uploads///UNP Agriculture division

Falling US Grain Exports Could Drag Down Union Pacific’s Agriculture Revenues in 2016

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Jan. 18 2016, Updated 4:28 p.m. ET

Union Pacific’s agriculture freight composition

Previously in this series, we assessed the patterns associated with Union Pacific Corporation’s (UNP) industrial freight revenues. In this part, we’ll go through the company’s agriculture products freight over the past year.

Agriculture includes grain and related products as well as food and refrigerated products. The company’s network serves major agriculture produce and related food markets in the West and Midwest US regions in addition to prominent consumption markets across the Midwest. Union Pacific reported a 16% share from agriculture freight in 2014 revenues.

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What agriculture freight carloads in 4Q15 suggest

According to Union Pacific’s data, grain carloads went down by 11% in the fourth quarter of 2015 compared to 4Q14. Carloads of farm products dropped by a significant 19% in 4Q15 compared to the same period one year previously. The change in grain mill product carloads was in the negative. However, there was a slight negative change in the carloads of food and kindred products in the last quarter of 2015.

US grain exports in 2016

According to the USDA (US Department of Agriculture), wheat prices are expected to decline through 2016 and 2017, indicating more wheat stocks, lower corn prices, and lower planted acreage. The USDA further adds that the agricultural sector will likely adjust to lower prices for most farm commodities in near term.

This lower crop price should, in turn, result in reduced acreage planted, indicating reduced prospects of hauling agriculture items for railroads in 2016. Adding to this, the strength in the US dollar should negatively impact US agricultural exports, causing low volumes for railroads in 2016.

Union Pacific’s peer group companies

Nevertheless, Union Pacific’s peer group companies including Norfolk Southern Corporation (NSC) and CSX Corporation (CSX) are hopeful for better agriculture freight revenues in 2016. Along with the smallest Class I railroad in the US, Kansas City Southern (KSU), these railroads make up all the Class I railroads in the US, and the iShares US Industrials ETF (IYJ) holds approximately 4.6% in Class I railroads.

In the next part of this series, we’ll look at the brightest category in Union Pacific’s revenues: automotive.

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