Within the next 10 years, U.S. and Canadian grain exports could look very different from now. Stiff competition from other grain-producing countries and regions, such as Brazil, the area around the Black Sea and Australia, could pressure North American export volumes. Meanwhile, domestic production of biofuels, particularly biodiesel, is anticipated to grow.

What will these changes mean for the freight railroads, which transport grains from the Midwest and western Canada to the ports for export? FreightWaves chatted with Jay O’Neil of H.J. O’Neil Commodity Consulting to find out. O’Neil also serves as a consultant for the U.S. Grains Council, and he previously served as senior agricultural economist for the IGP Institute at Kansas State University.

This question-and-answer session has been edited for length and clarity. 

FREIGHTWAVES: What are some of the factors that could affect U.S. grain movements for this upcoming harvest season?

O’NEIL: You have to look at the macroeconomic picture and break it down into three or four different pieces frankly. 

First of all, we talk about the post-pandemic being something less than expected. During the pandemic, there was a shortage of everything, from trucks to drivers to intermodal, to chassis to railroad cars. You could go down the list and everything that had to do with logistics was in short supply.

And then I think too many people in all sectors of the transportation industry expected some of that to continue post-pandemic, and it hasn’t. There was a huge truck driver shortage, and now all of a sudden there’s not. There was a shortage of railroad workers. There was a shortage of all kinds of things.

So from that macro picture, you watch what’s going on now in the U.S.

[Association of American Railroads data shows] intermodal rail traffic is at a four-year low. Obviously, that goes back to pre-pandemic. We have not recovered back to pre-pandemic levels. And then, if you look at grain, the chart even looks worse. It’s a four-year low in grain traffic across all Class I railroads in the United States.

Every day, I watch the port lineups — the grain port lineups at the U.S. Gulf, West Coast, etc. The Texas Gulf has been anemic. It’s really been a slow volume of business going out of the Texas Gulf. And Texas, unlike New Orleans, is largely rail-supplied. So, exports out of Texas have been weak. All I see going out of Texas is a little bit of sorghum, occasionally some wheat.

The only exports that look like they’re still healthy are soybean exports since China continues to be a major buyer of soybeans. But wheat exports and corn exports have been lagging expectations and are lower than they were a year ago and have been challenged to try to meet USDA expectations for 2023. I watch the PNW [Pacific Northwest] exports along with the Gulf, and I have not seen a corn or soybean vessel in the elevator lineups in the West Coast for the last two months. [Instead] it’s all been wheat going off the PNW to Asia.

When you think about it, [these events] speak to a number of different issues and dilemmas. One is that it shows the difficulty in U.S. competitiveness in corn and soybean markets relative to the South American competition. China has been buying a bunch of corn and soybeans out of Brazil in particular this year.

It also speaks to the railroads — BNSF more than anybody else. Both BNSF and UP [Union Pacific] serve the West Coast. That’s an important route for those transport companies. If you talk to the railroads, they’ll always tell you that they’ve got crews stationed up in the north of the United States — North Dakota, South Dakota — and western Nebraska. The railroads say, we’ve got capacity dedicated to West Coast grain movements. [But] when those West Coast grain movements drop significantly, we not only lose that business, we lose that volume. It disrupts our crew schedules, our [deployment of] locomotives. We have to see what we have to do to keep those people employed and keep those rail cars and those trains moving.

This has been a very unusual — some might call it wacky — year. We’ve seen railroads give deep discounts. They have offered deep discounts to exporters to take grain west to motivate additional demand. It just shows again the railroads trying hard to get some movement going west and utilizing their trains.

We’ve seen the railroads moving grain from north to south. We’ve seen special rates put in to move grain down into Kansas. It’s an unusual move. We’ve seen imports of European grain into the U.S. East Coast and into the U.S. Gulf. So, there’s been some rail business to move wheat north, mostly into both feed and milling channels. That’s a pretty unusual move, but it shows the, I hope, temporary situation.

But, some of this is not transitory — some of it I think is longer term. I don’t expect us to be importing wheat every year, but some of the other things, like how we stay competitive in the United States on wheat, soybeans and corn, are going to be a challenge for farmers and U.S. marketers with the growing influence of South America and the Black Sea region despite everything else that’s happening in the Black Sea.

Back to that question of what do we expect for this harvest season. Weather is always a question mark that makes it impossible to predict. But overall, I think the railroads — all the Class I railroads at the moment have some excess capacity because of all this [export decline]. I think they’re very much looking forward to the harvest season and the business, and I think they’re going to be hungry to attract that business and to serve that business, so I don’t see any particular influences right now that should get in their way and prevent them from providing a decent service for harvest.

FREIGHTWAVES: What time frame were you referring to when you talk about grain moves out of Texas?

O’NEIL: I’m talking about the past two to three months. But I think we should ask that question for the next two to three years, the next two to five years. What do we think about the competitive nature of U.S. corn, soybeans and wheat?

Soybeans I think has a lot of international competitive challenges, both from a standpoint of foreign production and from a standpoint of foreign exchange advantages — the Brazilian real being cheap relative to the U.S. dollar, etc.

If you want to ask some questions about what you think will happen over the next two or three years, let alone five or 10 years, there’s a lot of discussion in the market among grain industry people about how it’s going to be challenging to compete with Brazilian corn and Brazilian soybeans. I think we will still export U.S. soybeans for many years to come, but the question is market share, the question is percent and volumes. Will we be shipping out as big a volume of soybeans three or four or five years from now? I think the answer is generally no. Soybean exports from the United States probably will not be as robust looking forward as they have been looking backward.

But we have a large increase in soybean crush capacity coming on in the United States. We have 22 crushing plants on the drawing board. We know that not every facility on the drawing board comes to reality, but even if we take 15 or 16 of those 22 plants, that’s going to require probably about another 4 million acres of soybeans just to supply that expansion. What that means longer term is that we will grow more soybeans in the United States for domestic consumption. It will not be for export. So, U.S. exports of soybeans probably will diminish as domestic demand increases.

It’s kind of like the ethanol industry a few years back where we increased the domestic processing of corn because of all those ethanol plants. Well, now we’re kind of doing the same thing for soybean crushing for biofuels or biodiesel. That will also mean we’ll be producing a surplus of soybean meal that predominantly has to go for export because we don’t have the animal numbers — the per capita beef and pork consumption in the United States — to absorb that much of an increase in animal diets. If you look around the industry, you’ll find AGP out west making improvements at their Grays Harbor facility. That whole new facility, as well as the current one, is dedicated to the export of soybean meal specifically. We have people at the Gulf doing the same thing: looking and examining how they will be able to handle the increase in soybean meal exports in 2024 and 2025. But again, all that means is less whole bulk soybeans going out [for export].

When you look at corn, we continue to have a challenging market to be competitive. And wheat, particularly U.S. wheat exports, has suffered over the last few years. If Europe and Australia and the Black Sea continue to have good weather [for wheat production] and good crops, we don’t see a big turnaround in U.S. wheat exports. In fact, they could decline further.

I’ve had some chats with some Class I railroads, and they understand this and they say, yeah, we’re trying to think how we can adjust, knowing the U.S. will consume more, particularly soybeans, domestically. It’s interesting times. There’s talk about using ethanol for this new, sustainable aviation fuel. If the government subsidies and other things play out a certain way, we could see an increase in ethanol being used for the supply chain, which again would certainly create more demand for domestic corn. So, we’re watching those things.

FREIGHTWAVES: Is the unusual year that the U.S. experienced for grain volumes a harbinger of what’s to come?

O’NEIL: Well, again, it depends on what you’re asking. The importation of European wheat is being viewed right now as an opportunistic attempt: For a period of time, wheat looked cheap and some people jumped on the opportunity. Now, I do think that U.S. exports of whole soybeans, bulk soybeans, will diminish over the next three to five years for the reasons I explained about biodiesel demand and soybean crush demand. Corn hopefully will come back a bit.

And then there’s China. There’s a lot of talk, not only about the post-pandemic recovery but also that the Chinese population has stopped growing. The Chinese population is starting to age — not as much as the U.S., but they’re starting to head in that direction. So, there is talk about is it reasonable to expect that China will remain a major importer? If you look at a five-to-ten-year picture, the answer is, maybe not. It’s still a big country and it still has a big demand, and nobody sees China becoming self-sufficient. We believe that China will continue to be an importer of grains, particularly corn and soybeans. But we probably won’t see incremental growth in the volumes that they’re currently importing.

The world still needs to eat. There’s still going to be demand. It’s just a question of a market share for each country and how that market share may shift between domestic use and export.

FREIGHTWAVES: Are Canadian grain producers experiencing similar issues?

O’NEIL: As far as grain exports are concerned, we don’t live in a vacuum and no place is an island unto itself and therefore is unaffected by what happens around the world. Canada is an exporter of wheat, barley and canola. So, if there’s competition that comes from the Black Sea and other places in Europe for wheat, it affects Canada like it does in the United States. Saudi Arabia and China are the two biggest importers of barley. You probably read that China removed the import barriers for Australian barley that have been in place for the last four years. Barley farmers in Australia are looking pretty happy, but that’s going to affect Canada’s exports of barley.

Canola is a big issue because it’s an oil seed, and canola oil can be used for biodiesel just like soybean oil can.

We’ll have to see how things play out but it’s always like dominoes. What happens in one place ends up impacting everybody else too.

FREIGHTWAVES: How could increased North American production of biodiesel affect Canadian canola oil?

O’NEIL: Canola in Canada, like soybeans in the United States, is going to move by truck from the farm to a processing plant. It’s not going to move by truck from a farm to a local elevator to the port. It’s going to move to a domestic crushing facility, a domestic processing facility. So, that has a significant impact on railroads, who are used to hauling bulk soybeans or bulk barley or canola. So, it affects overall volumes and types of movements.

If I were sitting and working for a Class I railroad, I would say, how many grain cars do I need for the next five years? The way all this is playing out affects the nature of the cars. If you’re talking about [transporting] dried distillers grains and soybean meal, most of those actually travel in private equipment rather than railroad. So, how do Class I railroads make up their fleets? Do we need as many bulk rail cars or our own grain cars?

So yeah, whether it’s Canada or the U.S., I’m sure all the railroads are looking at it the same way: How do we structure our capacity, our fleets and our crews? I think in the next three to five years, there’ll be definite changes.

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