The inadequacies of Canada’s grain logistics system are costing prairie farmers at least $1 billion and likely much more this year.
When looking only at Canada’s record 1.14 billion bushel wheat crop, insufficient shipping capacity puts prices in Canada at a $1 per bushel discount to the United States, where transportation is less of an issue this year.
Western Canada’s grain transportation issue is not only a problem of inefficiency. It is also a problem of capacity and to solve it will require investment in railways, highways and ports.
Canada’s export economy is increasingly oriented toward the Pacific. The federal government recognizes this and has spent money on improving transportation corridors. However, the need is greater.
The federal Conservatives believe a good way to support farmers is to increase access to foreign markets and invest in market development.
However, that effort goes to waste if Canadian farmers can’t get their products to market.
That is the case this year. The railways are moving a near record amount of grain, but it still falls short of the demand.
Grain companies have ordered 40,000 rail cars that the railways have been unable to deliver. Under ideal conditions, the railways move about 10,000 grain cars a week, so that is a four-week backlog.
The results include depressed grain prices, wide basis, lack of farmer cash flow, demurrage charges at port, unhappy customers and a tarnished reputation.
It is good that Ottawa is contributing $1.5 million to a $3.2 million industry-led effort to create efficiencies in the agriculture supply chain over the next five years.
When announcing the investment, agriculture minister Gerry Ritz spoke of a “new normal” in the demands on the grain transportation system. This year’s crop is a record bin buster, but advances in crop genetics and the demand pull from Asia could mean that what is exceptional now is routine in the future.
It is not just agriculture demanding more from railways. Coal, minerals and container traffic are all rising, not to mention the boom in the controversial movement of petroleum products by rail.
Canadian National Railway and Canadian Pacific Railway each plan to spend about $1 billion in 2013 to replace aging infrastructure and invest in increased capacity.
However, it appears that more money must come from somewhere to allow even more funds to be spent on rail improvements. One possible way is to let the free market have a greater role in rail grain movement.
The western grain revenue cap will likely be a target of discussion, but it might be hasty to assume that a regulation that allows the railways a return on investment and that is tied to inflation is an impediment to increased movement.
Government investment in rail infrastructure is tricky. Unlike publicly owned highways and airports, the rails are privately owned. And the railways are posting good profits.
Nevertheless, given their vital role in the economy, government might have a nation-building role to leverage increased investment in rail, particularly if it also holds the railways more accountable for performance failures.
In the meantime, the agricultural industry must make the most efficient use of available resources. Better information dissemination about grain company export programs and freight expectations would help the transportation sector know what demands it will face.
Grain companies should also consider ways to better employ the underused eastern Thunder Bay shipping route.
Government could increase the limit on its cash advance program.
And farmers could build more storage, which would allow them to use market tools to be paid to hold their grain.
As a result, there would be less panic selling in situations like today.