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Could Canadian Grain Stay Canadian Pacific’s Main Freight?

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The Canadian grain belt

Canadian Pacific (CP) supports its western corridor through four major feeder lines: the coal route, the Edmonton-Calgary route, the Pacific Can-Am route, and the north main line route. The north main line route serves customers between Portage la Prairie, Manitoba, and Wetaskiwin, Alberta. This line is a prime collector of Canadian grain.

CP’s Canadian grain business accounted for roughly 16% of total freight revenues in 2015. The grains are mainly shipped to Metro Vancouver’s port in the west and Thunder Bay’s in the east for export. CP also ships grains to the United States, Mexico, and eastern Canada for domestic consumption.

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Future outlook

According to the U.S. Department of Agriculture’s foreign agricultural service, Canada’s wheat production is expected to go up by 3% in 2016 and 2017. It has further predicted increased barley and soybean production in 2016 and 2017. However, production of corn, which is also one of CP’s main Canadian grains, is expected to go down by 10% in 2016 and 2017.

Currently, the Canadian dollar is weak against the US dollar. However, with the stabilization of the Canadian dollar, the export advantage could diminish. This may result in reduced expansion of land in production. On the weather side, the prediction of a dry spring in western Canada looms over production. The El Niño weather effect is expected to bring wetter weather in western Canada during the 2016 harvest season.

To sum up, the combined production of oat, corn, barley, and wheat is forecast to drop marginally in 2016 and 2017. Coupled with the low agricultural commodity prices, this could result in reduced haulage prospects for Canadian Pacific going ahead.

ETF exposure

Grains form a sizable freight source in terms of traffic and value for CP and Canadian National Railway (CNI). This is not the case for their US counterparts Union Pacific (UNP), Kansas City Southern (KSU), Norfolk Southern (NSC), Genesee & Wyoming (GWR), and CSX (CSX).

All of the above railroads, excluding GWR, form the US Class I railroad group. The iShares Transportation Average ETF (IYT) holds a total of 22.2% in Class I railroads. In the next part of this series, we’ll assess whether US grain hauling prospects are bright for CP in times to come.

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