Thursday, March 06, 2014

Canada grain shippers, railways in a “cold” war

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Canada grain shippers, railways in a “cold” war David Duffin
Clearing the autumn grain harvest from trackside elevators is a perennial occasion for ritual fist-shaking on the Canadian Prairies. Western Canadian farmers enjoy a long tradition of blaming the railways for their woes, even more than the weather. (A favorite national folk tale has a Prairie farmer stricken by hail and locusts cursing, “God damn the CPR.”)

This year’s historic bumper crop has conspired with exceptionally frigid air to make the grain-shipping season particularly contentious.

Canada’s two national railways must move at least 5,500 grain cars per week each or face penalities of C$100,000 per day under a federal executive order issued Friday, March 7. The aim is to double the tonnage of grain currently on the move, according to the department of transport:

“The railways will be required to increase the volumes carried each week, over a period of four weeks, to a combined target of one million metric tonnes per week—more than doubling the volume currently being moved.”

While promising best efforts to meet the mandatory quotas, both railways lamented the government's one-sided blaming of carriers instead of addressing problems elsewhere in the supply chain, particularly the office-hours-only work culture at shipping and receiving terminals:

“CP believes the actions of the federal government raise more questions than they answer and only focuses on the railways and not the entire supply chain. CP's position remains that moving grain from the farm to the port is a complex pipeline involving many parties and requires all participants of the Canadian grain handling and transportation system to work together, which requires a 24/7 commitment similar to the railways,” said the company.

“Despite an extraordinary crop size that was not forecasted by anyone and periods of extreme winter weather, our railway has continued to move record amounts of grain and despite this unfortunate order in council, Canadian Pacific is committed to matching the record volumes we moved in the fall, which will align with the order. CP expects to transport 240,000 carloads of Canadian grain this crop year, a more than 20% increase over last year's record.”

CN said it could meet the quota, but only if there is greated coordination among shippers, carriers and consignees: “Our assessment shows that an upper limit of around 5,500 cars per week may be achievable, but only if all members of the supply chain work together closely.”

“This level of performance can be sustained, provided that there is strong collaboration from all partners in the supply chain—grain companies, country and terminal elevators. Critical factors will include: use of all sale corridors; timely loading and unloading of grain cars; and encouragement from the federal government to act in a collaborative, as opposed to accusative, manner in the grain supply chain.”

CN President Claude Mongeau also advised that additional government regulation would “ill-advised and counter-productive.”

“More regulation would lead to adversarial relationships within the supply chain, at a time when collaboration is essential,” said Mongeau. “Sound policy calls for exactly the opposite: a more collaborative and commercial framework is what Canada needs to support a world-class grain growing sector.”

The immediate conjunctural factors of crop size and weather have conspired with underlying structural conditions to inspire this lastest intervention in Canada’s long history of federal attempts to balance rail efficiency and the frustrations of Western Canada’s grain growers.

The leading wheat farmers’ lobby wants the Western-dominated Conservative government in Ottawa to legislate “service obligations of the railways, in terms of car order fulfillment, car spotting, pickup, and delivery.” It also wants shippers to have “interswitching” access to a competing main line carrier extended from 30 km (18.6 miles) to 120 km (74.4 miles). The government says it is listening sympathetically.

The Western Canadian Wheat Growers’ Association advocates adjusting the country’s regulated cap on grain rates to give railways “greater incentive to provide additional surge capacity during the peak post-harvest shipping period.” But it wants to rake some of that back by sharing in the productivity gains made by the railways since the rate cap went into effect 14 years ago.

Crude-by-rail has become a new but probably illusory target for grain shippers. The Saskatoon-based wheat lobby argues, “Increased shipments of oil by rail result in fewer locomotives, crews, and line capacity dedicated to shipping grain.” It wants more pipeline approvals to release equipment for traditional rail-borne commodities.

The big cause for this year’s network congestion, according to CN spokesman Mark Hallman, is the persistent extreme cold that impedes the performance of train braking systems, forcing railways to run shorter, slower trains.

“The notion that CN’s crude-by-rail business is displacing grain on the company’s rail network has no merit,” Hallman said. “CN’s crude oil carloadings in 2013 accounted for just 1.4% of the company’s total carloadings of freight, and CN has ample network capacity in normal weather conditions to move all freight efficiently, including grain.”

A huge but late harvest combined with the Arctic air mass that settled over North America is slowing the movement of all freight, not just grain, Hallman said:

“When the temperature is forecast to drop below -25 degrees C, CN needs to plan for shorter trains to consistently get air from the head-end locomotives to the tail-end of trains to release the brakes. Usually, this occurs for relatively short periods in specific areas. This year, we have had to operate with shortened trains for much longer periods, and over much broader territory than normal.

“Shorter trains increase the number of trains operating on our network handling the same volume of traffic. Running more trains means a need for more crews, and more trains meeting and passing one another, which eats up network capacity. Shorter trains and cold weather also mean longer dwell times for cars in switching yards, and slower local train operations when delivering and picking up cars from sidings. The cumulative impact of the continuing severe cold has been to slow down the velocity of train operations throughout our network, which reduces our capacity to move traffic.”

Once normal weather returns, say both CN and CP, railways will be able to rapidly catch up with car spottings and pickups. That will not fix the underlying business and regulatory issues that guarantee tension among grain shippers, carriers, and governments.

Insisting that railways move more grain while at the same time crippling rate economics is deeply rooted in the country’s history. Canada’s sea-to-sea geographical span is in fact thanks to an 1897 deal that handed Canadian Pacific land and cash to push track just above the 49th Parallel as a counter to 19th century American “Manifest Destiny.” The deal included an absolute cap on CPR freight rates for shifting western grain to the Great Lakes and the backhauling of “settlers’ supplies” westward.

That “Crow Rate” subsidized both prairie growers and central Canadian manufacturers, to the disadvantage of Western attempts to build regional manufacturing. The Crow Rate was replaced in 1993 by a sliding cap on freight rates equal to 10% of the global wheat price. In turn, that cap was superseded in 2000 by today’s “maximum grain revenue entitlement.”

Incorrectly but universally referred to as the “revenue cap,” the current formula adjusts the annual rate the two Class Is may levy for carrying grain to the ports of Vancouver and Thunder Bay. For the 2013-2014 crop year, the formula fixes the maximum revenue for CN at C$35.51 per tonne, and C$33.15 for CP. The average haul is about 1,000 miles.

But, as with the previous schemes to damp market economics, the revenue cap isn’t working to anyone’s advantage. The government’s preferred solution, as in the past, is yet another set of mandates and price caps.

To offset its demand for compulsory service performance and a longer reach to competing carriers, the wheat growers suggest tweaking the revenue cap so that railways could charge slightly more for car movements above a “normal” threshold during the peak post-harvest shipping time. A 5% increase above the threshold would earn the railways a 1% increase in the rate cap, but only for the September-December peak period.

What the farmers giveth, they also want to taketh away: Any productivity gains made by the railways “should be shared with farmers through a reduction in the revenue cap.”

Gerry Ritz, Canada’s minister of agriculture, recently threatened to “mandate” the priority movement of grain by rail. As a first step in that contentious direction, Ritz ordered CN and CP to provide weekly instead of monthly reporting for grain car deployments. The Conservative minister warned the railways there will be “consequences” if they manage car movements to the disadvantage of farmers.

CN invested C$100 million last year to grow prairie capacity, including its northern line between Saskatoon, Sask., and Wainwright, Alberta, said Hallman.

“This investment in additional capacity has worked,” said Hallman. “It has increased the network capacity to operate more trains, and has provided a more robust parallel route for recovery from disruptions. So far this year, CN has doubled the number of trains operating over the Prairie North Line compared to a year ago.

“CN has also acquired and deployed more equipment to handle record volumes of traffic, including Western grain, by acquiring more high-horsepower locomotives and augmenting its fleet of grain hopper cars. CN has also trained management employees as conductors or engineers, who have been stepping in during December and January to help relieve short-term crew shortages in targeted areas of the network impacted by the extreme cold. These and other initiatives have helped mitigate the short-term effects of winter on our operations and to grow our long-term spotting capacity for Western grain.”

CP, for its part, moved 17% more grain than the five-year average from September through January, and 8% more than last year, said spokesman Ed Greenberg. It could move even more if port terminals had capacity to accept it, he said.

“This is a complex supply chain issue involving not just the railways, but all participants,” said Greenberg. “For example, the grain handling and transportation system would further benefit from more port elevators working 24/7 to match the round-the-clock operation of the railway. By working 24/7, the ports would unload more railcars so we can turn them back into service for grain shippers.”

Throughput is expected to increase as spring weather opens Great Lakes and Hudson Bay ports to grain traffic.