Canada's logistical challenges

by Leo Quigley
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The Canadian government has passed legislation that will strip Canada’s grain marketing agency — the Canadian Wheat Board (CWB) — of its monopolistic powers and introduce Prairie wheat and barley growers to the vagaries of the open market — something they haven’t experienced since membership in the board became compulsory for grain farmers in 1943.

While the move appeals to many farmers as well as livestock producers and grain companies on the Prairies, it does not appeal to all grain farmers.

Details are still being worked out. And as German art historian Aby Warburg said roughly 100 years ago, “The devil is in the details,” causing some farmers to say it’s a sign that the Harper Government rushed into changing the legislation for philosophical reasons, without first considering the negative impacts it could have on the industry.

Also, in a move that will either ease the transition for grain farmers, or add to the confusion, the government has said it has no plans to completely eliminate the wheat board. In fact, CWB President and Chief Executive Officer (CEO) Ian White has said that in the next crop year the board — even without its monopolistic powers — will offer farmers a full portfolio of grain marketing programs to be launched this year including pooling options, futures contracts and cash prices.

“The grain marketing landscape is changing, but farmers’ business needs are the same,” he said. “Farmers want good returns for their grain, solid risk management and timely cash flow. We’re ready to deliver competitive alternatives that farmers can use with confidence as they build individual marketing strategies.”

White also pointed out that CWB finances will continue to be backed by the full guarantee of the Government of Canada, which will provide security for farmers in the new open-market environment that begins Aug. 1, 2012.

Included in this package of services will be:
•Price pooling: Pooling grain offers farmers the benefits of a cost-effective risk management strategy to stabilize price volatility and generate returns across markets throughout the pool period. The CWB will offer short- and longer-term pool periods that enable farmers to choose the best match for their own price-risk tolerance and cash-flow needs. Payments will take the form of initial payments, followed by adjustment and final payments. Early Payment Options will be available. The shorter-term pool will create early delivery opportunities for farmers, while the longer-term pool will call deliveries throughout the pooling period.
•Futures contracts: Farmers can take advantage of the CWB’s extensive experience hedging wheat on the Minneapolis, Kansas City and Chicago grain exchanges. Under these contracts, farmers can protect an attractive price based on futures markets, as a highly effective way to manage risk. They will be able to lock in a price that takes care of futures values, foreign exchange and delivery with one decision. They will also have the flexibility to choose a base grade of wheat.
•Cash contracts: Farmers can use CWB cash contracts to increase profitability and cash flow through upfront price certainty. Farmers choose when they price and sell, and receive full payment soon after delivery, with delivery opportunities offered in accordance with contract terms.
•Support for a marketing strategy: CWB experts will be available to assist farmers in building a marketing portfolio that serves their business needs. Frontline CWB staff will be able to explain how CWB programs, used individually or in combination, will help them implement a grain-marketing plan that makes the most sense for their own farms

But what the CWB failed to point out is that it does not own any storage, loading or processing facilities to handle farmers’ grain.

For farmers outside of Canada, particularly U.S. farmers, the concept of working in an industry tightly controlled by a single government institution with a monopoly that controls your industry is difficult to comprehend.

As a monopoly, the CWB has advised farmers on everything from long-range weather patterns and what they should plant to when they should deliver their grain to the elevator, how much and at what price. Then, once the load was dumped, it became the property of the CWB and no longer of concern to the producer. All that was left for the farmer to do was to wait for the final payment, which could come as much as a year later.

Grain Transportation Impact

In short, for almost 70 years wheat and barley producers living in Canada’s major grain producing provinces — Manitoba, Saskatchewan, Alberta and the Peace River region of British Columbia — have not been involved in either marketing their crop, understanding customer needs or the logistics involved in moving their product to the buyer.

The changes scheduled to be put in place at the beginning of next crop year will impact nearly every aspect of the wheat and barley industry in Western Canada and, particularly, the grain transportation business.

In its position as a single desk marketing agency, the CWB has been the conductor of Western Canada’s grain transportation system, a task that is perhaps best described in a CWB job opportunities bulletin that says: Among other things, the CWB’s logistics department is “responsible for determining railcar demand requirements (both quantity and product mix) to meet inbound vessel shipping requirements (export vessels, domestic milling lakers, as well as transshipments by laker to the St. Lawrence River) in the ports of Thunder Bay, Churchill, Vancouver and Prince Rupert, as well as transfer elevators in the St. Lawrence River, besides also coordinating vessel loading, the CWB’s grain tendering program, along with ocean freight and laker freight chartering.

“As well, the logistics department is responsible for the creation, maintenance and communication of the pool accounts and export availability, which are drivers of the CWB sales program. This area also ensures that the approval of sales inquires take into account the operational capabilities and considerations for a sale to be successfully executed.

“Rail Logistics is also responsible for origination including tactics and strategies in order to maximize both customer and farmer service while minimizing supply chain expenditures of the CWB. The Quality Control and Inventory Management section of the department is responsible for the CWB’s quality control and inventory management tactics and strategies in order to maximize both customer and farmer service while minimizing supply chain expenditures of the CWB.”

This is clearly no small task. However, in preparation for the changeover from a transportation system driven by a single desk monopoly to a system driven primarily by farmers and three major grain companies — Viterra, Cargill Canada and Richardson Pioneer — the Harper Government has established a Crop Logistics Working Group involving major players in the transportation system, including representatives from crop sectors, such as Western Canadian canola, lentil and pea growers, that do not come under the control of the CWB. However, the group does not include railways, truckers or steamship lines that are critical links in the logistics chain.

In announcing the establishment of the working group, Agriculture Minister Gerry Ritz said: “The Working Group will be a forum for the agriculture value chain to consider the performance of the supply chain for all crops and to exchange views and information on issues arising from the transition to marketing freedom. The facilitation process will bring together shippers, railways and other stakeholders to develop a template service agreement and a streamlined commercial dispute resolution process.”

As well, the Working Group will “allow agriculture stakeholders to exchange views about issues and support of the (government’s) Transport Canada facilitation process flowing from the Rail Freight Service Review.”

In the freight service review, the government panel recommended that both major railways adopt a more “customer-centric behavior.” However, the panel also recognized that communication between the railways and customers is now more frequent and that “there is a renewed willingness to cooperate, and that rail service is improving in some sectors.”

Nevertheless, the panel recommended that facilitators be appointed by Transport Canada to “help stakeholders negotiate some of the details of the commercial approach,” and said the railways should improve their reporting to stakeholders.

In conclusion, the report recommends that the upcoming 2015 statutory review of the Canada Transportation Act “include an assessment of the effectiveness of the rail service framework and an evaluation of whether there have been unintended consequences …”

In fact, both of Canada’s railways have taken proactive steps in the past year or two to reach agreements with ports and industry customers to improve communications, customer relations and performance. CP Rail has entered into Service Level Agreements with most of its customers, including major ports and terminals that will improve the railway’s productivity, reliability and efficiency. Likewise, CN Rail has entered into similar agreements across Canada and the U.S.

Claude Mongeau, president and CEO of CN, told the Southeast Freight Conference in Memphis last fall that CN “is taking its Precision Railroading model to the next level, delivering on an agenda of operational and service excellence anchored on supply chain collaboration to improve end-to-end service for our customers.”

What the railways have objected to in the government’s Freight Service Review report is the suggestion that government-appointed facilitators are necessary to ensure they are, in fact, improving service to grain producers.

While the legislation removing the monopolistic powers of the CWB will not come into effect until the beginning of the crop year, Canadian-owned grain handling companies have already welcomed the change.

Mayo Schmidt, president and CEO of the largest company, Viterra, said at the announcement: “While marketing choice in itself is a major and positive change for agriculture in western Canada, we also anticipate that further transportation and logistical efficiencies will be realized, benefiting farmers, industry, customers and the broader economy. The future of agriculture in Canada looks brighter than ever.”

Also, Viterra immediately began signing contracts with farmers for the coming year.

Curt Vossen, president of Canada’s largest privately-owned grain company, told World Grain: “I do think it will change for the better. You’ve got a logistics pipeline that starts with trucks and goes to railcars and then goes to vessels. It’s tough enough managing those logistics effectively over a considerable distance, a very challenging geography and a challenging climate without inserting another third party into the equation. It then has the potential to be less clear, more vague and with a greater chance for misunderstanding.

“In our non-CWB (crops that do no come under the CWB’s jurisdiction, such as canola), we think we’ve got much greater efficiency and control from point of origin to point of destination, because we manage the entire pipeline.”

“We like to manage the pipeline,” he said, “because then we can coordinate volume in, volume on rail, rail matching to fobbing capacity at a terminal position and to vessel arrival as opposed to having to accommodate inefficiencies in the system by building up inventory, storing inventory unnecessarily, moving that inventory in advance of when it’s truly needed, tying up space and inventory capacity at a terminal position and then moving it onto a vessel.

Vossen said whenever you start to get these disconnects, you create inefficiencies in the system. “Clearly, in this new situation, whether we’re doing business for the new Canadian Wheat Board or doing our own business, we will want to manage that pipeline as rigorously and as effectively — on a demand-pull basis — as we’ve done traditionally with our non-boards,” he said.