Farmers in the Upper Plain states are dependent on rail service for soybean export shipments, as rail is the most efficient transportation mode in rural areas where the truck cost to the waterways make transporting by barge cost prohibitive. Every year, the railroad tries to determine what assets will be required to handle anticipated volume. The problem is that a farmer’s production is dependent on weather, which is impossible to predict. This makes forward contracting of soybeans problematic. For the cash soybean market, future contracts and exchanges were set up to solve the unknown production issue. If the farmer has a bumper crop, the merchant will require more freight. Likewise, if the farmer has poor yields, the merchant will have too much freight. Because agriculture takes place in rural areas that have limited freight alternatives and require specific equipment, finding replacement freight is impossible. So, the railroads set up a secondary rail market where the freight contract can be bought and sold.
According to the National Grain Feed Association (NFGA), the following items should be in every contract:
- Date of contract
- Number of rail cars, units, shuttles
- Type(s) of equipment
- Price to be paid
- Applicable Trade Rules
- Contract placement period(s)
- Destination restriction(s)
- Terms of payment
- Other terms
Once a set contract is agreed upon, the contract can be sold or bought on a floating price. In years of higher than expected exports, secondary rail markets increase in value and vice versa. Almost every year, certain areas will experience better than expect yields while other areas experience lower than expected yields. This system allows freight commitments to switch to where the freight is required.
Another advantage of a tradable contract is the ability to either “buy” or “ration” demand through freight cost. For example, if a merchant has a secondary freight contract that has increased $500 in value, the merchant could sell the contract and truck the soybeans to the local crushing plant. Likewise, if the contract is selling for a negative $500, the extra margin will make more sells possible.
Monitoring the secondary freight market can give hints for future soybean movements, especially for the Pacific Northwest export market. As can be viewed in the following chart, since BNSF started offering shuttle rate secondary contracts, this is the first time both February and March have been positive. When considering how much more than normal Brazil has shipped out during September, October, and November, the secondary rail rates being unusually high in February and March is logical. With Phase One of the China / U.S. trade deal completed, the U.S. should capture a portion of Brazil’s sales to China.