Why Did Union Pacific’s Agricultural Shipment Revenues Slide in 1Q16?



UNP’s Agriculture segment: revenues and shipments 1Q16

In 1Q16, revenues from Union Pacific’s (UNP) Agriculture segment—the company’s second-largest freight source—fell by 6% YoY (year-over-year) to $882 million from $939 million in 1Q15. The strong US dollar and a substantial stock of grain across the globe contributed to this reduction in agriculture shipment revenues.

Overall volumes declined by 4% YoY in 1Q16 while grain volumes fell by 7% YoY. This was due to soft export demand, which outweighed the strengths in the volumes of domestic feed markets. Domestic feed grain volume rose by 4% YoY due to higher animal counts and less availability of local grain in the US South and West.

Why Did Union Pacific's Agricultural Shipment Revenues Slide in 1Q16?

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Grain products volumes declined by 6% YoY in 1Q16. The DDG (distiller’s dried grains) fell by 29% as a result of the decline in exports to China and enhanced inclusion in feed rations in the Midwest. Carloads of soybean meal dropped by 9% YoY in 1Q16, due to a decline in US exports, and volumes of food and refrigerated products rose by 3% YoY, mainly due to continued strength in import beer demand.

Management insights

Union Pacific expects that robust crop production worldwide will remain a deterrent to US exports, and this could translate into reduced freight opportunities going forward. The company foresees softer exports of Gulf wheat in the first half of 2016, mainly due to higher wheat supplies across the globe and to reduced US competitiveness in world markets. However, UNP projects higher volumes in domestic corn, driven by higher poultry production.

In the wake of the strong US dollar and competition from global players, agricultural revenue growth has been a concern area for UNP’s peers as well. Below is a breakdown for in UNP’s and peers’ agricultural revenue growth:

  • Union Pacific (UNP)—5% decline
  • Norfolk Southern (NSC)—1.2% rise
  • CSX Corporation (CSX)—5% decline
  • Kansas City Southern (KSU)—4% decline
  • Canadian National Railway (CNI)—4% rise
  • Canadian Pacific Railway (CP)—6.7% rise

Investors interested in the transportation and logistics sector might consider investing in the iShares US Industrials ETF (IYJ), which holds 4.8% in major US railroads.

Now let’s go through the performance of UNP’s Chemicals division in 1Q16.


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