Market Matters Blog

The PNW Building Boom -- A Bubble?

There's one question market reporters always have to keep in mind: Is there a bubble here? Has this trend grown so fast that it is bound to crash?

In my reporting for my recent series, PNW Building Boom, that question lingered. After all, booms are usually followed by busts. A 123% increase in shuttle elevators over a 10 year time span is significant, but can the market support it?

As several experts explained to me, the fundamentals of the shuttle elevator building boom are incredibly strong.

The Corn Belt keeps marching north and west as seed technology has boosted corn and soybeans production in traditionally fringe areas. North Dakota corn acreage has increased 150% since 2003, soybean acreage jumped 50% and wheat acreage declined 20%. Early hopes had pegged the North Dakota corn acres at more than 4 million this year, and while a wet, late spring trimmed the optimism, the trend of increasing corn acreage in small grains country remains intact. The fact of the matter is that available grain supplies are shifting closer to the West Coast, making rail the most viable mode of transportation.

Global demand for corn and soybeans has grown faster than supplies, and it's expected to keep growing. For instance, China's soybean imports are expected to double to nearly 4 billion bushels by 2020. That's more than any single U.S. crop grown to date, and China already buys an average of 25% of U.S. production every year. China's far from the only country with a growing middle class eager to eat more meat.

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The direction of those two trends spurred the largest infrastructure expansion in the PNW since at least the 1980s. These factors, by their very nature, are long term trends. Unless something catastrophic and unexpected happens, their trajectory is pretty dependable.

That deflates the crux of the bubble argument: something would have to change in long-term demand trends for the elevator boom to go bust. However, many concede that compared to current demand and production, the market is close to overbuilt.

In some places, like Chester, Mont., competing grain companies built elevators just miles apart. There simply isn't enough grain grown in the counties around Chester to keep both new terminals operating at full capacity.

"In any market, if you build more capacity than there is demand for it, profitability goes down," said Brian Schouvieller, CHS Inc.'s senior vice president for North American Ag Business. "Building capacity at same time and pace that demand grows is nearly impossible. We've built additional capacity beyond demand today, and it'll likely take three to five years for demand to catch up with the capacity that's been built."

Elevator capacity severing the PNW export market has more than doubled in the last decade, but if acres in the Northern Plains continue to shift from lower yielding crops like wheat to corn and soybeans, the additional capacity will be necessary to handle expanded output.

So is the shuttle elevator building boom a bubble? I don't think so. It might be overbuilt at the current moment and companies may struggle to break a profit, but in a long term, the nation will need the capacity. The grain companies are willing to take the short term hit if gives them a strategic origination advantage down the road.

It's worth mentioning here that the Gulf of Mexico still accounts for the bulk of U.S. agricultural exports, and it could see some expansion of its own once the third lock of the Panama Canal opens. Yet the barge-based supply chain serving that export market is crumbling. Most locks in the U.S. are as old, and likely older, than the average farmer.

Transportation affects the profitability of every farmer. The issues are real and solutions difficult. For the first time, USDA has teamed up with the National Grain and Feed Association and the Soybean Transportation Coalition to host an Ag Transportation Summit, where they hope to identify the best solutions and start working towards consensus around them.

If you enjoyed the PNW series and/or would like to learn more about transportation issues that might affect your local prices, please consider attending the transportation summit on July 30-31 in Chicago. I'll be there, and am excited for the thoughtful dialogue in store.

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