Canada’s Grain Transport Conundrum


by Cliff Jamieson, Canadian Grains Analyst

Returning to Saskatoon to speak on the grain markets at the Grain Handling and Transportation Summit on Wednesday, hosted by the University of Saskatchewan, was unnerving for me. In the crowd would be some of the agriculture economics professors who inspired me during my undergrad years in the College of Agriculture in the 1980s. My message suggesting that the basis improvement needed to reflect pricing on the prairies that is linked to world market conditions remains a function of rail movement and shows few signs of improvement at this time was also not what producers hoped to hear.

It did not take long, however, before my insignificant challenges were put into perspective when compared to the monumental hurdles facing the western Canadian agriculture sector, as outlined by speaker after speaker. Further reassurance came from the fact that by far the toughest job of the day was to represent either of Canada's two major railways before the crowd of over 200, as did the panel speaker representing CN Rail.

While Canada's federal government was preparing for the afternoon release of their newly crafted Fair Rail for Grain Farmers Act, speakers at the conference discussed issues which included the lack of west coast terminal capacity, the trend toward higher movement in a westerly direction to meet growing Asian demand, the powers of the railways who create inequities which penalize smaller shippers, lack of transparent data, lack of communication between the railway and shippers, and railway biases which appear “by region, by product and by shipping corridor.” And that's just a start!

My message was that growing ending stocks in 2013-14 will result in huge beginning stocks for next crop year, which will lead to huge supplies next year when using AAFC acreage projections based on more traditional yields closer to five-year average. As a result, grain companies are showing few signs of urgency in securing new-crop supplies as indicated in basis levels right through next March. Conversation during the day suggested that while some companies are facing significant pain as a result of low through-put, demurrage bills and contract cancellations by their end-use customers, other firms are buying grain in the country at perhaps the widest basis levels ever and stand to post record profits as a result. It stands to reason that a significant amount of the approximate $5 billion in damage that the University of Saskatchewan has estimated to be the producer cost due to this year's market is being shifted to the grain companies. Meanwhile, there is a school of thought that there may be a lack of incentive for the larger grain companies to push for improved rail service given the profit potential in the current environment.

While the number of grain cars backlogged is now suggested to have grown to 70,000, railways are posting favorable financial results, with CN shares up $10 per share and CP shares up $40 per share. “Moving commodities must be more important than the company's share price,” suggested Perry Pellerin from the GNP Grain Source Group. Meanwhile, it is suggested that railroads have no idea when the train will arrive to be loaded and force companies to load in a specified time period when it does arrive or face a penalty and then leave loaded cars sitting for days or weeks on the siding. Terminals on the other end face the same issue, as railways can provide no notice of when trains will arrive, cannot guarantee that trains arrive in the same sequence as ordered, and even more troubling, can't even find the train! The whole issue brings up the notion of coordination versus capacity.

The federal government's Fair Rail for Grain Farmers Act is perhaps viewed as a step in the right direction. Also known as Bill C-30, the bill includes provisions that will:

— Allow for volume requirements to be set in what's viewed as extraordinary circumstances with a $100,000 per day fine to be incurred for non-compliance.

— Require railways to produce more data and more timely data for monitoring purposes.

— Allow for authorities to monitor grain contract issues.

— Allow interswitching distances in the prairie provinces to grow from 30 kilometers to 160 km, allowing companies to move each other's traffic if the shipping point falls within 160 kilometers of an interchange. This is suggested to increase the number of facilities that qualify to use a competing railway to 150 points, which is up from the 30 that qualify today. This even opens the doors to U.S. competition, something that will have the railways fuming mad.

Will this be enough? A suggestion made at the summit was that anything announced would be better than nothing. A quote from the Western Grain Elevator's Association on Twitter suggested that more is needed, while the Canadian Canola Growers responded that “We appreciate the Government's intentions with this Bill as it takes one more step toward addressing the complex and highly interconnected grain logistics challenges that we face.”

There is more to be done. Given Richard Gray's comments from the University of Saskatchewan in Wednesday's Summit which suggested that the current situation will challenge the industry for decades to come, I'd say this is only one small step in the right direction.

© Copyright 2014 DTN/The Progressive Farmer. All rights reserved.

Posted with DTN Permission by Haylie Shipp


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