Multinational railroad merger promises big changes for Southeast Iowa

A merger between railway giants Canadian Pacific (CP) and Kansas City Southern (KCS) looks increasingly likely after the latter announced stockholder approval Friday morning for the combination into a new company known as CPKC. While communication officials at CP don’t expect a go-ahead until the late in FY 2022, the expected move has big implications, including an over 300% increase in train traffic for Southeast Iowa.

If approved, CP-KCS merger would establish the first single-line railroad linking the U.S., Mexico and Canada, a move proponents say will boost the economies of every community along the way, much of it running through eastern and southern Iowa.

“By connecting communities across three countries, this combination facilitates growth and economic opportunity, improves safety, grows employment and takes trucks off the roads,” CP Media Relations Manager Andy Cummings said. “We intend to grow the traffic that the combined CP-KCS systems handle supporting economic growth in communities, including those in southeastern Iowa. Jobs and expanded economic opportunities will flow to the communities and local businesses we serve.”

The move is expected to have a number of effects on Iowa’s broader economy, much of it through a solution to what industry professionals call the “watershed” problem in grain transport.

“CP’s lines in Iowa traverse fertile corn-growing regions, but the limited reach of CP’s network and the relatively short distances CP would move grain shipments destined for markets in the south via the Kansas City Gateway have constrained … the infrastructure necessary to serve these flows,” CP Commercial Integration Vice President Jonathan Wahba and KCS Chief Marketing Officer Michael Naatz said in a joint statement. “That will change with the CP/KCS Transaction and the new single-line routes to distant markets it will create.”

Wahba and Naatz said the merger would also expand Iowa-based ethanol markets across the continent.

“Today, most of this ethanol goes to gasoline blenders in the Northeast, with smaller volumes going to Chicago and Charlotte, NC,” they said. “CPKC will be able to offer these blenders access to a larger range of destinations. We will offer single-line routes to receivers in East Texas, the largest consumers of ethanol in the U.S. … In the longer term, The CP/KCS combination will open Mexican markets to U.S. and Canadian ethanol producers.”

Of the over $275 million CPKC plans to spend on infrastructure in the three years after the merger, nearly half ($134.18 million) is slated for Iowa, most of it dedicated to new siding according to public records, which also mention plans to improve grain elevators and lumber bridges in the state.

“The choice of locations is based on what these models indicate is needed to support anticipated traffic growth,” Cummings said. “These investments will create construction jobs and economic activity up and down the line.”

The change will create have some noticeable outcomes in Southeast Iowa over the three years after a merger. Cummings said the Ottumwa line of CP, which runs through Ottumwa, Washington, Muscatine and Davenport, could expect a jump from an average of 4.2 trains per day to 18.4.

“Freight train traffic through the Washington (Iowa) area is expected to increase based on post-merger projections,” he said. “These increases will not occur overnight and are projections over a three-year period following the combination.”

Cummings acknowledged the impact such high traffic could have on a community, and said the company was working with communities to avoid disruptions to daily life.

“While the overall impact of the CP-KCS transaction is unambiguously pro-environment and pro-economic growth, we recognize that we will be increasing the number of trains that operate through some communities,” he said. “We will work hard to be a good neighbor and mitigate potential adverse community impacts.”

He later added details on what that impact mitigation would entail.

“CP is communicating directly with community leaders to discuss their concerns,” he said. “CP will work closely with the Surface Transportation Board’s Office of Environmental Assessment so that potential issues are carefully and appropriately analyzed. But for example, our planned investments in infrastructure in the corridor will allow trains to move through communities safely and even more efficiently.”

Washington Economic Development Group Director Mary Audia said the merger would be a boon for Southeast Iowa businesses plagued by supply chain issues.

“This will be an efficient straight line system to ease the supply chain/truck driver shortage allowing goods and services to flow more efficiently between Canada, the U.S. and Mexico,” she said. “It will deliver a dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth and the growth of local industries … in Washington County.”

The historic merger comes with an array of endorsements from cities, companies and organizations across the Hawkeye state.

“Iowa's two largest trade partners are Canada and Mexico,” Muscatine Chamber of Commerce President Erik Reader said in a letter to the Surface Transportation Board. “We would like our farmers and manufacturers to be able to benefit fully from trade deals such as the (USMCA.) A CP-KCS network will create the first U.S.-Mexico-Canada railroad network capable of doing this.”

Ottumwa Mayor Tom Lazio’s letter to the Surface Transportation Board said the move would enhance the community’s industrial base.

“By giving CP greater market reach, the combined network will provide better transportation options for our businesses and support economic growth and job growth,” he said. “Ottumwa has a large community of manufacturing businesses — such as John Deere, JBS, C&C Manufacturing, Winger Co. — that may benefit from this consolidation.”

Closer to the Missouri border, Iowa Southern Railway Marketing Director Jordan Buck endorsed the merger, saying CP’s business had been instrumental in keeping Centerville’s railroad industry alive.

“With the combination of the CP and the KCS, even more benefits will come to Iowa Southern’s customers and the local and regional economy,” he said. “Agricultural producers in Southern Iowa … will have single line access to new markets with the many poultry feeders on the KCS, export ports on the U.S. Gulf, and the huge market for ag products in Mexico. Local manufacturers will also see improvements in their ability to source imported raw materials moving out of Mexico or through Gulf ports.”

Despite the numerous endorsements in the 4,342-page merger application, the combination is not without some opponents. Railway company Union Pacific (UP) filed for the transportation board to reject CPKC’s proposal in early November, saying the move would disproportionately and unfairly hurt competition, an accusation taken very seriously in railway regulations.

“The Application lacks support for projected market impacts and fails to analyze impacts on competition for cross-border traffic,” said the UP petition. “Although the Application projects substantial diversions and growth of traffic moving between the United States and Mexico, it contains no analysis of rail competition for such traffic within Mexico and its effects on transportation within the United States … scattershot claims are no substitute for the detailed, data-driven market analyses that the Board requires.“

UP is joined by Burlington Northern Santa Fe, Norfolk Southern, and Canadian National — the last of which lost a bidding war with CP for the merger deal with KCS — in a handful opposition statements to various steps of the merger process.

Transportation Board authorities, however, found those arguments insufficient, and accepted the merger application as complete and ready for public comment on Nov. 23.

Comments: Kalen.McCain@southeastiowaunion.com