe getting a better deal for a short time.  Others from farther out will burn up any advantage in trucking costs, time and road maintenance.  Then when the other elevator competition is eliminated, the BNSF will have no reason to give preferential rates to anyone.  Less competition among buyers will mean less incentive for them to pass on any savings.  Farmers and rural America lose out, while BNSF pads its already hefty profit margins on our grain. 

Those profit margins are substantial.  The revenue to variable cost ratios on many North Dakota grain rail movements are far in excess of the 160% standard of adequate profitability.  This is confirmed by the inverse rate scheme.  If BNSF can afford to haul farther for less money, then its higher rates for the shorter distance shipping are even more out of line. 

INTERIM AG COMMITTEE

One month ago today the Interim Ag Committee of the North Dakota Legislature held a hearing on rail rates and service, much as we are doing today.  For the record, I am attaching the minutes of that meeting to my testimony, and also attaching an article from our Association’s March Grainmen’s Mirror magazine about the hearing.  Southwest Grain Cooperative Grain Division Manager Jim Bobb’s comments at that hearing about there being few markets for wheat shuttle trains and that the BNSF is shifting the PNW market to eastern shuttle loaders who would otherwise not have sufficient volume, confirm what I said previously about the unspoken BNSF motives with the inverse rates. 

An exchange between Senator Bill Bowman and Steve Bobb of BNSF at that hearing confirms that the railroad will charge whatever the market will bear when it has the opportunity. 

Not only is BNSF distorting markets here at home, it is also jeopardizing our hard-won markets overseas.  North Dakota Wheat Commission Administrator Neal Fisher stated at that Ag Committee hearing the Commission’s concern that there be no quality disruptions.  Asian buyers are accustomed to certain milling characteristics in wheat from usual sources of supply in western North Dakota and Montana.  This is not to say that our eastern wheat is inferior.  It is just different, because it is raised under different climate conditions.  But buyers notice these things. 

SCOOTS

Another discriminatory car supply program being developed by BNSF is called Scoots.  They’ve been called the domestic equivalent of the 110-car shuttle train program.  BNSF first indicated these would be 58-car trains.  But they are available to only 110-car shuttle loaders.  This is a new and higher level of discrimination and manipulation. 

Several of us in this room challenged BNSF on this, questioning why 52 and 54-car loaders who could accommodate 58 cars would not be eligible.  The latest from BNSF is that Scoots will be in the 65-68-car range, but still available to only 110-car shuttle loaders.  This is like requiring a person to drive an 18-wheeler to get a week’s worth of groceries.  This kind of discrimination should be flat-out illegal.

MARKET FORCES CIRCUMVENTED

Market forces are not at work in creating the inverse rates or the BNSF push for shuttle trains.   It is well known in the grain trade that BNSF provides facility-building incentive to some but not others.    At the Ag Committee hearing, Mr. Steve Bobb denied putting any upfront capital into new shuttle loading facilities.  But that doesn’t address the upfront commitments to provide rebates later.  BNSF says it is not driving these changes.  But that is contradicted by an article from the July 3, 1999 Hillsboro (ND) Banner in regard to the planned construction of the Alton Grain Terminal near Hillsboro, ND, quoting one of the directors of the Halstad, MN elevator, a significant owner in the facility:

 In fact, Lovas said, it was the railroad that was pushing the project.  “The railroad is driving this.  Without their incentives,” he continued, “this would not have happened.  They’re giving us a hell of a deal.”  BN-Santa Fe has assured board members that it will “protect” the rates it will give the terminal for a 75-mile stretch of track.

I would also like to submit for the record a copy of the article from the February 3 Bismarck Tribune titled “Alliance claims railroad out to bust rural ND”.  The article states that Steve Bobb said BNSF has provided incentives to build all ND shuttle loading facilities.  I don’t know if that is true in every case, but it surely tells the direction BNSF is headed and willing to push for.  This is the same article in which Steve Bobb said the elevator in Edgeley is a “victim of its own poor planning” for upgrading to 52/54-car loading a few years ago on the RRVW in order to feed the BNSF more traffic.  It could have upgraded on a Canadian Pacific short line.        

THE FEAR FACTOR

As the railroad has become bigger, more dominant, and more demanding, shippers and receivers become less willing to speak out in public forums like this one about their problems with railroads.  Some will say privately that they disagree with the railroad’s direction and the investment requirements.  But for fear of reprisals or being left out of the next deal to come along, they decline to speak in public.  Maybe some of that silence is breaking.  Perhaps the formation and growth of our Alliance To Keep Rural America On Track has given more people a flag to rally around and encouragement to speak out.  But many shippers remain apprehensive. 

WHAT IS TO BE DONE

You, Senator Dorgan, have been engaged on these issues for a number of years and for that we thank you.  You have been in contact with the BNSF on these current problems and arranged for this hearing to shed more light on the topic, provide additional encouragement to BNSF to mend its ways, and establish a record of abuse to document the need for change in regulatory oversight, should the railroad continue to think about only itself.  Senator Conrad and Representative Pomeroy have expressed their strong support for our efforts.  Governor Hoeven has met with BNSF officials and is forming a coalition of regional Governors to address these issues.  Our PSC, Ag Commissioner, Tax Commissioner, and many state legislators are involved.  

Unfortunately, the BNSF’s response so far has been to tell us we are simply against change. 

You have introduced the Railroad Competition Act of 2001.  It provides some needed changes like elimination of the phony revenue adequacy test, and putting into law the elimination of product and geographic competition in the market dominance test.  Shippers desperately need an inexpensive and quick way to resolve disputes with railroads.  The size of the railroads and their ample number of attorneys tilts the table in their favor.  Somehow the interests of shippers and shipper groups must be strengthened when dealing with railroads.

Perhaps there needs to be some restrictions on contracting for rail grain movements, or at least greater public disclosure of the provisions.  I’ve watched the process move from no contracting to contracting with disclosure of terms.  Then we went to contracting with hardly any disclosure.  Now, what little disclosure there is can come after the movement is completed.