NFU Recommendations for Solving Canada’s Grain Transportation Problems

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The following was sent to Transport Minister Marc Garneau on March 23, 2016:

The transportation of prairie grain by rail is a critical element in Canada’s economy. The consequences of its success or failure are measured in the billions of dollars annually. The costs of dysfunction are inordinately borne by farmers who are forced to accept lower prices for their product and pay higher storage, freight and demurrage costs to get it to market. Grain companies are margin traders. Their profits depend not on the actual price of grain, but on the difference between the price they pay farmers for the grain and the price they obtain when selling it to the end-user. They can discount the price paid to farmers to cover freight and storage costs by means of the “basis” they can charge on deliveries of grain to country elevators. Thus, grain companies are shippers that can offload all costs due to poor railway service onto the farmers. Farmers have no recourse, as the volume of grain and distance to market makes them captive to railway transportation.

The two mainline railways and four largest grain companies use their ability to control access to and use of critical infrastructure as means to guarantee their own profitability, regardless of the size and quality of the crop, the weather, storage facilities, or terminal unloading capacity. Thus, deregulation will not result in increased investment, but in greater control by, and higher profits for these dominant corporations.

Canada’s grain transportation system will always have infrastructure limitations due to our seasons and the geography of our country. Efficient use of the available infrastructure is possible, as seen in the past, and could be achieved again through an authority that has the power to spread peak demand throughout the year and ensure that less commercially attractive port terminals (Thunder Bay and Churchill, for example) are strategically utilized.

Grain transportation and marketing are so fundamentally interdependent that both need to be addressed to improve efficiency, reduce total system costs, and increase fairness. The difficulties experienced in moving the 2013-14 bumper crop highlighted the consequences of removing both the orderly marketing and logistical coordination functions formerly carried out by Canada’s single desk wheat marketing agency. The same problems continue, and while less visible last year, farmers are still paying too much for transportation and receiving too little for their grain. The excess profits obtained by the railways and grain companies accrue to their urban and foreign owners and shareholders. In contrast, if the grain transportation and marketing systems were repaired, farmers would receive a fair return on their production, which would be added to Canada’s economy through consumer spending and investment in farm capital.

Some system improvements can be accomplished quite quickly through the Transport Ministry. Other improvements will require the cooperation of other ministries and/or new legislation. Recommendations 1 through 3 are necessary initial steps. Recommendation 4 would build upon, complement and/or supercede aspects of the other recommendations when implemented in the future.

Recommendation 1: Establish an agency with enforcement powers to compel railway performance regarding grain transportation and which is authorized to apply penalties for non-compliance.
Proposed agency – Terms of Reference:
How constituted:

• Mandated to coordinate grain shipment to achieve an equitable level of service to farmers regardless of size or location, minimize transit time, and maximize volume throughput from farm-gate to end-user via vessel at port, domestic processor or point of export (for US shipments).
• An independent third party comprised of a majority of elected farmer members.
• Reports to Parliament.

Functions:

• Uses crop volume data to set targets and enforce coordination between railways, elevators, producer car loaders and among terminals to ensure timely movement of grain from country elevator to vessel at port, domestic processor or point of export (for US shipments).
• Works with the Canadian Grain Commission to ensure that domestic processors and feed mills are served equally as well as export customers.
• Provides arbitration to ensure that effective, reasonable, economically viable inter-switching contracts are in place such that all shippers within the inter-switching region may be served by all available railway companies.
• Monitors:
  • Railcar spotting, movement, location and delivery to all port terminals to ensure efficient movement and prevent cars from being sidelined or diverted.
  • Vessel loading at port terminals.

• Publicly reports the following via website and smartphone app:
  • Real time railcar spotting, movement, location and delivery.
  • Weekly data on the number of vessels waiting, names of vessels waiting for more than one week and dates of each berthing by vessel by terminal.
  • Railcar spotting performance (% of target) for each location.

Authorities:

• To collect accurate crop volume data in a timely fashion.
• To allocate port terminal capacity (including Thunder Bay and Churchill) among all users and commodities (producer car loaders, independent inland terminals, individual grain companies; wheat, canola, oats, flax, etc.).
• To set time-limited one-way traffic periods on the railroads to promote efficient grain movement during peak periods.
• To enforce railcar spotting allocation and schedules at all elevators, inland terminals, independent shippers and producer car loading sites.
• To levy penalties on railways for lack of performance, escalating daily with higher penalties for failure to serve producer car sites, short line railways and independent shippers.
• To order grain companies to swap similar qualities of grain among port terminals to promote timely loading of vessels and transparency of blending practices.
• To levy fines against grain companies for inefficient loading performance at port. The data and fines would induce grain companies to plan shipments to maximize throughput at port, and induce them to demand better service from railways.

Recommendation 2: Maintain the Maximum Revenue Entitlement (MRE, or “revenue cap”),with a full costing review within 18 months

Railways have a statutory common carrier obligation to provide service. Captive shippers require protection against monopoly pricing practices of railways. Increasing revenue to railways will not improve service because grain producers are captive shippers. Railways will haul non-captive commodities first and make grain wait, no matter what the freight rate. When the revenue cap was introduced, railways claimed they would not need the full amount of revenue provided, but soon claimed all of it, and frequently exceed it.

• The revenue cap is necessary to stop predatory freight rates from being applied to grain.
• A full costing review is needed to increase transparency and restore fairness to the MRE in light of the significant restructuring of the railway system since the previous costing review. Costing review formulae need to be redesigned to permit downward rate adjustments in situations where prices of cost components go down.
• An arbitration mechanism is needed to deal with price and service level discrepancies.
• Smaller shippers must have an access to justice through a lower-cost alternative to the courts to effectively challenge unreasonable rate quotes that railroads use to unduly discriminate between locations and thereby reduce service for cost-cutting purposes.

Recommendation 3: Improve Producer Car Access to Transportation

Access to producer car loading is an essential part of the grain transportation system guaranteed to farmers under the Canada Grain Act. Producer cars’ ability to compete, and thereby moderate elevation tariff levels charged by grain companies, is accomplished by ensuring that producer cars are also efficiently transported and unloaded at the car’s destination.

To improve producer car access to transportation:

• Increase the number of producer car loading sites, particularly in under-served areas
• Guarantee producer cars’ access to unloading facilities at all terminals

Recommendation 4: Establish a single desk selling agency for wheat

On behalf of farmers, the single-desk selling agency would be empowered by statute to market all of each year’s wheat sold for export or for human consumption domestically. The single desk agency would know the quality and quantity produced in all areas of Canada, have the capacity to collect from the countryside in an orderly fashion, blend to meet customer specifications, and be able to communicate transportation needs efficiently to coordinate movement with sales so that domestic millers and food processors could be supplied and lake freighters and ocean-going vessels could be loaded without delay.

The single desk selling agency would be a shipper under the Canada Transportation Act, and thus would have standing in the event of a dispute with a railway.

Farmers’ beneficial ownership of the wheat would reach from the farm gate to the end-use customer (a beneficial owner is entitled to the benefit of owning the property in question even though the title to that property is in another’s name, usually in situations where the other acts as an intermediary on behalf of the beneficial owner).

The single desk selling agency would be:

• Established and empowered by statute
• Democratically controlled by elected farmer directors
• Retained earnings prohibited — all proceeds less cost of sales returned to farmers annually
• Annual audit tabled in Parliament and posted on website within 90 days of fiscal year end

OUTCOMES:

Implementing the above recommendations would lead to equitable access to timely, efficient grain transportation at reasonable cost among prairie farmers regardless of size or location of farm and the orderly marketing of Canada’s largest crop. The specific outcomes would be:

An aggregate level of service for farmers

• Timely crop volume estimate data would allow the grain logistics agency to allocate port capacity among users and set enforceable shipping targets for each growing region (boundaries to be determined). This would prevent bottlenecks and the associated costs.
• Smaller and independent shippers would have equitable and timely access to car spots, resulting in a more diversified market and greater choice for farmers.
• Time-limited one-way traffic periods would increase the rail system’s surge capacity and reduce the need to invest in capacity that would not be necessary every year, freeing up resources for other kinds of investment.
• Poor railway performance would be minimized, as the railways’ power would be counterbalanced by the weight of the agency responsible for all grain and oilseed traffic.

Viable Producer Car shipping

• Producer car loaders would get their cars spotted in a timely manner.
• Producer cars would have access to market at port terminals.
• Short line railways would have fair inter-switching contracts which permit them to provide service to producer car shippers along branch lines.

Viable Independent Shippers

• Independent shippers would be guaranteed timely and reasonably priced access to port terminal facilities.
• Independent shippers would get cars spotted in a timely manner, allowing them to contribute to the diversity and vitality of Canada’s economy.

Fair Returns to Wheat Farmers, Improved Service to Customers

• All proceeds of grain sales, net of operating costs, would be returned to farmers each year.
• All the appreciation in the value chain – from seed developed by plant breeders to the efficient assembly and transportation of shiploads according to customer specifications – would be returned to farmers every crop year.
• Canada would recover both income and reputation as a premium supplier of high quality grain.
• Domestic millers and food processors would obtain timely and secure supply; consumers would have improved access to Canadian foods.