Buffett’s Burlington Exploits Boxed Asia Grain

Products such as organic or genetically modified soybeans, which can’t travel in traditional hopper cars, are now being packed in containers that once sailed back empty to Asia after bringing retail goods to the U.S. That’s an opportunity for railroads to bring boxes of specialty grains to American ports.

U.S. agriculture exports in containers accounted for 21 percent of 2010’s total, 4 percentage points more than 2006, as carriers and shippers seek to meet consumer demand among Asia’s growing middle class. Burlington has disclosed about $680 million in spending on container yards since 2002, more than half in the Midwest, where most corn and soybeans are grown.

“As the world has now neared or surpassed 7 billion people in population, there’s a direct correlation in this increasing demand and rising tide for exports,” said Fred Malesa, who oversees international intermodal marketing for the carrier controlled by Buffett’s Berkshire Hathaway Inc. (BRK/A) “Containers and global containerization are playing a significant role in meeting that demand.”

Seaborne grain-container deliveries to Asia climbed 29 percent in the first eight months of this year alone, according to the U.S. Department of Agriculture.

‘Handled Carefully’

“It used to be we send them whatever grain we had, whatever soybeans we had, we send them, they’re happy to have it,” said Peter Friedmann, executive director of the Agriculture Transportation Coalition in Washington. “Not anymore. They are being very selective in what they purchase, demanding highest quality, and often smaller volumes of specific” goods.

Container shipments of grain began just five to 10 years ago, Friedmann said. The shipments accounted for about 5 percent of U.S. seaborne grain exports last year, with most farm products still moving in open-topped railcars.

Containers already were popular with railroads and their customers. The so-called intermodal boxes can be moved from ocean-going vessels to railcars to trucks, all without being unpacked.

Adapting that shipping practice for export grain means new markets for Burlington, the largest U.S. rail carrier of farm products. Fort Worth, Texas-based Burlington’s rail network in the western U.S., where the company competes with Union Pacific Corp. (UNP), moves shipments to Pacific ports such as Los Angeles and adjacent Long Beach.

Transfer Loading

Hauling containers laden with grain for Asia-bound ships on the U.S. West Coast lets Burlington profit from trade in both directions, since it already carries items such as electronics made in China and South Korea from those ports to inland destinations.

Union Pacific, based in Omaha, Nebraska, is investing in a transloading unit at the company’s Yermo facility near the ports of Long Beach and Los Angeles, where bulk shipments of grain from the Midwest are transferred to containers, then shipped overseas.

Shippers “think they will need and want this service,” said Tom Lange, a Union Pacific spokesman.

Boxing up grain near ports and thousands of miles from farmers’ fields may not satisfy customers like Japanese tofu- maker Shikoku Kakoki Co. and Tokyo-based Gomei Shoji Kaisha Ltd., which may want goods separated for the entire journey, according to Bruce Abbe, executive director of the Midwest Shippers’ Association, and Sean Strawbridge, managing director of trade relations and port operations at the Port of Long Beach.

Midwest Shipments

Shipping of specialized grains is “best done when they can load containers back here in the Midwest right at the source of plants, and that’s where we’re not as well served as we’d like to be by the system,” said Abbe, whose group represents businesses including soybean shipper Brushvale Seed Inc. and peas and lentils exporter Maviga NA Inc.

The challenge is two-fold: Railroads benefit from having fewer stops and longer trains, and farms in the Midwestern U.S., which produce much of the country’s agriculture exports, are often far from container hubs in Chicago and on the West Coast.

While Burlington said transloading, or transferring cargo from bulk cars to containers, near ports is inefficient, the company serves inland transloading facilities in the Midwest.

Rail Rally

“We take these producing areas of ag exports and we match those with the urban and growing population centers in the U.S.,” where containers arrive with consumer goods, Burlington’s Malesa said by telephone. That creates “a better trade balance for the country.”

Rising demand for containerized grain and capital goods for railroads is helping drive a rally in the shares of carriers and their equipment suppliers. The Standard & Poor’s 500 Railroads Index of three U.S. carriers, including Union Pacific, climbed 10 percent this year through yesterday. Burlington was part of that gauge before being bought by Berkshire in February 2010.

Rail-car builder Trinity Industries Inc. (TRN) added 9.5 percent in the same period and competitor Greenbrier Cos. gained 4.1 percent, while rail-car lessor GATX Corp. increased 16 percent. The S&P 500 fell 1.7 percent.

“The demand for export containers of grain far exceeds the supply of available containers,” said Long Beach port’s Strawbridge.

‘Continue and Accelerate’

While bulk goods historically have been carried overseas in ships from the Pacific Northwest, the increase in customized grain is spurring the southern California ports to “eagerly pursue” more farm products, said the Agriculture Transportation Coalition’s Friedmann. Los Angeles and Long Beach are the busiest U.S. container ports.

“Now we’ll have, really for the first time, large volumes of containerized grains moving to L.A.-Long Beach, as opposed to just up to Seattle-Tacoma” as limited container capacity drives railroads to seek additional boxes, Friedmann said. That shows that railroads expect that “this is going to continue and accelerate.”

The Port of Long Beach is preparing by studying additional export grain units. Terminal operator Total Terminals International is among developers studying construction of grain transloading facilities, Strawbridge said.

Infrastructure planning is crucial for rail companies seeking to position themselves in markets where demand will grow, said Union Pacific’s Lange.

‘Anticipate the Markets’

“It takes a long time for our investments — we spend years getting track in place,” Lange said. “You have to anticipate the markets pretty far in advance here.”

Taiwan is the largest destination for U.S. grain-container shipments. China is second, though it remains the top destination for overall U.S. agriculture exports that totaled $99.9 billion through September.

Open-topped hopper cars, which carry more grain than can fit in a container, will probably always be the main method of transporting crops, Abbe said. Still, demand for higher-quality foods will “lend itself to containerized shipping and more and more of that’s going to develop,” he said.

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