Railroaded

The harvest of 2013 should have been a windfall for prairie farmers. Instead, the grain industry lost billions. Here’s why farmers blame the railways – and why they’re banding together to change the rules

Alberta Venture, December 2015

Kelly McIntyre has finally quelled the fallout from his 2013 harvest. It should have been one of the best years ever for the Fairview farmer; wheat production across the prairies was up almost 40 per cent from a year earlier. Instead, it was a crisis. There weren’t enough railcars to get his grain – or anyone else’s – to the coast. By January of 2014, prairie elevators were at a bin-busting 95 per cent capacity while export terminals in Vancouver sat hollow at just 30 per cent. “Everyone in Canada seemed to know that there was a huge crop coming,” McIntyre says, “except the railroads.”

Two months later, Gary Stanford was at a world grain summit in Singapore. A farmer near Magrath, a small town near the Montana border, he was representing the Grain Growers of Canada, where he’s president. He was the last slated speaker, and when his turn came he had to change the tenor of his speech. Speaker after speaker decried Canada’s transportation system for its inability to get grain to tidewater. They told buyers to look elsewhere.

“I couldn’t believe what I was hearing,” Stanford says. “I had to change my speech to say, ‘Hey, look, we have the biggest crop there is and we’re trying to get it out. We’re working with the railways to move it, and I don’t want our reputation to be tarnished.’”

The backlog was a bi-partisan issue the likes of which Canada rarely sees. Even Green Party Leader Elizabeth May stood with former Prime Minister Stephen Harper, who said, “We simply cannot accept outcomes where those two big companies would dictate to the market just what they think is satisfactory in their interests.”

To cope with the backlog, McIntyre took out a loan and built two new storage bins at a cost of almost $120,000. He also stopped signing contracts months ahead of delivery, to reduce penalties should he be unable to deliver. It’s an upended way to run a business. But he hopes an upcoming review of the Canada Transportation Act, which governs the railways and their relationship with grain producers, will mean he’ll never have to face this bind again.

Today, half of Canada’s grain output is exported and 94 per cent moves by rail. (Five trains can fill a bulk carrier in Vancouver harbour; it would take about 1,250 tractor-trailers to do the same, costing five times as much.) Wheat, canola and other cereal grains account for almost 11 million of the 55 million yearly tonnes of rail commodities leaving Alberta, leading to a $16-billion industry. CN Railway and CP Railway are the keys to international markets.

But by February 2014, the whole supply chain had fractured. Data from CN showed it needed more than 24,000 rail cars to fill its orders. Wade Sobkowich, the executive director of the Western Grain Elevator Association, whose members include Cargill, Viterra, and Richardson Pioneer, said CN and CP were sending 8,000 cars per week, but he needed 12,000. In one week, the WGEA reported a 40,266-rail car shortfall, with just 27 per cent of rail cars moving on time. By March, Sobkowich said the railways had failed to fill orders for 60,000 rail cars. Sixty million tonnes of grain were stranded.

The railways blamed the backlog on inclement weather (below -25 C, railways plan for shorter trains, decreasing capacity) and unforeseeable grain volumes. “Once the cold abated, CN was back to moving record volumes of grain,” says Mark Hallman, director of media relations for CN. CP spokesperson Jeremy Berry says, “If it had been a normal crop, the supply chain would have been able to deal with it,” although the significantly reduced 2014 harvest still faced an average weekly shortfall of almost 4,000 rail cars. The federal government nevertheless passed the Fair Rail for Grain Farmers Act, or Bill C-30, on March 7, 2014, mandating that for 90 days – the government later extended the terms – each railway provide a minimum of 5,500 hopper cars per week or face $100,000 a day in penalties.

“It’s a sad day for Canada when the government decides to hit one sector of the economy in order to placate a vocal constituency,” said Claude Mongeau, the CEO of CN. Farmers and shippers, however, saw it not as an outlier but as the bubbling of latent tensions. Grain production increases every year, yet the railways allocate cars based on historic averages. It’s true that the railways move record volumes of grain, but former Agriculture Minister Gerry Ritz calls this a self-fulfilling prophecy. “Railways only recognize the cars they allocate – they don’t recognize the cars that are asked for,” he says. “[The railways] say, ‘Hey, we’re measuring up!’ Well, you’re measuring up on your own terms, not what’s actually been asked of you. A mea culpa moment needs to happen with the railways for them to readjust their business plan.”

But readjust how? Of the 340 inland prairie grain terminals, just six are served by both CP and CN. Sobkowich calls the railways a “dual monopoly.” And grain farmers are disproportionately affected because unlike other commodity producers, they aren’t also the shipper, and can’t scale back production when rail capacity is scarce. And affect them it did – the Alberta Federation of Agriculture estimated the overall cost of the 2013-14 backlog was up to $8 billion. Shippers paid demurrage costs to vessels waiting in port, at up to $35,000 per day. By February, the industry had paid $20 million in demurrage costs alone. If the shippers couldn’t make the delivery window, they faced contract extension penalties; if they couldn’t deliver at all, they paid contract defaults. “I have one customer who couldn’t deliver to the U.S., and he had to pay more than $1 million in contract defaults because the customer went somewhere else,” Sobkowich says.

McIntyre, meanwhile, couldn’t sell his grain because shippers wouldn’t take on any new contracts. He carried more than 50 per cent of his wheat into the next year. Needing cash flow, he took out a loan nearly twice what he was comfortable with. Stanford had $52,000 worth of grain waiting for delivery by March. The glut caused the price of wheat and canola, the two biggest crops, to dive by almost 30 per cent.

One bad year, however, pales in comparison to the losses of an industry selling to rail capacity rather than demand, at the mercy of railways in whose interest it is to preclude additional capacity. They want 100 per cent asset utilization, Sobkowich says; high operating ratios sell stocks. Railways know they’ll move the grain eventually. CP CEO Hunter Harrison admitted as much when in March 2014 he told a Wall Street audience not to worry about the winter impacting container traffic. “It’s not like grain … [where] if you’re a bit late you’re still going to haul it,” he said.

Producers’ and shippers’ biggest complaint is that there’s no commensurate penalty for the railways when they don’t provide cars on time. Penalties produce results for shippers – when the railways spot a train for shippers to load, they load it within 24 hours more than 90 per cent of the time, as the railway tariffs outline. Grain companies can file a “level of service” complaint, as the Canadian Wheat Board did after the 1996 backlog, but it’s a year-long process that costs around $1 million in legal fees. They can obtain a service level agreement from the railway, where an arbitrator dictates terms for a one-year period, but the arbitrator can’t rule on penalties.

Murdoch MacKay is the chair of the Canadian Grain Commission, which was formed as the Board of Railway Commissioners in 1904 as a response to CP’s monopoly and is responsible for regulating the grain-handling industry. He’s also chair of the Crop Logistics Working Group (CLWG), a consortium revived by Ritz last year to provide feedback on crop transportation. Sobkowich, Stanford and McIntyre, who sits on the board of Canadian Canola Growers Association, are involved through their organizations. And when the Canada Transportation Act, the federal statute that enables the Canadian Transportation Agency, went up for review, as it does twice a decade, the CLWG compiled a report with eight recommendations. Fuelled by the 2013 crisis, the report reads: “Most shippers are served by only one carrier. This reality renders most shippers captive to one rail company and subject to pricing and service strategies that are characteristic of monopolistic behaviour.”

The CLWG members see the Canada Transportation Act review as a critical opportunity for the kind of structural change at which previous negotiations failed. When pro-market organizations call for more regulation from the federal government, it’s a mark of urgency. The “dual monopoly” won’t be challenged anytime soon – neither CN nor CP are keen on sharing lines to increase capacity, and while rural co-operatives have bought decommissioned rail lines, their impact is akin to a farmer’s market on Safeway. No one is suggesting a return to nationalized rail companies, but reciprocal penalties would be the easiest way to boost the railways’ movement of grain and allow the industry to expand. A competitive market, after all, is supposed to ensure shippers can take their business elsewhere if their main carrier isn’t serving them. Under the current system, their only options are to put up or board up.

When Sobkowich looks 10 years down the road, he sees two possible scenarios: in one, the review of the Canada Transportation Act spurs fundamental change to the dual monopoly of the railways. Prairie farmers are increasing their capacity, expanding their farms and shipping their product in a competitive environment.

The other? “It’d look a lot like today, I guess,” he says. “Which means that when we get a larger crop, there are problems all over the place, prices to the farmer are compressed and grain companies aren’t competing for grain because they can’t move it anyway. And when cold weather hits, we’re going to see the same drop in capacity, and we’ll still end up with the railways putting as few resources as they can get away with into the system while returning as much value as they can to their shareholders, at the cost of their customers.”

The CLWG has submitted its recommendations, and the government will have the review concluded and its summary presented before the end of the calendar year. We’ll have to wait and see down which road Sobkowich – and all Prairie farmers – will be headed.

Reprinted with permission from Alberta Venture.