Fall 2000, Vol. 6 No. 4
In this issue...
Comparing Grain Transportation in the United States and Argentina
Thomas J. Goldsby
Assistant Professor of Marketing and Logistics
Ohio State University
This report is extracted from a CARD publication titled "A Comparative Analysis of Agricultural Transportation and Logistics Systems in the United States and Argentina," MATRIC Research Report 00-MRP 3.
Whether an individual or nation can compete in the global marketplace hinges on the ability not only to produce materials and goods demanded by customers but also to deliver those materials and goods in an efficient, timely, and safe manner. The transportation and logistics systems that serve a market are critical given that transportation costs typically represent more than one-half of a commodity's total landed cost. The agricultural sector of the United States enjoys considerable advantages in grain movement and storage, helping to explain the overall trade advantage of the United States over Argentina in common export markets. It is estimated that higher freight rates and inadequate transportation capacity result in a 10 to 20 percent increase in the cost of South American exports relative to the United States. It appears, however, that cost and performance differences are narrowing between the United States and Argentina. Argentina's rapid progress promises to diminish the advantage the United States has.
Motor transport almost exclusively serves as the mode for transferring harvested grains from the farm to the next-destination customer, usually either an elevator location or a processor. Although, the relative coverage of paved highways (as shown in Table 1) is fairly comparable across the two countries, the quality of U.S. roadways generally surpasses that of Argentine roadways. While roadway conditions do not impede grain transfer directly, they can lead to more frequent truck and equipment failure, transit time uncertainty, and overall higher costs. Continued privatization of the roadways in Argentina will increase the number of paved roads and improve existing ones, but this will result in high tolls paid by the users of the roadways. These tolls can easily exceed costs for fuel and other operating expenses along selected routes.
Overall, the general health of motor operations in both countries is relatively sound. However, growing congestion within major metropolitan areas and near port locations is a problem in both countries. Continued privatization of roadways in Argentina and intensified competitive pressures among motor carriers will result in continued efficiency gains in agricultural trucking in that country.
The unavailability of rail service in Argentina and its relatively poor service performance have limited its use as a primary means of grain movement. Five freight rail companies operate over Argentina's 34,572 kilometers of track. A major problem with the rail system is the variety of gauges (1.000 meters, 1.435 meters, and 1.676 meters) found among the respective rail lines. The burden of having to unload, transship, and reload shipments across rail lines creates prohibitive costs. In addition, the Argentine rail lines originally constructed by the British, French, and Germans during the late-1800s through the mid-1900s have not been well maintained over the past several decades, with many key segments inoperable today. At an estimated expense of $200,000 per kilometer to build a new line and $100,000 to repair one kilometer of existing line, the challenge of revitalizing the several thousand kilometers of rail in need of replacement or repair becomes apparent.
Despite these challenges, Argentina's rail freight traffic has increased by more than 10 percent in each of the past five years. Recent estimates indicate that 20 percent of Argentina's grain production moves by rail at some point. As a result of improved utilization and efficiencies, the cost of rail transportation has dropped by 25 percent in Argentina. Argentine rail operators expect business to increase dramatically over the next five years. Unlike Argentina, the United States has traditionally relied heavily on its rail network to move grains from consolidation points to processors or export ports. Table 2 shows an emerging shift in modal usage for U.S. grain shippers in recent years, however. The early 1990s marked a general preference for truck transportation for movements outbound from the country elevator. This is true for all major grains except wheat, which continues to rely greatly on rail transport.
In sum, Argentina is making great efforts to rejuvenate its rail systems. Modernization efforts seem to be resulting in significant performance improvements and a substantial shift in traffic from motor to rail service. The United States, on the other hand, is relying somewhat less on its extensive rail network. Recent figures indicate that motor transportation has replaced rail as the preferred mode for movements from the elevator to processor or export port locations.
The significance of motor and rail operations in all three settings has been clearly demonstrated but water transportation cannot be overlooked. Table 2 shows that approximately 20 percent of all U.S. grain movements from the point of consolidation to the processor or export port location are made by barge. In addition, more than 90 percent of U.S. grains moved by barge are ultimately destined for export markets. Barges serve as the primary mode of export movement for U.S. corn and soybeans (rail maintains a 60 percent share of wheat export movements). The use of waterways for export delivery is even more pervasive in South America.
Argentina and Brazil are currently looking to expand their already extensive network of navigable inland waterways. Significant investment in recent years extends the reach of barge and vessel traffic inland from the deep rivers of the region's major port cities along the Atlantic coast. Perhaps the most ambitious, and certainly the most controversial, of all South American transportation developments is the creation of the Rio Paraguay-Rio Paranï¿½ Hidrovia. The Hidrovia, or "water highway," is a multinational effort to extend the reach of inland navigation from Uruguay's Nueva Palmira to Cï¿½ceres in the Mato Grosso region of western Brazil, spanning 3,442 kilometers through all four Mercosur nations (Argentina, Brazil, Paraguay, and Uruguay) as well as Bolivia. The extensive dredging and realignment in South American rivers is anticipated to have a significant economic impact on producers and carriers alike. It is estimated that transportation costs for upstream shippers will be cut in half by using the river system rather than rail or truck.
Progressive barge carriers in Argentina are already achieving considerable efficiencies within the nation's current network of navigable waterways. Foreign investment has dramatically expanded barge and towing capacity while also improving the navigability of large tows. Satellite tracking and guidance systems are helping South American barges to operate with efficiencies on a par with those of the United States. U.S. shippers and barge operators, on the other hand, are concerned with an aging waterway infrastructure. After several decades of extensive use and reliance on the river system for efficient bulk materials movement, the rivers are in need of renewed attention. Special concern is directed toward the aging lock system of the Mississippi River. The Mississippi serves as the backbone of efficient grain movement in the United States. The proximity of growing areas for corn and soybeans to the Mississippi and its tributaries make the system imperative for low cost exporting. The ability to quickly and efficiently access port facilities located at the mouth of the Mississippi River in Louisiana has proven critical to the export success of these U.S. crops.
If the United States wants to maintain the comparative advantage that it has long enjoyed with inland navigation, it will need to make a significant investment in its aging lock and dam system. This holds particularly true given the aggressive advances South American shippers are making to their own river system.
The United States enjoys far greater grain storage capacity than Argentina. In fact, storage capacity on South American farms is virtually nonexistent. Rather than building storage facilities on the farm, most Argentine farmers prefer to invest in improved production. The current thinking among South American farmers seems to be to produce at maximum levels and rely on quicker access to market rather than storage. As a result, farmers continue to invest in technologies that improve yield, accelerate harvesting, and facilitate delivery to the elevator.
Given this rush to deliver grains upon harvest, the worst bottleneck in commodity movement and storage throughout Argentina is that which occurs at the country elevators during peak harvest. Literally hundreds of trucks can linger for several days awaiting an opportunity to unload at the elevator. The transportation vehicles themselves serve as an important form of temporary storage. Commodities that cannot be immediately transported must often sit exposed to the elements until a truck is available.
A review of the comparative transportation and logistics systems demonstrates that U.S. agricultural shippers maintain a significant advantage over their peers in Argentina. This advantage in movement and storage capacity is substantial enough to create an overall comparative advantage in the serving of common export markets. There is evidence, however, that the gap is closing. While the U.S. has benefited from several decades of substantial public and private investment, yielding perhaps the world's most advanced logistical infrastructure, Argentina has languished from minimal development of its own infrastructure. An influx of investment from domestic and foreign sources is largely responsible for Argentina's diminishing disadvantage in movement and storage. The privatization movement has achieved great progress in a very short time. The rate of change in the Argentine logistics environment is anticipated to remain high, well into the foreseeable future. As Argentina's infrastructure develops, time-to-market and costs will be reduced simultaneously, enhancing the country's already considerable competitive position in common export markets. ♦