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Scrapping maximum revenue entitlement will double farmers’ freight bill

Agricultural economist Derek Brewin concludes the MRE works for farmers and the railways and has resulted in a more efficient system

Western Canadian farmers will pay the railways at least double what they do now to ship grain if the maximum revenue entitlement (MRE) is phased out as recommended in the Emerson Report.

Western grain farmers will see the cost of grain shipping at least double if the maximum revenue entitlement is scrapped.

Western grain farmers will see the cost of grain shipping at least double if the maximum revenue entitlement is scrapped.
photo: Allan Dawson

“The increase is somewhere between 100 and 150 per cent in real rates if we remove the MRE,” University of Manitoba agricultural economist Derek Brewin said following a lecture Oct. 19 in Winnipeg.

Western farmers routinely pay the Canadian National Railway Company and the Canadian Pacific Railway more than $1 billion a year for shipping grain. It varies with the volume.

Without the MRE average freight grain-shipping charges of $36.60 a tonne would jump to $78.52 or $109.97 a tonne, Brewin said. Farmers could expect the higher 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.

Brewin’s forecast is based on the premise that grain shippers have few affordable alternatives to the railways, and because the railways are local monopolies they can extract higher payments from farmers than would be so in a competitive transportation market.

The railways want the MRE removed, claiming it discourages them from investing in making grain shipping more efficient, but according to Brewin the MRE has been good for farmers and the railways.

“I think it is almost inspired regulation,” he said.

In 2000 the MRE replaced a fixed government-imposed freight rate allowing the railways to set their own rates so long as total grain-shipping revenue doesn’t exceed a maximum set annually by a formula adjusted for grain volumes, miles hauled and inflation.

In 2000 the formula gave the railways a 20 per cent contribution to grain-shipping revenue, over variable costs, to cover fixed operating costs. Brewin noted consulting firm Travacon recently estimated the railways are earning $8.36 a tonne in excess of the 20 per cent contribution, which is 61 per cent of their volume-related variable costs.

While the MRE protects farmers from paying excessive rates, it allows the railways to ration shipping demand and encourage increased shipper efficiency through price signals. The railways can charge inefficient shippers more and charge more efficient shippers less.

And it has worked, Brewin said. There are 326 elevators in Western Canada now versus 960 in 1999-2000, yet storage capacity is up slightly. There are fewer, but more efficient elevators.

“This reduced fixed cost per tonne for both elevators and railways, that were stopping at fewer points to fill a train bound for Vancouver or Thunder Bay,” Brewin said during his lecture.

Brewin didn’t mention that fewer elevators raised many farmers’ costs because many have longer trucking distances now, something farm groups have long noted.

During the same period there was a 38 and 80 per cent increase in the average grain turnover rate at country elevators and terminals and a 67 per cent jump in grain moved in 50-car-or-more trains.

“This (MRE) let them make all these efficiencies,” Brewin said. “It gave them a cap rate so they got increased profits. They have started to invest in grain cars, according to (grain monitoring company) Quorum. To me that is a sign of the railways being better off under the MRE than they were under the fixed rates.”

The railways would make even more money without the MRE, but farmers would make a lot less and that could negatively affect farmers and discourage them from investing in grain production, Brewin said.

Most western farm groups and the Western Grain Elevator Association (WGEA) want to keep the MRE. Farmers fear, as Brewin predicts, higher costs for grain shipping.

The WGEA has the same fear, noting that the railways charge more in non-regulated corridors and the service is no better.

The Keystone Agricultural Producers also want railway grain-shipping costs reviewed. It suspects because of increased efficiencies, which have not been accounted for the MRE formula, farmers are paying more than they should, as Travacon concluded.

While Brewin sees the MRE as working for farmers and the railways, he said it can be improved with measures that better reflect railway costs. For example, under the MRE if Railway A bought 1,000 cars, its increased revenue entitlement to reflect the purchase would be split with the Railway B.

It’s expected the future of the MRE and other possible changes to grain transportation, will be dealt with through amendments to the Canada Transportation Act currently under review.

Hints about what might be coming were expected in a speech by Transport Minister Marc Garneau in Montreal Nov. 3.

About the author

Reporter

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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