Canadian railways could run out of grain to transport due to drought: analyst
TORONTO – Canada’s two largest railroads may run out of grain to transport and face revenue issues in the coming year as the domestic grain harvest is expected to decline 37% due to drought in the Prairies despite a slight improvement in August.
Statistics Canada said on Friday that 3.07 million tonnes of grain had been delivered in August. This was a 4.5% increase from the four-year low in July, but deliveries were 31% below the August 2020 level.
Wheat, Canada’s main grain crop, was 4% higher in August than in July, but down 25.6% during the year.
Oats, barley, rye, flax and canola had mixed performance. Canola and flaxseeds were down sharply in both periods, barley deliveries were strong while rye and oats were mixed.
The poor harvest forecast for the coming year will be particularly difficult for Canadian Pacific Railway Ltd., as 24% of its total freight revenues in 2020 came from grain, its largest segment, compared to just 15% for the Canadian Pacific Railway. CN, Cameron Doerksen of National Bank Financial wrote in a report.
Canadian grain accounted for 72 percent of all grain revenues last year for both railways, with US grain accounting for the remainder.
Doerksen said the net result would be about a 6% drop in revenues over the next 12 months for CP and about 4% for Canadian National Railway Company.
Agriculture and Agri-Food Canada (AAFC) and Statistics Canada estimate that total production of major grain crops will drop to 49.3 million tonnes in 2021-22, from last year’s record of 78.5 million tonnes.
Wheat is forecast to fall 38.3 percent to 21.7 million tonnes due to a 32.6 percent reduction in yields and 8.5 percent less harvested area.
Canola is forecast to decline 34.4 percent to 12.8 million tonnes, the lowest level since 2010.
Barley is expected to fall 33.5 percent to 7.1 million tonnes, as higher harvested area is not expected to offset a 38 percent drop in yields.
Although smaller, the oat and pea crops will be hit even harder, falling 43.6 and 45 percent respectively.
Such low production levels have not been seen for more than a decade, and grain exports will fall by 41 percent, the lowest total since 2006-2007.
The federal government said 99 percent of all farmland in Alberta, Saskatchewan and Manitoba, which accounts for the overwhelming majority of wheat, canola, oats and barley production, was in times of drought.
CN’s rail network is concentrated in the northern regions of the Prairies where growing conditions were slightly better, while CP is more exposed to the southern regions.
While drought has also affected grain growing in the United States, the United States Department of Agriculture predicts near-record production of corn and soybeans, the two most important American crops for CN and CP, due to the increase in the area sown.
Maize and soybean production is expected to approach record levels. Corn production is forecast to increase 4% to 14.7 billion bushels, while soybeans are forecast to increase 4.9% to 4.34 billion bushels.
In Canada, increased production in Ontario and Quebec will increase corn production by 5.9% to 14.4 million tonnes, while soybean production is expected to decrease 7.4% to 5.9 million tons.
CN is more exposed to grain in Illinois, while CP is more exposed in the Dakotas, Minnesota and Iowa, areas that are expected to experience declining grain production.
“As such, CN appears to be better positioned than CP for US grain this year,” Doerksen said.
He added that US grain volumes may be linked more to prices and exports than to production, as there is much more storage in the US than in Canada.
CN and CP have recognized the challenge posed by the drought, warning investors last month that they are unlikely to repeat the record grain shipments they saw in 2020 as they each carried around 31 million tons.
This report by The Canadian Press was first published on September 24, 2021.
Companies in this story: (TSX: CNR, TSX: CP)