Sealing and painting plywood

Sanding sealer as per the directions on the can (usually a few coats, sanding between coats to remove the roughness), then paint it.

If hiding the grain is important, start with high quality plywood, such as birch or Baltic birch.  An alternative is to use regular plywood and apply a thin layer of spackle / drywall joint compound for roads; sand and paint it.

IMO, painting or sealing the entire plywood sheet is an unnecessary expenditure of time and money unless one is trying to make the layout look like a piece of furniture.

My understanding is that Sealing of the plywood also has an advantage of reducing seasonal fluctuations in the plywood's moisture content.  So sealing will reduce warpage of the plywood.

You can purchase a laminate board, MDO, that has a smooth surface one, of both sides.  Product is used for exterior signs.   A good quality plywood would be marked A/C.  (A) grade one side/(C) grade the other.  An (A) grade side is use-able without a lot of smoothing work.  Exterior grade is water/moisture resistant.

I tend to agree with MikeCT though I would go with 1/8 inch hardboard. It is already painted white on one side which should save you some time and money on sealers and paint. I buy mine at Home Depot.

Wow,  A lot of good advice here.  Let me add from my years of experience.

If you spend the money and buy true Exterior Grade plywood (it will have a black APA grading stamp on the back that says Exterior), then you will not have anywhere near as much warpage or moister shifting as you think.  This is not the same as the salt treated plywood, just Exterior grade. Available at Lowes and HD.

If you take this plywood before it gets dirty, and paint both sides, twice, thin coats, with a high grade primer, such as Kilz II interior/exterior primer, then you will have sealed it against almost all external moisture, and you can forget about any warpage problem, except in perhaps instances of extremely high humidity, such as proximity to steam from a shower, or long term direct water contact.    Moreover, if you put a dehumidifier in the area, and keep direct water off of the painted plywood, you should have zero warpage issues..

If you buy the exterior grade, you will find it in BC grade, with the B side being up and well sanded.  Yes, you will see the grain, but it is not anywhere near as severe as the lower grades.  The B side may have a few areas where there were knotholes, but they are extremely well filled and sanded and even hard to see with the naked eye.  The BC sanded exterior sheathing is certainly not cheap, being as high as $60 a sheet now, but it is absolutely worth the extra money.  (Exterior grade plywood has green strips painted on its edges, as opposed to the black stripes that indicate interior grade.  The people who work at Lowes and HD don't even know what these stripes mean!)

Absolutely do not waste your time trying to sand the face of a sheet of plywood.  Hours of work and wasted time.  I like the little bit of grain showing through my finish paint job,  because it looks like uneven, wavy, grass, which is much more realistic than a totally smooth A side painted smooth. 

If  a totally smooth face is that important to you, then you will need to buy very very expensive cabinet grade plywood.  This plywood is generally much more stable against moisture issues than regular interior grade, but you will still have to prime it twice to seal it well.   And it could cost as much as twice the cost of the Exterior grade.   (I haven't priced any in years.)  Again, a dehumidifier would remove absolutely all moisture issues.

As an alternative, if you demand a totally smooth top, then use the Exterior BC sanded as I suggested, prime it twice, and then put a thin sheet of underlayment plywood on top of it, such as Sureply or Ultraply.   Again, this is expensive, but it has very tight grain and would prime and paint up better.  If you have an orbital sander, not a belt sander, you may also be able to very lightly sand this with good results before painting.        Other experienced folks here may recommend a different thin sheathing to put on top, which may work as well.

I used the Exterior 5/8 inch, BC sanded, primed and painted plywood for my layout top.  If your table is constructed right, though, you can definitely use 1/2 inch.     The paint I used on top of the primer was Exterior flat Benjamin Moore.     I never used any paint in my layout that will wash away if exposed to direct water.   So, I am certain that I could pour a 5 gallon pail of water on top of my layout, let it sit overnight, come back the next morning, mop up with a towel, dry it gently with a heat gun, and everything would  run just as before.   (The only loss would be the little bit of grass that I glued down with Elmers white.)         Since I have several water pipes running over the top of my layout in the open floor joists above, I wanted to make sure that I would have this type of piece of mind.

WHATEVER YOU DO.  DON'T SCRIMP ON THE LAYOUT TOP!  You may be putting thousands of dollars of stuff, and hundreds of hours of time, on top of it.

Hope this helps.

Mannyrock

I've never had an issue with plywood warping on model train benchwork - screwing it to the support structure will keep it flat.  It's also dimensionally stable.   In addition, if the environment has so much moisture that plywood and/or benchwork will warp, it's too wet for trains.

As @Mannyrock stated, don't scrimp on the benchwork, as it will haunt you forever.  But there is a line between doing a good job and wasting time and money.

Seal it with Kilz primer and get on with life.

Charlie