Grains and other agricultural commodity shippers could benefit from a Canadian rail line’s acquisition of Kansas City Southern because of faster shipping routes, but some experts also are concerned the deal could lead to further mergers that ultimately reduce competition and increase rail rates.
Last Thursday, the board of directors for KCS decided to terminate a merger agreement it reached with Canadian Pacific (CP) Railway in March for a more lucrative deal with Canadian National Railway.
The Kansas City Southern line extends from Springfield, Ill., to Kansas City and down through Texas before it divides into separate routes, one going to New Orleans and the other to Mexico. The merger would provide CN with direct access to Mexico to ship agricultural goods, and New Orleans is a major port for agricultural shipments like corn and soybeans. It would be the first time in history that one company owned a rail network connecting all three countries.
But on Monday, the Surface Transportation Board raised the bar for CN by denying its request to waive current merger rules that were revised in 2001. The revised rules are tougher on an applicant, forcing them to show "the transaction would enhance competition where necessary to offset negative effects of the merger, such as competitive harm or service disruptions." However, in April, the STB did approve a waiver for CP to use pre-2001 merger rules.
"We requested that the STB review its superior proposal to combine with KCS under these rules because we are confident that a CN-KCS combination will create a safer, faster, cleaner and stronger railway that is ideally positioned to support the growth of an emerging consumption-based economy through better service options and customer choice," CN said in a statement on the STB decision.
Canadian National is offering $33.6 billion for KCS, compared to CP’s $25 billion proposal, according to KCS. CN submitted a revised acquisition proposal to KCS last Thursday. All three are Class I railroads, but CN is larger than either CP or KCS.
Paul Bingham, director of transportation consulting at IHS Markit, said there is no question the implementation of the U.S.-Mexico-Canada Agreement last summer influenced these deals.
“Whoever is connecting into that network from somewhere is going to provide them the potential for the seamless operation of rail right into Mexico,” Bingham told Agri-Pulse.
He expected all the grains will have the potential to benefit, especially in the upper Midwest.
“We get into wheat, and some of the other corn-growing areas, but even soybeans, all the major export crops will benefit in some degree by having this connectivity improved,” he said. Bingham said shipping activity is not going to change a lot except where there is an interchange.
Max Fisher, vice president of economics and government relations at the National Grain and Feed Association, told Agri-Pulse having one rail line will be more efficient because shippers will only have one contracted rate rather than multiple contract rates due to passing through different railroad interchanges as they do now.
He also said shippers in Canada and Mexico would likely get the greatest benefit because they would have direct access to each other. "The U.S. is kind of caught in between," he said.
U.S. Wheat Associates Market Analyst Michael Anderson said the merger is unlikely to make Canadian growers more competitive than U.S. farmers in efforts to sell to Mexico. But he’s concerned about Canada’s history of nationalism in rail policies favoring certain shippers.
“It is also possible a merger would increase Canada’s competitiveness in the U.S. domestic market, while the Canadian industry continues benefiting from an archaic, government-mandated variety registration system that helps minimize any large-scale U.S. wheat imports north,” he said.
Mike Steenhoek, executive director of the Soy Transportation Coalition, said regardless of the company size, agricultural shippers are always concerned about more mergers.
“Nothing stimulates merger and acquisition activity more than when there is an announced merger and acquisition or consolidation,” Steenhoek told Agri-Pulse. “I don’t know a lot of agricultural shippers who want to see a lot more consolidation in the rail industry.”
He thought a CP-KCS merger would elicit “less concern” because it has no overlap of connecting rail lines, while CN has limited overlap.
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CN’s line stretches across most of Canada, running parallel to the Mississippi River down to New Orleans. Access through Kansas City would give them connections into Mexico, too.
“Together, CN and KCS will seamlessly connect ports and rails in the United States, Mexico and Canada by providing superior service, enhanced competition and new market access to move goods across North America safely and efficiently,” said JJ Ruest, president and CEO of CN.
John Brooks, chief marketing officer for Canadian Pacific, told Agri-Pulse farmers and ag shippers stand to benefit from a KCS merger with his company more.
He said a CP merger would create more opportunities for ag shippers in the upper Midwest and goods could be shipped as a single line haul.
“Creating that efficiency to take corn and beans out of Iowa and provide a competitive option into Texas and Mexico in a single line haul, I think definitely creates an economic advantage for those shippers,” he said.
KCS stockholders still must approve the merger, and the STB's approval process could take several months.
Chandler Goule, CEO of the National Association of Wheat Growers, said his group wanted STB to use the "enhanced competition" merger rules on both proposals.
Neither NAWG nor NGFA is taking sides on the merger.
“For right now it’s KCS who decides who they want to be purchased by," NGFA's Fisher said. "Once KCS makes this determination, it will be STB who will decide if they allow the merger to go through and what conditions they place on the merger.”
CN has received 1,000 letters of support that have been filed to the STB as of May 12.
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