Railway rate deregulation arguments don’t add up, skeptics say

Competitive markets work, but the key is competition and that’s lacking in Canada’s rail sector

Consensus is rare in western Canadian grain transportation policy.

That’s why when two economists who have spent decades sparring over contentious issues actually agree, people take notice.

The sky didn’t fall, as Paul Earl joked it might, after admitting at a recent Winnipeg meeting that he is in agreement with University of Saskatchewan agricultural economist Richard Gray “to some very small extent” on whether further deregulation of rail freight rates would benefit farmers.

Earl, a senior scholar at the University of Manitoba’s Transport Institute, and Gray shared concerns at the annual Fields on Wheels conference in Winnipeg Dec. 2 that in the absence of the so-called maximum revenue entitlement (MRE), grain shippers would pay much higher freight costs.

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A wheat train pulls up next to a cargo ship at the Alliance Grain Terminal in Vancouver, British Columbia.

They weren’t alone. John De Pape, president of Farmers Advanced Risk Management Company, Harvey Brooks, general manager of the Saskatchewan Wheat Development Commission, Keystone Agricultural Producers president Dan Mazier and Murdoch MacKay, chair of the Grain Logistics Working Group and a Canadian Grain Commission commissioner, all challenged the proposition that ending the MRE would result in better railway service for grain shippers.

The Western Grain Elevator Association (WGEA) has taken that position as well. Its members have noted that’s the case now when moving grain where the MRE doesn’t apply.

There’s also general agreement the railways must be compelled by regulation to agree to service agreements with grain shippers and be subject to penalties when they fail to fulfil them.

Critics

The MRE has its critics. Graham Parsons, a consulting economist, Barry Prentice, a University of Manitoba transportation and agricultural economist and John Coleman, a senior fellow at Carleton University’s School of Public Policy, condemned the MRE at Fields on Wheels, arguing it discourages railways and grain companies from investing to move more grain, ultimately hurting farmers and Canada’s economy.

Their message: let the market work and rail freight rates will ration the demand for rail services.

Most would agree — if there was competition between the railways.

Without it, the railways have no incentive to invest in surge capacity because they know they’ll get the grain eventually.

In the meantime, they can charge what the market will bear. In fact, they have a fiduciary duty to shareholders to do just that.

Earl, who lobbied for deregulated grain transportation for years while working for United Grain Growers and the Western Canadian Wheat Growers Association, said Parsons failed to convince.

For starters, Parsons wrongly blamed the MRE for the decline in Canada’s share of world wheat markets, ignoring the fact the United States’ share has declined too. Market share has dropped in both countries due to increasing exports from Ukraine, Kazakhstan and Russia, which in some years accounts for 23 per cent of global wheat trade. U.S. share has also dropped as American farmers grew less wheat in favour of other crops, according to a report from Kansas State University.

“Simply restoring (Canadian) market share would increase grain exports by 20.8 million tonnes, increasing grain revenues perhaps by $8.2 trillion,” Parsons said. “Perhaps half would end up in farmers’ pockets. It’s a big number. You can do the calculations forwards and backwards, it doesn’t really matter.”

Wrong math

Even if there was a link between market share and the MRE, Parsons’ math was wrong. In 2013, Canada’s total gross domestic product was US$1.8 trillion, a fraction of the gains he said could be made marketing wheat. He later said it was a slip of the tongue.

Parsons also misleadingly referred to the railways having to move a minimum amount of grain. While that was true for about a year after the federal government ordered the railways to meet weekly minimum volumes in response to the 2014 grain backlog, that order ended last March.

The formula used to establish the MRE is applied retroactively, according to Parsons, making it difficult for the railways to know what to charge. But the railways are amazingly close to their maximum entitlement most years. They have a good idea of what to charge, because every April the Canadian Transportation Agency announces the Volume-Related Composite Price Index for the new crop year.

Parsons also argued the MRE formula doesn’t allow the railways to buy new cars. It does provide for car replacements, although, since the formula applies equally to both railways, if one purchases 500 cars and the other doesn’t the company that bought the cars would only recoup half its cost — a flaw that could be fixed easily by changing the MRE regulations.

Earl noted that CP Rail boss Hunter Harrison himself acknowledged grain is captive to the railways.

“(An intermodal trailer is) not like grain, or it’s not like coal, (where) if you’re a little bit late you’re still going to haul it,” Harrison said during a meeting in New York March 12, 2014. “If that trailer comes in Friday night and you’re not able to handle it, it’s probably not going to be there Monday.”

Hangover

Harrison’s admission didn’t resonate with Parsons or Prentice. Prentice, who co-authored a study criticizing the MRE with Parsons for the Railway Association of Canada, claimed the railways are not captive.

“It’s not like farmers today are captive to just export markets as they were in the past,” Prentice said. “So this whole notion that the railways have such market power and just dictate revenues and capacity at will, I think is a hangover from previous ideology.”

That prompted some eye rolling. Tell a farmer in the Peace River or even Swan River he can truck his wheat to an American elevator if he doesn’t like Canadian rail rates.

We’ll soon learn whether the team appointed by the previous federal government to conduct “an arm’s length” review of the Canada Transportation Act sees the MRE as a help or a hinderance. Its report is due on the transport minister’s desk this month.

Even if the review chaired by former cabinet minister David Emerson recommends scrapping the MRE, the current government isn’t likely to comply. Veteran Saskatchewan Liberal MP Ralph Goodale knows the file well and recognizes grain shippers are captive to the railways.

Still, never underestimate the railways. They are powerful and critically important to Canada’s economy. They must be profitable. In 2000, the government thought it struck the right balance between farmer and railway interests. Will today’s government reach the same conclusion?

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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