Grain Transport: Modal Trends and Infrastructure Implications

Grain Transport: Modal Trends and Infrastructure Implications

Order Code RL32720
CRS Report for Congress
Received through the CRS Web
Grain Transport: Modal Trends
and Infrastructure Implications
January 5, 2005
John F. Frittelli
Specialist in Transportation
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Grain Transport: Modal Trends and Infrastructure
Implications
Summary
The 109th Congress is expected to take up reauthorization of funding programs
for surface and marine transportation infrastructure that were debated but not enacted
by the 108th Congress. Grain shipping has been either a central part or at least an
element of the policy debate on many of the infrastructure funding proposals. Most
notably, a key infrastructure project under consideration is enlarging the locks on the
Upper Mississippi River and Illinois Waterway (UMR-IWW) to speed up passage of
barge tows. Grain shipping has also figured prominently in debates over federal aid
for rail infrastructure, particularly for short line rail track located in agricultural
states. Highway policy discussions particularly relevant to grain transportation
include funding rural interstates and other federal-aid designated roads to support the
growth of heavy grain hauling trucks and improving the truck routes connecting
highways with ports and rail terminals.
Over the past two decades, the amount of grain transported has increased by
nearly 70%. While all modes have participated in this growth, they have done so at
different rates. Barge modal share has decreased slightly, rail share has decreased
substantially, and trucking’s share has increased substantially. The doubling of
domestic demand for grain and static export demand has favored truck transport
because trucks generally have an advantage in moving grain over shorter distances.
Barges and railroads favor hauling large volumes of grain long distances, which suits
the export market. Farm and rail consolidation has also favored truck transport.
Large farms may find it more economical to own their own fleet of trucks because
trucking offers more flexibility as to when, where, and how much grain is delivered.
By using trucks, farmers can better time their deliveries to grain elevators in order to
receive the highest price. As a result of rail consolidation, many of the smaller
country elevators and short line railroads are being bypassed in the grain delivery
network, leaving grain farmers to rely more on trucks to deliver grain to the larger
elevators. While the bulk method for shipping grain dominates, a new logistics
pattern utilizing containers is also emerging.

As described in this report, the grain supply chain is a multifaceted system.
Changes or developments with one component of the system will likely affect the
ability of other components to perform efficiently. The complexity of the grain
supply chain raises a number of issues for Congress as it evaluates pending
investment decisions in surface and marine transportation infrastructure. One issue
is if a systems-level perspective can lead to more sound investment decisions than
a mode-specific perspective. Another issue is balancing the desire for transportation
efficiency with local economic development concerns. Concern for local economic
development raises the question of whether supporting a grain value-chain as
opposed to a grain volume-chain would create more jobs and income for rural
communities. The additional infrastructure costs that utilizing larger vehicles
imposes on others is also an issue. Finally, whether system users should pay a greater
share of the cost of infrastructure improvements is a key policy issue. This report
will not be updated.

Contents
Infrastructure Funding Issues Relevant to Grain Shipping . . . . . . . . . . . . . . . . . . 2
Mississippi and Illinois River Locks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Short Line Railroad Track . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Rural Roads and Bridges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capacity of Main Line Railroads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Intermodal Connectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Grain Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Growth In Tonnage Transported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Modal Shifts in the Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Farm and Rail Consolidation Increases Truck Hauls . . . . . . . . . . . . . . . . . . . 8
Farm Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Rail Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Differential Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A New Logistics Pattern Utilizing Containers . . . . . . . . . . . . . . . . . . . . . . . 11
Refrigerated Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Specialty Grain Varieties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Mode-Specific versus Systems-Level Perspective . . . . . . . . . . . . . . . . . . . . 13
Transportation Efficiency and Economic Development . . . . . . . . . . . . . . . 14
Volume-chain and a Value-chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Vehicle Size and Infrastructure Demands . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Who Should Pay for Infrastructure Improvements? . . . . . . . . . . . . . . . . . . 16
Assessing Competitive Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Grain Transport: Modal Trends and
Infrastructure Implications
The 109th Congress is expected to take up reauthorization of funding programs
for surface and marine transportation infrastructure that were debated but not enacted
by the 108th Congress. Water Resources Development (WRDA) legislation would
fund river locks and dams1 and highway reauthorization legislation would fund
interstate and other primary-use highways.2 The 108th Congress also debated several
proposals for funding freight rail infrastructure, including loan guarantees, a rail trust
fund, tax-credit bonds, tax incentives, and federal grants.3 As part of the American
Jobs Creation Act of 2004 (P.L. 108-357), the 108th Congress did enact a measure
that provides tax credits to short line railroads for upgrading their track beds.

Grain shipping has been either a central part or at least an element of the policy
debate on many of these infrastructure funding proposals.4 Most notably, a key
infrastructure project under consideration in WRDA is enlarging the locks on the
Upper Mississippi River and Illinois Waterway (UMR-IWW) to speed up passage of
barge tows. Grain shipping has been front and center in the debate over this project
because grain accounts for about half the total freight tonnage carried on these rivers.
Similarly, grain transportation has figured prominently in debates over federal
financial assistance for rail infrastructure, particularly for short line rail track located
in agricultural states. Railroads carry about a third of annual grain tonnage to market.
In the debate over highway reauthorization, total funding and equity issues among
states dominated Congressional debate in the 108th Congress, but freight
transportation, in general terms, has received considerable attention. Trucks carry
about half of annual grain tonnage, or about the same amount that barges and
railroads carry combined. Highway policy discussions particularly relevant to grain
transportation include funding rural interstates, roads, and bridges to support the
growth in traffic of heavy grain hauling trucks and improving intermodal connectors
which are the truck routes connecting highways with ports and rail terminals.
1 In the 108th Congress, WRDA bills include H.R. 2557, S. 2554, and S. 2772. For
legislative developments regarding WRDA, see CRS Issue Brief IB10133, Water Resources
Development Act and Other Army Corps of Engineers Legislation.
2 In the 108th Congress, see H.R. 3550 and S. 1072. For legislative developments regarding
highway reauthorization, see CRS Issue Brief IB10138, Surface Transportation:
Reauthorization of TEA-21.
3 See H.R. 2571, H.R. 1617, S. 1961, H.R. 876, S. 1703, and section 4632 of S. 1072.
4 For the purposes of this report, “grain” refers to corn, wheat, and soybeans, even though
soybean, unlike the other two, is technically an oilseed and not a grain.

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This report examines the grain-handling system and the infrastructure that
supports it. The first part of the report briefly identifies transportation funding issues
before Congress that are particularly relevant to grain shippers. The report then
describes how grain is delivered to market, including long-term trends taking place
and the underlying reasons for those trends. The final part identifies some of the
implications these trends have for targeting future investment in the grain-handling
system.
Infrastructure Funding Issues Relevant to Grain
Shipping
The infrastructure issues identified below are particularly relevant to shipping
grain. These are infrastructure segments that have been targeted for investment in
legislation debated in Congress. They are briefly described here because there are
other CRS reports cited below that discuss these infrastructure segments in more
detail.
Mississippi and Illinois River Locks
One infrastructure investment proposal Congress is evaluating is whether to
upgrade locks on the Mississippi and Illinois Rivers. Several of the lower locks on
the Upper Mississippi River have been targeted for extension from 600 feet to 1,200
feet to enable larger barge tows to pass through more quickly, and thus reduce the
cost of barge transport of exported grain and other bulk commodities. Many of the
current locks were built between 1930 and 1950. Standard tows since then have
grown from 600 feet to over 1,100 feet — nearly the length of four football fields.
The lock chambers targeted for extension can only accommodate 600 foot tows and
therefore the standard tow must move through the locks in two passes, requiring
break up and reassembly of some tows. Passage through a 1,200-foot lock can take
about 45 minutes or less but transiting a 600-foot lock takes approximately 90
minutes, which can produce queuing delays for other barges.
Specific plans for these lock improvements are discussed in greater detail in
CRS Report RL32574, Proposed Authorization of Upper Mississippi River - Illinois
Waterway Investments. The potential benefits of these lock improvements are
heavily dependent on agricultural trade patterns. Evolving agricultural trade patterns
and projections for future agricultural cargo on these waterways is discussed in CRS
Report RL32401, Agriculture as a Source of Barge Demand on the Upper
Mississippi and Illinois Rivers: Background and Issues.
Short Line Railroad Track
Of the170,000 miles of rail track in the United States, about 50,000 miles of
track is owned by about 550 short line and regional railroads. Many short line
railroads operate trades that were formerly part of a main line railroad’s network but
were abandoned by the main line railroad due to low profitability on that route. Of
the more than 100,000 miles of tracks that Class I railroads have abandoned since
1980, about 50,000 miles of that track has been acquired by short line railroads.
Before abandonment, the main line railroad typically deferred maintenance on these

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sections of track, focusing their resources on their trunk lines. As the main line
railroads transition to the use of the larger 286,000 pound railcars, short line railroads
need to upgrade their track beds and bridge structures to support these heavier cars
and continue their role as collectors and distributors of main line traffic. The short
line rail industry estimates that it could cost almost $7 billion to upgrade their rail
systems to accommodate the heavier cars.5
Rural Roads and Bridges
The continuing trend toward greater reliance on trucking in the grain delivery
system (as discussed further in the next section) has led to increasing concern with
the wear and tear on rural roads and bridges. Many of these roads and bridges were
built before this trend was evident and therefore were not designed for this type of
traffic. Since many of these roads are located in sparsely populated rural counties,
the tax base may be insufficient to meet the cost of maintaining these roads.
Although rural roads and bridges are the responsibility of local and state
governments, they are mentioned here because the expense of maintaining them to
accommodate heavy grain hauling trucks has fueled the debate over public support
for preserving short line rail service. Proponents of short line rail assistance contend
that it might be more cost-effective to provide public aid to maintain short line rail
service in affected areas than to reinforce rural roads and bridges.
Capacity of Main Line Railroads
Railroad main lines are experiencing high track utilization rates. Much of the
main line network is single tracked. Double or even triple tracking, and increasing
the number of sidings would allow more time sensitive freight trains to pass less
service sensitive trains. Some industry analysts contend that the privately financed
Class I freight railroads are failing to keep pace with the growth in demand for freight
transportation capacity.6 Because freight railroads are critical to the nation’s
economy, upgrading and expanding their infrastructure, according to proponents of
public support for rail infrastructure, should be a federal government concern.
Capacity problems are most acute during the fall peak shipping season. Grain
farmers complain of railcar shortages and train delays that cut into their potential
profits. Class I railroads argue that they cannot be expected to build their physical
plant to meet a relatively short-lived spike in demand that occurs around harvest
time.
Legislative proposals for accelerating investment in rail infrastructure include
creating a rail trust fund, expanding the Railroad Rehabilitation and Improvement
Financing program (RRIF), and tax incentives. Repeal of a 4.3 cents per gallon rail
diesel tax was enacted as part of the American Jobs Creation Act of 2004 (P.L. 108-
357). Arguments for and against federal assistance to main line railroads are
5 U.S. House of Representatives, Committee on Transportation and Infrastructure,
Subcommittee on Ground Transportation, Hearing: Short Line Rail Infrastructure Needs,
106th Congress, 2nd Session, July 25, 2000.
6 In this report, the terms Class I railroad and main line railroad are used interchangeably.
Class I railroads are those with operating revenues of at least $277.7 million in 2003.

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discussed further in CRS Report RL31834, Intermodal Rail Freight: A Role for
Federal Funding? dated August 18, 2004.
Intermodal Connectors
Intermodal connectors include facilities such as the access roads to marine and
rail terminals. These routes are typically short segments of road, generally less than
two miles in length, that connect freight terminals to the highway system. Many of
the connector roads, especially those leading to seaports, are in older, industrialized
areas and have a preponderance of at-grade rail crossings that impede traffic flow.
Two recent Department of Transportation (DOT) surveys have found these access
roads, in many cases, to be inadequate to accommodate the heavy truck traffic they
handle. The pavement may be in poor condition or the intersections and width of the
roads are not designed to handle large trucks. The results of these surveys and the
policy issues they raise are discussed further in CRS Report RL31887, Intermodal
Connectors: A Method for Improving Transportation Efficiency?
To address the issue of deficient intermodal connectors, the highway
reauthorization bills would create a “Freight Intermodal Connectors” program which
would allow states to set aside a portion of their federal highway funds to improve
these roads to cargo hubs. Highway reauthorization is discussed further in CRS Issue
Brief IB10138, Surface Transportation: Reauthorization of TEA-21.
While the infrastructure segments identified above are presented as separate
issues, viewed from the perspective of the grain supply chain, there is a high degree
of connectivity among them. An examination of the grain supply chain can help
prioritize investments in these infrastructure components.
The Grain Supply Chain
Trucks, trains, and barges both compete and complement one another in moving
grain to successively larger elevators. Grain elevators accumulate a critical mass of
product that creates economies of scale in shipping bulk grain. Between origin and
final destination, most grain shipments have traveled by two or more modes of
transportation. Trucks traditionally have an advantage in moving grain for shorter
distances (less than 250 miles) and therefore function primarily as the short haul
gatherers of grain. Railroads have a cost advantage in moving grain long distances.
Barges have even a greater cost advantage than rail in long distance transport but
only where a waterway is available. Barges, moreover, cannot compete with trucks
and trains in terms of transit time, and waterways are not always available due to ice,
floods, or drought. Figure 1 illustrates the cost advantages of the three grain hauling
modes in terms of shipment distance.

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Figure 1. Modal Cost and Distance
Source: USDA, Agricultural Transportation Challenges for the 21st Century, Appendix B, n.d., n.p.
Due to these modal cost advantages relative to shipment distance, domestic and
exported grain tend to exhibit different transportation patterns. If grain is being sold
in the domestic market, depending on the distance, either trucks or short line
railroads move the grain from the country elevator to the domestic processor, feed
manufacturing plant, or off-farm feed lot operator (livestock farmer). The U.S.
Department of Agriculture (USDA) reports that in 2000, trucks transported about
two-thirds of grain tonnage sold in the domestic market while railroads carried about
one-third, and barges carried less than 2%.7
Much of the grain exported has to travel long distances to reach U.S. ports, so
Class I railroads and barges are the primary modes in moving grain for the export
market. The USDA reports that in 2000, barges transported 55% of exported grain
tonnage, rail transported 38%, and trucks transported 7%.8 The preponderance of
exported corn and soybean moves by barge since these crops are grown relatively
close to either the Upper Mississippi, Illinois, or Ohio Rivers. Barges transport 90%
of the corn moving to Center Gulf ports while railroads transport 10%. The high
level of interdependence between the barge and grain industries is evidenced by the
fact that four of the top ten barge operators are owned by grain companies (ADM,
7 USDA, Transportation of U.S. Grains: A Modal Share Analysis, 1978-2000, October 2004,
p. 10.
8 U.S. Grains Council, Value Enhanced Grain Exporter Manual, 1999, p. 74.

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ConAgra, Cargill, and Bunge), which together control about 40% of the barge fleet.9
The preponderance of exported wheat moves by rail since wheat production is
concentrated in the central and northern plains, farther from waterway access.10
Figure 2 shows which modes are typically used in the transport links to reach
seaports for exported grain.
Figure 2. Typical Modal Flow of Grain for Export
Source: U.S. Grains Council, Value Enhanced Grain Exporter Manual, 1999, p. 44.
9 USDA, Agricultural Transportation Challenges for the 21st Century, Washington, D.C.
10 USDA, Grain Transportation Prospects, USDA/STB Grain Logistics Task Force
Working Group, November, 1998.

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Growth In Tonnage Transported
Since 1978, the amount of grain transported has increased almost every year.
Grain tonnages increased from 242 million in 1978 to 404 million in 2000, an
increase of 69% in 22 years. The growth in demand for grain transportation is the
result of increases in grain production but also because of an increasing amount of
grain used off the farm from which it is grown. More grain used to feed cattle and
poultry is moving off-farm because of a continuing trend toward consolidation of
livestock and poultry production into large-scale operations, which purchase
significant amounts of feed grown off-site. Livestock and poultry production is
moving away from major feed-grain-producing states to areas of deficit grain
production, thus increasing demand for feed-grain transport. The growth in ethanol
production, other industrial uses of grain, and food products made from grain also
requires transportation of the product off the farm to domestic processors.
While all modes have participated in the growth in demand for grain
transportation, they have done so at different rates. From 1978 to 2000, tons of grain
hauled by truck increased 170%, tons of grain carried by barge increased 43%, and
tons of grain carried by rail increased 13%. The reasons for these differing rates of
increase are explained in the following section.
Modal Shifts in the Supply Chain
Long term trends in the amount of grain sold domestically versus exported has
shifted modal market shares. The majority of grain is sold in the domestic market.
The USDA reports that from 1996 to 2000, nearly 70 % of grain movements were for
the domestic market.11 Moreover, the amount of grain transported for the domestic
market has been increasing steadily, from 123 million tons in 1978 to 280 million
tons in 2000, an increase of 128%. Typically, about 80% of corn, 65% of soybeans,
and 50% of wheat production is sold domestically.12 The smaller export market is
much more volatile than the domestic market. After surging during the 1970s, the
amount of grain exported has fluctuated erratically but overall has been about the
same since the late 1970s. In 1978, 119 million tons of grain was exported while in
2000, 122 million tons of grain was exported. As can be seen in these tonnage
figures, in 1978 nearly the same amount of grain was exported as was sold in the
domestic market but in 2000, about two and a quarter times more grain was sold
domestically than exported.

Figure 3 illustrates the impact these trends have had on modal market shares for
grain transport. These modal shares are based on the transportation mode used for
the last leg of a grain shipment within the United States (i.e., to a domestic buyer or
to a U.S. seaport or land border crossing for export). The Transportation Services
Branch of the USDA has calculated these modal market shares from 1978 to 2000.
11 USDA, Transportation of U.S. Grains: A Modal Share Analysis, 1978-2000, October
2004, p. 6.
12 Figures are for 1999, Chris Hurt and Lee Schrader, Long-Term Structural Shifts in Grain,
Oilseed, and Animal Industries in the United States, USDA, Nov. 2000.

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Since 1978, barge modal share has decreased slightly, rail share has decreased
substantially, and truck share has made up the difference. From 1978 to 2000,
truck’s modal share increased significantly from 31% to 49%, while rail’s market
share dropped significantly from 48% to 31%, and barge’s dropped slightly from
21% to 18%. Increasing domestic demand and static export demand has favored
truck transport because, as mentioned above, trucks generally have an advantage over
rail and barge for shorter haul shipments. Also, domestic buyers tend to buy grain
in smaller volumes because they operate throughout the year.13 Smaller shipment
size fits the characteristics of truck transport more than rail and barge. Class I
railroads and barges are more interested in long distance, trainload or bargeload-size
shipments, which suits the export market more than the domestic market.
Figure 3. U.S. Grain Transportation Modal Shares, 1978-2000
(based on tons hauled)
Note: Data are for the last shipment leg in the United States.
Source: USDA, Transportation of U.S. Grains: A Modal Share Analysis, 1978-
2000
Farm and Rail Consolidation Increases Truck Hauls
In addition to the shift from on-farm to off-farm livestock feeding, higher levels
of domestic corn processing, the more than doubling of domestic demand for grain
13 Larry Kaufman, “Booming Grain Business Has Small Shippers Seeing Red,” Trains, April
2004.

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while export demand stagnates, farm consolidation (fewer but larger farms) and Class
I railroad rationalization (fewer miles of tracks, but more trains) have contributed to
trucking’s predominance in grain movements. Due to farm and rail consolidation,
the smaller country elevators and short line railroads are increasingly being bypassed
in the grain delivery system. Trucks are replacing short line railroads in the grain
collection function — the movement of grain for relatively short distances. In one
survey, industry experts predicted that one in four of the more than 10,000 grain
elevators in today’s network will no longer be in existence a decade from now.14
Farm Consolidation. Between 1980 and 1998, the number of farms
decreased by 15% while the average size of farms increased by nearly 11%.15 Larger
farms may find it more economical to own their own fleet of trucks and move their
product directly to the sub-terminal elevator or to the processor or feed lot. Farmers
receive payment at delivery and thus can receive payment faster if their product
moves by truck rather than short line railroad. For farms with sufficient on-farm
storage, trucking offers farmers more flexibility than rail as to when and where they
deliver their product. They can adjust delivery times and amounts more easily to
obtain the highest grain price. Other reasons farmers may use trucks rather than short
line railroads is that trucks are more dependable, truck rates are lower, and because
the rail line available may not serve the most profitable market.
Rail Consolidation. The construction of rapid load-out facilities on Class I
railroad networks has also contributed to greater reliance on trucking for the initial
leg of a shipment. Class I railroads are exploiting operating efficiencies by
consolidating their trackage and rolling stock around larger, sub-terminal elevators.
These larger elevators have enough grain to not only load longer trains but also trains
using larger and heavier grain cars. New super jumbo covered-hopper railcars have
loaded weights of 286,000 to 315,000 pounds compared with 263,000 pounds for the
traditional cars. The larger elevators are also equipped with high-speed loading gear
which can fill a mile-long train in 15 hours or less. Less time spent loading at the
terminals means that trains can increase their turnaround time, making more trips in
a given period.
In addition to streamlining the loading process, railroads have streamlined their
train operations with new configurations. The rail consolidation process emphasizes
unit and shuttle trains, de-emphasizing carload service in favor of shipment sizes that
can fill entire trains, and operating from single origins and destinations rather than
multiple origins and destinations.16 These unit-grain-trains are designed to reduce
switching costs and delays, thereby improving car cycle times. By concentrating on
the long-haul portion of grain movements, Class I railroads have simplified their
operations, making more efficient use of railcars, locomotives, train crews, and track.
14 Kimberly Vachal, The Long-term Availability of Railroad Services for U.S. Agriculture,
paper presented at the Transportation Research Board’s 81st Annual Meeting, January, 2002,
Washington,D.C.
15 Jerry Norton, Transportation Implications of Structural Shifts in U.S. Agriculture, USDA,
AMS, July 1998.
16 Unit trains are typically 50-54 car trains while shuttle trains are typically 100-110 car
trains.

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One study estimates that in 1999, approximately 50% of U.S. rail shipments of corn
and 10% of rail shipments of wheat were handled by unit trains.17 The Class I
railroad tactic of increasing the density of grain movements over their track is
consistent with their strategy in moving other commodities as well. From 1970 to
1999, the number of ton-miles of all commodities carried by Class 1 railroads
increased by 87 percent while the number of miles of railway operated by Class I
railroads declined by 43 percent.18
North Dakota Inverse Rail Rates: An Illustrative Example
The influence that Class I railroad strategies can have on the grain delivery system is illustrated in North
Dakota. The practice of so-called “inverse rate” pricing by the Burlington Northern Santa Fe (BNSF)
Railroad drew a lot of attention in the state and was the subject of a congressional field hearing. At the
hearing, a grain farmer located near Gladstone in the southwestern part of the state described how he
trucked his grain to a subterminal elevator in Jamestown located 160 miles to the east, even though his
local elevator was located only 20 miles from his farm.19 The reason he trucked his grain to the more
distant elevator was because he received a better price for his grain at that elevator than from his local
elevator. The subterminal elevator gave him a better price because grain farmers are paid the price of
grain minus the cost of transportation, which in this case was the cost of rail transportation to a seaport in
the Pacific Northwest (PNW). The BNSF Railroad charged less to ship grain from eastern North Dakota
than western North Dakota to PNW ports even though the distance is farther (hence the term “inverse
rates”). From the subterminal elevator in Jamestown, the BNSF would then haul the grain back west,
passing through the grain farmer’s yard located near Gladstone on its way to a PNW port.
While inverse pricing may seem peculiar, from the railroad’s perspective, it is a sound pricing
strategy. Traditionally, grain produced in eastern North Dakota would be sold in the domestic market or
exported via the Port of Duluth (for shipment through the Great Lakes) or via Minneapolis or another
Mississippi River port (for barge transport to the Port of New Orleans). Thus, trucks or barges would
capture most of the inland freight revenues for shipment of eastern North Dakota grain and eastbound rail
shipments would be for relatively short distances. However, if the BNSF Railroad could encourage the
movement of this grain in the opposite direction — that is, west to PNW ports, it could capture all of the
inland transport revenues because this route would utilize BNSF’s rail network over a much longer
distance. In eastern North Dakota, the BNSF also faced competition from Canadian Pacific Railroad
which can carry grain to the Port of Vancouver, BC. To compete with these alternative routes, BNSF had
to reduce the cost of eastern North Dakota to PNW grain movements so that it could lower its rates. To
do this it streamlined and simplified its train operations, employing the rail rationalization strategy
described above. In so doing, it resulted in rail rates to PNW ports from eastern North Dakota costing
less than from western North Dakota. (In western North Dakota, there is no competing railroad and it is
farther from Duluth and the Mississippi River, making these destinations cost prohibitive.) While this
pricing strategy benefitted grain farmers in eastern North Dakota, it aggravated grain farmers in western
North Dakota.
Source: Senate Committee on Commerce, Science, and Transportation, Field Hearing entitled Rail
Freight Transportation in North Dakota, March 27, 2002, Bismarck, ND. S. Hrg. 107-1057.
Differential Pricing. The inverse rail rates described in the text box above
are part of a more widespread railroad pricing concept commonly referred to as
differential pricing. It is an important concept to consider when evaluating how
17 Kimberly Vachal, The Long-term Availability of Railroad Services for U.S. Agriculture,
81st Annual Meeting of the Transportation Research Board, January 13-17, 2002,
Washington, D.C.
18 Transportation Research Board, Freight Capacity for the 21st Century, National Academy
of Sciences, Washington, D.C., p. 19.
19 U.S. Senate, Committee on Commerce, Science, and Transportation, Rail Freight
Transportation in North Dakota, March 27, 2002.

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inland waterway infrastructure improvements may affect grain producers with
waterway access versus those without access. Through differential pricing, a rail
network can act as a mechanism by which the competitive dynamics in one part of
a railroad’s service territory influence the rates charged to shippers located at other
parts of the network. Differential pricing stems from the fact that railroads can
charge a higher price to customers whose demand for service is relatively price
inelastic, while charging less to customers who have other shipping options (i.e., their
demand is relatively elastic). It means that rail shippers with the fewest alternatives
(for instance, where truck or barge is not economically feasible) pay a higher portion
of a railroad’s fixed costs.
Differential pricing has a lot to do with how railroads pay for their
infrastructure. Railroads primarily finance their infrastructure on their own,
therefore, track maintenance and construction is a fixed cost. In contrast, trucks and
barges finance their infrastructure through the payment of fuel taxes charged per
gallon (in addition to taxes on equipment in the case of trucks) which are deposited
into the federal highway trust fund. Thus, for trucks and barges, infrastructure is not
a fixed cost but a variable cost. Their infrastructure costs vary in proportion to the
amount of fuel they consume (which is generally in proportion to the amount of cargo
they haul).
A New Logistics Pattern Utilizing Containers
Refrigerated Products. As discussed above, higher levels of domestic grain
processing and off-farm livestock production are responsible for increases in
domestic grain transport. While the export of bulk grain has remained flat in recent
years, bulk grains are also used as inputs in more highly processed farm products that
are exported. For instance, part of the growth in domestic demand for feed grains is
due to increased Asian demand for livestock and poultry products.20 Frozen or
chilled animal products are exported in refrigerated containers. Despite the long
overland hauls to seaports, a large share of frozen and especially chilled meat product
exports are moved by truck rather than railroad because of the product’s high value
and high service requirements (in terms of transit time and temperature control).21
To the extent this trend continues, one can view it as the replacement of bulk grain
export movements by barge down the Mississippi River to Gulf ports with truck
shipments of grain to domestic feed lots and a subsequent truck movement of
containerized meat exports to West Coast ports. Per unit of weight, the containerized
transport system is more expensive than the bulk system and therefore tends to attract
higher value agricultural products.
Specialty Grain Varieties. Also, a small but growing quantity of grain is
exported in containers. About one million tons per year, accounting for only about
1% of U.S. grain production, is exported in containers. However, a recent spike in
dry bulk ocean freight rates, which have surged to their highest levels on record, has
increased interest in utilizing containers for exporting grain. One study expects that
20 Chris Hurt and Lee Schrader, Long-Term Structural Shifts in Grain, Oilseed, and Animal
Industries in the United States, USDA-AMS, November 2000.
21 Chilled meat requires tighter temperature specifications than frozen meat.

CRS-12
containerized grain shipping will grow to about 3% of U.S. grain production over the
next five years.22 Although it is still a fledgling grain distribution channel, it is
worthy of inclusion when reviewing grain flow patterns because it has important
implications for infrastructure investment decisions.

Containerized grain exports follow a logistics pattern separate from traditional
bulk grain exports. Bulk grain can be loaded into containers packaged in bags
stacked on pallets or in raw bulk form using open top containers that have canvas
tops and whose interiors are lined or have been sanitized. Utilizing containers, the
grain producer can control the shipment from the farm to final overseas destination
rather than merely from the farm to the first elevator. While grain exported in the
bulk manner is treated by ocean carriers as a fronthaul move, containerized exports
are treated as backhauls and are priced accordingly.23 The persistent U.S.
merchandise trade deficit manifests itself in container shipping as the problem of
having to ship empty containers back overseas. To reduce the number of containers
that have to be shipped back empty, ocean lines typically reduce their rates for export
shipments. The rate differential between inbound and outbound shipments depends
on the current trade imbalance in goods shipped in containers. Shipping lines may
rate outbound shipments merely to recover the variable cost of shipping the container
back rather than at a remunerative rate. Thus, U.S. producers of relatively lower
valued products, which typically would not ship via containers, can take advantage
of the containerized trade imbalance. However, even though outbound container
rates are generally rated at a discount, it is still much less expensive to export grain
by the traditional bulk method. Hence, the small portion of grain that is exported in
containers tends to be higher-valued and specialized grain varieties,24 which are
purchased in smaller quantities, and must be kept separate (often referred to as
“identity-preserved” grain) from the co-mingling of product that occurs with the
elevator-based system. Also, the Class I railroad promotion of trainload-size
shipments in the elevator-based system is incompatible with the shipping
requirements of specialized grain markets, while the container-based system can
facilitate this market.
Grain exported in containers follows a similar modal path as other containers
originating from locations far inland. A truck will typically deliver the container to
the nearest intermodal rail ramp from where it moves by intermodal train to a seaport.
Ports in the Pacific Northwest are the leading gateways for containerized grain as
Asia is the largest purchaser of these products.
22 Kimberly Vachal, Tamara VanWechel, Heidi Reichert, U.S. Containerized Grain &
Oilseed Exports Industry Survey, Phase I, November 2001, prepared for the USDA.
23 See for instance, Bill Mongelluzzo, “Backhaul Bonanza, U.S. Food Exporters Are
Expanding Their Markets in Asia,” Journal of Commerce, November 10-16, 2003, and
“Container Drain,” Traffic World, November 29, 2004, p.30.
24 Examples of specialty grain products are low saturated fat soybeans, soybeans with altered
carbohydrates that are more easily digested, organically produced grains, wheat with
specific baking characteristics, corn with high protein content, and wheat that produces a
creamy colored noodle.

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Issues for Congress
As described in this report, the grain supply chain is a multifaceted system.
Changes or developments with one component of the system will likely affect the
ability of other components to perform efficiently. The complexity of the grain
supply chain raises a number of issues for Congress as it evaluates pending
investment decisions in surface and marine transportation infrastructure.
Mode-Specific versus Systems-Level Perspective
The process for making decisions on where to target investment in transport
infrastructure is largely mode specific. Railway investment decisions could be
characterized as primarily “market-driven.” They are made in the private sector (by
the railroads themselves), although some short line railroads may be either owned or
subsidized by state departments of transportation. Road and waterway investment
decisions could be characterized as primarily “policy-driven” as they are made in the
public sector. State and local governments have primary responsibility for roadway
investment decisions. Waterway infrastructure investment decisions are made at the
federal level.
Given the seemingly disjointed and dispersed nature of this decision making
process, an issue for Congress is whether to develop a coordinated infrastructure
investment strategy that supports the needs of an increasingly interconnected grain-
handling system. The benefit of a coordinated strategy is that it can lead to a grain
distribution system that allocates grain to the mode or modal combination best suited
to a particular shipment’s service requirements, thereby reducing the nation’s overall
cost of shipping grain. Analyzing transportation investment from a supply chain
perspective can lead to a more coordinated or integrated approach. However, an
integrated strategy is difficult to develop because transportation is still largely
administered and funded along modal lines. A GAO report on grain transportation
states, “efforts to improve grain transportation tend to concentrate on individual
transportation modes rather than on the transportation network as a whole,” and that
without “an integrated analysis that considers interrelationships between the various
components of the grain transportation system... implementing wise policies is
difficult.”25 Although this GAO report was written in 1981, its recommendation is
no less relevant today. The high degree of intermodal functioning in today’s grain
supply chain essentially means that policy decisions affecting one mode affect all
other modes. Any major capital project, even if mode-specific, is likely to affect the
interrelationship among all the freight modes, as well as their grain customers.
Optimizing an individual component of the grain handling system without
considering the whole system could merely divert traffic from one route to another
without appreciably improving the performance of the overall system.
Proposals for providing financial aid to short line railroads to upgrade their track
illustrates the need for a systems-level perspective. For instance, the short line grant
program prescribed in the Senate version of the highway bill in the 108th Congress
25 GAO, U.S. Grain Transportation Network Needs System Perspective to Meet Future
World Needs, CED-81-59, April 8, 1981.

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(S. 1072) requires the DOT to “ensure the award of a grant is justified by present and
probable future demand for rail service by the railroad.” Determining which short
lines have a viable economic future largely depends on where the larger sub-terminal
elevators are located. Where these larger elevators are located, in turn, is largely
dependent on the routing decisions of the Class I railroads. The policy issue is
whether financial aid to short line railroads can be successful in preserving their
service in light of market pressures for large volume rail shipping methods and the
greater flexibility that trucking offers grain producers.
Transportation Efficiency and Economic Development
In evaluating grain transportation investment choices, it is important to define
whether the objective is economic efficiency or economic development. The supply
chain perspective adopts economic efficiency as its primary criterion for evaluating
investment choices. However, Members of Congress may also weigh local economic
development as equally or more important than economic efficiency concerns when
evaluating transportation funding choices. Promoting transportation efficiency on
a national scale and promoting local or regional economic development are often not
compatible. As exhibited in the bulk grain delivery system, there is an economic
incentive for bulk grain shippers and carriers to pursue a high volume logistics
strategy. This strategy consolidates grain handling operations around a limited
infrastructure in order to maximize the use of their fixed and mobile assets. Rural
towns and remote communities located near elevators or rail lines that have been
abandoned or seen a reduction in business as a result of this process are negatively
affected. Legislators concerned with the economic development of these regions
have a desire to provide resources to these areas. However, consolidation in the grain
delivery system means that some facilities will be abandoned and thus greater risk
for public investment in these facilities or the infrastructure that provides links to
these facilities. Some investment choices in the grain-handling network, therefore,
involve a trade off between a national concern for transportation efficiency and a
local concern for economic development.
Volume-chain and a Value-chain
As identified in this report, three grain supply chains can be distinguished: (1)
export of bulk grain, (2) bulk grain for the domestic market, (3) and the export of
containerized specialty grain products and containerized refrigerated meat products
in which grain was used as feed. Each of these supply chains are tied to their own
infrastructure network. The bulk export system relies most heavily on river
navigation and Class I railroad trunk lines to reach seaports. The domestic bulk
market relies more heavily on rural interstates or short line railroads to reach
domestic processors and livestock farms. The container export system relies heavily
on interstate highways, railroad trunk lines, and efficient intermodal interchanges at
rail ramps and marine terminals.
An issue for policymakers is prioritizing limited public resources among these
various supply chains. In one sense, the export supply chains involve a choice
between a volume chain and a value chain. In terms of tonnage, the bulk export
system dominates but in terms of value, the container export system gains more

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significance. By weight, only 15% of all U.S. agricultural product exports were
shipped in containers in 2002, but by value, over 52% of all agricultural trade was
shipped by this method.26
Grain producers with access to the UMR-IWW navigation system, particularly
corn and soybean farmers that export much of their product via this system, advocate
investment in lock extensions. They note that Brazil and Argentina are becoming
increasingly competitive as global suppliers of grain because of their lower
production costs. U.S. competitiveness in this market, they contend, is highly
dependent on the superior efficiency of the U.S. inland transportation system. To
compete in the global marketplace, these waterway shippers argue that it is vital that
the lock system be upgraded to accommodate the prevalent use of 1,100 foot barge
tows.
Other observers, noting the relatively low margins in the export of unprocessed,
bulk grain, question whether “winning” this market does not in actuality mean losing.
They assert that a wiser investment strategy would be to focus on the infrastructure
segments that support the relatively higher margin food products market. These
observers contend that the grain processing and food manufacturing industries
generate more jobs and income for rural communities than does the exportation of
unprocessed, bulk grain. Therefore, if economic development is the policy goal, they
argue that investment in the infrastructure that supports the domestic or containerized
export supply chains deserves careful consideration.27
Vehicle Size and Infrastructure Demands
Competitive forces push grain carriers to move more grain, move it faster, with
less assets, and at a lower cost. This puts pressure on carriers to utilize larger
vehicles. Railroads deploy longer trains using larger and heavier rail cars, barges
utilize longer tows, and trucks maximize the size and weight of their trailers up to the
legal limit. While increasing vehicle capacity improves operating efficiency and
reduces freight rates charged by a particular mode, the cost savings may be merely
shifted on to others resulting in no net benefit to society. For instance, heavier
railcars require short line railroads to upgrade their track beds and bridges to handle
the new cars. They, in turn, are seeking public aid from state and federal taxpayers
to fund these upgrades. While longer barge tows reduce barge costs they also require
lock extensions for efficient passage. Half the construction cost for new locks are
paid for by general taxpayers. General taxpayers also pay all of the costs of
maintaining the locks. Some trucking firms want to increase federal weight limits
to 97,000 pounds which would reduce truck operating costs but would increase road
maintenance costs for other motorists and local taxpayers as well as for truckers.
If the additional infrastructure costs of larger vehicle size are born by others,
carriers can be expected to discount these costs when calculating the costs and
26 Kimberly Vachal, Tamara VanWechel, Heidi Reichert, U.S. Containerized Grain &
Oilseed Exports Industry Survey, July 2003, prepared for the USDA.
27 See for instance, Bruce A. Babcock, “Processing or Exports: Which Path for U.S. Grain,”
Iowa Ag Review, Summer 2004.

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benefits of deploying larger vehicles. In other words, to the extent that infrastructure
costs are external to a carrier’s cost analysis, their decisions regarding vehicle size
will be biased in favor of larger vehicles. Thus, a potential issue for policymakers
is whether infrastructure costs cannot be paid for by the carriers to a greater degree
in order to more accurately reflect the additional costs of bigger vehicles.
Who Should Pay for Infrastructure Improvements?
The discussion above raises the issue of the appropriate cost share arrangement
between general taxpayers and system users for infrastructure improvements. As
mentioned earlier, Class I railroads primarily finance their infrastructure on their
own. Trucks pay for their infrastructure through fuel taxes and other fees although
a DOT cost allocation study suggests that the heaviest trucks tend to underpay (80%
of the costs they generate on the highway system) while other highway users tend to
overpay.28 Barges also pay for their infrastructure via a fuel tax but a CBO study
indicates that this user fee contributes only a small fraction of the total cost of their
infrastructure.29
The continuing trend toward consolidation in the grain delivery system raises
the issue of whether the system’s users, who are increasingly fewer in number and
larger in size, should not shoulder a greater share of the cost burden for their
infrastructure use. In addition to an issue of fairness, the level and manner in which
user fees are assessed affects system efficiency. Some transportation economists
assert that the fuel-based tax system used to finance highway and waterway
infrastructure could be refined to include congestion tolls and other fees which would
be more closely tied to the time and place of infrastructure use. Alternative pricing
mechanisms, they contend, could maximize the throughput of existing highway and
waterway infrastructure, reducing the need to build additional infrastructure.
Assessing Competitive Balances
As described in this report, the grain-handling system encompasses many
market dynamics. This report has focused on the competitive dynamics among
transportation modes based on their operating characteristics. Among grain hauling
modes, competition is most fierce between trucking and short line railroads for
shorter haul shipments and between barges and Class I railroads for longer haul
shipments. Of likely interest to transportation policymakers is the affect that
infrastructure funding decisions could have on the competitive balance among
modes. If the interrelationship among the various components of a supply chain are
not examined or not quantified, policies may work at cross-purposes. For instance,
increasing truck weight limits while at the same time providing financial assistance
to short line railroads would be mutually inconsistent. Similarly, policymakers may
consider the affect that the transition to larger railcars will have on future demand for
28 U.S. DOT, Federal Highway Cost Allocation Study, August 1997 with Addendum in May
2000.
29 CBO, Paying for Highways, Airways, and Waterways: How Can Users Be Charged? May
1992, p 53.

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barge transportation. Conversely, they may consider to what extent the heavy draw
from general treasury funds to finance river navigation is encouraging the railroad
rationalization process or if it could require offsetting financial aid to railroads in the
near future.