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Market Matters Blog           09/23 14:27
Fed Wants Banks Out of Commodities
STB Makes Proposal on Rail Transportation of Grain, Rate Regulation 
A Look at 2015-16; Soybean Crop Year Cash Price Ends on Low Note
Will Railroads Keep Up During Harvest in US and Canada? 
Louisiana Flooding Affecting Transportation, Crops
Ag Shippers Push ILWU, PMA to Discuss Contract Extension
The Other Winter Wheat
STB Proposes Rule to Provide Competitive Rail Service
Freight Costs Rise as Large Crops Loom 
Volatile Markets Require a Long-Term View

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Fed Wants Banks Out of Commodities

   The Federal Reserve stepped back into the spotlight Friday, two days after 
announcing it was leaving interest rates unchanged in September. However, its 
latest move could possibly be read as an attempt to limit banks' exposure to 
increasingly volatile commodity markets if a December rate increase -- 
particularly if it is larger than the expected 1/4% -- is seen.

   According to a Wall Street Journal article, the proposals are to "minimize 
risks an environmental catastrophe could pose on the financial institution." 
The article goes on to point out such risks include "an oil spill, mine 
explosion, or power-plant meltdown at a bank-owned facility."

   But the timing and reaction of markets following the release of the news 
would suggest there may be more to it than that. Commodities from all major 
sectors, particularly those showing investment traders holding large net-long 
futures position, came under heavy pressure from what looked to be investor 
long-liquidation selling.

   Why? While many of the investors may not be in the banking industry in 
question, the idea of forced selling of physical commodity ownership would be 
enough to skew the perceived supply-and-demand situation. Therefore, investors 
from other areas would look at reducing their exposure to out-of-balance, 
fundamentally, markets. Crude oil's Friday move certainly looks to be the 
poster-child of such a situation, falling to a loss of almost $2.00 after 
trading higher earlier in the day. Ag commodities aren't immune to the ripples 
either, with investment traders holding a large net-long position as of the 
most recent CFTC Commitments of Traders report. On the other hand, corn and 
wheat saw light support as investment traders covered a portion of their 
net-short futures position.

   As with threats of a rate hike, tighter restrictions are nothing new to the 
banking community. For years, banks have been slowly winding their way out of 
the physical commodity sector, expecting tighter trade restrictions. The 
article states the Fed would impose an "unusually steep" 1,250% capital charge 
on banks to push them out of remaining physical commodity businesses. Wall 
Street Journal's article also points out that public will be given a 90-day 
comment period, with the deadline Dec. 22, and the rule taking effect after 
that. Interestingly enough, that is one week after the FOMC (Federal Open 
Market Committee) December meeting where an interest rate increase is expected. 

   To track my thoughts on the markets throughout the day, follow me on 
Twitter:www.twitter.com\Darin Newsom 

   -- DTN Senior Analyst Darin Newsom

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STB Makes Proposal on Rail Transportation of Grain, Rate Regulation 

   Shippers have until Nov. 14 to comment on a U.S. Surface Transportation 
Board (STB) proposal to establish a new railroad rate review process that would 
be more affordable and accessible to shippers of all commodities -- including 
agricultural commodities -- with small disputes.

   The push for changes to the railroad rate review process began last year 
when the STB held a hearing in Washington, D.C., on June 10, 2015, to give rail 
shippers, ag organizations and railroad companies the opportunity to express 
their opinions about improving procedures to set fair shipping rates.

   Through those meetings, the STB explored the issue of "making the rate-case 
process more accessible" to all shippers who use rail as their mode of 
transportation. The Staggers Rail Act of 1980 provides rail shippers the 
ability to challenge unreasonable rates. 

   "Yet, despite concerns about high rates from shippers of grain over the 
years, no such shipper has filed a rate complaint with the agency since 1981," 
the STB said at the 2015 hearing. Shippers cited some of the reasons were that 
the current formula was arbitrary, too costly and onerous, which discouraged 
them from taking part in the current process. 

   If you are a rail shipper, it's no secret that rail rates continue to creep 
higher. If a shipper feels rates are unreasonable compared to others, it has 
not been cost-effective or easy to dispute rates. A wheat trader told me a few 
months ago that freight rates have doubled over the last five years and freight 
is one-third the value of grain wheat today. 

   With grain prices being so low currently, an increase in freight costs cuts 
into shippers' margins and affects the cost of the grain paid to the farmer. 
Looking at the current DTN cash index for corn on Friday, Sept. 19, versus the 
same time last year, the price is 46 cents lower. For winter wheat, the DTN 
cash index is $1.20 lower. Heading into the fall, harvest prices are expected 
to weaken even more. On top of that, it is not uncommon for railroads to raise 
tariff rates in October. 

   Tim Luken, manager of Oahe Grain, an elevator located on a short-line 
railroad in Onida, South Dakota, which is serviced by the Canadian Pacific, 
told me one year ago, "Back in 2007, it cost $2,644 per car on the short line 
for the 25-car rate to Chicago and beyond. Today it costs $3,881 per car to 
Chicago and beyond; a 46.8% increase in eight years."

   Since then, Luken told me recently, "Union Pacific did lower their rates not 
only to Chicago but other destinations later last summer. The CP did lower 
their rates also due to the fact the UP did. We use to have a 25-car rate and a 
single-car rate. Now it's all a single-car rate no matter how many cars we 
ship. From one to 74 lo-cap (low capacity) cars are $3,735, and if we ship 
75-plus cars, the cost is $3,350 per car." 

   The National Grain and Feed Association (NGFA) said in a news release that 
it will "carefully examine" the STB advance notice of proposed rulemaking 
decision. Here is a link to STB Docket No. EP 665 (Sub-No. 2): 
https://www.stb.gov/decisions/readingroom.nsf/UNID/2E759A7B8B7E996F85258020004DF
485/$file/44836(2).pdf 

   The NGFA in 2015 developed and proposed to the STB a totally new rate 
methodology, called the "agricultural commodity maximum rate methodology," that 
would create a more accessible, streamlined, cost-effective and workable 
process for grain shippers to challenge unreasonable rates, according to the 
news release. The NGFA had been an active participant in a previous STB 
proceeding that laid the groundwork for the agency's new rulemaking. 

   In the news release, the NGFA also said the "STB's current 
rate-reasonableness standards are inappropriate for grain given the nature and 
characteristics of rail movements of agricultural commodities, the multiple and 
varying origin-and-destination pairs for agricultural shipments and volumes, 
and the nature of railroads' pricing practices, under which uniform rates are 
imposed across-the-board for certain commodities or types of traffic." These 
points were also acknowledged in the STB's advance rulemaking notice issued 
Aug. 30.

   Bob Zelenka, executive director of Minnesota Grain and Feed Association, 
told me, "We too are in the process of reviewing the proposal and will be 
offering some comments. Generally speaking, we like the move to a more 
user-friendly process. The previous process was extremely time-consuming and 
very expensive to pursue. This new proposal would streamline the rate challenge 
process and certainly make it more accessible to the smaller captive shipper, 
which are the ones most likely to be facing what could be deemed as an unfair 
or excessive rate." 

   "The fear of retribution by the railroad serving this customer is still in 
the back of each rail customers mind. This fear may lead to a reluctance to 
utilize the process but we believe it is still very important for rail users to 
have access to some reasonable recourse, to challenge a rate (and service 
level) that is deemed as unfair, unacceptable or excessive. It is good to 
finally see the STB become more of an advocate for the rail user, which hasn't 
been the case up until now, since the advent of the STB in 1996," added Zelenka

   The STB said in their proposal that based on the comments and testimony 
received, they believe the existing rate review processes present accessibility 
challenges for not only grain shippers, but also small shippers of any 
commodity. "The board also recognizes that for small rate disputes, regardless 
of commodity, the litigation costs required to bring a case under the board's 
existing rate reasonableness methodologies can quickly exceed the value of the 
case. Therefore, the board is opening a proceeding in Docket No. EP 665 
(Sub-No. 2) to develop a new rate review process that would be more affordable 
and accessible to shippers of all commodities with small disputes." Comments 
are due by Nov. 14, 2016. Reply comments are due by Dec. 19, 2016.

   Mary Kennedy can be reached at Mary.Kennedy@dtn.com   

   Follow her on Twitter @MaryCKenn

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A Look at 2015-16; Soybean Crop Year Cash Price Ends on Low Note

   The 2015-2016 crop year started out with soybean basis going strong as 
old-crop supplies were hard to find and processors had to pay a premium to 
flush out what was left until harvest started.

   The soybean cash index started out on Sept. 1, 2015, with the DTN National 
Average Basis at -15 under the November 2015 futures (SX15) and a DTN National 
Soybean Index cash index at $8.72. 

   By Oct. 1, basis was definitely feeling the pressure at -56 SX15 and a DTN 
cash index of $8.21 as harvest was rolling along with strong yields being 
reported. By the middle of October, the DTN cash index rallied to $8.54, but 
the basis was still at -56 SX15, content to let the futures market control the 
flat price. As the week rolled on, processor basis weakened overall as farmers 
moved new-crop beans to market thanks to the futures rally. River basis in the 
Upper Mississippi was weaker due to low water conditions slowing barge traffic. 

   Heading in to November 2015, basis moved to the January (SF16) futures, 
unchanged at -51 SF16 with the DTN cash index at $8.27 on Nov. 1. Rail basis 
delivered to the Gulf strengthened as beans were having a hard time making it 
south in barges due to the dredging south of Greenville and low-water safety 
advisories in effect for the lower Mississippi River, slowing barges heading to 
the Gulf. By Nov. 9, basis improved to -48 SX16, but the DTN cash index 
weakened to $8.19. Rains in the Ohio River Valley helped improve water levels 
in the lower Mississippi River, and once the dredging in the lower Mississippi 
ended, the river reopened for empties and full barges to move freely without 
restriction. 

   By mid-November, the DTN cash index was at $8.09 with the basis at -46 SF16. 
Soybean futures were pulled lower after USDA reported soybean production of 
3.981 billion bushels vs. their October estimate of 3.888 billion bushels and 
also raised the yield estimate to 48.3 bushels per acre vs. 47.2 the prior 
month. It appeared the increases made by USDA showed not as many acres of 
soybeans were victimized by the heavy rains during the 2015 growing season 
and/or other states that had good weather picked up the slack. Farmer selling 
slowed at this point due to the cheap cash prices. Exporters in the upper 
Mississippi River were working to fill their needs at the Gulf as the shipping 
season was preparing to close for the winter. The 2015 towing season on the 
upper Mississippi River was extended by a few days due to unseasonably warm 
weather in the northern Midwest, but on Dec. 3, the U.S. Army Corps of 
Engineers, St. Paul District, locked the last tow of the season out of St. 
Paul, Minnesota, signaling the beginning of the end of 2015's upper Mississippi 
River transport season.

   By the end of December, all hell broke loose on the middle and lower 
Mississippi River as the water levels went from dangerously low in spots to 
overflowing its banks. River basis levels weakened as river terminals were 
unable to get barges under spouts in high water to load grain, and anything 
loaded or empty was either moving at a slow crawl or likely tied off due to 
river closures. On Dec. 30, 2015, the basis moved to the March (SH16) futures 
unchanged at -44 SH16 and the DTN cash index had still not improved much at 
$8.21. Basis levels on the river continued to fade as most of the U.S. river 
system was shut down due to flooding. The areas that remained open were under 
high-water restrictions and unable to load barges.

   On Jan. 15, 2016, basis remained unchanged, but the DTN cash index improved 
to $8.38. Basis on the Illinois River weakened as high water and ice flows in 
some parts continued to hamper barge traffic and the CBOT force majeure 
remained in place for a few delivery stations on the Illinois River. By the end 
of January, river conditions started to improve but barges had a slow go of it 
in the lower portion of the lower Mississippi River, and while the river had 
crested there, continued navigation slowdowns and logistic delays from 
Vicksburg to New Orleans were expected for a few more weeks. The DTN cash index 
was lower at the end of the month at $8.21 and basis wasn't much improved at 
-46 SH16.

   You can see on the chart accompanying this article that basis remained 
pretty steady through February, ending the month moving to the May (K) futures 
at -56 SH16 and then started to slowly weaken heading in to March. The DTN cash 
index at the end of February was lower at $8.08, thanks to South America 
harvesting a large crop and Brazil exports picking up, putting pressure on U.S. 
prices. 

   When March 2016 came to an end, the soybean market got some help from USDA 
reporting estimates for soybean planted acres for 2016 at 82.2 million acres 
vs. trade estimates of 83.1 million acres. USDA said that compared with the 
prior year, planted acreage intentions were down or unchanged in 23 of the 31 
estimating states. The March basis ended 5 cents weaker than the first day of 
March as a strong DTN cash index throughout the month pressured basis, with the 
DTN cash index on March 31 at $8.53, 48 cents higher than it was on March 1. On 
April 29, 2015, the basis moved to the July (SN16) futures unchanged at -73 
SN16.

   On May 10, soybean prices staged a rally, with futures reaching a 17-month 
high with a DTN cash index of $10.11 after USDA surprised the market with a 
lower-than-expected reduction in both U.S. and global stocks. The DTN cash 
index spiked, but fell back toward the third week of May to $9.88 as soybean 
planting was moving along at a good pace and above the five-year average. By 
the end of the month, basis rallied to -68 SN16, and the DTN cash index was at 
$10.18 thanks to fresh export demand and slow farmer selling as most farmers 
were either still planting or were running short on cash beans.

   By the middle of June 2016, soybean futures reached a near two-year high, as 
dry, hot weather forecasts caused concern in the market. The DTN cash index 
rallied to $11.07, putting pressure on the basis which was at -71 SX16. At the 
end of June, soybean basis moved to the November (SX16) futures with a 2-cent 
hike on the roll at -33 SX16 and the DTN cash index was firm at $10.79 due to 
dry weather in the eastern Midwest and Delta. U.S. soybeans were still a 
cheaper value than Brazil at the Gulf and demand continued for export. But, 
old-crop soybeans were not readily available either due to cheap prices or the 
fact some farmers had none left.

   Following the long July 4th weekend, soybeans staged a late fireworks 
display with the new-crop November beans losing 60 cents. Rains in parts of the 
Midwest over the long weekend and more predicted during the week pushed 
soybeans lower with the cash DTN cash index at $10.48. Basis remained firm at 
-29 SX16 as the futures price lost ground. By the middle of July, the DTN cash 
index fell to $10.17, taking a beating after the market was feeling less 
concerned about a "dome of heat" over the soybean crop in its critical growth 
stages. The basis wasn't much of a help as it dropped to -41 SX16. By the end 
of the month, basis turned around to -33 SX16, but the DTN cash index had 
continued its downward spiral, ending July at $9.45.

   At the beginning of August, favorable weather once again pushed the DTN cash 
index lower to $9.30 as weekly crop conditions remained steady and above the 
five-year average for that timeframe. Basis moved a little higher to -31 SX16 
as the low cash price turned away any farmers who had old-crop soybeans left to 
sell. On Aug. 12, USDA NASS forecast that U.S. soybean growers would increase 
their 2016 production by 3% from 2015.

   "Soybean yields are expected to average 48.9 bushels per acre, reaching 
another record-high mark. The acres planted to soybeans remain unchanged from 
the June estimate. Record soybean yields are expected in Illinois, Iowa, 
Missouri, Nebraska and Wisconsin. Growers are forecast to harvest 83.0 million 
acres of soybeans this year," USDA stated. While this news sent the market 
lower, it didn't last long as soybeans continued to see fresh export business 
on an almost daily basis during the first half of August. 

   As the old-crop year came to a close, soybeans came under pressure from the 
Pro Farmer Midwest Crop Tour estimating that U.S. farmers would likely see a 
record crop this fall. August weather was ideal for the corn crop in most of 
the key growing areas and remained nearly ideal for soybeans. Soybean 
conditions reported for the week ended Aug. 21 by USDA were at a 10-year high 
for that time of year, which added pressure on the DTN cash index of $9.18 on 
the last day of the old-crop year. Basis ended the last day of year at -33 
SX16, remaining firm as processors continued to look for old crop beans to 
crush due to the strong meal demand.

   There were spikes in the flat price during the year, giving farmers an 
opportunity to get rid of their old crop and most of them did. Overall, though, 
it wasn't really a stellar year for soybean prices, especially once the 2015 
harvest ended and projections grew for a larger crop in 2016. The DTN average 
basis of -51 for 2015-16 crop year was the lowest average since 2011-12. 

   Mary Kennedy can be reached at Mary.Kennedy@dtn.com 

   Follow her on Twitter @MaryCKenn

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Will Railroads Keep Up During Harvest in US and Canada? 

   With near-record corn and soybean crops predicted in the U.S. and big crops 
also expected in Canada, railroad companies in both countries are gearing up 
for what looks to be another high-volume harvest this fall. The question on 
many farmers' and shippers' minds likely is: Can the railroads handle it?

   The major railroad service disruptions in 2014 are still fresh for many 
farmers and shippers and likely is part of the reason for their concern about 
rail movement this fall, as a large harvest looms on the horizon. 

   In addition to the near-record U.S. harvest for corn and soybean crops 
estimated by USDA, Statistics Canada said even though some of Canada's crops 
will produce less than they did in 2015, Canadian farmers are still expecting 
production of wheat, barley and lentils to increase in 2016.

   In the U.S., as of January, BNSF had about 4,800 furloughed due to slowing 
demand for rail cars by the agriculture sector, but also due to a large 
decrease in demand for coal cars during that month compared to the prior year. 

   A source knowledgeable with BNSF told me that the number of furloughed 
employees is now at about 2,000. He said BNSF has invested over $15 billion the 
past few years, keeping network infrastructure in optimal condition while also 
staying ahead of customers' freight service needs. Also, reduced coal and oil 
traffic has resulted in a significant amount of rail capacity that agriculture 
can use.

   According to the most recent service update, the current shuttle (110-car 
unit) trips per month (TPM) is at 3.0, and most shippers plan around 2.5 to 2.8 
turns. My source told me that BNSF is currently running 130 grain shuttles, a 
record for this time of year, and they can "scale up" some more if demand 
warrants. 

   Secondary shuttle freight costs have soared this past week, adding 25 cents 
to as high as 59 cents a bushel (at current cost) to already cheap cash prices. 
On Thursday, shuttle freight rose from the prior day with prices for September 
split into four weeks at $900/$1,100/$1,400/$1,900 per car. October costs were 
at $1,750/$2,200 per car split for the month. Remember, these costs are on top 
of tariff rates by the railroads, which sometimes increase in October. The 
tariff rate per car for a shuttle from Grand Forks, North Dakota, to the 
Pacific Northwest is $1.51 per bushel. 

   Freight costs play a large part in basis determination for an elevator. Note 
that corn basis in North Dakota, where most shuttles of grain flow to the PNW, 
ranges from a low of -95U cents to a high of -46U cents, according to DTN's 
regional average basis on Aug. 26. 

   Angie Setzer, vice president of grain at Citizens Elevator in Charlotte, 
Michigan, told me that while they do load cars normally, "we don't have too 
many concerns when it comes to not being able to ship the needed bushels 
because we are sitting in one of the few areas affected by drought this year. I 
know in Iowa there are some concerns, but so far, they have been told the cars 
will be there when they need them. Much of that, of course, will depend on 
whether or not harvest happens in a two-week compacted time frame or is spread 
out a bit. If it happens quickly, I foresee a lot of ground piles in our future 
until the railroad performs!"

   CANADA RAILROADS ALSO GEARING UP FOR BIG HARVEST

   DTN Canadian Grains Analyst Cliff Jamieson said that "Statistics Canada 
released its first estimates of Canadian crop production on Aug. 23, which 
showed a large prairie crop is on the way. This report, which is based on July 
producer surveys, tends to be conservative. The canola crop is pegged at 17 
million metric tons, which is 5.5% above the five-year average but well below 
industry expectations. Canada's all-wheat production (including durum) is 
estimated at 30.5 million metric tons, only the second time in 25 years that 
the 30 mmt level has been cracked."

   The topic of grain transportation remains one of the top issues for prairie 
agriculture as the industry looks to what should be a large prairie harvest, 
added Jamieson. "Both railways, The CP and CN, have made bold statements that 
they are prepared to move the 2016 crop."

   The Canadian Pacific published a letter on their website to federal 
ministers of transportation and agriculture, stating they are "well-positioned 
and ready to move this year's western Canadian grain crop, which is forecast to 
be significantly bigger than the five-year average, to market." 
(http://goo.gl/Wu1Lfo)

   Canada's two railroads performed well in the 2015-16 crop year ending July 
31, said Jamieson, but the Ag Transport Coalition, made up of prairie commodity 
groups which are involved with 90% of the grain movement originating from 
Western Canada, reported that:

   -- 88% of the hopper cars ordered over the 2015-16 crop year were spotted in 
the country for loading in the week wanted;

   -- 8% of hopper cars were spotted one week late;

   -- 1% of the hopper cars were spotted two weeks late, and;

   -- 3% of the cars ordered were outstanding at year-end.

   "Prairie producers and industry are not satisfied that enough has been done, 
with the railroads' failure to move the record crop of 2013-14 at an estimated 
cost in the billions of dollars in lost sales and producer income still fresh 
in many minds," said Jamieson.

   Jamieson noted that prairie grain transportation was on the agenda when 
Federal Agriculture Minister Lawrence MacAulay and Saskatchewan MP Ralph 
Goodale met with 19 agricultural stakeholders in a meeting in Regina this week. 
"Every effort that can and could be taken will be taken to ensure that the 
grain is moved more efficiently than it was (in 2013-14)," stated MacAulay. The 
issue of increased data availability and transparency is one issue that was 
reported to come up in many of the presentations. The Saskatchewan Association 
of Rural Municipalities has called for harsher penalties imposed upon railways 
in the event of failure. 

   In the U.S., all Class 1 railroads still provide thorough weekly service 
updates as directed on Oct. 8, 2014, by the Surface Transportation Board. On 
Dec. 30, 2014, the STB proposed that the weekly service updates become 
permanent, but would listen to opinions from railroads and shippers. As of this 
date, there is no final decision on whether to change the current reporting or 
leave it as is. Also note that in the U.S., there are no penalties for 
non-performance as there is in Canada.

   The success of the railroads both in Canada and the U.S. will indeed be 
dependent on timing of the harvest and may have different results for different 
railways.

   Mary Kennedy can be reached at mary.kennedy@dtn.com 

   Follow her on Twitter @MaryCKenn 

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Louisiana Flooding Affecting Transportation, Crops

   Louisiana has been under siege for weeks from torrential rains causing 
catastrophic flooding as harvest neared. Crops are waterlogged in flooded 
fields, some rail lines were under water and roads closed, making transport of 
grain (or anything) difficult. Still, the effect on grain basis has been 
marginal, as basis had started to weaken along the river before the floods.

   Ronnie Levy, LSU AgCenter soybean specialist, told Delta Farm Press on Aug. 
16, "It's such a shame, really, because we had an excellent crop. It's hard to 
take. It probably wouldn't have been the record, but USDA had us pushing 50 
bushels and that would have been second best ever."

   Mike Strain, Louisiana Agriculture and Forestry (LDAF) commissioner, told 
Delta Farm Press on Aug. 17, "I've been on the phone with my federal 
counterparts daily. We're doing analysis of the situations on our farms and 
grain elevators. There are teams currently on the ground assessing the damage. 
It usually takes several weeks after floods have fully receded for our federal 
counterparts to have a full analysis of crop damages. We're very concerned a 
lot of our rice and soybeans won't be harvested."  

   AT THE GULF

   Tom Russell, co-owner of the Russell Marine Group, told DTN that while 
weather forecasters did not report the recent rains as a tropical storm, it had 
all the features of one, minus the winds. "It dropped a lot of rain mostly 
north of NOLA (New Orleans). That area has a lot of small rivers that jumped up 
fast and caused the flooding.

   "Bayou Sorrel (aka Port Allen Route) is closed due to high water for the 
next week or so. Bayou Sorrel route hits Mississippi River at Baton Rouge. The 
alternative New Orleans route is still open. The New Orleans routes hit the 
Mississippi River just south of the 'grain corridor' where most elevators are 
located. It is a little longer route but works.

   "I know there is some high water on upper areas of the Illinois River but 
not near flooding. All rivers look like they will have a short-lived bump from 
recent rains but levels are safe. My big concern is tropical storm/hurricane 
activity for the second half of August and the first half of September. Most 
forecasts agree that it will be active in the area this year."  

   UP RIVER

   Shippers up river are seeing a mixture of issues. Kent Hamm, buyer for the 
DeLong Company in Minooka, Illinois, told DTN, "Basis is much weaker in our 
area at the Illinois River on corn. I have heard that lower basis has been the 
recent result of Gulf elevator capacity at the CIF export houses. In talking 
with a grain merchant yesterday at Ottawa, he said his contracts to arrive were 
as small as he's seen since the spring and he had enough empty barges in front 
of him for the week.

   "CIF basis had weakened before this big rain event. I believe all the 
importers are waiting for new-crop cheaper supplies," added Hamm.

   A farmer near Rock Port, Missouri, told DTN the elevator there had long 
truck lines and was filled up because the train was late in getting to the 
facility. "The shuttle train showed up a day late. However, as far as I know, 
the only thing affecting basis right now is supply and demand. Everyone seemed 
to be sitting on a couple of bins of corn they all decided to move at once."

   As for elevators in the flooded areas of Louisiana, DTN was unable to 
collect daily grain bids from some of the elevators we normally contact.

   Road closures stalled truckers from getting loads to and from their 
destination and the Kansas City Southern Railroad had to close a mainline due 
to water running over the tracks.

   In a statement released Aug. 19, the KCS said, "As previously communicated, 
excessive rains caused flooding in the South, resulting in a federal disaster 
area declaration for Louisiana as well as a declaration of states of emergency 
for both Louisiana and Mississippi. On Tuesday, Aug. 16, flood waters rose 
above our tracks on the mainline between Reserve, Louisiana, and Baton Rouge, 
Louisiana (MP 819), resulting in the closure of the line. Although resulting in 
delays, detours are in progress for the impacted carload customers. Crews 
remain in the field both on this mainline as well as the other hard-hit areas 
in the south and are monitoring the situation."  

   Looking ahead, the weather news is not encouraging. DTN Senior Ag 
Meteorologist Bryce Anderson said late Friday, Aug. 19, "Heavy rain has eased 
up in Louisiana, but there will still be light to moderate showers throughout 
the next week to 10 days. There's not a completely dry day indicated until 
Monday, Aug. 29."

   Information regarding road closures and reopenings in Louisiana can be found 
here at the Louisiana DOTD website: http://goo.gl/WOh15p  

   Mary Kennedy can be reached at mary.kennedy@dtn.com  

   Follow her on Twitter @MaryCKenn 

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Ag Shippers Push ILWU, PMA to Discuss Contract Extension

   Agriculture product shipping groups are urging the International Longshore 
and Warehouse Union and Pacific Maritime Association to begin contract 
negotiations to avoid another labor dispute like the one in late 2014 and early 
2015 that disrupted operations at West Coast ports. That dispute affected the 
container industry, which relies on the West Coast to ship goods, including 
agricultural products.      

   On Aug. 11, more than 100 delegates from 30 West Coast ports from San Diego, 
California, to Bellingham, Washington, who were elected by rank-and -file 
members of the International Longshore and Warehouse Union (ILWU), convened 
during the week to consider an employer request to discuss the possibility of 
an extension to the 2014 to 2019 collective bargaining agreement between the 
ILWU and the Pacific Maritime Association (PMA), according to a statement on 
the ILWU website.

   That's good news for shippers who fear a repeat of what happened two years 
ago. In July 2014, a contract agreement between the ILWU and PMA expired. The 
two sides remained at an impasse from late 2014 to early 2015, resulting in 
slowdowns at West Coast ports that caused significant disruptions and cost 
millions of dollars for many industries importing and exporting from the 
region. Finally, on Feb. 20, 2015, the PMA and ILWU ended the nine-month-long 
contract dispute, reaching a new five-year contract agreement, which involved 
29 ports from San Diego to Seattle. The nine months of stalemate crippled the 
container industry, which relies on the West Coast to ship their goods, 
including agriculture products.

   Mike Steenhoek, executive director of the Soy Transportation Coalition 
(STC), told me while soybean and grain exports via container from the West 
Coast were affected, "the more detrimental to agriculture was the impact on 
U.S. meat exports, which are exported via refrigerated container and, due to 
their perishable nature, cannot withstand significant delay along the supply 
chain. The domestic livestock industry is our most important customer. Any harm 
absorbed by the livestock industry will be felt by those soybean and grain 
farmers producing the food the animals consume. The West Coast port disruption 
was such an example."  

   Midwest Shippers Association (MSA) Executive Director Bruce Abbe gave DTN a 
copy of a letter sent Aug. 8 by a coalition of business and container shippers, 
including MSA and STC, to the heads of the ILWU and PMA urging them to begin 
negotiations on a new contract/contract extension. You can read the full letter 
here: 
http://www.dtn.com/ag/assets/Multi-Industry_ILWU-PMA_2019_Negotiations.pdf   

   "The two party's leaders have made some sounds in the recent past that they 
may be willing to do this," Abbe said. "ILWU leader said at the JOC conference 
last spring that if they got a letter requesting that they engage in early 
negotiations, he would bring it to his members. So it's worth the effort."  

   "If nothing else, we feel a strong need to keep shippers -- particularly us 
ag export shippers -- directly pushing where we can to try to prevent another 
congestion meltdown like a year-and-a-half ago that was so economically 
damaging to the macro economy all the way down to countless small companies 
that have banked their business and customer supply chains on having reliable 
container shipping service," Abbe said. "Right now, the customer shipping 
community has no direct role, even observatory role, in those labor 
negotiations. Maybe we should."

   The service disruption at the West Coast ports diminished the U.S. 
reputation as the most reliable exporter in the global marketplace. "It has 
also been the concern of many industries, including agriculture, that the 
current detente between the ILWU and the PMA will be temporary -- particularly 
with the current contract expiring in a few short years. It is therefore 
welcome news that the ILWU may consider commencing negotiations with the PMA to 
extend their contract," said Steenhoek.  

   Steenhoek noted that the West Coast is a prominent and irreplaceable link in 
our logistics chain, and is not the only option for many industries. "The 
recent expansion of the Panama Canal, the increased utilization of the Asia to 
East Coast route via the Suez Canal, and expanded export terminals along the 
West Coast of Canada have provided needed competitive pressure on the West 
Coast. Industries and companies, in agriculture and beyond, continue to explore 
diversifying their supply chains so that fewer eggs are in the West Coast 
basket. If the ILWU and PMA desire to preserve their position in the global 
economy, providing greater predictability for those who utilize West Coast 
ports would be a welcome first step."

   "We are encouraged by this development and strongly support any step that 
will result in a more long-term contract between the two parties," Steenhoek 
said. "Such a contract extension will provide greater predictability of the 
supply chain for those industries, including agriculture, that depend upon West 
Coast ports."

   Mary Kennedy can be reached at mary.kennedy@dtn.com 

   Follow Mary Kennedy on Twitter @MaryCKenn

******************************************************************************
The Other Winter Wheat

   The discovery of genetically modified wheat plants in a Washington state 
field recently prompted South Korea and Japan to temporarily halt imports of 
U.S. wheat, which sent the cash price of Soft White Wheat falling right in the 
middle of harvest.  

   In its July 2016 Wheat Outlook, USDA's Economic Research Service reported 
2016 SWW production was forecast to rise 20.2% to 202.3 million bushels with a 
yield of 69.9 bushels per acre. Total white winter wheat production (SWW and 
hard white winter) for 2016 is forecast to total 223.5 million bushels compared 
to the estimated total production of 219 million bushels in 2015.

   The latest find of genetically modified wheat was reported by USDA on July 
29. In a news release, USDA stated: "USDA has confirmed the discovery by a 
farmer of 22 genetically engineered (GE) wheat plants growing in an unplanted 
agricultural field in Washington state. The GE wheat in question is resistant 
to the herbicide glyphosate, commonly referred to as Roundup. APHIS has taken 
prompt and thorough action in response to this discovery and has no evidence of 
GE wheat in commerce."

   South Korea promptly ceased purchasing wheat from the Pacific Northwest 
region, and by Monday, Aug. 1, Japan followed suit. 

   The last time GMO wheat was found growing, was in an Oregon field in April 
2013. After that find, Japan ceased buying wheat from the Pacific Northwest for 
four months, which created uncertainty and low prices for growers in Oregon, 
Washington and Idaho. Japan imports about 60% of its wheat from the U.S. on an 
annual basis, and about 800,000 metric tons of that is SWW. 

   This news is bad at any time, of course, but harvest has started and is 
moving along at a good pace. Soft White Winter wheat (grown predominantly in 
the PNW) cash prices were fading before the announcement due to the large 
yields being reported, but after bids were pulled Friday, they reappeared and 
cash prices were down 25-31 cents per bushel on Monday. 

   Joseph Anderson, an Idaho farmer and Idaho Wheat Commissioner, told me: "The 
wheat harvest in north Idaho is just getting underway. Yields look to be above 
average, due to low stresses during the growing season and good rainfall. Most 
of the wheat-producing areas of the world are anticipating good crops, and 
stocks, as you know, are up worldwide. A large HRW harvest, while not competing 
directly for the same customers, is bearish for our SWW price too."

   Anderson, whose farm is 20 miles north of Lewiston, Idaho, told me that "90% 
of the soft white wheat class in the Northern tier of Idaho is shipped down the 
Columbia River system, and exported, mainly to the Pacific Rim but also 
elsewhere in the world.

   "Farmer selling is light to nonexistent at these prices, as we are busy 
harvesting, added Anderson "and we are still in shock at prices we haven't seen 
in years." 

   It is likely that bins will fill to the brim for now until farmers run out 
of storage and have to find a home for their bountiful harvest.

   The latest news on foreign buyers is both good and bad. On Aug. 5, Dow Jones 
reported that South Korea had ended its brief suspension of new purchases of 
U.S.-grown wheat and will continue testing grain for GMO content as it has done 
for three years. Japan, on the other hand, has not lifted its ban, and sources 
in the PNW told me they have stopped buying spring wheat as well, possibly for 
one month. So, the GMO saga continues to linger out west, once again creating 
uncertainty for growers.

   Mary Kennedy can be reached at mary.kennedy@dtn.com 

   Follow Mary Kennedy on Twitter @MaryCKenn

******************************************************************************
STB Proposes Rule to Provide Competitive Rail Service

   Last week, after five years of study, the Surface Transportation Board 
proposed new rules for "reciprocal" or "competitive switching," which refers to 
a situation where a railroad that has physical access to a facility will switch 
rail traffic to that facility for another railroad that does not have physical 
access to that facility. The fees are then incorporated into the final rate the 
shipper pays. The idea behind the proposal is to allow all shippers another 
alternate for moving their commodities that may be cheaper and, in some cases, 
faster. 

   With a large corn and soybean crop looming, on top of a just-harvested 
high-yielding winter wheat crop and cheap grain prices across the board, any 
savings afforded to a shipper to move grain would be welcome. It's uncertain if 
that will be the case and how many shippers will benefit if the new rules are 
implemented.

   The effort to draft new reciprocal switching rules began on July 7, 2011, 
when the National Industrial Transportation League (NITL) filed a petition to 
institute a rulemaking proceeding to modify the Surface Transportation Board 
(STB) standards for reciprocal switching. Following that action, STB took 
public comment and held a hearing on the issues raised in the petition. 

   On July 25, 2016, the STB stated on its website that it would grant NITL's 
petition and institute a rulemaking proceeding to modify the board's standards 
for reciprocal switching. "In this decision, the board proposes new regulations 
governing reciprocal switching which would allow a party to seek a reciprocal 
switching prescription that is either practicable and in the public interest or 
necessary to provide competitive rail service," the STB stated.

   The Interstate Commerce Act makes three competitive access remedies 
available to shippers and carriers: the prescription of through routes, 
terminal trackage rights and reciprocal switching.

   Competitive access generally refers to the ability of a shipper or a 
competitor railroad to use the facilities or services of an incumbent railroad 
to extend the reach of the services provided by the competitor railroad. Under 
reciprocal switching -- or as it is sometimes called, "competitive switching" 
-- an incumbent carrier transports a shipper's traffic to an interchange point, 
where it switches the cars over to the competing carrier, notes the STB. 

   According to the STB, "The competing carrier pays the incumbent carrier a 
switching fee for bringing or taking the cars from the shipper's facility to 
the interchange point, or vice versa, which is incorporated into the competing 
carrier's total rate to the shipper. Reciprocal switching thus enables a 
competing carrier to offer its own single-line rate to compete with the 
incumbent carrier's single-line rate, even if the competing carrier's lines do 
not physically reach a shipper's facility."

   On April 4, 2014, the National Grain and Feed Association presented 
testimony on behalf of itself and eight other national agricultural producer 
and agribusiness organizations urging the STB to develop and propose revised 
competitive switching rules between Class I railroads that would be more 
conducive and accessible to captive agricultural rail shippers and receivers.

   "During a March 25-26, 2014, public meeting, the agricultural organizations 
reiterated their conceptual support for a petition filed by the National 
Industrial Transportation League (NITL) to revise the STB's existing 
competitive switching rules. But the groups reiterated their contention that 
the NITL proposal falls far short of what would be needed to provide meaningful 
relief to captive agricultural shippers," said the NGFA.

   After reviewing all comments prior to its July 25 decision to institute a 
rulemaking proceeding, the STB said: "We are concerned that reciprocal 
switching based on the proposed conclusive presumptions could have adverse 
effects on categories of shippers not eligible under NITL's proposal. If NITL's 
proposal places downward pressure on the rates of those shippers who are 
eligible, then there may be an incentive for railroads that cannot make up any 
shortfall to raise the rates of ineligible shippers or degrade service in an 
effort to cut costs."

   "For these reasons, the board prefers a reciprocal switching standard that 
makes the remedy more equally available to all shippers, rather than a limited 
subset of shippers. Imposing reciprocal switching on a case-by-case basis would 
also allow the board a greater degree of precision when mandating reciprocal 
switching than is afforded under the approach advanced by NITL. We believe such 
an approach would allow the board to better balance the needs of the individual 
shipper versus the needs of the railroads and other shippers." 

   Here is a link to the full decision: https://goo.gl/a2C7uk

   RAIL INDUSTRY OPPOSES DECISION

   On July 27, Association of American Railroads (AAR) President and CEO Edward 
R. Hamberger made the following statements in response to the Notice of 
Proposed Rulemaking (NPRM) by the Surface Transportation Board (STB).  

   "The freight rail industry acknowledges the complexities the STB had to take 
into consideration in arriving at this proposed rule, but, at the end of the 
day, the board should have dismissed the petition without further proceedings, 
as imposing new regulations like this are a step backward from the deregulatory 
path that has allowed railroads to make the capacity investments required to 
meet customer demand and further modernize a nationwide rail network that 
benefits shippers and consumers." 

   "The freight rail industry's position remains unchanged: forced access is an 
ill-conceived approach that compromises the efficiency of the entire network by 
gumming up the system through added interchange movements, more time and 
increased operational complexity."

   "Forced access would be a step backwards for the supply chain in our country 
as railroads would ultimately require more resources to move the same amount of 
freight, which would impact operational efficiencies introduced under the 
Staggers Rail Act," added Hamberger. 

   Hamberger noted existing STB regulations already protect rail shippers as 
railroads voluntarily switch traffic under the current system, and by law, if 
freight can get from its origin to final destination only if it is carried by 
two or more railroads, railroads must cooperate to move the shipments.   

   The STB noted on its website that comments on the proposed rule changes are 
due by Sept. 26, 2016. Replies are due by Oct. 25, 2016. Requests for ex parte 
meetings with board members are due by Oct. 10, 2016, and meetings will be 
conducted between Oct. 25, 2016 and Nov. 14, 2016. Meeting summaries are to be 
submitted within two business days of the ex parte meeting.

   Mary Kennedy can be reached at mary.kennedy@dtn.com

   Follow Mary Kennedy on Twitter @MaryCKenn

    

******************************************************************************
Freight Costs Rise as Large Crops Loom 

   "Bin-buster" will likely be the one word to describe the 2016 harvest. 
Starting with the winter wheat crop, yields so far have been reported to be 
anywhere from 50 bushels per acre to as high as 85 bpa or higher in some areas. 
USDA recently revised its winter wheat yield estimate to 50.5 bpa, which would 
be a new all-time high vs. the final yield in 2015. 

   Tim Luken, manager at Oahe Grain in Onida, South Dakota, told me it didn't 
take long for his winter wheat bins at the elevator to fill up. Currently, he 
said, "Anything that is coming through the door at this time is cash and with 
bins being full in the country, cash is the only game in town at this time."

   "Winter wheat yields in western South Dakota have been as good as expected," 
said Jerry Cope, who does the grain marketing for Dakota Mill & Grain, Inc. in 
Rapid City, South Dakota. "I am guessing our average is in the high 50s bpa. 
Harvest has outrun either total farm capacity or allotted capacity at farm 
bins. Grain delivered to the elevator has been contracted bushels, first, and 
excess over storage, second. In turn we have, or will be, shipping more. For 
now wheat is following soybean weather and corn's export demand and will either 
benefit on the cash side or suffer if freight values go higher." 

   Moving on to the 2016 corn crop, the most recent USDA estimate is that 
yields will be at 168 bpa vs. 2015 final at 168.4. However, many in the trade 
feel USDA will raise that estimate again for 2016, given the excellent shape 
reported for corn all summer. As of July 17, the corn crop was rated at 76% 
good to excellent vs. 69% the same time in 2015.

   Here's the problem: 2015 corn is still left in the bins. In the June 30 USDA 
Grain Stocks report, 2.47 billion bushels of corn remained stored on farms. 
This means corn has to start moving in order to make room for all the 2016 
crops, not just corn and winter wheat. 

   As far as the corn reported stored on farms in the June 30 report, some of 
that has moved from farm storage, but likely not enough to make a huge dent in 
the pile thanks to prices diving since June. On June 15, the DTN Cash Index was 
at $3.92; one week later on June 22, the cash index was 3.57; on July 1, the 
cash index was $3.23 and as of Friday, July 22, the cash average was at $3.06. 
As the price dropped, farmers ran away from the market. To make matters a 
little worse, freight costs are on the rise.

   At the end of June, secondary shuttle (shuttles no longer needed) freight 
costs were at $50/$150 per car (over tariff costs) for July, August was at 
$0/100 per car, September was at $0/$200 per car and October-December was at 
$450/$650 per car. On July 19, freight was quoted at $700/$900 for the rest of 
July split, August was at $400, September was at $300/$750, October was at 
$1,000/$2000 per car and full October, November, December was at $550/$750 per 
car.

   To put it in perspective, the shuttle tariff rate per car (plus fuel 
mileage) cost for corn delivered from Minneapolis to Portland, Oregon, is about 
$1.24 per car. If you want to buy shuttle cars in the secondary freight market 
for new crop, the added cost on top of the tariff cost is about 50 cents per 
bushel and that cost, in the end, may end up cutting into the price paid to a 
farmer; not a good thing given how much the cash corn price has dropped in the 
past two months.

   New-crop shuttle freight costs are obviously on the rise given the 
expectations for a very large corn new crop along with soybeans and wheat new 
crop that will have to ship. Nearby costs have been moving higher due to demand 
and also because shuttles are not moving quickly enough to destination and back 
again to be reloaded. A shuttle loader in eastern North Dakota told me he has 
three shuttles to move in the next few weeks, but "shuttles have slowed down 
causing delays." The BNSF considers "normal" trips per month for shuttles 
delivered to the PNW at 2.5 TPM (turns per month). In their weekly rail service 
update, the BNSF reported that for the week ending July 16, shuttle TPM were at 
3.0. 

   Dakota Mill and Grain, which is serviced by the Rapid City, Pierre & Eastern 
Railroad (RCPE), doesn't have a secondary freight market but is affected by 
other railroads that do, as well as rising barge freight. "We watch BN freight 
and notice bids are strong through the end of the year," Cope told DTN. "You 
are right, nearby freight values have jumped. From what we hear, there is fall 
demand and indications of a strong corn export program that will keep shuttle 
resale values well supported. We don't follow barge freight as close, but it is 
reasonable that stronger rail demand creates barge demand. The railroads are 
leaving the door open for rate increases after November and if they follow 
their usual pattern, would not be surprised to see an attempt for $200-plus per 
car (5 -- 6 cents per bushel)." 

   Barge freight on the Mississippi River and its tributaries reached all-time 
highs in the past month. USDA in its June 23 Grain Transportation report said, 
"Current grain barge rates have increased to the highest levels since November 
2015, based on increased demand from higher shipments. As of June 21, St. Louis 
to New Orleans grain barge rates were 300 percent of tariff ($11.97 per ton), a 
40% increase compared to last week, and 18% above the five-year average. Rates 
at other major barge origins had 25% to 51% weekly increases and were 10% to 
27% above the three-year average. The largest weekly increase for export-barged 
grain was at origins on the Ohio River. Corn shipments have been up as the last 
four weeks of corn inspections at the Mississippi Gulf were 120% of last year 
and 151% of the three-year average. Continued concerns over tight corn supplies 
in South America, especially Brazil, may be driving the current increase in 
corn exports and may be causing the higher barge rates."

   Since that report, costs have come down some, but remain well above average 
for this time of year. For example, barge freight on the Illinois River for the 
week ending July 19 was 9% higher than last week, 12% higher than last year at 
this time and 27% higher than the three-year average. 

   A northeast Illinois grain merchant told me that he has quite a bit of corn 
to move to be shipped to the Gulf via the Illinois River. He agreed that high 
freight costs are not a good thing for the farmer with the lower prices we are 
currently seeing. He added that he has heard talk of bulk ocean vessel freight 
moving higher as well.

   That means that the piece of pie going to the farmer will just keep getting 
smaller.

   Mary Kennedy can be reached at mary.kennedy@dtn.com 

   Follow Mary Kennedy on Twitter @MaryCKenn

******************************************************************************
Volatile Markets Require a Long-Term View

   The last couple weeks have been an excellent example of volatility, not only 
in commodity markets, but also in financial markets domestically and globally. 
The turmoil surrounding the Brexit situation in the financial and stock markets 
is a primary example as prices initially plunged but have now bounced back 
above pre-Brexit highs. 

   In the two days following Brexit, the Dow Jones Index fell nearly 900 points 
with some concerned that aggressive follow-through liquidation would lead to a 
widespread, global recession. However, fast forward just two weeks and the Dow 
Jones index has regained all of the losses and has moved to 14-month highs well 
above 18,000 points with Monday trading at 18,256 points. This is well over a 
1,100 point rally from the post-Brexit lows.

   It is premature to say that we have all the ramifications of the United 
Kingdom leaving the European Union in hand, as realistically the only thing 
that is complete is the initial deciding vote. Much more volatility is likely 
to be seen in the months and years ahead as each side charts its course. 

   In commodity markets, this is an important lesson to take to heart. The most 
publicized and talked about events that touch a market may not always be the 
"sky is falling" type of tragedies they are made out to be. Take for example 
the lean hog market. Over the last two months it has shown both sides of this 
equation as nearby contracts rallied sharply during the last two weeks of May 
and first half of June. This added $9 per cwt to July contracts. Expectations 
for extreme firmness in cash prices and tighter supplies heading into the 
summer added fuel to the already red-hot fire; the price increases seemed 
unstoppable -- until the second week in June.

   However, over the last month, the total opposite action is taking place, 
with sharp and steady liquidation not only quickly eroding front-month July 
futures prices to near the May lows, but the trade also aggressively shed open 
interest as commercial and investment traders alike bailed on the market which 
just a month ago held so much promise and optimism.

   There are fundamental and technical factors involved in the lean hog market 
which may continue to drive additional volatility, but it is good to keep in 
mind that the more volatile the market, the more vital to keep a long-term view 
of market shifts, and try not to get caught up in the daily and intra-day 
action that can add so much emotion to the complex. 

    Rick Kment can be reached at rick.kment@dtn.com

    

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