Producer Bypasses Prairie Traffic Jam With Own Railroad

December 16, 2015 07:26 AM

AGT Food and Ingredients Inc., the world’s largest exporter of peas and other pulses, wanted to make sure its products didn’t get stuck on the Canadian Prairie again -- so it bought a railroad.

The rail lines in the province of Saskatchewan will help AGT add about 1 million tons of capacity, cut grain-handling costs and speed up delivery to booming markets in India, Turkey and North Africa, according to Chief Executive Officer Murad Al-Katib. AGT, which buys peas, lentils, beans, chick peas, durum wheat and rice from producers around the world and processes them for export, has spent nearly C$80 million ($58 million) this year to acquire more than 550 kilometers (341 miles) of rail track to move its crops.

“Short line rail, in my opinion, is going to become a very important element of the future grain transportation system in Canada,” Katib, 43, said in a telephone interview from Regina, where the company is based. “We own the track, we own the locomotive, and we have a fleet of around 483 of our grain cars.”

AGT is expanding its ability to move its own produce after as much as C$20 billion worth of grain got stuck on farms in 2013 due to a shortage of rail cars amid record wheat and canola crops. The government is reviewing its transportation system after it imposed orders to force Canadian National Railway Co. and Canadian Pacific Railway Ltd. to move the grain to alleviate the backlog. Al-Katib, an adviser on the review, said recommendations will be sent to the government before the end of the year.

Achilles Heel

AGT stock has gained 19 percent in the 12 months through Monday, among the best-performing stocks in Canada and beating the 7.4 percent decline in the benchmark Standard & Poor’s/TSX Composite index. Six analysts have a buy rating on the stock and one a hold, according to data compiled by Bloomberg. Analysts forecast the stock to gain 18 percent from its closing price Monday of C$30.41 in the next 12 months with adjusted earnings per share expected to rise 87 percent in 2015 from a year ago.

AGT’s shares climbed 1.7 percent at 11:18 a.m. in Toronto.

“What’s really cool about what Murad has done is he knew from day one that his Achilles heel was always going to be logistics,” Mark Hemmes, president of Edmonton-based Quorum Corp., the company hired by the federal government to monitor Canada’s grain transportation system, said in a Dec. 11 telephone interview.

Origination Advantage

AGT bought Mobil Capital Holdings Ltd. for C$57.5 million in October and West Central Road & Rail earlier this the year for C$22 million. The purchases will give it access to five bulk loading sites and boost capacity in peak shipping windows for lentils, peas, durum wheat and other crops. The company can now load 100-car unit trains in rural Saskatchewan and ship them to main CN and CP interchanges in Regina and Saskatoon faster and cheaper.

“When the demand to pull Canadian exports is really high, and pricing is really high, having access to product is key,” Steve Hansen, an analyst at Raymond James in Vancouver, said by phone. He rates the company a buy. “One of the biggest advantages they’ll have going forward is that origination advantage they’ve been able to fortify here.”

AGT’s investment in rail is unique as other grain companies are focused on expanding their port terminals, Hansen said. The acquisitions will reduce grain-handling costs and leave as many as four large competitors to look elsewhere for their pulse supplies in southern Saskatchewan, Hansen said in a report to clients.

Production Increase

The investment is unique in Canada as there are few short-line opportunities for other grain companies, Hemmes said. Glencore Plc’s Viterra unit, Cargill Ltd. and

Richardson International Ltd. have strategically located their grain-handling facilities along main or secondary rail lines, he said.

Production of lentils in India has been hampered by dry weather, boosting demand for Canadian legumes. Saskatchewan is Canada’s largest pulse producer and lentil exports have risen to 436,800 between Aug. 1 and Dec. 6, up 56 percent from the same period a year earlier, according to Canadian Grain Commission data.

Pulses are the edible seeds of plants in the legume family; they’re gluten-free, high in protein and fiber and low in fat. They can be processed into fiber, flour starch and protein concentrates.

Acres of peas, lentils and other special crops like fava beans will probably rise in 2016 and the next five to seven years to meet that demand, Al-Katib said. There’s unlikely to be any leftover lentils before next year’s harvest, he said.

“All of these elements give us a recipe for growth and success,” Al-Katib said.

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