U.S. railway deal expected to send more grain south

Most analysts say taking over Kansas City Southern would help Canada’s two major railways become more effective continental players. | Reuters/Edgard Garrido photo

If one of Canada’s giant railways manages to take over Kansas City Southern, Canadian agriculture exports to the United States and Mexico should increase, thinks a leading grain logistics expert.

Railway companies are much more likely to send trains south if they can control everything from country pickup to end-point delivery. That’s why Canada’s railways today send so much to Vancouver.

“We all know how much emphasis is placed on car cycle times for moving grain to the coast. The railways are in full control of their equipment and they are able to manage it to get high levels of efficiency,” said Barry Prentice, professor of supply chain management at the University of Manitoba.

“Going south of the border is another matter. As soon as you have to hand off cars to an interlinking railway, time is lost. Moreover, their attention to a quick turnaround might be much less.”

Both Canadian National and Canadian Pacific railways have launched takeover bids for Kansas City Southern, with the takeover battle facing U.S. regulators’ scrutiny and shareholder approval. Most analysts say taking over the U.S. railway would help both Canadian railways become more effective continental players, better connected to the U.S. Gulf of Mexico coast and deep into Mexico itself.

Mexico is a significant customer of many Canadian crops, meat and food products, but much of that trade goes by rail to Vancouver, is loaded on ships and then unloaded at Mexican ports.

To send goods by rail to Mexico requires Canadian railways to turn over rail cars to U.S. railways for the southern portion, which hurts efficiency, returns and attractiveness for that route.

However, Prentice thinks direct ownership of the Kansas City Southern rails would provide great incentive for either CP or CN to begin shipping directly to Mexican customers, the way that it shoots trains to Vancouver today.

“The distance from Winnipeg to the Mexican border is not much different from sending a train to Vancouver, but avoids all the costs of unloading and transshipment by sea, and then a second transshipment by land to destination,” said Prentice.

“Logic would hold that the Mexican market could be better served with direct unit train service.”

Mexico is a major buyer of Canadian crops, buying about $400 million in 2019. It is also a major buyer of Canadian meat, buying about $300 million in the same year.

Prentice sees potential for meat and food sales to increase as well, since those products move in cars that demand greater oversight than basic grain cars.

“I believe that refrigerated rail cars and (refrigerated) containers could be much more appealing to the railways and shippers moving north-south for the same reason,” said Prentice.

“Refrigerated rail cars are not generally owned by the railways. They are private cars leased by shippers. However, better service counts, and would lower their costs and perhaps reduce the risk of loss because the railway as a single line can track and trace shipment easier.”

Kansas City Southern is asking American regulators to approve CN’s US$29.8 billion takeover bid. CN has offered to sell a rail line in Louisiana to eliminate some duplication of lines that would reduce competition in that area connected to Gulf ports.

CP ridiculed the offer, saying CN’s overlap with Kansas City Southern was far more profound and would reduce far more competition.

Prentice said however competition is affected in the U.S. Gulf region, it might spur additional competition for the traffic going south from Winnipeg.

A venture in Mazatlan on the west coast of Mexico is hoping to link Mexican facilities with Winnipeg’s inland port complex, and that could entice Burlington Northern Santa Fe to compete with either CN or CP for the business.

“If CN or CP get a better route to Mexico, the BNSF might take a more aggressive approach to such shipments too.”

Prentice said either takeover would probably help send more Canadian agriculture products south.

“I believe that the grain industry should gain from this merger regardless of which Canadian partner is chosen,” said Prentice.

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