Summary
In these troubling times of economic contraction, it’s easy to assume all cutbacks are due to financial problems or decreases in consumer demand as citizens around the world adjust their purchases to both declining incomes and declining levels of wealth. Such is not the case however, in the U.S. agricultural sector. The current collapse in export demand, ranging from -25% to -65% for the various crops grown in the US, is due to bumper crops in other grain consuming and exporting nations. This decrease in exports is the reason rail grain shipments are down 15% compared to last year.
Analysis
Except for the rising requirements of the ethanol industry, annual domestic demand for U.S. farm products has rising quite predictably over the years. Foreign demand however, has been even more fickle than the weather. Weather and distribution problems in other parts of the world since 2004 has allowed US farmers to export up to 27% more tonnage than they did in 2003. The exports in the latter year were lower than they had been 10 years earlier due to changes in the government subsidy programs. In 2008 however, farmers in other countries responded to the higher grain prices by planting more acres, and the weather and transport systems allowed them to bring a bumper crop to market and decrease the need for US exports. Notwithstanding and weather surprises, the USDA expects them to repeat their performance in 2009.
Western Australia is just one area beating the US on the world market. Producers in Central Europe and Asia also had good crops. Moreover, the export controls many nations applied to grain crops due to high world food prices are being lifted and even more grain will enter the market in coming years. Finally, even Russia is boasting, many believe foolishly, that it will capture 20% of the world market in future years and replace US suppliers who now hold that enviable market share.
The bottom line for railroads is that the boom in grain traffic may be over for a while, perhaps longer if world weather and political developments allow.
