Canadian railways could run out of grain to transport due to drought: analyst

TORONTOfrom Canada two larger railroads could run out of grain to transport and face revenue issues in the coming year as the national grain harvest is expected to decline by 37% due to drought on 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 is up 4.5% from the four-year low in July, but shipments were 31% below the level of August 2020.

Corn, from Canada the largest grain harvest, 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 farmers. Canadian Pacific Railway Ltd. because 24% of its total freight revenue in 2020 came from grain, its largest segment, compared to just 15% for CN, Cameron Doerksen of National Bank Financial written in a report.

Canadian grain accounted for 72 percent of all grain revenues last year for the two railways with we cereals counting for the remainder.

Doerksen said the bottom line would be about a six percent drop in revenue over the next 12 months for CP and about four percent for Canadian National Railway Company

Agriculture and Agri-Food Canada (AAC) and Statistics Canada estimate that the total production of major cereal crops will fall to 49.3 million tonnes in 2021-2022, from 78.5 million tonnes last year.

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 that 99 percent of all farmland in Alberta, Saskatchewan and Manitoba, which account for the overwhelming majority of wheat, canola, oats and barley production, experienced drought conditions.

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 the drought has also affected we cereal, the US Department of Agriculture near-record corn and soybean production projects, both we crops for CN and CP, due to increased acres seeded.

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 maize production will increase 5.9 percent to 14.4 million tonnes while the soybean product is expected to decrease 7.4 percent to 5.9 million tonnes.

CN is more exposed to grain in Illinois while CP has more exposure in the Dakotas, Minnesota and Iowa – areas which should experience a drop in cereal production.

“As such, CN appears to be in a better position to we grain than CP this year, ”Doerksen said.

He added that we grain volumes may be related more to prices and exports than to production because there is much more storage in the we that 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 of The Canadian Press was first published September 24, 2021.

Companies in this story: (TSX: CNR, TSX: CP)

© 2021 The Canadian Press. All rights reserved., Source Canadian Press Data File

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