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Report On Business CN Rail boosts profit but sees threat in rising Canadian dollar

A Canadian National Railway Co. locomotive pulls a line of cars through the Macmillan Yard in Vaughan, Ont, in this 2009 file photo.

Norm Betts/Bloomberg

Canadian National Railway Co. posted a 20-per-cent rise in second-quarter profit, but warned that the stronger loonie poses a headwind for the rest of the year.

Montreal-based CN beat analyst expectations in a quarter that saw many freight categories post double-digit gains.

Revenue rose 17 per cent to $3.3-billion, profit climbed to $1-billion and adjusted per-share earnings rose to $1.34, CN reported after markets closed on Tuesday. Analysts had expected adjusted profit of $1.32 a share and revenue of $3.27-billion for the three months ending June 30.

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Related: CP Rail hauls record profit as shipments rise

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Carloads rose 14 per cent, beating the industry average of 7 per cent.

"We outperformed the economy," CN marketing chief JJ Ruest said on a conference call on Tuesday. "We outperformed the industry."

"The North American economic outlook continues to be positive, and we remain committed to delivering on our 2017 financial outlook," Luc Jobin, CN's chief executive officer, said in a statement accompanying the earnings release. "However, volume comparisons in the second half of the year will be more challenging, and the strengthening of the Canadian dollar will constitute a headwind."

In April, CN raised its profit forecast for 2017 based on expected strength in grain shipments.

But amid dry weather in western parts of Canada and the United States, Mr. Ruest said it is too soon to predict grain carloads for the rest of the year. The company has based its forecast on average crops in Canada and the U.S. this year, and a loonie worth 75 cents (U.S.). The dollar was trading near 80 cents on Tuesday.

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The Canadian currency has risen about 10 per cent against the U.S. currency this year, amid U.S. economic weakness and stronger oil prices. CN said every one-cent rise in the loonie reduces profit by $30-million (Canadian), or 4 cent a share.

CN said it is sticking with the earlier forecast of profit growth of a range of 8 to 11 per cent, or a range of an adjusted $4.95 to $5.10 a share, from 5 per cent, despite the strong quarter.

Second-quarter grain and fertilizer revenue rose 23 per cent.

The U.S. Department of Agriculture has predicted production of the major crops – wheat, corn and soybeans – will be down by 7 per cent this season.

Much of North and South Dakota and Montana are in a severe or extreme drought, according to the U.S. Drought Monitor, a government-university partnership.

Recent rains have helped "green-up" the fields but not enough to save the "ravaged crops," the monitor said on July 20. "Reports from the field include many reports of extensive drop damage, livestock water holes drying up, and cattle losing weight due to poor or non-existent grazing land."

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Canadian Pacific Railway Ltd., last week reported record second-quarter profit but declined to raise the financial guidance from "high single digits" for the full year. Company executives cited uncertainty over the effect of dry, hot weather on the size of the grain crop, the direction of the Canadian dollar and crude volumes. John Brooks, CP's chief marketing officer said the railway will be less affected by a smaller crop than others, but there is uncertainty heading into harvest.

Harry Brook, a crop specialist with Alberta Agriculture and Forestry, said the east-central areas of the province are in a hot and dry spell that could reduce crop yields. Other regions, including the north-east and north-west areas, are having good growing seasons with plenty of sun and moisture, Mr. Brook said by phone from Stettler, Alta.

He said it's too soon to predict the size of Alberta's crop, but said it will likely be average "at best."

"It started out really wet but it's started to dry out. We're seeing signs that some plants are under moisture stress, but we're nowhere near as bad off as North and South Dakota are," he said, adding, "We're not going to get a boomer crop."

He cautioned against using the word "drought."

"I hate that word because it's too emotionally charged. This is not a drought. A drought is 2002," Mr. Brook said, referring to the two-year Canada-wide drought that reduced agricultural production by $3.6-billion and cost more than 41,000 jobs. "That was a drought. A drought is devastating. This is just a dry patch."

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Some areas of Alberta are traditionally semi-arid, but after the rainy past few years growers became accustomed to moisture. The lack of rain could represent a return to normal, Mr. Brook said. " The thing about moisture is it's not how much but when you get it. Timing is everything."

Rob Carrick has a warning about average yearly prince inflation for Canadians.
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