Railroad ethanol traffic is growing faster than expected while grain traffic slows

Implications: Ethanol production has been increasing at an exponential rate during the past 12 months, surpassing forecasts of just six months ago. Industry capacity now exceeds 6.3 billion gallons and another 6.1 billion gallons of capacity is under construction. At 12 billion gallons per year, the railroad industry should handle almost 400,000 carloads of ethanol, up from less than 50,000 carloads in 2003 when only 2.8 billion gallons of ethanol were produced. Carloads of corn have not declined during the last few years because there was enough surplus grain in stock to handle the increase in demand from ethanol producers. This year’s expected bumper crop of corn should be just enough to meet all orders, but the demands of the ethanol industry will soon double, and there may not be enough corn to meet the demands of both the exporters and domestic users.

Analysis:

In 2003, the railroad industry handled over 740,000 carloads of corn; by 2006, the number of carloads had risen to over 820,000. So far in 2007, carloads of grain are down 7.6%, with carloads of corn probably registering near 2003 levels by the end of the year. The falloff might be due to last year’s disappointing corn crop, which was down 5% from 2005 and 11% from 2004, and it might also be due to the increased amount of corn being trucked to local distilleries instead of being moved by rail for export. Deliveries of corn are up 6% to West Coast ports so far in 2007, but down significantly (>10%) by both rail and barge to Gulf Coast Ports that usually handle the bulk of corn exports. Even if the most optimistic forecasts of corn production in 2007 are realized (12.2 billion bushels), the harvest will be just a little larger than the 2004 crop of 11.8 billion bushels when the production for ethanol was much lower. If ethanol production jumps to over 9 million gallons next year, the historic distribution of corn between domestic feedlots (~50%), export (~25%), and domestic food and industrial use including ethanol (~25%) will have to change.

 

If exports decline, the results so far in 2007 indicate that the barge industry will suffer more than the railroads, since exports of corn through Pacific ports are up 6% so far this year and barges handle the lion share of the export traffic to Gulf Coast ports. Eventually however, even West Coast traffic is bound to be affected and rail carloads of corn will fall, but the gain in ethanol traffic should more than offset the loss in grain traffic. At least that is what the early numbers are starting to show.