TEGMA's 2009 Annual Meeting featured an excellent program and attendance, prompting Chairman Mike Mandl to declare the meeting a resounding success and a key step in TEGMA's re-building effort. The January 28/29 session at Marriott's Camelback Inn in Scottsdale, Arizona was TEGMA's first stand-alone meeting in some 50 years. Sixty-five people signed up for the event.
Mandl told the group, "The last year has been an eventful and productive one for the organization. A lot of people have put in a lot of hard work to better position TEGMA to re-establish itself in these ever changing times. In order to do so, TEGMA needs to be relevant and provide value to its members. We defined that relevance in the revision of the mission statement, which reads as follows:
TEGMA seeks to provide a forum where the grain-based agribusiness industry can debate, discuss and facilitate resolution of operational and business issues bringing insight to its membership and stakeholders."
Grain Market Prospects for the Coming Year: Surviving the Wild Commodity Ride We Are On: Bill Lapp, principal, Advanced Economic Solutions, said he expects the nation's GDP to hit one of the lowest levels ever for the last quarter of 2008, to remain negative in the first quarter of 2009, but then to begin rebounding later in 2009. The world economic recovery, he said, will precede the United States' recovery. Key drivers of food commodities in the next year: value of the U.S. dollar, extent of global economic slow-down, acreage battle and production shifts in 2009, U.S. weather in 2009 and beyond, and government bio-fuels policy. The answers to these uncertain factors probably contain more upside than downside from current levels. Lapp said corn availability in 2009/2010 could be extremely tight with only 88 million acres, leading to a likely rebound in prices.
The Financial Crisis and Its Affect on Commodity Lending: Pete Lopoukhine, director, Structured Trade Finance, Lloyds Bank TSB, said the United States was facing its most significant economic crisis since the Great Depression. All in all, it is probably a healthy adjustment, he said, but it presents a very challenging time with debt and equity markets at a virtual standstill. Lloyds TSB is an established bank based in the United Kingdom that re-entered commodity lending in 2008. Lopoukhine said all banks are looking at credit risk much more closely.
Railroad Industry Trends: Darius Gaskins, partner, Norbridge, Inc., and former president of the Burlington Northern Railroad, looked at the broader trends facing the rail industry. He said the rail industry in general is as sound today as any sector and most carriers are in relatively good condition.
· Grain and coal carloadings rose slightly in 2008.
· Industrial production has fallen dramatically and the outlook is dark in the near term.
· Looking to the future, proposed climate change legislation will change the market. Real carbon reductions will decimate the demand for coal and cause costs for electricity production to skyrocket.
Performance of the Agricultural Markets and Potential Contract Changes: David Lehman, director of Commodity Research and Product Development for The CME Group, outlined the evolution of The CME Group, which now includes the former Chicago Board of Trade and New York Mercantile Exchange, and the key commodity issues facing the exchange. In looking at historical basis levels for key grains, Lehman noted that futures and cash prices are showing economically rational behavior as they better converge at expiration of the futures contract. The CME Group has increased storage rates for wheat, soybeans, and corn and haas approved several additional steps for the wheat contract: adding three new delivery territories, implementing seasonal storage rates, and gradually tightening the permissible vomitoxin levels. Changes still being reviewed include dynamic storage rates, modified compelled load-out, and cash settled futures.
Change Comes to Washington, DC: David Lyons, vice president for government relations, Louis Dreyfus Commodities, said change has been coming for several years leading up to the election of 2008. That 2008 election was historic and its outcome was likely determined with the onset of the financial crisis in mid-September. Lyons said we live in interesting times and are entering a period of:
· Bigger, more intrusive government,
· More government regulation of markets and probably other aspects of U.S. life,
· Less reliance on free and open markets to allocate resources,
· Increased government spending and massive government debt, and
· Extremely uncertain economic outlook.
Overview of Developments in the Official Grain Inspection System and Current Issues: Randall Jones, deputy administrator of USDA's Federal Grain Inspection Service covered a number of key topics.
· With a high percentage of its workforce reaching retirement age and the advent of technology FGIS is taking steps to centralize many services.
o One element is more web-based applications, termed FGISonline, with the goal of bringing official inspection and weighing to the desktop.
o Another element is development of the National Grain Center in Kansas City as more of a hub for FGIS services.
· Quality management program - FGIS is collaborating with official service providers to incorporate principals of modern quality management programs into the official system.
· Contract/load order comparison - FGIS will be checking compliance with GIPSA policy that export load orders reflect contract specifications.
· Study regarding use of contractors for export services - FGIS has found no long-term savings to exporters from the use of contractors at export locations. A final report on the subject should be ready very soon.
· Sorghum odor - issues have developed with the application of the current inspection line on sorghum odor. FGIS' goal is to ensure that the odor line continues to facilitate marketing and the agency will soon be appointing a task force to further explore the matter. The objectives are to ensure the odor line reflects market needs and ensure consistency in application throughout the official system.
Arizona Agriculture, Ethanol, and Markets: John Skelley, general manager, Pinal Energy, LLC, began by tracing the changes in Arizona agriculture. Forty years ago, Arizona agriculture was characterized by the four Cs - copper, cotton, cattle, and citrus. Many of the feedlots then were small and water was cheap. Arizona agriculture today has: (1) much more expensive water; (2) a burgeoning dairy industry with very large milking herds (average size of 1,331 cows per dairy); (3) fewer, but larger cattle feedlots that feed out mostly Holsteins. Volatile grain markets have led to a dairy industry under duress. The ethanol industry is also facing a difficult economic situation - the basis today for corn is much higher than envisioned in the original economic model. He expects additional ethanol plant closings as ethanol producers adapt to the economic realities.
Operational and Business Issues Facing the Grain Industry, a panel discussion featuring: Mark Huston, director of North America transportation, Louis Dreyfus Commodities; Larry Kittoe, president, DeBruce Grain, Inc.; Ryan Pellet, executive vice president, J.D. Heiskell & Co.; Al Vergin, general director-wheat and products, BNSF Railway; and Eric Wilkey, president, Arizona Grain, Inc. The panel shared their views on a variety of topics posed by Bob Petersen, panel moderator. Highlights from that discussion are as follows:
Question 1. W hat are your top three everyday headaches that fall into the category of business and operational issues?
Panel grain responses: Credit availability/counterparty risk, especially in Mexico. Right-sizing the company's rail freight deck, operating the company's logistics within the windows allowed by the railroad car ordering systems. Trying to trade deferred without knowing rail rates, fuel surcharge; taking on long-term freight commitments without knowing rates; passing of liabilities/assessorial charges including -- inaccurate Umler tare weights; track leases/agreements very one- sided; moving locomotives; railcar contamination tariff.
Panel rail carrier response: Maximizing train size - shuttles should be a minimum of 110 cars; resource planning - balancing fleet size with car orders, critical with managing cost, however will err on the side of customer expectations; pipeline management - commodity sequencing, slot planning, information sharing; and forecasting car demand
Question 2. For grain companies, what are the three things railroads are doing right?
Panel responses: service has greatly improved, as have velocity and consistency; carriers are providing quality equipment, building capacity and reinvesting in their systems; ETA's have improved, but further improvement is still needed; systems and technology continue to improve.
Question 2(a). What are the three things where you would like to see improvement?
Panel responses: reduce the attempts to pass through liability; publish rates out forward to be able to trade on; keep accessorial charges reasonable.
Question 2. For rail carriers, what are the three things customers are doing right?
Panel response: investments in capacity, velocity, and efficiencies; logistics, pipeline management have improved; loading/unloading customer improvements; much improved communication; and jointly managing exceptions
Question 2(a). What are the three things where you would like to see improvement?
Panel response: improve timeliness of non-shuttle order placement; need assistance in developing longer, more efficient trains; set the bar higher in pipeline management, need to continually improve velocity; most of all if they have an issue such as constructive placement, demurrage, OEP, or DEP, promptly communicate concern - it alleviates future misunderstanding and time consuming reconciliation
Question 3. Given the challenging economic times that 2009 has brought, are there areas where carriers and grain companies can work together better in facing these challenges?
Panel responses: Railroads should share the value savings of efficiency improvements; there needs to be a balance where railroads can plan and forecast resources while the industry maintains the flexibility necessary to respond to the world market.
Panel rail carrier responses: balancing fleet size; longer trains; and communication of potential demand.
Question 4. On a related note, as we look at the working relationship between grain companies and rail carriers, what are three longer term trends you see developing - positive or negative?
Panel grain responses: on the positive side, carriers and grain firms seem to do a good job of communicating market observations. On the negative side, a major item is the emphasis on the passing on of liabilities.
Panel rail carrier response: full pipeline visibility and more efficient matching of origin and destination demand; risk sharing - tougher to find middle ground with enhanced visibility (origin report cards), customer needs to have direct communication with multiple departments within railroad such as demurrage, accounts receivable, operations, marketing, and utilize electronic tools; and safety.
Question 5. Where can TEGMA play a constructive role that brings value to your company in 2009?
Panel responses: continue to develop as a constructive venue for members to interface on non-rate business issues with the carriers. Create a clearinghouse for industry and railroad issues. Continue with small group meetings which focus on individual carriers.
We Thank Our Sponsors
An important part of TEGMA's improved financial condition, according to President Bob Petersen, is the excellent support of members in sponsoring key events at the meeting. TEGMA again extends its thanks to these leading companies for their support of the Association's annual meeting.
Thursday Meeting Break
NIK Marketing Cooperative
Reception
Arizona Grain, Inc.
Bartlett Grain Co.
DeBruce Grain
J.D. Heiskell & Co.
Banquet
Champaign Danville Grain Inspection
Louis Dreyfus Corporation
Port of Corpus Christi
The Scoular Company
Friday Meeting Break
Union Pacific Railroad
Speaker Presentation
BNSF Railway Co.