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Growing diesel costs have been a pain for farmers who need the fuel to run equipment in their fields. Now, as harvest approaches, farmers face yet another obstacle as railroads have raised their shipping costs.
Railroad fuel surcharges have more than doubled in the past year as diesel prices have reached over $6 a gallon. Railroads carry about 1.6 million carloads of grain each year, according to the Association of American Railroads. That makes up 24% of domestic grain movements.
It’s not uncommon for railroads to add fees due to changing fuel costs. However, when these surcharges happen, the cost often trickles down to farmers in the shape of lower crop prices. That’s according to Mike Steenhoek, executive director of the Soy Transportation Coalition.
“Agriculture is a very competitive industry, and so what will often happen is if [grain shippers] try to pass those costs on to an importer from another country, what that importer very likely will do is say, ‘Well, I guess I'm going to buy more soybeans from Brazil or Argentina if you're trying to pass these costs on to me,’” Steenhoek said.
The grain shipper also doesn’t want to absorb those costs, which means the hot potato lands in farmers' hands.
“Farmers have options where they can sell to; maybe an elevator close by or a processor further down the road,” Steenhoek said. “But there is kind of a limit to how many points of sale a farmer has access to. So a lot of times the farmer just simply has to absorb that cost.”
Too early to see significant price changes
Some local grain elevators where farmers sell their crops have started to see changes in crop prices. However, David Ripplinger, a bioenergy economist at North Dakota State University, said it’s difficult to separate how much of that change is due to fuel surcharges and how much is due to normal changes around harvest time.
“You already have low prices because you have all of the supply coming online,” Ripplinger said. “So parsing out the exact impact of high diesel prices would take a little bit of math that I haven't done. I don't know if anyone's done that yet.”
There’s also another pressure point on the horizon that could affect transportation costs. Major railway company Union Pacific is looking to buy fellow railway, Norfolk Southern. Proponents of the deal say the merger could help optimize grain transportation. But Steenhoek said it could also mean increased base costs for transporting grain.
“One of the things that we have seen throughout history is that when you limit the number of transportation providers competing for the business of a shipper, in agriculture, in this case, that often results in higher rail rates being assigned to that railroad customer,” Steenhoek said.
Steenhoek added there’s already skepticism surrounding railways. He said there’s a frustration among agriculture shippers who feel the transportation cost hike is also a way to increase profit and revenue.
“As a customer, you don't want all the power to be on the other side of the table,” Steenhoek said.
Farmers eye surcharges
For now, current fuel surcharges may take some time to affect prices. Todd Davis, Indiana Farm Bureau chief economist, said he hasn’t seen crop bids change significantly from typical harvest patterns. But then again, he said, harvest has just begun.
“So the question will be, as farmers harvest and that grain enters the marketing channels, and we have transportation costs paying higher fuel expense: What is that going to do to bids?” Davis said.
Illinois farmer Adam Henkel is no stranger to rail surcharges. He’s seen them before and felt their effect on his prices. He said it’s not something you see as a line item.
“I think most of our suppliers are going to tell us, ‘Hey, we had to get this fuel surcharge in there,’” Henkel said. “So they're going to tell us about it, but we won't physically see it listed separately as most companies or most businesses would.”
Still, even with a fuel surcharge, Henkel looks forward to selling his crops, which include corn and soybeans. Recent U.S. Department of Agriculture crop reports show corn and soybean yields are lower than expected. Less supply means each bushel is worth more than last season.
“I did not lose money this year, but I'm not gonna sit here and brag about having a record year,” Henkel said. “There won't be all new machinery sitting on the farm next year.”
This story was produced in partnership with Harvest Public Media, a collaboration of public media newsrooms in the Midwest and Great Plains. It reports on food systems, agriculture and rural issues.
