April 26, 2000

Dear Minister Collenette:

Saskatchewan Wheat Pool, Cargill, Agricore, James Richardson International, and United Grain Growers sent you a letter dated February 24, 2000. In their letter, the five grain companies urge you to bring forward legislation that would create a more commercial grain handling and transportation system. The National Farmers Union would like to comment on that letter and the issues raised by these companies.

The five grain companies claim that they "have demonstrated the system efficiencies that are possible by providing a complete package of logistics management to FOB position for Board grains." This is not correct. The only Board grain for which the grain companies have provided FOB service is malt barley. Based on the experience with that commodity, the evidence contradicts the grain companies claims of efficiency. They have not provided improved car cycle times, decreased "in-store" times, or cost savings. In fact, they have performed below average by some of these measures. The evidence demonstrates that system performance is maximized when the Canadian Wheat Board handles system logistics and that system performance declines when that task is entrusted to grain companies.

To take another example, last fall, grain companies sold more canola than they could realistically expect to transport, plugging the system. At that time, they refused to be accountable, casting blame on others in the system for what was clearly their error. These companies demonstrated an inability to coordinate their sales programs with available transportation resources. The canola situation demonstrated that while the grain companies may have some incentive to maximize overall system performance and capacity, each also has an incentive to maximize their own sales and maximize their own access to that system. When the companies all try to gain maximum access simultaneously to our constrained system, the result is extreme congestion. The current co-operative management of the handling and transportation system maximizes capacity and it precludes the use of the high tariffs that would be needed to manage deliveries and grain flows in a "commercial" system.

The grain companies February 24 proposal is not motivated by their desire to increase system performance; it is motivated by their desire to gain increased control of the handling and transportation system. All signatories to the letter are terminal owners. If one looks carefully at their proposals, one can see that those proposals would not be attractive to grain companies without terminals. For instance, the signatories point to "the need to ensure that all tenders are done on a minimum shipload FOB basis." Overall, Kroegers proposals advantage terminal owners relative to other grain companies.

The signatories proposals also give terminal owners the blending premiums which farmers would get under the alternative proposal made during the Kroeger process. The grain companies proposal would hurt farmers in other ways as well. The commercial system which they propose would leave the CWB dependent on grain companies for timing and supply, creating the probability that the CWB would have to pay stiff premiums if it engaged in an aggressive sales program (or if the grain companies engaged in an aggressive sales program and, thus, required inordinate system capacity).

The grain companies claim that a commercial system would allow them "to compete for market share" and that "the intense level of competition among companies will ensure that cost-reducing efficiencies gained through the reforms are passed back to producers." Though these companies would claim that they currently compete intensely, this alleged competition has not affected the high and stable tariffs they all charge. Further, it is likely that competition will decline still further.

U.S. giant Archer Daniels Midland owns a commanding share of United Grain Growers. Sask. Wheat Pools share price is one-fifth of its level of three years ago and it is likely that that it will not survive as an independent company. Agricore President Gordon Cummings has stated several times that he expects the industry to consolidate to 3 or 4 companies in the near future. If there is competition today, such consolidation would greatly reduce that competition. In its examination of Canadas railways, the CTA found that the bulk of the savings that the railways passed back to farmers were passed back as a result of regulatory requirements.

It is likely that Canadian and American grain companies will consolidate significantly. It is possible that Canadian and American railways will do the same. This consolidationbecause it will increase the size and decrease the number of these companieswill decrease competition and increase their market power. These companies will almost certainly use that market power to increase tariffs and profits. If Canadian transportation legislation exacerbates this trend toward increased market power by deregulating the system and providing these companies with an environment where they have freedom (and incentives) to increase handling and transportation charges, the result will be disastrous for farmers. Mr. Estey and Mr. Kroeger professed to believe that a commercial system must rest upon competition. Yet there is little competition today, and there will almost certainly be less in the future. The clearly-visible trends in the grain handling and rail sectors point toward the need for prudent and effective regulation. It would be a mistake to move in the opposite direction at this time.