Wednesday, May 13, 2009

Morgan Stanley: Ag products volume could rise in late 2009

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Corn and soybean products could bolster rail freight volume for the 2009/2010 crop year, according to a report by Morgan Stanley Research analysts William Greene and Adam Longson. “While total production/export volumes were flat, corn and soybean forecasts implied volume improvement (exports up 9% and 2% and production flat and up 2%, respectively), whereas wheat forecasts predict sharply down volumes (exports down 11% and production down 19%)," the report said. "That said, the USDA forecast for falling wheat stocks could stimulate near-term volumes if higher prices encourage destocking."

Green and Longson believe farmers “have built significant grain inventories in response to weak prices. In this context, we view flat grain production as a positive for two reasons: (1) were volumes to track production rates, flat volumes in 4Q09/2010 would represent a significant second derivative improvement from recent, sharp [year-to-year] declines, and (2) tempered grain production has the potential to stimulate favorable prices - which would likely lead to de-stocking, thus stimulate volumes.”

The Morgan Stanley duo believe Canadian National and UnionPacific will reap the biggest benefits among the Class I railroads. “[W]e view the forecast as a modest positive for rails with heavy U.S. grain exposure (Canadian and Western rails). However, poor wheat exports are an incremental, offsetting negative for [BNSF], as export wheat volumes are some of the highest margin moves on the railroad.”              

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