Canada Copes with Grain Rail Backlog Fiasco

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SUGAR LAND--April 4, 2014--Researched by Industrial Info Resources (Sugar Land, Texas)--A huge backlog in Canada's grain shipments by rail has resulted in lots of finger-pointing between railways, politicians and farmers.

This year's Western Canadian crop of 76 million metric tons was 50% higher than average, according to Transport Canada, the country's federal agency in charge of transportation regulations and policies.

A months-long shipping backlog, amounting to more than five million metric tons of grain and 60,000 rail car orders, has ensued, according to the Western Canadian Wheat Growers Association, which estimated last month that the backlog had caused financial losses of at least C$2 billion due to resulting grain price discounts.

Canada's two major rail haulers, Canada Pacific (NYSE:CP) (Calgary, Alberta) and Canadian National Railway (NYSE:CNI) (Montreal, Quebec) have been at the center of the backlog controversy. The railways maintain the huge harvest, and logistics challenges that were posed by the unusually harsh winter, helped to create the backlog.

Canadian Pacific Chief Executive Officer E. Hunter Harrison, said in a statement issued last week that the "supply chain challenges with moving this exceptional crop need to be recognized. At close to 80 million metric tons (MMT), this crop is 27% above the previous 2008/2009 record and 37% above the 5-year average. While the production increase is dramatic, the scope of the supply chain challenge has been exacerbated by the fact that the increase is almost entirely for export, meaning there is more than 20 MMT additional volume to be moved over and above the 33 to 34 MMT exported in a typical year. This record grain crop is far beyond the overall grain supply chain's capacity in a single year and as a result will be moved over the remainder of this year and into next.

"Canada's grain handling system is just not built to handle this record amount of grain," Harrison added. "While it is easy to blame the railways for 'dropping the ball', it ignores the facts."

But others have looked to an increase in the rail shipments of crude oil products as a contributor to the situation.

According to Statistics Canada, wheat shipments by rail last year fell by 1% to 21,319,741 metric tons from 2012, while shipments of other grains and cereals fell by 10.5% to 14,924,835 metric tons. Rail shipments of petroleum and coal products, on the other hand, rose 16.2% to 27,356,749 metric tons.

In January, Canadian railways carried a total 25.3 million metric tons of freight in January, down 2.7% from the same month last year, according to Statistics Canada. The largest declines in shipments were for wheat (down 228,000 metric tons), iron ores and concentrates (down 220,000 metric tons), other refined petroleum and coal products (down 116,000 metric tons) and wood pulp (down 111,000 metric tons). The drop in January rail loadings occurred despite strong gains in several commodities, led by coal (up 405,000 metric tons), fuel oils and crude petroleum (up metric 314,000 tons), other chemical products and preparations (up 166,000 metric tons) and potash (up 158,000 metric tons).

But Canadian Pacific President and Chief Operating Officer Keith Creel told Parliament's Standing Committee on Agriculture on Tuesday that the railway had moved record grain volumes last fall, which were later impacted by the extraordinary cold temperatures in December and January. With the improved weather, the railway has regained momentum, he said, moving 15% more Western Canadian grain in February and 20% more in March than the previous year.

In response to the situation, Canada's government under Prime Minister Stephen Harper ordered the railways on March 7 to carry more grain. The railways were required to increase the volumes of grain carried each week, over a period of four weeks, to a combined target of 1 million metric tons per week, which was more than double the volume that had previously been moved, according to Canada's transportation and agriculture departments. Failure to meet the targets could result in penalties up to C$100,000 (US$91,000) per day.

Canadian National said on Monday it had spotted 5,102 hopper cars for loading at country grain elevators in Western Canada during the previous week, marking the fourth week in a row that the railway had delivered more than 4,000 grain cars, averaging 4,550 cars per week, or 21 % the railway's average March performance for the last decade.

Canadian National President and Chief Executive Officer Claude Mongeau said, "We are continuing to make significant progress toward our goal of transporting close to 5,500 grain cars per week to meet the Canadian government's Order in Council of March 7, 2014. But [Canadian National] can only meet its commitment if all other key players in the supply chain are equally held to account for their performance."

Railways have maintained that other links in the logistics chain, such as operators of grain elevators, have not received as much scrutiny during the backlog fiasco.

Mongeau also pointed to "a lack of coordination across the supply chain and growing pains from new grain marketing strategies following the change in role of the Canadian Wheat Board."

Legislation in 2011 caused the Canadian Wheat Board to lose its monopoly to sell western Canadian wheat and barley, beginning with the 2012-13 crop year. The Quorum Corp., which was appointed by the government to monitor Canada's grain-handling system, said the legislation was one of the "most significant changes to the functioning of the Grain Handling and Transportation System [GHTS] in three generations."

Mongeau said, "Despite the fact that CN will soon have moved more grain than ever before in its history crop-to-date, the benefit of its strong performance does not appear to be flowing to farmers as it did before."

Last week, Canada's Parliament took up the "Fair Rail for Grain Farmers Act" by Agriculture Minister Gerry Ritz and Transportation Minister Lisa Raitt, giving government agencies the authority to set minimum grain hauling requirements for railways and to impose penalties for non-compliance.

Some members of Parliament, such as Ruth Ellen Brosseau (Berthier--Maskinongé), of the New Democratic Party, maintained the bill does not go far enough. "When the minister presented the order in council on March 7, farmers knew right away that it would not be enough," she told Parliament last week. "The minister is requiring that the rail companies move one million metric tons a week. That amount is what the railways always said they could do. Therefore, in the end, the government is forcing the railways to do something they were already going to do."

Other members of Parliament warned the measure could have unintended consequences.

"The last thing I want to say is that rail is responsible for moving other products besides grain," said Brent Rathgeber (Edmonton, St. Albert), of the Progressive Conservative Association of Alberta. "There is potash. There is oil. If the railways are forced by threat of a $100,000-per-day fine to put priority on grain over other commodities, are we going to be standing up in the House three months or six months from now debating a potash fair transport act or an oil fair transport act? Those products are going to become compromised if grain becomes the only priority."

The railways have signaled opposition to another part of the legislation to expand interswitching limits, which involve the transfer of traffic from the lines of one railway to the lines of another railway. Currently, where a shipper is served by only one railway, the shipper is entitled to transfer its traffic to another railway at a regulated rate set by the Canadian Transportation Agency if the shipper's facility (either at origin or at destination) is located any point within a 30-kilometer radius of where the two railways connect. The legislation would expand the interswitching radius to 160 kilometers in the provinces of Alberta, Manitoba and Saskatchewan.

Canadian National's Mongeau said, "The government is opening the door to extended interswitching limits for specific regions or goods without any due process to assess the potential consequences for railways and the Canadian economy. This action could hit Canada's railways by opening their business to unfair poaching by U.S. railways without any reciprocity. Beyond causing financial harm to [Canadian National], it could drain traffic away from Canadian ports and cause the loss of jobs, reduce investment and undermine tax revenues across Canada."

Canadian Pacific's Harrison said, "We need to move away from reactionary legislative interventions that target unfairly one participant and potentially damage the Canadian economy. Instead we should all focus on commercial solutions to maximize overall capacity in the grain supply chain."

Industrial Info is tracking $481 million in Canadian grain-related projects for the Food & Beverage Industry, including the $120 million Vancouver Grain Elevator Expansion Project. Richardson International and FWS Group are building the project to expand the facility's capacity to five million metric tons per year from four million metric tons. Project completion is scheduled for October, 2014.

Industrial Info is also tracking Canadian rail-related projects, including $20.6 billion for Terminals, $18.6 billion involving Metals & Minerals, and 2.7 billion involving Industrial Manufacturing. Many of the projects involve rail upgrades and rehabilitations.

For related information see March 20, 2014, 2013 article - Mother Nature, Crude Oil, Grain and Ethanol Clog Rail Transportation in U.S. Midwest and March 24, 2014, article - BNSF Railroad to Hire 5,000 Workers this Year for Expansions, Replacements.

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