SASKATOON – A more efficient rail system won’t necessarily mean lower freight rates for grain farmers, says a Saskatchewan government study.
Cost savings get passed down the line only when there is true competition, and that doesn’t exist in the rail industry in Western Canada, say researchers Ken Perlich and Ron Eley of the province’s department of agriculture.
In the absence of competition, and without effective government regulation, any savings will be pocketed by the railways, they say.
“There is a popular belief that increased efficiency in Western Canada’s grain transportation system will automatically lead to lower rates,” said Eley. “If there is no effective competition, however, it is unlikely that efficiency gains will be passed through to farmers once maximum rates are eliminated.”
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The researchers say with the federal government already preparing for its 1999 review of whether to retain a maximum &reight rate, farmers and grain shippers should be lobbying Ottawa to make sure the review accurately measures the level of rail competition in Western Canada.
Perlich said in an interview the study was prompted in part by the widely held view that regulation is bad, and that a deregulated rail system will lead to greater efficiencies which in turn will lead to savings for shippers and producers.
Benefit everyone
“The assumption is that everybody will be better off,” he said, adding that seems to be the prevalent attitude in the federal department of transport and the Canadian Transportation Agency, as well as among some farm groups in Western Canada.
In fact, he said, an analysis of freight rates in Canada and the U.S. indicates regulation in the Canadian rail industry has helped keep rates here at a level comparable with an open competitive market in the U.S.
“It’s very different reality from what the common understanding is,” Perlich said.
The researchers compared 1990-95 grain freight rates in four locations: Kansas City, described as a highly competitive market; Denver, described as competitive; Shelby, Mont., where there is no competition; and Moose Jaw, Sask.
They found that the rate in Moose Jaw was on a par with the rates in Kansas City and Denver and significantly below the rate in Shelby. And they found the spread between the competitive points and Shelby more than doubled during that period.
Those findings raise three major questions for prairie farmers and grain shippers, according to the study.
- Will deregulation result in freight rates similar to Kansas City or to Shelby? That depends on how much competition there is between CN and CP, and current indications are that “at most points in Western Canada, the development of a competitive railroad market is unlikely.”
- If rates rise to Shelby levels, what does that mean for resource use in Western Canada? Excessively high freight rates would send distorted market signals that would result in less seeded acreage, less input use and more livestock.
- Can farmers achieve lower freight rates through deregulation than they have achieved under regulation? Even if there is competition between CN and CP, “the analysis in this paper suggests that only marginal improvements could be obtained by moving to a deregulated market.”
Perlich said the ideal solution would be a deregulated, competitive railroad market, which could be attained by allowing the railways to run on each others lines (called joint running rights) or having a separate entity take ownership of the rail bed.
Failing that, he said, the best option would appear to be continued regulation through a maximum freight rate based on railway costs.
