In fact, they say they can handle twice as many rail cars during the first half of the crop year than what the railways intend to supply.

“We don’t expect the railways to gear up to provide 18,750 rail cars a week right off the bat, but it should be a number that they’re striving for,” Western Grain Elevator Association (WGEA) executive director Wade Sobkowich said in an interview Aug. 22. “If they supplied 20,000 rail cars by some miracle every week throughout the winter period then the (export) terminals would be the bottleneck. But they’re not supplying that.”

Last year CN Rail said it would deliver 4,000 cars a week to western elevators in the winter and 5,500 during the rest of the year.

“If CN does that this crop year we’d be happy,” Sobkowich said, noting it fell far short of that target for much of the 2017-18 crop year resulting in a grain shipping backlog.

But if grain companies knew the railways would reliably supply 18,750 cars weekly, most years they would sell to that target from October to the end of March, he added.

Grain companies want to sell as much grain as they can then because that’s when they normally earn the best returns, Sobkowich said.

Even in years when Western Canada produces a below-average crop, grain companies want to ship more grain from fall to spring than the railways can handle, he said.

Grain sector estimates put this year’s crop at close to 71 million tonnes, plus an above-average carry-over of 12.6 million tonnes.

In their recently released grain plans CN Rail says it will move 24 million to 26 million tonnes and CP will haul 25 million. Combined, that’s 49 million to 51 million tonnes — similar to last crop year.

The railways say they will each deliver 5,500 cars a week to western grain shippers in the fall, spring and summer and 4,000 each during the winter.

That’s a weekly total of 11,000 cars in the non-winter months and 8,000 in winter — the same as last crop year and far short of the 18,750 cars a week Canada’s grain export terminals can handle, Sobkowich said.

Unrealistic

The railways respond that the grain companies aren’t acknowledging the reality of the situation.

“That’s not a realistic number… ” David Przednowek, CN Rail’s director of grain marketing said in an interview Aug. 24. “It’s one thing to build nameplate capacity and then make an assumption that capacity can run 100 per cent efficient seven days a week, 24 hours a day over the course of the year, and that there will actually be market demand for the utilization of that capacity.

“What CN has provided (is what it) can realistically handle on a sustained basis both outside of winter and during winter.”

Many things can disrupt grain trains, including bad weather, derailments and landslides, Przednowek said. But things can also disrupt grain moving into and out of country and terminal elevators too, he said.

“Everybody needs to acknowledge that there are realities and limitations in the supply chain,” Przednowek said.

CN’s grain plan refers to some of them, including vessels arriving late to load grain and rain delaying ship loading. But Sobkowich counters those points in an analysis of CN’s plan.

“In the past three years the stock levels at port terminals have only exceeded 80 per cent of the working capacity once (81 per cent),” he wrote. “There have been very, very few situations at port of inhibited rail car unloading due to lack of terminal space since 2014 resulting in minimal delays. However, the opposite occurs regularly — late rail car arrivals delay vessels.

“It’s like saying there are lots of people who want to go between Winnipeg and Toronto and the railways say part of the problem is you don’t have big enough airports. It’s not that. We need more flights.”

The WGEA has long argued grain shippers are captive to the railways, therefore the railways don’t need to invest in extra capacity to meet grain shippers’ full season demand, knowing they will eventually move grain later.

“We need the rail freight market to behave as though it were a competitive market,” Sobkowich said.

Some argue if the railways were free they could earn as much as the market would bear from hauling grain, higher freight rates would ration the demand for rail service and provide the capital to expand rail capacity.

“If we were in a competitive marketplace for sure let the competitors charge what they will for the service,” Sobkowich said. “If they’re charging too much then they won’t get the business, but it doesn’t work like that because we’re not a competitive marketplace.”

Grain companies and farmers hope the Transportation Modernization Act, which became law earlier this year will help in that regard, but the industry doubts it will be a panacea.

Railway executives have often said you don’t build a church just to accommodate the extra faithful on Easter Sunday. And likewise, it’s uneconomic to build rail capacity to move most of the crop in half a year.

“I understand why somebody would want to push the envelope of the supply chain and do more with the type of grain handling and trading margins that are available in the fall and winter and early spring in relation to what might be available in the market later in the spring and summer and early fall,” said Przednowek. “There are limitations.”

One is ensuring other traffic, including products that move year round, also need to get to market, he added.

Uncertain

If 18,750 cars a week isn’t the right number, what is?

“I don’t know,” Przednowek said. “It’s not 19,000.”

The railways want to maximize assets to maximize revenues, Sobkowich said. But so do grain companies, by moving as much grain as terminals can handle when margins are the highest, he added.

Sobkowich also questions why the railways have committed to delivering the same number of cars as last crop year, despite millions of dollars of investments in new cars, locomotives and employees.

CN’s weekly car plan is based just on its own car fleet, Przednowek said. There will be perhaps an additional 500 to 600 ‘private cars’ coming from grain shippers. While private cars are part of CN’s fleet, private car suppliers get access to the same number of cars they provide, adding to total capacity.

Western Canada used to produce around 50 million tonnes of crops annually, now it’s closer to 70 million — a 40 per cent increase.

“CN’s fall rail program hasn’t remained static either,” Przednowek said. “If you look over the same period of time from 2005 to last year the size of CN’s fall rail program has gone up by 40 per cent as well. The notion that the size of the crop moving on CN… has just remained static… and all the grain needs to be pushed into the spring and summer and fall is false.”

In addition to adding capacity, CN has created new car allocation programs, including car auctions and private cars, giving shippers more flexibility and assurance of supply, Przednowek said.

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In a letter to the Commons transport committee, Garneau said, “I look forward to presenting this legislation, which will support a more transparent, balanced, safe, and efficient freight rail system, for the benefit of all users.” The bill will “advance a long-term agenda for a more transparent, balanced, and efficient rail system that reliably moves our goods to global markets.”

The bill will reflect discussions with shippers and carriers and recommendations in a report released by the committee last year, he said.

• Read more: Federal rail bill to overhaul revenue cap, expand interswitching

“We all agree on the importance of an effective and efficient rail transportation system for the health of our economy, including the grain sector,” Garneau wrote.

Parliament is on recess until May 1. Garneau will have to act quickly after that to get the bill through the Commons and the Senate before the summer recess in mid-June.

Among the issues to be covered in the bill will be:

• The future of the 160-kilometre extended interswitching limit in the Prairie provinces;
• The requirement under the Canada Transportation Act to move minimum volumes of grain;
• Clarification of adequate and suitable service;
• Financial penalties in the context of service level agreements;
• The future of the maximum revenue entitlement;
• Shippers’ recourse to dispute resolution processes; and
• Access to market data.

“In addition, the legislative package will propose other complementary measures for strengthening the freight rail policy framework,” Garneau said.

The committee proposed 17 recommendations for the bill, which is needed to preserve the minimum volume requirement for the start of the 2017-18 crop year next August. The thrust of the report was to establish a power balance between the railways and shippers.

In the letter, Garneau said, “Canada has a world-class freight rail system, which directly supports our economic growth and trade agenda. Freight railways are critical links in many supply chains, including in the grain sector. Grain farmers and shippers depend on the freight rail system to get crops to market, allowing them to compete globally. The continued accessibility and efficiency of the freight rail system is therefore essential for the long-term strength and sustainability of Canada’s grain-handling and transportation system.”

The committee proposed an expanded role for the Canadian Transportation Agency in monitoring the performance of the railways. That included giving it the power “to issue temporary orders to respond to system-wide service issues.” The government should also ensure the full potential of producer cars can be achieved.

In his report on the state of Canadian transportation, former cabinet minister David Emerson called for an Integrated Data Platform and Multimodal Data Dashboard to facilitate transport collection and processing. Consideration should be given to housing this new entity with the Canadian Transportation Agency, he said.

In the budget, the government said it would create the Canadian Centre for Transportation Data (CCTD), with $50 million in funding over 11 years. Peter Frayne, a spokesman for Statistics Canada, said the CCTD would be a partnership between his department and Transport. It would not be set up as an independent body like the Grain Monitoring Program run by Quorum Corp.

“The proposed CCTD would be a partnership of Transport Canada, Statistics Canada and other parties to serve as an authoritative source of data and information on the transportation system in general,” Frayne said.

Transport and StatsCan “will work together with other stakeholders in the transportation sector to establish a comprehensive, authoritative source of multimodal transportation data and performance measures,” he said. “Other participants would include other levels of government, other federal government departments, industry, educational institutions and others with expertise or data to share in the area of transportation.”

The goal would be to provide “high-quality, timely and accessible data and analysis to support innovations that will move goods more efficiently across supply and distribution chains, getting them from the manufacturer and into the hands of consumers more quickly, affordably and sustainably,” he said. It would have an open data portal. “As is the case today, data would not be released publicly if it is protected under statute.”

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“To ensure success during this crop year, the broader supply chain must work together to collectively harness our energy so that the entire Canadian economy can reap the maximum benefit,” said CP CEO Hunter Harrison. “We have been preparing for this crop year for months and we are ready.

“The grain supply chain in Canada, like most efficient supply chains, works best when demand is well distributed throughout the year. The rail supply chain has returned to normal since the extraordinary crop and winter of 2013-14 and CP has continued to move record amounts of grain. This means there is now excess capacity in the supply chain, including thousands of rail cars in storage ready to move the latest crop.”

Meanwhile CN says it’s “fully prepared to move the coming Western Canada grain harvest safely and efficiently over the crop year. CN has the motive power, freight cars and people to do the job.

“At the same time, the entire Canadian grain supply chain, from Prairie elevators to terminals at West Coast ports, will need to work collaboratively and at full capacity throughout 2016-17 to move the crop,” CN spokesman Mark Hallman adds. “CN will be operating 24 hours a day, seven days a week to do its part.

“CN’s operating plan is designed to enhance rail network capacity and to provide efficient hopper car cycle times between origin and destination. With the assets, team and solid operating plan in place, CN is ready to move its share of the coming crop to market.”

Meanwhile Wade Sobkowich, Western Grain Elevator Association executive director, says overall grain shippers are entering this crop year with an optimistic outlook.

“Many conditions are different than those which existed in 2013, such as less demand for shipping in other sectors and an early acknowledgment of the large crop size,” Sobkowich said.

Back in June, the WGEA sent a letter to the railways and the federal government noting that the Prairies were heading toward a harvest between 63 million and 74 million tonnes with more than additional eight million tonnes carry-over.

“We felt it important to provide both railways with as much advance notice of these projections as possible, so you may ensure enough capacity is available to meet shipper demand for the upcoming crop year,” Sobkowich said.

While the comments from CP and CN are encouraging, disconnects remain between the grain companies and the railways. Sobkowich points out while the railways call for 24-7 operation of grain terminals, that “will do nothing more than result in more sitting around and waiting for cars to arrive, and impose an unnecessary cost burden to the entire industry.” The important element is speedy unloading of rail cars once they are delivered.

“Grain facilities do not sit idle unless it is because they do not have rail cars,” he says. “When rail cars are presented at port terminal facilities, with appropriate notice and with a regular and consistent cadence, they are unloaded by terminal operators in a timely way.”

The grain companies communicate their delivery requirements “to both railways on a regular and frequent basis, so the railways have a good understanding of grain shippers’ collective demand on a week-to-week basis.” The companies need to know “in advance the capacity it will be offering in the various weeks, in each of the corridors.”

Grain companies face penalties from the railways if they fail to load and unload rail cars in a timely way, or if they do not use rail cars provided to the elevator, he said.

“This places accountability on grain shippers to perform.”

Currently, the railways are not held financially accountable if they don’t meet their delivery commitments, he added.

Harrison urged the grain companies to make more use of Thunder Bay to relieve the pressure on the Port of Metro Vancouver.

Sobkowich says grain companies make sales in a way that returns as much value for grains, oilseeds and pulse crops as possible and pointed out the delivery route should be a decision made by the shipper, who is the customer of the railways.

“That is not for the railways to dictate, that is for us to decide,” Sobkowich said.

Thus far, federal cabinet ministers say they are monitoring the situation but for now are leaving it to the railways and grain companies to deal with any issues.

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The report “Pathways: Connecting Canada’s Transportation System to the World” is the result of an accelerated review of the federal legislation. The scheduled review was pushed ahead by a year in the wake of the grain transportation crisis of 2013-14.

So a lot of people in the grains industry were pinning high hopes that the review panel would recommend changes designed to ensure the railways do their part to get the right grains to the right port at the right time.

It’s important to note that the panel was assigned to look at the entire transportation system. Not surprisingly, the panel found that generally speaking, the transportation network is not in good enough shape to keep Canada competitive into the future.

“Our global infrastructure and related rankings have been declining and Canada continues to compare less favourably to other developed nations on a number of measures — a disturbing trend for a small, open economy in which prosperity depends on success in global trade,” the report says.

It goes further to suggest that when it comes to infrastructure investments, government priorities have been — we’re paraphrasing here — politically expedient and short sighted.

When it gets to the grains section, the conclusions are hardly surprising.

Murad Al-Katib, the grain sector lead adviser to the Canadian Transportation Act review secretariat, strongly hinted at various meetings last year that the review panel would find removing the Maximum Revenue Entitlement (also known as the “revenue cap”) conducive to increased investment in improved service. He stated that shippers care more about service than cost — as if the two were linked.

The federally appointed Grains Logistics Working Group found otherwise; evidence shows commodities not covered by the MRE do not receive better service or lower freight costs.

Nevertheless, the CTA review report recommends getting rid of the MRE over the next seven years because “an unfettered commercial framework provides greater assurance that supply chain partners who handle and transport grain will invest in innovative supply chain solutions to move grain efficiently in years to come.”

It also concludes that the MRE stifles innovation and found “no compelling evidence” to suggest grain shippers should merit special protection over other shippers.

It is here that the panel misses the point of the MRE, which is not to protect grain shippers, so much as grain farmers from gouging. Grain producers pay the full cost of shipping their grain, but they are not the ones negotiating the freight. As such, they are captive in a way that coal shippers are not.

As well, coal is coal, whereas grain consists of a multitude of commodities of varying qualities that must be picked up at numerous locations and delivered on a time-sensitive basis to the ships waiting at port. Poor railway service can mean demurrage charges, lost sales and reduced competitiveness.

The panel refers to, but does not cite, studies that it says “support the notion that Maximum Revenue Entitlement has had adverse effects on the efficient operation of the grain-handling and transportation system.”

Further, that regulation keeps rates higher than necessary by stifling technological and service innovations.

The report does cite a letter dated April 10, 2015 from CN CEO Claude Mongeau that states, “the regulatory framework for Western Canada grain is ill suited to promote sound railway investment through adequate pricing mechanism.”

We’re left wondering if CN also provided those aforementioned “studies.”

Mongeau’s conclusions are contrary to the findings of the Grain Logistics Working Group, which found no evidence to show that the MRE hurts the railways’ ability to invest and innovate. The MRE does not cap how much grain the railways can move, nor does it cap how much they earn. It merely caps the average rate they can charge per tonne, adjusted for railway inflation and the distance travelled. The more grain the railways move, the more they can earn.

That research found that railway profitability was actually higher under the MRE than if there was true competition in rail freight. It also found that while the MRE has little impact on service, the lack of competition does.

It remains to be seen what the Trudeau government will do with a report commissioned by its Harper predecessor. But from this desk, it appears that the CTA review panel has bought into the myth of deregulation as the go-to solution.

Deregulation must go hand in hand with competition. It is no longer a question of whether to implement open running rights, but how.

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