Commentary

Grains, Trains, and Automobiles: Looming Rail Disruption to Have Near-Term Impact on Canada's Grain Handlers

Transportation

Summary

Canada's two largest railroad operators, the Canadian National Railway Company (CN; rated "A" with a Stable trend) and Canadian Pacific Railway Company (CP; rated BBB with a Positive trend), are facing a considerable labour disruption set to begin as of August 22, 2024. The looming lockout is expected to include nearly 10,000 workers, and could have a significant impact on Canadian businesses and the overall economy. Here's a breakdown of what's to come:

-- Canada's grain handlers are all highly dependent on Canada's two large railways: CN and CP. In that context, we note that rail disruptions not only impede the flow of grain from inland elevators to its destination, but they also impede the railways' ability to return or reposition empty rail cars back to inland elevators.
-- Rail disruptions not only affect grain handlers directly, but they also affect associated upstream business, including farmers, as well as downstream business, including food processors. If farmers have to stop delivering grain, they don't get paid, which can affect their ability to purchase crop inputs, such as seeds and fertilizer that are necessary for the next crop. Ultimately, these disruptions could have a direct impact on the availability and pricing of certain food products at grocers and restaurants.
-- Assuming the potential labour disruption is relatively short in duration, the impact on Canada's grain handlers should be muted. We do not expect the disruption to ultimately be material enough to have a lasting negative impact on the long term credit risk profiles of Canada's grain handlers.

"While, the labour disruption will impact near-term shipment volumes, we do not expect the disruption to have a lasting negative impact on the long-term credit risk profiles of Canada's grain handlers," says Reid Usher, assistant vice president, Diversified Industries. "However, the incident highlights the sector's vulnerability to rail disruptions and the importance for grain handlers to have adequate railway, infrastructure, and customer diversification to mitigate the associated risks."

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