Ethanol plants depend on rail service improvement to prevent shutdowns

Source: By: Mikkel Pates, Agweek • Posted: Tuesday, October 28, 2014

Jim Seurer says only “plain old action” can prevent serious impacts from rail delays on the ethanol industry this winter and beyond.

WATERTOWN, S.D. — Jim Seurer says only “plain old action” can prevent serious impacts from rail delays on the ethanol industry this winter and beyond.

Seurer is CEO of Glacial Lakes Energy LLC of Watertown, S.D. The company has two ethanol plants, one in Watertown and one in Mina, S.D., both solely dependent on BNSF Railway.

He and Brad Schultz, the company’s director of commodities and risk management, are aware BNSF plans to increase double-tracking and add locomotives, but they’re also realists. They’ve made expensive counter-moves because of rail delays and say if things don’t improve, they’ll increasingly be forced into trucking for ethanol shipping — which is far more limited — or face the threat of disastrous shutdowns.

Seurer is pleased to hear the Surface Transportation Board is requiring more reporting by Class I railroads to indicate whether all sectors are “feeling the pain” equally, but he’s also in favor of a bill by Sen. John Thune, R-S.D., to streamline the STB’s powers to address rate disputes and service complaints.

“BNSF Railway touts its $5 billion in infrastructure spending,” says Seurer, who testified at an STB field hearing in Fargo, N.D., on Sept. 4. “Maybe it needs to be $10 billion or $20 billion. In all seriousness, maybe that’s what it needs to be.”

Speaking from experience

GLE is no stranger to the kind of exponential growth Seuer says will be crucial to solve rail problems.

The company was formed in May 2001 by Glacial Lakes Corn Processors and Glacial Lakes Capital LLC, of Brookings, S.D. GLCP and its 4,100 shareholders purchased sole ownership in 2004. GLE’s Watertown plant started at 40 million gallons per year capacity and increased twice to more than 100 million gallons per year. Total investments have been about $120 million.

Separately, in June 2008, the company launched GLE-Mina with an annual capacity of 100 million gallons and $165 million in investment.

In addition, GLE has 15 percent ownership in Granite Falls (Minn.) Energy, and 8 percent ownership of Redfield (S.D.) Energy LLC.

The combined activities of Watertown and Mina alone involve the purchase of 80 million bushels of corn each year and the output of 230 million gallons of ethanol, 600,000 tons of feed products and distiller’s grains.

Ethanol is more than a processing venture for farmers — it’s also a marketing tool and a hedge against low commodity prices, Seurer says.

Like many others in ag, as well as some legislators, Seurer wonders about inequities between shipping of ag-related goods and those from the Bakken oil fields.

“I don’t know what the tariff rate is out of the Bakken,” he says. “I’d love to see it for these other products. I have nothing to prove it, but I suspect it’s more lucrative than some of the rest. Maybe it’s not, but somebody missed the projections early on of what it’s going to do to the rest of us. Now, they have an opportunity to fix it.”

Ethanol in the Midwest

The U.S. ethanol industry accounted for 1 percent of carloads on U.S. freight railroads in 2013 and 1.5 percent of tonnage — three times 2003 levels. Ethanol production was 13.3 billion gallons in 2013. Production is concentrated in the Midwest, according to the Association of American Railroads.

In 2012, the most recent year for which information is available, the top ethanol rail originations were: Iowa, 34 percent; Nebraska, 21 percent; South Dakota, 12 percent (33,202 carloads); Illinois, 8 percent; Minnesota, 8 percent (22,617 carloads); and North Dakota, 5 percent (12,711 carloads).

GLE’s Watertown facility fills 11 or 12 single cars every day. Almost all of those go to the Pacific Northwest. The Mina plant is a unit train facility, handling three or four 96- or 80-car unit trains per month. Unit trains are considered more efficient and have access to more destinations.

“There’s a big difference in the flow,” between the two, Schultz says.

The Mina location often sends trains to Texas, so BNSF improvements at its intersection near Dallas could be a big help. GLE’s paid marketers are trying to move more ethanol toward Texas markets to avoid longer shipping times to other markets. A good portion of Mina’s product also is exported to South America.

Weather or the ‘new norm’

Late cars are an even bigger problem in the winter.

Ethanol plants have been built with a large amount of outdoor piping, which is safe as long as the plant is running, even in the coldest weather.

But if the plant is forced to slow or stop production, it can freeze up, delaying restart for days or weeks while extra costs build up, Seurer says. One of those costs would be rail demurrage for cars standing, waiting for ethanol that couldn’t be produced.

In September and October of 2013, GLE started to see fewer ethanol tanker cars returning after shipments. Trains were 20 percent slower in Watertown on the single-car system and 10 to 15 percent slower for the unit trains in Mina. By November, the problems forced slow-downs in production, and even plant shutdowns.

GLE typically expects 32- to 34-day turnaround times and was averaging 42- to 44-day turn times, primarily blamed on weather.

When problems persisted into summer, Seurer could see it wasn’t weather, but a “new norm” of poor service.

“When we saw two of our unit trains parked in Nebraska or southern South Dakota in July, that’s not weather-related,” Schultz says. “That’s two-thirds of our fleet that isn’t moving.”

BNSF keeps GLE informed of when the trains stop, but isn’t able to say when they’ll start running again.

Trucks limit options

GLE normally markets its ethanol through CHS Inc. To avoid shutdowns, GLE has sold trucks at lower margins. It has dedicated crews to fill tankers as soon as they’re on-site.

Putting ethanol in trucks can limit the options for destinations of the product and usually translates into a smaller profit, Schultz says. But there aren’t enough people in the Midwest markets to take all of the ethanol being produced here.

“We ship to where the people are, where the driving is, which is a rail market,” he says.

Trucks typically go only about 100 miles, but when GLE is selling ethanol just to keep the plant operating, they might go as far as St. Louis, Wyoming, even into North Dakota, sometimes passing by numerous ethanol plants.

“Anywhere you can basically get a bid, you’re going to do that,” he says.

Adding rail cars

The company also added 20 to 30 percent more cars to the rail fleet to avoid shutdowns. The new cars were doubling the lease rates GLE had been paying — increasing from about $1,000 per month per car to $2,000 per month per car. So the 60 extra cars cost $120,000 per month. Seurer says lost production rates might be less than the industry average, but there’s no way to know.

“We can’t really shut the plant down in the winter without freezing it up,” Schultz says. “Then, the only option we have is to anticipate when these cars are going to come back. If the cars show up, we’ve lost production. If the cars don’t show up, we might have to slow it down even further. Either way, we’ve lost production.”

Crews load cars on weekends and staff are creative in figuring out how to quickly restore full production after a slow-down, he says.

Seurer says the bottom line is that lack of performance by railroads “drags down the economy” and shifts wealth away from those who wait. The oil industry might have some future alternatives of shifting some production into pipelines, but agriculture-related businesses do not.

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