Insights - Winter Update 2014 - (Page 5)

executive said, referring to the volume of the nation's freight that moves through the Chicago gateway, which is plagued with inadequate and outdated infrastructure that can slow rail movement to a snail's pace or stop it altogether during a major onslaught of snow or ice. Last year Chicago's rail capabilities were stretched to the breaking point by bad weather. In order not to see history repeat itself, eastern mills this fall prepared by filling their storage to capacity in the hope of having enough wheat on hand no matter what the weather brings. "The mills have bought more than they need," said a grain analyst. In similar fashion, mills regularly "double bought" grain in Kansas City and Minneapolis during the worst of the rail delays earlier in the year. When scheduled deliveries didn't arrive, mills bought grain offered on the spot market, driving up cash basis levels, to ensure they had supply to keep running. When the delayed grain finally arrived, often weeks later, mills were faced with excess supply, which then pushed the basis lower. Truck demand record high While additional trucks have been sought to ease rail delays, they are far from being the solution to the problem. Shipping by truck is more expensive and trucks typically are used mostly for local or short haul needs. In addition, there is a general lack of trucks and drivers, especially during the peak of harvest. Grain merchandisers in Central states and the Southwest noted truck and driver shortages for moving millfeed and other products even before row crop harvest was at its peak in the fall. Trucks are especially important for the ethanol industry, with refineries typically drawing much of their corn supply locally, which requires trucks. Although profit margins for ethanol plants have been declining, production remains profitable and demand for lower-priced corn strong. The U.S.D.A. projects 5,125 million bus of corn will be used by the ethanol industry in 2014-15, equal to about 35% of total corn production. Outgoing shipments of ethanol and byproducts, especially large volumes of distillers dried grains, require significant truck and rail freight. Grain storage capacity shortages by state TOTAL 952 Million Bushels 236 49 58 147 212 27 171 and stocks expected to exceed total permanent storage as of mid-October. Source: U.S. Department of Agriculture 52 " Ocean freight rates are expected to remain low '' The American Trucking Associations' advanced seasonally adjusted for-hire truck tonnage index (for all types of freight) for August was 132.6 (2000=base), up 1.6% from July 2014, up 4.5% from August 2013 and the highest on record for any month, indicating strong demand for truck freight. In September the index was unchanged, holding at the record level. The A.T.A. expects moderate tonnage growth for the remainder of the year as the economy continues to improve. "During the third quarter, truck tonnage jumped 2.4% from the second quarter and surged 4% from the same period last year," said A.T.A. chief economist Bob Costello, adding that third quarter truck tonnage was the highest on record. At the A.T.A. Management Conference and Exhibition in San Diego in early October, Mr. Costello noted that driver shortages may restrict growth in truck freight volume. "Industry revenue and average revenue per mile are increasing nicely as capacity remains constrained," Mr. Costello said. "However, the industry is having a difficult time adding trucks due to the driver shortage." He said the driver shortage was "as bad as ever and is expected to get worse in the near term" as freight volumes grow. Barge freight rates hit record highs While not experiencing the same performance issues as railroads, demand for barges ahead of the expected record large fall harvest has pushed freight rates higher, not unlike rail freight costs. Year-to-date grain barge tonnage was 30% above the three-year average and the highest since 2010, with the total as of Sept. 13 equal to last year's annual amount, the U.S.D.A. said. "With the anticipation of the upcoming record corn and soybean harvest, grain barge rates for this week are at unprecedented highs, 5

Insights - Winter Update 2014

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