Floods are the least of the railroad worries in 2008

Implications: The recent reports about the crop problems in Iowa and the flood problems for the railroads operating in the region have greatly exaggerated their impact on railroad profits in 2008. The news media might be excused for inflating reports of local problems into national importance in order to garner more readers, but UP executives are probably hiding behind the Midwest flood stories to keep from having to explain revenue and profit shortfalls due to other reasons and other regions.

Analysis:

Carloads of grain products and railroad profits from this traffic segment generally fall during the second quarter of the year as the grain-year winds to a close and farmers begin to plant next year’s traffic.  The floods did spoil some grain still held in storage and some farm output grown in 2007 will probably not move to market via rail because of the floods; but it is doubtful that the impact of these would amount to 5% of the second quarter’s total income for the Union Pacific Railroad (UNP). What about the mainline closure in Oregon that lasted from December to May due to a giant landslide in the Cascades? What about the decreasing shipments of automobiles, SUVs, and light trucks as the economy begins to contract? What about the steep decline in West Coast container imports and the declining intermodal traffic levels? The UP is facing some several major challenges, none less important than the problems in the Midwestern farm region. Increased freight rates will help offset some of these traffic losses, but freight rates cannot keep rising forever and eventually the yearly profit increases will diminish. Perhaps concern for this situation is affecting investors more than high river levels.