Due to recent trends in the inland water transportation market, the cost advantage of shipping goods on U.S. waterways is likely to continue rising relative to other forms of transportation.

For many commodities, particularly those produced or processed within a short distance of a river terminal, neither truck nor rail is the most cost-efficient way to get to market. Waterway access has transformed the U.S. agricultural industry by significantly reducing the cost of transportation to export markets. For example, the cost of shipping corn to New Orleans from the Southern Illinois/St. Louis region on the water is significantly cheaper: Barge transportation costs less than $15 per ton compared with $34 per ton by train.1 The cost advantage of shipping via barge has recently increased, as a declining coal industry and successive large grain harvests have contributed to an oversupply of inland hopper barges.

Commodity Groups as a Percentage of Total Tonnage Moved on Inland Waterways

Freight Rates Between St. Louis and New Orleans

Barge Types by the Numbers

The Decline of Coal

Over the past 10 years, coal transportation by barge has dropped almost 40% as an abundance of cheap natural gas and new regulations have reduced demand for the fuel used for power generation. The U.S. produced 728 million short tons of coal in 2016, a decline of 443 million short tons from the 2008 peak.2 As demand for coal has softened and production has slowed, so too has demand for the barges used to transport the commodity. Assuming 1,500 short tons per barge and a 10% share of the coal transportation market in 2016, we can roughly calculate that the market for hopper barge transportation declined by more than 29,000 barge loads annually over the past eight years. With 7,000 inland hopper barges currently in service, the result is four fewer one-way trips per barge annually.3

Total U.S. Natural Gas vs. Coal Production

Several riverway operators have responded to declining coal traffic by refitting open hopper barges with covers that allow them to transport more delicate cargoes like grain. These operators are paying upward of $50,000 per barge to refit their 200-foot-by-35-foot hopper barges with fiberglass covers.4 The covers are designed to last the life of the barge and can significantly increase the earning power of a barge fleet. In the past few years alone, hundreds of such barges have been fitted with covers and redeployed into the grain market, contributing to overcapacity and driving the day rate for grain barges well below its historical average.

Construction of Dry Covered and Open Barges

Mother Nature Keeps Rates Afloat

As bad as day rates for inland barges have been, it could have been much worse. Mother Nature has delivered bumper grain crops in recent years that have kept demand for barges steady and helped mask the growing overcapacity in the covered barge market. Soybeans and corn have done particularly well, recording their five largest harvests over the past five years.5 With roughly half of soybeans and 16% of corn produced in the United States being sold abroad, the demand for barge transportation to export product to international markets – often through New Orleans – has been higher than expected.6 Since the weak harvest in 2012, corn exports have grown at an average of 33% annually to more than $10.1 billion in 2016, while soybeans have grown 10% annually to more than $17.8 billion in 2016.7

U.S. Crop Production

U.S. Exports of Select Agricultural Products, by Region

Last year, 97 million tons of food and agriculture products were carried to market on barges along U.S. inland waterways. That set a tonnage record (going back to at least 2006) that may be broken again this year. Through October 14, 2017, data on grain commodities being barged through locks on the Mississippi, Ohio and Arkansas Rivers shows a crop size that is roughly 1% ahead of last year.8 Still, demand for covered barges has not translated to higher prices for U.S. barge operators because of the decline in coal volumes and the market response of adding to the covered barge fleet. Supply has increased to meet the new demand, keeping a lid on prices.

Tonnage Carried on Inland Waterways

Covering Up Excess Capacity

The market for covered grain barges appears to be increasingly oversupplied in a domino effect that began with the increased shale gas production. As coal production dropped and U.S. farmers increased grain production, barge operators reacted by building new covered barges and refitting an estimated 1,000 existing hopper barges with covers. This influx of new and repurposed covered barges has kept tariff rates depressed, hovering around their owners’ breakeven price for most of this year.

While back-to-back bumper grain crops have helped delay a potential day of reckoning for the inland maritime industry, the question remains: Where would the industry be without the good fortune of consecutive bumper crops?9 If Mother Nature changes her tune, there could be more trouble brewing on the water.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2020. All rights reserved. PB-03559-2020-04-28

1 Source: USDA Agricultural Marketing Service. Rates quoted are from the week ending October 17, 2017. Barge rates are based on the tariff benchmark index for St. Louis to New Orleans. Train rates are based on shuttle train rates from Champaign-Urbana, Illinois, to New Orleans.
2 Source: U.S. Energy Information Administration (EIA).
3 Source: EIA (10% figure). Only represents coal production delivered to power generation markets, which accounts for roughly 93% of total coal production.
4 Source: Trinity Marine Products, Inc.
5 Source: USDA National Agricultural Statistics Service.
6 Source: USDA Economic Research Service.
7 Ibid.
8 Source: USDA Agricultural Marketing Service.
9 In another fortunate twist for the inland barge industry, unseasonably low water levels on the Ohio and Lower Mississippi Rivers in September and October 2017 have forced grain barges to “light load” to decrease their draft and slowing transit times. This has also increased the demand for barges during the fall 2017 harvest.