A Canadian Pacific Rail train hauling grain passes through Calgary, Thursday, May 1, 2014. Canada's two largest railways may run out of grain to move and face a revenue challenge in the coming year because of an expected 37 per cent decrease in the domestic grain crop due to drought conditions across the Prairies, says an industry analyst. THE CANADIAN PRESS/Jeff McIntosh

TORONTO - Canada's two largest railways may run out of grain to move and face revenue challenges in the coming year as the domestic grain crop is expected to decrease 37 per cent due to drought conditions across the Prairies despite a slight improvement in August.

Statistics Canada said Friday that 3.07 million tonnes of grain was delivered in August. That's up 4.5 per cent from July's four-year low but deliveries were 31 per cent below the level in August 2020.

Wheat, Canada's largest grain crop, was four per cent higher in August than July but down 25.6 per cent in the year.

Oats, barley, rye, flaxseed and canola had varying performances. Canola and flaxseed were down sharply in both periods, barley deliveries were strong while rye and oats were mixed.

The bleak crop forecast for the coming year will be particularly difficult for Canadian Pacific Railway Ltd. because 24 per cent of its total freight revenues in 2020 came from grain, its largest segment, compared with just 15 per cent for CN, Cameron Doerksen of National Bank Financial wrote in a report.

Canadian grain accounted for 72 per cent of all grain revenues last year for both railways with U.S. grain accounting for the rest.

Doerksen said the net result will be a revenue headwind of about six per cent over the next 12 months for CP and about four per cent for Canadian National Railway Co.

Agriculture and Agri-Food Canada (AAFC) and Statistics Canada estimate that the total production of major grain crops will fall to 49.3 million tonnes in 2021-2022, from last year's record of 78.5 million tonnes.

Wheat is projected to be down 38.3 per cent to 21.7 million tonnes because of a 32.6 per cent reduction in yields and an 8.5 per cent less harvested area.

Canola is expected to be down 34.4 per cent to 12.8 million tonnes, the lowest level since 2010.

Barley should fall 33.5 per cent to 7.1 million tonnes as a higher anticipated harvested area is not expected to offset a 38 per cent drop in yields.

Although smaller, crops of oats and peas will be even harder hit, falling 43.6 and 45 per cent, respectively.

Such low production levels haven't been seen in more than a decade and grain exports will fall 41 per cent, the lowest total since 2006-2007.

The federal government said 99 per cent of all agricultural land in Alberta, Saskatchewan and Manitoba, which account for the overwhelming majority of production for wheat, canola, oats and barley, were under drought conditions.

CN's rail network is concentrated in northern regions of the Prairies where growing conditions were slightly better, while CP is more exposed to southern regions.

While drought also affected U.S. grain-growing, the U.S. Department of Agriculture projects near-record production of corn and soybeans, the two most important U.S. crops for CN and CP, due to more planted acres.

Corn and soybean production is expected to approach record levels. Corn output is forecast to grow four per cent to 14.7 billion bushels while soybeans should be up 4.9 per cent to 4.34 billion bushels.

In Canada, increased output in Ontario and Quebec will boost corn production 5.9 per cent to 14.4 million tonnes while soybean product is projected to decrease 7.4 per cent to 5.9 million tones.

CN is more exposed to grain in Illinois while CP has more exposure in the Dakotas, Minnesota and Iowa — areas that are expected to see a decrease in grain production.

"As such, CN looks to be better-positioned for U.S. grain than CP this year," Doerksen said.

He added that U.S. grain volumes may be more tied to pricing and exports than production because there is significantly more storage in the U.S. than in Canada.

CN and CP acknowledged the challenge from drought, warning investors last month that they are unlikely to repeat the record grain shipments they posted in 2020 when they each moved about 31 million tonnes.

This report by The Canadian Press was first published Sept. 24, 2021.

Companies in this story: (TSX:CNR, TSX:CP)

News from © The Canadian Press, 2021