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.