Western grain farmers and the railways would be better off if the maximum revenue entitlement (MRE) was scrapped, according to Barry Prentice, an agricultural economist and professor of supply chain management at the University of Manitoba.
“Farmers may be losing more on (grain) prices (because Canada is seen as an unreliable supplier) than they ever gain from the lower freight rate they might be encountering,” Prentice said in an interview Oct. 21, in response to a presentation by University of Manitoba agriculture economics professor, Derek Brewin.
“There are lots of reasons why this should be changed and I think it really is in the farmers’ interest to do that.”
Prentice’s position is based on the premise that competition in grain shipping exists between the railways. Farmers were captive to the railways in 1916, but not now, he said.
“Today you can grow canola,” Prentice said. “Half the canola is sold to local crushing plants. You can sell to the feed mill. It can be trucked across the border to the U.S. If the railways did try to extract more than what was competitive farmers would respond by selling more to these other areas and the railways would lose that volume, which is very important to the railways. I think the worries about the railways exceeding their power and taking advantage of the situation is a misplaced view.”
(NOTE for video above: Viewers may notice a jump in the video at approximately 11:10. The interview was momentarily interrupted and restarted. The two clips have been edited together.)
If competition exists then the more money farmers pay to ship grain will see the railways invest more in the system making it more efficient and providing farmers better service.
“There needs to be an incentive for the railways to actually make the expansion… and we can see right now that’s not happening,” Prentice said. “If there’s not the incentive… why should they do it? I think it’s in producers’ interest that the railways have the incentive and do make those investments.”
Although farmers ultimately pay the cost of shipping grain, it’s a transaction between grain companies and the railways, Prentice said. And grain companies have power too. If a company moved just 10 per cent of its grain to its elevators on a competing rail line that would have a huge impact on the line losing the business, he said.
“We have some really big grain companies,” Prentice said. “In fact a couple of these grain companies — Glencore (which owns Viterra) and Cargill — could buy and sell our railways.”
Although University of Manitoba agricultural economist Derek Brewin contends the MRE gives the railways freight rate flexibility to ration demand and encourage efficiency, according to Prentice it doesn’t. He said the railways effectively charge a flat rate all year so as not to exceed the MRE, which would trigger a fine the forfeiture of the overage.
If the MRE is resulting in lower freight costs for farmers that means other shippers are cross-subsidizing farmers, Prentice said.
“I don’t think farmers want to be freeloaders and depend on potash and coal and other commodity shippers to pay their share of the capital investment needed to move their grain,” he said.
The MRE also discourages the railways from shipping grain in containers, which is more expensive, but not reflected in the MRE formula, he said.
When the MRE was introduced in 2000, it was not intended to be permanent, Prentice said.
But that’s because the railways said the MRE would be moot since competition would keep them well under the maximum allowed.
“Under a cap framework, overall railway revenues are expected to decrease as a result of commercial forces while at the same time providing more price flexibility to encourage efficiencies,” Arthur Kroeger, who in 1999 led the industry in a process to reform grain transportation, said in a letter to then transport minister David Collenette.