Cheerios Could Face a Shortage Thanks to Oil's Overabundance

Crude by rail is sucking up more than just rail capacity, it's now affecting other areas of rail transport like the grains used to make Cheerios.

Mar 9, 2014 at 2:00PM


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.

 Sad Cheerios

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.

Oil By Rail

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. 

Warren Buffett is profiting from shipping oil-by-rail, learn more of his profit secrets here

Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information