By Tim McLaughlin, Lisa Baertlein and Julie Ingwersen
Sept 14 (Reuters) - Railroad fuel surcharges on U.S. grain shipments have more than doubled over the past year, rippling through the farm belt and raising transportation costs as many farmers also struggle with higher production costs.
The average fuel surcharge rate on grain shipments climbed to 48 cents a mile per rail car in the second week of September, up 153% compared with the weighted average a year earlier, according to U.S. Department of Agriculture
data. Railroads use surcharges to recover most of what they have paid for fuel and combine them with long-haul freight rates.
With higher per-mile rates, surcharges accounted for 11% of total rail transportation costs for shipping corn and soybeans, compared with 5% a year ago, according to the USDA's September 10 report.
The timing is particularly challenging for farmers, with corn and soybean harvests just beginning. As the U.S. war with Iran pushes crude oil and refined product prices sharply higher, diesel fuel surcharges are becoming a bigger part of grain shipping costs just as transportation demand increases.
Whenever railroads pass excess costs on to shippers, such as grain elevators that buy from farmers and ship grain by rail, growers typically see a weaker basis, meaning they receive a lower price when they sell crops.
Gary Millershaski, a wheat and sorghum farmer in Kansas and chairman of U.S. Wheat Associates, an export promotion group, said the basis at his local grain elevator was around 70 cents per bushel below Chicago Board of Trade K.C. hard wheat futures, when it is normally closer to 40 cents under.
"We don't even like to look at it, because it just upsets you," Millershaski said.
Brent oil futures rose above $104 a barrel last week, the highest level since mid-May, on worries about the escalating Iran war. The price for diesel fuel, which locomotives burn, is at a record above $6 a gallon.
"What’s causing absolute conniptions and fits is how fuel prices are changing so quickly,” said Frayne Olson, a North Dakota State University expert on crop economics.
"When you think about an industry where your profit margin is only a couple cents per bushel, that makes a difference."
Many corn, soybean and wheat growers lack access to inland waterways and lean on railroads to move crops long distances to processors, export terminals and livestock feeding operations, Olson said.
"Everybody is quick to raise the fuel surcharges and very, very slow to pull them back. It just gives them an excuse to elevate those freight rates, which further exacerbates the problem we already have," said Steve Compton, a Kansas farmer.
Fuel surcharges are levied on top of long-haul freight tariffs by railroads BNSF, CSX, Norfolk Southern, Canadian National, Canadian Pacific Kansas City and Union Pacific. CSX and Norfolk Southern did not respond to requests for comment; BNSF and Union Pacific declined to comment.
BILLIONS FOR BUSHELS
For railroads, surcharges are designed to respond to fluctuating fuel prices while reducing their exposure to them, a Canadian Pacific spokesperson said.
Surcharges are pegged to the U.S. On-Highway Diesel Fuel Index, up about 60% year over year, and triggered when the cost of fuel equals or exceeds a strike price that generally ranges between $2.30 and $3.25 per gallon. The surcharge escalates as the index rises.
The railroads collected $2.93 billion in fuel surcharges in the second quarter, up more than 90% from the year-earlier period, according to the Surface Transportation Board, the industry's regulator. That covered about 90% of their diesel costs.
Surcharges "ensure rates remain fair and reflective of current operating costs," a Canadian National spokesperson said.
Railroad analysts expect surcharges to remain elevated for the rest of the year.
Archer-Daniels-Midland and other major shippers have not reported negative impacts from surcharges, according to their latest financial reports. They can pass along some of the cost, and ADM last month boosted the upper end of its 2026 profit forecast 10% as rising oil prices increased margins for corn-based ethanol.
Grain elevators, owned by companies such as ADM and privately held Cargill, factor freight and fuel surcharges into the cash prices, sometimes lowering the prices farmers get for grains. ADM and Cargill did not comment.
During periods of strong export demand, transportation costs shift and can be passed on to buyers in key markets such as China, Olson said.
Transportation costs could become a larger issue if Union Pacific buys Norfolk Southern in a deal the railroads say could streamline freight movements and improve service.
Farm groups worry the merger would hurt the cash price for grains. "If you put two big railroads together, that market power is only going to increase," said Daniel Munch, an economist with the American Farm Bureau Federation, the leading U.S. farm lobby.
Attorneys general from major grain states agree.
"There is no reason to create a behemoth railroad that will take more money from farmers, shippers and ultimately consumers in our States and across the country,” officials in Iowa, Kansas, Montana and other states wrote in an August 11 letter to the STB.
(Reporting by Tim McLaughlin in Boston, Lisa Baertlein in Los Angeles and Julie Ingwersen in Chicago, editing by Timothy Gardner and Nia Williams)
