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International competition and trade uncertainty weigh on U.S. rail volumes for grain

While trade uncertainty is a dominant theme in the rail demand outlook for moving grain this fall, other factors such as global market competition come into play when considering how much grain volume could be moved by U.S. rail operations in the 2019-2020 season.

“The question is what feeds what. If we have reason to expect an increase in exports, then that begets a need for rail and barges. You have to look at international demand and look backwards,” said Jay O’Neil, a consultant and agricultural economist.

The U.S. faces competition from wheat producers around the Black Sea and even Europe, putting pressure on global demand for U.S. wheat, O’Neil said. 

But the domestic picture isn’t rosy either, because of a potential slump in purchasing demand, O’Neil continued. The ethanol industry has been struggling with low profit margins, which in turn can dampen processing margins for corn because corn is a feedstock to produce ethanol. Domestic soybean processing also looks to be lower year-over-year, although that market tends to be served more by trucks, O’Neil said. 

Meanwhile, the ongoing trade war between the U.S. and China has dashed the hopes of U.S. soybean producers again for this upcoming fall because China has drastically cut its imports of U.S. soybeans.

The U.S. Department of Agriculture (USDA) lowered its expectations for U.S. soybean exports in the latest World Agricultural Supply and Demand Estimates (WASDE) released on August 12. U.S. soybean exports are estimated to be at 1.78 million bushels for the 2019-2020 crop year, compared with USDA’s July estimate of 1.88 million bushels. 

The WASDE report also lowered its volume estimates for Chinese imports of soybeans to 85 million metric tonnes from a July estimate of 87 million metric tonnes. But the lion’s share of China’s soybean imports for this year and 2019-2020 is expected to come from South America, O’Neil said.

Although Chinese imports of U.S. soybeans have actually been growing in recent months, recent calls to maintain existing tariff policies have created uncertainty among U.S. soybean producers seeking to export their crops to China. 

The WASDE expects U.S. soybean production to total 3.68 billion bushels for 2019-2020, compared with estimated U.S. production of 4.54 billion bushels for 2018-2019 and 4.41 billion bushels in 2017-2018.

“I would rather that the federal government be predictably good than sporadically great,” said Mike Steenhoek, executive director of the Soy Transportation Coalition.

A FreightWaves analysis of how lower Chinese soybean imports affect U.S. rail volumes is available here

Although the WASDE and USDA’s monthly Crop Production report allude to lower U.S. production year-over-year of corn and soybeans, in terms of transportation demand, the question is what the yields will look like this fall and how much crop could get stored, according to O’Neil. A higher corn yield, for instance, could put downward market pressure on corn prices, he said. 

If corn prices are lower, it might encourage farmers to store their crops until prices improve. The WASDE report raised its 2019-2020 forecast for U.S. ending stocks of corn to 2.18 billion bushels from its July 2019 estimate of 2.01 billion bushels.

“It’s a lot more than just the production figure. Even if we have a big crop yield and if we’re storing the crops, then it doesn’t have the impact on transportation,” O’Neil said.

Couple that with the tariff war and uncertainty about the global economy, and “I’m not bullish for rail or barge” to see higher grain volumes this harvest year, he said.

Union Pacific (NYSE: UNP) appears to agree with O’Neil’s assessment for this fall. 

“We expect uncertainty to persist in the grain market due to reduced U.S. crop production and foreign tariffs,” said UNP vice president of sales and marketing Kenny Rocker during his company’s second quarter earnings call on July 18.

Investments to trade-related infrastructure to the Pacific Northwest

Besides potentially lower grain volumes for 2019 and 2020, the other difficulty in an uncertain trade environment is when investments will bear fruit for the segments linking agricultural goods to China, including investments in rail, dredging and on the port and the origination side, Steenhoek said.

Although deliveries of soybeans to rail terminals on the U.S. Gulf Coast have risen exponentially as the market tries to capture demand in Europe and even South America, the loss of significant soybean volumes to China has caused soybean export volumes to fall out of the Pacific Northwest

Infrastructure investments at and to the Pacific Northwest “was so much predicated on serving the Chinese market, and now there’s a dramatic pullback,” Steenhoek said.

The Port of Seattle estimated that combined two-way trade with China through the Northwest Seaport Alliance, which consists of the Ports of Seattle and Tacoma, Washington, was down 11.75 percent through the end of May compared with the same period in 2018.

“Our farmers, ranchers, fishing industry, and others are already being deeply harmed, and spreading the impact will only make that problem worse,” Port of Seattle Commission president Stephanie Bowman said on August 1 in response to President Trump’s proposal to implement a 10 percent tariff on $300 billion of Chinese imports beginning on September 1, 2019. President Trump postponed that proposal for some consumer products until December 15, 2019.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.

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