Introduction

Agriculture represents an important industry to the state of North Dakota. Farm production, food processing, and transportation and distribution of agricultural products accounted for nearly 13 percent of North Dakota's total economic output in 1997.¹ This compares to an average of 5 percent of output for agricultural activities nationwide.² Moreover, at least 30 percent of business proprietors in the state were agriculture-related in 1997, compared to 8 percent nationwide. Because of the important role played by agriculture in the state's economy, small improvements in the competitiveness of the state's agricultural sector can result in major economic gains for North Dakota.

Efficient transportation is vital to the continued and improved competitiveness of North Dakota's agricultural sector. In the increasingly global economy, transportation improvements will allow North Dakota's agricultural and value-added producers to compete in expanding markets and to maintain their positions in traditional markets.

However, many external factors will influence the ability of the state's agricultural sector to compete in new, emerging, and traditional markets. These factors include changing rail technologies and operational practices, the merger activity sweeping the nation and the way legislators respond to such activity, the speed at which continued globalization of the world economy occurs, and vertical integration of firms strategic to North Dakota's agricultural economy. The changes create an environment of uncertainty and opportunity for agricultural production and processing firms in the state and for North Dakota. North Dakota firms and the state must have the necessary information and analysis to participate in the process of change which will continue.

As an attempt to provide some of the information that will enable North Dakota firms and policymakers to make better decisions, this project addresses four transportation issues, which are critical to the future of the state's agricultural sector: (1) the impact of 110-car shuttle trains on the marketing of grains, (2) the impact of heavier cars on light-density rail lines, (3) the changing trend in the use of truck/rail container intermodal transportation for marketing North Dakota products, and (4) the role played by logistics factors in determining the optimal location of value-added facilities. The following will provide a summary of the analysis of each of these issues.³

The Impact of 110-Car Shuttle Trains on Grain Marketing

The local grain industry in North Dakota includes 440 elevators; two Class I rail carriers; three short line railroads; several local processors; 3,858 rail miles; 106,514 road miles; and thousands of farmers. In looking to the future of North Dakota's local grain industry infrastructure it is important to (1) view our local infrastructure as a 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. Shuttle rail rates are, in today's grain industry, the railroad's most competitive rate. Shuttle rates are available to shippers equipped to meet specific volume, transaction, and operational commitments. Investment in shuttle facilities and the ability of these facilities to use the more competitive rates in attracting grain has the potential to strongly influence future local grain flow patterns. As these local grain flow patterns adjust to new market signals, demands on the local grain gathering system must be addressed. The objective of this study was 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) provide framework for understanding the longer-term implications of shuttle trains for North Dakota's grain processing industry, infrastructure, and rural communities.

Facility infrastructure requirements, economic incentives, investment requirements, and financing packages are unique to each shuttle venture. Based on an earlier Upper Great Plains Transportation Institute study, a $6 million green field facility required approximately a 10 million bushel handle for profitable returns. 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 an 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.

Spatial analysis was used to estimate producer delivery patterns for alternative rail rate and producer truck cost scenarios. Grain production and draw area spans were used as quantitative measures in discussing the delivery patterns. An economic decision model was employed to illustrate the impact of changes in elevator rail rates and producer trucking costs on the relative competitiveness of local processors. HRS wheat, durum, barley, and corn were considered in this economic analysis of shuttle rail rates on the local grain marketing. In the base case, wheat, the area included in the 10 shuttle facility boundaries accounted for approximately 45 percent of the total North Dakota land area. Regarding production, approximately 88.6 million bushels of HRS wheat and 32.9 million bushels of durum were contained in the estimated shuttle draw areas.

The 10 draw areas encompassed approximately 38 percent of North Dakota HRS wheat production and 39 percent of the state's durum production. In the cases of barley and corn, shuttle facilities have the potential to accumulate 26.5 million bushels (24 percent of average North Dakota production) and 14.2 million bushels (19 percent of average North Dakota production), respectively, based on the estimated draw areas.

Considering these four crops, the 10 shuttle facility draw areas have the potential to originate about 162 million bushels. In relative terms, 2 percent of the elevators may originate up to 32 percent of the average annual production of wheat, barley, and corn. This market share of North Dakota production translates to an average 16.5 million bushels per facility. This potential concentration of bushels has implications for local roads, short line railroads, bridge infrastructure, local processors, local communities, and the North Dakota elevator industry.

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 also 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.

The Impact of Heavier Cars on Light Density Rail Lines

North Dakota's grain producers rely on an efficient rail system to move their products to export and domestic markets. In the 1999-2000 crop year, approximately 69 percent of all North Dakota grains and oilseeds transported to export and domestic markets were transported by rail.

A recent shift to larger grain hopper cars may threaten the viability of the state's light-density branch line network. The old industry standard of 263,000-pound cars capable of hauling 100 tons of grain is being replaced with 286,000-pound cars capable of hauling 111 tons of grain. Many light-density branch lines can not handle these larger cars, as they have light rail in place, shallow or poor ballast, and/or deferred tie maintenance. Although it is possible to load the larger rail cars at lighter weights or operate at lower speeds on such lines, railroads operating over such lines eventually will face a decision between upgrading and abandoning lines that can not handle the 286,000-pound cars at full weight.

This study simulates the impacts of handling larger rail cars on many types of rail lines, models the decision process used by railroads in deciding whether to upgrade such lines or abandon them, estimates the costs of upgrading rail lines that are unlikely to be upgraded, and estimates generalized highway impacts, which could result from the abandonment of non-upgraded lines.

In simulating the impacts of handling larger rail cars on different types of rail lines, the study estimates that rail lines that have rail in place, which is less than 90 pounds per yard, are likely to need some form of upgrading to handle the larger rail cars. More than 1,200 miles of rail line in North Dakota have rail that is less than 90 pounds per yard. The costs of upgrading all the lines are estimated to range between $258 million and $324 million, excluding costs of bridge upgrading.

In modeling the railroad decision process on whether to upgrade lines with light rail to handle the larger cars, it was shown that railroads are likely to rank investment alternatives based on their internal rates of return. In estimating the internal rate of return to an upgrading investment, railroads are likely to use a maximum of an eight-year time frame for evaluating the benefits to upgrading. Moreover, the internal rate of return to the upgrading investment will depend on the proximity of the rail line to competitors' rail lines, actions taken by competitors in terms of upgrading their rail lines, ability of trucks to serve destination markets directly, location of new shuttle train facilities, operational cost savings resulting from the upgrade, service improvements from the upgrade, and the cost of upgrading.

A numerical illustration of originating traffic levels where railroads are more likely to upgrade lines shows that at current revenue splits, and in most cases, short lines are unlikely to make the investment upgrade while Class I railroads may find it beneficial to upgrade at traffic levels as low as 35 to 40 cars per mile.⁴ The illustration shows that a larger revenue share for short lines or a loan guarantee program that extends the length of loan terms available to short lines could increase the likelihood of upgrading lines with light rail on short-line systems.

Finally, the study estimates generalized highway impacts that would result from eliminating rail lines with various traffic thresholds. The study shows that the generalized highway impacts resulting from eliminating rail lines are small in comparison to the rail upgrading costs (Table 1). If all rail lines with less than 35 cars per mile originated and less than 90 pound per yard rail are eliminated (895.5 miles), and if highway impacts are realized in perpetuity, the total highway impacts may exceed $41 million, but the cost of upgrading these lines would exceed $191 million. Similarly, if all lines with less than 150 cars per mile originated and less than 90 pound per yard rail are eliminated (1,202.3 miles) and highway impacts are realized in perpetuity, the total highway impacts may exceed $73 million, but the cost of upgrading these lines would exceed $257 million.⁵ Thus, a state-funded subsidy to upgrade all such potentially abandoned lines does not appear to be warranted. However, some subsidy may be justified on specific lines.

Table 1: Comparison of Total Highway Impacts and Upgrading Costs (Assumption that Highway Costs are Realized in Perpetuity - 6 percent Discount Rate)

¹Economic Development and Finance. The Economic Performance and Industrial Structure of the North Dakota Economy, May 2000.

²Ibid.

³Separate publications exist for each issue. These publications are MPC 01-127.1, "Intermodal Highway/Rail/Container Transportation and North Dakota;" MPC 01-127.2, "Logistical Factors Influencing the Success of Value-Added Processing Facilities;" MC 01-127.3, "Shuttle Trains;" and MPC 01-127.4, "Heavier Loading Rail Cars."

⁴This is only the case when the Class I has competition in close proximity. In cases where the Class I railroad does not have competition in close proximity, the railroad is unlikely to upgrade the branch line at any traffic levels, since the railroad can maintain its traffic without serving the branch line.

⁵These upgrading costs do not consider the costs of upgrading bridges. The need for upgrading bridges to handle heavy rail cars is case specific. Thus, it is beyond the scope of this study to estimate bridge upgrading costs.

⁶Assumes an upgrading cost of $205,000 per mile.