Agriculture Committee on Feb. 12th, 2014

[Lynn Jacobson]

I would say that the figures are probably going to be what I quoted earlier, to some extent, if I can find the piece of paper I had. We talked about $1.6 billion and then $800 million and more for forward contracting.

If you can't do any forward contracting next year or if the price is down that much more, then we're going to expand the losses further, and they could be well beyond $2 billion, depending on where the price settles out.

[Humphrey Banack]

Very quickly, I'll reply to Robert Chapman's talk about extended basis levels. Basis levels for companies are high now because their risk is much higher in this environment, and those are going to be a loss to the grain producers in Canada.

[The Chair, Conservative, Bev Shipley]

I want to thank the witnesses very much for coming out.

Thank you to the committee members for being astute in terms of your time.

We will now break for a couple of minutes while we bring in the next set of witnesses.

Thank you very much.

[The Chair, Conservative, Bev Shipley]

I'd like to call the committee back to order. We have a pretty tight schedule.

I want to welcome our witnesses. As you've heard, we had our first round on Monday, and then wrap up today.

We are very thankful and appreciative that both CN and CP were able to attend and be a part of the short study that we're having. The shortness doesn't indicate anything about the significance and the urgency of it. You've likely had a good taste of what we were hearing on Monday also, so I'm glad you were here to hear that.

You will each have 10 minutes to make your presentation before we go to questions.

From the Canadian National Railway Company, we have Mr. David Miller, assistant vice-president of government affairs.

Mr. Miller, for 10 minutes, please.

[David Miller, Assistant Vice-President, Government Affairs, Canadian National Railway Company]

Thank you, Mr. Chair.

I want to thank the committee for the invitation to appear here before you today. We certainly understand that you're hearing a great deal from your constituents regarding the movement of the current record crop. That really is the key point. This is a record crop, a crop of 76 million tonnes, 20 million above the five-year average and a full 20% above the previous peak in 2008. Not only is it a record crop, but it's a crop that few saw coming even as the harvest was starting.

As late as mid-September Agriculture Canada's own estimates had the size of the crop at 60 million to 63 million tonnes. Post-harvest from mid-September to the end of November CN performed well. After a number of months of very low demand from May to mid-September, we prepositioned our car fleet and other resources to prepare for the harvest. We were able to ramp up quickly and we were spotting more than 5,000 cars per week. In fact, we were able to set new CN records for spotting cars over an eight-week period.

However, as you know, since early December we've been facing the most prolonged period of extreme cold in many years. In some places this has been the coldest or second coldest winter in the last 120 years. The cold weather has affected large parts of our network, Saskatchewan, Manitoba, and northwestern Ontario. The most challenging aspect has been the frequency and duration of the extreme cold temperatures in these regions. For example, Winnipeg had 33 days below -25°C since December 1. In my home town of Saskatoon there have been almost four times as many days below -30°C as compared to a normal winter.

The reality is that, despite the tireless efforts of our operating employees who have been doing everything that's humanly possible, the polar vortex has had a crippling impact on our network. I know the mindset is "winter comes every year, you should be ready for it" and indeed we do what we can to plan and adjust for winter conditions. In fact we have an aggressive winter readiness plan that we share with Transport Canada and other supply chain partners every fall. However, the reality of railroading is that the sort of extreme conditions we have seen this year, which are far outside the norm, have very significant structural consequences for our operations.

When the temperature is forecast to drop below -25°C, we must plan for train length restrictions. This is necessary because in those temperatures we are unable to consistently get air from the front end to the back end of our trains in order to release the brakes. We expect these issues to arise at times during the winter, but normally this occurs for relatively short periods in specific areas. This year we've had to operate with shortened trains for much longer periods over a very significant part of our network.

Operating shorter trains for long periods of time has a dramatic effect on us. When we need to operate many more trains to handle the same volume of traffic, this increases the number of crews required, the number of locomotives required, the number of trains meeting and passing one another. More trains and more meets have a very serious impact on the velocity of our operations.

Frankly, everything is slower in the severe cold and it takes a significant toll on our employees and equipment. I understand Canadian Tire ran out of car batteries in December, so you can imagine what we had to face in terms of the demand for engine parts and wheel change-out inventory. The delays and adjustments caused by the weather inevitably get our network out of sync. Assets are not where they should be, which causes additional delays and adjustments, resulting in a ripple effect across the system.

The slowdown has drastically affected our capacity for the past 10 weeks. While understandably much of the focus has been on grain, the reality is that everything we move has been seriously impacted. Intermodal traffic from west coast ports through Winnipeg to eastern Canada and the U.S. has been hard hit, resulting in plugged terminals and waiting ships. Terminal dwells are triple what they have been in recent years.

Potash shipments from Saskatchewan are also backlogged as are virtually all the other commodities we move. We are not alone in this. I'm sure you'll hear similar issues from my friends at CPR and you'd hear much the same if you were to speak to BNSF across the border. We'll need a sustained break in the weather before our network velocity and dwell times can recover to normal seasonal levels. However, when they do, we have the assets and resources needed to meet the challenge of moving this crop.

I know questions frequently arise regarding rail capacity. I can assure you we have the capacity to meet the demands we're now facing. CN invests over $2 billion annually to maintain and upgrade our network, our rolling stock, and our systems to ensure we have the capacity required to meet commitments. For example, last year we recognized that our network across the prairies needed more resiliency, so we invested an additional $100 million between Edmonton and Winnipeg to increase capacity. This included double track and siding extensions. Quite a bit of this investment was made on our prairie north line, which as a result has seen twice as many trains as was the case previously. In addition to the investment in capacity, CN has been doing many things which have positively impacted the reliability of our grain service.

I appreciated that in the emergency debate last week, several MPs mentioned the reliable service we've provided in recent years. Our scheduled grain service, which was introduced in the fall of 2009, was a sea change in the way cars were placed in country elevators and enabled us to average 80% in spotting cars to the promised day of the week since the onset. We've worked hard on maximizing our hopper car fleet velocity. This requires the focus of all participants on the same objective of moving cars through supply chains as quickly and efficiently as possible. Day-to-day communications and engagement with our supply chain partners is key. This is needed to plan and manage flows so as to mitigate congestion and maximize throughput. Communication is also key to minimizing dwell at origin and destination.

We believe there's been a dramatic improvement in communications and coordination in the supply chain and that the anecdotes that were common five years ago about elevators or terminals bringing in crews to handle trains that didn't arrive, and for which they got no explanation, are largely a thing of the past.

Nor have we hesitated to add grain cars to the fleet. Since the harvest we've moved to add 1,000 hopper cars to our western Canada fleet to increase our peak period capacity. Our locomotive fleet is 10% larger than it was a year ago, and our board just approved a new order for additional new high-horsepower locomotives to be delivered this year.

To help with the need for additional crews in winter, CN has trained over 800 management employees as conductors or engineers, and they have been stepping in to help relieve short-term crew shortages in areas of the network impacted by the extreme cold.

As you well know, grain movement is traditionally a highly seasonal business for CN. In most years there is not enough grain to keep us busy in late spring and summer. The variation from peak periods to trough periods has been 80% on average. We recognize this year is different, but the reality is that we cannot build up capacity in a matter of weeks. As I mentioned earlier, as late as late August it did not appear this crop would be above average by such a staggering factor.

It takes six to eight months to hire and train crews, nine to twelve months to order hopper cars or locomotives. Just as no one is expecting new elevators to spring out of the ground to add storage capacity within weeks, it is not realistic to expect us to find significant new capacity overnight.

Nor can we be expected to build capacity based on one year's crop. Rail customers in other sectors often take years of study before they make a major move to increase capacity. In potash, for example, Canpotex is expected to take the better part of five years and up to $1 billion of investment to expand their export capacity by five million tonnes.

I have spoken with some of you about this situation. I also recently spoke with the agriculture minister in Saskatchewan. I know there is a view that this year's crop is the new normal. There is no question that advances have been made that create good reasons to believe the trend will be upward in the coming years.

As I've indicated, we are not averse to making incremental investments to address increased volume. However, the railways cannot be expected to make major investments based strictly on one year's crop. In addition, we can only move as much volume as can be handled at the ports. In recent months, terminals at Vancouver and Prince Rupert have had empty space because of our weather-related challenges.

However, this is not always the case. Adding assets when it adds to congestion makes no sense. Our spotting program must inevitably reflect both the number of cars that can be unloaded at the ports and the number of empty cars returned to the prairies. This will be essential once things return to normal.

We are very proud of the advances we have made in grain transportation in recent years. We have been very focused on better communications with our customers and trying to break down the distrust that has historically existed. We felt we were making great strides and that we were well positioned to move this record crop. This winter has been a serious setback, and we are not happy with the way all our customers have been impacted.

If this year's crop is the new normal, then the whole grain system will have to adapt. If the government ensures the proper commercial incentives are in place, CN will not hesitate to make the required investments to grow our system in sync with the other components of the supply chain. I can assure you we are doing everything in our power to return to normal operations as quickly as possible and we will remain focused on returning to the record levels we were able to reach last fall.

We are a true backbone of the economy and we are committed to playing our role to help the Canadian grain industry win in world markets.

[The Chair, Conservative, Bev Shipley]

Thank you, Mr. Miller.

I appreciate your good presentation.

I'll now move to CP Rail and Mr. Murphy and Mr. Taylor. I believe Mr. Murphy, the vice-president, will be making the presentation. You have 10 minutes, please.

[Michael Murphy, Vice-President, Government Affairs, Canadian Pacific Railway]

Thank you, Mr. Chairman. We appreciate the invitation to appear before you today to discuss the grain supply chain.

In 2013 CP and its supply chain partners moved about 2.6 million carloads of traffic, including 40 million tonnes of grain.

CP is of the view that there has been a lack of practical context on the size of this year's crop. Other parties have made statements that unfairly, and in our view, unrealistically, characterize that the crop would move if not for so-called constraints or other priorities, or poor performance of the railways.

The exceptional order of magnitude of this crop is central to any balanced dialogue.

Here are a few basic facts.

Western Canada produced approximately 80 million tonnes last year and this is 27% above the previous 2008-09 record and 37% above the five-year average, which is 58 million tonnes.

While the production increase is dramatic in itself, the scope of the supply chain challenge and the demand being faced by the supply chain is reflected in the fact that the additional production is almost entirely an exportable surplus.

Such an increase is extraordinary by any measure. So the challenge is to move as much grain as efficiently as possible, to not only exceed that five-year export average but to set another significant export record beyond the one established last year.

I would now like to talk a little about CP's performance to date for this crop year. This is best looked at over three periods: first, August; second, September through November; and finally, December and January.

In August low ending stocks and a late harvest resulted in literally less than 100 outstanding grain requests on CP at month end. In fact, in August, about 4,000 cars, almost 20% of our fleet were stored due to a lack of grain to move. We started storing cars in May and June. This simple fact has been ignored in comparisons drawn by others in reference to this year's performance.

From September through November with the harvest in full force, CP responded with record levels of performance. CP moved 20% more grain and grain products in Canada than the five-year average, and 14% more grain and grain products than last year. This demonstrated the ability for CP and the supply chain as a whole to scale effective capacity in response to strong demand.

In December and January our record run rate was curtailed by extreme weather, principally cold temperatures. Environment Canada recently reported that December's extreme cold, combined with January's 12 days of -30°C temperatures, created an unprecedented low average. To quote them, “If we take the two months and combine them, we find it is the coldest December/January since 1949/1950”.

CP has very extensive winter preparations and actions to deal with winter operations; however, sustained cold -25°C is a tipping point for railway operations. We must act on added winter mitigations such as reduced train lengths, and it is extremely challenging for equipment and people. Velocity slows and hence effective capacity goes down. This impacts all parts of the supply chain in North America across multiple railways, broad geography, and all commodities.

Despite the challenging weather, CP remains above both year-over-year and five-year average benchmarks as our grain and grain products volumes from September through January are 17% above the five-year average and 8% more than last year. We are confident, weather permitting, that we will soon return to stronger year-over-year gains on a current basis. I can't emphasize enough how focused the railway is on moving grain right now.

I would also like to talk about sustaining and enhancing system capabilities.

CP is sized in its mobile resources to handle the business at very strong levels as demonstrated through the fall of 2013. With moderation in weather and a return to shipping at these levels through the balance of the current crop year, the grain handling system can move volume at record levels.

Leveraging capacity across multiple corridors and outlets is critical, not only for market value for farmers and merchandisers but also to utilize latent capacity in the system. For example, in addition to strong year-over-year gains to Vancouver, CP supports freight to the U.S. Pacific northwest outlets to supplement Vancouver, a robust Thunder Bay program, the strong return of eastern direct exports, and U.S. destined shipments.

CP will also balance priorities with all customers through active daily collaboration. Directing shipments into the most efficient and fluid corridors to maximize grain flows for the system as a whole will move the most grain.

It is critical that customers continue to manage shipment priorities on a demand pull basis as well; that is, positioning product that will flow rapidly through the system.

Moving more grain with each train, through longer trains, will enhance throughput. As a proactive response to the current crop, CP reviewed customer facility siding lengths across the property to identify opportunities to increase lengths, where practical, above the standard 112-car model to move more grain with each launch. Increased use of multi-car block incentives, which reduce processing and handling, are also evident.

Cycle times and asset utilization must continue to be a key driver for improved grain handling and transportation system performance. A key element to enhance capacity is reducing time to load trains at origin and unload at destination. Actions that bolster velocity include: the prompt loading on placement, timely launches, and more 24-7 operations right across all elements of the system.

Finally, Mr. Chairman, let me move on to discuss future supply chain capabilities. The above actions that we've talked about, which are within CP control, by customers and in collaboration between the two, will sustain and improve near-term system performance this crop year. There are other areas for consideration as we look to the coming crop year and beyond, however.

I'll start with network development. We will continue to work with customers on elevator siding lengths for long train opportunities. This includes ensuring facilities are developed or upgraded to allow spotting and lifting of railcars without interfering with main line operations to sustain over-the-road capacity. Similarly, customer enhancements in existing elevator infrastructure, as well as greenfield developments, will continue to be an area of collaboration. CP's ongoing capital commitments to sustaining and enhancing our core network, such as our strategic investments in our north line, Edmonton to Winnipeg, will also contribute to core capabilities in capacity, velocity, and service.

Let me turn to the commercial marketplace. Further steps to establish a fully commercial market should also be considered. Today, the U.S. upper plains are served by high throughput elevators and unit trains similar to Canada. However, in sharp contrast, this market is fully commercial, with freight trading at premiums during peak demand periods and with market-based mechanisms used for allocation of capacity. In Canada, the maximum revenue entitlement is inconsistent with these commercial approaches, as the revenue entitlement earned is the same regardless of overall demand levels. As a practical matter, grain demand is always in excess of the supply in the fall peak period, in a typical year. During the off-period, in the second half of the crop year, we are storing unused assets.

Simply put, if more railcars are acquired to serve a greater peak demand, whether it's seasonal or for exceptional production, then more railcars are ultimately stored unused during the off-peak. The removal of the MRE would enable market forces, through commercial mechanisms, to determine the handling capacity for peak demand. If the market values more peak capacity, then premiums could be offered to help justify some level of added capacity.

CP has demonstrated capability to move record levels of grain in Canada and our railway has the resources in place to sustain strong year-over-year growth. We are proud of our performance last fall and of the efforts of the CP team in the field since the record setting cold seemed to settle in for much of December and carry through January. Our objective remains to accept new requests every week that exceed past benchmarks. With the cooperation and performance of all supply chain stakeholders we can make the 2013-14 crop year another record year. Looking beyond the current crop year, a fully commercial market would seem a logical consideration for sustaining and growing capabilities.

Thank you, Mr. Chairman.

[The Chair, Conservative, Bev Shipley]

Thank you very much for your timely presentation. It was right on.

Now we're going to go to our committee.

We'll start off with Madam Brosseau for five minutes, please.

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

Thank you, Mr. Chair.

I'd like to thank our witnesses. I think it's really important that you guys are here to have your voices heard because we've heard a lot of comments from witnesses, and through articles, and just from speaking with farmers. I think this is a great opportunity for you to debunk and have your say.

I'm wondering if you can comment about the changes to grain shipments after the Canadian Wheat Board and how that's changed. There's been a change since then. Has it been easier? Do you have any comments on that subject?

[Michael Murphy]

I can start if you want.

We're now into the second year of the process. From our standpoint, it was a step in the commercialization of the marketplace.

As you know, this is the area of our business that's most affected by regulation, so when we looked at the entire supply chain and think about roles that various entities were playing, our view was that the relationships that we have with the grain companies and our ability to work with them to get product moving, we thought was pretty good. Having the board out of the equation, we didn't see that necessarily as going to be a negative. I think last year, which was the first year and people were kind of wondering what the impact might be, was pretty darn successful. From our standpoint, it worked out well. There was no negativity from CP's standpoint.

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

I don't know if you'd like to comment from the CN.

[David Miller]

Generally speaking, I would agree with that. The only area where I suppose there has been a bit of a challenge is that the board recognized the limitations of the system in terms of what realistically could be moved—in the first three months of the year after harvest, for example—and therefore tried to space their sales out through the year to recognize that reality.

When you have a number of companies competing, obviously everybody wants to move as much crop as they can, as fast as they can. Clearly the pressures are on us in the first three months of the year.

That being said, we can only move what we can move, so I'm not sure that in the end it makes a great deal of difference. It does, however, increase the pressure on us, because it does create expectations that we realistically can't meet.

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

That did play a role when it came to logistics in grain transport and planning. It just seems to me to have been a perfect storm. Not just one thing went wrong; a few things went wrong.

You guys mentioned cold weather, which means you're using smaller cars to move grain now. Can you tell me how many more individuals are shipping their grains—or are there more people doing it now?

[David Miller]

No, it's the same number of customers. It's just that we deal with them directly rather than through the board.

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

Do you think there needs to be in place a special committee or special agency that is responsible for ensuring better communication between all the stakeholders—the rail companies, the shippers, the ports? Do think there's a need to have—

[David Miller]

No, we deal directly with our customers in all other sectors. I'm not sure there's any reason that this has to be different. I think communications have improved dramatically in recent years.

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

How would you say we got here, exactly? What are you doing immediately, right now, to resolve this problem to get grain moving short term, and what measures do you have in place for the long term?

[Michael Murphy]

As I was indicating in my remarks, our biggest problem is obviously this extreme cold that we've had. It started early and it settled in, unfortunately. That, for the rail industry, is our toughest obstacle, quite frankly.

All you have to do is look at where we were in September, October. We started to get grain presented to us in quantity in September, even though the grain year starts in August. So in September, October, November, we moved an incredible amount of product. We then were hit with the weather.

So the weather is the biggest obstacle. If we get a sense of our ability...because as I mentioned, we sized the railway to deal with the kind of crop we're looking at here. As David said, we're never going to be able to move the entire crop within the fall peak period. No system is going to be designed to do that. But we're in a position where, once we get a break here, we should be able to get back to the kind of performance levels we were looking at in the fall.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Madam Brosseau.

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

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

Thank you, Chair.

When it comes to the Wheat Board, I think it's fair to say that not having a single-desk mandatory wheat board has reinvigorated the wheat sector. Farmers have seeded more than two million new acres of wheat and barley. This is actually a success story. Unfortunately, it's contributed to bottlenecks in the movement of this bumper harvest to port.

I do want to query a few things. When we had our last witnesses here on Monday, I asked a question about the percentage of rail movement of grain, not compared with the harvest this year but compared with last year. The number I got was sort of, well, they're moving actually 5% less, the rail companies are moving 5% less grain than they moved last year.

I heard a couple of numbers from I think Michael Murphy—20% more than the five-year average, and 14% more, or perhaps it was 8% more, grain than last year. I'm wondering if you could just confirm the number for me.

I'm not too sure why there's a disparity there. To me, these are just simple metrics, and the numbers should speak clearly.

[Robert Taylor, Director, Government Affairs, Canadian Pacific Railway]

Right.

We're using a September compare. We dropped August because we didn't have grain to move in August. So to make a fair comparison, we're using September to the end of January.

At CP we're 8% over last year, which was a record.

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

So you're using September. Do you know where the minus 5% might have come from? You're just saying it's a different—

[Robert Taylor]

That's an industry number, so it obviously includes other railways beyond CP.

I would think they have August included, because last crop year August was a fairly robust month for movement. Because we didn't any grain to move, we dropped August out of that compare.

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

So you're saying you're 8% above last year's September-to-January timeframe.

[Michael Murphy]

That's correct.