Agriculture Committee on Feb. 10th, 2014

[Bob Zimmer, Conservative, Prince George—Peace River, BC]

Can you be prescriptive? You say it's a car-crew-power issue. I understand the demand when somebody wants.... When I want to go buy something, I want to go buy it. I don't want to have to wait, or can't wait sometimes two months to go purchase that food. But you said car-crew-power. Can you quantify that? Is it 1,000 cars more? To me, when you ask that, because I think you also said that there is capacity there, is it not a rail capacity issue as well? Do we need more rail? Can you quantify what you're saying there?

[John Heimbecker]

I guess the quantification would be 1,000 cars divided by the amount of weeks since we started that count, which I don't have, unfortunately. But I would say that railways have always argued that they don't want to carry excess assets during the slow times in order to service the peak demand times. Our view or at least my view and the WGEA's view is that they should do that. Most industries do it and they should do it.

I would argue, in fact, that they don't even have enough assets to service anywhere close to what we need during the peak time.

[Bob Zimmer, Conservative, Prince George—Peace River, BC]

I think you stated previously, too, that the percentages are actually down, because you said this is not a bumper-crop issue. Even with the bumper crop, it's somewhat irrelevant when they're still behind. Is that correct, John?

[John Heimbecker]

Yes, for instance, I can only speak for my company in this, but we had signaled our demand for cars for Vancouver, for instance, in June and July, basically based on an average-sized crop. In June, Vancouver was already more or less sold out. That is to say the demand from customers had already been at capacity and our assumption of what the car supply was going to be was already considered. A big crop came in and it's not as though all of a sudden we were able to ramp up and try to sell another two million or three million tonnes into that slot. Again, the railway couldn't even service the demand that was required based on what we would consider a regular-sized crop.

[The Chair, Conservative, Bev Shipley]

Thank you very much to our witnesses. I'm sorry, Mr. Zimmer, but we're out of time.

I want to thank our witnesses from Pulse Canada, Greg, and also from the Western Grain Elevator Association, Wade and John, for participating, and also Levi on video conference. You've been very helpful.

We're going to take a minute because we have to switch you guys off and get onto a video conference in Prince Albert, Saskatchewan. Thank you very much.

[The Chair, Conservative, Bev Shipley]

I'd like to call the committee back, please, as we get started on our second round regarding the grain logistics system in Canada. We're studying this over a two-day period, and it's pretty intense.

We welcome our witnesses. First of all I'd like to welcome from the Canadian Canola Growers Association, Rick White, who is the general manager. Welcome. Also, we have the Grain Growers of Canada, Allison Ammeter, director, and also Janet Krayden, analyst. Also on video conference from Prince Albert, Saskatchewan, as an individual, is Stuart Person.

I welcome each of our witnesses. We have seven minutes each, so I will start with Mr. White, please.

[Rick White, General Manager, Canadian Canola Growers Association]

Thank you, Mr. Chairman.

Good afternoon to the members of the committee. Thank you for inviting me here today to speak to you about the grain logistics system here in Canada.

CCGA represents 43,000 canola growers and is governed by a board of directors who are farmers. We represent all provinces from Ontario west to B.C. With 85% to 90% of canola grown in Canada being shipped to export market by rail, canola growers rely heavily on the service of Canada's railways to market their grain. The competitiveness of our industry, which contributes $19 billion annually to the Canadian economy, is highly dependent on the railways' providing timely and efficient service.

This year the canola industry celebrated a milestone. Our goal of reaching 15 million tonnes of production by 2015 was well surpassed when canola farmers harvested a record 18 million tonnes of canola this fall. This, coupled with relatively high prices for canola, meant that canola farmers were feeling very optimistic about their future this fall. However, to fully realize the economic benefits of this bumper crop, farmers required the opportunity to market their crops, and unfortunately, this is an opportunity they have not been able to fully realize this year.

Canada's railways are the linchpin in our grain handling and transportation system, and this year they have failed. The inability of the railways to incrementally respond to the service demand is troubling and has had serious implications for farmers. We are now in a situation where most country elevators are congested and not accepting deliveries, while terminals are under capacity and vessels are waiting offshore to be loaded. Many farmers with contracted grain for the fall of 2013 have been told that they will not be able to deliver their crop until spring or summer of 2014 at the earliest. Farmers with uncontracted grain may not be able to deliver their grain before the next crop is harvested.

This situation is causing serious cashflow issues for many farmers. CCGA is an administrator of Agriculture and Agri-Food Canada's advance payment program, and we are seeing evidence of this cashflow crunch reflected in the current demand for cash advances. This year we have seen a substantial increase in the total amount of money advanced to farmers compared to last year.

The inability of producers to deliver their crops to the country elevators is costing farmers in other ways as well. The backlog means prices have fallen, basis levels have widened, and opportunities for sales have been lost. Equally concerning, particularly over the long run, is the impact our underperforming logistics system has on our industry's reputation as a consistent and reliable supplier of canola. Farmers and the entire canola industry are gravely concerned that our competitiveness in the global market is being seriously undermined by our inability to deliver on our sales commitments. Clearly, real solutions are urgently required to address this issue, and CCGA continues to advocate for reciprocal penalties to bring a framework of accountability into the commercial relationship between the shippers and the railways.

In the Canadian rail system, the railways have established loading and unloading performance benchmarks that grain shippers are financially accountable to through the use of penalties. These penalties have been quite effective in holding grain shippers accountable for their performance. However, on the reciprocal side, the railways are not subject to the same types of penalties for providing poor service once they have committed to spotting cars. This creates a very unbalanced system that does not provide the railways with adequate incentive to meet service.

Performance measurements should be established for the railways that are as well defined and measurable as they are for grain shippers. CCGA proposes that through legislation—because it won't happen voluntarily—the railways be subject to performance penalties in circumstances where they have failed to perform. Issues with rail service have plagued the grain industry for years and directly impact the bottom line of Canadian farmers. While solutions have been proposed and even implemented in the past, they have not been able to resolve the ongoing issues associated with poor rail service. Legislated, reciprocal penalties are the only way we see these issues being remedied in a meaningful and lasting way.

This will not help many farmers who need help immediately to address their cashflow needs and allow them to get next year's crop planted. In the short term, the government could help farmers by increasing the limit on the cash advance program and applying the limit in the same way as the $100,000 interest-free limit is applied, with overlap between program years.

This would allow farmers who are already at or near the current $400,000 maximum under the program to take a new advance that would be applied against the crop they will be planting this spring. This change would be at low cost to the government and would go a long way towards easing the marketing problems many farmers are currently facing.

In closing, canola and the agricultural sector are poised to continue to increase yields and volumes into the future. The canola industry has set a new goal of producing 26 million tonnes by 2025. That's a 40% increase over this year's record production.

A reliable and efficient rail system will play a fundamental role in our ability to reach this goal. Strengthening and modernizing the contractual relationship between grain shippers and the railways is how a more functional, responsive, and reliable system will be created.

Thank you for the opportunity to speak to you today. I look forward to your questions.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Mr. White.

Now I would like to move to the Grain Growers of Canada.

I think Allison Ammeter is going to present. You have seven minutes, please.

[Allison Ammeter, Director, Grain Growers of Canada]

Thank you very much for inviting me to present at this transportation panel. I truly appreciate it.

My name is Allison Ammeter, and I am a Grain Growers of Canada director, and vice-president of the Alberta Pulse Growers commission.

Grain Growers of Canada provides a strong national voice for over 50,000 active and successful grain, oilseed, and pulse producers through its 14 provincial and regional grower groups. We represent wheat, durum, barley, canola, oats, corn, soybeans, beans, lentils, rye, and triticale farmers from across Canada.

My husband and I farm 2,300 acres on a third-generation farm near Sylvan Lake, about halfway between Calgary and Edmonton. With our three children, we grow peas, fava beans, wheat, barley, canola, and oats.

Last year Canadian farmers grew a record crop. You have heard that over and over. We had a significant increase in yield. They said there was 75 million tonnes, which was a 33% increase over the year before. Some of the contributing factors to our bumper crop were a buoyant farm economy, improved genetics, use of new and effective fungicides, good agronomics, and treatments of micronutrients in fertilizer application, which we expect to have again this year.

Last year we had amazing weather too.

While those crops are always weather-dependent, because of these new technologies and better and more sustainable farming practices, there is no doubt that farmers' yields will continue to increase, which is really good news for farmers and for the Canadian economy.

But today after the most successful harvest in Canadian history, we can't move our grain.

I would like to explain to you how a grain farmer's cashflow works. I think understanding the very basic method of our cashflow is critical.

In the spring we go out and purchase a large number of what we call inputs—seed, chemicals, and fertilizer, generally on a line-of-credit type of loan. We don't get paid when we put our seed in the ground. We do not get paid when we fertilize our seed. We do not get paid if we have to go out and spray or we have to go out and do any kind of field operations. We don't get paid when we go out in the fall and spend a month or whatever it is harvesting that crop even though we're putting $1,000 worth of fuel into a combine each day. We don't get paid for any of that.

We get paid when we take our crop to either the elevator or the end user. That's when we get a cheque. So in a year like this when our crops are largely sitting in our bins or in grain piles, we have no cheques. That's cashflow.

Elevators cannot get enough rail shipping to move grain and oilseeds to port right now. Port terminals in Vancouver are 50% empty. Ships are waiting in port to be loaded and sent to export destinations.

Carry-over stocks for several of the grains will be large due to this backlog. In many cases farmers may not be paid for last year's harvest until after spring planting, translating into lost sales and a really serious cashflow issue for many farmers at a time when we need money to start paying for that new spring seeding cost.

Regarding all of this, I'd like to highlight a few items.

There is Canada's export reputation. While last year's harvest continues to sit idle on our farm and in our country's elevators due to challenges with rail service performance and capacity, Canada's international reputation as an export nation is being affected.

I know you have all heard about the ship last week. It was a Japanese ship. It sat empty in the harbour in Vancouver waiting to be filled. They got fed up. They went down to Seattle, and they filled the ship with American wheat.

We should never have lost that sale, and we don't know if we'll lose more sales because of that. We are concerned that important relationships our industry has worked hard to build as an export nation are being compromised because of the challenges with grain movement.

Secondary processing sectors of our economy, such as food processors, mills, and maltsters are also being affected by this capacity issue as they require a consistent supply of product. This supply bottleneck has the potential of slowing down all of Canada's economic growth.

We have collaborative solutions. Grain Growers of Canada has seen recommendations for actions such as enhancing measurement and reporting, as announced last Monday. They will keep all the parties taking the necessary actions to address the issues that are causing the backlog.

We also support the leadership of Pulse Canada—the study that Greg Cherewyk was talking about—and their project partners to strive for greater measurement in rail service supply chain efficiency over the next five years. This work will provide effective data to help communicate shippers' long-standing rail service issues that hinder grain farmers' market access.

At Grain Growers of Canada we are talking to the railways, to the grain companies, and to the government. We are encouraging better communication and better coordination in order to get the grain moving. We are asking railways about their plan to deal with the backlog this year and also asking about their plan to deal with growth in grains, pulses, and oilseeds in the future.

Grain Growers continues to press for a short-term plan, interim measures, and long-term solutions, now and through the 2015 rail service review. This review simply must increase competitiveness and efficiency in our industry.

We were really pleased with the federal government's Fair Rail Freight Service Act. However, without amendment, there is a lack of balanced accountability. Poor railway service must have consequences.

There's an economic reality. Recent railway earnings show record profits. A large portion of the railways' profits this year came from Canadian farmers' record crops. While farmers are not direct customers of the railways, we are paying the price as the penalties and the shipping demurrage charged to the exporters is passed on to our bottom line. The price we are offered gets lower and lower as grain companies signal they cannot move our grain. You'll hear this called the price basis.

Rail transportation is so important to our Canadian economy, and in turn, moving grain is important to the railway's own sustainability as a transportation provider. We want to encourage the railways to reinvest their profits into railcars, engines, hiring, and better communications processes with the elevators. Solutions like these can only improve transportation logistics and address the need for better and more efficient movement during peak seasons.

Gearing up to alleviate the grain backlog needs to translate into long-term service solutions for the future. We need to ensure that this situation does not happen again and that rail service can keep pace with the expanding business that farmers and Canada's thriving economy are providing.

In closing, Canada is at risk of losing more exports with the ongoing delays. We are facing the toughest competition in the export market that we have ever had in the grain industry. With new emerging export rivals, we need immediate solutions to maintain our market share. Our reputation as a reliable export nation is in question.

Thank you for letting me speak to you today. It is an honour, and I really appreciate the opportunity to present to you, as a farmer, on behalf of the Grain Growers of Canada.

I welcome your questions.

[The Chair, Conservative, Bev Shipley]

Thank you very much for your presentation. Well done.

I will now move to video conference. From Prince Albert, Saskatchewan, we have Mr. Stuart Person.

I hope you have been able to hear everything. I should have checked sooner, but I didn't hear that you didn't.

You have seven minutes, please.

Are we coming through okay?

[Stuart Person, Business Advisor, Agriculture, MNP LLP, As an Individual]

It's a little choppy on my end. If I am choppy, let me know.

[The Chair, Conservative, Bev Shipley]

Sure, thank you very much.

[Stuart Person]

Good afternoon, Mr. Chairman, honourable members of the committee, special guests, and fellow witnesses. Thank you for the opportunity to speak today on behalf of our MNP agri-teams, located in more than 40 offices across Canada, serving in excess of 7,000 grain producers and farm families.

My name is Stuart Person. I'm both a partner in MNP and a partner in my family's grain farm located near Canwood, Saskatchewan. In the short time I have to speak today, I want to focus on the financial impact that the crisis has had and is going to continue to have on our producers in western Canada. Some of my comments will be echoing comments made previously, but I still think...[Technical difficulty--Editor]...and I plan to expand on them a bit.

I hope you can take my message today and pass it on to the railroads and the line companies and make sure they understand the situation. This is important to us.

I'm going to focus on three specific costs that all producers affected by this will have to incur as a result of the current grain transportation crisis. The first cost is lost revenue or reduced profitability. I look at them together. Producers are seeing negative basis levels of up to $100 per tonne on some commodities, simply because the line companies are not in a position to purchase and handle our grain.

If we were to assume that half the tonnage produced in western Canada this year will be subjected to these discounts, the numbers are absolutely staggering. It's billions of dollars lost, if we are forced to sell our grain under the existing circumstances. In some cases, this is calculating out to more than a 50% price discount from the daily or futures market price being offered for the grain.

Can everybody still hear me okay?

[The Chair, Conservative, Bev Shipley]

You're okay.

[Stuart Person]

To speak more in terms of farm profitability, the average costs of production have risen to over $300 per acre in some areas of the prairies. If our farm families were to sell our grain in today's environment, we'd be lucky to average enough revenue to simply break even, and that is after harvesting a bumper crop, as others have mentioned. Any producer who suffered production issues this year will be well into the red and in some cases relying on AgriStability for assistance. This is gut-wrenching when producers can see that futures prices are offering excellent returns, if only they could cash in on those prices. The only thing holding them back right now is logistics.

The second cost I want to talk about is added interest costs. This has been alluded to previously already. Grain producers are going to face extreme difficulty with managing cashflow. Those who cannot pay back their input loans by the agreed-upon deadlines will face penalties in the form of outrageous interest rates being retroactively applied to their balances. In addition, many farm families will be unable to meet other loan payment options on capital purchases, which will increase their interest costs, and in some extreme cases, could result in forced liquidation or seizure—none of which we want to see.

The third cost I want to mention is additional handling and spoilage costs. If not stored properly, grain is a perishable commodity. A significant amount of grain was stored in grain bags and on the ground this past year due to the bumper crop. These storage mechanisms are not long term and need to be dealt with before spring, in many cases to avoid the risk of significant spoilage.

Spoiled grain in most cases becomes worth little to no revenue, resulting in a direct hit to the bottom line. In addition, many producers are going to have to move the grain stored in bags or on the ground to bins, and that's assuming they actually have bins to move them to. This will result in fuel, transportation, shrinkage, and possibly some drying costs, all of which will raise their costs and negatively affect the bottom line.

It should also be noted that this is not likely going to be a one-year issue. Estimates are that 20 million tonnes of grain will likely carry over to next year. So if our farm families produce an average crop in 2014, the situation will be exactly the same as it is this year, assuming no change in the logistical situation. What if our producers actually harvest another bumper crop? Where will we be then?

I have some conclusions and recommendations. They're very simple. I don't think there's anything too complex here. First of all, in the short term, we need a solution to be investigated and implemented. The easiest one is just to get the grain moving. If there's...[Technical difficulty--Editor]...government support. Financially, just get our grain moving so that we can sell it, we can get the cash, and we can pay our bills.

Barring that—and I really do think that the short-term solution is going to be a tough one—as the canola growers indicated before...[Technical difficulty--Editor]...some mechanisms out of the cash advance system. I would like to recommend that we review and look at making the full $400,000 interest free. I would like you guys to review that and see if it's possible to increase it, because $400,000 is not significant for a large grain operation anymore. You could possibly look at something like $200 per acre per farm to cover at least the inputs to get these guys through until next year. Also look at extending the deadline for repayment for the 2013 and 2014 cash advances to bridge this gap that we're looking at, as mentioned previously.

On the long-term side, I'd like to make a couple of recommendations. We need to look at the overall grain movement capacity and align that with expected average production figures in the future, as mentioned previously. This will allow for more competition in the grain logistics business in Canada. Specifically I still think we can achieve a lot by taking a closer look at the Port of Churchill and finding a way to make better use of that line and port.

The third one is that I really think you need to put some sort of accountability into place such that the railroads have to be accountable to us and to the line companies and the citizens of this country. The lack of delivery results should result in penalties that can be paid back to producers to equalize our losses incurred when we face situations like this.

I would also like to point out that CN and CP have known about this problem for four months now. As far as I can see, they haven't done anything about it. They may be working on it behind the scenes, but I have not been informed as to what they've done to make it better.

There is one other thing I'd like you to consider when reviewing the entire grain logistics system. It's always interesting to consider how you would do it, if you were to step back and have to rebuild the system from scratch. Rather than what we have today, what would you do if you had to start over and how would that impact your decision on what alternative measures might be out there for us to move grain or increase capacity to get grain out of our country?

With that, I'll thank you for your time. I hope I've provided some beneficial information on this extremely important topic for our industry and I look forward to your questions.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Stuart, we appreciate your presentation.

Now we'll go to witnesses.

I would ask Madam Brosseau, first of all, to start, for five minutes please.

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

Thank you, Mr. Chair.

I'd like to once again thank our witnesses for sharing some solutions about what to do moving forward.

There have been supporters of the Wheat Board who have said they did have a job and a role to play. Moving forward, do we need a special team, a group mandated to help with the logistics? We've had bumper crops before, this isn't new. We've had bumper crops in the past but we've never experienced such a backlog like this before. I'm not saying to bring back the Wheat Board, but is there a need to have a group in charge to deal with logistics to make sure that this does not happen again?

Maybe we could start with Allison or the canola oil, Mr. White?

[Allison Ammeter]

There is absolutely a need for it. The Wheat Board was a single desk that pooled the buying of grain. It really wasn't a transportation board. That is kind of a red herring.

But there is a need for a group that manages transportation and that is what Greg Cherewyk with Pulse Canada was talking about. They've had a project in place since 2007. They started out by trying to get a handle on it and then they brought together all of the different shippers and port authorities and everybody else together. They've been studying it and they are working towards this 2015 set of guidelines and measurements and consequences. We need a body that establishes consequences.

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

Kind of like a big stick....

[Allison Ammeter]

A big stick.... A carrot and a stick....

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

We have to make sure that gets into our recommendations; we've got to whack them.

But I think everybody has a role to play in this. We need to be at the table, not just thinking what to do in the next few weeks but with a long-term vision for transporting our grain. The government has done an amazing job opening up markets. But what I've heard and what we know is that this has impacts right now, and also damages our long-term reputation internationally. When you buy anything, you want to make sure it's quality and you trust that company. There's been a bottleneck recently with the transport of our grain. Farmers aren't getting paid and we're not getting it to market. We need to play a leadership role showing we do have a plan and this is how we're going to fix it to make sure this doesn't happen again.

That makes me think of the Fair Rail Freight Service Act. Do you have any amendments you would like to bring to that piece of legislation? We've had some witnesses say it's not working, it's not as effective as it could be. Do you have anything you could submit to the committee amendment-wise that could make this piece of legislation better? I don't know if any witnesses have something to bring.

[Rick White]

We made at least five recommendations under Bill C-58, when the Canada Transportation Act was last open, to accommodate the service level agreement clauses. One of the key ones was to have financial accountability built into it, i.e., contractual arrangements that had financial penalties for both parties, both the shipper and the railway. None of those amendments were made.

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

They never made it into the report? Oh.

[Rick White]

Those pieces were not put into it.

The service level agreement legislation is a great framework, but we need to go back to it now, review those earlier recommendations, and revisit whether or not that would have helped the situation. I think it would have. Again, in my presentation I articulated the need for financial incentives for the railways to perform. That is missing right now. They won't negotiate it. It needs to be legislated. That's why it needs to be put in place in the CTA in the 2015 review.

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

Okay.

Mr. Person, do you have anything you would like to add?