Wednesday, April 01, 2009

Analyst: Fewer amber trains of grain

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A reduction in acres of grain planted is “not helpful for rail volumes” since today's plantings will determine carloadings for fourth-quarter 2009 through second-quarter 2010, according to Morgan Stanley & Co. analysts William Greene and Adam Longson.

bnsf-grain.jpgThe United States Department of Agriculture has released its plantings forecast for 2009, and the acres planted to include most major crops carried by railroads. Wheat plantings are down 7% this year. Corn plantings fell 1.2% despite concerns that fertilizer prices and lower corn prices would lead to greater soybean substitution. Similarly, soybean planted acres are up only 40 basis points vs. 2008 plantings.

If USDA forecasts prove true, “rail grain volumes are unlikely to return to previous highs when the next crop is harvested this fall,” said Greene and Longson. “Production estimates for 2009 and 2010 won't be published until May, but current forecasts imply railroads are unlikely to see a strong rebound in grain volumes in 2010. Moreover, the acreage declines are not large enough in any single category to cause a material change in crop prices. Farmers continue to store last year's harvest where possible in hopes of higher commodity prices in the future.”

Final production could vary from acreage trends based on changes in yields, but lower acreage “is a negative signal for grain volumes and pricing,” said the analysts. “The western railroads, BNSF in particular, have the largest grain franchises among the railroads. Wheat is the primary crop in BNSF's grain portfolio, so a 7% decline in wheat plantings is not helpful. On the other hand, Union Pacific is generally more exposed to corn than BNSF. While not helpful, a 1.2% decline in corn plantings is better news for UP on the margin as many analysts expected corn plantings to come in much lower due to soybean substitution.”

Greene and Longson added that grain volumes “should experience sequential improvement as farmers move more grain to generate cash for spring plantings.”