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Increasing Freight Rail Rates Pressuring Ag Income

The cost of shipping commodities on domestic rail systems is rising, and it’s putting pressure on U.S. farmers’ bottom lines. Daniel Munch, associate economist with the American Farm Bureau Federation, says rail rates on agricultural goods have risen as much as 18 percent.

“Rail rates on corn have gone up 13 percent; on soy, have gone up 11 percent; and on wheat, 7 percent over the past five years. Similarly, rates to transport ethanol increased 18 percent or about four cents a gallon.”

Much to his surprise, Munch said the rising cost of fuel wasn’t a primary driver in the higher cost of shipping freight via railroad.

“Adjusted for inflation, rail fuel costs have remained quite similar to 2018 and 2019 rates, unlike what consumers are experiencing at the pump; they have increased quite a bit in the past year but mainly as a comeback from COVID-19-related demand shocks. Additionally, demand for freight rail from the ag sector, at least, has remained steady over the past five years with a few spikes associated with increased exports. So, overall fuel and transportation demand were not clear pressures for increased rail rates.”

Munch analyzed shipping rates by origin and destination states. In both cases, Munch said states east of the Mississippi River had the highest increases. Reduced competition in the rail market is also playing a role in the rising cost.

“In the ag sector, we found that over the past 15 years, non-competitive rail movements or routes not subject to strong competition have increased from 20 percent of revenue to about 42 percent of revenue when there’s limited competitive forces. This can incentivize price-setting behavior and disproportionately impact rail customers like farmers and ranchers, who are limited in their ability to choose other options to transport their goods.”

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