Grain transportation constraints have become the top issue for western Canadian farmers this year. The railways say the main cause of the problem is unusually cold weather, but others allege that increased rail movement of crude oil is also a factor. As politicians and farmers hold meetings to try to get to the bottom of the disaster, producers wait for calls to deliver, country elevators remain plugged and ships at the West Coast collect demurrage waiting to load. This second part of Western Producer reporter Brian Cross’s multi-week transportation special report looks at how grain companies are coping with the problem. (to view part one in the series click here)(part three is available here)(part four is available here)
With spring fast approaching and a mountain of undelivered grain still weighing heavily on markets, calls for a long-term solution to Western Canada’s lingering grain transportation problems are growing louder.
Last week, a delegation of Saskatchewan cabinet ministers met with grain company executives in Winnipeg to discuss factors that have fuelled a growing sense of frustration among farmers, shippers and end users of Canadian grain.
Saskatchewan premier Brad Wall assembled the delegation earlier this month, suggesting delays in moving western Canadian grain are harming Canada’s reputation as a reliable supplier of agricultural products throughout the world.
Farm organizations across the West are also demanding solutions.
Producers attending a recent grain transportation symposium hosted by the Agricultural Producers Association of Saskatchewan heard that carryout stocks from the 2013-14 crop year could easily land in the 25 million tonne range.
At an average value of $275 per tonne, that would represent an unmarketed asset valued at nearly $7 billion.
A carryout that large, combined with an average-sized crop this year, would put additional strain on domestic grain prices and would almost certainly guarantee that huge volumes of grain will be stored on prairie farms again next winter.
Concern is also peaking among domestic processors, specialty crop shippers and grain companies whose sales programs are now weeks, if not months, behind schedule.
“Currently, we’re running at least four weeks behind,” Viterra president Kyle Jeworski said earlier this month.
“That’s causing a lot of delays in our vessel execution so obviously there are customer challenges.”
Added Keith Bruch, vice-president of operations at Paterson Global Foods: “The rail industry in grain in Canada is in a mess.… We are well behind on our shipping programs. We’re only getting about 20 percent of the cars that we request in the week that we request them. We’ve got shipping orders that are two months old and we’ve got some elevators that haven’t seen a train in two months…. Like all companies, we’ve got customers, globally, who are very upset, and it’s not good for Western Canada.”
It’s difficult to measure the costs associated with the backlog, but numbers from the Western Grain Elevators Association provide perspective.
According to the WGEA, the difference between the number of rail cars requested and the number of rail cars spotted at country locations surpassed 55,000 cars as of last week.
The backlog equates to five million tonnes of prairie grain that have been sold to overseas buyers but have yet to be delivered.
Canada’s railway companies say the backlog is largely the result of extremely cold weather that began in December and has persisted through most of January and February.
Canadian National Railway spokesperson Mark Hallman said the volume of grain moved during the first four months of the 2013-14 crop year was well above the five-year average.
CN expects grain traffic in Western Canada to return to above-average levels as spring approaches.
Meanwhile, Quorum Corp. pegged grain stocks in storage at country elevators across the West at more than 3.5 million tonnes in mid-February.
“(That is) the absolute limit for the system’s working capacity,” the WGEA said.
Demurrage fees and contract extension penalties are also mounting.
As of last week, more than 50 ships were waiting at west coast port locations to be loaded with Canadian grain.
Bruch said demurrage charges averaging $16,000 per day are accruing on most, if not, all of those vessels, many of which will wait four to six weeks to be loaded.
Based on those figures, daily demurrage costs are assumed to be costing the industry $600,000 per day or more.
“Contract extension and default penalties are huge,” added Bruch.
“In the multimillions.”
Bruch and Jeworski rejected suggestions that logistical problems and lack of co-ordination at port facilities were contributing to loading delays at Vancouver.
WGEA executive director Wade Sobkowich said there is significant unused port unload capacity in Vancouver, Prince Rupert and Thunder Bay.
Jeworski offered a similar view, suggesting that investments in Viterra’s grain collection facilities, both inland and at port, are not being used to their full potential.
“We’re sitting with considerable space right now at port position,” said Jeworski.
“(At port,) we have not been in a plugged situation once this entire crop year and that’s with our directly owned port facilities and our joint ventures, so that’s six port facilities…. We’ve invested in our country facilities and we’ve invested in our port facilities, so we believe we’ve got significant efficiencies there.… But the big challenge now is getting (grain) from Point A to Point B.”
Added Bruch: “We’ve got country elevator stocks at record (high) levels … and terminal stocks at record low levels…. We’ve got boats waiting, the grain is in the elevators and farmers will deliver at any opportunity. The missing link is the rail.”
Across the West, farmers and shippers are trying to pinpoint the factors that have contributed to the current situation.
And more often than not, the movement of crude oil by rail is emerging as a key factor.
Petroleum shipments at Canadian Pacific Railway increased to 161,000 carloads in 2013 from 64,000 in 2011, an increase of 251 percent over three years.
And at CN, revenue from the petroleum and chemicals sector jumped by $500 million to $1.9 billion during the same period.
Petroleum and chemical traffic was CN’s second largest business segment last year, accounting for more than 20 percent of the $9.6 billion that CN earned through freight revenues.
Grain was third.
CN has said throughout the winter that crude oil shipments are not affecting grain movement.
Instead, cold weather is the primary factor affecting grain movement, according to CN officials.
The railway said it has taken various steps to mitigate the short-term effects of extremely cold weather and increase its long-term spotting capacity for western Canadian grain.
“The notion that CN’s crude-by-rail business is displacing grain on the company’s rail network has no merit,” Hallman wrote in a Feb. 11 email.
“CN’s crude oil car loadings in 2013 accounted for less than two percent of the company’s total freight volumes, and CN has ample network capacity in normal weather conditions to move all commodities efficiently, including grain.”
Bruch said the number of grain cars that move in any given week typically exceeds the number of oil cars moved, but the proportion of railway resources used to move grain relative to oil is diminishing.
“Really, what we’re seeing is a dramatically increasing movement in oil by rail, and it’s very clear that will continue to increase,” he said.
“It’s really become a choice for the railways of moving oil or hauling grain, and what we’re seeing is more and more of their efforts going into oil.”
Grain is still moving to the West Coast. Elevator company officials say most grain moving to the West Coast is coming from Alberta, where haul distances are shorter and car cycle times are faster.
Elevators in eastern Saskatchewan and Manitoba are receiving a disproportionately low number of hopper cars. The number of cars moving Canadian grain into U.S. markets is also well below grain industry demand.
Canadian grain companies serving U.S. markets have been told that car cycle times are too long.
Others say oil and gas traffic in southern corridors is simply too profitable for railway companies to forego.
Major line companies are not the only ones being affected.
Small processors and specialty crop exporters are also waiting for cars and losing markets.
Greg Simpson, president of Simpson Seeds Inc., a specialty crop processor and exporter in Moose Jaw, Sask., said his company will lose 20 percent of its potential export sales this year because of insufficient rail service and supply chain constraints.
Potential sales to overseas buyers looking for near-term deliveries are being lost because the company already has a backlog of unfilled orders.
“It’s impacting us at every level,” Simpson said.
“We can’t take deliveries from growers and we can’t ship orders to overseas buyers.… We’re basically taking all new inquiries and saying that we’re not doing any new business now for at least two months … because we already have a backlog of shipments to get caught up on.”
Simpson said the transportation constraints are a disincentive to further investment.
“We have 100 employees here, so I pay salaries to 100 employees, whether we have hopper cars out front or not,” he said.
“Right now, we’re not getting asset utilization. We’re not getting enough velocity out of our facilities, and it’s hurting us financially. As an industry, why would we want to increase production if we can’t get our product out of the Prairies?”
With financial losses mounting, calls are growing for tougher railway regulations.
“In our view, the government really has to decide whether … it’s acceptable to them to have the railways determine the economic priorities of Western Canada,” Bruch said.