A decline in railway costs could mean lower grain freight rates in the 2003-04 crop year.
The Canadian Transportation Agency last week announced a 2.4 percent decrease in the composite price index used to calculate the railways’ grain revenue cap for next year.
An agency official said that should translate into good news for grain shippers.
“I would think it’s very likely that the railways would adjust their rates downward,” said Jim Riegle, grain division manager in the agency’s rail rate costing and monitoring directorate.
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Because the railways will face lower costs in the crop year beginning
Aug. 1, he said they will be able to reduce freight rates but still maintain or even increase their profit margins.
In addition, grain hauling remains a profitable business for the railways and they will continue to compete for business, which should put downward pressure on prices.
While Riegle said it was likely that rates will go down, officials with the railways weren’t willing to make such commitments.
Canadian National Railways spokesperson Jim Feeny said the railway will weigh a number of factors as it decides over the next few weeks on a rate structure for 2003-04.
But he emphasized that farmers and shippers shouldn’t expect to see a direct link between last week’s announcement of a 2.4 percent CPI decline and the 2003-04 freight rate.
“We’ll be looking at all of the factors before we decide what, if any, changes we make,” he said. “One should not assume rates will go up or down by any specific percentage.”
Fred Green, vice-president for marketing and sales for Canadian Pacific Railway, said there will be some rate adjustments as a result of the change in the CPI, but it’s too early to say exactly what those changes will be.
“I think it’s inevitable there will be some re-alignment of different kinds of rates as we better understand what that means to us and where the volumes and the demand are and how successful the various crops are this year.”
He acknowledged that grain remains a profitable commodity for the railways and there is “some room” to make price adjustments as necessary.
The 2.4 percent reduction in the composite price index for 2003-04 reflects the agency’s forecasts of lower fuel costs and a lower cost of capital. Since 1984-85, the average error in the CTA’s railway cost forecast has been 0.1 percentage point.
Based on an average length of haul of 1,448 kilometres, a 2.4 percent reduction in costs would produce a 60-cents-per-tonne reduction in the railways’ single car rate for grain. The current average single car rate is around $27.25 a tonne.
Under the revenue cap system, introduced in August 2000, the railways can set freight rates wherever they like, as long as their total grain hauling revenues for the year come in under the cap.
That makes it harder to define an average freight rate than it was under the previous system, which saw the CTA publish a new statutory rate scale each year.
The revenue cap is set by a formula that takes into account the CPI, the average distance grain is hauled and the tonnage of grain shipped during a given crop year.
For example, if the volume of grain shipped in 2003-04 remains at 22 million tonnes (the same as in 2001-02), then the 2.4 percent CPI reduction would result in a $13 million reduction in the combined revenue cap for the two railways.
If volumes increased to 30 million tonnes, then the combined revenue cap would decline by $18 million.
The average length of haul has been declining in recent years as branch lines are abandoned, which works to reduce the railways’ revenue under the cap.
Both railways have been below the revenue cap every year since it was introduced.
