The 2024 grain harvest campaign has started amid the lowest prices for grain carriage use in recent memory. However, the trend will soon reverse, and there are all the prerequisites for Ukrainian agricultural producers to once again pay a large part of their margin for the opportunity to deliver their goods by rail, as they did in 2022 and 2023.
Does the surplus raise prices?
For two years of the war, the same situation repeated itself: the cost of using grain train cars skyrocketed. (But the logistics problem remains unresolved.) Ukrainian Railways (Ukrzaliznytsia) explained this by market factors: it was a natural increase in demand for cars, so the increase in the cost of using them was a purely market-based consequence.
If you listen to the arguments of Ukrzaliznytsia’s commercial department, you might get the impression that the main problem for Ukrainian farmers is the lack of grain hoppers, and it is precisely because of the lack of available railcars that they cannot deliver grain, and this becomes a factor in the multiple increase in the cost of renting free grain hoppers. It turns out that it is the shortage of railcars that dramatically increases farmers’ costs and generates their losses.
However, as of the beginning of 2022, in addition to Ukrzaliznytsia grain cars, there were 19,000 grain cars in private fleets in Ukraine. During the war years, agricultural business owners purchased more than 2,500 grain cars at their own expense and with donor funds. Thus, at the beginning of the 2024/25 marketing season, in addition to Ukrzaliznytsia cars, we have about 22,500 more working cars in the private fleet.
The capacities of the working export channels (all operating ports and all border crossings) make it possible to unload 1,500–1,600 railcars per day. Provided that the railroad keeps the car turnover within 10–12 days, by performing basic arithmetic calculations (multiplying the daily unloading rate of 1,600 cars by the 12-day turnover), we get the following picture: 19,200 cars will be enough to meet the working capacity of grain unloading for export.
In other words, the needs of railway logistics for harvest can only be met by private fleets. At the same time, the availability of Ukrzaliznytsia cars on the market that are not loaded with cargo should serve as a factor in reducing the price of using a car.
What is it that happens when the number of grain carriers grows nominally, but they still become scarce and, consequently, expensive means of transportation at certain times?
Speed of movement
In fact, the shortage of railcars is not due to the lack thereof, but to a lack of available railcars. The number of available railcars is directly proportional to the speed of logistics flows and, accordingly, the speed of unloading grain from railcars. Let’s pay attention to this particular indicator: the speed of movement. Traffic speed is measured in tonne-kilometers per day, and it is the main indicator of logistics productivity.
It is this indicator that has been critically interfered with by Ukrzaliznytsia’s commercial department since 2022. The speed of logistics movement is lower than it was before the war, and even lower than it was in the years of bigger harvests. It is unacceptably low, especially during peak loads. So it’s not just cars that farmers lack; it’s actually the kilometers traveled.
The latter indicator directly depends on Ukrzaliznytsia, which is a natural monopoly in the market of locomotive traction and management of strategic railway infrastructure. “As the sole manager of the transportation capacity of port stations, the sole owner of the planning system and the sole monopoly coordinator of transportation plans, Ukrzaliznytsia has the ability to manage the demand for railcars by artificially limiting the number of kilometers traveled.
In the summer of 2022 and fall of 2023, it was enough to double the turnover of cars to stretch the average trip time from the norm of 10–12 to 25 days, thus tying up most of the private cars in queues and significantly limiting the supply of state-owned cars.
As a result, cargo owners whose wagons had not yet returned from the voyage were forced to buy Ukrzaliznytsia’s grain carriers to urgently catch up with their plans to fulfill export contracts.
From that moment on, Ukrzaliznytsia began selling grain cars exclusively at auctions and deliberately put them up for sale in limited quantities. Taken together, this led to an increase in the price of using a grain car to UAH 4,000 per day and higher.
There have been cases when the cost of one railroad car trip at auction was 5% of the cost of a new grain car. This is the same as if one taxi ride cost a passenger UAH 31,000 (5% of the cost of a new Chevrolet Cobalt low-cost car).
Artificial deficit
In fact, the main logistical risks for farmers are related to the fact that Ukrzaliznytsia combines the status of a monopolist on traction and infrastructure with the functionality of selling its own grain carriers for use. The fact that Ukrzaliznytsia has planned to generate UAH 9 billion in revenue from the use of its railcars in 2024 creates the main prerequisites for a repeat of the situation with the formation of an artificial shortage of railcars during the next season’s logistics campaign.
Obviously, the situation should be viewed from a broader perspective: a conflict of interest between the agricultural industry and railroad logistics.
What do you think is more important for a farmer: loading grain into a railroad car or unloading grain at the destination? The answer is obvious. But for the owner, who has lent his railcar to the farmer, something else is important. It is more profitable for him to keep the railcar moving as slowly as possible or just stand in line for unloading and not unload as long as possible.
Every day of railcar use is expensive. That is, the worse Ukrzaliznytsia works for its agricultural customers, the more it and the owners of private railcar fleets earn.
Railcars with grain create incredible queues at stations and unloading points. Unlike road congestion, railroad congestion is unpredictable. Congestion enriches the owners of railcars and impoverishes the agricultural producers who use them.
That is why the lion’s share of agricultural profit margins is absorbed by owners of railcar fleets. In addition, the lack of responsibility of the railroad for the timing of cargo delivery and the unpredictability of transportation times lead to contractual failures and penalties. All of this destroys farmers’ opportunities to reinvest in production and development. When agribusiness is already facing enough risks as a result of the war, why create new ones?
Queues and traffic jams are to blame
The key to changing the situation is in the hands of the managers who run the country. Firstly, the Antimonopoly Committee has the authority and responsibility to stop the abuse of monopoly and oligopolies. Secondly, the problem will be solved by implementing the European model of rail transport, in which the state railroad company will continue to manage strategic infrastructure but will not be a player in the commercial railcar market.
But even without waiting for the adoption of the European integration law “On Railway Transport,” the government, as a shareholder of Ukrzaliznytsia, can change this situation now. It is enough to change the criteria for Ukrzaliznytsia’s success and prioritize increasing the speed of transportation of a ton of grain, rather than the number of billions taken from agricultural producers.
Agrarians do not need more railcars, at least not today. What they need is to reduce queues, eliminate congestion and free up those railcars that are not moving and have been standing at stations filled with grain for weeks.
If railcars deliver grain faster, they will again become a surplus resource. A surplus of railcars will create healthy competition. Not like now, when producers are competing for access to transportation resources, but when railcar owners start competing for the producers’ cargo. Then the price of using railcars will come down to a market-based level.