Market for U.S. Grain Barge Services Russell Byington Chief Economist Maritime Administration May 2009

U.S. Grain Exports Rail Barge U.S. is the world’s largest grain exporter. Grains move from the U.S. Midwest to five major port areas: Seattle/Columbia River Ports LA/LB Houston New Orleans Norfolk Seattle, Col. R. Ports Norfolk About 25 percent of U.S. grain production is exported each year. Half the exports are to the Far East. Inland barges move exports to New Orleans. Railroads move exports all ports including New Orleans. In a six months, the lower Mississippi will be teaming with grain barge tows, each hopper barge 195’ x 35’ with a 1,500 ton capacity. Some tows include as many as 40 hopper barges, propelled by a 6,000 HP push-boats. As of year-end 2008, there were about 9,600 covered hopper barges and 3,600 tugs available for operation on the Mississippi. L.A./L.B Houston New Orleans Rail Barge

Source: Agricultural Marketing Service for rail; USACE for barge. Over the last five years, rail shipments to U.S. ports increased by 73 percent, while barge shipments declined by 19 percent. Source: Agricultural Marketing Service for rail; USACE for barge.

Source: Agricultural Marketing Service. Rail shipments to PNW ports doubled. In 2008 PNW ports accounted for about 55 percent of rail shipments, and 25 percent of all shipments. Source: Agricultural Marketing Service.

Why rail increased and barge declined? Higher fuel prices A PNW short-cut to the Far East Higher prices for barge services Higher ocean freights Reliability issues Seattle/Japan 4,498 Mi. With higher fuel prices, shippers looked for shortcuts. The ocean leg from the PNW to Japan is less than half that from New Orleans to Japan. New Orleans/Japan 9,405 Mi.

Source: Bureau of Labor Statistics. Over the last five years, the producer price index for inland barge services (freight) increased by 92 percent while the price increase for rail carload services increased by 51 percent. Much of the increase was due to higher fuel costs. On average about 33 percent of fuel price increases were passed on in higher prices for barge services, while only twenty-four percent of the price increases were passed on in higher prices for rail services. Source: Bureau of Labor Statistics.

Fuel Efficiency, Water and Overland Modes Fuel Efficiency Measures: Ton-miles/gallon. Mule is the best, but slower and not as reliable as other modes. Runs on oats, a bio-fuel. Customers pay for speed and reliability as well as volume and distance. Fuels Costs/$ of Gross Output. Better for modal comparisons. Rail is best (6.5%) followed by Water (7.5%), truck (12.6%) and pipeline (16.7%). In terms of ton-miles/gallon, mule is best, but slower and not as reliable as other modes. I thought about using a mule for my trip to New Orleans, but air was a bit faster. Customers pay for speed and reliability as well as volume and distance. Fuel costs per dollar of gross output is better for modal comparisons. Rail is the best, water is second best.

Source: Clarkson’s Research. Ocean freights from the PNW are much lower than those from the U.S. Gulf. This advantage increased significantly with the increase in bulk carrier charter rates and fuel prices. This is changing. Source: Clarkson’s Research.

Waterway Disruptions Reduce Reliability of Barge Services There are 27 locks on the upper Mississippi. They were built in the 1930s. Twenty-five of them are 600 feet long by 110 feet wide which allows 6 barges to transit at a time. Two of the locks are 1,200 feet long which allows 15 barges to transit at a time. Tows on the upper Miss are generally 15 barges (one tug). The 15-barge tows have to be broken apart and reassembled to pass through the locks, which doubles transit times. Over the last 5 years, unscheduled lock repairs (hours) increased by nearly 400 percent. Source: USACE.

Market Model for Inland Grain Barge Shipments BMS = 5.872 + 1.115 Pbarge/Prail – 0.274 Pfuel – 0.046 down (25.529) (2.809) (-6.438) (-2.597) r2 = 0.965 dw = 2.467 int: 1999-2008 BMD = – 0.879 – 2.204 Pbarge/Prail + 1.162 Exports (-0.453) (-5.348) (2.801) r2 = 0.772 dw = 2.138 int: 1999-2008 Pbarge/Prail BM Inland Barge Movements, Grains and Oilseeds, Tons Pbarge Producer Price Index, Inland Barge Freight Services Prail Producer Price Index, Rail Freight Services Pfuel Producer Price Index, Diesel Fuel Exports Grain Exports, Tons down Unscheduled Lock Repairs, Hrs. S2 S1 There are a lot of decisions in model-building. For me the hardest decision was choice of variable names. I needed an abbreviation for “barge movements” Reluctantly, I chose “BM” The alternative was BS for barge shipments. Wore me out. So I started using pictures. The characteristics of market for inland barge services are: A high elasticity of demand -2.2, flat demand curve, and a much lower elasticity of supply, 1.0, supply curve is more vertical than demand curve. Higher fuel prices moves the supply curve to the left resulting in much lower barge shipments as shippers turn to rail and vice versa. D BM

What Ifs 2008 Values: BM 60.4 million tons Exports 130 million tons Lock Repairs 70,000 hours Fuel Price Index: 325 Barge Movements of Grains at 2008 Export Levels Fuel Price, Index Lock & Dam Repairs, Hrs. 100 160 325 5,000 83.0 76.4 67.4 35,000 77.0 71.1 62.5 70,000 74.9 69.0 60.4 It looks like diesel fuel price index is settled down to about 160 so far in 2009 If, the price of fuel falls by 50 percent from 2008 to 2009, everything else unchanged, barge movements would increase by about 9 million tons, or 15 percent. If lock repairs also fall by 50 percent, movements would increase by about 11 million tons or 18 percent. In 2002, the U.S. experienced poor economic growth, and rising unemployment, but declining fuel prices. It turned out to be a boom year for hopper barges services. Could happen again in 2009.

Conclusions Demand for barge services is price elastic (rail alternative). About one-third of fuel price changes are passed on in higher prices for barge services, compared to 24 percent for rail services. Unscheduled lock repairs (hours) have increased by nearly 400 percent over the last five years contributing to the decline in barge movements. Despite a bad economy, lower fuel prices should bring a 2009 recovery in barge shipments. Never use the “F” (forecast) word. This is a “What If” not the “F” word. “Persons pretending to forecast the future shall be considered disorderly under subdivision 3, section 901 of the criminal code and liable to a fine of $250 and/or six months in prison” Section 889, New York State Code of Criminal Procedure Cited by Pindyck, R. and Rubinfeld, D, Econometric Models and Economic Forecasts, 1998, p. xiii.

Questions Russell (Buff) Byington russ.byington@dot.gov www.marad.dot/data_statistics