Agriculture Committee on Dec. 9th, 2010

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

You started it.

[Wayne Easter, Liberal, Malpeque, PE]

I'll look at the letter and see what it says. We wanted them here. We are now allowing Transport Canada, because they're not here, to waste the time of our witnesses on an important issue. I don't want to waste our time with their letter when they're not here to respond to it.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Then quit interrupting and let him read it in. You're the one doing the points of order.

[Wayne Easter, Liberal, Malpeque, PE]

I want Transport Canada, not Pierre Lemieux.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

No. But, Chair, it's an important point. I'll read in one of the key paragraphs here. It's speaking to the chair, and it says: As you are aware, the Government is currently undertaking a comprehensive rail freight service review. The review is focusing on the performance of stakeholders involved in the rail-based logistics system--primarily the railways, but also shippers, ports and terminal operators. An external panel is preparing a final report for the Government's consideration, which should be completed by the end of the year. It is expected that the review will identify ways to improve the efficiency, effectiveness and reliability of the rail-based logistics chain, which is essential for Canada's economic competitiveness. Once the report is released, the government will make a decision on the response to the report. It is important to allow the panel to complete its recommendations before the Government addresses concerns on rail freight issues, including concerns raised by agricultural producers on railway services and costs. It would be premature for Transport Canada officials to appear before the committee while the panel is still completing its work. Once the review has been completed and the Government has made decisions on the next steps, officials at Transport Canada would be pleased to attend the Standing Committee to discuss issues related rail transportation in the agricultural sector.

[The Chair, Conservative, Larry Miller]

Thank you. I think the members could have read that just as easily themselves.

We're going to move on to the witnesses—

[Wayne Easter, Liberal, Malpeque, PE]

I have one last point, Mr. Chair--

[The Chair, Conservative, Larry Miller]

Yes.

[Wayne Easter, Liberal, Malpeque, PE]

--on why the letter has no merit.

If you look at the order of the day, it is, pursuant to Standing Order 108(2), a study of the “railway costing review”. Transport Canada's response is on a service review; that is not what we asked them to come here for. We want them to answer questions on why the railways are being allowed to gouge farmers, according to the Canadian Wheat Board study, of $275 million in 2008 and 2009.

That's why they were asked here, and that excuse is unacceptable.

[The Chair, Conservative, Larry Miller]

Thank you.

We're now going to move to witnesses from the Canadian Federation of Agriculture, Mr. Banack and Mr. Oberg.

Which one of you is going to speak?

Mr. Banack? You have 10 minutes, please.

[Humphrey Banack, Director, Canadian Federation of Agriculture]

Good morning.

It's interesting to hear the talk about the rail service review. As industry, we're all waiting to see where it is going to come out at the end of January. We're waiting to see what it comes to. I'm sure you will hear a reply from us at that time.

Good morning. Thank you for your time.

My name is Humphrey Banack. I'm the president of Wild Rose Agricultural Producers, Alberta's largest producer-funded general farm organization. I met with several of you in October to discuss the rail service review process.

At that time, I was in the process of putting $225,000 worth of canola on the ground because rail service was inadequate to meet contracts that were in place. To date, I have moved half this canola, and I hope to move the rest by the end of the year. The inland terminals we deal with are 40% behind in shippings due to poor rail service to date.

That's just a little update. Although this is an important issue, our objective here today is to speak to you about rail freight rates in western Canada.

Thank you in particular for the opportunity to speak to you on behalf of the Canadian Federation of Agriculture. With me today is Allen Oberg, chair of the Canadian Wheat Board's board of directors. We are here today on behalf of the CFA, an across-Canada federation of general farm organizations, sector-specific commodity groups, and cooperatives. I am a member of the CFA board of directors and Allen is a member of the CFA national council.

My wife and I farm with my brother and sister-in-law near Round Hill, Alberta, in the central area of Alberta. Transportation is one of the major expenses on our farm, and on all prairie farms, because our grain-growing region is located so far from export positions.

No other grain growers in the world have to move their grain so far to port. My farm is 1,100 kilometres from the port by rail from Prince Rupert and 3,500 kilometres from the St. Lawrence River. American farmers have a much shorter journey to their export position. Farmers in Australia and the Ukraine are only about 300 kilometres away from export water.

There's also something else to keep in mind. In western Canada, we have to move our grain by rail because no other competitive alternative exists. Farmers in Australia, the Ukraine, and much of the U.S. can choose from two or three modes of transportation to reach their tidewater.

As you are aware, a government-appointed panel recently released its interim report on the review of service issues and problems related to the rail-based logistics system in Canada. The CFA is pleased with the panel's extensive review and analysis of the current situation facing railway shippers, including western Canadian grain farmers.

The report portrays an accurate reflection of the problems grain farmers face when shipping their grains to export positions. As pointed out in the report, the biggest challenge farmers face is the market power exerted by railways and the lack of competition therein.

This situation has led to inadequate performance and excessive costs to western Canadian grain farmers. When the Crow rate was replaced by the current revenue cap methodology in 2000, subsequent productivity gains were to be shared with farmers. At that time, the federal government had hoped that competitive pressures and market forces would result in lower transportations costs due to productivity gains. Unfortunately, because of the near monopoly of railways, this has not happened.

The CFA recognizes that the service review panel's mandate explicitly excluded cost or price-related issues, including freight rates, the revenue cap, ancillary charges, and competitive access issues. However, the review panel outlined many problems with railway costs, and for grain farmers in western Canada, this is of paramount importance. Our message is clear: we need the Canadian government to put a rail cost review into motion right away, not a year from now, and not two years from now.

Thanks to devastating rains in the spring, farmers have just harvested an unusually poor-quality crop. Meanwhile, Minister Strahl has committed only to “thinking” about the possibility of a cost review after the current rail service review is completed. Somehow, we have to get you, our elected representatives, to understand that these are separate issues involving entirely different groups of analysts and experts, and that every year we wait is another year that goes by with farmers paying millions more than our fair share.

Freight rates need to be based on actual costs, not annual revisions from outdated formulas. We're coming up to 20 full years since the last full review of railway costs. Farming has changed a lot in that time. The railroads are proud of telling anyone who will listen that they're certainly not operating the same way they did then, and freight rates need to be based on today's reality, not the world of 20 years ago.

I'd now like to defer to my colleague Allen Oberg.

[Allen Oberg, Member, National Council, Canadian Federation of Agriculture]

Thank you, Humphrey.

As Humphrey said, my name is Allen Oberg. My brother and I run a grain and cattle operation near Forestburg, Alberta. I have been a member of the Canadian Wheat Board's farmer-elected board since 2002 and was elected chairman of that board this past June.

Earlier this year, a broad coalition of farm organizations led by the CFA released an important study confirming what western Canadian grain farmers have known for some years: that we are paying way more than our fair share in rail freight.

This study was commissioned by the Canadian Wheat Board and conducted by a highly respected and highly experienced rail analyst, John Edsforth of Travacon Research. Mr. Edsforth examined rail freights in western Canada for the 2007-08 and 2008-09 crop years. Copies of that study are available for you here today.

I want to comment briefly on Mr. Edsforth's approach. Mr. Edsforth examined rail freights in terms of a particular benchmark. That benchmark is 20% of volume-related variable costs. This is the same benchmark for a fair and reasonable return to railways used by the former Western Grain Transportation Act, or WGTA. It is also the percentage that the Canadian Transportation Agency has determined is the average system contribution for rail movement. A 20% level is also what Travacon Research believes would be the maximum achievable in a competitive environment.

Using this benchmark, Mr. Edsforth concluded that for the two crop years 2007-08 and 2008-09, western Canadian grain farmers paid $123 million and $275 million over and above what would have been considered fair under the WGTA. On a per tonne basis, that works out to $4.61 per tonne too much during 2007-08 and $8.81 per tonne for 2008-09. On an average for those two crop years, we are talking about $6.87 per tonne above what was considered fair and adequate under the WGTA. That is not just on wheat and barley that's marketed through the CWB; it applies to all major grains exported by western Canadian grain farmers.

To illustrate what this means to prairie farmers, let me tell you about my farm. I'm 1,056 kilometres by rail from the Port of Prince Rupert. Over the last two crop years, I shipped an average of 3,660 tonnes of grain. At $4.61 to $8.81 per tonne, that means I paid anywhere from $17,000 to $32,000 more than I would have under the WGTA. And that's just me, that's just my farm, and that's just in one year.

In total, farmers are contributing $200 million over and above what was considered fair under the WGTA, and that's each and every year. Any farmer who wants to know what this study means for his particular farm can use a simple online calculator to figure it out. They simply fill in the tonnes they've delivered, and the calculator comes up with the range of money that could otherwise be staying on their farm. This calculator, by the way, is available through the Canadian Federation of Agriculture website.

How did we get here? Well, there's no great mystery about it. We got to this point because of a huge consolidation of rail infrastructure. More than 1,000 prairie elevators have closed since the 1990s. Today we only have 240 grain elevators across the entire prairie region.

The system needed to become more efficient, and it became so. Today, the railways are shipping more grain in bigger blocks. They were able to pick up more grain with fewer stops along the line, so they are saving money, and that's a good thing. We support the system becoming more efficient and we support the railways making a reasonable profit. But as one of the railways' largest customers, western Canadian grain farmers believe that some of those efficiencies should be passed on to us.

In fact, just the opposite has happened. Over the last 15 years, freight rates have continued to trend higher, and the closure of thousands of elevators means, of course, that we farmers are hauling our grain by truck for much longer distances.

Since 2000, we have had annual revenue caps on Canadian rail company income for grain movement. The revenue cap takes into account things like changes in the volume of grain shipped, changes in fuel costs, and inflation, but it does not factor in the railways' true costs. When railway costs go down because of increased efficiencies, farmers don't share in these gains even when farmers have contributed directly to these efficiencies. As farmers, we're losing millions every single year that we wait for the Canadian government to call for a rail costing review.

Let me repeat. No one is objecting to profitable railways in Canada, but farmers cannot continue to shoulder an unfair share of the load. Freight rates must be fair, both for farmers and for the railways. The question isn't, “Why should we have a costing review?” The question is, “How can we not?”

Thank you, Mr. Chairman.

[The Chair, Conservative, Larry Miller]

Thank you, gentlemen.

We'll now move to Pulse Canada and Mr. Bacon.

You'll have 10 minutes.

[Gordon Bacon, Chief Executive Officer, Pulse Canada]

Good morning, Mr. Chairman.

Good morning, members of the committee.

Very quickly, I'll note that Pulse Canada is a national organization made up of grower organizations from each of the major pulse-producing provinces and of members of the Canadian Special Crops Association, which are the processors and exporters of peas, beans, lentils, chickpeas, canary seed, mustard, buckwheat, and sunflowers.

I think that all of the witnesses you're going to hear are businessmen. We have a business focus: we're trying to increase the profitability of our industry. At Pulse Canada, we're focusing on what every business does, and that's trying to reduce the costs that our industry faces and also to drive up the value, and particularly in pulses, with the tremendous story we have in health, nutrition, and environmental sustainability.

As it relates to costs, the number one issue for our members is transportation. I just want to quote one line out of a World Bank report that really puts our issues into perspective: “Predictability is central to the overall costs that companies incur in logistics and thus to their competitiveness in global supply chains”.

The key word there is “predictability”. What we are facing is a lack of predictability, and this is creating some costs in our industry. For this reason—our focus on trying to address rail costs—Pulse Canada, for the last four years, has had a major focus on transportation. We have played a major role in the Coalition of Rail Shippers and we have spent a lot of time over the last two years on the rail freight service review.

I want to give you just a couple of opening comments and then turn it over to Greg Cherewyk. I want to mention that from a pulse and special crops perspective on the costing of rail service, there are really two areas. There's the visible cost of a rail freight rate, but what we want to bring into this is an important part of the discussion; that is, of the costs shippers are paying, they're paying for service that is unpredictable.

Greg has summarized some of our key findings related to that lack of predictability, how it impacts our costs, and what we believe needs to be addressed to reduce costs and increase the profitability of our sector.

[Greg Cherewyk, Executive Director, Pulse Canada]

Thank you, Gordon.

You should all have in front of you right now a copy of a presentation that I am going to refer to. As Gordon said, I am going to talk about some of the factors that have the greatest impact on cost for our industry.

If you look at page 2, you'll see that I've given you a quick summary of what the rail freight service review looked at. I want to draw your attention to the very first bullet, which says “8 Quantitative analysis reports”. What's different about this review and the approach that government took this time around is that we looked at the facts. We went away from town hall meetings, shipper surveys, and questionnaires, and we focused on the evidence. We quantified what service looked like. It is to the credit of Transport Canada that we took that approach.

What were some of the facts? On page 3, I've summarized a key quote there, and that concerns the railways' performance in terms of meeting demand. Both railways together met 100% of the demand only 49% of the time. They met 75% of the demand approximately 57% of the time. If you look at the last sentence on that slide, you'll read that “these average performance levels mask week to week changes in performance that are very significant”.

On page 4, we look at how the railways did in terms of meeting commitments—not meeting the demand, but meeting the commitment that they have made to their customers: “Over the course of the study period, the shippers in the analysis received 90% of planned car supply on the planned day only 12-28% of the time”.

Now let's look how the railways performed in terms of their focus on the customer. On page 5, we note: “High error rates (error rates on bills from 20% to 70%) experienced by customers” on their demurrage bills. These are bills that our members pay for failing to load their cars in 24 hours. In fact, in our industry, many of our members hire part-time or full-time staff just to monitor the accuracy of demurrage bills.

If you look at page 6, you can see a key thing that speaks to the railways' contribution to system efficiencies. One of the most important things you can offer as a logistical service provider is an estimated time of arrival. It helps your customer plan their operations efficiently and effectively, and it helps them work with their supply chain stakeholders to ensure that they're operating efficiently and effectively. Yet “the railways acknowledge that the accuracy of this information is not subject to measurement...and the computer logic...is subject to a high degree of error”.

I'm not going to walk you through all the elements of the study and talk about transit time, variability, and the other findings of the report. I want to jump right ahead to the rail freight service review panel's conclusion: the major cause of rail freight service problems is a lack of effective competition or market power that reduces the railways' accountability for performance, and that has led to less than adequate service.

The last sentence on page 7 says: “It has long been recognized in transportation law that regulations are required to address potential abuse of market power by the railways”. On page 8, the panel says that “there are no practical ways to directly increase rail competition” and that the effectiveness of the current Canada Transportation Act protection provisions did not result in “reasonably adequate” service.

On page 9, we read that the panel “believes that the results of the Phase I research work...would have been much different” if shippers had had “access to effective competition and/or effective regulatory tools”. On page 10, the panel “recognizes that effective legislation and regulation may be necessary to foster an environment that encourages commercial solutions”.

Yet on page 11, instead of following that logical thinking process, they abandon it and suggest that the railways voluntarily implement new process improvements and sign agreements, and that at some point in the future—“2013”—the government should come back and look at this again to see whether we've made the steps towards progress that we all expect. I don't think I need to tell you how the shipping community views recommendations that really say nothing should be done and that someone else should come back and look at this again at some point in the future.

What I do want to spend some time talking to you about is the cost of inaction. On pages 12 and 13, I'm going to refer to a report that Pulse Canada commissioned in late 2009 and received in 2010. It was a report on the cost of unreliable and unpredictable transportation to our industry. We commissioned this report through SJT Solutions, Logistic & Marketing Services, and Mercantile Consulting Venture.

What we looked at was this: what is the cost of unreliable and unpredictable service? There is a real cost—we know that—but we wanted to quantify it. We looked at two ways of approaching this: the qualitative analysis and the quantitative analysis.

The quantitative analysis looked at the impact on our business over the last decade or more. On page 13, you will see a list of changes to the nature of our business as a result of unreliable service. I'm not going to speak to every one of these points, but I will highlight a few.

You've all heard about reduction in container availability and vessel capacity. Put simply, inconsistent and unreliable customers don't get containers or vessel space. The agriculture industry in North America is widely recognized as the least reliable and most inconsistent customer the steamship lines have. It definitely constrains our ability to access containers.

Point number three is on the extension of shipping windows sold. We used to be able to pull the trigger on four-week sales in our industry. That doesn't happen anymore. We don't bid on that business because we can't deliver. That changes our export markets. We routinely use contract extensions, and there are penalties associated with extending your contract. That just means we routinely include contract penalties and cost calculations, which means we put fewer dollars into the pockets of farmers. If we're getting 100% of our demand 49% of the time, we're over-ordering to mitigate risk, which creates inefficiencies across the supply chain.

These are some of the changes to the nature of our business that have occurred over the last decade as a result of unreliable service.

If you turn to pages 14 and 15, I'll talk a little bit about the costs of unreliable service. There are three main areas you look at when you consider costs: incremental costs associated with high levels of inventory, penalties associated with contracts and demurrage, and costs associated with hedging transportation on reliability.

If you look at all of those factors—and on page 15 we do summarize them for lentils alone based on 2008 data—and if you look at total additional storage, administration costs, labour costs, price penalties, demurrage charges, and container detention fees, you'll see that we arrived at an average figure, for lentils alone, of $11.92 as the cost for unreliable service.

If you applied that figure, $11.92, to the forecasted export total for lentils this year, you would arrive at a figure of approximately $14 million in lost earnings. That's on lentil shipments alone as related to unreliable service.

On average, we ship 30 million tonnes of grains, oil seeds, pulses, and special crops every year. I'm not suggesting to you that the figure of $11.92 applies neatly to every one of those commodities, but you should expect that the number will be very large when you look at the cost of unreliable service.

Are freight rates important? Is the price of freight important? Absolutely. But if you turn to page 16, you'll note that we're saying price isn't everything. If price was everything, every farmer in Canada would be driving what they call the Belarus tractor. If price was everything, we'd all be driving Yugos. Both are notoriously cheap. Both are notoriously unreliable. You could purchase a Yugo for under $4,000 U.S. when they were available, and if you had, you would have had what Car Talk voted the worst car of the millennium.

Our members expect value for their freight dollar. That must remain our top priority. The first action the government can take to address profitability at the farm level, profitability at the processing plant, and profitability in the export office is to address service, and to do that by putting forward a regulatory framework that compels all of our supply chain stakeholders to make predictability the central focus of their interactions.

We must first define the level of service that's expected by our business community. Then it would be appropriate to ask whether or not the cost of that level of service is appropriate. This is how, around the world, you establish a brand of consistent and reliable quality and consistent and reliable service. This is how we ensure that our export-dependent ag economy is competitive.

The ask from the pulse and special crops sector is, again, that government look at immediately drafting and passing what the panel included in its interim report as a fallback provision, immediately drafting an act to create the conditions that will result in the commercial solutions we're looking for. We're not so naive as to believe that's going to happen right away. We know that's going to be a long, hard process to put in place, but we have more than enough evidence to take substantive action on this issue.

But we don't have to wait for is performance measurement. That has to begin immediately. There has been a suggestion that this is not something that we need to undertake, but if you don't measure the performance of this system after having undertaken this review, you have no way of knowing whether the improvements you've asked for have resulted in the impact you desire or whether or not those impacts are sustainable.

These are important economic indicators, as important as measuring the performance of your gateways that you've dumped billions of dollars into infrastructure for and that we're happily measuring performance of today. We must measure the performance of the supply chain--the assembly line that feeds product into those gateways--and that we don't have to wait for that. We must begin today.

Thank you very much.

[The Chair, Conservative, Larry Miller]

Thank you.

We'll go to rounds.

Mr. Easter, you have seven minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

I thank all of you for coming today.

I find it rather strange that the pulse growers are offside with most other organizations on the costing review issue.

Gordon, you said that shippers are paying for services that are unpredictable. Do you believe they're not overpaying? I imagine you've read the study on the costing review. Are you saying the numbers in that study are wrong?

[Gordon Bacon]

Well, we're definitely not offside with any organization. I want to make that clear.

What we have said is that we believe the approach and the logical order of addressing this is to define the service, cost the service, and decide whether that cost is appropriate. We have a system that desperately needs improvement. We have to be talking about the performance of that system and find the appropriate cost.

I've used the example--and let me use it here again--that in our industry we may be told that our rail freight is going to arrive on Friday, so we may be arranging trucking and labour for over the weekend, but we don't find out that the train isn't going to come. So if we have to be charged $500 by the railways for them to pick up the phone and call us to say that the train is not going to arrive, charge it. We have huge costs built into our system.

A focus on the visible rail freight rate without a focus on the kinds of costs incurred by the industry for the lack of predictability is going to start at a place where we're not going to be addressing the number one issue, and that's the predictability of the service. As Greg said, then we can talk about whether the rates charged for predictable service are reasonable.

[Wayne Easter, Liberal, Malpeque, PE]

I just call the Department of Transport the “department of railways”, because they're always there for them. Now even the parliamentary secretary is....

Do you not think that both issues could be dealt with at once? Clearly, from the study, and just to look at Mr. Obert's farm, his farm is being overcharged—gouged—$17,000 to $32,000 per year by the railways. Multiply that by the number of farmers and the number of commodities being shipped. Don't you think both issues have to be addressed at once? Both have an impact, and one is the overcharging.

Greg said earlier that the major cost of the lack of service is the lack of competition and that has led to less than adequate service. Isn't that also the reason why there's an overcharging of rates under the revenue cap? There isn't competition and you also have a compliant government: isn't that the reason?

[Greg Cherewyk]

Today's rates apply to today's current level of service. We have great expectations with respect to improvements in service. We have huge expectations with respect to improvements in consistency and reliability. We're expecting service level agreements that define standards and include penalties for non-performance. All of this will entail changes at the railways. There will be a change to their cost structure, I guarantee you.

What we're saying is to first address what is a priority for us; that is, define our service expectations--because they are new, they are great--and then look at what it'll cost you to deliver that.

[Wayne Easter, Liberal, Malpeque, PE]

Let me then come back to my original question. Do you disagree with the numbers in the Wheat Board study?

[Greg Cherewyk]

Absolutely not.

[Wayne Easter, Liberal, Malpeque, PE]

Okay.

[Greg Cherewyk]

It's not a matter of being off order. It's a matter of order of priority.

[Wayne Easter, Liberal, Malpeque, PE]

Coming then, to the Wheat Board, or to all of you, for that matter, I think people have made the point that when the original changes were made and the revenue cap was put in.... Nobody is arguing that the railway shouldn't make a regional profit, but can anybody tell me how they're doing these days? Are they doing reasonably well? What are their profit levels? On the last numbers I've seen, they were doing pretty damn well, I think a heck of a lot better than people in the farm community.

For the CFA, which was involved in the original discussion, wasn't it the intent when the changes were originally made for farmers to share in the efficiency gains?