Grain Handling and Transportation System Review

Grain Handling and Transportation
System Review

A comprehensive review of Canada’s grain handling and transportation system began in December, 1997. The Review was motivated by a widespread belief in the industry that efficiency improvements were urgently needed to maintain and improve Canada’s position as a major world grain trader.

Canadian grain farmers face some of the longest inland distances to market of any exporting nation. So transportation is a large share of the Canadian farmer’s costs. Minimizing these costs critically affects their success, particularly when margins get squeezed by low grain prices.

Rail transportation is the largest single cost incurred by farmers in producing, handling and shipping of export grains. The pricing and performance of the rail system is understandably one of the central issues in the Grain Review. Farmers want the lowest possible rail rates and the best possible service. Railways, at the same time, need to earn profits to maintain the grain delivery system and to attract new investments that will improve services.

Rail freight rates for the majority of grain movements in western Canada have been regulated since the "Crow Rate" came into effect in 1897. The basic question is whether to eliminate the regulated rate schedule (known as the rate cap). The rate cap provides for equity—equal rate for equal distance shipped. However, shipments where the railways incur high costs to provide the service pay the same rate as low cost movements. A commercial rate system, where rates are negotiated between shippers and railways, would better reflect the true costs and demand for various services.

There is support in principle for deregulating the system to encourage efficiency and bring it more in line with other commodities which are subject to the commercial provisions of the Canada Transportation Act (CTA). However, there is concern about the level of railway competition, which some feel is not sufficient to keep the rates in check, given there are only two major railways.

As with many facets of the Review, the issue of competition triggers several other complex questions—including, what would be the "most effective way of increasing competition without putting the health of the railway system at risk" (Kroeger). Addressing this complex area would involve changes to the competitive access provisions of the CTA. The railways oppose this because they say that competition between them is already strong and that it will increase further as the system consolidates. Since the CTA applies to the rail movement of commodities other than grain, there is keen interest among non-grain shippers about possible legislative changes. (To the extent that rail competition issues may be dealt with in the context of the Grain Review, there could be less need for the federal government to address rail issues in the mandated comprehensive review of the CTA scheduled to begin in mid-2000.)

Justice Estey suggested a compromise on the issue of the rate cap that would permit clearer market signals to be sent by railway tariffs. He proposed to repeal the regulated rate system in return for a guaranteed freight revenue reduction by the railways, set as a ceiling on total railway freight revenue (revenue cap). The Kroeger process, however, found stakeholders unable to agree on: 1) how much rail revenues should be reduced; and 2) how to share any productivity gains resulting from market driven railway tariffs.

Another major issue is the transportation role of the Canadian Wheat Board (CWB). The CWB and others believe the CWB must continue to have a strong role in transportation (e.g., developing delivery schedules, influencing the assignment of rail cars to elevators) in order to meet its sales commitments and maximize returns to producers.

STATUS
(July 6, 2000)

Implementation of the reform package, announced May 10, 2000, required legislative changes. Bill C-34, which amended the Canada Transportation Act, received final Parliamentary approval on June 22, 2000.

The reform package includes:
• repealing the maximum grain rates that the railways can charge at each prairie delivery point;
• a cap on annual railway revenues from grain, representing an estimated 18% reduction in 2000-2001 freight rates (saving farmers an estimated $178 million per year);
• the expansion of CWB tendering for logistical services for grain shipments through the ports of Vancouver, Prince Rupert, Thunder Bay, and Churchill, from at least 25% of their volume in 2000-2001 to a minimum of 50% in 2002-2003;
• enhancing the provisions dealing with the sale or abandonment of branch lines;
• simplifying the Final Offer Arbitration process;
• an expedited examination of ways to increase railway competition, included in the review of the CTA;
• $175 million over five years for rural roads handling increased grain traffic; and
• an independent private-sector third party to monitor and report on the impact of these changes.

A separate Memorandum of Understanding (MOU) between the CWB and the Minister responsible for the CWB was signed on June 28, 2000, and released the following day.

The MOU seeks to introduce a more contract-based approach between the CWB, railways and grain companies.

THE GRAIN REVIEW PROCESS

Federal Announcement (May 10, 2000)
• Transport Minister David Collenette, Ralph Goodale, Minister responsible for the Canadian Wheat Board, and Lyle Vanclief, Minister of Agriculture and Agri-Foods, introduced new measures to be implemented by August 1, 2000.

Kroeger Implementation (May-Sept., 1999)
• A consultative process to develop the operational details of a more efficient system
• Report submitted to Mr. Collenette September 29, 1999.

Federal Announcement (May 11, 1999)
• Endorsed Justice Estey’s vision for a more commercially-oriented, contract-based system with appropriate safeguards to protect the public interest

Estey Grain Review (Dec. 1997-Dec. 1998)
• Identified key issues and made several recommendations on a plan to accelerate the evolution already underway in the industry *
• Final report submitted to Mr. Collenette December 21, 1998.

* Given the complex connections between the parts of the grain logistics system, it was proposed that the recommendations be acted upon as an integrated package where possible.

Some view the CWB as an unnecessary third party in the transportation chain. The argument is that responsibilities are blurred, competition among elevator companies restricted, and inefficiencies created. Proponents of this view advocate removing the CWB from transportation, leaving all transportation and handling to the grain companies and railways. Many system participants believe that commercial contracts are the best way to implement such an approach to ensure that the needs, responsibilities, and authorities of the CWB, farmers, grain companies and railways are clearly spelled out.

Grain is a vital commodity for the ports of Vancouver, Prince Rupert, Thunder Bay and Churchill and for ports on the lower St. Lawrence which act as transfer ports for offshore markets. Grain is also important to the economics of shipping on the Great Lakes/St. Lawrence Seaway because it helps balance traffic flows (eastbound grain and westbound iron ore). Clearing grain through port terminals and onto ships critically affects the efficiency of the entire gathering system extending back to the prairies.

Apart from these operational concerns, issues of strategic importance were dealt with outside of the Grain Review. Justice Estey’s recommendations on ports and waterways were addressed through a Transport Canada Ports Task Force on maintaining competitive port options for Canadian shippers and factors affecting the supply of grain to western ports. The Ports Task Force Report was submitted in September 1999. A related study on port competitive issues was also completed by Transport Canada and released earlier this year.

The importance of Canada’s grain trade . . .
Canada’s grain industry injects some $12 billion into the economy each year. It ranks in importance with the forestry, automobile manufacturing, mining and fishing industries and employs some 140,000 grain farmers, mostly in western Canada. (Estey Review, Final Report).

As other countries do, we meet our own needs first. What makes Canada unique is the large proportion of grain that we export, some two-thirds of each year’s harvest to over 100 different countries. Worldwide, we rank third as a grain supplier, behind the US and European Union. For several products (rye, canola, flaxseed, mustard seed) we are the world’s principal exporter. (WESTAC Grain Handling and Transportation System Profile Report, May, 1998) .

The complexities of moving grain . . .
Grain logistics is a complex subject. A large number of farmers grow many varieties of grain products and there are many different grades within each product—all of which must be kept separate during handling and transportation. Much coordination is required for movements off farms to elevators, the rail movement from farms to ports or directly to US destinations, unloading of rail cars at port elevators, and loading of ships that ply international routes.

Apart from the farmer, the other key players are the grain companies, railways, and the Canadian Wheat Board. Hauling grain represents up to one-quarter of railway revenues. The CWB, a federal government agency, acts as a single-desk marketer of wheat and barley on behalf of Canadian farmers and accounts for over 60% of grain shipments. The CWB uses grain companies as agents to collect grain because it does not own elevators.

For more background information . . .
• Transport Canada
• Canadian Wheat Board
• Canadian National Railways
• Canadian Pacific Railway Company
Implementation of the reform package, announced May 10, 2000, required legislative changes. Bill C-34, which amended the Canada Transportation Act, received final Parliamentary approval on June 22, 2000. The reform package includes: • repealing the maximum grain rates that the railways can charge at each prairie delivery point; • a cap on annual railway revenues from grain, representing an estimated 18% reduction in 2000-2001 freight rates (saving farmers an estimated $178 million per year); • the expansion of CWB tendering for logistical services for grain shipments through the ports of Vancouver, Prince Rupert, Thunder Bay, and Churchill, from at least 25% of their volume in 2000-2001 to a minimum of 50% in 2002-2003; • enhancing the provisions dealing with the sale or abandonment of branch lines; • simplifying the Final Offer Arbitration process; • an expedited examination of ways to increase railway competition, included in the review of the CTA; • $175 million over five years for rural roads handling increased grain traffic; and • an independent private-sector third party to monitor and report on the impact of these changes. A separate Memorandum of Understanding (MOU) between the CWB and the Minister responsible for the CWB was signed on June 28, 2000, and released the following day. The MOU seeks to introduce a more contract-based approach between the CWB, railways and grain companies.


Some view the CWB as an unnecessary third party in the transportation chain. The argument is that responsibilities are blurred, competition among elevator companies restricted, and inefficiencies created. Proponents of this view advocate removing the CWB from transportation, leaving all transportation and handling to the grain companies and railways. Many system participants believe that commercial contracts are the best way to implement such an approach to ensure that the needs, responsibilities, and authorities of the CWB, farmers, grain companies and railways are clearly spelled out.

Grain is a vital commodity for the ports of Vancouver, Prince Rupert, Thunder Bay and Churchill and for ports on the lower St. Lawrence which act as transfer ports for offshore markets. Grain is also important to the economics of shipping on the Great Lakes/St. Lawrence Seaway because it helps balance traffic flows (eastbound grain and westbound iron ore). Clearing grain through port terminals and onto ships critically affects the efficiency of the entire gathering system extending back to the prairies.

Apart from these operational concerns, issues of strategic importance were dealt with outside of the Grain Review. Justice Estey’s recommendations on ports and waterways were addressed through a Transport Canada Ports Task Force on maintaining competitive port options for Canadian shippers and factors affecting the supply of grain to western ports. The Ports Task Force Report was submitted in September 1999. A related study on port competitive issues was also completed by Transport Canada and released earlier this year.

The importance of Canada’s grain trade . . .
Canada’s grain industry injects some $12 billion into the economy each year. It ranks in importance with the forestry, automobile manufacturing, mining and fishing industries and employs some 140,000 grain farmers, mostly in western Canada. (Estey Review, Final Report).

As other countries do, we meet our own needs first. What makes Canada unique is the large proportion of grain that we export, some two-thirds of each year’s harvest to over 100 different countries. Worldwide, we rank third as a grain supplier, behind the US and European Union. For several products (rye, canola, flaxseed, mustard seed) we are the world’s principal exporter. (WESTAC Grain Handling and Transportation System Profile Report, May, 1998) .

The complexities of moving grain . . .
Grain logistics is a complex subject. A large number of farmers grow many varieties of grain products and there are many different grades within each product—all of which must be kept separate during handling and transportation. Much coordination is required for movements off farms to elevators, the rail movement from farms to ports or directly to US destinations, unloading of rail cars at port elevators, and loading of ships that ply international routes.

Apart from the farmer, the other key players are the grain companies, railways, and the Canadian Wheat Board. Hauling grain represents up to one-quarter of railway revenues. The CWB, a federal government agency, acts as a single-desk marketer of wheat and barley on behalf of Canadian farmers and accounts for over 60% of grain shipments. The CWB uses grain companies as agents to collect grain because it does not own elevators.

For more background information . . .
• Transport Canada
• Canadian Wheat Board
• Canadian National Railways
• Canadian Pacific Railway Company