US Grains provide a stabilizing factor for rails – when did you ever expect to read/hear that?
Last month Ag was up almost 6% YOY, one of only two of 20 commodities up in the carload sector (farm products were the other, +5%; IM was up 3% - we’ll have more after RTI is published next week). Following the grain markets have always fascinated but also perplexed me – remember that what’s reported as “bullish” or “bearish” in Ag discussion (for example in the weekly “US Farm Report”) can be counterintuitive. The huge but not really unexpected jump in USDA production estimates (summing up, corn +12% YOY, soybeans +25%, and wheat -4%; the Pro-Farmer numbers are a tad lower) is bearish for prices but could – could – be bullish for rail transportation. Indeed, with demand uncertainty (hurt by the big drop in ethanol), logistics, and storage are increasingly the talk of the farm belt. Will we have too big a crop? Is there such a thing? Very recent weather has been dry as well as extremely windy (“derecho”) which is bad (good/bullish) – but there seems to be already nervous talk about 2021! So what’s the key ingredient? China! And how will the mix of declining grain prices and the declining USD factor, as well as the tension between the Phase One promises and the, well, tension between the US and China (as well as the tension between China and Canada and Australia)?
Which leads us to….
US Rails and the big harvest – can they handle it? This is an issue for the western rails as they begin what an expert I know calls “the delicate dance” of staging shuttle trains to haul grain to the Texas Gulf and the PNW. And, he notes, they are doing it with reduced market expertise and fewer marketing “boots on the ground,” not to mention the whole PSR thing (PSR and Ag have never been the best of pals – it’s the opposite, in normal times. Of “stable” – it’s episodic, weather and event-driven, unbalanced, etc – but can still be a strong contributor). BNSF’s turn to an OR-focused machine (it seems and I have heard) may have contributed to their amazing Q2/20 performance but it’s not reducing the growing angst in the big grain trading houses. Those same big shippers are also watching China, obsessively. Big late-year purchases to satisfy political urges could tip the supply/demand balance in grain transportation as the bumper crop roils the Chicago markets. The UP/SP gridlock (look it up, young ones) started with grain train congestion in Texas….Could this be the issue/commodity that caused the STB/FRA to issue their letter? If I were a betting man, I would bet on the two biggest railroads; BNSF in particular has proven to be a good “dancer” in the past. Can they shake off the rust and get back on the dance hall floor?