national farmers union

SASKATOON, Sask.-National Farmers Union President Cory Ollikka summed up his organization's response to the Kroeger Stakeholders' Report and letter of recommendations stating, "A combination of the very best options from the stakeholder process might have penciled out but Kroeger chose a package that is an outright attack on farmers' income. It will be very expensive as was Kroeger's last foray into transportation policy - the change to the statutory Crow Rate." Ollikka says any Ottawa legislative round should reject Kroeger's recommendations. "In the middle of the deepening farm crisis, a legislative package that costs farmers more money, reflects hostility to their interests, has no consensus, and just falls in with the railways cannot go ahead. The Government of Canada would have to be crazy," stated Ollikka.

NFU Transportation Committee member Wendy Manson says the option Kroeger supported for a revenue cap is the wrong one. A revenue cap needs to assure that farmers receive a fair share of productivity gains. "The CTA work showed clearly that when the railways were given the chance to 'voluntarily share', they chose to be quite stingy," stated Manson. Kroeger has supported voluntary sharing in his letter.

Kroeger does not mention the need to limit the railway's prices for various services to the actual cost difference in the provision of those services. "Railways could price branchline service out of our reach through their rates for single and multiple cars. They could charge more for canola because the rules let them, not because it costs more to ship," commented Manson. Given the tone of the rest of his recommendations, it is likely railways will not be subjected to such limitations.

NFU Transportation Committee Chair, Terry Boehm, says Kroeger's choice to force the staged move to tenders means that "....if in the first year of implementation there are problems, the next year there will be twice as many problems and no way to stop them." Boehm also says the option Kroeger rejected regarding the CWB in transportation would allow the CWB the necessary guarantee to railway capacity and is the only one that allowed the CWB to retain grain to the "in-store" position, giving farmers the blending premium rather than foregoing it to the grain companies.

Boehm says there is a close link between issues such as revenue caps, competition, and branchline retention. "Unless we are absolutely certain that there is going to be effective railway competition - and that means full and effective open access - then there is no reason to move to a revenue cap. Rate caps provide much greater protection to farmers," he stated. If the Government of Canada simply goes to extended interswitching, a possibility under the Kroeger recommendation, "competition" certainly lost the round.

Ollikka says he hopes the Kroeger recommendations will simply disappear as a bigger set of political issues confront the government in Ottawa if any legislative round begins. He says the NFU is ready to make the case for farmers benefitting from transportation reform, not paying for it. "We don't intend to support transportation reform which transfers power and profits from farmers to railways. Our position is that reform must result in a benefit to farmers," concluded Ollikka.

For More Information:

• Cory Ollikka, NFU President: (306) 652-9465
  
• Terry Boehm, NFU Transportation Committee Chair: (306) 255-2880 or 257-3689
  
• Jim Robbins, NFU Transportation Committee: (306) 493-2569
  
• Wendy Manson, NFU Transportation Committee: (306) 243-4811
  
• Darrin Qualman, Executive Secretary: (306) 652-9465

During 1998, Willard Estey prepared his report on grain handling and transportation. He released it on December 21, 1998. That report recommended a move to a commercial, contractual system. Farmers and farm groups were almost universally critical of Estey's major recommendations which would diminish the power of the CWB, increase freight rates, end farmer participation in the transportation system, and result in the federal government selling its hopper car fleet to the railways and not to farmers.

On May 12, 1999, Federal Minister of Transportation David Collenette appointed Arthur Kroeger to facilitate talks aimed at reaching a consensus on implementing Estey's recommendations. Talks began May 26 and ended September 9, 1999. Kroeger released his "Stakeholders' Report" and his letter of recommendations to Minister Collenette on October 5, 1999.

The Stakeholders' Report lays out options for altering the freight rate setting mechanism, the CWB's role, hopper car allocation and ownership, and possible railway competition. Because Kroeger failed to achieve consensus, the Stakeholders' Report contains two or more options related to each major issue. Kroeger's letter to the Minister contains his personal opinions on the issues.

The NFU and others expect that any future legislative initiative will include hearings.

Major issues

The major issues that Kroeger's report and letter address are:

• the shift from a rate cap to a revenue cap
• the introduction of competition into the Canadian railway industry; and
• an effective transportation role of the Canadian Wheat Board.

Revenue Cap

Currently, a rate cap governs grain freight rates. The Canadian Transportation Agency sets maximum rates and farmers pay equal rates for grain movements of equal distances. The rate cap is becoming less effective over time due to the 1995 removal of productivity gain sharing.

Willard Estey proposed that government replace the rate cap with a revenue cap where total railway revenue (rather than rates based on distance) would be capped.

In his "Stakeholders' Report", Kroeger lays out three options for a revenue cap. Each takes a different railway revenue level as its starting point. In his letter to Collenette, Kroeger recommends an amended version of option B-the "middle" option in terms of initial railway revenue levels.

1. Its initial revenue level is too high. While it would return $112 million per year to farmers, economists estimate that actual railway windfalls resulting from unshared productivity gains are double that amount. All the options in the Kroeger report give railways revenues far higher than they would earn in a truly competitive environment.
   
   
2. It does not include future productivity-gain sharing. Over time, transportation costs fall-railways lay off staff, eliminate cabooses, utilize more fuel-efficient locomotives, close branchlines, etc. Farmers must share in those gains. The lack of a productivity-gain sharing mechanism in the current legislation is costing farmers approximately $5,000 per year on an average sized farm. Referring to productivity gain sharing, Kroeger states that "competition rather than regulation should be relied on to affect rate reductions in the future." He then refrains from recommending effective measures to create competition (more on this below).
   
   
3. It does not limit rate differentials. A minimally-acceptable revenue cap must limit rate differentials between mainlines and branchlines, single and multi-car spots, high and low season, and between different commodities. Limiting rate differentials is essential to:
   • protect branchline shippers;
   • protect small carlot shippers, such as wooden elevators, on branchlines and mainlines;
   • protect farmers from price increases during the peak shipping season;
   • protect producers of high-value crops such as canola and flax from higher rates; and
   • ensure that producers alone benefit from price increases without sharing them with railways.
   
   
   Rate differentials must reflect the actual cost savings or cost increases involved in providing the service. Farm groups at the Kroeger talks supported a legislated 3% limitation on the branchline/mainline differential in addition to those limits.

Legislation must state the principle above. Disputes would be settled through Final Offer Arbitration but the legislation needs to exist as the ruler.

Revenue cap versus rate cap

Kroeger's recommendations for a revenue cap are flawed. In addition, there is every reason to question whether a move from a rate cap to a revenue cap is wise or necessary. Rate caps provide equity and predictability to farmers and can be an effective tool in helping protect branchlines.

A revenue cap is an inferior option for farmers and should be considered only as a measure to facilitate railway competition. Unless the government introduces legislation which will quickly lead to effective railway competition-that means full and effective open access-then there is no reason to move to a revenue cap.

Given that Kroeger does not recommend concrete measures to create competition, there is no reason to move to a revenue cap at this time. The government should retain the current rate cap, initiate an immediate railway costing review, and ensure that farmers receive their fair share of system productivity gains.

Competition/open access

The key premise of the Estey report is that competition will be the safeguard that protects farmers as they lose other regulatory and system safeguards. To Estey, "open access" in the Canadian rail industry, is essential to create a competitive grain transportation system.

Bowing to railway pressure, Kroeger refrains from recommending concrete measures to foster competition. Instead, he recommends "expert assessment': a study of various methods of creating competition including open access, but also much less effective measures such as extended interswitching. Kroeger's frequent reference to "competition between CN and CP" (and not other carriers) indicate open access is not an outcome he thinks is essential.

It is telling that Kroeger recommends pushing ahead with a reduced role for the CWB, the replacement of the rate cap with a revenue cap, and a reduced producer role in car allocation-all measures roundly criticized by farmers. At the same time, he demures from recommending open access-a measure opposed by the railways.

Further, given the pivotal nature of competition to the Estey package, Kroeger's failure to make strong recommendations regarding competition renders Kroeger's package incomplete, inconsistent, and logically flawed. For many farmers, the only thing worse than the Estey package would be the Estey package without effective railway competition. With the release of the Kroeger Report, that seems to be the direction that the government is heading.

If the government proceeds with full and effective open access, the NFU agrees that a revenue cap system with adequate productivity sharing mechanisms and sufficient limits on differentials should be tried. In the interim, or if new policies fail to create effective competition, a rate cap, with full costing reviews and productivity-gains sharing, should be the norm. It is illogical to proceed with other changes proposed by Estey and Kroeger until a clear and effective plan to implement open access is well under way.

Kroeger's Stakeholders' Report presents two models for an altered CWB transportation role. The 1st model includes the following desirable elements:

• the CWB has access to system capacity through direct access to car supply;
• the CWB can place orders to specific geographic areas to meet sales or farmer contract commitments;
• the CWB and farmers retain blending premiums by taking possession of grain in-store;
• the 1st model fosters terminal competition through CWB/Terminal agreements ensuring the non-competitive aspects of the present car unloading arrangement are eliminated; and
• it creates commercial mechanisms and defined accountability.

Kroeger's choice of the 2nd model and his recommendation that it be mandatory locks in tenders even if they don't work, doubling them in the second year. The CWB and many farm groups oppose this model because it does not meet the CWB's need to directly access capacity and it could not be shown to benefit farmers.

Conclusion

Since 1984, freight rates have risen 700%. The number of elevators has fallen by 2/3 yet handling charges have doubled. Farmers have not enjoyed the benefits of deregulation. To the contrary, deregulation has caused sharp increases in costs, decreases in service, and have contributed to the current net farm income crisis. Kroeger's report attempts to move the system further in a direction that has proved disastrous for farmers.