Twenty-five years ago critics claimed Western Canada had one of the worst grain-handling and transportation systems in the developed world.
Yet today it’s among the best, says Canada’s grain monitor Mark Hemmes.
Far from perfect, and still vulnerable to costly disruptions, including right now, the system from farm gate to terminal spout has been revamped to try and keep pace with western grain production, which has jumped by more than 60 per cent since 1995.
Billions of dollars have been invested by railways, grain companies and farmers to make a more efficient system paying off in a steady climb in grain throughput, including a record in 2019-20 and a string of monthly rail shipping records during the current crop year that started Aug. 1.
“If I could put myself back 25 years I never would be able to predict this is where we’d be today because it has been such a dramatic advance,” University of Manitoba supply chain professor, Barry Prentice, said during the opening of the 25th annual Fields on Wheels conference held online Dec. 11.
The conference shines a light on grain transportation problems and promotes more western value-added grain processing.
Western Canada’s grain industry has gone from being highly regulated and heavily subsidized “to one that pretty much today is based on open markets and very little subsidy…” Prentice added.
Canada exported almost $26 billion worth of grain in 2018 with three-quarters of it shipped by rail to export ports, government data published recently by Farm Credit Canada shows.
Why it matters: Western Canadian grain farmers rely heavily on exports, which almost all go by rail. When grain isn’t moving farmers can’t deliver or get paid.
“There’s been more movement forward in the last 25 years than the 50 years before that,” Hemmes, who is also president of Quorum Corporation, said in an interview Dec. 15. “I truly do believe that.
“When you look at key factors our gathering system is probably one of the best in the world.
“As good as we are, because of all the extraneous issues that we have to deal with — distance, climate, mountains, et cetera — we have to be twice as good as anybody else.”
How to fix Western Canada’s grain system was hotly debated for decades by those who favoured and opposed deregulation.
Deregulation came, albeit slowly, leading to investments and the more efficient system of today, Hemmes said. But some important regulations, especially for farmers, remain.
The maximum revenue entitlement (MRE) is the key one. Implemented in 2000 it allows the railways to charge whatever freight rate they want to ship western grain so long as it doesn’t exceed a total annual amount based on a formula that provides railways with a return on investment and adjustments to cover inflationary costs and the distance grain is hauled.
The MRE replaced statutory, distance-related rates, allowing the railways to give grain shippers a lower rate if they can load and unload cars faster and charge more if they can’t. It’s a carrot and a stick.
The MRE, which blocks the railways from charging whatever the market will bear is justified because at best, Canada’s two main railways, Canadian National and Canadian Pacific, are “a duopoly,” Hemmes said. Farmers are price-takers so any increase in rail costs will be passed to them, he added.
“And the market power they (railways) have is phenomenal,” he said. “So essentially what the MRE has done for the railways is on the one hand it allows them only to increase the rates at the rate of their own cost of inflation, but by the same token all of the productivity improvements that they put in place go into their pocket as well.”
Some farmers complain they should also get a share of productivity gains arguing their investments in semis and hauling grain a lot farther to an elevator contribute to rail efficiency. But Hemmes counters if the railways can’t keep the gains why would they invest to be even more efficient?
The proof is in what the railways have done. Soon after the Transportation Modernization Act (C-49) became law in 2018, CN and CP Rail ordered 2,500 and 5,900 new, high-efficiency hopper cars, respectively.
That cost CP $500 million, Jon Harman, CP’s managing director of bulk marketing, told the meeting. But the shorter, fatter, cars carry 15 per cent more grain. When the new cars are part of CP’s new higher-efficiency product (HEP) 8,500-foot trains, grain volume jumps 44 per cent, he said.
“This amount of shipping could fill a Panamax vessel in three or four trains rather than five,” Harman said. “This will reduce liability and reduce vessel anchorage. It will also empty elevators faster making more room for grain deliveries in the peak of grain shipping.”
The new legislation tweaked the MRE so each railways’ revenue entitlement increases to reflect their investment is things such as cars.
“With the change in legislation it gave us more certainty to make that investment — not a small investment — to go and acquire thousands of hopper cars,” David Przednowek, CN’s director of sales and marketing told Fields on Wheels.
The same for CP, Harman said.
Both railways have invested in double tracks, longer sidings and more locomotives.
CN and CP will spend $2.9 billion and $1.6 billion on capital projects this year alone, respectively.
Increased rail capacity has cut car cycle times to the West Coast to around 16 days on average, Hemmes said, which is “significantly better than what we were seeing back in the mid-1990s.”
Hemmes agrees the MRE is an “elegant” approach to encouraging railway investment, while protecting farmers in the absence of railway competition.
“It’s a control mechanism that ensures that they (railways) don’t increase their rates to usurious level at the same time allowing them to cover their costs and make money,” he said. “And they make a ton of money off grain, make no mistake about it.”
Hemmes, whose company was hired by the federal government in 2000 to monitor Western Canada’s grain-handling and transportation system starting with the 1999-2000 crop year, has witnessed massive changes since then.
Most farmers were delivering grain in five-ton trucks then versus super Bs, hauling 43 to 46 tonnes, Hemmes said during Fields on Wheels.
In 1996 there were 1,434 country elevators, most of them small and wooden; now there are just 402, large high-throughout elevators mostly made of concrete or steel. That’s a 72 per cent decline, but because the new elevators hold so much more, storage capacity has grown.
Elevators going up today have loop tracks that can handle bigger trains without breaking them apart or shutting down power. That makes for faster loading.
In 1995 less than 80 per cent of the grain moved in trains of 50 cars or less; today 80 per cent of the grain moves in trains of 100 to 143 cars.
“We went from 10 major grain companies back in 1990,” he said. “Through a series of takeovers and consolidations we’ve brought it down to… five. And then we’ve seen a bunch of new entrants such as G3, Providence Grain, Grains Connect and AGT Foods is also a big player today.”
Meanwhile, export terminals in Vancouver have been improved and new ones, built, including G3’s which has a loop track that can handle three unit trains simultaneously.
Terminals used to load ships at around 700 tonnes an hour; now they average 2,300 and G3 can load 6,000 tonnes an hour, Hemmes said.
“The grain companies spent $2 billion increasing their infrastructure,” he said. “And the (farm) industry has spent hundreds of millions of dollars in improved agronomics — everything from genetics to the technology applied to how they seed, herbicides and insecticides.”
Twenty-five years ago Western Canada was producing around 47 tonnes of grain a year; 2020 production is estimated at a record 77.745 million tonnes, just slightly about 2013’s record 77.021.
Total western grain supplies averaged 56.5 million tonnes 1999 to 2006. The previous eight-year average now is 80.7 million, up 40 per cent, Hemmes said.
This fall Canadian railways were moving about 1.5 million tonnes of grain a week, Przednowek said.
“Since 2007-08 we (CN) basically doubled the amount of tonnage being shipped at any point in time in the network during peak period demand,” he said. “What used to be 350,000 tonnes per week in peak demand in October, November is now 700,000 tonnes per week. That’s just about five per cent compound annual growth compared to annual crop production at two to three per cent annual compound growth.
“You put that into perspective that’s a ridiculous amount of grain moving… in a week compared to where we were 10 years ago. It’s a great story of investment not only by carriers but all the players end to end in the supply chain and I see continued growth in this fashion.”