The railways would do a better job moving western Canadian grain if the revenue cap was scrapped, allowing the free market to work, says Barry Prentice, an agricultural economist and professor at the University of Manitoba’s Transport Institute.
“I wonder why on earth do we have a government… holding up the case for capitalism… dealing into the kit bag of the old Soviet Union to have regulated rates and a rationing system for grain (shipping),” he said in an interview Dec. 3 following the 19th annual Fields on Wheels conference in Winnipeg.
“And now they (railways) have a regulated amount of (grain) they have to move. It’s the command-and-control economy. I thought we proved that was a crazy idea and the Russians did that for us. Why are we doing it now?”
Last March, the federal government issued an order-in-council (OIC) establishing how much western grain the railways had to move weekly until Aug. 1 or face a $100,000 fine per violation. It came in the wake of a huge shipping backlog following a bumper crop and then extreme winter weather.
Another order followed, and a third was issued Nov. 29 that goes until March 28, 2015.
“If you look at the regulations they will not help move one more tonne of grain in a surge because they don’t do anything about the surge,” Prentice said. “I laughed when I saw the numbers, because they’ve ordered the railways to do what they normally do.
“Again, it was politics trumping policy.”
The Maximum Revenue Entitlement — a.k.a. revenue cap — was implemented by the federal government in 2000 to ease farmers’ concerns that the abolition of legislated rail freight rates would allow the railways to gouge them. The railways can charge whatever they want so long as the total annual revenue doesn’t exceed the maximum established by the Canadian Transportation Agency.
The revenue entitlement gives the railways the flexibility to adjust freight rates to encourage efficiency — discounting the rate charged for moving 100-car trains versus 50 for example, while preventing them from taking advantage of farmers who are captive shippers.
“This idea of the railways being a monopoly and captive shippers, this is old thinking,” Prentice said. Farmers feeling overcharged are free to start producing for domestic livestock production or ship to the U.S. by truck, he said. “It’s not as if they have an absolute monopoly.”
There is no maximum railway entitlement for the movement of potash, coal and lumber and they do all right, Prentice said.
It results in inefficiency and perhaps lower grain prices because international grain buyers see Canada as a less reliable supplier, he said.
“I don’t think the grain companies picked up the demurrage charges and cut their Christmas bonuses,” Prentice said. “I think farmers end up getting paid less for grain…”
If supply and demand was reflected in freight rates, they would be higher in fall when the demand is highest. Some buyers might defer purchases, Prentice said. Those desperate to meet a sale might be willing to pay more to avoid ship demurrage.
Now when demand exceeds supply, the railways ration cars, resulting in “phantom orders” as shippers try to get enough cars to meet their needs, he said.
Grain companies had sales for every car they ordered in 2013-14, said Wade Sobkowich, executive director of the Western Grain Elevator Association, later in an interview.
However, even a deregulated rail freight market can’t instantly respond to a sudden surge in demand or overcome extreme weather, both of which occurred last crop year, Prentice said. Nor can government orders to move grain.
At the very least, grain shipped in containers should be excluded from the entitlement, Prentice said.
“We don’t need to speculate about what would happen (without the entitlement),” Sobkowich said. “We’ve seen what has happened shipping to the U.S. (where the entitlement doesn’t apply).”
And while grain firms are staunch free enterprisers and abhor onerous regulation, the evidence is the railways don’t compete “and that’s why we need the government’s help,” he added.
Grain companies want government regulation to compel the railways to enter contracts to serve grain shippers and be subject to penalties when the railways fail to fulfil their contracts.
“That will simulate a market-driven system,” Sobkowich said.
Farmers fear rail market power, said Keystone Agricultural Producers president Doug Chorney.
“We don’t have a truly competitive market for rail in this country so we need government oversight,” he said. “There’s too much at stake for our entire economy.”
Grain is different than potash because there are thousands of producers with little market power compared to a few potash firms, he said. Potash companies will even stop shipping if returns get too low, while farmers continue to produce no matter what.
“We really are price takers,” Chorney said. “Generally speaking farmers are in a much more vulnerable position than a potash mine.”