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Canadian Railways’ hopes for bumper grain crop may be dashed

By: | at 08:00 PM | Channel(s): International Trade  

Jeff Burghardt had scheduled a maintenance shutdown at Canada’s largest grain terminal recently in preparation for a surge in volumes this fall. He wanted Prince Rupert Grain Ltd. to be shiny, oiled and ready to go when the carloads arrived. He’s now sitting in his office with dashed hopes. “In a four-week period we really lost it,” he said of the grain crop, one of Canada’s main exports and a key revenue driver for Canada’s two main railways.

The Canadian Wheat Board is now forecasting a grain harvest of about 45-48 million metric tons - above the 43.4 million tons that came off the fields last year and much higher than the 28 million tons seen in 2002 after three years of drought. But that is down from the 50 million tons predicted at the start of the summer, as a wet and warm spring raised expectations of a bumper crop. There were even whispers the harvest could yield as much as 52 million tons, the best in 30 years. Then frost hit in late August and again in early September. And since then it has been raining, hampering farmers’ ability to take the crop off the fields. Now Burghardt, president of Prince Rupert Grain, is in “wait-and-see mode.” Typically, he says, he would have already seen between 60-70% of the harvest completed by now. “We are nowhere close to that,” Burghardt said. “There is an absence of grain in this system.”

The harvest is delayed between two to three weeks, confirmed Bruce Burnett, director of weather and crop surveillance at the Canadian Wheat Board. “Generally speaking, we’re over half complete the harvest at this point,” he said. This year, only about 10% of the crop has been harvested, however. And there is a risk of it staying on the fields if weather conditions deteriorate, he said.

“Nevertheless, “in terms of the quantity, this is a much better crop than we’ve had in the past few years at least.” But in terms of quality, he said farmers would be quite disappointed. So might Canada’s two main railroads, Canadian Pacific Railway Ltd. (CP) and Canadian National Railway Co. (CNI). Both companies rely on grain for just under 20% of their revenues and both had expected to boost their bottom lines from the high-margin crop this year. Many brokerages had raised their earnings estimates on the railroads this year based in part on the higher grain revenue outlook. At Canadian Pacific, revenues from grain rose 9.2% in the first half of the year; at Canadian National, revenue from grain and fertilizers rose 21%. The second half was expected to be even stronger. Not only was the grain harvest eagerly anticipated, but there has been strong demand from Asia for all other commodities. As well, the healthy North American economy has caused a surge in merchandise volumes.

Too early to gauge impact

While volumes in most areas still appear strong, according to industry observers, there are already signs the lower grain crop could hurt the railways. Gain merchandiser Agricore United cancelled more than 100 cars of grain recently, citing the weather delays. Nevertheless, analysts haven’t yet scaled down their earnings outlook for either Canadian Pacific or Canadian National. “It’s too early yet” to gauge the impact of the lousy weather on the crop and therefore on the railroads, said one analyst who requested anonymity. “I’m not prepared to change my numbers at this point,” he said. And the railroads are still relatively optimistic. “We know that there’s been an effect on the quality (of the crop) and some effect on the quantity,” said Canadian National spokesman Jim Feeny. “But the crop is still there.” Feeny said the strongest grain volumes usually begin in late August or early September, are at their highest in October, and at their lowest in June and July.

“We didn’t see that this year, it stayed strong all summer,” he said, with the only slowdown noted in late August following the frost. Besides, he noted, “the farmers with their technology and equipment, can move very very quickly if they get a break in the weather.” (Dow Jones News Provided by COMTEX)