Pointing to what they say is over $100 million per year in “unreasonably excessive” railway revenue at farmers’ expense, Western Canada’s general farm organizations want Ottawa to conduct a full rail costing review for the first time in 16 years.
At a press conference Tuesday just outside Winnipeg, spokesmen for the Canadian Federation of Agriculture (CFA), National Farmers’ Union, Keystone Agricultural Producers and Canadian Wheat Board (CWB) released a study by Travacon Research which estimates that Canadian National (CN) and Canadian Pacific Railway (CPR) in the past two crop years have collected substantially more for moving grain than what the previous Crow Rate legislation would have found “fair and reasonable.”
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“Volume-related” costs
The Travacon study, by rail analyst John Edsforth, found that in 2005-06, CN and CPR together earned $256.5 million ($9.04 per tonne) in grain freight revenue, or about 50.9 per cent of “volume-related variable cost (VRVC).”
VRVC, the ag groups explained, denotes the costs that vary up or down in response to changing traffic volumes. In 2006-07, they said, the railways’ combined revenue from grain freight rose to $277.6 million ($9.94 per tonne), worth 53.9 per cent of VRVC.
The previous Western Grain Transportation Act, which established the Crow Rate for the handling of Prairie grain, had viewed grain freight contributions of 20 per cent of VRVC to be considered fair relative to other goods and commodities shipped by rail. The Crow Rate was repealed in 1996 and has been replaced with a system of grain freight revenue caps.
But by the WGTA standard, Edsforth wrote, the railways made $5.49 per tonne ($156 million) more than what was deemed fair and adequate from grain freight in 2005-06 and an excess of $6.25 per tonne ($175 million) in 2006-07.
The 2006-07 figure doesn’t include the drastically lower grain revenue cap set by the Canadian Transportation Agency. The CTA recently ruled that the railways were charging for more than triple their costs of railway car maintenance; the agency then docked the 2006-07 cap by $72 million. Both railways are appealing the CTA’s decision but in any case, the ag groups wrote, “a gap of at least $100 million remains.”
In short, the study’s “shocking” results show that CN and CPR “earn far above what they would in a competitive rail market,” said CWB director Ian McCreary. “As shippers, (farmers) need timely rail service but we also require that the cost for that service is reasonable since we face greater distances to port than all the other grain exporters in the world.”
(The groups noted that Western Canada’s farmers on average must ship grain 1,450 km to port, compared to 650 km in Kansas, 320 km in France and just 160 to 280 km in Australia.)
“We’re not against the railways making a profit,” said CFA president Bob Friesen in the groups’ press release. However, “at a time when the soaring cost of production is still interfering with the ability of farmers to profit from high commodity prices, $100 million in revenue lost on a runaway train is a big problem.”
“Rebalancing” needed
In the groups’ release, Glen Blakley, president of the Agricultural Producers Association of Saskatchewan, said the railways “continue to charge farmers based on a cost picture that was taken 17 years ago” and it’s time to “bring railway costs back to reality and rebalance the equation for farmers.”
The groups said grain freight rates haven’t shown any of the “major changes” since 1992 that have boosted railway efficiency, such as the consolidation of grain elevators from about 1,500 down to 370 today, or the introduction of multi-car blocks for grain handling, due to which grain is now sourced in blocks of at least 50 cars at a time.
In that time, however, rail rates for grain freight have risen “sharply,” the groups said, citing a 1992 rate of $30 per tonne to run grain from Saskatoon to Vancouver, compared to $42 per tonne today.
Thus, where a farmer in 1994 would have paid just $17,000 to move 1,300 tonnes of grain by rail to port from Saskatoon, he or she would pay $54,600 today, not counting the trucking costs to the elevator or the costs of ocean freight, the groups said.
In the meantime, the groups said, railways’ performance in handling grain has become “much worse,” as rail car cycling time remains virtually unchanged, the CTA has found CN “violated its legal obligations” for adequate grain freight service in 2006-07 and CN’s new rail car ordering system has “thrown the CWB’s shipping system into disarray by failing to recognize the realities of wheat exports from Canada.”
The federal government last month pledged to launch a review of railway service as part of Bill C-8, which also introduced multi-party final-offer arbitration to help shippers work through issues with railway service. It also removed the need for shippers to prove “substantial commercial harm” before applying for remedy from the CTA.
“Most western Canadian farmers are captive to a single railway,” the groups wrote. “They have no choice but to move their grain on either a CN or CPR line. A lack of competition for grain freight makes regulation of rail service very important to farmers. Yet producers face inflated rates, unacceptable services and little accountability from the railways.”
Neither CN, CPR nor the federal government had made an official statement in response to the groups’ request nor their study’s figures as of Tuesday afternoon. More details will follow in the April 3 issue of the Manitoba Co-operator and April 7 issue of Alberta Farmer Express.
