There is an invisible passenger riding America’s freight trains this morning.
It does not eat. It does not sleep. It does not care whether the train is carrying wheat from Kansas, corn from Nebraska or feed headed toward a cattle operation somewhere far from either one.
Its name is the fuel surcharge—and it has become very expensive company.
According to USDA data, the average fuel surcharge for moving grain reached 48 cents for every mile traveled by every rail car during the second week of September. That is 153 percent higher than it was a year ago.
Here is the fifth-grade version: If one rail car travels 1,000 miles, the fuel surcharge alone averages about $480. That is added on top of the regular freight bill.
A few hundred dollars may not sound like much in the grand machinery of American agriculture. But trains do not usually carry one lonely rail car through the prairie. They carry many. Those charges pile up, and someone eventually has to pay them.
Right now, fuel surcharges account for about 11 percent of the total rail cost of moving corn and soybeans. Last year they represented about 5 percent.
The railroads say the surcharges help them recover the changing cost of diesel. That is true. Locomotives are not famous for their fuel economy.
But there is another number worth knowing: Railroads collected $2.93 billion in fuel surcharges during the second quarter, enough to cover about 90 percent of their diesel expense, according to Surface Transportation Board data.
The question is not whether fuel costs more. It plainly does.
The question is who gets stuck with the bill.
First, the farmer
When a grain elevator buys corn or wheat, it considers what it will cost to ship that grain somewhere else. If transportation becomes more expensive, the elevator can offer the farmer less.
This shows up in something called the “basis.”
The futures price is the number people hear on the market report. The basis is the difference between that price and what the farmer can actually receive at the local elevator.
A Kansas wheat and sorghum farmer told Reuters that his local wheat price was running about 70 cents per bushel below the futures price. Normally, he said, it would be closer to 40 cents below.
That extra 30 cents did not disappear into the prairie wind. Transportation costs helped swallow it.
Then, the livestock producer
This is where the story gets interesting for cattle, sheep and dairy producers.
A weaker grain basis can sometimes make feed cheaper for livestock operations located near the grain. A feedyard sitting beside a sea of Kansas corn may find an opportunity.
But cattle do not all live beside cornfields.
Feed moving into remote ranching country must travel by rail, truck—or both. It may be unloaded, stored, mixed and reloaded before it reaches the animals. Each step adds another charge.
So the farmer may receive less for the grain while the distant rancher still pays more for the delivered feed.
That is the sort of economic magic trick that leaves both people checking their pockets.
Meanwhile, oil is still climbing
The weekend threat to oil supplies became a real market increase Monday morning.
Brent crude rose about 3.3 percent to $108.04 per barrel, while West Texas Intermediate reached $103.54.
The immediate cause is trouble along the routes that carry a substantial portion of the world’s oil. Saudi Arabia temporarily shut its East-West pipeline after an attack. That pipeline allows oil to bypass the Strait of Hormuz, where shipping is already disrupted.
In other words, someone closed the dangerous road, and then trouble arrived on the detour.
National diesel prices had already moved above $6 per gallon before Monday’s oil increase. We do not yet know exactly how much this latest jump will add to ranch fuel tanks, trucking bills or delivered feed prices. Those changes generally take time to work through the system.
We do know the pressure is moving in the wrong direction.
Why this matters today
Strong cattle prices can make the ranch economy look healthier than it really is, but revenue is not profit.
Diesel moves the cattle. Diesel grows and delivers the hay. Diesel pumps water, runs equipment and carries grain. Borrowed money buys cattle and keeps operations moving between sale days.
A producer can receive an excellent price per head and still discover that fuel, feed, freight and interest consumed the gain before it reached the bank.
That is the story hiding inside this morning’s numbers.
Today, we are going to follow one ton of feed from its starting point to a Western livestock operation. We want to know what the grain producer receives, what the railroad charges, what happens at the elevator and what the rancher ultimately pays.
Because somewhere between the field and the feed bunk, the money is going somewhere — we’ll report back when we find it.