in union is strength

Index:

• Introduction
• The CWB is an extension of farmers' power
• Farmers' current support for the Board
• The reasons farmers support the Board
• The CWB as farmers' advocate within the transportation system
• The CWB as transportation facilitator
• The CWB's superior performance within the current system
• The future role of the CWB in transportation: port buyer
• The effects of deregulation
• Conclusion

In our Phase One submission, the NFU pointed out that "farmers, on the one hand, and railways and grain companies, on the other, have different and competing interests." As an example of these differing interests, the NFU Phase One submission stated:

Farmers want to minimize railway freight rates and elevator tariffs in order to maximize their profits. Railways and grain companies, on the other hand, want to maximize these rates and tariffs in order to maximize their profits-accountability to their shareholders demands no less.

This brief will demonstrate that not only does the Canadian Wheat Board, in its role as transportation coordinator, help farmers protect and assert their interests, but that, in so doing, it contributes significantly to overall system efficiency and cost reduction.

As the NFU pointed out in the Phase One brief, and as others have echoed, the western Canadian grain transportation system is a co-operative effort. Each participant must coordinate and co-operate with every other in order to ensure the smooth functioning of the system. Each must temper or compromise its particular interests to maximize the efficiency of the system as a whole. In its transportation coordination role, the CWB facilitates co-operation, efficiency, and the smooth operation of the system. In its farmer-advocate role, the CWB helps farmers assert their interests in the ongoing process of system reorganization and, thus, makes meaningful compromise possible between relatively powerless individual farmers and powerful grain and rail companies.

This brief will outline the dual roles of the CWB: as farmers' advocate and transportation coordinator.

The CWB is an extension of farmers' power

The creation of the CWB

The Canadian Wheat Board was created as a result of overwhelming pressure from farmers. In a recent paper, Dr. John Thompson, Director of Canadian Studies, Duke University, Durham, North Carolina, details farmers' support for the creation and maintenance of the CWB and the federal government's desire to do away with it.

The King Liberal government in fact decided to do away with the Wheat Board, even as a voluntary marketing institution. Between 1936 and '39, they did all that they could to get rid of it. Cabinet set the CWB price about ten cents below the market price to ensure that no farmers would deliver any grain to the Board.....

[I]n 1939 the King government drew up legislation to abolish the Wheat Board. Protests poured in from farm organizations, from prairie provincial governments, and from the Western MPs in the Liberal caucus. Liberal agriculture minister J. G. Gardiner "regretfully reported" to prime minister King that "most farm leaders would welcome a permanent government monopoly for the marketing of Canadian wheat." Abolishing the Wheat Board, King wrote in his diary, "will cost us many seats in Western Canada....."

Farmer support continued unabated after World War Two and resulted in the government once more backing away from plans to scrap the Board.

[T]he federal government continued the Wheat Board monopoly reluctantly after 1945, and the government did so in large part because prairie grain producers demanded it because they found a monopoly CWB the best solution to marketing grain..... Political scientist David Smith writes that the Board "became a steward of producers' interests and the fervour with which the vast majority of farmers defended it revealed how great was the need it satisfied."

Farmers' current support for the Board

Farmers' strong demonstrations of support for the CWB are not confined to the past. In March of 1997, farmers voted 63%-almost 2-to-1-to retain barley marketing under CWB jurisdiction. They soundly rejected the alternative which was to place barley on the open market. In a Canadian referendum, 50.6% is a win, 63% is a landslide. Had the vote been held on wheat, there is no question that the winning margin would have been even higher.

In the summer of 1996, pro-CWB rallies were held in dozens of towns. These rallies culminated on August 14, 1996 when almost 3000 pro-CWB farmers rallied in three communities-Rosetown, Sask.; Oak Bluff, Man.; and Edmonton, Alta. While there have been anti-CWB rallies, none have brought out one-tenth this number of demonstrators.

In the most recent CWB Advisory Committee elections (November 1994), pro-CWB candidates won 10 of 11 positions. Each of the 11 positions was contested by a candidate who supported orderly marketing and a strong CWB, and one who favored the dual market. Farmers rejected the latter.

In July and August of 1996, when Minister Goodale asked farmers to write to him to express their opinions regarding the CWB, by the Minister's own admission, the response was overwhelming and the overwhelming majority of those letters supported a strong and effective CWB.

In preparation for its report, the Western Grain Marketing Panel (WGMP) held Town Hall meetings in communities across western Canada in January of 1996. At almost every meeting, a vote of farmers attending or a poll of the round-table discussion groups was taken. In virtually every case, these indicated that farmers overwhelmingly supported the CWB.

Whenever and wherever farmer support for the CWB is tested, the result is the same: while CWB-opponents may be vocal, CWB-proponents are several times more numerous.

The reasons farmers support the Board

Farmers in the 1930s and '40s reasoned that they could reap higher prices, lower costs, and more power in the marketplace marketing collectively through a single, farmer-centered agency rather than selling their wheat individually to private grain companies. The CWB, as it was envisioned then and as it continues to operate today, differs fundamentally from private grain companies. Private companies seek to maximize their profits by buying grain from farmers at the lowest possible price and then selling it at the highest possible price. The Canadian Wheat Board also sells grain at the highest possible price, but then returns all profits less expenses (a modest 4.7 cents per bushel) back to farmers. While private grain companies must make profits at the expense of farmers, the CWB makes profits for farmers.

The Western Grain Marketing Panel asked representatives of grain-importing countries to rank major exporters. Canada ranked number one in customer service, dependability of supply, technical support, cleanliness of commodity, intrinsic quality of commodity, and consistency of quality. Canada scored last in the category of price. The message from our customers is clear: the CWB and Canadian farmers consistently deliver the highest quality wheat and barley in the world but we charge too much. For farmers, this is an ideal situation.

In addition to capturing premium prices and returning all profits to farmers, the CWB provides other benefits to farmers:

• Price pooling allows farmers to deliver some grain at harvest and still receive the higher prices that come later in the August-July crop year. It protects farmers from the risk of sudden price declines during the year. It saves them the high costs associated with commodity-market hedging. And it facilitates orderly and predictable deliveries into elevators and to port because farmers need not rush to deliver all of their grain at a peak price. Price pooling saves farmers time and money, provides peace of mind, and contributes to the ability of Canada's on strained delivery system to handle the western Canadian crop.

• Federal government guarantees of CWB prices, borrowings, operations, and credit sales allow the CWB to borrow at lower interest and, thus, save farmers over $60 million annually. This saving more than covers the total cost of operating the CWB: approximately $45 million annually.

• The CWB's single-desk selling authority gives it power in the world marketplace: power that translates into higher prices to Canadian farmers. Because of Canada's climate, the skill and commitment of its farmers, the diligence of the Canadian Grain Commission in grading and inspection, and the CWB's uncompromising commitment to quality, Canada has the undisputed reputation as the supplier of the highest quality milling wheat and malting barley in the world. If foreign buyers want high-quality, consistent wheat and barley-and most do-they must buy from Canada and from the single seller of Canadian export wheat and barley: the CWB. This monopoly allows the CWB to extract the maximum possible price in each market.

• Market development is extremely important in today's competitive grain markets. Because the CWB is the single-seller for Canadian export wheat and barley, it can invest time and money in market development secure in the knowledge that competing exporters will not steal the fruits of that labour. In the U.S.-where there are multiple sellers of largely undifferentiated wheat and barley-the government has had to rely on expensive and market-depressing export subsidies as a tool for creating markets for U.S. exports. As a measure of the CWB's success, it has been able to expand world markets for Canadian wheat and barley over the last decade-a time of heavily subsidized U.S. and European Union exports.

• In addition to these financial benefits, the CWB provides farmers with an additional and extremely important benefit: social and political power through collective action.

The CWB as farmers' advocate within the transportation system

In terms of farmers' participation in the design and operation of the grain handling and transportation system, the last benefit listed above-power for farmers-is very important. In the winter of 1996-97, when delayed grain shipments cost farmers over $65 million in lost sales and demurrage, it was the CWB, on behalf of farmers, that launched a "level of service" complaint before the Canadian Transportation Agency (CTA). That complaint is a necessary first step in recovering some portion of the money farmers lost. No grain company was willing to take similar action on farmers' behalf or even participate in the CWB's action. And to those who attended the hearings and saw the mountains of documents, rows of lawyers, and the parade of expert witness, it is clear that no individual farmer or farm group could have mounted such a challenge. The CWB acted to protect farmers' interests in the transportation system. The out-of-court settlement by CN indicates that the CWB's case has substance. Note, however, that the CWB was able to act on behalf of farmers because it had an integral role in the grain transportation system. Had the CWB been a "port-buyer"-a proposal which we will examine below-the CWB would probably not have had standing to pursue its case on behalf of farmers.

In December 1997, when farmers in the west-central district of Saskatchewan wanted to load an 83-car producer train in an attempt to save their branchline, CN railway would not agree to spot the necessary cars. The farmers took the case to the CTA. The CWB also assisted those farmers: it put orders in place to facilitate the movement of grain from that area and smoothed out administration and grading obstacles.

In February, 1995, the federal government announced its intention to sell its 13,000 grain hopper cars. The Senior Executive Officers group (SEO)-consisting of representatives from the railways, grain companies, the Canadian Wheat Board, and the Canadian Grain Commission-proposed that the government hopper cars be sold to the railways and that the freight rates paid by producers be increased to finance the purchase. Farmers responded that if they were to pay for the cars, they should own them. Thus was created the Farmer Railcar Coalition (FRC). After the creation of the FRC, the CWB withdrew its support for the proposed sale of the hopper cars to the railways and has since remained a staunch supporter of producers' efforts to buy the cars. The CWB remains the only "industry" ally farmers have in their attempts to secure the government hopper cars. The CWB remains the sole entity which seeks to promote farmers' interests in this matter.

Note the measured and prudent actions of the CWB in defending producers interests in the cases listed above. The CWB did not charge ahead and confront other system participants in a combative way. The CWB took little action at all until farmers had organized and demonstrated their clear intent. The CWB allowed farmers to take the lead and then firmly supported them. Even in the CTA case, the CWB was reluctant to move and waited until it was clear that no other avenues existed. The CWB waited until farmers' groups had organized and formed the Farmer Railcar Coalition before it withdrew its support for the SEO proposal and sided firmly with farmers. It waited until farmers in west-central Saskatchewan took the initiative to load a producer car train before it stepped in with measured and appropriate assistance. The CWB is not pushy or disruptive when dealing with other system participants. Its defense of farmers interests is low-key but firm. The CWB does not stand up for farmers: it stands with us.

The CWB does not just intervene in the isolated and dramatic instances listed above, it works day after day, year in and year out to help ensure that the western Canadian grain transportation and handling system works in farmers' interests. As an example, the CWB ensures that the transportation and handling system moves the majority of the wheat and barley crop when the prices are highest. While maximum Canadian prices often occur in the May-July period-just before the North American crop is harvested and when supplies are lowest-it is impossible to market more than a small portion of the Canadian crop at this time (buyers purchase only for immediate needs and are justifiably reluctant to commit to large purchases with the harvest, and lower prices, just around the corner). The period where the highest prices combine with the highest potential sales volumes is the October-March period when buyers around the world are making their major purchases.

In order to take advantage of the sales opportunities available in the October-March period, the CWB must ship a disproportionate share of the Canadian wheat and barley crop during that period. This necessity conflicts with the objectives of grain and rail companies which prefer to fully utilize their assets consistently throughout the year and, thus, would prefer an even flow of grain in each of the twelve months. Clearly farmers' and customers' interests, on the one hand, and those of grain and rail companies, on the other, are different. The CWB, through its participation in the grain handling and transportation system, ensures that the system meets the needs of farmers and their customers.

The CWB also brings a pro-farmer presence to the hopper car allocation process. The CWB was the only organization at the SEO table which advocated the inclusion of a farmer representative on the Car Allocation Policy Group (CAPG) Executive Committee. CAPG producer representative Jim Robbins said that: "Adrian Measner, CWB SEO representative, worked for the inclusion of producer representation in the Memorandum of Understanding which created CAPG. The Western Grain Elevators Association (WGEA) SEO members were very reluctant to offer farmer representatives anything more than observer status."

Robbins also stated that the CWB has been an ally at the CAPG Executive Committee. The CWB has helped Robbins raise and advance issues raised with him by farmers. "During the winter of 1997-98, when CN suspended winter service on several Saskatchewan branchline subdivisions, the CWB assisted in the organization of a producer-car train on one of those subdivisions," stated Robbins.

CWB involvement on behalf of farmers also ensures equity. The CWB draws equitably from all producers across the CWB area. This ensures that the system does not discriminate against producers along branchlines or in remote areas. If delivery coordination were left up to grain and rail companies, it is likely that this vital equity of access to Canada's constrained handling and transportation system would disappear.

The role of the CWB in protecting farmers' interests is key because farmers are captive shippers. That captive status often tempts railways to allocate their resources to move other commodities, knowing that the grain will still be there for them to move later. A May 28, 1998 Financial Post story details a CN's plan to de-prioritize grain shipments in the event of a possible strike. The article, which cites CN's own strike plan, begins:

Canadian National Railway Co. will strive to protect its potash, fertilizer, and automotive business while slashing grain shipments if hit by a strike by Canadian Auto Workers.

Grain gets the lowest priority, with CN saying it would cut "grain train operations by 30% immediately upon announcement of a strike. "The reduction, affecting both main and feeder lines, would rise to 50% if the strike persisted.

Many farmers believe that both railways similarly de-prioritized grain during the winter of 1996-97, causing massive backlogs, high demurrage, lost sales, and damage to Canada's reputation as a reliable supplier. Without the CWB active in the transportation system, and without effective legislative controls, railway companies would be free to de-prioritize grain and move other commodities.

Farmers want fair treatment. Due to the relative size and power differences between the railways and individual farmers, fair treatment is unlikely unless farmers have a powerful advocate such as the CWB within the system.

Farmers created the CWB to give them collective power in an international grain market dominated by huge multinational traders. Farmers knew that without collective power and a strong voice, their interests would be ignored and they would by financially poorer as a result. Much the same is true in our current transportation system.

Handling, elevation, and freight costs take almost half the value of some crops. This high proportion means that farmers have just as much of an interest in the system that collects and moves their grain as the one that markets it. The CWB represents farmers' interests within both systems.

The CWB as transportation facilitator

How CWB involvement increases overall system performance

The CWB helps protect and advance farmers' interests. In so doing, however, it also helps the system attain maximum efficiency and lowest cost-for these things are clearly in farmers' interests. As the farmers' marketer to international buyers, the CWB has an extremely strong interest in fast, efficient, consistent, and predictable grain movement. Repeat sales depend on consistently fulfilling delivery commitments. Without the ability to dependably deliver western Canadian wheat and barley, the CWB's market-development work would be in vain. The CWB's success in expanding its markets-even as the U.S. and European Union countries engage in aggressive export-subsidy programs-proves the CWB's prowess in making sales, delivering grain, and satisfying customers.

The CWB is the only commercial entity within the system which has an interest in decreasing total system costs. Grain and railway companies each seek to maximize individual profits, often by externalization of costs onto other players, farmers, or society. Branchline abandonment is an example of this tendency to pursue profits by externalization of costs. The CWB-because it sees itself as an agent of the farmers who must pay all costs-works toward total system efficiency, often leading the rail and grain companies.

An example of the CWB's leadership role in improving system efficiency and performance is its work in restructuring the incentive system for rail car loading:

"...while [grain] company performance on car loadings is already good within the IRCAP [Industry Rail Car Allocation Policy agreement], the CWB strongly supports the implementation of mechanisms that further reward more accurate loading of rail cars at country locations. To address this issue, the CWB is working with the industry to address alternative ways of dealing with the loading of incorrect grades, out-of-turn shipments, and other car loading issues. The objective here is to build a financial basis upon which to reward performance and reflect costs directly back to the source."

"As the industry moves forward with zone [allocation], the CWB will be working on additional commercial means aimed at encouraging efficiencies and rewarding performance."

Examples such as this make it is clear that the CWB does not stand in the way of greater system efficiencies: it leads the way.

The CWB's superior performance within the current system

The CWB not only attempts to maximize total system efficiency; it succeeds. The average turnaround times (time from load to reload) for CWB grains are 17.9 days for Vancouver-bound cars and 18.4 days for those going to Thunder Bay. This is far better than non-Board grains such as canola and oats which have turnaround times of 20.7 days to Vancouver and 24.0 days to Thunder Bay.

CWB-administered commodities also make more efficient use of terminal facilities (this frees up scarce capacity and, thus, benefits producers of all grains and oilseeds). In 1995-96, CWB grains had a turnover ratio of 25.5 (the terminals were filled and emptied 25.5 times that year) while non-Board grains had a turnover ratio of just 21.7-18% less efficient. The ratios for the 1996-97 crop-year are similar.

West Coast ports operate at near capacity. Because CWB grains make up the majority of shipments through terminals, their efficient and timely throughput is essential. If CWB-administered grains fell to the turnover ratios of non-CWB grains, the capacity of Canadian terminals could be reduced by one-quarter to one-third. If car turnaround times for CWB grains were as low as those for non-CWB grains, system rail capacity would be reduced by a similar amount.

Not only do CWB-administered grains make better use of constrained hopper car and terminal facilities, the CWB is much more competent in forecasting its car requirements. Car allocation between CWB and non-Board grain relies heavily on estimated sales-to simplify, the higher your estimated sales, the more cars you will get. Thus, sales estimation is critical to the efficient allocation of hopper cars and the smooth functioning of the transportation system overall. Between August 1 and December 31, 1997 CWB actual sales through the west coast were at 95% of CWB sales estimates and east coast sales were 109% of estimates. In contrast, actual sales of non-Board grains were just 84% of estimates at the west coast and 57% at the east.

The preceding examples demonstrate that calls to remove the CWB from transportation are not based on poor CWB performance. To the contrary, the bulk of the evidence suggests that without the CWB, the system would perform much less efficiently. Handing power over CWB-grain transportation to the railways or grain companies would only increase their power within an already imbalanced system and it would give responsibility for the movement of these grains to companies that have demonstrated less, not more, competence than the CWB.

The future role of the CWB in transportation: port buyer

Despite the demonstrated competence of the CWB; the railways and grain companies are eager to squeeze the CWB out of its grain sourcing and transportation roles. These companies argue that they need to be free to "manage their assets." They argue that the CWB should buy grain at port and contract with grain and railway companies to source that grain in the country and deliver it to port.

Clearly, this drive to squeeze the CWB-and, hence, farmers-out of grain sourcing and transportation is merely an attempt by these companies to restructure the system to maximize their control and profits. Within such a system, farmers' interests would be ignored. Further, there is every reason to believe that even if there were savings from such a restructuring, the railways and grain companies would grab those savings for themselves rather than pass them back to farmers.

Transforming the CWB to a port-buyer would have several negative effects. Not only would it compromise the overall efficiency of the system and diminish farmers' representation, it would undermine the CWB's ability to function as a single-desk seller and to maximize returns to farmers.

The CWB's transportation role is essential to its marketing role. The CWB's mandate is to maximize returns to farmers for the sale of wheat and barley. Fulfilling that mandate requires that the CWB have an active role in originating and moving grain to export position. Like all marketers, the CWB requires control over sourcing and shipping its inventories. Few, if any, of the grain companies which are calling for the CWB's demotion to port-buyer status would, themselves, relinquish control over sourcing and shipping

Various proposals for a port-buying system have been put forward. But no matter how such a system might work, the following negative impacts on the CWB's marketing ability and on the operation of the handling and transportation system as a whole seem unavoidable:

• As a port buyer, the CWB would have to rely primarily on rigid supply contracts with grain companies. These contracts would significantly reduce the CWB's flexibility to change logistics plans in response to changing market conditions and, thus, make it difficult for the CWB to quickly and flexibly react to short-term sales opportunities. In addition, decreased logistics flexibility would make it difficult for the CWB to adjust rail arrivals if ships were delayed.

• Currently, the CWB knows and controls its sourcing and delivery costs. If it were a port-buyer it might face unreasonably high costs if grain companies use their market power to hold the CWB to "ransom." There is no evidence that sufficient competition exists between grain companies to ensure reasonable tenders for grain deliveries to ports. This would be especially true if stocks were tight at the end of the crop year or when supplies, due to weather events, were concentrated in areas served mainly by two or three companies. Further, it is likely that grain companies would learn to "temper" their competition over time.

• Without effective competition, tenders to move grain to port could include high margins for grain companies which would add to farmers' costs. Further, grain companies would include "risk premiums" in their tenders-percentage amounts to offset possible penalties for non-performance. At the very least, and even if there were sufficient competition, grain companies would build "reasonable profits" into their tenders. This would be an added cost that farmers do not currently face.
  

• Farmers' costs would almost certainly rise due to increased adverse freight. Adverse freight costs are incurred when total transportation miles within the system are not minimized. Currently, the CWB knows where grain stocks are, can control the call of those stocks from the country, and coordinate them with its sales. This allows the CWB to minimize total transportation distances. It calls wheat from Manitoba to Thunder Bay whenever possible, and wheat from Alberta to Vancouver. In a tender-based system, this overall coordination would not exist. Most grain companies have the bulk of their capacity clustered in certain provinces or regions. Thus, under a tender system, we may well see east-bound barley cars from Alberta passing west-bound barley cars from Manitoba. These adverse freight costs would be borne by farmers.
  

• Farmers' support of the CWB rests on their perception of equitable treatment. If the CWB was a port buyer, grain companies would, in effect, decide which farmers got to deliver and when. In addition, grain companies would use incentive prices to lure grain into elevators. Unequal delivery opportunities combined with unequal pricing would erode farmers' support for the CWB.

• Fluctuating prices needed to draw grain into elevators would mean that farmers would try to time deliveries to capture the highest prices. This presents the risk of farmers missing the peaks and selling at lower prices. This is exactly the risk that CWB price pooling currently eliminates. Price fluctuations needed to pull grain into elevators undermines or cancels the benefits of CWB price pooling as a simple, inexpensive risk-management tool for farmers.
  

• Depending how a "port buyer" system were structured, it is likely that there would be times that grain companies would simply be unable, through fluctuation price signals, to draw needed grain into the system.

• Port buying may result in the loss of the current efficiencies gained through car pooling. Car pooling is a system wherein cars originating from various companies' country elevators are sent to the first available terminal rather than waiting for a particular terminal to be free. Car pooling was implemented to take full advantage of the unload capacity of all terminals and to maximize railway capacity. Barley is pooled at Vancouver but not at Thunder Bay. The difference in cycle times is more than 9 days. At Vancouver, wheat, barley, and #1 canola are pooled. Their cycle times were 17.5, 21.5, and 20.6 days respectively. For comparison, non-pooled commodities such as oats, rye, and flax had cycle times of 29.4, 25.2, and 24.8 days respectively. If the CWB were relegated to port buying, the grain companies with which it contracted would be contractually liable to deliver specific grades of grain at specific times to specific terminals. Under this scenario, rail cars from each company may have to be unloaded separately to ensure that the contractual obligations were met. This would make car pooling difficult or impossible.

• Farmers currently have the option to deliver CWB grains to the elevator of their choice, space permitting. Thus, farmers often choose the closest elevator or the one where they have built a beneficial business relationship. Under a port-buying scenario, a farmer with a given grade and type of grain would have to deliver to an elevator of the company which had won the tender to supply that type and grade.

This could easily mean that farmers would have to deliver to a wide range of elevators, many distant. This may increase farmers' trucking costs and force farmers to deal with elevator agents they do not know. Farmers rely on the integrity of elevator agents on such matters as dockage determination. In addition, many farmers work with their local elevator agents to blend grains to the farmers' advantage. For example, during harvest, a farmer may need to deliver several hundred bushels of tough grain to the elevator. If the farmer has a good working relationship with the elevator agent, the agent will take the grain as dry and then blend it with dry grain. If grain company tendering forces farmers to deliver hither and yon, such business relationships would be undermined and farmers would suffer.

Port buying is unworkable; it undermines the other benefits that farmers receive from the CWB; it removes the CWB's farmer-advocate voice from the transportation system; it increases system costs to farmers; and it would probably decrease system efficiency and performance. The grain companies and railways which advocate demoting the CWB to port-buyer status seem to have little regard for these adverse effects. These companies are attempting to squeeze the CWB out of the transportation logistics system (and out of existence entirely, over time). This attempt can be seen as part of their larger drive to escape regulation in general.

So long as the CWB is "at the table" helping to restructure the grain logistics system in farmers' interests, the grain and rail companies are constrained in their abilities to "manage their assets" for maximum profit. To those companies, CWB "interference" is a form of regulation and an impediment to profits. To farmers, CWB participation is a valuable source of equity, efficiency, and cost savings

The effects of deregulation

When evaluating the grain and rail companies' drive toward deregulation, one must examine the results of deregulation so far. With the August 1, 1995 repeal of the Western Grain Transportation Act (WGTA) and its replacement on July 1, 1996 with the more permissive Canadian Transportation Act (CTA), Canadian railways were largely deregulated. As a result of the change from WGTA to the CTA

• Railways can abandon branchlines, subject only to a modest $10,000/mile penalty. In addition, railways can "de-market" branchlines-starve them for cars in order to "train" farmers to haul elsewhere. This practice often occurs with the co-operation of grain companies and has resulted in the loss of hundreds of perfectly functional elevators and thousands of miles of irreplaceable branchline track.

• Railways are no longer subject to quadrennial costing reviews. These reviews gave a consistent view of railway costs. There was a cost-review scheduled for 1996 but, as a result of the implementation of the CTA, it was not conducted.

• Railways are no longer compelled to share productivity gains with farmers. Under the WGTA, gains were shared equally between railways and farmers. Under the CTA, rates rise with inflation but are not adjusted downward to reflect productivity gains (increases in fuel economy, reductions in staff, and the use of new technology). This has resulted in a windfall for the railways which have pocketed all productivity gains accumulated since 1991. This has increased their margin above cost by approximately 12%. This 12% is in addition to the generous 20% margin above cost already built into the CTA.

• The change from WGTA to CTA deprived the government of its major regulatory "stick." Under the WGTA, the Grain Transportation Agency reviewed the railways' movement of grain quarterly and had the ability to establish "...grain transportation, shipping and handling performance objectives" and to fine the railways up to "10% of the volume-related variable costs of the railway company" by withholding Crow Benefit money (Section 21 of the WGTA). The CTA does not provide such mechanisms for accountability.

Further, although the termination of the WGTA and the Crow Benefit has reduced Canada's budget deficit, it has created a comparable infrastructure deficit. By spending less on rail transportation, the government has created a countervailing need to spend more on road maintenance.

Concurrent with this deregulation, farmers' freight costs increased dramatically. A Saskatoon-area farmer who paid $13 per tonne in freight in 1994-95 paid $33 in 1995-96. However, despite widespread deregulation and higher costs to farmers, system performance has not improved. To the contrary, the performance failure of 1996-97 occurred within a relatively deregulated regime where the railways had wide latitude to "manage their assets."

Canadian railways' performance has declined in other ways since the deregulation in the mid-1990s. Peak weekly west-coast unload targets have fallen steadily since the termination of the WGTA in 1995 as Figure 1, below, demonstrates.

Figure 1. Peak season weekly unload targets: west coast: 1994-95 to 1997-98

          Source: CWB

The railways' argument that deregulation increases performance is not borne out by the data above. Note that the railways' decrease in performance has occurred despite: branchline closures, more numerous "high-throughput" elevators, larger car spots, and increased flexibility in car allocation-all of which, the industry argues, facilitate higher performance.

In addition to evidence from Canada, the American system-almost totally unregulated-continues to fail farmers. Difficulties in the fall of 1997 which left farmers and industry organizations "increasingly frustrated with severe rail car congestion in the central United States" continue unsolved. The July 16 Globe and Mail featured the headline: "Burlington warns it can't ship all grain." The story stated that this latest announcement "suggests further problems and delays in the troubled U.S. railway system."

Please see pages 32-34 of the CWB's March 9, 1998 submission to this Grain Handling and Transportation Review for a litany of quotes from U.S. officials and associations pointing out the complete failure of the unregulated U.S. system to meet farmers' needs.

Note that the deregulated U.S. system failed despite its: significantly greater storage capacity-three times Canadian storage capacity: per bushel of production; terminal utilization at approximately 50% in many areas compared to near 100% utilization for Canadian west coast terminals-the port for 60% of Canadian wheat and 85% of Canadian barley exports; fewer grades and segregations; higher costs.

Grain and rail companies calling for deregulation attempt to compare the current Canadian system-with its flaws and weaknesses-to some deregulated, perfectly functioning, perfectly competitive, highly-efficient, and low-cost alternative. In such a comparison, the Canadian system does not fare well. However, when compared to real-world alternatives such as the deregulated U.S. system, the Canadian system compares favourably.

The railways have long promised better service if only the government would change the system. In the 1970s, the railways said that they would move grain if the government would upgrade branchlines. Canadian taxpayers spent $900 million on branchline rehabilitation over the decade from the late 1970s to the late 1980s. In the 1970s and 80s, the railways said that they would move grain if the government bought hopper cars. The government bought 13,000 hopper cars between 1972 and 1986 at a cost of $560 million. In the early 1980s, the railways said that grain would move quickly and efficiently on a largely double-tracked mainline system if the government would get rid of the Crow Rate. The government did so in 1983. In the 1990s the railways said that they would move grain if the government did away with the Crow Benefit and deregulated grain transportation. The replacement of the WGTA with the CTA in 1996 did largely this.

Despite fulfilling almost all of the railways' requests, western Canadian grain still does not move cheaply, efficiently, or reliably to port. Today, railway companies are promising increased performance if only the government will further deregulate grain transportation. Given their poor past performance, their more recent failure during the winter of 1996-97 to move grain within a largely deregulated system, and evidence from the U.S., there is little reason to believe the railways' promises. To the contrary, there is every reason to believe that an increasingly regulated system with centrally-enforced penalties to all participants may prove a superior alternative (we will examine such an alternative in our next brief).

Conclusion

The CWB plays two vital roles within the grain transportation system: farmers' advocate and transportation coordinator. Its success in executing these two roles has increased the efficiency of the grain transportation system as a whole and resulted in decreased costs for farmers.

Grain and railway companies are attempting to turn criticisms of the Canadian grain transportation system-and their role in it-into criticisms of the CWB. They have proposed that the CWB be made a port buyer, and that such a move would increase efficiency and lower costs. They provide little evidence to back up such a claim.

As a grain marketer, the CWB must have control over sourcing and shipping that grain. To farmers, there is little doubt that the current role of the CWB in transportation is essential to its marketing role. Further, the combined CWB marketing and transportation activities result in overall system efficiencies and numerous benefits to farmers. The CWB's transportation role compliments and strengthen its marketing role. Therefore, the CWB must retain or enlarge its transportation role.

The National Farmers Union recommends:

• the CWB should maintain its active role in transportation-system design, management, and administration;

• the CWB's role should be maintained at its current level or expanded; and

• the CWB should execute its transportation coordination duties within a system which is increasingly regulated in farmers' interests.