Ottawa, Ontario
March 9, 1998

Preface:

The National Farmers Union (NFU) welcomes this opportunity to present our views to Justice Estey and this Grain Transportation Review. The NFU is the only voluntary, direct-membership national farm organization in Canada. It is non-partisan and works on the development of economic and social policies that will maintain the family farm as the basic food-producing unit in Canada.

The majority of the NFU's thousands of members are grain producers. Because of this, the NFU has been active in grain transportation issues since its inception in 1969.

Ottawa, Ontario
March 9, 1998

Index:

• Introduction
• What farmers need
• What railway and grain companies need
• The needs of other groups
• How to reconcile competing needs
• Can the market provide a solution?
• The case for an increased government role in grain handling and transportation
• Necessary components of a government-regulated grain handling and transportation system
• Rail freight rate cap
• Productivity gain sharing
• Control over abandonment
• The preservation of rural grain elevators
• The CWB's role in grain transportation
• The ownership of government hopper cars
• CO₂ and other issues
• Conclusion
• Appendix A
• Footnotes

Introduction

Farmers, on the one hand, and railways and grain companies, on the other, have different and competing interests. As an example, 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 rates and tariffs in order to maximize their profits--accountability to their shareholders demands no less.

While these interests are different and competing, they need not lead to conflict. Grain transportation is not a "zero sum" game where one group must lose for the other to win. For the total western Canadian grain handling and transportation system to function smoothly, a compromise must be reached between all parties that recognizes their legitimate interests.

What farmers need

Farmers pay the total cost of Canada's grain handling and transportation system. That cost is approaching $2 billion annually. Despite paying the total costs, farmers are often excluded from participating in the design and operation of that system. The result, the needs of farmers are often ignored or overlooked.

Farmers need affordable grain transportation services and, thus, low railway freight rates. However, it is in farmers' interests, and the interests of the entire Canadian grains industry that not only are railway freight rates as low as possible, but that total--granary to ship--handling and transportation costs are minimized.

Total transportation costs must not only be as low as possible, they must also be equitable. Farmers along railway mainlines do not want slightly lower freight rates if it means that farmers in northern Saskatchewan or the Peace River region of B.C. will face unreasonably high ones. Freight rates should be based on distance and be based on the principle of equal cost for equal distance. It is almost certain, that in order to meet the objective of creating a lowest cost granary-to-ship grain transportation system, all farmers will require local access to reasonable-cost railway transportation. This objective requires equity in grain freight rates.

Finally, in order for farmers to take advantage of low and equitable transportation costs, elevators and railways must be accessible. Branchline abandonment and elevator demolition, and the resulting decreased access to these services, results in higher costs for two reasons: due to longer trucking distances and due to decreased competition among elevator companies and railways.

What railway and grain companies need

The companies that collect, handle, and transport western Canadian grain have different, and no less legitimate needs.

Railway and elevator networks must be profitable. Over time, railway and elevator companies must make investments in new facilities and technologies. In order to do this, they must be sufficiently profitable to attract investment. Reasonable profitability can also contribute to stability and predictability in the grain transportation and handling system because it helps ensure that elevators will continue to operate over the years in the same location, farmers will be paid for their grains, and that railways will move grain without excessive delays due to mechanical breakdowns.

Companies must also be competitive. They must invest in technology and infrastructure in order to maintain cost and profit levels similar to their competitors. As companies compete, they seek lower costs. If these lower costs are passed on to farmers, everyone is better off. Competition, without regulatory safeguards can, however, lead to cost externalization. Cost externalization occurs when some players in the system are large and powerful enough to cut costs to themselves by forcing those costs onto others. More on cost externalization later in this brief.

Finally, grain and railway companies must be reliable. These companies, in order to remain in business and reap profits, must provide prompt, predictable, reliable service, both to farmers and to foreign and domestic grain customers.

The needs of other groups

The National Farmers Union realizes farmers, grain companies, and railways are not the only participants in Canada's grain transportation and handling system. That system includes:

• workers in a wide range of occupations and companies;
• their unions;
• Canada's valued grain customers, both domestic and foreign;
• federal, provincial, and municipal governments;
• Rural communities which rely on the financial health of the surrounding farmers;
• Canadians as a whole, citizens and taxpayers, both rural and urban, who share in both the costs and the benefits of the Canadian grains industry.

It is important to keep in mind that farming, grain transportation, and handling affects a huge number of Canadians. The health of these economic sectors and the prosperity of the workers and communities that rely on them is a public good. A properly designed grain handling and transportation system could make significant positive contributions to taxation levels, community development, road safety, and the environment. An improperly designed system could further decrease farmers' incomes, exacerbate rural depopulation, heighten worker insecurity, accelerate the disintegration of rural roads, and contribute to the degradation of the natural environment.

Grain transportation and the rural economies that rely heavily upon it, affect many people. The argument--made by railways and some grain companies--that the system should be designed and managed only by those with "system assets" is self-serving and destructive. Such an approach ignores the monopoly nature of many of the system-asset-owners; it ignores the reality that farmers pay the total transportation and handling bill; and it ignores the fundamentally interrelated and interdependent nature of the prairie grain handling and transportation system. If that system is to work smoothly and minimize total granary-to-ship costs, it cannot simply be designed and managed by a small number of powerful players with "system assets" and then imposed on the others. Clearly, a balance of interests is needed in designing the system.

How to reconcile competing needs

Farmers, railway investors, grain company executives, rural taxpayers, governments and the other participants in the grain handling and transportation system all have different needs. All of these needs must be met in order for grain to move smoothly to port and for farmers, rural communities, and others to prosper. However, it is important to remember that all of these individuals, groups, organizations, and corporations have differing levels of power which they can use to assert and protect their interests.

The aim of the current Grain Transportation Review is to design a mechanism which will balance those interests and provide all parties with a reliable, lowest cost granary-to-ship grain transportation and handling system. The current mechanism, the Canadian Transportation Act (CTA), uses legislative means in an attempt to balance competing interests. Justice Estey and the Transportation Review will be assailed by calls to create a new system with far less government involvement. Justice Estey and the Transportation Review will, in the end, need to decide if more or less government involvement is needed in the grain transportation and handling system. Proponents of a deregulated system will claim that a "market-driven," deregulated system will lead to greater efficiencies, lower costs, and meet the needs of all transportation system participants. There is reason to believe that these claims are simplistic, deceptive, and, false.

Can the market provide a solution?

If all participants in the grain handling and transportation system had equal power with which to pursue their interests and if all were represented at some hypothetical negotiating table, then all could come to a mutually-beneficial agreement on how grain should be collected, handled, and transported, what the fair cost of those services should be, and who should pay those costs. This is not the case. Rural communities have no negotiating power when compared to Canadian National (CN) or Canadian Pacific (CP) railways. Individual farmers have no negotiating power when compared to Saskatchewan Wheat Pool, a $4 billion-a-year corporation. Further, in the absence of government participation, the interests of the general public or of the environment would have no representation at all.

The "market" will always play a dominant role in the western Canadian grain handling and transportation system. That system will continue to be made up largely of private corporations and individual farmers. While the smooth functioning of the system will continue to rely on market mechanisms, market mechanism alone cannot ensure that all participants' interests are accounted for and balanced or even that the system as a whole operates on a least-cost basis.

As evidence that the market alone fails to balance all interests, let us examine grain freight rates in the U.S. A Government of Saskatchewan study (Grain Freight Rates under Competition and Regulation: A Case Study, Regina, 1997) compared grain freight rates in Moose Jaw, Sask. with those in Shelby, Montana; Denver/Commerce City, Colorado; and Kansas City, Kansas. All centres are approximately equally distant from port via rail. The cities differ in the amount of competition that exists, both from competing railways and from water-route alternatives. The study examined freight rates from 1990 to 1995 and found that where there was significant competition--such as in Kansas City (served by numerous railways and the Missouri River system) or Denver/Commerce City (served by three major railways)--freight rates were slightly lower than in Canada. However, where there was only service from a single railway, as is the case in Shelby, Montana, freight rates were almost twice as high as those in Canada. See Figure 1, below.

Figure 1. Freight rates for wheat, selected Canadian and U.S. points

       Source: Grain Freight Rates under Competition
               and Regulation: A Case Study, Gov't of Sask.,
               Regina, 1997

Canada's railway transportation system is extremely non-competitive. With just two companies, insurmountable barriers to the entry of new railways, and little chance that one railway will ever be able to (or allowed to) buy out the other, there is little, if any, incentive for Canada's two railways to compete. To the contrary, the two railways could best maximize their profits through co-operation. Further, because of the distance between competing lines, CN and CP operate in geographic monopolies. This all but eliminates any remaining incentive for the two railways to compete.

Branch line abandonment, because it increases the distance between competing rail lines, strengthens each railroad's geographic monopoly and, thus, further decreases competition. Because of the low, and decreasing, competition between railroads, in the absence of a freight rate cap, we could expect Canadian freight rates, in the vast majority of centres, to rise dramatically. This prediction is borne out by data from the U.S.

Agricultural economists who have studied the situation agree. In a recent address entitled, "Railways, Competition and the Hold-Up Problem," given by Drs. Murray Fulton and Richard Gray of the University of Saskatchewan, these economists stated:

The U.S. system provides a very stark view of the likely outcome of a deregulated system. When railways are not faced with competition from waterways or other railways, they will price freight services at truck competitive rates. For producers in Montana this has meant rail rates to the West Coast of 6.5 cents (US$) per tonne mile--over double the regulated rates in Western Canada. If rail rates in Western Canada were deregulated, it is likely railways would pursue a similar freight rate structure to that in Montana. The result would be an increase in freight costs by $30 to $50 dollars per tonne. This is not merely a transfer from producers to railway shareholders; the higher freight rates will also distort production incentives and create losses elsewhere in the economy. (page 25)

Regardless of whether one believes that a fully-deregulated-monopoly system is more "efficient" or not, it is clear from the U.S. experience that in such a system, savings from any alleged efficiencies do not flow back to farmers. Instead, the monopoly railroads pocket any gains due to efficiency, raise rates to farmers, and pocket those revenues as well. We need not duplicate costly U.S. errors in Canada.

As further evidence that the market alone fails to adequately balance the interests of all participants, or, more specifically that it allows large and powerful participants to reap disproportionate returns, let us compare farmers' return on equity levels to those of the major agribusiness corporations. Please see figure 2 on next page.

Figure 2. Return on equity for Canadian farmers and selected agribusiness corporations

       Sources: Globe and Mail: Report on Business
                Magazine, July 1997 and various corporations' annual
                reports.
                 
       For an explanation of the calculation of farmers'
       return on equity, see appendix A.

Table 2, above, shows that agribusiness corporations are earning very healthy returns on equity when compared to farmers. The market does not seem able to balance the interests of farmers and the relatively much more powerful corporations that buy from and sell to farmers. The numbers above clearly demonstrate that large corporations can use their market power to capture revenues that should, more properly, accrue to farmers. An imbalance in size and market power leads to an imbalance in benefits and returns. This is the case in the market in general, it is currently the case in the U.S. railway transportation system, and it would almost certainly be the case in any deregulated, "market-driven" Canadian grain transportation and handling system.

Moving to a deregulated, U.S.-style grain transportation system is extremely unlikely to lead to reduced freight rates for farmers. Nor is it likely to improve service. As evidence of the expected performance of a deregulated grain transportation system, one need look no further than to the performance of the U.S. grain transportation system this past winter.

"Rail car congestion frustrates grain industry" was a headline in the October 20, 1997 "AGWEEK" (Page 10). The story states that :

"Grain industry organizations say members are becoming increasingly frustrated with severe rail car congestion in the central United States.

Storage problems and increased expenses resulting from the congestion are causing serious problems for elevators and producers, they say. Despite plans to relieve the pressure, grain officials believe it will take months to clear rail lines.

"The problems developed in the South and are spreading like wildfire," says Pat Ptacek, executive vice president at the Nebraska Grain and Feed Association. "Elevators are absolutely backed up and bottlenecked in Kansas. In Nebraska, we are about half way through harvest and headed for the proverbial train crash."

He says rail congestion and the resulting lack of rail cars "is the primary concern of my membership, bar none."

His story is repeated throughout the grain-rich Plains region. Grain officials say they have heard concerns all summer about the inability of railroads to meet shipping needs of grain elevators in Texas, Oklahoma, and Kansas....

The front page of the December 22 issue of "AGWEEK" reported:

Throughout the 1997 harvest season, Midwest grain dealers and shippers faced a frustrating shortage of rail cars and locomotives. Behind schedule on their grain shipments, many elevators throughout the region were left with the option of either piling grain on the ground or leasing additional bin space elsewhere.

Proposed solutions to the problem vary. Some point out the near monopoly conditions under which the railways operate and argue in favor of government re-regulation.

Page 8 of that same issue quoted Steve Domm, general manager of the Colfax, N.D. Farmers Elevator, saying:

As shippers, dependent on the railroad, and you're served by only one, you're captive and sometimes feel taken advantage of. Free enterprise is a wonderful thing, but when it becomes monopolistic, you need something to fall back on.

Any proposed Canadian grain transportation system should be compared to the real-world alternatives and not to some hypothetical, perfectly-competitive, perfectly-reliable "free-market" system. The high freight rates and poor service of the U.S. system should serve as a cautionary tale for Canadian farmers and shippers.

Despite evidence to the contrary, Canadian railways and grain companies continue to argue that a "market-based" system of bilateral, confidential contracts with built-in rewards and penalties will ensure that grain moves quickly and efficiently to port at the lowest possible cost. They have repeatedly called for a move "toward the disciplines of a fully commercial and accountable business environment."(1). They argue that such a system will make all parties "accountable." However, accountability cannot exist without one or more parties willing and able to hold the others accountable.

In any proposed bilateral, confidential contractual rewards-and-penalties system, it is assumed that railways and grain companies will each hold the other accountable. Farmers with some experience with these companies find this highly unlikely. The grain companies, for instance, are highly unlikely to aggressively take the railways to task for poor performance for fear of antagonizing them. Note that, despite being asked, none of Canada's grain companies agreed to take part in the current CTA case, brought by the CWB against CN and CP railroads. The private grain companies have a very poor record of protecting farmers' interests against the railways.

Nor are the railways likely to hold grain companies accountable. In a bilateral, confidential, contractual system of rewards and penalties, the grain and railway companies are likely to pocket what rewards they could and pass the penalties back to farmers in the form of higher freight rates or elevator tariffs. Almost all regulatory costs within the Canadian grading, handling, and transportation system are currently passed back to farmers--there is little likelihood that penalties to railways or grain companies would be treated differently. To the contrary, in a deregulated system, with no cap on freight rates or grain handling charges, if the potential for penalties existed, it is likely that the grain and elevator companies would pre-emptively raise rates to cover those projected costs. There is considerable doubt that farmers will be able to force powerful grain and elevator companies to "swallow" monetary penalties.

A system of rewards and penalties would put farmers in a double-bind:

• if grain and railway companies were not penalized, grain might not move quickly enough, costing farmers money;
  
• if grain and railway companies were penalized, freight rates and elevator tariffs may increase, costing farmers money.

The ease with which the railways and elevator companies forced farmers to shoulder the full $65 million cost of the 1996-97 transportation debacle demonstrates how adept these companies are at passing costs back to farmers. However, even if railway and grain companies could be prevented from passing penalties back to farmers, such a system relies on those companies operating conscientiously on farmers' behalf. If railway and grain companies did not hold each other accountable on farmers' behalf, it is unlikely that farmers could do so. Enforcement of a bilateral, confidential, contractual system requires costly litigation. Observers of the CWB's current CTA complaint against CN and CP, with teams of lawyers on each side, will hold no illusions about farmers' financial ability to hold railways or grain companies legally accountable.

While bilateral, confidential, commercial contracts containing rewards and penalties are unlikely to either hold railways and grain companies accountable or ensure smooth, timely, lowest-cost movement of grain, there is another option. A transparent, multilateral system of well-defined rewards and penalties may work, but only if they were enforced by government and implemented within a capped-rate system. Such a system would include performance requirements for all parties, specified penalties for failing to meet those requirements, and specified rewards for exceeding them. This system of rewards and penalties would be transparent, effective, predictable, and would not rely on railway or grain companies for implementation and enforcement.

The case for an increased government role in grain handling and transportation

For many grain farmers, transportation is the largest single cost they face. A Saskatoon-area farmer now pays almost a dollar per bushel of wheat for freight (98"). After this freight cost, the Saskatoon-area farmer is left with just $3.93 (1997-98 crop year projections). Despite already high freight costs, the railways and other participants in the grain handling and transportation system argue that the government should remove the cap and allow rates to rise.

Decreased government involvement in grain transportation will not lead to lower freight rates for farmers, nor is it likely to lead to improved service. By replacing the Western Grain Transportation Act (WGTA) with the Canadian Transportation Act (CTA) in 1995, the Canadian government largely deregulated grain transportation. 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 guarantees or mechanisms for accountability. The railways' disastrous performance this past winter showed that a deregulated system does not work. The U.S. system compels one to the same conclusion. We must not move farther in a direction which has yielded such poor results.

Railways are monopolies. The large and increasing (because of branchline abandonment) distances between CN and CP lines precludes competition.(2) As monopolies, railways must be regulated. The choice in this Review, in establishing a regulatory framework for Canada's railways, will not be between the free market and a regulated market: it will be between a regulated monopoly and an unregulated monopoly. Economists of all ideological stripes will concur, monopolies must be tightly regulated.

If railways sincerely wish to avoid government regulation, then they must relinquish their monopolies. If railways granted common running rights to all carriers, then real competition would exist. As a result, rates would fall to reasonable levels and service would rise as a result of competing carriers. In a truly competitive system, there would be no need for regulation. Until the railways agree to such a system, they remain monopolies and must, therefore, agree to regulation.

Necessary components of a government-regulated grain handling and transportation system

Having determined that the participants in the grain handling and transportation system have differing interests, needs, and levels of power with which to realize their goals; and further having determined that a strong government role is necessary to balance these competing interests and needs; let us now turn to an examination of the practical measures which a government could undertake to reach its goal.

Since this is the first phase of submissions to the Grain Transportation Review, we will not be exhaustive or definitive, but rather indicate where solutions to the problems outlined above may be found. In our second submission, we will explore, in detail, specific regulations needed to create a balanced, reliable, least cost granary-to-ship handling and transportation system for Canadian grain.

For the Canadian grain handling and transportation system to function smoothly--for grain and railway companies, farmers, and our customers alike--the government of Canada must regulate three aspects: price, availability of service, and performance. The former can be regulated through a rate cap tied to costs and efficiencies, the second by controlling rail-line abandonment and elevator closure, and the third by building into any legislation, government-enforced, monetary penalties for poor performance within the system.

Rail freight rate cap

As noted above (see Figure 1), the American experience shows us that unregulated rates, in the absence of competition, will likely rise well above current Canadian levels. Further, the American experience also shows us that it is highly unlikely that farmers would reap any off-setting benefits such as increased service. For this reason, it is in the interests of farmers to maintain a rate cap as long as such a cap is not so injurious to the railways that it unduly constrains their ability to make a reasonable profit and, in so doing, impairs their ability to provide adequate service and to maintain Canada's rail infrastructure. There is no evidence that the current freight rate cap results in such negative effects and, thus, it represents a reasonable and legitimate compromise between the interests of farmers and the railways.

Far from depriving the railways of needed and reasonable net incomes, the current, capped grain freight rates provide an extremely generous return to the railways. The current regulated rates are far above the railways' costs of delivering service and the margin between freight rates and the railways' costs is increasing. More on this below.

Under the freight rate cap system, Canadian railways are almost guaranteed a profit year after year. The rate cap takes into account all variable costs and makes a generous allowance for fixed costs and return on capital. Many farmers would like to operate within a similar system. Given the huge financial losses that farmers have faced due to weather and commodity-price volatility, it is hard for them to feel sorry for railways that operate within a guaranteed-profit system. When these same railways call for the freedom to raise rates, farmers are, predictably, unsympathetic.

Productivity gain sharing(3)

Regulated, capped rates necessitate a mechanism for adjusting those rates to take into account increased costs to the railways due to inflation, on the one hand, and decreased costs due to productivity gains, on the other. Productivity gains come from a number of sources including: more fuel-efficient locomotives, discontinuing the use of cabooses, technology which cuts labour costs, and the ability to load more hopper cars at one location.

Under the Western Grain Transportation Act (WGTA), from 1984 to 1995, the freight rate cap was adjusted upward annually to reflect estimated inflation in the railways' input costs. Every fourth year, the railways' actual costs were measured precisely and rates were adjusted downward to reflect decreases in actual transportation costs resulting from technological advancement and increased productivity.

The Canadian Transportation Act (CTA), enacted in July 1, 1996, retains the annual inflation-compensating rate increase mechanism but drastically changes the mechanism for decreasing rates as a result of productivity gains.

During the ten years that the WGTA was in effect, producers and railways shared productivity gains in roughly equal proportion. However, had the WGTA remained in effect for several decades, the four-year cost review system would have allocated approximately 90% of productivity savings to farmers and 10% to the railways.

The Budget Act of 1996, in effect, amended the CTA. The Budget Act contained a proposed formula for distributing efficiency gains between railways and farmers. Under this proposed formula, farmers would capture only approximately one-quarter of the savings resulting from increased railway efficiency (excluding branch-line abandonment related gains, see below). The formula states that the railways get the first 0.5% of the productivity gains and the farmers receive just one-third of the remainder--through lower freight rates. On a typical 2% annual productivity gain, the farmers' share of the productivity gain would be just 0.5%--the other 1.5% accruing to the railways and serving to raise their rates further above their costs.

This formula, however, has not yet been implemented and, for completely obscure reasons, it will not be implemented unless the federal government's hopper car fleet is sold. In the mean time, the railways continue to collect 100% of all productivity gains as they have done since 1992. Even if the new efficiency gain sharing mechanism is implemented immediately, assuming a 2% annual productivity gain, the railways' profits will be $4.70 per tonne higher by 2005 than they would have been if efficiency gains were shared with farmers. This will increase total railway profits by $1.6 billion over 10 years.

Between 1992 and 1998, railways were allowed to keep all (non-abandonment-related) productivity gains(4). Thus, assuming a 2% annual productivity increase in each of those five years, 1998 freight rates include an additional 10% margin above costs, above and beyond the 20% margin set as a result of the 1992 costing review. The railways' margin above cost will continue to increase approximately 1.5% per year (0.5% plus a 2/3 share of an estimated 1.5%: see above). Thus, unless a fair productivity-sharing formula is implemented, by 2010 the railways' margin above cost could be 28% plus the 20% margin set in the 1992 costing review.

While it is necessary to return some productivity gains to the railroads in order to encourage efficiency, 30% (20% + 10% see above) margins above cost are unnecessary and 48% (20% + 28%) margins above cost are outrageous. These large margins have occurred, and will continue to increase, because the CTA lacks an effective mechanism to share productivity gains with farmers. Any new legislation should include an effective mechanism to allocate the bulk of productivity gains back to farmers so that the margin between freight rates and the actual costs of transporting that grain does not increase steadily over time leading to unnecessarily large railway profits. To accurately determine efficiency gains, regular, limited cost reviews are necessary. It is our belief that the current CTA staff could conduct those necessary, limited costing reviews.

Control over abandonment

Canadian railways euphemistically refer to rail line abandonment as "system rationalization" and imply that it will lead to cost savings. While it may lead to cost savings to the railways, it may increase the total, granary-to-ship transportation and handling bill faced by farmers.

What railways call "cost saving" may simply be cost externalization. Cost externalization occurs when a business, because of its market power, can force its costs onto its suppliers or customers. Railways, because of their power to close lines and not suffer attendant revenue losses, can transfer costs from themselves, in the form of operating and maintenance expenses for branchlines, to farmers, in the form of higher trucking costs, and to taxpayers, in the form of increased municipal property, income, and fuel taxes. Per tonne mile, trains are three times more fuel efficient than trucks. It stands to reason, when all of the costs are taken into account, that moving trainloads of grain with steel wheels on steel rails would be more efficient than moving the same grain one truck at a time over roads and highways. There is every reason to suspect that when all costs--the farmers', railways', RMs.', and taxpayers'--are taken into account, that rail line abandonment increases the cost of moving grain from granary to ship.

If branchline abandonment does increase the cost of moving grain from granary to ship, it makes Canadian grain uncompetitive with that of our competitors; it lowers the incomes of farm families; and it drains money from federal, provincial, and municipal governments and ultimately from the taxpayers of Canada.

Branchline abandonment necessitates longer truck hauls, larger loads, and increased speed. Road damage increases exponentially with heavier, faster traffic. This creates huge road maintenance and repair bills for both highways and rural roads. More on road costs in a future brief.

The CTA contains no effective measures to discourage or control branchline abandonment. Current CTA regulations decrease aggregate freight rates by $10,000 per year per mile of track abandoned. Under this formula, total grain freight rates would decrease only $60,000,000 if all 6000 miles of grain-dependent prairie branchlines were abandoned. This is just 5% of the $1.1 billion total cost of rail transportation and would translate to a rate decrease of less than $2 per tonne--just over 5" per bushel. This does not take into account increased trucking costs or road maintenance costs which farmers would pay through higher taxes.

When branchlines and elevators go, schools, hardware stores and hospitals follow. No farmer is willing to trade his or her local school, store, or hospital for a saving of 5" per bushel. Moreover, the increased costs to farmers--of trucking grain longer distances and higher municipal taxes to pay for road maintenance--would be many times higher than the 5" saving. Because it does little to discourage abandonment, the current CTA formula is a lose-lose proposition for farmers and their communities. Farmers lose money. Communities lose jobs and services. Canada loses rural infrastructure. Federal, provincial, and municipal taxpayers lose tax dollars maintaining roads and highways destroyed by heavy truck traffic. And the taxpayers of Canada lose the $900 million investment in branchline rehabilitation they made over the decade from the late 1970s to the late 1980s.

Clearly, the total costs and benefits of branchline abandonment need to be measured and evaluated. This is something that the market alone does not and cannot do. If abandoning branchlines saves CN money and increases its profits, then it will abandon those lines regardless of the costs to farmers, taxpayers, or communities.

Transport Concepts' report, "Impact of Branch Line Abandonment" (May 1995), estimates that each kilometer of branchline abandoned costs between $10,000 and $31,000 annually due to increased road maintenance and upgrading, pollution, and accident costs (p. 4). The preceding figures do not include farmers' increased trucking costs which have been estimated at $838 annually per km of branchline abandoned(5). This total increased cost of approx. $11,000 to $32,000 per km, annually, far exceeds the $6,250 per km ($10,000 per mile) annually that the railways are penalized under the CTA for abandoning branchlines(6).

Assuming that the railways act rationally, they will abandon every km of branchline where their cost of operation exceeds the revenues by over $6,250 annually--where their savings from abandonment exceed $6,250. They will do this even when the total cost of that abandonment to farmers, communities, and taxpayers may be between $11,000 and $32,000 per km annually.

Branchline abandonment is the outright destruction of one type of infrastructure--the rail lines--and it leads inevitably to the deterioration and destruction of another type of infrastructure--the roads. Canada's roads were built at public expense and they are public property. Canada's railways were also built, maintained, and refurbished at substantial costs to Canada's taxpayers. No company should have the right to degrade and destroy this public infrastructure for its own gain.

Only a government can regulate the "rationalization" process to maximize benefits to all Canadians. Government could require that the railways not abandon branchlines unless they could demonstrate that by abandoning a given line, decreased costs to railways and subsequent lower freight rates will substantially outweigh increased costs to farmers, municipalities, and provincial and federal taxpayers. Alternately, increasing the branchline abandonment deterrent amount from its current $6250/km ($10,000/mile) to a more realistic $25,000 - $32,000/km might accomplish much the same aim.

The preservation of rural grain elevators

Along with branchline "rationalization" has come elevator "rationalization." Many elevators are being toppled and burnt despite the fact that farmers are more than willing to buy them at a good price. Farmers find this wanton destruction of valuable infrastructure highly irrational.

The elevator companies involved are destroying these elevators in order to protect their own profits. The companies say, on the one hand, that these elevators are not cost competitive, and, on the other, that they cannot sell them to farmers for fear that farmers will use these facilities to "compete" with grain companies' own facilities.

The destruction of usable grain elevators in spite of farmers' offers to purchase these facilities for fair prices is an example of these companies' complete disregard for the interests of farmers and communities. It leads farmers to doubt that these same grain companies would protect farmers' interests by pursuing performance penalties against railways should a system-wide failure occur again as it did in the winter of 1996-97.

The uncontrolled destruction of good-quality grain storage elevators on the prairies has had several negative effects:

• insufficient storage capacity;
  
• longer trucking distances; and
  
• decreased competition between elevator companies.

Any savings resulting from this process are not being shared by farmers. Farmers, on the other hand, are being forced to build costly on-farm storage to compensate for the destruction of local elevators.

It is the height of folly to demolish valuable, functioning grain storage elevators in an already constrained system. Both elevator destruction and branchline abandonment must be studied within a holistic, minimum-granary-to-ship cost analysis model. Such a model should take all costs into account including road maintenance costs and farmers' trucking and granary-building costs. Western grain handling and transportation is an interdependent system designed for the long term. However, current branchline abandonment and elevator closure is based on unilateral action and short-term profit. Current system "rationalization"--which only takes into account the costs and profits of one or two companies--is leading to higher costs for farmers and higher overall system costs.

The CWB's role in grain transportation

The Canadian Wheat Board (CWB) works on behalf of farmers. Through collective action, it gives farmers power in an international grain market dominated by giant, foreign grain companies. In the winter of 1996-97, when delayed grain shipments cost farmers over $65 million in lost sales and demurrage, it was the CWB that launched a "level of service" complaint before the Canadian Transportation Agency. That complaint is a necessary first step in recovering some portion of that money for farmers. As noted above, no grain company was willing to take similar action on farmers' behalf or even participate in the CWB's action.

Eliminating the CWB from western grain transportation will neither increase efficiency nor decrease costs. It would also compromise the CWB's ability to market Canadian grain and, thus, decrease farmers' incomes. The CWB's involvement in transportation provides many benefits to farmers, including:

• the CWB has detailed knowledge of on-farm grain stocks and can coordinate sales
  
• the CWB can draw grain from different areas in such a way that it minimizes total transportation distances
  
• CWB involvement ensures equitable delivery opportunities; and
  
• CWB-coordinated grains have consistently better turn-around times and this increases overall system capacity and efficiency.

The CWB consistently out-performed private grain companies in important logistical areas. For instance, car allocation between CWB and non-Board grain relies heavily on estimated sales--to simplify, the higher the estimated sales, the more cars you will get. Thus, sales estimation is critical to the 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.

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 ownership of government hopper cars

The Canadian federal government currently owns approximately 13,000 grain hopper cars. This represents a significant portion of the 26,000-29,000 car total fleet(7). In February, 1995, the federal government announced its intention to sell those cars.

At the request of the federal government, the Senior Executive Officers group (SEO)--consisting of representatives from the railways, grain companies, the Canadian Wheat Board, and the Canadian Grain Commission--developed a proposal for the sale of the government hopper cars in late 1995. The SEO proposed that the government sell the cars to the railways for $100 million and that the freight rate paid by producers be increased by $1.00 per tonne for 5 years 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). The CWB soon withdrew its support for the sale of the government hopper cars to the railways.

Railways argue that only parties with assets in the transportation and handling system be allowed to design and manage that system. They then go on to argue against farmer ownership of government hopper cars. Further, railway executives on the SEO recommended a sale price of $100 million when it seemed that the railways were to be the buyers. Now that farmers have come forward, possibly prepared to pay that price, the railways now seem to agree that the price should be higher.

The railways' opposition to farmer ownership of government hopper cars seems extremely self-serving in light of the following facts:

1. The SEO proposal would have seen freight rates increase $1 per tonne for five years. This would have yielded approximately $150 million in revenue to the railways to pay for their $100 million "purchase."
   
2. The railways have had the free use of the government hopper cars for approximately 19 years.
   
3. The farmers of western Canada have paid approximately $5000 per car per year in maintenance costs to the railways through the freight rate cap cost calculation. Commercial leasing companies calculate annual maintenance costs at about $1500-$2000. If this $3000-per-car discrepancy has existed for the approximately 19 years that the government has owned the 13,000 cars, the cumulative subsidy to the railways could now be approaching $740 million.

The railways have already reaped tremendous financial rewards from the free-use and paid maintenance of these rail cars. Now they are asking farmers to buy the cars for the railways. The final irony will be that if farmers do buy the cars for the railways, the railways will, in all likelihood, continue to argue that farmers should be excluded from designing or managing the handling and transportation system because farmers have no assets in that system.

Turning government hopper cars over to the railways will increase the already-substantial power railways wield within the handling and transportation system and further undermine farmers' power within that system. On the other hand, farmer ownership of 13,000 hopper cars will help protect and further their interests within the grain handling and transportation system.

CO₂ and other issues

Canadian federal officials agreed in Kyoto, Japan to reduce greenhouse gas emissions. Branchline abandonment will sharply increase those emissions. Trains are three times more fuel efficient than trucks and trains produce only 1/3 as much CO₂ per tonne-mile as trucks (Environmental Implications of increased trucking due to branch line abandonment, Robert, Sloane, & Associates Inc., 1992). If Canada is to reduce emissions of CO₂ and other greenhouse gases, we must act immediately to ensure that grain stays on the rails and off the roads.

The danger is, if voluntary programs and common-sense solutions such as increased rail utilization do not achieve the necessary CO₂ emission reductions, a carbon tax may be next. Any carbon tax would hit farmers hard. The choice is between a win-win solution--maintain branchlines, reduce farmers' costs, and reduce CO₂ emissions--or a lose-lose solution--tear up the rails, increase farmers' costs, and lock Canada into a high- CO₂-emission grain transportation system at a time which requires emission reductions.

The production, processing, transportation, and distribution of food--from seed to shelf--produces CO₂. If we increase CO₂ emissions in one stage, transportation, the burden of future emission reductions will fall increasingly on other stages, such as production. Terminating branchline abandonment and increasing railway utilization allows farmers and agri-food sector participants to cut emissions in a relatively painless and low-cost manner. If we do not do so, we will be forced to make deeper and more costly cuts in emissions at other stages along the seed-to-shelf chain. If CN and CP, by abandoning branchlines, force an increase in CO₂ emissions, then the need for cuts elsewhere increases; those cuts may prove very expensive; and those cuts will likely fall on the production and processing sectors. Branchline abandonment effectively externalizes costs to farmers. It also externalizes the need to make necessary cuts in CO₂ emissions.

Again, the market alone cannot ensure that Canadian railways "do the right thing." If abandoning branchlines and increasing CO₂ emissions cuts railways' costs and increases their profits, they will abandon lines and increase emissions. Only government intervention can ensure that the railways behave in the larger public interest.

Conclusion

Farmers need a grain transportation and handling system that minimizes total granary-to-ship costs and one that reliably and predictably delivers grain to our valued customers. We need affordable, equitable, accessible grain handling and transportation services.

In order to achieve these ends, the handling and transportation system must balance the interests of all participants. It must curb the power of railways and other corporations to externalize costs to farmers and other participants. It must regulate freight rates in the absence of competition. It must provide mechanisms to monitor and enforce performance. And it must preserve the valuable elevators and branchlines already built and paid for in western Canada.

The National Farmers Union will provide greater detail of the specific mechanisms needed to realize these goals in future briefs. We plan to provide separate and detailed briefs on the subjects of branchline abandonment, performance monitoring and enforcement, and the role of the CWB grain transportation.

Calculation of return on equity

Return on equity can be understood simply as net income (or profit), divided by the equity of an operation. For instance, the Royal Bank of Canada listed the following figures in its 1996 annual report:

• Net income: $1.430 billion
  
• Common shareholders' equity: $7.662 billion

Return on equity, in this case 18.6%, can be calculated by dividing the former by the latter.

Note that it is common practice to subtract dividends on preferred shares from net income before calculating return on equity. The Royal Bank follows this procedure and therefore its listed return on equity number of 17.6% differs slightly from the 18.6% calculated above.

Return on equity is a standardized measure of corporate performance. For corporations, net income (or profit)--a critical factor in calculating return on equity--is calculated after everyone is paid. The CEO receives a salary for managing the corporation, the workers for assembling the products or delivering the service, and the secretaries for filing the papers before net income is calculated.

In contrast, the most commonly cited measure on farms, realized net farm income, is calculated before subtracting the value of the farmer's or the farm family's "unpaid" labour as an expense. Therefore, realized net income for farms must be adjusted to account for the value of the farmer's or the farm family's "unpaid" labour before it can be compared to the net income of a corporation.

Table A, on the following page, calculates return on equity rates for all Canadian farms for the years 1990 to 1996. It uses the following formula:

Farmers' return on equity = (Realized net farm income + Appreciation of farm assets - Value of labour and management ) / Farm Capital - Debt

The total value of farm labour and management is estimated, extremely conservatively, at $35,000 per farm with gross sales over $100,000. No value is assigned for labour or management on the 70% of Canadian farms with gross sales below $100,000. Less conservative estimates of the value of farm labour and management will yield return on equity rates well below those calculated below.

1. Canadian Pacific news release, April 1, 1997.
   
   
2. The WGTA and the CTA recognized this lack of competition between railways and included competitive access provisions such as Final Offer Arbitration, Interswitching, and Competitive Line Rates in an attempt to simulate and stimulate competition between the railways. These measures, in their current CTA form, do not seem to be effective in accomplishing their goal.
   
   
3. This section draws upon the work of James Vercammen, The Economics of Western Grain Transportation, 1996 Van Vliet Publication series, Module B-3
   
   
4. The sole exception to this was the $30 million cost of capital error in the 1994-95 which was repeated in the 1995-96 crop year. This error has now been rectified.
   
   
5. The 1995 Branch Line Review, National Transportation Agency
   
   
6. This is the second productivity-gain distribution mechanism included in the CTA. The penalty amount, $10,000 per mile per year in this case, serves as a de facto throttle on abandonment activity--the lower the figure the more incentive to abandon and the faster lines will be torn up.
   
   
7. The total number of cars in the fleet varies depending on demand and the number of cars the railways lease.