It was commonly thought Canada’s railways wouldn’t auction rail cars because the maximum revenue entitlement (MRE) prevents them from pocketing the extra revenue.
But CN started offering a limited number of cars to the highest bidder in the 2016-17 crop year, David Przednowek, CN Rail’s director of grain marketing, said in an interview Aug. 24.
“There are customers who are prepared to make commercial decisions to pay more for freight when demand is high and the demand for freight exceeds the supply available,” he said.
“It’s a way for the market to determine who gets the car supply at peak period, at surge capacity when grain handling and trading margins are at their greatest.
“Just like our commercial car supply products the auction allows customers to lock in car supply.”
While grain shippers can gain from the auction, CN doesn’t earn any more because of the MRE. The regulation introduced in 2000 to prevent railways from charging what the market would bear, allows the railways to charge whatever they want for shipping grain. That way, the railways can use freight rate discounts and premiums to encourage efficiency. However, under the MRE the railways are allowed to earn only so much from shipping grain, based on a formula adjusted for inflation, the amount hauled, and the distance.
“CN doesn’t retain any value of that (extra) freight (charge) that’s associated with peak demand (paid through the auction),” Przednowek said. “It just gets built into the MRE. So it’s not realistic to expect that a bunch of surge is going to be built up (in expanded capacity) to move the crop in six months.
“In the case of the revenue cap, if a customer makes a commercial decision to pay more for that freight when demand is high, everyone else pays less (for rail freight) later in the year because it falls under the revenue cap.”
The car auction is held weekly for delivery of cars up to eight weeks in the future. CN sells up to 200 cars per week in blocks of 25 and up to 20 cars a week in blocks of 10. Smaller blocks makes it more practical for smaller shippers to bid, Przednowek said.
The minimum bid is $250 a car in addition to the regular freight charge.
The minimum bid last year was $100 and they were seldom much higher because of the grain shipping backlog. But two years ago shippers were bidding $600 to $700 a car.
That might seem to be a lot of money, but presumably the shipper’s margin covers it and more or they wouldn’t be bidding.
“It’s transparent to the market,” Przednowek said.
“We post the minimum winning bid.”
CN is also integrating ‘private cars’ supplied by grain shippers into its car pool, but ensuring the car provider gets access to a similar number of cars.
The idea came from grain companies complaining they couldn’t increase their market share because car allocations were based mostly on historical orders, Przednowek said.
“For almost any move that we’ve got, whether it’s commercial or revenue cap regulated, you can enter into a commercial car supply agreement with CN and lock in car supply in advance of the harvest with reciprocal penalties for both CN and the shipper when they fail to perform per the contract,” he said. “We expect this year probably 95 per cent of our overall car supply in terms of CN-supplied equipment is going to be based on commercial car supply agreements between CN and customers, whereas four years ago it was zero.”