Piecing together the transportation puzzle
By Kevin Hursh
If transportation costs continue to increase, will the face of agriculture be altered? How long will it remain feasible to move food products across the country, across the continent or even halfway around the world? Perhaps buying food locally will become a necessity rather than a consumer choice.
While that’s what the trend line numbers might suggest, the issue isn’t as straightforward. Transportation costs are affecting production patterns and how business is conducted, but the movement of agricultural products is as brisk as ever.
Extreme freight costs
The rail freight to get barley from a central Prairie location to export position at Vancouver is around $40 a tonne. If it is feed barley destined for Saudi Arabia, the ocean freight in recent times has been more than $80 a tonne.
Do the math and the cost to get barley from Watrous, Sask., to Jeddah, Saudi Arabia, is more than $2.50 a bushel. And that doesn’t include getting the barley from the farm to the railway in the first place.
When you examine transportation costs related to the value of the product, it makes you wonder if the system is sustainable.
Most feed barley from Western Canada stays in the region to be used by cattle feedlots and hog operations, but when international prices are sufficiently strong, feed barley also goes to export markets. For that to happen, offshore prices need to be high enough to offset the big freight bill.
Ocean freight costs have risen rapidly in recent years but fuel costs are not the main reason, says Brian Morris, transportation analyst with the Canadian Wheat Board. Imports of raw materials into expanding economies such as China and India have meant a shortage of ocean freighters.
“The major shipyards are booked solid building more vessels, but delivery takes years,” Morris notes. Thus the squeeze on transportation capacity could continue for the foreseeable future.
High ocean freight costs have affected competitive advantage. Australia is far closer than Canada to markets in China, Japan and India. Therefore Aussie producers have a higher net return from those markets than Canadian producers.
Of course, that doesn’t matter much if you don’t have product to ship. For the past two crop years, Australian production has been dramatically reduced by drought.
From bulk to containers
Rising transportation costs as well as other factors could accelerate the switch from bulk shipments to containers, says Barry Prentice, professor of supply chain management with the I.H. Asper School of Business, University of Manitoba.
China is a huge exporter of manufactured consumer goods, and those products reach markets around the world in containers. Business is so strong that the containers often go back to China empty. Prentice believes that as transportation costs rise backhauls will become more important, opening up the potential to move more agricultural products in containers returning from the Western world.
Many specialty crops (such as chickpeas) and organic grains already move by containers. Prentice says many users like the quality control and smaller quantities. They often prefer just-in-time delivery rather than holding large inventories.
Important transportation principles
As the move to container shipping shows, transportation systems are constantly evolving to meet business needs. Ethanol from wheat and corn has been relatively easy to develop because we have a well-established handling system. Transportation is one of the barriers to producing ethanol from biomass.
Producers know intuitively that heavy, bulky products are not good candidates for movement, particularly if they have relatively low value. Another example is hay, which is costly to move long distances when there are feed shortages. The transportation bill can quickly exceed the value of the hay. As a general rule, the more processing that goes into a product, the less transportation costs matter. Refrigerated transportation for meat may seem expensive, but as a percentage of value the cost is much less than shipping grain.
Access to processing plants is a big issue for livestock producers. As slaughter and processing plants have consolidated, producers in many regions of the country have had to ship their animals much farther. In addition to the extra trucking costs, death loss and shrink (weight loss) become part of the equation.
Pooled transportation costs
For the producers of some commodities, transportation costs are not a major consideration. For instance, it’s common to have pooled transportation charges for milk going from dairy farms to processing facilities.
Every dairy producer in the province pays the same amount – about 2.5 cents per litre for raw milk transport, says Dairy Farmers of Ontario transportation manager Dave Hitchon. Compared with many other commodities, that transportation charge represents a low percentage of the total value.
Hitchon notes that a new dairy farm setting up in a remote part of Ontario would be required to pay a transportation fee more reflective of the actual cost.
Transportation in your business plan
In its massive greenhouse complex at Leamington, Ont., Seacliff Farms propagates plants for sale to other greenhouses in the region. Owners John and Bob Ondejko also have a thriving business in potted plants, which are sold to retailers such as The Home Depot.
Seacliff used to sell potted plants all the way from Leamington to Montreal. With rising transportation costs, their marketing region now goes only as far as Toronto.
“Margins are tight. We can’t afford to have transportation such a big percentage of the total value anymore,” John Ondejko explains.
The brothers use a special software program to calculate the most efficient routes for their deliveries.
Seacliff runs its own trucks. The 53-foot insulated and heated trailers have custom tailgates to service delivery at retail stores. A trailer can hold about 2,000 pots with a 10-inch diameter. The freight bill to Toronto is about $1,000, or about 50 cents per pot. That represents more than their typical labour cost per pot.
Practical transportation tips
It’s difficult to come up with advice that fits all the different circumstances surrounding transportation issues, but here are some thoughts for consideration:
- In your business planning, it’s important to treat transportation costs consistently. If you’re comparing returns from corn to returns from soybeans, it might be best to use net prices f.o.b. the farm to account for differences in transportation costs.
- Many producers are faced with decisions about whether to custom-hire the movement of their products to market or whether they should own the trucks. Here’s a consideration to put into the mix: who is in the best position to find appropriate backhauls – you or a custom trucking firm?
- Try to anticipate changes. How will you be affected if a particular grain elevator or meat processing facility closes? If a buyer is currently paying you a trucking premium, how long is that likely to last?
For transportation issues we need to think globally, but act locally. All indications point to increasing transportation costs in the years ahead. That will affect trade patterns, but people still need to eat.
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