Canadian growers blindsided

by Leo Quigley
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In a Prairie small town everyone talks about the weather and, on coffee row, farmers talk about crops.

Across Western Canada hundreds of meteorologists broadcast Environment Canada’s weather predictions and agricultural consultants and investors at ICE Futures Canada, (former Winnipeg Commodity Exchange) bet on the weather and crop yields with enough confidence to risk money on their predictions.

Without question, predicting the weather and guesstimating crop yields is a multi-million dollar business and critical to the lives of roughly 200,000 farmers in Western Canada.

However, in the autumn and early winter of 2013-14 nobody predicted the possibility of an Arctic Vortex. In fact, no one on coffee row had ever heard of an Arctic Vortex when three days before Christmas temperatures plunged to a record -40.9 degrees C in Southend and -39.2 degrees C in Spiritwood, Saskatchewan, and where Winnipeg recorded its second-coldest winter in 75 years. Nearly 1,000 homes had frozen pipes and families went without running water for days or weeks.

The frigid weather hit transportation systems in both sides of the Canada/U.S. border. In fact, Walmart, a company you would expect to be a world class leader in transportation logistics, suffered a 5% drop in its first quarter that Chief Executive Officer (CEO) Doug McMillon attributed largely to severe winter weather

“Like other retailers in the United States, the unseasonably cold and disruptive weather negatively impacted U.S. sales and drove operating expenses higher than expected,” he said in a statement. Not only did frigid winter weather impact the company’s store traffic, it disrupted the entire supply chain, including the trucking industry.

The second misfire was the fact that crop prognosticators failed to warn the industry that a massive crop was taking shape on the Prairies – a crop that was something Prairie farmers hadn’t seen for 100 years — a record 75-million-tonne harvest that shattered the previous record set in 2009 by 28% and 50% higher than the average for the West.

Most farmers didn’t see it coming, grain handlers didn’t see it coming, grain marketers didn’t see it coming, grain export terminals didn’t see it coming and the railways didn’t see it coming.

And there was no time to prepare.

Can it happen again?

The result of this lack of vital information was calamitous. The railways were unprepared and couldn’t move the massive crop quickly enough to satisfy farmers; farmers were frustrated and losing money as prices plunged; the federal government was hit with the brunt of complaints and passed legislation complete with fines to pressure the railways into moving more grain; and Canada’s reputation as a reliable supplier worldwide was damaged – and not only for commodities such as foodstuffs, but for products such as lumber as well.

David Lindsay, president and CEO of the Forest Products Association of Canada, said in a statement: “The forest products industry is one of the sectors that faced downtime and lost revenue because of the lack of an adequate transportation system in this country, Canada’s prosperity depends on exports, yet we often can’t ship our products to market in a timely fashion.”

He also noted that the grain industry in Canada exports $21 billion of product each year while the forest products industry exports $28.5 billion.

The question now for Canada’s grain industry, among others, is: Can this happen again? Can another extremely cold winter and near-record production once again create a transportation bottleneck?

The simple answer is: Nobody knows for sure.

The question calls for an accurate, long range weather forecast and an accurate estimate of what the 2014-15 crop (including all grains, oilseeds and pulses) will come off the fields this fall.

Industry officials weigh in

In attempting to find an answer to the question, World Grain talked to a variety of people in the grain industry, with most saying that the railways must solve the problem, most suggesting that more “capacity” is needed, and there should be more “collaboration” within the industry.

Curt Vossen, president and CEO of Winnipeg, Manitoba-based James Richardson International Ltd., told World Grain: “We’re spending significant money speeding up our elevators, trying to figure out how we can go to even faster load times on even bigger trains, because we’re moving from 100-car trains to 108-car trains soon. We’re spending a significant amount of money and we’re not alone. There are a lot of different companies — Cargill’s announced new capacity and Viterra announced a couple of newbuilds and the purchase of an elevator in Southern Alberta plus increases in capacity. I frankly can’t think of anybody that isn’t doing something right now.

“These are all big projects. When you build an elevator today it is $40 million to $50 million. What we did in Vancouver (terminal expansion) was $150 million. Vittera announced a $100 million investment at its Pacific terminal on the South Shore (of Burrard Inlet, Vancouver). One of the terminals in Thunder Bay that we bought with the Viterra transaction that had been closed for three years has been brought into production. We’ve loaded a bunch of grain into it and loaded a bunch of grain out of it and it’s going flat out this year. We basically doubled our shipping capacity with two berths and 400,000 tonnes of shipping capacity.

“Look at (the Port of) Churchill – it’s running flat out and never handled as much grain as it’s moving today. Once again, it’s another outlet. Nobody’s ignoring any opportunity to add capacity to the system if it’s physically possible. We leased 100 cars from a U.S. carrier, put them on the Churchill/Hudson Bay line and are shuttling those cars back and forth from The Pas, Manitoba, to Churchill to move grain right now. And, we’re trucking the grain to The Pas. So, we’re not moving grain in the traditional way or most cost-effective way; we’re doing it to add incremental capacity to the system.

“We’ve trucked grain to Thunder Bay, because we couldn’t get cars. We’ve tried moving grain to Duluth to see if we could get extra capacity using different lines. Everybody’s pushing to get more volume through the system,” he said.

Another industry executive World Grain spoke with was Kyle Jeworski, president and CEO of Regina-based Viterra.

Appointed to the position in late 2013, Jeworski was born and educated in Saskatchewan and has been with Viterra since it was the farmer-owned cooperative, Saskatchewan Wheat Pool, and in 2011 was named one of “Canada’s To 40 Under 40” in a business management recognition program sponsored by Caldwell Partners.

Clearly, Jeworski knows grain transportation, understands Saskatchewan politics and the roller coaster history of Viterra, the largest grain company in Canada’s largest wheat-producing province.

While others called for increased rail capacity, he said what Western Canada’s grain handling system needs is more “velocity.”

“It depends what you define as capacity in the system,” he said. “If I look at country capacity I would argue that there’s enough country capacity. When I look at what we’re able to do through assets, through investment and overall efficiency we do have capacity in the country system.

“Transportation is a big factor, but inland elevator capacity with this years’ record crop has not been a limiting factor at all. We can get it in, as an industry, promptly and we can ship it out. But the difference is a significant amount of capacity sat plugged waiting for sufficient rail capacity. So, I don’t think adding 50 more elevators in Western Canada is going to help us move more crop.

“It comes down to not just rail capacity but how companies work with that rail capacity. It’s not just saying ‘the railways have to add more cars,’ each industry player has to look at what they’re doing to add velocity. Why I say velocity is it comes down to how fast you can cycle those cars, because you can get more capacity by loading them properly in the country and you’re unloading them properly at the terminals. If you can take cycle times from Central Saskatchewan to the West Coast from 15 days to 13 days, you’ve added capacity into the system. When I look at the West Coast, there’s capacity at the West Coast and there’s the ability to add staff to the existing capacity that’s out there.”

As an example, Jeworski said Viterra is upgrading Pacific Elevators in Vancouver to ensure the facility has better receiving capabilities, better shipping capabilities and shipping speeds – everything in the chain from the terminal receiving onto the vessel will be improved.

“I think that’s important to deal with this crop and future crops,” he said.

He said it comes right from coordinating with end-use customers, coordinating with farmers and, obviously, the big link in between, which is coordinating with transportation providers, whether they are rail or truck.

“But more has to be done,” he said. “Some of it is operational, some of it is coordination. The thing is we’re not shipping one homogenous product out of Canada. That’s an advantage for Canada, but it’s also a challenge. When you look at velocity and our ability to meet customer requirement and the needs of the grower, we have to be sure we’ve got proper sequencing.

“It’s ensuring we’ve got proper movement of canola when the canola vessels are in port, followed by wheat, followed by barley, followed by yellow peas. I think that’s something we’ve done a good job of in Canada, but there’s areas of opportunity – that means you recycle cars faster, you get boats out quicker, you’re dealing with your inland customers more effectively, by ensuring that you’ve got the proper plan and the proper sequencing.”

Jeworski also said the backlog encouraged growers to truck grain south to elevators in Northern U.S. states.

“A huge amount of grain has gone across the border, all across the Southern Prairies,” he said. “If you go back 150 kilometers from the border, you’ll find a lot of truck traffic has gone to U.S. handling facilities and U.S. rail capacity. And here’s the interesting thing, you wouldn’t have been able to do that two years ago (before the government stripped the Canadian Wheat Board of its monopoly). If you had the Wheat Board, that option would not have been available.”

But the question remains: What will happen to Canada’s already tarnished world reputation as a reliable supplier of grain, oilseeds and pulse crops if Prairie farmers achieve another bumper crop in 2014-15 and the temperature once again drops to -40 degrees C?

Wheat Growers’ proposal

In a statement, the Western Canadian Wheat Growers Association, Western Canada’s largest organization of wheat farmers, have proposed the following remedies to the grain transportation problem:

1. Implementation of an incentive-based revenue cap: The Wheat Growers recommend amending the Maximum Grain Revenue Entitlement (informally known as the revenue cap) formula in such a way as to provide the railways with a greater incentive to provide additional surge capacity during the peak post-harvest shipping period

2. Expand interswitching distances: Under the Canada Transportation Act, a shipper is allowed to gain access to a competing railway, at a prescribed freight rate, if an interchange is within 30 kilometers of its shipping point. The grain trade has indicated to that rail service has been good at the six locations which are served by both mainline railways, or at those locations (a further 22 elevators) where the interswitching provision applies. The Wheat Growers recommend this distance be expanded to 120 kilometers to encourage even greater competition for business from the two main railways.

3. Strengthen the Canada Transportation Act: Amend the Canada Transportation Act to better define the service obligations of the railways, in terms of car order fulfillment, car spotting, pick-up and delivery. Performance standards and penalties must be established by contract to ensure shippers, railways and terminal operators meet their obligations. While these performance standards and penalties should be negotiated, shippers and terminal operators must have access to an expedited arbitration process that adequately addresses the imbalance in their negotiating position with the railways. Providing such contractual commitments along the supply chain will improve system accountability and help ensure farmer delivery contracts are honored, with penalties (or storage payments) paid to farmers for non-acceptance of grain within contracted terms.

4. Shift oil from rail to pipelines: Increased shipments of oil by rail results in fewer locomotives, crews and line capacity dedicated to shipping grain. The Wheat Growers urge the federal and provincial governments to move quickly to approve pipeline projects, so more rail capacity can be reserved for the movement of grain, fertilizer, lumber and other goods where shipment by rail is the safest and most economical mode of transport.

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.

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