A Perfect Storm

by Leo Quigley
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Mother Nature had a love affair with Western Canada last summer and bumper crops of everything from wheat to broccoli were the result. However, the winter of 2014 was a much different story. Mother Nature introduced the Polar Vortex to North America and, as an example, temperatures in Winnipeg, Manitoba, plunged to -25 degrees C with wind chill values of -40 degrees, and pretty much stayed there.

Aside from small town hockey rinks, the sub-zero temperatures created problems across Western Canada and especially problems for the railways. At -25 degrees air condenses and brake lines that run the length of the train become less effective, particularly at the end of a 120-car unit train, meaning shorter trains were required. As well, steel track becomes shorter which can result in “pull aparts” which is something you don’t want on a rail line.

In short, railroading in sub-zero temperatures becomes very difficult and, as a consequence, moving goods – including grain – by rail becomes slower and less efficient.

But, as in other years, Western Canada’s crops, which grow primarily in an east-west strip along the Canada/U.S. border from Winnipeg, Manitoba, to the Rocky Mountains, came off the fields in roughly a three-week period and, since they were bumper crops, many Prairie farmers faced with full elevators and not having sufficient on-farm grain storage resorted to piling wheat on the ground (which has happened other crop years as well.)

Mark Hemmes, president of Quorum Corp., an Edmonton-based company responsible for keeping track of grain transportation in Western Canada, told farmers at a community meeting earlier that Western Canada’s average production of cereal grains, oilseeds, pulse crops and specialty crops averages over 50 million tonnes most years. However, the 2013 crop yielded more than 75 million tonnes.

He also warned producers that the level of production of crops in Western Canada is on the increase as farmers adopt improved crop farming techniques, new varieties and improved crop inputs. As well, he pointed out that with the sea change in global markets there has been a major shift toward exporting through terminals on the West Coast rather than the East Coast and the St. Lawrence Seaway.

He referred to the increased production, increased exports and growing markets as “the new normal” for Prairie farmers.

But, farmers wanted their wheat off the ground and into the elevator where they could get cash and they were anxious for the railways (CN Rail and CP Rail) to move the grain to export quickly.

Government’s response

Rightly or wrongly, Ottawa responded to farmer complaints of slow grain movement by passing an Order In Council under section 47(1) of the Canada Transportation Act requiring CN Rail and CP Rail to “increase the volumes carried each week, over a period of four weeks, to a combined target of 1 million tonnes per week, more than doubling the volume currently being moved.”

Also, Ottawa warned the two major railways that: “The Order creates direct legal obligations on (the) railways and will result in penalties for non-compliance of up to $100,000 per day.”

In making the announcement, Canada’s Transport Minister, Lisa Raitt, said in a statement: “For the past several months, the bumper crop of grain produced in Canada has not been moving fast enough to Canadian ports. This issue affects more than just our farmers; it affects trade and Canada’s ability to supply our markets around the world.  We are taking this action to more than double grain shipments in order to preserve the integrity of Canada’s transportation system and our reputation as a global supplier.”

As might be expected, Canada’s two major railways were angered by the announcement.

In a speech in Winnipeg to a grain industry audience, Claude Mongeau, president and CEO of CN Rail, said: “I was with CEOs of the grain companies in late August (2013) and the talk was whether the late-planted crop would suffer from frost. For the first five weeks of the year, the grain elevator companies were not moving crop while the crop was maturing in their own backyards. Then, all of a sudden, 10 million (extra) tonnes appeared.

Mongue also accused grain companies from over-ordering grain cars in order to gain market share over competitors. And, he also said that the fact that the companies worked together to shift the blame for the shortfall from themselves to the railroads has worked against the industry.

“That shifting of the blame was very unfortunate,” he said. “That shifting of blame has brought ill-advised regulation.

“In the future, if we want to do more, faster to adjust to bigger crops we’re going to have to make investments, all of us – not just the railroads.”

Saying he believes in commercial approaches, Mongue said, “It’s not perfect (a commercial approach) but it’s tried and true. It works in every sector and it works with grain in the U.S.”

In closing, Mongue said that he will be encouraging the federal government to regulate Canada’s grain elevator system as well as the railways in order to “level the playing field.”

“If the regulated approach doesn’t have the right outcome, maybe we’ll get smart and go back to a commercial system,” he said.

CP Rail’s Chief Executive Officer, Hunter Harrison, echoed Mongue’s remarks, saying in a statement: “CP believes that the government has unfortunately chosen to introduce legislation which will do nothing to increase supply chain capacity in the grain handling system, will not move more grain to markets more quickly, and has the potential to cause great damage to the Canadian rail transportation system that is unquestionably the best in the world.

“Targeting the railways when our dedicated men and women are working 24/7 to recover from some of the harshest winter operating conditions ever seen, is not only ineffective but grossly unfair.”

Ed Greenberg, CP Rail spokesperson, said: “We need solutions that will increase throughput of grain from farm to ship. Additional capacity can be brought online if railcars are unloaded 7 days a week, 24 hours per day. Instead of cars sitting waiting to be loaded or unloaded, those cars should be cycling back to the Prairie elevators and Ports.”

‘A fractured system’

While many grain farmers and the industry blame the railroads for the grain backlog, some blame the way business is transacted in Western Canada’s grain industry. Brian Otto, chairman of the Barley Council of Canada and past President of the Western Barley Growers Association, told World Grain, “It’s not just grain that’s struggling with shipping, it’s all the sectors. Oil is having a struggle, the forestry industry, the potash industry, coal; they’re all struggling to get product moved. I understand the railroads faced a difficult winter, but this is Canada, we do have winter.

“You’ve got a fractured system right now. Everybody is blaming everybody else and, you know, everybody has to take a step back … we’ve got to get everybody in the room, all the players, through the whole transportation chain so we understand the challenges that each sector faces because you can’t put a solution in place until you understand the challenges everybody is facing.”

Otto said the former Canadian Wheat Board “would not have been able to resolve this issue any easier than the commercial system we have now.”

Otto said Canadian farmers have faced a transportation problem at least once every six to eight years. “Nobody has sat in a room and tried to resolve it,” he said. “It doesn’t matter if you’re a grain producer or you’re a grain company, or you’re a railroad company or if you’re a port terminal. If you’re the cause of why somebody can’t meet their commitment and you have a contract, there has to be a penalty in place that forces you to try and meet those commitments.”

Otto also said there has to be more transparency between shippers and the railroads.

“In my opinion there’s definitely been a breakdown in communications,” he said.

Barry Prentice, director of the Transportation Institute at the University of Manitoba, agreed that there may be a communication problem in the industry, but also said: “There are also a lot of people who don’t want to listen.”

Also, it’s his opinion is that the industry is “literally jumping to conclusions and policy based on, actually, nothing.”

“I really think that this is a larger policy, an attempt to get back at or get the government to whip the railways into some kind of competitive industry that they’ll never be. I look at it this way … think about an extra large harvest, to handle that, what you’re looking for is insurance. What the industry seems to want done is that all the cost of insurance should be borne by the railways, by having cars sitting around just in case, and the rest of the industry should just benefit from that.”

“If farmers want insurance there’s two ways to do it: One is to build your own storage or, alternatively, pay more to have a reserve of cars ready for you. To demand that the railways have 30% more cars sitting around, just in case, is a ridiculous premise. What I find strange is that canola is damn near as big as wheat, certainly in terms of value, and yet it operates fine and I never hear any complaints about canola.”

Prentice said he believes what may be going on in Western Canada’s grain industry goes back to the old saying: “Wheat is 13% protein and 87% politics,” and much of the debate is being generated by farmers that are still angry at seeing the Canadian Wheat Board stripped of its monopoly.

“There’s something going on that has nothing to do with the market or with moving grain,” he said. “It’s purely about political survival.”

Based in Vancouver, British Columbia, Canada, Leo Quigley writes for a variety of national and international publications specializing in agriculture and transportation. He can be reached at Quigley@dccnet.com.