Weekly Market Update With Tom Lilja and Progressive Ag

The Canadian Pacific Railway merged with the Kansas City Southern railroad in an announcement September 15th. The new merged rail line will be called the Canadian Pacific Kansas City (CPKC) and it will remain the smallest of six class I railroads in the US with about 20,000 miles of rail line. The CP agreed to acquire KCS in a stock and cash transaction estimated at approximately $31 billion US, which includes an assumption of $3.8 billion of outstanding KCS debt. The CP-KCS merger was sparked partially by the US-Mexico-Canada Agreement (USMCA) and yearly revenue estimates are at $8.7 billion based on 2020 actual revenues. This will be the only class I railroad that will have a single line going throughout Canada, down the central US and deep into central Mexico.

This one is a big deal for competitive and logistical reasons as it could take some pressure off US interstate systems. The new single line competitive options for intermodal shipments between Mexico, the US Midwest and Canada will be truck competitive for time-sensitive shipments in high value parts and perishables. The new single line hauls will link key automotive manufacturing and distribu

tion centers in Mexico, the US Midwest and Canada. The new single line routes will also allow the efficient flow of agricultural products from CP’s origin-rich franchise area to KCS’s destination rich franchise area including gulf ports. Canadian Pacific’s executive vice president John Brooks stated that there will be growth opportunities for agricultural shippers. “I look at our ag book business, and this becomes a real game changer to create new links, origins and reduce production risks that CP customers simply can’t get now.”

It was a wicked week with the macro markets taking stiff losses in September 20th trade. The Dow lost 560 points, the S&P 500 lost 70 points and the Nasdaq was over 300 lower on reports that the Chinese property giant Evergrande was on the brink of collapse. A couple of analysts were quoted as saying that a collapse of Evergrande would be the biggest test that China’s financial system has faced in years. Reports were that the property developer was in a crushing debt load of $300 billion and was scrambling to pay its suppliers. This level of debt is absurd leading some to speculate that Chinese shadow banking or banking off the books is likely. There will be a lot of questions that will be answered regarding this debacle in the upcoming weeks but for now China has egg on its face for letting this happen. There won’t be lengthy trails like we have here in the US. There will be bullets. The trouble is its such a big scheme that the first question they’ll need to resolve is who do you shoot? The new CPKC rail line merger looks even smarter as does the new USMCA agreement as we can move to more regionalized trade and lessen our exposure to these black markets.

By the end of the week, there were reports that some of this debt will be paid helping to rebound the financial markets. The grains and crude oil overall followed the same pattern this week, with steep declines early week followed by a recovery late week. The wheat complex led the way with Informa estimating an increase of 1.5 million US acres for next year. Earlier reports estimated a 3.0 million acre increase so this attracted buying. The Oats market had two limit up days reaching new contract highs on the general shortage of Canadian and US production. We are witnessing an unusual premium of oats futures to corn futures which will likely continue until new crop supplies come in next fall.

Weekly US crop condition ratings showed a 1% improvement in corn and soybeans. Corn mature is at 57% vs. 47% for the 5-year average. Soybeans dropping leaves was at 58% vs. 48% normal. Harvest progress for both corn and soybeans was right at the 5-year averages of 9% and 6%, respectively. Winter wheat plantings are at 21% compared to 18% for the 5-year average.

The 6 to 10 forecast is calling for decent precipitation chances in the Pacific Northwest with the other 3 primary wheat belts warmer and drier than normal. 8 to 14 day forecasts show slightly better chances of rainfall for the western plains states with above normal temperatures. October to December outlooks show good chances of LaNina conditions across the southern plains which means hotter and drier than normal.