Grain the bane of trains
Reduced rail regulation would benefit farmers along with all Canadians
Last month, a coalition of Saskatchewan farm groups demanded the federal government overhaul its grain-freighting rates. The lobby group — consisting of the Agricultural Producers Association of Saskatchewan (APAS), Sask Wheat, Sask Pulse and Sask Barley — is demanding steep discounts for grain; the coalition believes Canada’s railways are earning more than $322-million more than what the Canadian Transportation Agency has deemed fair. “Grain is paying full freight and then some,” says APAS president Norm Hall. “We need a full costing review to determine fair costs for freight.”
In Canada, the rail shipment of grain — unlike all other commodities — is tightly regulated. The profits railways can earn on the 50 or so varieties of Canadian wheat and grain products are capped; grain, at a time when commodity prices have hit an all-time high, is moving at below-market rates. Farmers are charged 20% less to ship it than all other freight. And Saskatchewan’s farm lobby claims that discount does not go far enough. It claims it is entitled to the gains the railways have made from running an efficient operation, by burning less fuel or running longer trains.
Canada’s railways, however, see things differently. In February, CP, the country’s second biggest railway, called on Ottawa to scrap the revenue cap. CP believes the revenue cap hampers innovation and investment. Claims on railway efficiency gains, CP says, solidly discourage railway investment in larger rail cars capable of carrying 25% more grain.
There is, however, one point on which both grain farmers and rail industry insiders do agree: There is a growing crisis in grain shipment in Canada and capacity problems are hobbling the system, causing major slowdowns. Canada’s two biggest rail companies, CN and CP, say billions of dollars of new asset and infrastructure investments are needed to get grain moving more quickly to port and, they say, they need to encourage investment in this environment. For now, the larger hopper cars that could more quick- ly move Western grain and that could speed deliveries are not without investor risk. The cars, CP says, could attract a claim, like that of APAS, for a lower shipping bill because railways are moving the same volume of grain in fewer cars.
This is not the first time the country’s two major rail companies have complained they are being hampered by grain regulations. By the 1950s, Canada’s grain handling system was fall- ing apart; the Royal Commission on Transportation, headed by Murdoch MacPherson, was called to investigate freight-rate inequities.
The commission reported that the “Crow Rates” — the deeply discounted freighting rates charged to grain — were bankrupting the country’s rail companies, causing serious inefficiencies and deterring new investment. Delivery slowdowns were also hurting farm incomes. The commission urged Ottawa to bring in a market-based system, allowing rail companies to func- tion like all other Canadian business, with freighting charges determined by “ordinary business standards” and “competitive conditions and changes in cost patterns.”
The recommendations were largely ignored. Successive governments, fearful of angering Western Canadian voters, have clung to grain freighting regulation. By the 1970s, when grain was shipping at roughly half real costs; the grain handling system had fallen 50 years out of date and Canada was unable to deliver on new contracts to the Soviet Union and China.
“Ottawa needs to look at the longterm consequences of all this regulation,” says Saskatoon farmer Bill Cooper, former governor of the Winnipeg Commodity Exchange. “If the railways upgrade with more efficient hopper cars, there will be a farm group saying that the reduced costs are theirs. So, railways don’t buy larger cars, nor can they get innovative with allocating the railcars they have.”
And new regulations like Bill C-30 — which imposed quotas on grain rail deliveries — “discriminate against shipping to the U.S., even though that’s where we want our grain to go. Canadian ports get priority.”
A 2001 Conference Board of Canada study on the relationship between regulated rates and railway capital spending raised similar issues. Questioning Canada’s curious fixation on regulating grain, it found that the railways, if freed from tightly regulated pricing, could encourage greater investment, lower shipping rates and increased competition.
Farmers and all Canadians would benefit from reduced regulation in rail. And it’s simply not the job of the Canadian government to dictate when and how businesses are to be run, nor to limit Canadians’ access to goods and services. Eliminating the grain regulation on CN and CP would allow far greater opportunity to encourage investment in a vital market and to stimulate Canada’s economy. The only body that does not seem to recognize this reality is Ottawa.
There is a growing crisis in grain shipment in Canada