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What is the importance of grain? Any food made from wheat, rice, oats, corn or barley is a grain product. Breads, pasta, breakfast cereals, grits and tortillas are examples of grain products. And there are hundreds more…
The combination of a global virus pandemic and an illogical energy price war will impact grain movements.
In a worst case scenario, there will be geographic pockets of decline in the buying and selling of grain. This might result in a two- to three-month drop of up to one-third in freight train grain movements.
(Photo credit: BNSF Railroad)
A prudent contingent outlook suggests a lower, yet significant, 15%-20% decline in certain origin/destination trade lanes.
Both outlooks are “black swan” market consequences.
There may be selected trade upsides in grain demand. Why? Because some buyers and some countries will seek to lock in supplies from trusted sellers. The U.S. and Canada historically meet that trusted definition.
However, there will be winners and losers in the railway grain trade sector.
The North American advantage is that no other country beats the cost-efficiency of the combined Canadian and U.S. rail services.
The United States is the world’s largest grain supplier. The “mean” 10-year typical grain production (2008 to 2017) was 570 million tons annually.
States in which BNSF originates grain using “shuttle trains.”
(Source: BNSF presentation at a USDA Forum; February 2019)
The transport pattern in the United States involves the main origin states of Illinois, Minnesota, Nebraska and North Dakota.
Top rail-served destination states include California, Illinois, Texas and Washington.
Here are the top railroad carriers, by volume moved. (Carloads of grain reported in thousands – Year 2018)
Class 1 Railroad
The chart below describes the overall fleet of railway cars available. Note: some of these cars are more suitable for commodities like sand or plastics.
(Chart courtesy of Chicago Freight Car Leasing CO. at REF20.)
Here are highlights of the 2019 railroad grain market:
Initial 2020 market outlook
The original outlook for moving grain as February ended was excellent. Some reports “suggested” that China alone might increase its purchases by 50% or more.
A month later, that’s still questionable. What about the short-term market? Both Canada and the United States face uncertainty.
Here are the essential points regarding agriculture that my sources seem to agree with as March ended.
According to the U.S. Department of Agriculture (USDA), rail shipments of grain to ports for exports were down during the first quarter of 2020.
For perspective, the FreightWaves SONAR chart below represents the overall change in rail freight volume through March 2020 compared to the past two years.
Overall, March was the lowest single month of total railroad carload traffic in decades. That’s not yet the case for gains.
What’s this mean for grain rail traffic in the coming two quarters? No one who invests in either the grains trade or in the freight railcars to move grain can be sure.
A month ago, no one in the rail industry was predicting what would happen over the next 30 days. Yes, some experts were nervous.
Those of us with long railroading careers had never seen anything like the month of March.
Now, a grim 2020 market outlook
It’s impossible to accurately predict the future of the grain market, especially since even the experts can’t agree on what the overall U.S. GDP might be past in the next two quarters. Experts’ ranges are for a contraction of between -15% to more than -35%.
Nevertheless, here is what I believe we should prepare ourselves for:
The railroad carload movement demand/supply patterns are not easy to interpret on a day-to-day basis. The USDA data is, for now, more revealing.
Here are the recent railroad reported movement volume changes from all inland grain gathering areas to the four regional U.S. ports.
Port region rail served carload changes
This second table identifies recent month 2020 delivery of grain to Mexico. So far, Mexico’s demand for U.S. grains is holding up.
Meanwhile, as we move into the second week of April 2020, farmers need to be planting their seeds. They are likely asking themselves, “What is the market demand outlook?”
They also wonder, “How much livestock feed is going to be required if personal consumption of beef and pork is unknown?”
Conclusions looking towards late May and into June
The good news is that the North American grain railcar fleet is sufficient to handle any possible human and animal consumption surge in rail traffic during 2020.
If, however, grain exports to China should increase by 50% or more, the fleet size for the resulting grain movements could become tighter.
That would require the railroads and the ports to redouble their car utilization logistics performance. That’s doable since there is plenty of railway track and yard and locomotive capacity across the current network.
Among the companies that buy and finance the grain hopper fleet, a possible grain surge would be welcomed because that would place back into service many of the stored hopper cars.
The bad news is that we should allow for, at minimum, a possible 15% drop in former grain volume expectations.
(Photo credit: Shutterstock)
New railcar building orders will likely also drop – perhaps as much as 30% compared to most corporate plans.
Without a firm commitment of export grain orders and facing a likely diminishing domestic edible and feedstock grain demand, there will not be many (if any) new grain car building orders placed for 2020.
As a reference, here is how many large cubic foot hopper cars were added to the North American fleet in more normal recent years.
The table below shows grain railcars added compared to smaller grain cars retired in the North American fleet. (Gravity hopper railcar types in thousands.)
>5000 cu ft
For a clearer rail market view of grain, let’s check back in mid- to late May. As always, seek other sources. Please, share your contrary logic.
This article first appeared on www.freightwaves.com
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