Excerpted from Wolfe Research:
On Friday, the USDA released its initial grain production and grain export forecasts for the upcoming 2013-14 crop year. Total corn, wheat and soybean (the 3 major crops moved by the rails) production is expected to increase 22% y/y after dropping 8% last year and 14% in total the past 3 years. The USDA also expects total exports for these 3 crops to increase 18% y/y, a major reversal from a 30%+ decline the past 2 years.
This Would Be Positive for Grain Volumes Starting in Late 3Q
Total grain vols for the U.S. rails are tracking down 6% YTD and have been weak for the past 8 qtrs. following last year’s terrible drought. Initial crop forecasts are extremely sensitive to weather conditions (last year’s crop finished 21% below last May’s initial forecast), but assuming more normal weather this year, grain vols seem likely to inflect strongly positive y/y by late 3Q and to remain positive through 1H:14. Note that the USDA’s yield assumptions for this year’s crop already assume at least some negative impact from the delayed start to this year’s planting season.
Greater Grain Exposure in the West
Among the public U.S. Class I rails, UNP and KSU have the most total grain/agriculture exposure at 16% of total rev., well above CSX and NSC at around 9%. As shown below, UNP and KSU also have relatively more export exposure than the eastern rails. By crop, the western rails are primarily leveraged more to corn and wheat, while the eastern rails are relatively more exposed to soybeans.