Your Reading List

The Business Case For Farmers Owning Lake Freighters

The Canadian Wheat Board has decided to purchase two lake vessels, based on a very strong business case that will result in significant economic benefits for Prairie farmers. This investment will generate revenue for decades to come, and pay for itself many times over – just as CWB ownership of rail hopper cars has done.

We on the CWB board of directors, which includes farmers’ elected representatives, have been highly supportive of this innovative idea. We approved this purchase on its business merits, which I would like to share with you here.

Investment:The upfront costs associated with purchasing these ships are about $65 million. The CWB will pay for this over four crop years from its revenues. To put this in context, assuming an average tonnage volume over those four years, this expense is equal to a little less than $1 a tonne (less than half of one per cent of expected gross CWB revenues over the payment period).

Return:The return on this investment begins accruing

immediately, once the ships are in operation. This benefit accrues to all farmers, regardless of what port their grain flows to, since all farmers share in all transportation costs. Seaway movement costs all farmers $70 million to $75 million each year. Owning ships will see some of that cost come back in the form of freight revenues.

We conservatively estimate net revenues, after costs of operation and maintenance, at $10 million per year. That means the ships will have paid for themselves within seven years of going into service. And they will keep generating revenue for their lifespan,

which is at least 25 years. In addition, all farmers will benefit from improved efficiencies in transporting grain through the Great Lakes-St. Lawrence Seaway.

Risk:This is a low-risk investment. These ships are in high demand, as the current fleet on the Great Lakes is very old and badly in need of replacement, so revenue potential is strong. After delivery, our two ships will operate in a pool of vessels (the others owned by shipping companies Algoma Central Corporation and Upper Lakes Group), operated and managed by Seaway Marine Transport, which is a partnership of those two companies. The CWB (farmers) will then receive a proportionate share of the revenue generated from all the freight business carried out by the pool of vessels.

Opportunity:There is a narrow window of opportunity to make this investment. The strong Canadian dollar, the removal of a 25 per cent tariff on imported vessels and the business appetite of global shipyards has made this initiative economically feasible. In addition, the fact that others are looking to build new ships means that our order can be part of a larger shipbuilding contract, which helps keep costs down. Because of the dire need to replace an aging Great Lakes fleet, the CWB’s participation was highly desired, which placed us in an excellent position to negotiate favourable terms. We are proceeding in partnership with shipping companies and ship-design experts who have long experience in this industry.

The CWB mandate:The CWB’s mandate is to maximize the financial return to farmers from the marketing of their wheat and barley. Grain marketing includes transportation, which directly affects the competitiveness of Prairie grain in the world marketplace and, for that reason, directly impacts farmers’ returns. For the same reasons, the CWB purchased 3,400 rail hopper cars in previous years.

Western Canadian farmers are businesspeople who understand the value of cost efficiency, profit margins and investments that generate future revenue. The purchase of these ships is sound business strategy.

———

Weconservativelyestimatenet revenues,aftercostsofoperationand maintenance,at$10millionperyear.

About the author

Allen Oberg's recent articles

Comments

explore

Stories from our other publications