Now that the federal government has given the two national railways four weeks to get grain shipments up to speed or face daily fines of up to $100,000, all eyes are on what happens next.
The government has promised it will table legislation to improve rail service for grain after the parliamentary break this month.
Farmers and grain companies are hoping this legislation will do what the Fair Freight Service Act of 2012 didn’t — hold the railways accountable for poor service.
Greg Cherewyk, chief operating officer of Pulse Canada said the lack of a competitive rail environment has allowed the two national railways to boost profits, sacrificing surge capacity — knowing grain shippers have few other options.
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For example, CP Rail has cut 4,550 employees, 11,000 cars and 400 locomotives, since 2012.
“We think the railways have captured so many efficiencies from the industry… transferred that wealth to the shareholders of their companies, they need to use some of that wealth to invest back in for things like surge capacity,” said Wade Sobkowich, executive director of the Western Grain Elevators Association.
Grain shippers want the government’s new law to define “adequate and suitable” rail service and include fines when the railways fail to provide it, Sobkowich said.
Poor service
In a competitive market, poor service results in lost business and reduced profits, Cherewyk said. In markets where competition is lacking, financial penalties are needed to ensure performance. After all, grain companies are penalized by the railways if they fail to load or unload cars in good time.
But there is no such recourse if the railways fall behind.
Last week there was a backlog of 61,000 undelivered grain cars and 43 grain ships waiting to be loaded at the West Coast. Western elevators were 90 per cent full.
The situation brought Agriculture Minister Gerry Ritz and Transportation Minister Lisa Raitt to Winnipeg March 7 armed with an order-in-council giving CP and CN Rail four weeks to achieve weekly shipments of at least 5,500 cars of grain per week — amounting to one million tonnes — or face the stiff daily fines.
The order-in-council, an emergency measure allowed under Section 47 of the Canada Transportation Act, can be renewed after it expires in 90 days.
The railways blame a record 74-million-tonne crop and a cold winter for shipping delays.
Ritz left little doubt as to who he holds responsible.
“The railways have dropped the ball,” he said.
“You’ve all heard of back-to-work legislation, this will be get-to-work legislation,” he told reporters, grain company executives and farm leaders gathered for the announcement.
Shipping 11,000 grain cars a week will double the railways’ recent movement, Ritz said. But it’s no more than what the railways themselves said they could do.
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On the table
Ritz said going forward everything is on the table, including complaints the railways don’t compete and the cap on the total revenue the railways can collect for shipping grain — a regulation that prevents the railways for charging farmers what the market will bear.
“We want to make sure that everyone has the proper incentive to move the product at the end of the day,” he said.
The railways say users should pay for extra capacity. But farmers and grain companies have already paid to make the grain-handling and transportation system more efficient, said Starbuck farmer and Keystone Agricultural Producers member Reg Dyck. Small elevators and rail branch lines were scrapped forcing farmers to haul longer distances to more efficient elevators. Grain companies invested millions of dollars building them.
“The railways need to pay for that surge capacity because they have the luxury of not operating in a competitive environment,” Cherewyk said. “Through legislation and regulation, we need to create an environment where… they maintain reserve capacity… and absorb costs when they fail to meet their customers’ demands because that’s the environment their customers operate in too.”
Liberal MP Ralph Goodale estimates the backlog has cost farmers almost $5 billion in lost and delayed sales, lower grain prices and demurrage.
In separate statements the railways criticized Ottawa for imposing more regulation.
Moving 500,000 tonnes per week is at the upper limit of CN’s abilities, but achievable if the entire supply chain works together, said Jim Feeny, spokesman for the Montreal-based railroad.
The extra grain volume that needs to move this year is similar to the total volumes of some other commodities that CN transports, he said.
“No supply chain in the world could handle that big an increase on such short notice as we received with this crop last fall,” Feeny said.
Counterproductive
Feeny said introducing more regulation into the rail industry would be counterproductive.
CP spokesman Ed Greenberg said the railway was disappointed with the government’s action.
“CP’s position remains that moving grain from the farm to the port is a complex pipeline involving many parties and requires all participants of the Canadian grain-handling and transportation system to work together, which requires a 24/7 commitment similar to the railways,” Greenberg said, adding that CP is committed to matching its record fall volumes, which would align with the government’s order.
The eventual weekly volume requirement of a combined one million tonnes is more than double the current volume moving, according to official figures, though Feeny said CN is already more than halfway to its target.
Canada’s railways are also big shippers of coal, fertilizer and, increasingly, crude oil. Raitt said the government arrived at its minimum levels based on how much grain it knows the railways can ship without affecting the other commodities.
Weather factor
But others questioned the move.
“There’s likely a real weather element to this,” said Canaccord Genuity analyst David Tyerman, who covers the railroads. “It’s almost like we’re trying to regulate a situation that is being caused by factors beyond the control of the railroad itself.
Sobkowich said the WGEA members are also concerned whether the federal order will ensure the right grain gets to the right destination in a timely fashion.
“To move tonnage is great, but how will that tonnage be broken out by corridor?” Sobkowich said.
The railways have been directing where grain will go, which has meant very little is moving into the U.S. When concerns were raised about a possible shortage of Cheerios, the railways said oat exports could resume, but only to General Mills, a grain industry official said.
“There has to be some consideration as to where shippers need to move this product to market,” added Sobkowich. “There needs to be some specificity in terms of corridors.”
