Introduction

The agricultural sector attributed 11 percent of North Dakota's gross state product in 1996 (U.S. Department of Commerce, 1999). The state's agricultural sector includes production and processing activities. A majority of the average 600 million bushels of grain and oilseeds produced annually by North Dakota farmers is marketed to destinations beyond the state border, with a small population of local processors and feeders consuming a limited share. Domestic and foreign destinations are unique for each commodity and fluctuate with supply and demand conditions. Therefore, an efficient and flexible grain logistical network is critical for future success of this industry.

The North Dakota grain industry has evolved from early days when horses and wagons were used to deliver grain to a large population of single rail car elevators to today's market where truck deliveries are made to a rationalized local market. This market includes local processors and elevators -- some with no access to rail and others with differing capabilities for rail loading, such as single-car, multicar, unit train, and, most recently, shuttle trains. Single-car elevators are those equipped to load up to 24 cars without a railroad switch. Multicar elevators can load 25 to 49 cars without a switch. Unit train facilities have track capacity to load 50 cars or more, without a railroad switch. Shuttle facilities can handle more than 100 cars, and are eligible for railroad efficiency programs described later in this section.

Approximately 1,800 elevators were in business within state borders in 1922. On average, these elevators housed storage capacity of 30,000 bushels and drew from a 250 square mile trade area (Ming and Wilson, 1983). For the 1999-2000 crop year, the North Dakota Public Service Commission reported that 443 facilities in North Dakota were licensed to buy grain. The average storage capacity for these facilities was 551,000 bushels. Based on discussions with several North Dakota elevator managers, today's unit train¹ facilities draw from approximately a 45-mile radius or a 6,362 square mile trade area. A 2000 survey of North Dakota elevator managers suggests that elevator numbers will continue to decline, with respondents predicting that more than 25 percent of the elevators currently operating in the state will discontinue business over the next decade.² Declining elevator numbers and increasing size of elevator draw areas illustrate the impact market influences, such as technological advancements, government policy, and investment decisions, have in shaping the local infrastructure.

The North Dakota grain industry competes for markets and investment dollars in a world market. The decisions made in production, marketing, infrastructure, and equipment investments influence the ability to retain and attract resources and investment dollars, which are crucial to North Dakota's continued success in offering competitively priced products that meet customer demands. As technological advancements are made and market information exchanges become more liquid, producers and agribusinesses continue to seek to incorporate efficiencies into their marketing channels. The marketing channels cover a vast array of supplier and customer relations, from on-farm feeding operations to large-volume international buyers.

An important component in each of the marketing channels is the physical delivery, or logistical flow, of the product. Although many factors are encompassed in the logistical flow of a product, a primary factor for grain marketing in a rather homogeneous, bulk product fashion often is the freight rate. For example, consider freight costs for a bushel of wheat grown in western North Dakota and purchased by a buyer in Taiwan - delivery via Portland, Ore. The farm-to-elevator freight cost is estimated to be $0.12 per bushel, assuming a 20-loaded mile trip (Vachal, et. al, 1996). Rail freight from western North Dakota to Portland is $1.21³ per bushel. Ocean freight from Portland to Taiwan is approximately $0.45.⁴ In a simplistic transfer, considering only acquisition price and freight, given a Minneapolis futures price of $3.50 per bushel and the total freight costs of $1.78, freight would account for about one-third of the delivered cost of that bushel of wheat. This hypothetical sale illustrates the importance of freight rates in this type of supplier-receiver relationship.

Railroads play an important role in many grain transactions, offering a for-hire alternative to move grain from supplier to customer. Railroads have developed a multitude of rail services to attract grain business, differentiating service and price based on factors such as competition, equipment, service requirements, and operational efficiency. These differentiated rate levels affect competitiveness of rail service for a commodity and route, relative to other modes and markets, and influence the investment decisions of customers. Shuttle trains are one alternative in the multitude of service options that rail carriers offer their grain customers.

Shuttle trains offer rail carriers operational savings, which can be reflected in rates spreads (Vachal, et. al, 1998). The potential impact of shuttle train marketing on the North Dakota grain-gathering network is of interest in this study. Class I railroads serving North Dakota elevators -- the Canadian Pacific Railway (CPR) and Burlington Northern Santa Fe (BNSF) -- offer shuttle train programs to their customers. The BNSF serves seven shuttle-equipped facilities in North Dakota with two additional facilities expected to be on line this fall.⁵ The CPR currently does not serve any shuttle-equipped facilities in North Dakota, but does market a shuttle program with provisions such as co-loading, which allows its customers to compete in markets eligible to receive shuttle trains. No shuttle facilities are currently located on any of the three short lines operating in North Dakota.

BNSF shuttle train service is offered via auction as a "rail transportation package." This shuttle service may be applied to eligible origins and destinations. Primary destinations are export facilities, with a limited population of domestic processors and feeders also equipped to receive this type of shipment. Shippers may order a package of 6, 12 or 24 trains of 100⁶ cars. These trains are to be used consecutively under railroad specified loading, unloading, testing, and billing guidelines. The railroad estimates turn times at approximately 11 days for a North Dakota-Portland trip (Bobb, 1999). Therefore, a buyer who commits to the minimum six-trip package will be required to load 2.7 trains per month. The six trains, or 600 cars, would equate to approximately two million bushels of wheat.

Beyond the published tariff rates spread, performance incentives and penalties are specifically defined for the shuttle train program. The origin efficiency program (OEP) offers shippers a $100 discount if they meet certain loading time, electronic billing/payment, and origin weight requirements. An additional $100 discount is offered to receivers who meet specified requirements. Penalties include: $1,100 per hour for late release of cars by shipper/receiver; a cancellation fee of $100 to $300 per car per train for shipper; and a late placement penalty of $0 to $2,200 to be paid by the railroad for late placement of cars.

Existing facility infrastructure, economic incentives, investment requirements, and financing packages are unique to each shuttle venture. Based on a feasibility estimate developed for a green field facility, approximately a 10 million bushel handle was required for profitable returns (Vachal et.al, 1998). Discussions with grain companies and railroads suggest a target of 12 to 15 million bushels for a shuttle facility. This bushel requirement compares to the current average annual handle of 1.2 million bushels for the North Dakota elevator population, and average annual handle of 5.6 million bushels for the state's largest elevators. Therefore, redistribution of bushels in the local elevator industry seems imminent. Currently rate/efficiency incentives for a 24-trip shuttle train were estimated to be 15 cents per bushel. In the context of rail rates, an elevator housing a 50-car facility at Jamestown, N.D., would pay $1.21 per bushel to ship a unit train of wheat to Portland. A 100-car facility at Jamestown would pay between $1.06 and $1.14 per bushel to ship a shuttle train of wheat to Portland, depending on how the shuttle advantage is shared between origin and destination.

Table 1. Distribution of North Dakota Elevator Population and Bushels, by Average Annual Handle

Based on discussions with industry experts, this rate advantage allows an elevator to expand its draw area by 25 percent, to 60 miles. This compares to the 45-mile draw area attributed to a unit train elevator discussed previously in this report. The additional 15 miles expands the estimated facility draw area to 11,310 square miles, a 77 percent increase in the area included in the elevator draw area, compared to the unit train facility. Theoretically, this suggests that the shuttle may have substantial influence in shaping the local grain industry in North Dakota.

Implications

The rate advantage available to the shuttle-equipped facility has implications for producers, elevators, local processors, rural communities, and local and state governments. Just as unit train rates were instrumental in redefining local grain flow patterns in the 1980, shuttle train rates too have the potential to dramatically influence local grain distribution patterns. As grain is transferred among markets and modes, a new pattern of grain flows will be established in the local grain market. This pattern will determine infrastructure employment for local grain market, and provide signals for decision makers in establishing policy and distributing limited resources to maximize returns to the user group.

Objectives

In looking to the future of North Dakota's local grain industry infrastructure it is important to (1) view our local infrastructure as part of global grain marketing network (2) determine, with the best current knowledge, what resources our segment of that much larger network will require, and (3) rationally allocate available resources to maximize returns to our segment of the network. In support of these efforts, the objective of this study is to provide a market-based synopsis of the potential impact of shuttle train shipments on North Dakota's local grain industry. Secondary objectives are to (1) profile the local grain procurement network, (2) develop alternative network scenarios to analyze the influence of shuttle trains, and (3) discuss the longer-term implications of shuttle trains for North Dakota's grain industry and infrastructure.

Methodology

Case study analysis will be used to define grain draw areas, which are indicators of grain flow patterns. The draw areas will be determined by rail freight rates and producer delivery costs. Sensitivity will be conducted to examine relative influences of market factors, such as demand and producer truck investment. In addition, this research will be considered in the heavy axle load (HAL) hopper car analysis. These analyses may then be customized and applied to assess local impacts and discuss local investments.

Data

The data sources for this analysis are secondary. Production data will be compiled based on information published by the National Agricultural Statistics Service and the North Dakota Agricultural Statistics Service. Rail rate information included in the analysis is based on BNSF and CP public tariffs. Truck rates are estimated based on a 1995 survey of North Dakota wheat producers and the commercial truck cost model developed by Berwick and Dooley (1997). A summary of each data source are provided later in this report.

Organization

This report includes three sections beyond this introduction. The following section contains a profile of the local grain industry, including production, infrastructure, and market demand. Case studies and sensitivity analysis are presented in section three. Project results are summarized in the final section of the report.

^1. Unit train equipped facilities handled about half of the bushels originated by elevators in 1998-99 (Vachal, 1999).

^2. Upper Great Plains Transportation Institute, 2000 ND Elevator Survey Results, April 2000.

^3. Source: Burlington Northern Santa Fe, Published Tariff Rate Item 43521, 52-Car Rate, June 2000.

^4. Source: Grain Transportation Report, SEA/USDA.

^5. A shuttle facility is included at Kindred for coverage in this analysis, but a facility has not been sited at Kindred.

^6. "100" car units will be used in discussions of the "shuttle" train. The exact number of cars included in a shuttle train is typically between 100 and 115, varying by railroad and commodity.