The Wall Street Journal published a very interesting article a few weeks back detailing the disturbing issue facing American farmers. Booming oil production in North America is leaving producers with only one option to transport oil as several key pipelines, including the Keystone XL, are being delayed. This surge in rail traffic due to the oil boom, when combined with horrible winter weather, is creating a big backlog in fertilizer supplies and slowing the delivery of corn to ethanol makers, both of which are hurting farmers.
Springing up worries
The backlog in fertilizer supplies is springing up worries among farmers that there won't be enough crop nutrients this spring to help the corn, wheat, and barley grow. Farmers in the Dakotas, Minnesota, and Wisconsin, states that are finally getting the warm weather needed to plant crops after a really rough winter, are feeling this fear.
The lack of rail capacity has been plaguing farmers for a while now, as last fall, grain in storage surged as there wasn't enough takeaway capacity to bring these grains to processing plants. This year, storage might be an even bigger factor as there might not be enough storage space to go around if there is a delay in the spring planting season due to delays in getting fertilizers.
Hurting more than farmers
Rail delays are also hurting the revenue of fertilizer makers like Mosaic (NYSE:MOS), Agrium (NYSE:AGU), and PotashCorp (NYSE:POT). According to Mosaic CEO Jim Prokopanko in the Journal article, this spring's fertilizer backlog is unlike anything his company has ever seen before. He noted that his company was "many hundreds of thousands of tons behind" on shipments. Transportation issues plagued Mosaic's first-quarter results, causing a 43% decline from last year's first quarter.
Meanwhile, Agrium noted similar problems in its first-quarter results. The company reported net income from operations of just $12 million in the first quarter, which is substantially below the $146 million it earned in last year's first quarter. Agrium noted in its press release that its first-quarter results were "exacerbated this year by a record cold winter across North America." It was this record cold that forced railroad operators to take shorter routes, causing a buildup in fertilizer supplies as an increase in oil shipments really put a heavy load on the shoulders of railroads.
Even PotashCorp noted that it experienced "an especially challenging environment" in the quarter. In PotashCorp's earnings press release, it specifically pointed out that "ongoing rail constraints -- precipitated by difficult winter conditions and record grain harvests in Canada -- kept dealer supplies tight," something that factored into its results. These issues contributed to PotashCorp's earnings falling to $0.40 per share from last year's $0.63 per share.
America's failure to approve the Keystone XL is causing a lot of oil to be shipped on railroads. That likely wouldn't have been such an issue if it wasn't for the extremely harsh winter we experienced in North America. That being said, there is no guarantee last winter was an aberration, meaning America really needs to do something to get its oil shipped without taking up so much precious cargo space on our railway system. While approving the Keystone XL isn't the only answer, it would certainly help the situation.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. 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.