Thank you, Mr. Chair.
Good morning, members. On behalf of Canadian Pacific Railway I would like to thank the committee for the invitation to appear before you today to discuss the government hopper car fleet.
My name is Judy Harrower and I'm assistant vice-president of agri-business. I'm joined today by Jim Buggs, general manager of car management.
To summarize CPR's position up front, we believe the government has made a good decision in retaining ownership of the hopper car fleet. It restores some certainty to the effective and efficient operation of the grain handling and transportation system. We look forward to finalizing details with Transport Canada on the new operating agreement.
Before delving into our perspective in more detail, I'd like to first tell you a little bit about our company, as it's important context for how grain fits in. Then I'll describe how the current grain handling and transportation system works at CP.
Canadian Pacific Railway plays a major role in the movement of goods across all commodity sectors. Our franchise is national and North American. Our head office is in Calgary, Alberta. We employ approximately 16,000 people across North America, and move approximately 2.6 million carloads of goods every year.
It is an extremely important time for our railway. A solid strategy of revitalizing and expanding our infrastructure to accommodate the growth in demand for transportation of the goods we move is under way. This strategy includes substantial investment and improving the use of our assets to maximize capacity. To sum it up, we are investing in our business--rail infrastructure, locomotives, crews, and railcars--which I will speak to in a few moments.
On the infrastructure side of things, we completed the first step in a major expansion of our network. The work was completed last year, cost approximately $160 million, and involved 25 individual projects. This included extending and building sidings, laying of double sections of track, and a number of other projects.
CP is now able to handle an incremental 12% more demand, starting at Moose Jaw in Saskatchewan, through to the port of Vancouver, which is our fastest-growing corridor. This investment demonstrates our commitment to be a major player in supporting Canada's position as an exporting nation in grain and other commodities, as well as a key player in the supply chain to bring low-cost imports into Canada.
I'll speak to the year-over-year improvement in Canadian grain volume shortly, but it is critical to note that part of this improvement is directly attributable to the capacity improvements we put in place.
Several important developments gave us the confidence that the time was right to make this kind of investment. One of the most important factors was to ensure that there was a stable regulatory and policy environment. The stability factor comes into play when we talk about ownership of key assets that move in this corridor, like the covered hoppers we are discussing today. The second key factor is to have the financial ability to invest. Customers must understand their role in supporting this kind of investment to facilitate their own growth.
Now I'd like to turn to grain. Efficient, reliable, low-cost grain transportation is key if our producers are to be competitive in world markets. There are many players, from grain marketers--including the Canadian Wheat Board--to elevator operators, producers and processors that use grains and oilseeds, export terminals, consumers, and railroads.
Having personally led a number of different commodity groups at CPR, I can attest to the fact that this business is one of the most complex of all commodities we handle. Grain markets are also very diverse. We move western Canadian grain from hundreds of origins to several ports, as well as numerous domestic destinations.
MaxTrax, which is our order fulfillment system for Canadian grain, continues to allow grain customers to order multi-car blocks in advance. This has improved the fluidity of moving grain in all of our corridors, and has led to a reduction in our cycle times over the last few years.
The overall system presents its challenges, but it is working well. It is delivering grain reliably and effectively. Because of deregulation there have been some significant improvements in system performance, especially in recent years. The trend continues and improves the overall service offering to the customers.
I mentioned earlier that I would speak briefly to the volume improvements we've seen in the Canadian grain side of the business. Our volumes are up approximately 25% for the first quarter of this year versus last year. There are four key drivers of this business segment success, in our view. One is better overall coordination with all of the stakeholders in the industry. The second is improvements in car-cycle times. The third is aggressive weekly car placements at our customers' sidings, and the fourth is the capacity we invested in.
I would like to give you some specific performance numbers for reference. The cycle time in our Vancouver corridor on grain shipments improved to 17 days in the first quarter this year versus 20 days in the same period last year. This represents a 15% improvement. The cycle time in our winter rail corridor improved by 7%.
You might ask why we care about cycle time. It's because it creates more overall carrying capacity. A one-day improvement in cycle time is equivalent to approximately 400 to 500 incremental cars of grain moving in a year; for two days it's 800 to 1,000, etc.
We do recognize that agricultural producers in western Canada have experienced major challenges in recent years. The main problems have been drought, excess global capacity, some market-distorting policies like direct subsidization, fuel price increases, and escalation of other farm input costs. But these are not problems created by rail transportation. If you look at Statistics Canada's latest data on farm input costs, it shows that the most significant increases in input costs over the period from 1998 to 2005 were machinery, fertilizer, and fuel. These components alone are up 25%, 35%, and 65% respectively. In comparison, freight rates for movement of regulated grain have increased less than 10% over this period, an increase that is less than the rate of inflation for that same period.
Now I'd like to move to discussing hopper cars. CPR welcomed the government's announcement on May 4 that it would retain ownership of a hopper car fleet. This decision removes the uncertainty around the ownership of the cars and enables the implementation of initiatives focused on improvements in the overall grain-handling and transportation system.
While it's premature to engage in the details of a new operating agreement, we will approach the negotiation from the perspective of pushing the grain-handling and transportation system forward, not anchoring us in the past. An example of what we mean by this would be the overall use of the cars. A revised economic and broader permitted-use model for the federal cars would create incentives for us to potentially allocate a higher proportion of our state-of-the-art new high-capacity covered hoppers in regulated grain movements. These details need to be worked out but would provide for improvements in the grain-handling system that don't exist today.
Our primary concerns regarding leasing of the cars to the Farmer Rail Car Coalition--which concerns were also shared by other important grain industry stakeholders--were twofold. One was the insertion of a new organization into an already very complex grain-handling and transportation system; and the second was the real potential for some reduced system effectiveness and efficiency, for a number of reasons: potential for increased line-haul costs and switching costs, more complex maintenance activities, a potential perpetuation of a non-homogeneous fleet, and overall reduced railway flexibility.
At CP, we have approximately 25,000 covered hoppers in our fleet. This includes about 6,300 federal government cars, 1,000 provincial cars, and approximately 18,000 cars that we lease and own. Our objectives are to look at our fleet in its entirety and utilize the various types of hoppers in the most efficient way possible, and make improvements and additions as the marketplace and economics provide for it.
I'm very pleased to be able to state here today that we are in the process of taking delivery of 500 new high-capacity cars built by National Steel Car in Hamilton, at a cost of approximately $40 million. These cars have 16% more cubic capacity, 9% more content weight capacity, and are 9% shorter, which means 10 more cars can be added to a train set. The cars have a much more robust bottom gate, designed for today's high-speed, powerful gate-opening equipment. The gates are much larger, for faster unloading, and are much more resistant to product leakage. These will be added to our existing fleet of 8,000 high-cubic-capacity covered hoppers.
The government's decision to retain ownership of the federal government hopper fleet and negotiate a new operating agreement should provide the certainty to plan fleet improvements, including the acquisition of additional high-capacity cars. Pending the outcome of our negotiation with Transport Canada, we hope to be able to use more of these cars in the Canadian grain-handling and transportation system. We still have many details to work out with Transport Canada regarding the new operating agreement. Nevertheless, I have the confidence today to say the new agreement will provide multiple benefits to the grain system in Canada--to name a few, reliable demand-based fleet size from year to year and during peaks; an increased proportion of high-capacity cars in the fleet; a program to improve the quality of the federal government hopper cars; and most importantly, the ability to effectively move large amounts of grain to destination markets.
In closing, I would like to thank you for this opportunity and respectfully reiterate our view that we support the government's decision to retain the ownership of the fleet, while negotiating a new operating agreement with Transport Canada.
Thank you.