Boles, Patrick P.

Gerald, John O.

English

Research Papers in Economics

SOUTHERN  JOURNAL OF AGRICULTURAL  ECONOMICS  December,  1970
PRICE.AND  THE STRUCTURE
OF FREIGHT CAR OWNERSHIP
Patrick P. Boles  and John O. Gerald*
The  recurring  shortage  of railcars  to haul  agricul-  control  of these  cars has  been  quite  different  from
tural  and  forest  products  continues  to be of utmost  general purpose railcars.
interest  to  farmers  and  agriculturally  related  enter-
prises.  Pricing  systems  internal to the railroad  indus-
try  prior  to  1964  may  have  discouraged  railroads  FACTORS REFLECTEDIN
from  purchasing  an  adequate  supply  of  railcars  to  RAILCAR  OWNERSHIP
meet  the  needs  of shippers  [2  and  3].  These  same
pricing  systems  also  may have  discouraged  railroads  A  number  of factors  influence  the  ownership  of
from  purchasing  high  cost  market-oriented  equip-  railcars.  First,  there  are  approximately  70 indepen-
ment.  An  endeavor  has  been  made  to  examine  the  dent Class I railroads in the United States. Since these
performance  of railroads in  upgrading  the quality  of  railroads have standard equipment, the railcars owned
their  fleets  in response  to a significant change  in  the  by any one railroad  may  be used by any other. When
pricing system in 1964.  a  railcar  moves  from  one  railroad  to another with a
load  and is  emptied, economic  logic  dictates that the
MARKET-ORIENTED  RAILCARS  terminating railroad  use the emptied car productively,
if feasible, rather than returning it empty.
Technology  has  produced  railcars  that  are  com-
patible  with modern  facilities  and handling  methods.  Railroad  freight  can  be  classified  into  two  basic
This  market-oriented  equipment  is  needed  by  rail-  types,  raw  materials  and  manufactured  goods.  Raw
roads  to  furnish  the  services  and  conveniences  materials  are  usually  bulkier  than  manufactured
demanded  by shippers.  goods.  Railroads  serving  an area  that  is  primarily  a
producer  of raw  materials  have  few  terminations  of
These  market-oriented  railcars  take  many  forms  loaded cars and, thus, must backhaul a large supply of
and  the  improvements  in  operations  they  make  empty  cars  in  order  to  have  them  available  for
possible  are  numerous.  Special  service  boxcars  have  shippers'  needs.  However,  railroads  serving  the indus-
wide  doors,  sliding center sills and other  features that  trial areas have  a  number of empty cars  belonging to
permit  the use of modern handling methods.  Covered  other  railroads  at  their  disposal.  By  productively
hopper  cars  are used to carry grain and other flowing  using  cars  terminated,  these  railroads  can  operate
bulk  commodities.  These  cars  have  roof hatches  for  with  a  minimum  of owned  cars.  However,  since  dif-
loading  and  hopper  outlets  for  unloading.  Truck  ferent railroads are involved, the equity of the owning
trailers on specialized flatcars are now in wide use and  road must be protected.
permit  fast  loading and unloading.  These flatcars turn
around  three  times  as  fast  as  the average  freight  car  Early  in the history of railroads  there were  agree-
[2].  ments  between roads for the use of one road's railcars
by the other road. Different types of agreements  were
Other  types  of market-oriented  cars  have been  in  entered  into  until  finally  the  Committee  on  Car
wide  use  for  a  number  of  years.  The  mechanical  Service  of  the  Association  of  Americari  Railroads
refrigerated  car  is  a  direct  descendant  of  the  ice  presented  the  Association with  a per  diem code that
bunker  car.  Tank  cars  for  hauling  liquids have  also  became  effective July  1, 1902.  This agreement,  with
been  in  use  for  many  years.  The  ownership  and/or  modifications,  is still in effect.
*Patrick P.  Boles and  John 0. Gerald are agricultural economists,  Economic  Research Service,  USDA, Washington,  D. C.
Views expressed are the authors and do not necessarily  reflect the policies of ERS or the USDA.
189Historically,  per  diem  rates have  been  quite  low,  based  on  "original  cost  per  car  depreciated."  These
ranging from $.20 per day, in 1902, to $2.88 in 1959,  rates ranged  from  $2.16 for a car valued at $1,000 or
regardless  of the  original  cost  of the  car  (Table  1).  less  to  $7.74  for  a  car costing  $20,000  or more. On
The  late  Professor  Yehuda  Grunfeld,  University  of  March  1, 1965,  this was modified  and the maximum
Chicago,  in  an  article  on  per  diem  rates,  indicated  charge  became  $12.18  for  a  car  costing  $30,000 or
that with  a  life  of 30 years  per  car and a  return on  more  with subsequent  rates  for  different cost  above
investment  of  6 percent  the  per  diem rate  of $2.75  the  previous  maximum.  This  scale  of per diem  rates
(in  effect  in  1957)  would reimburse  an owner fairly  was instituted to encourage  the purchase of more and
for  a  new  car  costing  approximately  $6,400  [3,  p.  higher priced  railcars.  (Beginning August  1,  1969, the
62].  Data from the Interstate Commerce  Commission  ICC  effected  new  methods  of computing  car  rental
indicates  that the cost of new railcars ranged from an  costs which include  charges for  both days  of use and
average of $8,715  for regular  hopper  cars  to an aver-  mileage.)  The scale  appears  to have incorporated  two
age  of $15,667  for  refrigerated  cars  in  1959.  Using  of the  three  principles  of  a  good  per  diem  system
Grunfeld's analysis,  the  $2.88 per diem rate  of 1959  discussed by Grunfeld  [3, pp. 56-57].
would  not compensate  the owner  even for the lowest
priced  new  railcars.  Since  50  percent or more of the  The Impact of the Graduated Per Diem  Scale
life  of a  car  may  be spent on a  per  diem basis,  ade-
quate  per diem  rates are  required to  create  incentive  A  look at  various  aspects  of railcar  ownership  in
for investment  in market-oriented  cars. However,  this  the  period  1959  to  1967  reveals  some  interesting
article  is  not directed to the  adequacy  of freight  car  insight into the influence of railcar price and per diem
supply  but  rather  to  the  quality  or  composition  of  rates  on  railcar  ownership.  During this period,  there
the  fleets.  Grunfeld's  analysis showed  that  a flat per  was  almost  a  steady  decline  in  the  total  number  of
diem  rate  allows  margin  for  investment  only  in  the  railcars owned by Class  I railroads (Table  3).
lowest-cost  cars, and none  at all  for higher-cost  cars.
As  would  be  expected,  the  railroads  owned  pri-
A graduated  scale  of per diem rates was instituted  marily  general  prupose  railcars.  However,  over  the
by the American  Association of Railroads on January  1959-1967  period  there wassubstantial change in the
1,  1964  (Table  2).  This  scale  of per  diem rates was  relationship  between  general  purpose  and  market-
TABLE  1.  PER DIEM RATES FOR RAILROAD FREIGHT CARS,  1902-1963
Year initiated  Per diem rate  Year initiated  Per diem rate
Dollars  Dollars
1902  .20  1920  .90
1906  .25  1920  1.00
1907  .50  1945  1.15
1908  .25  1947  1.25
1910  .30  1949  1.75
1910  .35  1952  2.00
1913  .45  1953  2.40
1916  .75  1957  2.75
1917  .60  1959  2.88
Source:  [2, p. 28].
190TABLE 2.  PER DIEM RATES  FOR THE USE  OF RAILROAD  OWNED  FREIGHT CARS  OPERATING  IN
THE U.S.  BETWEEN  COMMONCARRIER RAILROADS,  JAN. 1,1964
Original cost of  r d  g  Per diem rate per
car depreciated  car day
Dollars
1,000 and less  1  2.16
1,000.01 to  5,000.00  2  2.79
5,000.01 to  10,000.00  3  3.58
10,000.01 to  15,000.00  4  4.50
15,000.01  to  20,000.00  5  6.15
20,000.01to  25,000.00  6  7.11
25,000.01  to  30,000.00  7  9.00
30,000.01  to  35,000.00  8  10.18
35,000.01  and over  9  12.18
Source:  [2,p.32].
TABLE  3.  MARKET-ORIENTED,  GENERAL  PURPOSE  AND  TOTAL  RAILCARS  OWNED  BY  CLASS  I
RAILROADS  (1959-1967) a
Year  Market-oriented  railcars  General purpose railcars  Total railcars
1959  177,264  1,499,122  1,676,386
1960  187,978  1,470,314  1,658,292
1961  193,345  1,410,896  1,604,241
1962  204,494  1,345,573  1,550,067
1963  221,610  1,290,696  1,512,306
1964  245,542  1,242,843  1,488,385
1965  295,896  1,182,109  1,478,005
1966  340,939  1,147,176  1,488,115
1967  373,743  1,103,423  1,477,166
aMarket-oriented  railcars,  as  used  in  table,  includes  special  boxcars,  covered  hopper  cars,
refrigerated  cars, rack  cars,  tank cars and for  1965-67  special  service flatcars. General purpose railcars include all
other cars owned by Class  I railroads.
Source: .[4, Table 163].
191oriented  railcars  owned  by railroads. General purpose  equipment.  The increased  purchases  of high cost cars
cars  decreased  from  1,499,122  in  1959 to 1,103,423  in  1962 and  1963  could have  been  caused  by several
in  1967,  while  market-oriented  cars  increased  from  forces,  one of which could  have  been anticipation of
177,264  to  373,743  (Table  3). Market-oriented  cars  the initiation of a graduated per diem scale.
increased  from  10.6 percent of the total fleet in 1959
to 25.3 percent in  1967.  ALTERNATIVES  FOR THE GROWTH OF
FLEETS OF MARKET-ORIENTED
More  dramatic changes are  observed when we look  RAILCARS
at  the  pattern  of ownership  and purchase  of various
types  of new cars during  the  1959-1967  period.  The  The demand before  1964 for market-oriented  rail-
increase  in  ownership  of  market-oriented  cars  over  cars  was  not  met by  the  railroads  because  of  their
this period ranged  from  37.3  percent  for rack cars to  internal  pricing system.  In order to meet the needs of
159.4  percent  for  special  service  boxcars  (Fig.  1).  shippers  wishing  to  use high cost equipment  special-
Contrast  these  increases with  general  purpose railcars  ized  to their systems,  car companies came into being.
which  decreased  from 47.5 percent  for stock cars to  Also,  some  shippers started purchasing their own rail-
14.6  for  hopper  cars.  The  purchase  of  market-  cars.  These  cars  were  assigned  to haul for  a specific
oriented  cars  increased  by 410.0  percent from  1959  shipper  and  could  be  used  by  someone  else  only
to 1967 while  general purpose  cars decreased  by 12.6  through  special  arrangement.  While  this  method  of
percent (Fig. 2).  car  ownership  permitted  shippers  the  benefits  of
market-oriented  railcars it was somewhat restrictive in
The purchase  of market-oriented  cars  shifted from  that it permitted less  than full utilization of available
the  minor  to  the  dominant  role.  In  1959,  they  equipment.
accounted  for  only  18.3  percent  of  new  cars  pur-
chased  but increased  to  56.6 percent in  1967  (Table  The  importance  of the  car companies  and private
4).  While much of the market-oriented equipment  is a  ownership  to  the  shipping public  can  be  seen  when
recent  development,  they  were  available at the begin-  we  look  at  their  ownership  of certain  types  of rail-
ning  of the period,  thus, giving further credibility  to  cars. Private  car  lines owned  96.3  percent of all tank
Grunfeld's  hypothesis  concerning  the  influence  of  cars  and 81.3  percent  of all refrigerated  cars in 1959.
graduated  per  diem  rates  on  the  purchase  of such  They  owned  97.2  percent  of all  tank  cars  and  55.5
TABLE 4.  MARKET-ORIENTED  AND  GENERAL  PURPOSE  RAILCARS  PURCHASED,  BUILT  AND
LEASED BY  CLASS I RAILROADS  (1959-1967)
Year  Market-oriented  railcars  General  purpose railcars  Total railcars
1959  7,738  34,550  42,288
1960  9,427  44,337  53,764
1961  6,058  19,992  26,050
1962  10,533  18,592  29,125
1963  16,297  16,675  32,972
1964  22,643  29,285  51,928
1965  37,013  25,679  62,692
1966  44,760  30,297  75,057
1967  39,467  30,200  69,667
Source:.  [4, Table 22];
192%  OF  1959
Special  service  boxcars
250  —/  Refrigerated  cars
150  ^^^  _<  >—  Rack  cars
100-—¢AII__ll  railcars
...............  Covere  hopper  cars
50  l—l,  ,  "Regular  boxcars
50  '  —  —  —  —  —  —  —  · Stock  cars
1959  1961  1963  1965  1967
URE 1.  COMPARISON OF SELECTED RAILCARS  IN SERVICE BY CLASS 1 RAILROADS IN
THE UNITED STATES,  1959-67
%  OF  1959—
:.  ,4 
°  r \  Market  oriented 500 t  ., 500~  /  railcars
_-  ...  . . . . - . 400  ——/  4
200  ——  .
''  All  railcars
,.1  ,  ,  r^  ^  General  purpose
railcars
1959  1961  1963  1965  1967
FIGURE  2.  NEW RAILCARS  PURCHASED AND INSTALLED BY CLASS 1 RAILROADS IN THE
UNITED  STATES,  1959-67
193percent  of all refrigerated  cars  in  1967.  It should  be  percent  while  market-oriented  cars  was  only  20.7
noted, however,  that private  companies owning most  percent  (Fig.  3).  These  figures indicate  that  shippers
of  the  refrigerated  cars  were  holding  companies  are  depending  more  on  the  railroads  for  market-
owned jointly by several of the Class  I railroads.  oriented  equipment  although private car lines are still
a very important source of railcars.
The private  car  lines had a  steady increase  in total
railcars  over  the  1959-1967  period  (Table  5).  Car  CONCLUSIONS
shortages  existed  throughout  the  latter years of this
period.  While  the bulk of the cars were high-cost, the  In conclusion,  patterns of ownership and purchase
car  lines  did  own  some  general  service  equipment,  of  new  railcars  by  railroads  1959-67  provide  rather
such  as  boxcars,  gondola  and open hopper  cars.  The  strong support  for Grunfeld's hypothesis that the flat
relationship  between  market-oriented  and  general  per  diem  rates  in existence  from  1902 to  1963  gave
purpose  cars  varied little  over the  1959-1967  period,  insufficient  incentive for  railroad-owned  car  fleets to
Market-oriented  cars  accounted  for  84.1  percent  in  be  tailored  to  market  demand.  A  second  point
1959  and  82.6  percent  in  1967.  However,  the  per-  Grunfeld  made was to the effect that, if the supply of
centage  increase  for  general  purpose  cars  was  35.0  freight  cars is to keep up with demand, per diem rates
TABLE 5.  MARKET-ORIENTED,  GENERAL  PURPOSE  AND  TOTAL  RAILCARS  OWNED  BY  PRIVATE
CAR LINES (1959-1967)a
Year  Market oriented railcars  General  purpose railcars  Total railcars
1959  256,057  48,270  304,327
1960  268,024  53,483  321,507
1961  266,691  55,882  322,573
1962  258,540  66,649  325,189
1963  271,289  63,482  334,771
1964  280,699  63,996  344,695
1965  285,818  61,767  347,585
1966  298,693  65,513  364,206
1967  309,003  65,139  374,142
aMarket-oriented  railcars include refrigerated,  tank cars, and other specialized  cars. General  purpose
railcars  include boxcars, gondola  and open hopper cars.
Source:  [5].
194should be  in accord with the cost of new cars, not the  Association  of  American  Railroads  in  the  current
average  value of the existing fleet.  The  1964 per diem  pricing system.  However,  we  cannot judge the degree
agreement  incorporated  this  feature  in  principle,  at  to which the present  per  diem scale  is optimum. The
least.  third role, that of varying per diem rates seasonally  in
line with  car demand  so  as to achieve optimal spatial
Thus,  two  of the three  roles  specified for  the per  distribution,  has  not  been  attempted  in  recent
diem  pricing  system  have  been  recognized  by  the  decades [1,6].
%  OF  1959
140 
General  purpose
railcars
130
All railcars
120  —  Market  oriented
railcars
110 
100i 100
1959  1961  1963  1965  1967
FIGURE 3.  COMPARISON  OF TWO GROUPS OF RAILCAR IN SERVICE  BY PRIVATE CAR LINES IN
THE UNITED  STATES,  1959-67
REFERENCES
1. Gerald, John O., "The 'Market' for Freight  Car Services," 1969 Proceedings, Western  Agr.  Eco. Assoc.
2.  Gerald,  John 0., and Mildred  R.  DeWolfe,  "The  Freight  Car Situation  and Prospects," Marketing and Trans-
portation Situation, MTS-163, Economic  Research Division, USDA, Nov.  1966.
3.  Grunfeld,  Yehuda,  "The Effect  of the Per Diem  Rate  on the Efficiency  and Size of the American  Freight Car
Fleet," J. of Business, XXXII,  No.  1, Jan. 1959.
4.  Interstate  Commerce  Commission, Transport Statistics in the United States; Part 1, Yearly,  1959-1967.
5.  ,Transport  Statistics in  the  United States; Part  9,  Yearly,  1959-1967.
6.  Weisbrod, Burton  A.,  "The Per  Diem  Freight  Car Rate  and Railroad.Efficiency-The  Short-Run Problem,"  J.
of Business, XXXII, No. 4, Oct.  1959. 
195

Commission, Transport Statistics in the United States; Part 1,

The 'Market' for Freight Car Services,&quot;

The Effect of the Per Diem Rate on the Efficiency and Size of the American Freight Car Fleet,&quot;

The Freight Car Situation and Prospects,&quot;

The Per Diem Freight Car Rate and Railroad.Efficiency-The Short-Run Problem,&quot;

Transport Statistics in the United States; Part 9,

PRICE AND THE STRUCTURE OF FREIGHT CAR OWNERSHIP

PRICE AND THE STRUCTURE OF FREIGHT CAR OWNERSHIP

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