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Could US Grain Dampen Canadian Pacific’s Freight Spirits?

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Canadian Pacific’s US grain business

Canadian Pacific’s (CP) US grain business is located in North Dakota, Minnesota, Iowa, and South Dakota. CP, in partnership with other railways, also hauls grain to export terminals in the Gulf of Mexico and the US Pacific Northwest.

US grains transported by CP consist of whole grains such as wheat, corn, and soybeans. It also includes processed products such as meats, oils, and flour. The company’s US grain business contributed about 8% of its total freight revenues in 2015.

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Future outlook

The USDA (U.S. Department of Agriculture) expects near-term weakness in US soybean market prices. This is mainly due to the ripple effects of the 2014 South American bumper crops and the solid US soybean crop production in 2015. The high value of the US dollar has further downed the prospects of exportable supplies.

The agency also predicts lower wheat planting in 2016 compared with 2015. The predicted harvested acres in 2016 are expected to be lower than they were in 2015. However, it anticipates a marginal rise in wheat production in 2016. The total wheat supplies in 2016 and 2017 are projected to be slightly above 2015 levels. However, the wheat price is expected to go down from $5 per bushel to $4.40 per bushel.

The projected 2016 US corn planting is slightly up from 2015’s figure and there is a larger forecast for 2016’s harvested acres. Though the USDA forecasts record production of corn in 2016, it forecasts no change in corn prices from the last recording of $3.60 per bushel.

Peer group status

Weather conditions, including El Niño effects, could play spoilsport for US crop producers. This casts a shadow on the hauling prospects of CP and other railroads such as Canadian National Railway (CNI), Norfolk Southern (NSC), CSX (CSX), and Kansas City Southern (KSU). Since Genesee & Wyoming (GWR) operates in most of the United States and some parts of Canada, it will be more affected than its Class I peers.

These companies, excluding GWR, form part of the portfolio holdings of the Industrial Select Sector SPDR ETF (XLI). XLI holds 7.3% in railroads. In the next article, we’ll go through CP’s coal hauling prospects. Surprisingly, the company reported higher coal revenues in 2015, a sharp contrast to its peer group.

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