Industry

Barge Industry Consolidation

As predicted last year, the oversupply of barges and higher operational costs are taking a toll on barge companies and have led to American Commercial Barge Lines (ACBL) filling for Chapter 11 bankruptcy.

“The U.S. Department of Agriculture (USDA) American Commercial Lines, often known as American Commercial Barge Lines (ACBL), filed for Chapter 11 bankruptcy on Friday, February 7,” reported USDA’s Agricultural Marketing Service (AMS.) “Several outlets, including Workboat and The Wall Street Journal, reported that creditors for the carrier had previously arranged a restructuring plan that included $1 billion of debt reduction. According to the 2019 Barge Fleet Profile report from IEG Vantage, ACBL owns 2,497, or over 19 percent of the 12,893 U.S. jumbo covered barges (the type used for grain transportation) counted by the survey. The company intends to make normal payments to vendors for transactions made after this restructuring. The bankruptcy filing reflects recent adversity for the industry, which has faced navigation challenges and trade-related reductions in shipper demand.”

While the financial situation should lead to more consolidation within the inland barge industry, that is nothing new. Since 1970, more than 85 mergers and/or acquisitions have taken place, with another round to take place this year. Even on the tank side of the business that benefited from increasing crude oil production, Kirby Corporation is buying Savage Inland Marine who bought Settoon Towing LLC’s liquid division in 2017. So, what brought the industry to this point?

Outside of a surging crude oil market, 2019 was a very tough year for the barge industry. The largest commodity in terms of barge movement volume is coal, which continues to decline as coal plants switch over to natural gas. The Energy Information Agency continues to forecast a decline in domestic coal consumption. The explosion in higher U.S. liquid natural gas exports is replacing potential coal exports.

In terms of ton-miles, grain and soybeans are the most important commodities. A ton-mile is the distance that the barge will travel multiplied by the number of tons loaded on the barge. Crop barge movements are a much longer distance than coal barge movements. Crude oil is very profitable but is transported in a tank barge. Coal and crops are transported in a dry barge with coal in an open barge and crops in a covered barge. Coal and grain barge movements were down, and bottom line, without major infrastructure improvements that increase the movements of other bulk commodities – such as concrete, steel, and aggregates – barge commodity movements in 2020 will depend on grain and soybean movements. The Phase 1 trade deal is a major step forward but increases in export expectations are being affected by competing countries enjoying good weather and the prospects of the Coronavirus impacting consumption. Eventually, another country will have a crop disaster and when the U.S. fills in the gap, barge volumes and rates will surge.

Barge rates are either spot or contract.  According to ACBL’s website, types of services for contract are: 

  • Affreightment or a contract for a movement of cargo within a carrier’s mainline system over a specified time period. This is the lowest cost service option.
  • Dedicated Barges are available to a customer to load as determined by the terms of their contract, ensuring availability during potential shortages in barge supply.
  • Unit-Tow is when a customer’s barges are moved from origin to destination with a single towboat, bypassing fleeting at river interchanges to provide the fastest service option.
  • Contract Towing is towing of third-party barges.

The advantage of a contract for shippers is the cost per ton transported is fixed. For the carrier, the profit margin depends on how efficiently the product can be transported.  Last year’s weather introduced major inefficiencies, such a limited tow sizes and daylight only movements. The restrictions resulted in more tows to move the same amount of product. For contract rates, the inefficient movement is expensive, but for spot moves, the inefficient movements effectively reduce barge capacity, which increases price. The spot market becomes an opportunity to offset contract revenue losses. The lack of volume kept barge rates in 2019 comparable to 2018 despite river conditions that greatly increased operating costs. By comparison, the last time the river was closed due to high water in 2014, the percent of the Illinois River Barge Tariff Rate exceeded 1,000%, whereas in 2019, the percent of tariff for the Illinois River only exceeded 600% one week and fell below 400% during one of the most extreme weather events in U.S. history.

While the oversupply of barges versus demand is taking a toll on barge companies, the low tariff rates are a positive for Midwest farmers. Declining barge freight rates and lower truck freight rates enable high farm prices in the Corn Belt.

Barge Freight Rate Calculations: According to USDA AMS, “the U.S. Inland Waterway System utilizes a percent of tariff system to establish barge freight rates. The tariffs were originally from the Bulk Grain and Grain Products Freight Tariff No. 7, which were issued by the Waterways Freight Bureau (WFB) of the Interstate Commerce Commission (ICC). In 1976, the United States Department of Justice entered into an agreement with the ICC and made Tariff No. 7 no longer applicable. Today, the WFB no longer exists and the ICC has become the Surface Transportation Board of the United States Department of Transportation. However, the barge industry continues to use the tariffs as benchmarks as rate units.

“To calculate the rate in dollars per ton, multiply the percent of tariff rate by the 1976 benchmark. As an example, a 200 percent tariff for Minneapolis-St. Paul barge grain would equal 2.00 times the benchmark rate of $6.19, or $12.38 per ton. Each city on the river has its own benchmark (see table below), with the northern most cities having the highest benchmarks.” 

Alan Barrett
Alan Barrett

Director of Consulting

Doane Advisory Services

Alan Barrett is Doane’s project consultant and accomplished commodity economist with more than 25 years of experience in futures and cash markets with a focus on cotton, commodity projects, non-traditional agricultural products, transportation and supply chain studies. Alan spent six years as a commodity futures broker. His expertise encompasses feasibility studies of oilseed crushing plants (soybean canola, and cottonseed), grain elevators, export elevators, shuttle elevators, grain container operations, flourmills and other processing facilities. Alan also has conducted transportation supply chain studies for grains, oilseeds, fertilizer, coal, natural gas, crude oil, and petroleum products. Alan has considerable experience in non-traditional agricultural products such as coal, coke, natural gas, chemicals, hydraulic fracturing fluid, hydraulic fracturing proppants, glycerin, fertilizer, micronutrients, salt, limestone, cement, iron ore, pig iron, and steel, especially feed ingredients. Mr. Barrett has a BS and MS in Agricultural Economics from the University of Tennessee.