(BRK.A), (BRK.B)
With all the supply chain issues in the news this past year, one that has flown largely under the radar are mandatory Union Pacific railcar reductions (and a threatened embargo) of Pilot Flying J tank cars carrying urea for Diesel Emissions Fluid (DEF) and ethanol for automobiles.
The Class 1 freight railroad is trying to reduce the number of cars in its system by 2-3% due to congestion that has caused service problems, and Pilot Flying J is warning that an embargo of its tank cars could be “disastrous” for the long-haul trucking industry.
Union Pacific offers the sole service to a number of urea manufacturers that make the key ingredient in DEF, and DEF is required in all diesel trucks manufactured after 2010.
“A single railcar carries 21,500 gallons of DEF on average,” noted Pilot Flying J CEO Shameek Konar in his testimony before the Surface transportation Board in late April. “A single truck takes in 7 gallons of DEF every time they fill. . . .That implies a single railcar is providing 7,000 trucks of DEF fill.” He went on to note every missed railcar “reduces trucking potential mileage by 5 million miles.”
While Union Pacific maintains that it is trying to reduce the number of railcars in its system to reduce congestion, Konar feels that Pilot is being incorrectly penalized based on data that looked at increases in shipments between January 2022 and March 2022 that inaccurately reflect an increase in Pilot shipments, noting that it has not increased the number of railcars it is adding to UP’s system. Instead it has just become the shipper of record for a number of companies that previously shipped the railcars in their own names.
“The total number of cars has stayed the same,” Konar testified.
Konar noted that unless Pilot agreed to UP’s 26% to 50% mandated reduction in shipments, they have been threatened with shipping embargos. He added that he was unaware of any other company being asked to reduce their shipping that dramatically.
Pilot Flying J operates one the largest DEF supply networks in the country, and accounts for approximately 20 percent of the US’s over the road diesel supply and 30 percent of the DEF supply. It supplies 300 million gallons of DEF to truckers on an annual basis.
Konar said that UP’s actions come during a time when diesel inventories are already running 10-15% below the historic lows over the past five years, and that the railcar reductions “will likely sideline trucks and reduce trucking capacity.”
He also added that a 50 percent reduction would also raise fuel prices and cause DEF to run out at some locations.
As for the cuts’ impact on automobiles, Konar also warned that UP’s cutting ethanol railcar shipments by 50 percent for the ethanol needed to blend with gasoline to raise octane that originates at its plant in Nebraska and is shipped by UP to markets in Arizona and Nevada will “substantially reduce the amount of gasoline available in these markets.”
Konar believes that the railroad’s actions are “flawed, disproportionate and unprecedented.” He added that “the current situation is untenable for us.”
With record CPI inflation numbers reported just this past week, if there is any area that calls for the direct intervention of the heads of the Department of Transportation and the Department of Commerce this would be it.
Both the Commerce secretary Gina Raimondo and the Transportation secretary Pete Buttigieg need to directly focus on this issue before a trucking bottleneck sends inflation far higher.
Berkshire Hathaway and Pilot
In 2017, Berkshire Hathaway made a $2.76 billion investment in Pilot, obtaining an initial 38.6 percent stake in the company, and Berkshire will become the majority owner in 2023.
© 2022 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.