Ask The Experts: May 29, 2019
Independent Transportation Analyst and Consultant
Q: What are your thoughts on the current US Agriculture markets?
A: Soybean prices have fallen below $8/bushel (an Iowa State University study pegs break-even at about $9); storage is at record levels; the African Swine Fever outbreak in China has reduced their appetite (even as LatAm competition – and harvests – grow rapidly. Not a pretty picture. The White House’s offer to renew a farmer bailout program (~$12-15B) is aimed at 2020, of course; their discussion on using crops for humanitarian aid doesn’t really apply to soybeans (not consumed by humans, largely). One bean farmer quoted in the Journal had to leave last year’s crop in the field because he lacked storage space (exacerbated by the metals tariffs!) – and thus didn’t qualify for the bailout money (only for harvested crops!). Catch 22….
Q: What do you think about the latest reactions to Precision Scheduled Railroading (PSR)?
A: I continue to marvel at the misconceptions and willing or naive pontifications on the subject. It is linked to what I have been calling the “Cult of the OR”, to be sure – and to the pure cost-cutting side of that equation. And, it has attracted investors on the shorter time horizon part of the spectrum (pressuring capex). But it can and should (will?) mature into a “pivot to growth” (viz CP) – as I have also stated, look north to the freight rail future (potential).
That hasn’t stopped the critics – in DC (below) of the “Old Guard” rail/transport press. The Journal of Commerce (JoC) called it unproven (while correctly noting the poor communication effort at CSX, whose experience will inform that of the reaction to the other US rails undergoing the transformation). The JoC quoted the usually reliable Full Tariff Rate (FTR) in stating that railcar capacity utilization had only improved slightly (they put it at 78%, up from 75% in 2017 – though how they get that proprietary information is anyone’s….guess).
Change is hard - More egregious was “Trains” magazine’s rip (calling PSR “the latest operating fad”) – saying it is “designed to reduce employment” (no, ideally all assets get reduced due to increased consistency/reliability; also see KSU’s recent proclamations on the subject – “Service begets Growth”). They (Solomon) goes on to say it’s “driven by Wall Street” which makes me wonder of Hunter was aware of Wall Street while initiating this on the Frisco – and why the – focus here – owners of a company are expected to have no say? To be sure, rails get punished by “short term-ism” – see my push to focus on ROIC and Capex – but rail investors have actually been pretty patient ones this century. Further: PSR seems to be “formulaic simplifications to please investors (here we are again, Kamerade) while glossing over shippers needs”. Is that happening above the 48th parallel?!? One thing they did get right is the reaction – which they are inflaming – to PSR is bringing back re-regulatory threats again.
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