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U.S. rail volumes for grain are facing ongoing headwinds in both the international and domestic markets, with factors such as a strong U.S. dollar and competition from other grain-producing countries weighing on export-bound volumes, while the coronavirus pandemic is putting pressure on domestic volumes, according to grain industry observers.
“The railroads are going to really struggle with what’s the forecast and with what [grain and soybean producers are] going to be delivering,” said Mike Steenhoek, executive director of the Soy Transportation Coalition. “Obviously, it’s very uncertain, but they’ve got a number of dynamics that are happening that are producing these significant headwinds.”
On the export side, U.S. grain exports are facing fierce competition from South America and the Black Sea region, as well as disrupted trade with China, according to agricultural consultant Jay O’Neil. These factors are hurting agricultural grain prices and railroads’ profitability.
The COVID-19 pandemic has also slowed U.S. grain exports between the U.S. and China, O’Neil said. Grain export activity was expected to increase following the first round of the U.S.-China trade agreement that both countries signed earlier this year.
“I am not hearing, nor am I aware of, any problematic issues with rail service in the U.S., at least not from the shippers side,” said O’Neil. “The railroads do have their concerns about reduced incoming intermodal volumes due to COVID-19 and, on the grain side, the drop in U.S. exports.”
Brazil has exported “significant” volumes of soybeans, predominantly to China, since this time of year is the height of exports for the South American country, Steenhoek said. The season for U.S. exports typically starts in the fall.
But the U.S. dollar has also strengthened as people worldwide flock to more stable currencies amid the global economy uncertainty, Steenhoek said. This in turn makes U.S. grain exports more expensive compared with grain exports from other countries, such as Brazil, he said.
“What will really be the tell-tale sign of our export strength will be later this year, when our harvest comes online. So, that’s what people really are gearing up. But in the interim, those headwinds do exist,” Steenhoek said.
In its monthly worldwide grain estimates report last week the U.S. Department of Agriculture (USDA) lowered its outlook for U.S. wheat exports and domestic use, while increasing its volume estimates for U.S. wheat stocks. The agency lowered its 2019-2020 wheat export outlook by 15 million bushels to 985 million bushels “on a slowing pace and prices that have become uncompetitive in many international import markets,” according to the World Agricultural Supply and Demand Estimates April 9 report.
USDA also raised its estimates for ending stocks of U.S. corn to 2.09 billion bushels from its March estimate of 1.89 billion bushels.
As for domestic grain volumes within the U.S., the COVID-19 pandemic has increased demand for agricultural products such as eggs and soybean meal for livestock, but it has also caused restaurants to reduce their food purchases significantly, Steenhoek said.
Meanwhile, the drop in crude oil prices has slashed U.S. ethanol production, since the price of ethanol tracks closely with the price of crude. Since corn is used to produce ethanol, corn prices in turn have fallen, and farmers are trying to figure out their planting intentions for the year, Steenhoek said.
“All of a sudden you have this dramatic decrease in the corn market, and that’s really causing some turmoil in the industry,” he said.
Grain producers might be able to shift some percentage of their farming operations from corn to soybeans or another grain, but producers typically don’t have the ability to alter their operations considerably because “Once you have your land a certain way, all of your inputs a certain way, your machinery a certain way, you don’t have that ability to just pivot on a dime,” Steenhoek said.
“The only good news from the shippers’ side of the coin is that the drop in cargo volumes means there is plenty of rail capacity at the ready to serve the upcoming harvest needs. I’m sure the railroads are saying, bring it on,” O’Neil said.
While U.S. grain exports are facing a strong U.S. dollar and competition from other countries, Canadian grain exports have been steady, following the rail blockades of February. The COVID-19 pandemic also doesn’t appear to have a material impact on Canadian grain exports, according to Wade Sobkowich, executive director of the Western Grain Elevator Association.
Grain producers and truck drivers have been subject to the same safety and sanitation protocols, including maintaining distances of two meters between workers, sometimes resulting in truck drivers being asked to remain in their truck as grain elevator staff bring the delivery receipt to the truck, Sobkowich said.
But “in spite of all these measures (and perhaps because of them to a certain degree), grain has been flowing well and as long as everyone involved in the supply chain can keep their employees healthy and working, we do not anticipate significant problems,” Sobkowich said.
“The federal government and the provinces have deemed grain/food and supply chains as essential services and, although there will be issues we will have to work through, our intention is to keep grain moving during this pandemic,” he said.
This article first appeared on www.freightwaves.com
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