Canada’s grain sector has seen momentous changes since the first Fields on Wheels conference 20 years ago. But debating grain transportation policy still tops the agenda.
As the annual event’s 20th anniversary was celebrated Dec. 2, speakers offered wildly contrasting views of how the grain transportation is performing and what it needs for the future.
Some argued more deregulation is necessary, while others focused on the improvements that have been achieved.
“Canada probably has the best grain-handling and transportation system in the world,” said Mark Hemmes, Canada’s grain monitor and president of Quorum Corporation, but added it must keep improving.
“What has happened in the grain-handling and transportation system in Western Canada in the last 20 years is truly remarkable.”
But according to economist Graham Parsons, a Regina-based consultant operating a company called Organization for Western Economic Co-operation (OWEC), regulations such as the maximum revenue entitlement (MRE) discourage railways from investing to improve grain shipping, which ultimately hurts farm incomes.
“The policy focus on the railway revenue cap (MRE) has slowed the introduction of the very market incentives needed to allocate resources to create investment to adjust daily variations in demand,” Parsons said.
Introduced in 2000, the MRE was suggested by CP Rail as an alternative to open running rights — a means of creating railway competition.
The MRE gives the railways the flexibility to set variable rates to encourage efficiency, while capping the total amount the railways can earn in order to protect farmers from gouging.
The CTA sets the MRE annually based on a formula that guarantees the railways a 21 per cent return on their volume-related variable costs — considered a reasonable profit. The formula is adjusted annually for inflation and takes grain volume and hauling distance into account.
Parsons’ conclusions are based on a study he and University of Manitoba Professor Barry Prentice prepared for the Railway Association of Canada. They recommend ending the MRE so market forces can work.
- More on the Manitoba Co-operator: Prentice never expected to see so much change to Western Canada’s grain sector
Grain is not paying its fair share of fixed railway costs, so other shippers pay more, according to Parsons.
“Grain is paying its fair share and then some,” countered Harvey Brooks, general manager of the Saskatchewan Wheat Development Commission.
A study by Travacon estimates grain pays a 61 per cent return because rail efficiency has increased since 2000.
“There is a lot of money on the table here,” Brooks added. “Taking away the maximum revenue entitlement without adequate regulation of the market power of the railways would be an incredible income transfer among market participants… so we need to… approach it from information-based assessment.”
Hemmes also contradicted Parsons, saying grain companies and railways are investing billions in country and port elevator and rail improvements. CP and CN Rail invested $1.5 billion and $2.3 billion, respectively last year.
The breakdown in grain shipping in 2013-14 was not representative and system players have worked to improve, he said.
“2014-15 was the single largest year that we’ve seen in volumes coming out of the country elevator network,” he said. “It was 43 (million tonnes) and change.
“It’s a really positive story.”
Most grain companies are expanding port and country capacity. In 2000, Vancouver terminals turned 13 times a year. It’s double that now. Last crop year West Coast ports handled a record 38 million tonnes.
Country elevators are turning 6.5 times a year, up from four. Rail cars cycle every 14 days instead of 20.
“This is really, really good news because again the number of times you turn cars and the lower the car cycle it means the capacity of the rail fleet is all that much better,” Hemmes said.
Improved track record
In 2000 grain was in the system 70 to 90 days. Today it averages 42.
The Grain Logistics Working Group studied the MRE and found non-regulated grain moving to markets in Eastern Canada or the United States pays higher rail freight rates but doesn’t get any better service, chair Murdoch MacKay said.
“The MRE is a public policy tool that is working,” he said.
“It is well established that there is no relationship between the cost of freight and the provision of service in the rail market.”
Grain production and grain-based rail revenue are up in lockstep averaging 2.26 and 2.4 per cent, respectively since 2000.
Prentice disputed charges the railways are monopolies, noting farmers can truck grain to the U.S. or domestic processors.
“It’s not like farmers today are captive to just export markets as they were in the past,” he said. So this whole notion that the railways have such market power and just dictate revenues and capacity at will I think is a handover from previous ideology.”
Steve Dziver, a consultant who also farms, sided with Parsons, saying he quit growing oats because of poor rail service.
After the meeting Keystone Agricultural Producers’ (KAP) president Dan Mazier said he wasn’t convinced by Parsons.
“It’s (MRE) working just fine,” Mazier said. “It does allow for reinvestment. There was a lot in that presentation that was questionable to say the least.”
The MRE and other rail transportation regulations are being studied as part of the Canada Transportation Act review. The transportation minister expects a report Dec. 15.
Most farm groups and grain companies hope it’s the beginning of a process to compel the railways to agree to a certain level of service, backed by penalties when they fail to do so.
Some farm groups, including KAP, also want rail grain-shipping costs reviewed, to determine if the railways are being properly compensated or farmers are paying.