Use of Ocean Containers for Temporary Storage and Surge Capacity

Dr. Barry Prentice Department of Supply Chain Management

Transport Institute University of Manitoba

19TH ANNUAL FIELDS ON WHEELS CONFERENCE

Excess Demand Excess Supply

Aug Oct Dec Feb Apr June

Normal Peak Demand Year

High Average System Capacity

Rail car utilization

Peak Load Problem in Grain Transportation

Revenue Cap

tonne-km Quantity

Supply of Railcars

Price

Peak Demand

Off-Peak Demand

Excess Demand

Excess Supply

Q

Total Demand

Peak Load Demand with a Revenue Cap: Normal Year

Rationing Problems • Chronic Complaints • “Phantom Orders” • Inefficiency

Aug Oct Dec Feb Apr June

Excess Demand

Excess Supply Demand Surge Peak Year

High Average System Capacity

Rail car utilization

Aug Oct Dec Feb Apr June

Normal Peak Demand Year High

Average System Capacity

Rail car utilization

Revenue Cap

tonne-km Quantity

Supply of Railcars

Price

Peak Demand

Off-Peak Demand

Excess Demand

Q

Total Demand

Peak Load Demand with a Revenue Cap: Demand Surge Year

Chronic Complaints &

Finger Pointing

Limits on the Expansion of the Bulk Handling Supply Chain to Meet Unexpected Demand Surge

High Fixed Cost Network Industry •  Significant Economies of Scale •  Multiple Systems/System Harmonization •  Long lived assets (30-50 years) •  Specialized assets/no alternative uses Availability of Short Term Asset Leasing •  U.S. railcars/locomotives Bottlenecks and Pinch Points •  Transfer points •  System synchronization

“In 2013, containers were used to transport 10 percent of total U.S. waterborne grain exports, up 2 percentage points from 2012. Approximately 61 percent of U.S. waterborne grain exports in 2013 went to Asia, of which 16 percent were moved in containers.”

Source: USDA AMS  

Top Destination Markets China 41% Taiwan 14% Indonesia 13% Vietnam 7 % Malaysia 7 % Korea 5 % Thailand 4 % Japan 4 % Other 12 %

U.S. Containerized Grain Exports, January-June, 2014

Asia is the top destination for U.S. containerized grain exports—97 percent in 2013.”

Canada has growing container exports through the west coast

Could Containers Provide Temporary Storage and Transport during a Demand Surge Year?

•  World supply of containers is very elastic and they can be rented on a short-term basis

•  Container transport of grain would augment rather than compete with space in the bulk system

•  Containers could provide temporary storage at harvest

•  Containers could be brought in from east, west and south

•  When the demand surge passes, all the extra containers can return to other service

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Containerization and the Revenue Cap

The Revenue Cap creates a double disincentive for the railways to handle containerized grain

– Containers were negligible when the base of the Maximum Grain Revenue Entitlement was calculated

– Containers cost more than bulk to handle (less profitable)

– Higher rates for containers eat up the Cap faster

Future of Grain Containerization

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•  Containerized grain is growing because of cheap backhaul rates to Asia and growth of Special Crops

•  Long run, competition is moving in favour of containerization – low barrier to entry, access to more buyers, just-in-time

•  Bulk is protected by economies of transaction costs – documentation and inspections – but technology is advancing

•  Containers offer a strategy to relieve excess inventories during demand surges