Rail Merger Could Decrease Service for Ag Shippers

Union Pacific said it would buy smaller rival Norfolk Southern in an $85 billion deal to create the first U.S. coast-to-coast freight rail operator and reshape the movement of goods from grains to autos across the country.

If approved, the deal would be the largest ever buyout in the sector and combine Union Pacific's stronghold in the western two-thirds of the U.S. with Norfolk's 19,500-mile network that primarily spans 22 eastern states.

The two railroads are expected to have a combined enterprise value of $250 billion and would unlock about $2.75 billion in annualized synergies, the companies said.

Railroad operators since the robber baron days of the late 1800s Gilded Age have dreamed of linking the U.S. Atlantic and Pacific Coasts by rail, and President Donald Trump's administration may be conducive to such a mega deal.

"What I infer from the timing on this is they believe that the current political climate is going to be more favorable than it has been in recent history," said Mike Steenhoek, Executive Director of the Soy Transportation Coalition.

The $320-per-share price implies a premium of 18.6% for Norfolk from its close on July 17, when reports of the merger first emerged.

The deal will face lengthy regulatory scrutiny amid union concerns over potential rate increases, service disruptions and job losses. The 1996 merger of Union Pacific and Southern Pacific temporarily led to severe congestion and delays across the Southwest.

Norfolk said that Union Pacific would pay a termination fee of $2.5 billion in cash if the deal was terminated under specific circumstances. The companies said in the statement they expect the deal to close in early 2027.

The deal reflects a shift in antitrust enforcement under President Donald Trump's administration. Executive orders aimed at removing barriers to consolidation have opened the door to mergers that were previously considered unlikely.

The National Grain and Feed Association (NGFA) said in a news release that it will undertake an extensive evaluation of the proposed merger to better understand its implications for our industry. “NGFA looks forward to hearing from the Union Pacific and Norfolk Southern railroads and learning how they believe the merger will create resilient and reliable efficiencies and incentives in timeliness of service and deliveries -- along with fair and reasonable rates to better serve our members," said NGFA President and CEO Mike Seyfert. “NGFA will also undertake extensive analysis and discussions with our members to determine the impact on cost and competitiveness for American agriculture.”

How Could Ag Shipping Change?

AgWeb's Michelle Rook reported that the proposed deal came as no surprise to Mike Steenhoek. Rook says, “If approved, the deal could change the shipping landscape with both winners and losers."

"Union Pacific officials say the merger would speed up shipping and make supply chains more efficient, and that is an argument proponents of the deal will lean on," Rook reported. "Less handoffs do cut costs admits Steenhoek, but he says “combining the two railroads would also decrease competition and raise rail rates. This is not normally favorable for farmers, and it could result in lower grain prices."

"One of the things that history teaches us is that when there has been consolidation, when there have been mergers within the rail industry, that often results in decreased competition for those agricultural shippers and can result in higher rail rates and a decrease in service," Steenhoek said. "Plus, if there is less competition, agriculture is often at the bottom of the food chain."

Steenhoek says while agriculture is a significant source of revenue for the railroads, there are other business lines that do have a more lucrative profit margin than agriculture and are willing to pay more for rail cars.

How Much Grain Do the Companies Move?

World-Grain's John Reidy reported that Union Pacific transports about 1.3 billion bushels of grain annually, with exports accounting for 30% to 40% of those shipments. The railroad serves most of the U.S. major grain markets, connecting the Midwest and Western production areas to export terminals in the Pacific Northwest and Gulf Coast, as well as Mexico. It also serves significant domestic markets, including grain processors, animal feeders and ethanol producers in the Midwest and West.

"In its second-quarter earnings report on July 24, Union Pacific said grain products volume was up for the three months ended June 30 compared to a year ago and continues to be driven by new soybean crush production in Nebraska and Kansas," Reidy reported.

Norfolk Southern moved 18,107 carloads of grain and grain mill products in 2024, according to its weekly performance reports. Agriculture products shipped include soybeans, wheat, corn, feed, flour and ethanol.

EDITOR’S TAKE:

Another merger of major rail carriers appears to be moving towards approval and finalization. Whether or not it is good for agriculture remains to be seen. If shipping rates rise dramatically, this could put more pressure on grain prices, especially exports. And it is clear from the reports that a lot of export bound grain is carried by rail. We will watch closely what happens to service and costs and how all of that impacts agriculture. One thing for certain, a deal of this magnitude will take a little time to sort out all the details and work out all the kinks.

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