Scrapping the maximum revenue entitlement (MRE) and grain grading will make western Canadian grain farmers more competitive, according to the North American Grain Grading Group (NAGGG).
It’s a big change, but don’t call it radical, Mary-Jane Bennett, a transportation consultant and NAGGG supporter, said in a phone interview May 30.
“What they’re saying is that they want to move to a market-based system so they can get their product to market in a timely, cost-effective way,” said Bennett, a former member of the Canadian Transportation Agency. “I wouldn’t call that radical.”
Some farmers beg to differ, especially with one predicting their rail freight bill could double without the MRE.
NAGGG’s proposal, emailed May 23 to Western Canada’s wheat commissions and some other groups, claims the MRE and grading discourages investment and masks market forces resulting in a less efficient grain-handling and transportation system.
The paper urges the groups to support ending both.
- Read more: Grain industry has other priorities
The NAGGG describes itself as Prairie growers and their supporters, dedicated to getting top values for wheat.
Veteran deregulation advocate Bill Cooper is listed as an NAGGG spokesperson, along with Bennett. The group lists eight more farm operations from Manitoba, Saskatchewan and Alberta as members.
The same day the NAGGG’s email was sent, the Transportation Modernization Act, which modified the MRE to encourage more railway investment, was made law.
The next day CN Rail announced it had ordered 1,000 new, high-volume hopper cars, countering the claim the MRE discourages rail investment.
- Read more: CN Rail ordered 1,000 hopper cars
Moreover, Canadian grain companies have been investing millions building new country elevators, expanding export terminals and G3 is building a new terminal at Vancouver.
Everyone supports competitive markets, but many observers don’t believe one exists between the two major railways operating in Western Canada.
“If you look at non-competitive points in the U.S. like along the northern lines in Montana… they pay considerably more freight rates than us in slack times and during peak demand they pay a lot more than we do,” University of Saskatchewan agriculture economist Richard Gray said in a phone interview June 1.
Between 2012 and 2016, on average, rail freight charges to move grain were 55 per cent higher in the northern United States compared to a similar movement from Saskatchewan, says a soon to be published policy paper called Export Sector: A Canada–U.S. Cross-Border Comparison, written by Gray and two other economists.
“This idea that somehow by allowing the railways to charge more (to haul grain), they would actually charge less, is pretty silly,” Gray said.
Their paper concludes there’s imperfect rail and grain-handling competition.
“For rail, it appears that the MRE is successful at constraining railways from charging monopoly prices,” the paper says, but adds the returns allowed under the MRE might be even higher than necessary “to incentivize the timely movement of grain.”
Since a full review of how much it costs the railways to haul grain hasn’t been done since 2000 the MRE could be allowing the railways to earn more than what would be expected in a competitive market.
According to Bennett, there are no economic studies showing Canada’s railways would gouge farmers if the MRE ended.
The MRE was established in 2000 to give railways freight rate flexibility, while preventing them from overcharging shippers.
But what’s the definition of ‘gouging?’
Scrapping the MRE would see grain shippers’ rail rates at least double, according to University of Manitoba agricultural economist Derek Brewin.
“The increase is somewhere between 100 and 150 per cent in real rates if we remove the MRE,” Brewin said following a lecture Oct. 19, 2016 in Winnipeg.
Western farmers routinely pay the CN and CP Rail more than $1 billion a year for shipping grain. Without the MRE average freight grain shipping charges of $36.60 a tonne (back then) would jump to $78.52 or $109.97 a tonne, Brewin said.
Farmers could expect the lower rate if grain companies are vigorously competing for their business. If they aren’t it means the grain companies are capturing a greater share of the value of export grain, leaving less for the railways to grab.
“Either way it’s bad news for farmers,” Brewin said.
When CP Rail proposed the MRE, a company official said the entitlement would be moot because competition would keep rail earnings down.
Bladworth, Sask. farmer and agricultural economist Ian McCreary says the fact that rail earnings from grain are close to what’s allowed under the MRE proves the railways don’t compete.
Meanwhile, farmers and grain companies have spent a decade successfully lobbying the federal government to amend the Canada Transportation Act (CTA) to give grain shippers tools to force the railways to sign service agreements, which will trigger financial penalties when the railways fail to deliver the service promised.
The farmers and companies argued two grain shipping backlogs in five years demonstrate grain is captive to the railways.
Western Grain Elevator Association (WGEA) executive director Wade Sobkowich wasn’t immediately available to comment last week. But in previous interviews he has said the railways don’t invest in surge capacity because they don’t have to. They know since shippers don’t have other options the grain will still be there when they have the capacity to move it. That’s a sign competition is lacking.
- Read more: Grain backlog not longer a problem
The fact that rail service is just as poor in corridors where the MRE doesn’t apply proves paying more to ship grain doesn’t get better service, Sobkowich has said.
Grain is not captive to the rail, according to Bennett.
“Please, you can’t expect the railway to be sitting on the edge of a field,” she said. “You have to get your grain to a rational space where it is picked up and that is an elevator. When a super B goes down a driveway it can turn right or left and hit a CP line or a CN line for a lot of these points. You will have to find me a study that says that grain is captive.”
According to Bennett, because of the MRE, grain farmers are paying the railways about 30 per cent less than they should be when compared to what others pay for to move bulk commodities by rail.
Moreover, three grain companies handle 75 per cent of the grain and therefore have the market power to take some of the MRE freight savings away from farmers, but rightly belong to the railways.
“These people (NAGGG) were also adamant that you could remove the Canadian Wheat Board to move to a competitive system,” Gray said. “Now they are in fact arguing the grain companies are powerful oligopolies and if we just took the MRE off, the two railways would become perfectly competitive instead of another powerful oligopoly. It’s doublespeak. Just as they point out, when you have a concentrated market you don’t get anything that approximates perfect competition. With two railways, and you remove the MRE, you’re not going to get anything that approximates perfect competition.”