Canadian National Sees Effects Waning From Grain Backlog

July 22 (Bloomberg) -- Canadian National Railway Co. predicted that most of the country’s grain backlog will be cleared by month’s end, easing the shipping tie-ups that sparked farmers’ complaints and spurred federal legislation.

“Our Canadian grain supply chain is fully back in sync,” Chief Executive Officer Claude Mongeau told analysts yesterday on a conference call. “We only have about one week of orders outstanding. All the ship lineups at the waterfront ports are at normal levels.”

Soaring grain cargoes helped Canadian National post a second-quarter profit that beat analysts’ estimates and led the carrier to boost 2014 profit and cash-flow targets. Grain hopper-car movements from Western Canada will probably set a record this year and exceed average annual totals by about 25 percent, the Montreal-based company said.

As much as C$20 billion ($18.6 billion) of crops was stuck on the prairies as railroads failed to meet demand, prompting regulators to order carriers to boost shipments or face daily penalties of as much as C$100,000. Agriculture Minister Gerry Ritz and Transport Minister Lisa Raitt introduced legislation in March to let the government set minimum shipment levels.

Canadian National still has “this Canadian grain thing to digest, up to Aug. 1, and there are some lingering effects in August,” Chief Marketing Officer Jean-Jacques Ruest said on the call.

Grain and fertilizer revenue soared 35 percent to C$526 million in the three months ended June 30, Canadian National said. Carloads jumped 29 percent in the period.

Meeting Demand

“We don’t have a week of outstanding orders” for rail cars, Mongeau said. “We are meeting all the demand, and there should be room to store the grain when it’s harvested.”

While rail service has improved, there are still 20,000 outstanding orders for rail cars on the prairies and about 1.6 million metric tons of grain waiting to move, said Mark Hemmes, president of Quorum Corp., an Edmonton-based company hired by the federal government to monitor Canada’s grain transportation system. There are 16 vessels waiting for grain in Port Metro Vancouver, twice as many as in a normal year because of pent up demand, he said.

“There’s still unfulfilled demand,” Hemmes said in a telephone interview today. “Anyone who had a pipe dream that railways were going to be able to move all this crop this year was dreaming in Technicolor.”

Grain Inventories

Demand for rail cars will probably remain strong this fall even if farmers harvest a smaller crop, Hemmes said. There may be as much as 17 million tons of grain leftover from last year’s harvest, adding to total supplies, he said.

Many producers still have a lot of grain in storage and farmers in western Saskatchewan and Alberta are buying extra storage bins before the 2014 harvest because of the potential for good yields, said Norm Hall, president of the Regina-based Agricultural Producers Association of Saskatchewan.

“I’m not sure if they’re caught up yet, but there’s pretty steady movement going on,” he said in a telephone interview. “There’s still going to be a lot of grain left in the bins.”

Wheat, Canola

Canadian farmers harvested record wheat and canola crops in 2013, and supplies overwhelmed the country’s rail system and made sales almost impossible.

Mongeau said Canadian National’s grain business should have another strong year in 2014. About 18 million tons of grain will need to be shipped after the current crop year ends July 31, which is still 6 million tons more than the average amount, Mongeau said.

“Add to this the new crop and the need to move it, and we should be moving record volumes of grain well into the spring and even summer of next year,” Mongeau said.

Canadian National gained 0.7 percent to C$74.36 at the close in Toronto. Earlier the stock touched C$74.83, its highest since the company went public in 1995.

Canadian National said it expects to deliver a “solid double-digit” percentage increase in earnings per share from last year’s C$3.06. The railroad had earlier said it was “aiming for” earnings growth of at least 10 percent. Analysts project profit on that basis of C$3.55 a share, based on the average of 27 estimates compiled by Bloomberg.

To contact the reporters on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net; Jen Skerritt in Winnipeg at jskerritt1@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Millie Munshi at mmunshi@bloomberg.net Carlos Caminada, Jim Efstathiou Jr.