Agriculture Committee on Feb. 10th, 2014

[The Chair, Conservative, Bev Shipley]

I want to welcome everyone here today for the 14th meeting of the committee. Pursuant to Standing Order 108(2), we are undertaking a study of the grain logistics system in Canada.

We have a number of witnesses today, and they are on video conference.

I think before we start, colleagues, we should always have congratulations and recognition of a birth within our organization. Mark Eyking is a new grandfather. Over the weekend his daughter and son-in-law had a little one.

Congratulations to you, even though that likely goes back a few years. All the best to you.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Chair. As my dad said, you can never have enough hands on the farm, and we have another set. Thank you very much.

[The Chair, Conservative, Bev Shipley]

Today, colleagues, I want to welcome via video conference from Winnipeg, Greg Cherewyk, chief operating officer from Pulse Canada, and also from the Western Grain Elevator Association, Wade Sobkowich, executive director, and John Heimbecker, director.

Each group will have seven minutes.

I'll turn it over to you. Please go ahead, Greg.

[Greg Cherewyk, Chief Operating Officer, Pulse Canada]

Thank you Mr. Chairman, and thanks to the committee for the opportunity to appear today as you address what is without question the single most important issue facing the agriculture industry.

This afternoon you are going to hear from a key group of stakeholders. Each witness is going to provide you with some important insights into the impact of this year's poor supply chain performance on that group's membership. I know that Wade, with the WGEA, will provide a great deal of data that will help us get a handle on the magnitude of the situation from the grain companies' perspective. Allison, of the Grain Growers of Canada, will later on this afternoon no doubt shed some light on how growers are being impacted by the system's inability to move grain off the farm this year. Rick, with the Canadian Canola Growers Association, will again a little bit later be able to talk about how farmers are managing cashflow, when they are less than 90 days from hitting the fields.

But let's begin with some of the very big numbers that set the stage. Year to date, we are 51,000 cars behind, meaning that 4.5 million tonnes of grains, oilseeds, pulses, and special crops have not moved to market according to plan. There are currently more than 35 vessels in Vancouver waiting for product. Agriculture and Agri-Food Canada is forecasting a 22-million tonne carry-over of grains and oilseeds this year.

These numbers tell you that all agricultural sectors have been hit hard this year, and the pulse and special crop industry is no exception. Year to date, participants in our performance measurement program have received 64% of their orders for hopper cars and 61% of orders for boxcars. Bear in mind that these are averages and thus mask experiences of shippers on a week-to-week basis. During the first 25 weeks of the current grain year, the railways provided participants in our program with no cars to meet orders 46% of the time and only supplied up to 80% of orders 61% of the time. As a result, pea shipments during the first four months of the 2013-14 shipping season were only at 739,000 tonnes, and at that pace they will fall 500,000 tonnes short of export expectations. Lentil shipments were only at 170,000 tonnes at the end of November, and at that pace we'll be more than a million tonnes short of this year's target.

As frightening as they are, these abysmal order fulfillment rates, resulting in massive railcar shortfall figures leading to enormous carry-outs, tend to hide the reality of the situation for individual companies and their buyers.

Take Simpson Seeds of Moose Jaw, Saskatchewan, for example—one of the first family-owned pulse and special crops processors in the business. They employ 100 people, serve 4,000 farmers, and export to more than 70 countries worldwide. In the month of January, Simpson Seeds was nearly shut out on hopper car orders and only received their January 6 hopper car orders in the week of January 27. With no railcars for nearly a month, they have been forced to shut down their processing plants, but continue to carry the full cost of their 100 employees.

Let's not forget the customer on the other end. Packaging and canning companies worldwide have been threatening to cancel Simpson's contracts. It is only a matter of time before the threats become a reality for Canadian suppliers such as Simpson. Only last week, Bloomberg News reported that Japanese wheat buyers are turning to U.S. wheat after two months of late shipments from Canada.

While every bit of this information is critical as we assess the impact of our transportation system's failure to meet the needs of its users, it is really only serving to confirm what you already know to be the case: it's bad out there and it's going to get worse until some very real and concrete actions are taken by our two national railways.

In the short term, Canadian farmers, processors, and exporters need to know with certainty what will be moved in the next six months. They don't need a plan; they need a firm commitment. The size of the crop and the nature of the demand has been known since September 2013. The expectation from the pulse industry is that by now a plan should be in place to meet that growth in demand.

In the medium term, Canadian farmers, processors, and exporters expect the capacity will be in place to move increasing volumes of Canadian grains, oilseeds, pulses, and special crops. Massive investments are being made to expand productive capacity in this country. These investments need to be matched with commensurate investments in our ability to market and move this production.

In the long term, Canadian farmers, processors, and exporters along with their colleagues and counterparts from the mining, forestry, fertilizer, chemical and other industries expect to see transportation system capacity that matches their industries' plans to grow—capacity for what we produce today, capacity for our planned growth tomorrow, and capacity that can surge to meet demand when it's needed. These are mandatory requirements for an economic growth strategy.

Peter Hall, vice-president and chief economist of Export Development Canada, called attention to this in June 2013, long before agriculture's record harvest was off the field, when he said:Transportation infrastructure is key to facilitating...growth, but insufficient rail track capacity is a key limiter. ...we may be running short of the means to realizing the growth that is already coming our way.

The first step in addressing this issue is to embrace section 5 of our national transportation policy, which currently says that:...a competitive, economic and efficient national transportation system that meets the highest practicable safety and security standards and contributes to a sustainable environment and makes the best use of all modes of transportation at the lowest total cost is essential to serve the needs of its users, advance the well-being of Canadians and enable competitiveness and economic growth in both urban and rural areas throughout Canada.

Our starting point must be an agreement that the system is here to serve the needs of its users. Today, the primary focus is on ensuring that the system is configured in the most profitable way for the railway, and the evidence is in the headlines of the business sections of our national newspapers. While the users of our system are experiencing massive shortfalls, the railways continue to create greater efficiencies and drive greater returns for shareholders.

We must make the needs of the users of the system in Canada our priority from this day forward. If we don't, we're answering the question that the Simpson Seeds CFO recently asked the senior management team, and that was, why are we considering more capital investments when we can't meet our current commitments?

Thank you.

[The Chair, Conservative, Bev Shipley]

Thank you for staying on time. I appreciate it very much.

We'll move now to the Western Grain Elevator Association.

Wade, are you going to do the presentation?

[Wade Sobkowich, Executive Director, Western Grain Elevator Association]

Yes, I will. Can you hear me all right?

[The Chair, Conservative, Bev Shipley]

Thank you very much. You're doing well.

You have seven minutes, please.

[Wade Sobkowich]

Thanks for giving the WGEA the opportunity to appear before you.

We're going to focus our opening comments on the general state of grain logistics today.

As Greg mentioned, total railcar shortfall is at an unprecedented level of 51,000 railcars. This represents 4.6 million tonnes of grain that grain companies have put orders in for, which haven't been filled. It's important to note that over 50% of the shortfall is in non-regulated corridors.

In the fall period, in the very best week, the railways spotted somewhere between 9,500 and 10,000 railcars. Since mid-December, the railways are providing about half that number.

Since the beginning of the crop year, grain shipping is down about 5% over last year. This decline will grow significantly if we stay with current performance levels.

Country stock positions are at approximately 3.5 million tonnes, which is the absolute limit of the system's working capacity. Grain elevators are now only able to accept deliveries after they load out.

Producers are experiencing very serious challenges in delivering. Some grain companies will not accept non-contracted deliveries, and few new contracts are likely to be offered until the rail backlog shows some sign of clearing. Companies cannot do more business until old contracts have been fulfilled.

Partially filled vessels continue to be held at anchor. We have 17 vessels waiting at Prince Rupert, and 37 in Vancouver, and several in the St. Lawrence. Again, these are unprecedented numbers. This comes with vessel demurrage and an inability to execute on contracts with end-use customers.

Vessel demurrage is between $11,000 and $25,000 per day. We estimate the total vessel demurrage paid in the crop year to date at over $25 million. Those are direct costs incurred by the grain companies, with no recourse.

There is significant untapped port terminal unload capacity in Vancouver, Prince Rupert, and Thunder Bay. The overall capacity of the grain industry to handle unloads is about 14,000 railcars per week. The potential exists to do more, but as Greg alluded to, it's difficult to justify capital expenditures for quicker unloading when rail capacity remains flat, at best.

Typical carry-out of stock from one crop year to the next is usually about five million tonnes. If rail capacity remains at today's level, the grain industry is going to experience a carry-out of over 30 million tonnes. If the railways could somehow return to the level of 10,000 railcars per week, our carry-out will be 23 million tonnes.

Price per tonne at today's value can be averaged at $275 per tonne, so a value of a 23-million tonne carry-out is $6.5 billion. If the railways carry on as they have and we end up with a 30-million tonne carry-out, that value is $8.5 billion not paid to farmers.

What are the grain companies doing? We're doing our best to use the limited railcars provided to move grain as efficiently as possible. Cars are being loaded and unloaded seven days a week, 24 hours per day in some cases, as presented at the port terminals. Country and port facilities have the capacity to handle much more.

While they try to bring in farmers' grain on a first-contracted, first-in basis, they also have to bring in the right grain to match the vessels waiting at port.

Here are some facts. We're not going to get out of this situation until we produce a low volume crop. We're going to see the quality of this crop's quality deteriorate over time. Opportunities are being lost and customers are turning to other countries for a reliable supply, and railway share prices keep rising.

What is apparent is that the railways do not have a process for forecasting the demand and movement of grain. They neither solicit an aggregate demand number, nor do they request demand forecasts by corridor.

We can only conclude that—unlike what we see in competitive industries—demand forecasting is not a key factor in the railway's decision-making process on planning supply.

I have two solutions on what we see in the short-term. Number one, additional rail capacity is needed. We've heard the argument that the railways simply cannot add capacity. One cannot force more cars on the freeway to solve the problem is what they say.

In actuality, CPR has decreased their workforce by 4,200 people, railcars by 2,700, and locomotives by 400 since 2012. CN took similar steps during their period of operating-ratio decline in the early 2000s.

This is a very important point that I'm about to make next. It's a statistic that you should keep at the forefront of your minds as the discussion goes on. During the first quarter of the current crop year, the industry exported 7.4 million tonnes of grain. In 1994, 20 years ago, the industry exported 8.7 million tonnes. Both railways have the means and ability to increase capacity.

The second thing we need is better planning from the railways and significantly better communications of those plans. We require an accurate allocation plan, with a reliable number of cars, accurate placement, pickup, delivery, and recovery plans.

We've heard the railways make statements with respect to capacity that one does not build a church for Easter Sunday. However, it's a fundamental of any business that any company must build excess capacity to service the needs of a growing marketplace. Railways are a provider of service to customers. They should not be allowed to dictate the fashion in which Canadian shippers and exporters market their products to the world. It is a fact that shippers do not have competitive options, and a fact that adequate regulations do not exist to hold the railways accountable to carrying surplus capacity.

If Canada expects to grow exports of potash, and coal, and oil, and grain, then there must be a competitive or regulatory rail environment to require the railways to provide added capacity and better service. It is imperative that the railways be made accountable to shippers. This is not a novel concept, and exists in all other parts of the value chain.

The subject of railway accountability has been the subject of numerous submissions before several parliamentary committees. However, in a year of larger-than-average production, which we expect might be the trend of the future, this lack of accountability exposes the industry to a state of crisis that must be addressed.

Thank you.

[The Chair, Conservative, Bev Shipley]

Thank you very much for being on time and for your presentation.

I'd like to now turn to Levi Wood, president of the Western Canadian Wheat Growers Association, also in Regina.

Thank you very much. Please go ahead, Levi.

[Levi Wood, President, Western Canadian Wheat Growers Association]

Thank you, Mr. Chairman and members of the committee, for the opportunity to speak with you this afternoon concerning the grain logistics system in Canada.

My name is Levi Wood, and I'm the president of the Canadian wheat growers. For those of you who aren't familiar with our group, we're a voluntary farm organization that is member-based and has been a strong advocate for opening competitive markets in the grain system for the past 44 years. Our members consist of farmers from across the three prairie provinces and into the Peace River region of B.C.

My personal situation is that we operate a 19,000-acre grain farm at Pense, Saskatchewan, which is just outside Regina. On that farm we traditionally grow durum wheat, winter wheat, canola, and lentils.

Prairie grain farmers are highly dependent on the rail system. Over 70% of our grain is shipped out by rail in either raw or processed form. The balance is fed to livestock or processed and consumed locally. Rail is therefore an essential service for western grain farmers. Shutdowns of rail service, even for a day or two, can have a significant negative impact on the western economy.

In our view, this current backlog of rail shipments—40,000 railcars at last count—is not due to a shortage of railcars; there are enough grain cars to move this crop to port. There is also sufficient throughput at the port facilities. In fact, grain stocks at port elevators are currently below average. The grain monitor, put out by Quorum Corporation, has confirmed that railcars are being unloaded at port on a timely basis and that there are no unusual constraints to vessel loading.

The problem, to our mind, is quite simply that the railways have dedicated far too few resources to shipping grain. They have not assigned a sufficient number of locomotives and crews to meet or even come close to meeting market demand. The key cause of this rail service problem is the lack of competition in rail and the lack of alternative options for us on the farm. With only two main carriers, there is not the competitive discipline that you see in other industries or even in other facets of the grain business. In competitive industries, service is good because customers are free to take their business elsewhere. Unfortunately, in the prairie grain business, farmers and shippers do not have that option. For the most part, grain shippers are captive.

For example, there are more than 340 grain elevators on the prairies, yet only six elevator locations are served by both railroads, CN and CP. An additional 22 elevators are situated within 30 kilometres of an interchange with the other main carrier. Under the current interswitching provisions of the Canada Transportation Act, this means that the shipper has the ability to access the other railway, with the originating carrier obliged to move loaded railcars to the other railway at a prescribed rate. The interswitching provision brings an element of competition into the rail sector. We understand that rail service has been good at those elevators that have access to both railways or are within the 30-kilometre interswitching distance. It is for this reason that our group, the wheat growers, is proposing to amend the act to extend the interswitching distance from 30 to 120 kilometres.

Some are suggesting that getting rid of the railway revenue cap will bring about a necessary improvement in service. Our fear at this time is that giving the railways rate freedom would allow them to jack up freight rates without any material improvement in service. As noted, farmers and shippers are largely captive, so the railways could still count on hauling almost as much grain as they do today, but extract a higher price for it. Yes, you might see an increase in trucking and more grain fed to livestock, but the main effect of eliminating the railway cap would be to present farmers with a much higher freight bill and lower overall farm-gate returns. Truck transportation is not currently, especially over long distances, a sufficient competitor to the rail service.

Having said this, we at the wheat growers are recommending that the revenue cap formula be modified so that the railways have greater incentive to add more shipping capacity during the peak post-harvest shipping period. In a typical year, farmers want to move as much grain as possible around the harvest time, because of their cashflow needs and the need to reduce storage costs. Generally speaking, it is also good to get as much grain as possible moved into the global system before the Australian crop starts to come off in January.

Today, the wheat growers have released our proposal for an incentive-based revenue cap and are pleased to share it with you.

Another measure we would like to see is a strengthening of the act to ensure that shippers can negotiate service agreements with the railways that include effective performance provisions. Performance standards related to car order fulfillment, spotting, pickup, and delivery need to be specified by contract, with penalties in place for non-performance.

While such performance standards and penalties should be negotiated between shippers and railways, shippers must have access to a quick arbitration process that adequately accounts for the imbalance in their negotiating position.

Lastly, the wheat growers recommend that governments, both federal and provincial, take action to ensure more oil moves by pipeline rather than by rail. Scarce railway shipping capacity that is now being used to transport oil should be reserved for those commodities such as grain, fertilizer, lumber, and coal, where there is no economically sound alternative. Moving oil by pipeline is certainly safer than by rail and can be done at a lower cost.

We note that in January of this year Canadian rail shipments of grain were down 12% year-over-year from last year, whereas shipments of petroleum and petroleum products are up 7%. This suggests to us that the capacity to move more grain is available. It's simply a case of the railways choosing to do so.

We recognize that these measures we are recommending are mid- to long-term solutions and do not address the current transportation backlog. Quite frankly, we do not know what levers are available; however, we ask the government, and the Parliament of Canada, to take whatever steps are necessary to encourage or compel the railways to clear up the grain-shipping backlog as soon as possible.

In summary, we offer the following recommendations.

First, expand interswitching distances from 30 kilometres to 120 kilometres.

Second, adopt an incentive-based revenue cap.

Third, strengthen the act so that shippers can negotiate contractual service agreements with the railways that include performance provisions.

Fourth, ensure pipelines are approved quickly so that more rail capacity can be devoted to shipping grain and other bulk commodities.

Finally, we ask you to take whatever measures are necessary to clear up this backlog.

Thank you for the opportunity to share our views right now. I look forward to your questions.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Levi. I appreciate it.

Good presentations. Now I'll turn to my colleagues on the committee.

The first colleague will be Madam Brosseau for five minutes.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Thank you, Chair.

I'd like to thank our witnesses for their presentations today.

Last week we had the opportunity to debate this in the House. I'm sure you were probably listening to the emergency debate. This is not an easy question to answer. It's not black and white, and I don't think this is a partisan issue because we all know the importance of it, and the gravity and the impact it has, not just on our farmers but on all the other industries locally.

I know a few of you have touched on what needs to be done in the short term.

Mr. Wood, you mentioned more competition. Presently, what we have is kind of a duopoly.

I was wondering if the other witnesses can comment on the current situation with CN and CP, on maybe opening it up to more competition.

[Wade Sobkowich]

Maybe I'll start, and let Greg and John jump in if they want.

Thanks for the question. We think added competition is ideally the solution that you would want in an ideal world. The problem is this. How do you get to effective competition, given the structure of the system? When you're an elevator planted in the middle of Saskatchewan and you have a CN line running up to your facility, you don't even have a duopoly. You're beholden to a monopoly. It is very difficult to get to a situation of true competition. That's why we tend to look for regulatory solutions. If you can't figure out how to get to a truly competitive environment because of the nature of the rail industry, then we need to simulate that balance that we would otherwise see by propping up the system with regulation. That's why we've been proposing regulatory solutions as opposed to.... Because if you could truly get an open marketplace in the rail industry the way it exists today, it would be there already.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Farmers have worked very hard and we've had this bumper crop and....

Sorry, do you have more to add?

[Wade Sobkowich]

No, I was just looking to Greg or John to see if they wanted to add more to my response.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Do you have anything else to add?

[John Heimbecker, Director, Western Grain Elevator Association]

No.

[Greg Cherewyk]

No.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Right now, if you had two suggestions, two concrete steps, to get grain moving right now what would they be?

[Wade Sobkowich]

Unfortunately, we find ourselves in a situation without any regulatory levers today. Really, the only tool that's available to us is to file a level of service complaint with the agency. Unfortunately, that's after the fact, so the problem has to have already occurred, the damage has to have already been done, and then you can go to the agency and file a level of service complaint to try to prove that the railways provide adequate service. Once you get a decision from the agency you can take it to court to get compensation of damages, if you can get through all that and be successful.

In the short term, I'm not sure if there are any levers the government can pull, but we need to somehow figure out how to compel the railways to add capacity for grain. That's the bottom line.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

What about tougher penalties? I've talked to some farmers and some people have said the government needs to get a bigger stick to whack companies with when they're not moving and they're not fulfilling their duties. Would you agree that tougher penalties are something the government could look at?

[Wade Sobkowich]

Yes, I think that's one thing that should be looked at. There isn't one silver bullet here. We could make a whole list of changes to the Canada Transportation Act, but I don't view those as short-term solutions. Those are on a medium- to longer-term track.

But, yes, ideally we would make some significant changes to the Canada Transportation Act.

[Greg Cherewyk]

Let's not forget that you had the most significant and exhaustive review of rail freight service this country has ever held only two years ago. The panel met with over 80 different stakeholder groups and read over 140 submissions from stakeholders across the country and they came up with an exhaustive list of recommendations. The needs of shippers haven't changed much from 2008 to 2010 to today. They still demand performance standards, they still demand that railways make commitments according to those standards, they still demand that they be held accountable when they fail to meet those standards, and they still demand that we have quick and inexpensive dispute resolution mechanisms in place. Those needs haven't changed since the time the panel made its findings known.

The crisis we face right now is more than just simply not having an effective communication protocol or effective performance measures or effective dispute resolution mechanisms in place. It's about capacity. If we don't have capacity, all those other things don't matter, and that's what needs to be addressed immediately. You need a plan in place for the next six months that will...not a plan, you need commitments in place for the next six months that describe exactly what will be done to get this crop moving.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Madam Brosseau.

I'll now move to Mr. Lemieux for five minutes, please.

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

Thanks, Chair.

I want to thank our witnesses for being part of this study. It's very important that the things you're saying today are heard, not only by this committee but also by Canadians who are following the work of the agriculture committee. There definitely is a huge problem in the movement of grain, but it's always good to hear from the stakeholders themselves and to have a better understanding of the magnitude of what you're facing.

I wanted to take perhaps a higher-level view. Certainly I think grain is moving. If one had a very superficial look at the issue, one would say no grain is moving at all, but I don't think that's the case. Grain is moving. What are the railways achieving, perhaps not compared to the record crop this year, but compared to what was moved last year? That might be a good benchmark for comparison purposes.

I'm wondering if each of you might be able to comment on that when you look at your sector. How are the railways performing in general this year versus last year in terms of tonnage?