in union is strength

Index:

• Introduction
• The current country elevator and branchline system
• Savings from elevator closure and branchline abandonment
• Solutions: The Prairie Rail Authority
• Proposed structure for a modern Prairie Rail Authority
• Conclusion

Introduction

Many farmers are losing access to the western Canadian handling and transportation system as grain companies close local elevators and railways tear up branchlines. To farmers, local access is critical. Local access reduces trucking and on-farm storage expenses, increases delivery options, and, thus, fosters competition. Local access to the grain handling and transportation system should not be sacrificed unless there is compelling evidence that there will be compensatory benefits in the form of significantly lower costs.

Grain and rail companies have told farmers that there will be compensatory benefits. These companies have told farmers that branchline abandonment and elevator closures will lead to a more efficient, more reliable, lower cost system. So far there is little evidence to show that this is true and increasing evidence to the contrary: that when all costs are taken into account, elevator closures and branchline abandonment lead us toward a higher-cost system. Further, there is evidence that decreasing elevator capacity may endanger the stability of the system, especially in light of increasing grain and oilseed production and exports.

This brief will examine some or the misinformation surrounding the current debate, examine the costs and benefits of closure/abandonment to farmers, and propose a solution to the problem of rationalizing the handling and transportation system in the interests of all participants.

The current country elevator and branchline system

"The current railway and elevator network was built for a time when farmers delivered their grain with horses and wagons and could not travel more than a few miles to an elevator. We now have semi trucks to haul our grain and, thus, we can make do with far fewer elevators and branchlines:" this is the lie that rail and elevator company representatives tell to farmers when these representatives come to town to explain the latest elevator closure or branchline abandonment.

The current grain collection and loading system was not built for horses and wagons. Since 1962-long past the days of wagons-grain companies have cut the number of licensed elevators in western Canada by 78%. They have cut capacity by 36%. And they have reduced delivery points from 2134 to just 811 today-a 60 % decrease!

The result today is that Canada-when compared to other major exporters-has the leanest, most constrained country and terminal elevator system in the world. For example, per export bushel, the U.S. has almost 7 times more commercial storage capacity. Figure 1., below, shows the exports and commercial storage of major exporting countries.

Figure 1. Commercial storage and exports of major exporting countries

     Sources:Canada-Statistics Canada, CGC; U.S.-USDA;
             Australia- AWB, IGS; Argentina-IGS,
             Secretaria de Agricultura Ganaderia,
             Pesca y Alimentacion; Data collected by CWB.

Canada has just 6.6 million tonnes of primary (country) elevator and 2.6 million tonnes of terminal elevator storage to handle approximately 40-50 million tonnes of annual western Canadian production (26.4 million tonnes of annual exports).

Despite relatively constrained storage capacity, primary elevator closures continue. Since 1992-93, grain companies have reduced primary elevator capacity by 600,000 tonnes. Projections show that closures through 2007 will reduce capacity further: from its current level of 6.6 million tonnes to 5 million. This is down markedly from the 1970-71 peak of 11 million tonnes. Clearly, we do not have a system built at the turn of the century for wagons, nor one with excess storage capacity relative to the past or to our foreign competitors.

Further, Canadian grain and oilseed production will continue to rise and-despite increased processing within Canada-so too will Canada's exports. The CWB projects that exports will rise from their current level of 26.4 million tonnes (1992-96 average) to 29.9 in 2002 and 31.6 in 2007. This 20% increase in exports and a similar increase in overall production will put increased strains on our grain handling and transportation system: particularly if it continues to contract as exports continue to expand. Figure 2., below, shows historical and projected grain production and primary (country) elevator capacity.

Figure 2. Historical and projected western Canadian production and elevator capacity

       Sources: Statistics Canada, Field Crop Reporting Series,
                Stats. Can. Cat. # 22-002-XPB.  
                Agriculture and Agri-Food Canada,
                Medium Term Policy Baseline, April 1998,
                p. C-11.  CWB, CWB Grain Trade
                Forecast to 2007-08, fall '97, p. 13.
                Sparks Company Inc., Grain Handling Infrastructure
                Rationalization Study, March 1998, p.iii.

Figure 2., above, raises some serious concerns. Is it wise to demolish elevators in such a constrained system and in the face of increasing production and exports? Is it justifiable for grain companies to increase farmers' trucking and storage costs through elevator closures in such a constrained system?

The transition from wooden elevators to larger concrete and steel "high-throughput" elevators should allow elevator companies to compensate for losses in storage capacity through increases in throughput potential. However this seems to be a break-even situation. One report predicts that as a result of the combination of lower storage capacity and higher throughput potential: "throughput capacity-or the amount elevators can ship-is not anticipated to drop." The CWB states, in relation to overall system storage and throughput capacity, that: "over the last few years it appears that system capacity is shrinking."

While total Canadian throughput capacity may neither drop nor increase as a result of elevator consolidation, the loss of storage capacity requires increases in railway-grain company co-ordination and performance to ship the same amount of grain. High-throughput elevators can only function to potential if they get the rail cars they need to keep the grain flowing through. In 1996-97 this did not happen. As elevator consolidation progresses, the system may become more susceptible to slowdowns and breakdowns. With increasing production and exports, a smaller and shrinking system-even if made up of high-throughput elevators-will be hard-pressed to move the crop.

The U.S. primary elevator system is already made up almost entirely of concrete high-throughput elevators and yet that country has 7 times the commercial storage capacity per export bushel that Canada has (Per bushel of production, U.S. commercial storage capacity is 3 times that of Canada's). Given current transportation and handling capacity problems in the U.S., it is unlikely that American farmers would agree that they could get by with one third or one seventh of their current capacity. The argument that Canada can get by with far less storage capacity if that capacity is in high-throughput concrete elevators is not borne out by an examination of the U.S. system.

While new concrete and steel elevators may add the throughput capacity needed to make up for decreasing storage capacity, there is certainly little room to argue that there is excess capacity on the prairies and that this necessitates elevator closures. Nor is there a solid basis to argue-given the 60% reduction in the number of delivery points since 1962-that there are too many delivery points and that necessitates further delivery-point consolidation and attendant branchline abandonment. Further, as the analysis below will show, it is unlikely that further branchline abandonments will result in substantial efficiencies or savings.

Savings from elevator closure and branchline abandonment

One of the most recent and detailed analyses of the costs and benefits of branchline abandonment/ elevator closure was conducted by University of Saskatchewan agricultural economists Richard Gray and Mohammad Khakbazan. That report quantified the savings from branchline abandonment and elevator closure in west-central Saskatchewan. It was comprehensive: looking at farmers' costs, road costs, railways' costs, and elevator companies' costs. The report compared the status quo system of branchlines and elevators with various combinations of branchline abandonments/ elevator closures.

The Gray and Khakbazan study found that closing 10 of the area's 13 branchlines yielded the greatest savings but that this total saving would be just 3¢ per bushel. Moreover, the study found, that 3¢ saving would not accrue to farmers. When all costs were accounted for, farmers would see their costs rise 1¢ per bushel, as would the elevator companies. The railways would see their costs decrease by 5¢ per bushel for a net saving, to all parties, of 3¢.

This well-documented study reconfirms that the savings from abandonment, if any, will be tiny. The overall effects of abandonment, however, will be large and devastating. The loss of the local branchline and elevator contributes to the loss of the local store, school, and post office and, eventually, the town.

The bargain that the railways and elevator companies propose is this: farmers agree to higher trucking and storage costs, higher taxes to maintain roads, the loss of local services, and, eventually local towns. In return, the railways receive an additional 5¢ per bushel profit for moving grain. Many farmers wonder why we are even discussing branchline abandonment if the total savings are just 3¢ per bushel, none of it accruing to farmers or local communities.

Even if the entire 3¢ saving went to farmers, few farmers would be willing to trade their local elevator, branchline, and, eventually, school, store, and rink for 3¢ per bushel. Nor would Canadians as a whole find this to be good value. Most Canadians support the maintenance of rural communities for social and economic reasons. Further, those Canadians have a selfish interest in maintaining branchlines, elevators, and rural communities: they will have to bear the increased tax burden necessary to repair and maintain roads which will crumble as a result of abandonment/closure and resulting higher truck traffic.

The deregulation of the Canadian grain transportation system which followed the termination of the Western Grain Transportation Act (WTGA) has placed in the hands of the railways the unprecedented and unwarranted power to decide the fates of rural communities, to transfer costs onto taxpayers and farmers, and to destroy two forms of vital infrastructure simultaneously-our rail and road networks. Clearly this is an illegitimate role for railways. 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.

Abandonment/closure results in a net transfer of wealth from farmers-and, to a lesser extent, from taxpayers-to prosperous, often foreign owned, grain and rail companies. Clearly, there is no compelling economic rationale for continued branchline abandonment/ elevator closure. There is no evidence that it will contribute substantially to the increased efficiency or decreased costs of the western Canadian handling and transportation system. To the contrary, when all costs are taken into account, further abandonment/closure may well increase total costs. Further, when the relatively constrained nature of our handling system is taken into account, further abandonment/closure may well decrease capacity.

Solutions: The Prairie Rail Authority

The preceding section demonstrates that branchline abandonment and elevator closure is proceeding in an uncoordinated fashion that may decrease system capacity and increase costs. Allowing grain and rail companies to make elevator closure and branchline abandonment decisions based solely on the effects that such moves will have on their profits will not necessarily lead us toward a system which minimizes costs or maximizes capacity, reliability, and efficiency. Instead, a regulatory structure is necessary to ensure that system assets are managed in a coordinated fashion and for the long-term benefits of all participants.

In talking to farmers across the prairies, NFU officials have learned that the situation in each community and on each branchline is unique. Some farmers believed that they could create a viable shortline railway if legislation existed which would compel the railways to pay the shortline a fair rate to deliver the filled cars to the mainline. Other farmers convincingly demonstrate that there is substantial traffic on their line and a need for a major railway to operate that line. Still others admit that their line is no longer viable and will need to be abandoned. These farmers need funds to pay for road upgrading and maintenance.

Rather than imposing a single solution on farmers, grain companies, railways, and taxpayers, we need to create an innovative, flexible, holistic, and cooperative framework in which all participants can work toward solutions which best suit each community and branchline.

The Hall Commission report of 1976 recommended just such a framework: the Prairie Rail Authority (PRA) In Hall's proposal, the PRA would:

• own, manage, and maintain prairie branchlines;
• oversee and coordinate branchline use or abandonment;
• evaluate the costs and benefits to all parties of continued use, abandonment, or transfer to shortlines; and
• create a long-term, coherent plan for western Canadian, grain-dependent branchlines.

A contemporary version of the PRA would provide the authority, resources, and flexibility to pursue the solutions best suited to each branchline and community. While the details of a PRA would have to be worked out cooperatively among all participants, the following proposed structure could form the basis for discussion.

Proposed structure for a modern Prairie Rail Authority

Under a modern PRA:

• The railways would initially retain ownership of the branchline network;
  
  
• Railways would lose their current CTA-mandated ability to abandon branchlines;
  
  
• The PRA would be responsible to independently evaluate the costs and benefits of retaining, abandoning, or transferring each grain-dependent branchline;
  
  
• The PRA would be responsible for developing a long-term plan for western Canada branchlines with the objective of minimizing total costs and maximizing the efficiency and capacity of the grain transportation system;
  
  
• On the basis of the long-term plan and the cost-benefit analysis, the PRA would have the legislative power to:
  
  • recommend abandonment and negotiate or arbitrate a fair allocation of cost savings to all parties. Railways would have the option to continue operating the lines rather than forgo the revenue.
    
  • transfer lines to shortline operator where such operations could be viable and after the payment of net salvage value (or a comparable lease payment) to the railways. The PRA would have the power to arbitrate rate-sharing between the railway and the shortline operator. The railways would have the option to continue operating the line rather than allowing it to be transferred (this should satisfy NAFTA and MAI expropriation clauses).
  • require the railways to operate lines where no superior or more cost-effective alternative exists.
  
  
• On viable lines where no elevator existed and no grain company wished to operate an elevator, the PRA would have the power to grant rights-of-way to allow farmers or other parties to build sidings and elevators or other track-side loading systems.

A modern, effective, and flexible PRA would allow farmers and other system participants to pursue solutions best suited to their individual lines. It would help ensure that the overall grain transportation system moved, in a concerted way, toward higher efficiency and lower cost, and it would ensure that farmers' needs and interests were taken into account when abandonment decisions are made. Specifically, a PRA would have the following benefits:

A PRA could coordinate the transfer of branchlines, in viable chunks, so that shortlines had the greatest possible chance of success. Currently, CN and CP are abandoning lines in sections, each too small to form a viable shortline. In addition, the PRA would have the power to arbitrate reasonable rate-sharing agreements between railways and potential branchline operators. Currently, the CTA requires railways to offer branchlines to prospective shortline operators. It does not, however, require railways to pay shortlines a reasonable or sustainable amount to operate those branchlines-a PRA framework would remedy this oversight.

Not all branchlines should be turned into shortlines. The current capped-rate system for grain transportation guarantees railways that their costs will be covered and that they will earn a generous return on their investment. Because of these generous guarantees, farmers and governments can legitimately expect railways to operate, not just the least-cost mainlines, but also the vast majority of branchlines. A PRA could evaluate the best solution for each branchline and require the railways to operate those which are viable and necessary, and for which no superior alternative operation scheme exists.

As a final option, the PRA could choose to abandon lines where operating costs far exceed rate revenues and where the benefits of abandoning the line far exceed the costs to all participants. The PRA would look at the total cost saving to the railroad resulting from abandoning a particular line and reduce the aggregate rate cap by an amount which approaches that total saving.

A PRA-when making decisions about branchline abandonment, continuance, or transfer to a shortline-could take into account farmers' costs, road costs, and the needs of the entire grain handling and transportation system: something that the railways do not currently do. A PRA would oversee and protect two types of vital Canadian infrastructure: branchlines, directly, and the road system, indirectly.

A Prairie Rail Authority would not solve all of the problems that various groups and individuals are having in retaining rail service to their communities. It would, however, provide a coordinated, independent, and holistic framework within which groups and individuals could work to achieve the best solutions for individual lines.

Conclusions

The National Farmers Union suggests that it is not responsible public policy to allow railways to tear up valuable infrastructure, increase taxes, increase farmers' costs, and decide the fate of Canadian communities.

Further, the NFU suggests that elevator closures are driven, not by a desire to decrease farmers' costs or rid the system of costly over-capacity, but merely to increase the short-term profits of grain companies. Such closures are short-sighted, increase the overall cost of handling and transporting grain, and endanger the capacity and stability of the handling and transportation system

Given that farmers costs' increase as a result of branchline abandonment and elevator closure, the current trend toward abandoning most, if not all, branchlines must be stopped. If it is not, abandonment/closure will leave the western Canadian grains and oilseeds industry at a significant competitive disadvantage.

To minimize total system cost and maximize efficiency, jurisdiction over use, abandonment, or transfer of branchlines must be turned over to an entity that can take a long-term, holistic view of the system. The current system which relies on railways' short-term profit calculations to determine which lines will stay and which will be torn up is completely inadequate.

The NFU recommends that the final report of Justice Estey's Grain Handling and Transportation Review include provisions for the establishment of a Prairie Rail Authority (PRA) with powers similar to those outlined above.