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Published January 22, 2013, 01:16 PM

Will ag ride rails improved for oil?

Railways are expanding and that’s good for grain.

By: Mikkel Pates, Agweek

FARGO, N.D. — Oil investments by railroads are good for grain traffic — more locomotives, better tracks and sidings — and that bodes well for grain elevators and the farmers they serve.

The North Dakota Grain Dealers Association at its annual meeting in Fargo, N.D., on Jan. 21 heard railroad company officials describe an optimistic scenario for car and infrastructure updates.

Mark Summers, director of agriculture and wheat marketing with the Burlington Northern Santa Fe Railway, says BNSF is expanding both in Minot and Williston in North Dakota and is adding several siding expansions. It also is adding the Hi-Line that extends west across northern Montana to the West Coast.

“Our company feels confident that we’ve got capacity to handle the demand that’s coming at us,” he says.

Asked whether coal exports to the Pacific Northwest would tie up rail capacity over the High-Line on the grain network, Summers says he expects the opposite.

“One of the opportunities we see coming is to export coal off the West Coast. It would originate from the coal fields in Wyoming and would travel up through Montana through the PNW (Pacific Northwest) highline,” Summers says. “And those projects are several years away. They have to be permitted and built and right now, they’re in the permitting phase. There’s been some struggles to get those projects properly permitted.”

More potential to handle oil exists from Washington and Oregon down into California. And there’s potential to handle more grain as Asian economies expand and populations grow.

“We have a number of strategic investments that we’re making across the highline to support that growth,” Summers says. “I feel confident in saying that coal is not going to displace capacity for grain. If anything, the coal and the other commodities are supporting investments that will allow us to move more grain.”

Elevator officials are cautiously optimistic.

Cautious optimism

“I think the jury is still out, though, because last year, when we saw the big boom in oil out here, we also saw a short crop in other parts of the country,” says Steve Strege, executive vice president of the grain dealer group. “The whole rail system wasn’t challenged as much as if we went back to a regular crop, or a big crop.”

Some legislation could be introduced in the wake of the Falkirk (N.D.) Farmers Elevator Co. insolvency, where farmers pre-paid for 2012 fertilizer but did not receive it. Strege says he wouldn’t be disappointed if no legislation came forth, and he hinted that it might not.

“Sometimes in an effort to address a local issue, laws are made or rules are put in place that affect everybody that may have some real negative effects,” Strege says. “Any additional requirements on elevators costs somebody money and normally that gets passed on to the farmer.”

Strege says he’s heard one person talk about putting in another indemnity fund, presumably analogous to the $6 million self-funded indemnity fund that reimburses farmers with price-later or deferred-payment grain contracts. In this case, an indemnity fund would require elevators and fertilizer or chemical dealers to collect an assessment on all fertilizer and chemical sold to go into a fund that would pay when a company goes insolvent.

“I’m not sure every farmer in North Dakota would want to pay an assessment on his purchases for that,” Strege says.

Similarly, there were no discussions about the Anderson Seed case, in which millions of dollars are owed to farmers in North Dakota, South Dakota and Minnesota because of an insolvency of a Mentor, Minn., company.

Strege suggests that bond levels in cases like that could quickly become unaffordable. “There’s no way you could have bonds at the level that would protect for all of the grain that would be in the elevator at today’s prices — you’d have bonds at multi-million-dollar levels. You couldn’t’ afford it,” he says.

Screening device

The bond process offers a “financial screening device” that requires a certain amount of working capital to get a bond, which is required to get a grain dealers license, Strege says.

“In most cases that works,” Strege says. He says it’s possible that the North Dakota Public Service Commission would require financial statements.

“They don’t right now,” he says. “Those go to the bonding company and the bonding company decides if that warrants a bond. If you put that burden on the PSC, then you’re going to have to hire more accountants — people who are experienced in looking at an elevator financial statement and saying, ‘Yeah that one’s okay, but this one isn’t.’”

Expanding

Many elevators in the region have expanded or are expanding to accommodate increased bushels, especially as higher-bushel corn production migrates northward.

Gregg Davidson of Davidson Grain Solutions based in Plymouth, Minn., offered tips on managing building and expansion projects.

Among other things, Davidson said some safety equipment investments are good business, whether or not state laws require them.

Cameron Erickson, manager of the Souris River Cooperative in Russell, N.D., and a vice president of the Grain Dealers Association, asked Davidson how particular the “extremely rural” companies can be in imposing construction completion deadlines in contracts with contractors.

“You as the owner-operator has to decide how important those things are,” Davidson says. “If you can let some of those things slide, and you’re comfortable with that, that’s fine with me. If you have some critical things that you just have to meet, you have to build it in the contract. Otherwise, you don’t have a leg to stand on.”

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