These questions and answers are meant to provide clear responses to the many myths, issues and complaints that are raised by various parties and service providers on why performance on grain transportation is often less than required to meet demand.
A: Railway service (both spotting/delivery performance as well as total crop moved) in the critical November to April period of the 2013/14 crop year was actually worse than some other crop years despite the fact that it was the biggest crop on record. For the first two quarters of the 2013/14 crop year, total grain movement to regulated corridor ports was 15.942MMT. For the first two quarters of the 2012/13 crop year, this amount was 16.563MMT, despite the fact that the crop was significantly larger (Source: Grain Monitor 2013/14 Data Tables – Tab 2B-1). Grain companies had been forecasting a big crop for months in advance of harvest and had communicated shipping needs to both railways.
What is particularly enlightening is in 1994/95, some 20 years earlier, the railways moved 8.7MMT to port in Q2, while for the largest crop year on record in 2013/14 they only moved 7.4MMT in the same period (Source: Grain Monitor 2013/14 Data Tables – Tab 2B-1, and, Manitoba Co-operator, December 12, 2013 News Article “Grain movement: better, but is it good?”).
A: We are well accustomed to the fact that winter railway operation typically means a reduction of 20% in the western Canada grain car loading capacity. The railways should also be equally aware of this performance drag. It happens every year.
It is well known that cold temperatures impact the performance of train airbrake systems. Railway operating protocol dictates a reduction of 20% to 40% in maximum train length at temperatures of -30C or lower (Source: RAC presentation titled “Winter’s Impact on Railroad Operations Fact and Fantasy”). Railways should have plans in place to address these airbrake issues when it becomes apparent that a cold snap is on the horizon. Furthermore, extra locomotives and train crews should be positioned as surge capacity for the winter months if the train length restrictions must be imposed. In today’s world, the railway operating problems and associated costs all just fall onto the shoulders of the shippers.
Grain companies have responded with temporary measures (e.g., providing generators in extremely cold weather on the siding to power up air brake pressure while the cars are sitting there waiting for hook-up), but we need long term solutions to this operational reality.
A: This is a partial truth that does not address actual operating practices and what has actually occurred at the ports. It is correct that not all terminals operate 24/7. However, all of the West Coast terminals have demonstrated that if and when cars are presented they will be unloaded and if required extra overtime shifts will be put on, including on the weekends. There are no instances of terminals not unloading cars scheduled to arrive due to a lack of labour.
Moreover, port terminal unload performance has been exemplary (>92% within specified time frames) (Source: WGEA Member Data). Many operators choose to staff weekends or late night shifts through overtime rather than a continuous 24/7 shift, as there are many circumstances where a third shift would be simply sitting around waiting for the railways to deliver or remove cars, which makes very little sense from a commercial point of view. The best measure to determine grain company performance at port would be the amount of time that the terminal was without cars. At present, terminals with staff on hand are sitting without cars 20% of the time. The Ag Transport Coalition has begun to track performance related to this critical metric, and reliable data outlining recent experience on terminal time without cars will therefore become available.
It should also be noted that the railways have the ability to impose rail demurrage penalties on terminal operators for a failure to unload cars within 24 hours. In the 2012-13 and 2013-14 crop years rail demurrage penalties were 1/5th and 1/16th of vessel demurrage respectively – (Source: WGEA Member Data). Vessel demurrage is most often incurred due to inaccessibility of rail cars for country elevator loading, failure to deliver loaded cars to port on time or failure to deliver trains in the right sequence to properly load vessels. By the same token, grain companies do not have and seek the ability to charge the same penalty to railways who fail to deliver or remove railcars at port within specified time frames – i.e. all within a commercial and contractual frameworks. Grain companies and railways should be held to the same service standards.
A: Grain companies have announced or made significant investments in port terminal operations, particularly in the Port of Vancouver. Viterra has announced $100 million in upgrades for its Pacific terminal on the South Shore. Richardson has recently completed adding 80,000 tonnes of storage capacity at a cost of approximately $120 million. Cargill has recently invested $60 million into improvements to their north shore terminal in Vancouver. Louis Dreyfus concluded an agreement with Kinder Morgan activating 1.8 million tonnes of West Coast capacity. Prince Rupert Grain has 5 year average annual receipts of 4.9 million tonnes and the ability to move 7.5 million tonnes annually.
For fiscal years 2013 and 2014 alone a total of $769 million in expansion and productivity investments by the major grain companies and terminal operators was made. $310 million was spent on port terminal expansion and productivity investments, $284 million on country elevator expansion and productivity investments, and $175 million on construction of new country elevators.
Grain companies currently have the capacity on the West Coast to handle consistently 557,000 tonnes per week or 30,000,000 tonnes on an annual basis. This is well in excess of what has been done in the past. These numbers are based on actual performance and do not reflect the above noted capital improvements nor do they reflect ‘surge’ capacity in any given week, which the WGEA calculates to be 690,000 tonnes per week in the case of West Coast port terminals (i.e., 80% of licensed terminal capacity, 40 turns annually, calculated on a weekly basis).
Railways in the first 25 weeks of the current 2014/15 crop year delivered on average 450,000 tonnes per week to the West Coast – significantly short of terminal capacity.
A: This is incorrect. Grain companies staff country elevators to load rail cars whenever they are available, any day of the week. The railways charge grain companies penalties ($100/car/day: Source – CN’s “Passport 2015 Carload, April 1, 2015” Circular and CP’s “Railcar Supplemental Services Tariff 2, May 1, 2015” Circular) if they do not load a train within 24 hours of delivery and the true measure of performance is therefore the railway demurrage paid by grain companies when they do not do so. Grain company performance in loading cars within that 24 hour period at country elevators is exemplary (>92%).
On the other hand, there are no financial consequences for the railways for non-performance, i.e. a failure to deliver/spot cars on time. Grain companies are advocating for the ability to have railways similarly held financially accountable if a railway does not deliver empty railcars to a country elevator on the day that it committed to do so. In the current crop year (as well as previous years), railcars are typically delivered to elevators in the week that they are ordered and accepted by the railways into their own car spotting schedule less than 50% of the time.
A: This statement is inaccurate. The situation we face is that railways offer less railcar supply than demand in order to get as close to 100% asset utilization on their operations as possible. They can do that because they are dual monopolies with full market power. This view is supported by the fact that we have remained in a period of car rationing imposed by the railways for 30 out of the last 34 months to May 1, 2015 (Source: Grain Monitor Data). Given that rail car supply is less than demand, grain companies sell to car supply, and could sell much more during peak periods if additional capacity were available.
Companies operate within a highly competitive market place. With the removal of the CWB ‘single desk’ as an industry we have moved from a supply push to a demand pull system. Orders are placed by companies to meet demand. If companies were truly phantom ordering then the railways would be providing empty railcars that weren’t being loaded.
Also there are ‘safeguards’ in place. At terminal position companies typically operate on ‘terminal authorization’. That is a terminal will normally not move cars forward from the country without this authorization. That authorization is typically supported by a vessel being nominated to fulfil a specific sale.
In addition the railways have the ability to charge grain companies $100/railcar/day if the grain companies do not load those cars within 24 hours of delivery to a country elevator – the same applies once cars arrive at terminal – they must be unloaded within 24 hours otherwise demurrage is assessed. That means that even if the railways feel grain companies are ordering more than they can handle, there is a clear and financially painful tool at their disposal to hold grain companies to account for the amount of rail cars ordered.
The real issue, as noted above, is that railways are, for the vast majority of months in most years, not meeting grain company weekly orders for rail cars at country elevators. The Ag Transportation Coalition is now tracking railway performance on a weekly basis to put a spotlight on the performance of the railways in meeting grain shipper demands.
Grain companies believe that both the supply of railcars (# of cars generally available) as well as the reliability in the delivery of railcars to country elevators once a railway has committed to do so are critical issues that must be addressed in the current review of the Canada Transportation Act.
A: First and foremost – grain companies fully understand and appreciate that it is impossible to move a year’s production within a 3 or 4 month time frame. Grain companies do not expect that 100% of demand will necessarily be met in peak periods for various reasons including scarcity of supply vs. demand; but nor do we find meeting 50% of demand to be acceptable. The issue is that the current system has minimal, if any, capacity to meet increases in demand at specific times of the year.
Grain companies expect railways to meet the transportation needs of its customers. Railways want a flat, consistent demand curve to maximize their own operating costs – and they are able to do it because they are dual monopolies. In a normal competitive marketplace, service providers would provide options to meet peak demand and would compete to gain and keep the business of their customers through a strong focus on customer needs and working together to find commercial solutions to meeting those needs
The reality is that almost every marketplace has peak periods of demand, and those supply chains in a normally competitive environment work together to take full advantage of peak periods. Retailers have massive peaks for the Christmas season, construction oriented businesses have May through September peaks, seed/lawn/garden companies focus on the spring, to name but a few. Seasonality is not unique to the grain industry, and we do not feel as though the railways should ignore the need for surge capacity in peak periods to suit solely the needs of their own bottom line.
A: The term “revenue cap” is a misnomer. The correct name of this measure is the “Maximum Revenue Entitlement” or MRE. The MRE is not a “cap” on revenue. The MRE, which is calculated each year by the Canadian Transportation Agency, sets a ceiling on the revenue per tonne that the railways are allowed to earn for the movement of regulated grain and grain products to the ports for export. It does not limit the amount of money that railways can make on grain shipments. The maximum revenue per tonne is adjusted each year by a volume-related composite price index, which has increased an average of about 2% per year since the MRE formula was established in the year 2000.
Grain companies have invested hundreds of millions of dollars in infrastructure in the past 15 years since the formula for the MRE was introduced. The number of elevators being served by railways has reduced from 1004 in 1999 down to 370 primary and process elevators in 2015. As of the end of January 2015, 81.8 percent of all railway traffic moved in a 50 car block or larger with the average block size being 78 cars (Source: Grain Monitor Data). A major contributing factor is the fact that, the percentage of grain moving in full unit trains of 100 or more cars has increased significantly. Railway operating costs per tonne of grain have declined significantly with this transformation of the grain handling system, and the benefit of that cost reduction accrues directly to the railways.
In the 10 year period between the 2003-04 crop year and the 2013-14 crop year, the railways reduced their fleet by 10%, from 25,266 railcars to 22,651 (source: Grain Monitor Data). That efficiency gain can be largely attributed to the increase in unit train shipping, which translates into quicker turn-around time of railcars and thus fewer cars required to move the same volume of grain. The increase in unit train shipping is made possible by the billions of dollars invested by Canadian grain companies in high-speed loading and large car-spot capacity at country elevators over this same period. Today, over 80% of grain shipments are loaded in multiple car blocks, the majority of which are 100 car unit trains.
The reduction in railway fleet translates into significant cost reduction to the railways, which the MRE allows for. The MRE protects the revenue per tonne, and the fleet reduction reduces the railways’ cost per tonne; therefore the margin per tonne for the railway is increased.
The bottom line is:
Fixed railway revenue (MRE) – significantly lower railway operating costs = Significantly higher railway margin per tonne of grain shipped
The railways are the main benefactor of the investments made by grain companies in high-throughput elevators and associated unit-train tracks at the elevators, and although their revenue per tonne is regulated, their margin per tonne has clearly grown.
In addition, the MRE only applies to grain by rail shipments destined for the west coast ports and Thunder Bay/Armstrong shipments and does not apply to in-land Canadian domestic or US-destined shipments. If the MRE were affecting grain rail transportation performance, one should see better performance of rail shipments in the unregulated corridors going east or south. The fact is that performance in unregulated corridors is often worse than in regulated corridors, as demonstrated through the ongoing weekly rail performance report by corridor implemented by the Ag Transport Coalition.
Moreover, we also see service failures in places like the United States where prices are unregulated and rates are dramatically higher per rail car, but where major service complaints are perennial.
A: Grain companies are not asking for rules that would hamstring the railways’ ability to manage their businesses. In fact, the railways are currently forcing grain companies to manage their sales based on the supply of rail cars, and not the demand of their customers. Companies who export grain from Canada face global factors that mean there are periods where demand is stronger with better prices than other times of the year. In other words, the grain business has to a large degree seasonality for price and volume demands from end use customers and it is only natural that exporting companies want to move as much as possible in periods where this demand is better than the rest of the year. A proper commercially functioning market place would strive to meet this demand.
What’s required to do this are rules that 1) clearly define “adequate and suitable” service to be provided by railways defined within the Canada Transportation Act – at its core, the concept is to within reason meet the customer demands of shippers and not simply the most cost efficient network for the railways, and 2) real accountability (i.e., financial consequences) if the railways fail to meet performance requirements, requirements that are ideally set out in Service Level Agreements.
A: The majority of grain shipments are done through high throughput elevators loading 100+car unit trains. Most grain shippers have invested heavily in country elevators, which has resulted in an extremely efficient system that both the grain companies and railways enjoy the benefits of. In a commercial environment services should be priced accordingly (which can be accommodated within the MRE). That is, lower rates for more efficient moves and higher rates for those that are less efficient.
A: A grain company has one primary tool to signal to its customers that it does not want to take in more grain – price. When elevators are plugged because the railways aren’t delivering empty railcars or taking away loaded trains, grain companies can either reduce the price to the point that there is no interest from farmers, or go to a “no bid”. Either scenario will be met with a lot of criticism from farm customers who are justifiably frustrated and sometimes angry with not being able to market their grain at a reasonable price given world market supply & demand for their crop.
Grain companies make the majority of their revenues from handling and marketing grain. Facilities sitting idle (plugged or empty) are a worst case scenario for grain companies as their profitability is tied to their ability to move or turn over as much grain through each of their country elevator and port terminals as possible. Turning away farmer grain by having low prices or no bids is simply not viable from a grain company operations perspective.
In the case of the significant railway failure in 2013/14, grain companies would agree 100% with farmers that a significant number of sales opportunities, at strong prices, were lost. The wide basis seen in 2013/14 was directly and inextricably linked to the railways’ inability to provide railcars — a service failure that has never been seen to that degree in the history of the grain sector. Our goal in the current review of the Canada Transportation Act is to ensure that commercial mechanisms are put in place, supported through legislation / regulation, to ensure that rail capacity is increased for all shippers in all sectors including grain to meet our trade requirements. The WGEA’s #1 policy priority is to get the federal government to make these changes and we hope all of our farmer customers understand and support this critically important goal.