New Report Finds Rail Customers Paying a Steep Price for Consolidation and Dwindling Competition

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WASHINGTON (July  29, 2021) – A new economic research report reveals that rail customers are paying a steep price for freight rail service as competitive pricing goes off the rails. Two key findings of the analysis show that both freight rail rates and rail industry revenue from monopoly pricing are continuing to climb higher and higher.

The new report, “Economic Analysis: Consolidation and Increasing Freight Rail Rates,” produced by Escalation Consultants for the Rail Customer Coalition, comes as consolidation within the transportation industry faces additional scrutiny and regulators contemplate additional rail mergers. Such mergers could have further negative impacts on the competitive landscape and the affordability of shipping U.S. goods by rail. The report shows that the number of large railroads declined in the 1980s and ‘90s, and freight rail rates have increased dramatically ever since.

To further understand these trends, Escalation Consultants analyzed data in the Surface Transportation Board’s (STB) Commodity Revenue Stratification Reports for eight major commodity groups: Farm Products, Food Products, Wood Products, Pulp & Paper Products, Chemicals, Stone & Glass Products, Metal Products and Transportation Equipment.

The analysis found that the largest railroads (Class I) have reaped an increasing share of their revenue from traffic that is required to pay rates the STB considers potentially non-competitive.

“Freight rail pricing trends have picked up a considerable head of steam over the past 15 years,” said Jay Roman, president of Escalation Consultants. “The data is clear: Non-competitive pricing has become the norm, not the exception. Rail customers continue to pay a substantial price for the consolidation of railroads’ market power — and today’s report underscores that this troubling trend is far more significant than previously recognized.”

The report shows:

  • From 2004 to 2019, real rates (adjusted for inflation) for all rail shippers increased 43%.
  • During the same period, real railroad costs rose only 8%.
  • Rates for the largest U.S. railroads have jumped more than twice as fast as inflation and rates for long-haul trucking.
  • For major commodity groups, revenue from potentially non-competitive rates increased 230%, while revenue from competitive rates increased only 24%.
  • In 2019, half of railroad revenue was generated from potentially non-competitive rates, up from 27% in 2004.
  • For significantly impacted sectors and commodities, the share of total rail revenue derived from non-competitive rates increased as follows:

Agriculture

Commodity

2004

2019

Food Products

15%

39%

Farm Products

34%

56%


Building & Construction

Commodity

2004

2019

Wood Products

8%

31%

Metal Products

17%

45%

Stone & Glass Products

36%

64%


Transportation & Infrastructure

Commodity

2004

2019

Transportation Equipment

13%

33%

  • In a troubling indicator of the railroads’ ever-growing market dominance and pricing power, the average revenue-to-variable-cost (RVC) ratio increased from 135% to 167% for shipments of these commodities. RVC is an important threshold indicator for freight rail rates because a rate greater than 180% can be subject to potential STB review for being unreasonably high.

American consumers are feeling the pinch of rising costs for products ranging from groceries to building materials. Although there are several market forces driving inflation, the sharp climb in freight rail rates is certainly part of the equation. The new report should serve as a wake-up call for the STB to take swift action on pending policy proposals that increase competition to get freight rail rates back on track.

These findings are especially timely as the STB considers additional Class I merger proposals that, if approved, will result in further consolidation and could impact freight rail rates and the share of revenue that railroads derive from non-competitive rates.

As the evidence of dwindling competition continues to mount and the call for action grows, the Board must adopt reforms that are better equipped to address today’s realities and challenges, such as reciprocal or competitive switching and a streamlined rate review process.

The following Rail Customer Coalition member organizations issued statements regarding today’s report:

“The companies that supply input products to America’s farmers are totally reliant on competitively priced and reliable service from all transportation modes, which is completely lacking in today’s railroad marketplace. Rail is particularly important in areas of the country that are not in close proximity to navigable rivers. This report is a call to action for the Surface Transportation Board to closely examine rail service pricing and provide some relief to shippers who have limited options and are essentially at the mercy of the railroads to serve their customers.”
Daren Coppock
President and Chief Executive Officer
Agricultural Retailers Association

“Chemical manufacturers are some of largest customers of freight rail by both volume and revenue, and our needs are continuing to grow with increased investments in U.S. chemical production. This analysis confirms what many large and small businesses know all too well:  Rail customers – and the broader economy – are paying a steeper and steeper price for the lack of competition within the freight rail industry. With this new report and President Biden’s recent Executive Order pointing out the need for greater freight rail competition, it is clear the STB must act now on long overdue reforms, including reciprocal/competitive switching and Final Offer Rate Review (FORR).”
Chris Jahn
President and Chief Executive Officer
American Chemistry Council

“America’s refining and petrochemical industries rely on our nation’s freight rail network to provide consumers the fuels and petrochemical products that make modern life possible. Unfortunately, as today’s RCC report indicates, a lack of freight rail competition has led to exponentially growing rail rates that have disproportionately burdened rail shippers. This ultimately poses a danger to American producers’ supply chains and markets. America’s manufacturing sector and consumers need Congress and the STB to adopt modern policies and take swift action on pending policy proposals to increase competition and promote market competitiveness.”
Rob Benedict
Vice President, Petrochemicals and Midstream
American Fuel & Petrochemical Manufacturers

“Americans rely on the consumer packaged goods industry for their everyday essentials, from food to personal care items, and CPG manufacturers rely on our nation’s freight system to deliver those essentials. Unfortunately, the lack of competition in the rail industry has led to increased shipping costs, with consolidation benefitting rail companies at the expense of consumers. This research from RCC underscores the importance of the Biden Administration’s executive order addressing rail competition and consolidation issues, and we hope to see swift action from the STB to enact reforms. Competitive, high-performing rail service is vital to ensuring the availability, affordability and accessibility of essential products.”
Tom Madrecki
Vice President of Supply Chain
Consumer Brands Association

“The report highlights the diminishing level of competition among the Class I railroads who are exercising increased market power. This power holds shippers captive, no longer allowing for access to the competition necessary to promote efficient service, reasonable rates and charges, and fair practices. The absence of effective competition in the rail industry significantly impacts prices for the agricultural industry, ultimately adversely impacting American farmers and consumers. The Corn Refiners Association (CRA) respectfully urges the Surface Transportation Board to remedy the lack of railroad competition and correct the imbalanced economic relationship for shippers so producers, suppliers, and American workers across the agriculture supply chain can efficiently deliver products to American consumers.”
John Bode
President and Chief Executive Officer
Corn Refiners Association

“The Fertilizer Institute (TFI) welcomes the Biden Administration’s Executive Order (EO) urging the STB to address the lack of competition in the rail industry and the exorbitant increase in shipping costs. An efficient and competitive freight rail system is essential to farmers and the fertilizer industry, but the lack of competition in the rail industry distorts prices and service. TFI hopes that the Administration’s EO will help the STB further its efforts toward practical regulatory reforms that improve its oversight of the rail marketplace. STB modernization can promote more competitive freight rail service, make goods more affordable, and boost the economy.”
Corey Rosenbusch
President and Chief Executive Office
The Fertilizer Institute

“The Freight Rail Customer Alliance (FRCA) welcomes these new findings that further demonstrate what shippers, particularly those who are rail dependent or captive, have been experiencing all across the country and across different commodities: Non-competitive or captive shippers have suffered rate increases that are disproportionate both to increases 1) in railroad costs and 2) on railroad rates for competitive traffic. While the STB has made progress in trying to address a lack of competition that results in increased rates and unreliable service, and within the spirit of President Biden’s Executive Order on Competition, it remains clear that the Board needs to: 1) implement all of the recommendations put forth by the STB’s Rate Review Task Force; 2) address outdated revenue adequacy determination criteria; 3) enhance shipper visibility into first mile/last mile service and on-time performance data; 4) move forward on the pending competitive switching proceeding; and 5) review all rail carrier merger proposals with the utmost scrutiny in order to protect the public interest.”
Ann Warner
Spokesperson
Freight Rail Customer Alliance

“The country’s glass container manufacturing industry, along with its supplier partners and customers, have long sought more fair and competitive rail service options. The economic research report released by the RCC highlights many of the costs and challenges faced by the glass container and numerous industries. In addition to raw materials and customer goods transport, the Glass Packing Institute (GPI) increasingly views freight rail service as a viable path in support of the nation’s glass recycling infrastructure. We urge the STB to continue its important work on the competitive switching rulemaking, and to address other critical shipper issues.”
Scott DeFife
President
Glass Packaging Institute

“The Independent Lubricant Manufacturers Association (ILMA) is extremely concerned by increasing freight rail costs. Especially now as the worsening truck driver shortage pushes more shipments toward rail, outrageous shipping rates hamper our members’ ability to do business.”
Holly Alfano
Chief Executive Officer
Independent Lubricant Manufacturers Association

“The National Association of Chemical Distributors (NACD) supports efforts that serve to promote greater freight rail competition and improve the efficiency and effectiveness of the STB. The Board must improve rate-reasonableness standards to ensure efficient and appropriate relief is available in rate cases. With unprecedented cargo shipping costs and delays impacting the supply chain, American small businesses need a fair and reliable form of transportation for their products and it’s time for the rail industry to enable these provisions.”
Eric R. Byer
President and Chief Executive Officer
National Association of Chemical Distributors

“The National Cotton Council and numerous other agricultural groups have conveyed to the Biden Administration that railroads and other carriers have increasingly and arbitrarily dictated the terms and conditions under which they will provide service to the agriculture sector. Rail is an important freight transportation system for efficient flow of U.S. cotton, which is why we have asked the Administration to implement regulations and policies that better balance railroads’ needs to earn revenues with the need for rail customers to have access to cost‐effective and reliable rail service.”
Kent Fountain
Chairman
National Cotton Council

“This RCC report further demonstrates that rail carriers are able to extract monopoly rents in the absence of cost-effective, transparent, and fair rate appeal procedures. Unreasonably high rail rates lead to lower farm gate values, higher retail food prices and undermine U.S. agriculture’s international competitiveness. The National Grain and Feed Association (NGFA) continues to communicate with the Surface Transportation Board as it undertakes proceedings on expanding access for rate relief and increasing competition. NGFA urges enactment of policies that provide balance between rail carriers and the U.S. industries that depend on rail transportation.”
Mike Seyfert
President and Chief Executive Officer
National Grain & Feed Association

“The National Industrial Transportation League (NITL) applauds the RCC for commissioning this study that reaffirms what our members have been saying for years and was the catalyst for NITL’s bold proposal to the STB in 2011 to require reciprocal switching in the U.S. freight rail industry. We remain committed to the principles of enhanced competition and service now more than ever.”
Jennifer Hedrick
Executive Director
National Industrial Transportation League

“The Steel Manufacturers Association’s (SMA) members work daily with the domestic Class I railroads to move raw materials and steel products. Manufacturers need a freight railroad system that is reliable and fairly priced. The RCC report provides the STB with more data and analysis to support its efforts to put modern-day transportation policies in place, which promote increased competition and service within the domestic rail sector.”
Phillip Bell
President
Steel Manufacturers Association