Thank you, Mr. Chair.
As president and CEO of the Railway Association of Canada, I am pleased to have the opportunity to appear before the standing committee as part of your study on the competitiveness of Canadian agriculture.
The RAC represents some 50 operating railways in Canada. Our membership includes Canada's class 1 railways—CN and CP—U.S. class 1 railways such as BNSF and others, and close to 40 short-line freight railways. We also represent regional railways such as Ontario Northland; Canada's national intercity railway, VIA; major commuter railways like GO Transit, AMT, and West Coast Express; and a number of tourism railways.
I am here today because my members believe it is important that a study of competitiveness of Canadian agriculture include the views of the rail industry. As you all know, there is a long history between rail and agriculture in this country. Both rail and agriculture have been key players in Canada's development into a prosperous, modern nation with a standard of living and quality of life that is frankly second to none.
Both rail and agriculture have also undergone significant transformations in recent years. The reality of the global economy has changed us and our business models. It is a challenging time for railways. A solid strategy of revitalizing our infrastructure, reducing costs, and improving the use of our assets, along with strong demand for transportation services—with the exception, of course, of the last six to twelve months—has led to steady growth in our industry over the last number of years.
Currently, all business lines are suffering dramatically from the recession, with one very notable exception, and that is grain. Our grain traffic has actually grown in the last six months. In fact, we are making exceptional progress in serving our grain customers in 2009. The system is complex but it's working well, and delivering grain reliably and effectively is a key part of our strategy.
There have been significant improvements in the system's performance in recent years. These have come about from the introduction of market-based mechanisms and because of ongoing collaborative efforts between all entities in the supply chain that drive overall efficiencies in the grain handling and transportation system.
Grain transportation is competitive. All grain movements begin with truck off the farm, and 80% of those volumes are within 50 miles of competing railway providers.
Railways have invested more than $11 billion into their business over the last five years. Several important developments have given us the confidence that the time was right to make major investments.
Amendments to the Canada Transportation Act were tabled that specifically ruled out forced access and set the stage for a stable regulatory environment in Canada for the foreseeable future.
Uncertainty about covered hopper cars has been removed. We also have confidence that there would be no major changes to the maximum revenue entitlement. There is a very real and direct link between the maximum revenue entitlement and the investment in the grain handling transportation system by railways. For example, currently the covered hopper car fleet for the movement of Canadian grain is aging. Many of the hopper cars in service are in excess of 40 years old, and although they are operationally in reasonable condition, they are nearing the end of their normal interchange-approved life. Railways and governments will require further investment in the short term to replace these aging assets. It's important that returns are sufficient to ensure that a fleet of this magnitude is maintained at its current level and modernized over time.
As you know, the maximum revenue entitlement was introduced as part of the package to reform the western grain handling and transportation system that came into effect on August 1, 2000.
Unlike any other commodity, railway revenues are subject to a cap. Total revenue for moving grain in any crop year—and crop years are August 1 to July 31—cannot exceed a set amount based on a volume and length-of-haul formula. It was, in effect, a replacement for the highly regulated previous environment, and it followed the removal of hundreds of millions in federal subsidies that were paid over many years, the highest being close to $700 million in 1995. Clearly these ongoing subsidies became an unsustainable burden to Canadian taxpayers.
The policy goal of the maximum revenue entitlement was to allow flexibility in grain transportation rates while simultaneously providing a benefit to western Canadian farmers by limiting the total revenues railways could recover from moving grain. This is a development that grew out of the Crow rate changes and the subsequent statutory government subsidies that follow the decision on the Crow rate. Under the Canada Transportation Act today, the revenue cap applies to all western Canadian grain moving from the Prairies to export positions in Vancouver, Prince Rupert, and to Thunder Bay, no matter what happens to the grain after it reaches Thunder Bay.
We believe strongly that a market-based system for rail transportation has benefited our customers overall. Average freight rates are down 7.5% in real terms from 1998 to 2007, including rates for the movement of agricultural products. I think we would all agree, including our customers, that the product offerings to shippers have improved considerably since the days of fully regulated markets. From 2002 to 2007, transportation rates have had the lowest rate of growth of any farm input, rising by only 3% in real terms over that time, compared to the 96% growth in the cost of diesel fuel, the 62% growth in the cost of gasoline, and 75% growth in the cost of fertilizers over the same period. For ease of reference, I have included a chart that displays the changes in farm input costs from 2002 to 2007 as an appendix to my remarks. I hope you all have that in front of you for your reference.
Railways recognize that a viable, efficient grain-handling and transportation system is critical if our producers are to be competitive in world markets. It's important to note there are many players in the grain logistics system: grain marketers, including the Canadian Wheat Board and the marketers of non-board grains and specialty crops; terminal elevator operators; country elevator operators; producers, some of whom are also producer car loaders; grain company head offices; processors that use grains and oilseeds for higher-value products such as flour, malt, and canola oil; and of course, both class 1 railways and many short lines. We are one part of this system.
As you note, I certainly haven't even started talking about the maritime end of the business for long distance export. Without question, agricultural producers in western Canada, whose well-being is vital to our industry among others, have experienced difficulty in recent years. As I see it, the major problems have been changes in weather patterns, excess global capacity, the global recession we are currently facing, and perhaps the most problematic—I was listening to some of the previous comments on this—is market-distorting policies like direct subsidies in many jurisdictions around the world. These problems must be addressed to ensure a competitive Canadian agricultural sector, and the work you are doing here, we hope, will keep a focus on these priorities. I would just ask not to use the transportation system to try to solve non-transportation problems in that context.
In conclusion, Mr. Chair, I'm here today to respectfully submit that a radical change in the maximum revenue entitlement provisions under the Canada Transportation Act would have a significant and negative impact on the competitiveness of Canadian agriculture. Market-based mechanisms have proven successful and a move back to increased government intervention, we believe, would hurt all parties. The key to improved rail service is investment, which drives efficiency and productivity. The key to investment is regulatory stability and a transportation system based on market principles.
Thank you very much, Mr. Chair.