Canadian Pacific Railway (CP) exceeded what it’s allowed to earn hauling western Canadian grain to port by $1.25 million last crop year (2010-11), while Canadian National (CN), was $913,447 under.
The results didn’t surprise Ian McCreary, a former Canadian Wheat Board elected director and farmer at Bladworth, Sask.
“Rail competition just isn’t there,” he said in an interview. “This number continues to escalate with inflation and all the productivity gains continue to be captured by the railways.”
The Canadian Transportation Agency, which sets how much the railways can earn from grain hauling, as well as measuring those earnings, released its findings Dec. 22.
CP will forfeit that $1.25 million in excess revenue, plus pay a five per cent ($62,500) penalty to the Western Grains Research Foundation, which will use the money for crop research.
The revenue cap is a form of “economic regulation,” says the CTA. It was implemented in 2000 for two reasons:
- Assure farmers in the absence of competition the railways wouldn’t charge what the market would bear to transport grain.
- To give the railways rate-setting flexibility to encourage more efficient grain movement. While total revenue earned from grain is capped, the railways are free to set the rates they charge.
(The revenue cap, which is really an entitlement, is adjusted for volume so the amount of grain the railways can move is unlimited. The entitlement is also adjusted for inflation to reflect increases in major rail expenses such as fuel and labour.)
At the time the cap was implemented, the railways said it would be meaningless because fierce competition would keep revenues well below the cap benefiting farmers through reduced shipping costs.
However, most years the railways are close to the cap and usually one exceeds it. The 2009-10 crop year was the first since 2002-03 that both railways didn’t exceed the cap.
CP’s gross revenue from hauling 14.7 million tonnes of grain an average of 913 miles in 2010-11 was almost $444 million. That’s average of $30.22 a tonne.
CN earned $508 million shipping 16.4 million tonnes of grain an average of 1,010 miles. That averages $30.92 a tonne
In total, grain companies paid the railways almost $1 billion to haul grain last crop year, or an average of $30.59 a tonne.
The grain companies pay the rail bill on grain but attempt to recoup it from farmers. What individual farmers ultimately paid last crop year varies. Farmers delivering wheat board grains are deducted the cost to ship a single car.
Freight costs are built into the basis of non-board crops, so farmers don’t know what they pay for freight.
Some of the money grain companies save loading multi-car trains gets shared with farmers through trucking premiums, but it depends on grain company competition, McCreary said. He suspects the companies aren’t passing all the savings back and he’s certain the railways aren’t because railway costs used in the cap formula haven’t been adjusted since 1992.
“Every year you get a year farther from the base line, so every year it gets just a little bit worse, every year there’s more productivity savings and every year 100 per cent of those are captured by the railroads,” McCreary said. Every year there’s inflation and every year that’s charged to farmers. So the gap between a reasonable public policy situation and the situation we’re in continues to widen.”
When the cap was introduced the railways were allowed to earn their costs plus 27 per cent. A Travacon Research study estimates the railways, benefiting from a much more efficient system, now get their costs plus a 50 or 60 per cent return.
The study prepared for the wheat board and a number of farm organizations in 2010 estimated farmers were overpaying the railways by $100 million a year or $6.97 a tonne.
Mark Hemmes, president of Quorum Corporation, the firm hired by the federal government to monitor Canada’s grain-handling and transportation system, says the revenue cap keeps farmers’ freight costs lower than they would be in its absence. As proof he points to higher rate for other products shipped by rail unprotected by a cap.
Agriculture Minister Gerry Ritz has said farmers might get better rail service if they paid more for it, causing some to speculate the government might scrap the cap. However, Paul Martin, Agriculture and Agri-Food Canada’s director general for the Marketing Policy and Environmental Policy Directorate, told a conference in Saskatoon Dec. 13 there are no such plans.