Cheerios Could Face a Shortage Thanks to Oil's Overabundance

Photo credit: Flickr/Y'amal 

America might be facing another energy crisis. This time it has nothing to do with not having enough oil. Instead, General Mills (NYSE: GIS  ) is about to run out of the oats it needs to make Cheerios. That'll create an energy crisis in many households as Cheerios is the favorite breakfast fuel many choose to start the day.

A sad start to the morning
A combination of a brutally cold winter in Canada as well as transportation problems is causing a severe problem for General Mills. According to Saskatchewan Premier Brad Wall the company will run out of oats to make Cheerios in as little as two weeks (though General Mills does maintain that it has an adequate supply). One of the issues causing an overall shortage of grains shipped to the U.S. is the fact that rail transportation has been slowed and at times stopped by the cold winter weather. On top of that rail companies are transporting more oil, which is sucking up much of rail's capacity.

 

Photo credit: Flickr/Cali4beach 

American farmers don't produce nearly enough oats to satisfy demand. Last year we actually imported 1.6 million metric tons of oats from Canada as our farmers produce less than half of our needs. The reason for this is simple economics as it's more profitable to produce corn and other crops in the U.S., which is why Canada has become the world's largest shipper of oats and our main supplier.

The problem this year is that Canada's grain producers have experienced a month long shipping backlog that's both pinching the income of farmers while at the same time sending oat prices in the U.S. soaring. Last year was actually a banner year for Canadian grain farmers, but because they cannot get these grains out of the country it's creating problems for them as well as companies like General Mills and even PepsiCo (NYSE: PEP  ) and its Quaker Oats division. That's likely to increase the cost to consumers as the price of oats are up as much as 42% since the start of the year.

Oil takes over
The issue many point to is that railways like Canadian National (NYSE: CNI  ) and Canadian Pacific (NYSE: CP  ) might be ignoring grain shipments because it's much more profitable to ship oil. One of the reasons it is more profitable to transport oil is because there is a cap that limits the revenue railroads can earn on grain transportation. On top of that there simply isn't enough pipeline capacity for the oil as the long-delayed Keystone XL remains in limbo which is fueling a huge surge in demand for rail options to get the oil out of Western Canada. When combined with the rough winter, it has created a real problem as grain shipments are piling up.

It has gotten so bad that Saskatchewan's Premier has suggested that the government consider penalizing railroads to encourage them to transport more grain.

Photo credit: Flickr/Roy Luck

That being said, Canadian Pacific CEO Hunter Harrison has said that moving oil-by-rail isn't the boon that some suggest. He said that crude oil transportation is less than 5% of his company's revenue and accounts for an even lower amount of its profit as it's a low-margin business for the company. Still, shipments of oil by rail have grown from virtually nil a few years ago to a projected one million barrels per day Western Canadian oil by 2015.

Final thoughts
The good news is there there are plenty of oats and that any Cheerio shortage will be short lived. However, the oil-by-rail still is creating almost as many problems as its solving. However, while it's creating headaches for some, it's fueling a lot of profits for investors, including Warren Buffett. 

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