(The following story by Angela Barnes appeared on the Globe and Mail website on June 20. With information from Bloomberg News.)
TORONTO — The massive flooding in the U.S. Midwest is not only affecting U.S. corn and soybean production. It is also disrupting rail traffic that normally moves through that area.
Ken Hoexter and Christian Wetherbee, research analysts for Merrill Lynch & Co. Inc., noted in a report that the significant flooding in Iowa, Wisconsin, Minnesota, Missouri and Illinois has hit rail traffic, particularly for Burlington Northern Santa Fe Co. and Union Pacific Corp., which have extensive networks in that region.
“While rerouting is occurring, and we believe network recoverability is fairly strong, the track disruptions caused by the flooding are widespread, particularly in Iowa where 54 of the 99 counties have been declared disaster areas,” they said.
The railways themselves have acknowledged the problems the flooding – the worst in 15 years – has caused for them. “We’ve had a heck of a challenge, the whole rail industry,” James Young, Union Pacific’s chief executive officer, told a Merrill Lynch transportation conference. “Every railroad that operates in Iowa was shut down or is shut down.”
Both Burlington Northern and Union Pacific have warned on their second-quarter profits because of the flooding and the surge in fuel costs. Burlington Northern said that it now expects second-quarter profits will come in at $1.30 (U.S.) a share.
In April, it had expected share profit would show growth in percentage terms in the high teens over the year earlier’s $1.20.
And Union Pacific has indicated that the severe weather will reduce its second-quarter profit by about 5 cents a share. Share profit is now expected to fall into the lower half of the 90- to 98-cent-a-share range that it had forecast.
The flooding affects the companies directly by making normal operations difficult. It also will have an impact on production of corn and soybeans, which the rail companies transport, and that is a longer-term situation.
“Unfortunately, the pain will extend into 2009 as the USDA [U.S. Department of Agriculture] is forecasting a 10-per-cent decline in corn production,” said Rick Paterson, who follows the rail stocks for UBS Securities LLC.
Agricultural products account for 17 and 18 per cent of sales for Union Pacific and Burlington Northern respectively and corn accounts for about half of that.
The floods put a damper on the recent runs in some of the biggest rail issues. Union Pacific, Burlington Northern and Kansas City Southern Industries Inc. all set highs earlier this month, and Norfolk Southern Corp. and CSX Corp. hit highs in the latter part of May.