Agriculture Committee on April 1st, 2014

[The Chair, Conservative, Bev Shipley]

Thank you very much for your presentation.

From Winnipeg, we have the Western Grain Elevator Association, Wade Sobkowich, executive director, and from Cereals Canada, we have Cam Dahl, president.

We'll start off with you, Mr. Sobkowich. You have eight minutes, please.

[Wade Sobkowich, Executive Director, Western Grain Elevator Association]

Good afternoon. Thank you for inviting the Western Grain Elevator Association to appear. We appreciate the support of the federal government in attempting to address the serious rail capacity issues the grain industry has faced this year.

Bill C-30 sets out a framework for railway volume thresholds to be set by the Governor in Council. The WGEA believes this to be a workable structure. However, it is critical that the details be worked out properly before we can tell whether or not the measure will have the intended effect. For example, if the volume thresholds are set too low or if they don't include enough specificity, the benefits of the legislation will be diminished.

Rail service must flow to where the customer needs the grain and not to where it best suits the desires of the railway. To this end, it is very important that the volume thresholds recommended by the Canadian Transportation Agency and ultimately passed by the Governor in Council include corridor-specific numbers for the west coast, Thunder Bay, eastern Canada, the United States, and domestic movements.

It's important to reiterate that these corridor numbers must be market driven. Grain shippers and exporters will sell into the highest-value markets first, and we have customers in each of these corridors. If we don't have corridor capacity to allow access to all markets, producers will fail to achieve full value for their crop.

It's recognized that it may not be practical to establish hard numbers for each corridor and that such numbers should be treated as a practical minimum.

Legislation ultimately needs to better define the goal lines for service to influence railway behaviour and to provide adequate capacity on an ongoing basis without a connection to the political process.

To address the ongoing capacity issues, the WGEA has recommended a more specific definition of adequate and suitable accommodation and service obligations than that found within section 113 of the Canada Transportation Act, with a view to depoliticizing the establishment of capacity thresholds and taking away much of the ambiguity involved with what actually is proper service. This is something the WGEA will be looking for through the upcoming expedited CTA review process.

While volume thresholds can work in addressing capacity issues from a macro perspective, they do not provide clarity in the relationship between an individual shipper and an individual rail carrier. We presume this issue will be addressed by the new regulatory authority charged with establishing more specificity with respect to operational terms in a service level agreement.

Grain shippers are subject to unilaterally imposed railway tariffs as well as other forms of regulation, which already include shipper penalties paid to the railways for performance the railway deems to be poor.

We continue to seek the commensurate ability to negotiate and, if need be, arbitrate penalities for poor performance by the railway companies in the same way.

Provided the regulatory process included with the announcement on Bill C-30 results in clarification that operational terms include railway penalties, reflecting the way railways penalize shippers through unilateral railway tariffs, and a fair process by which to recover liquidated damages, then this would be a positive measure and would address an overarching issue that the WGEA has been trying to have addressed for a very long time.

Regarding the amendments to the Canada Grain Act, the WGEA does not necessarily object to the changes authorizing the Canadian Grain Commission to create regulations if necessary to promote fair and equitable contract agreements between shippers and farmers. However, this item is inextricably linked with the previous item: railway penalties and recovery of liquidated damages. If grain shippers can recover these amounts from the railway for lack of rail service, competition would dictate that these funds would be used the following ways: to pay vessel demurrage costs, to pay contract extension penalties to the customer overseas or wherever they may be, and to compensate producers for their inability to deliver due to lack of rail service.

Should the CGC see fit to require these elements in producer contracts without providing grain companies the ability to recover damages from the railways, grain companies would have no choice but to respond with some combination of the following: they would probably include a risk premium in their prices to farmers; they might contract with wider delivery windows or nearer-term delivery windows; or they would do more street pricing and less contracting in general.

That's what I mean when I say it's inextricably linked with the railway penalties. We need that in order to be able to properly compensate farmers.

The extended interswitching to 160 kilometres is a positive change. Every grain elevator in western Canada should have practical access to an interchange. I'm advised that interswitching can be a cumbersome process for both the railways and the grain shippers. However, this in and of itself could serve as a motivating factor for a railway to provide better service just to avoid the interswitch.

The government must keep in mind that measuring success on interswitching goes beyond monitoring the increase in occurrence of interswitching. It includes measuring the increase in service levels or added capacity at a particular location due to the elevator's now having some degree of access to an alternative.

We wish to point out that under the current railway tariffs, interswitch traffic from one Canadian carrier to another does not qualify for multiple car rates, so this could make the economics of an interchange very challenging.

The legislation has a sunset of August 2016, and it will be the decision of the government at that time to determine whether to renew the legislation or allow it to expire. Grain companies begin booking business almost one year in advance, so in August 2015 we will be in the position of not knowing what shipping volumes will be while still selling forward past August 2016. To the extent possible, we require certainty on capacity volumes well in advance.

Similarly, the bill provides for the Canadian Transportation Agency to set volume requirements starting in the peak fall period. Given the nature of our business, grain companies are currently selling grain six months and into the future. If the agency is to make recommendations to establish volume thresholds, this must be undertaken immediately.

In conclusion, we still ultimately require a permanent piece of legislation that drives correct railway behaviour without a connection to the political process. We look forward to fully participating in the CTA review process to help establish legislation that will provide balanced accountability between a shipper and a railway that withstands the test of time.

Thank you.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Mr. Sobkowich, for your presentation.

Now we'll go to Mr. Dahl, president of Cereals Canada, for eight minutes, please.

[Cam Dahl, President, Cereals Canada]

Mr. Chairman, on behalf of Cereals Canada, I want to thank the standing committee for the invitation to appear before you today.

The crisis in grain transportation is something that impacts the entire value chain and is a threat to Canada’s brand and reputation. Cereals Canada appreciates the actions taken by the Government of Canada, including both the recent order in council and the fair rail for grain farmers act.

My name is Cam Dahl, and I am the president of Cereals Canada. While I have had the privilege of meeting many of you, I have not had the opportunity to do so while leading Cereals Canada, so I would like to take a few moments to introduce the organization.

Cereals Canada brings together a broad and diverse collaboration of partners from all sectors of the cereals value chain with the intent of enhancing domestic and international competiveness. Our members include farm organizations from coast to coast and grain handling firms, along with seed and crop development companies. Cereals Canada is guided by a board of directors composed of 12 individuals equally representing each of the three major stakeholder groups.

Cereals Canada going forward will focus on applying a coordinated effort to supporting market development, innovation in the cereals sector, and policy initiatives that will ensure the profitability and long-term sustainability of all elements of the cereals value chain. Bill C-30 amends both the Canada Transportation Act and the Canada Grain Act. I don’t think there is much in the way of clarity required on the Canada Grain Act, so in the time I have I will concentrate my remarks on the changes to the Canada Transportation Act.

Like many involved in the cereals value chain, Cereals Canada supports legislative solutions that will help ensure that the logistics failures that we have seen this past fall and winter do not recur. Legislative action is required to reassure our customers, both here in North America as well as offshore, that Canada will continue to be a reliable supplier of high-quality grains. Maintaining our reputation as a reliable supplier is critical to our economic growth and development as an industry, as well as for the economic health of the nation.

Legislative action is also required to help create and maintain an economic environment that encourages private investment in the system by all participants, including farmers, grain handlers, and rail companies. Cereals Canada supports Bill C-30, and we encourage all parties in the House of Commons to come together to pass this bill quickly.

However, we note that passing this legislation in and of itself will not provide a complete solution to the logistics backlog that we are experiencing today. There are some key elements that must be included in the regulatory package that will bring Bill C-30 into force, if we are going to accomplish our goal of preventing the next grain transportation crisis.

I'm not going to go into great depth on the key points that we would raise; rather I would like to share with you, as an executive summary, some of the key measures that must be part of the final legislative and regulatory package. I would be happy to expand on any of these points during our discussions today.

I will raise three key points.

First, Cereals Canada believes that at a minimum the Bill C-30 legislative and regulatory package must provide for a better and more specific definition of “adequate and suitable” whereby railway service obligations must meet the transportation needs of the shippers within the context of the Canada Transportation Act. The purpose of this adjustment to the regulations is to ensure that adequate capacity is available to shippers, and that is all shippers, not just those in the grain industry. The current definition of “adequate and suitable” is too vague and open to subjective interpretation when determining the common carrier obligations of the railways.

The second key point is that the regulatory and legislative package must ensure that financial consequences for railway non-performance and dispute resolution for liquidated damages are part of service level agreements. My members support financial accountability within the grain logistics network. But to be an effective tool to prevent service failures like the failures we have seen in this crop year, financial accountability must apply to all players.

Currently, grain shippers are accountable for their performance through penalties built into railway tariffs. For example, if a terminal in Vancouver fails to unload a grain car within the specified timeframe, they face a penalty of $150 per day per car. There is no similar financial accountability for railway performance or non-performance.

Clause 8 of this bill amends section 169.31 of the Canada Transportation Act to allow the agency to determine the operational terms that will be included in a service level agreement between shippers and carriers. Regulations relating to this amendment must make very clear that operational terms include financial accountability for railway performance.

The third key point that I would like to raise is to ensure that shipping requirements for the railways, should these be necessary, include corridor-specific requirements to reflect the needs of all grains, oilseeds, pulses, and special crops shippers.

Cereals Canada appreciates the unprecedented order in council that requires the railways to move at least a million tonnes of prairie grain per week. The potential for directions of this nature, again should they become necessary in the future, would be enshrined in law through Bill C-30. We support these amendments.

The regulations that will bring these measures into effect must be more specific than just a broad direction for total movement: direction must also include specific guidelines by traffic corridor, including the west coast, Thunder Bay, eastern Canada, domestic movements, and shipments to the United States. This specificity is required to prevent one or two traffic corridors from being shut down while the railways attempt to meet their legal obligation for total shipments.

I believe that all of these provisions can be enabled by Bill C-30, but success will require the right regulatory package.

Bill C-30 will provide for an extension of the interswitching distance limits. Cereals Canada supports these measures and believes that they may provide for additional competition for some movements. However, we note that transportation oversight will be required to ensure that carriers do not attempt to frustrate all efforts to obtain an interswitching agreement. Some members of Cereals Canada have faced this frustration even with the current distance limits.

Bill C-30 would require the Canadian Transportation Agency to become directly involved in grain logistics planning. A key element of this role will be the dissemination of information on the supply of and demand for transportation services. Cereals Canada supports this new role for the agency.

We emphasize the need for the Canadian Transportation Agency to immediately begin the capacity planning exercise for the 2014-15 crop year. This planning process must include shippers, carriers, and the commodity groups. We note that sales are already being made into this time period, and it is critical that shippers have an understanding of the capacity that might be available.

Cereals Canada also wants to emphasize the need to gain certainty past 2016, when the provisions under Bill C-30 may sunset. The planning horizon for producers and shippers extends beyond a few months, and all participants in the value chain need to know the regulatory environment they will be functioning in at least a year in advance, if not more.

It's important to pause for a moment to emphasize the strong unanimity that is coming forward from Canada’s grains, oilseeds, special crops, and pulse industries. It has been sometimes said that if you get two of our groups together in the room, you will come out with four different opinions. That can happen sometimes, but not in this case and not on this issue. The points that are presented to you today have strong support from almost all sectors and across the value chains. I know that you will find this reflected in the testimony from others who have come before you. I ask that it is upon this unity you focus during your hopefully short deliberations on Bill C-30, and not the minor differences that may surface.

Grain handling and transportation is a complex file. This is not a complete list of the issues that need to be resolved, nor is it a complete explanation of the details on the key points that must be ironed out if this legislative and regulatory package is to successfully meet our shared objectives.

Cereals Canada will continue to work with you, with ministers, and officials as the legislation moves forward through Parliament, as the regulatory package is drafted, and as we move through the review of the Canada Transportation Act.

Again, thank you.

[The Chair, Conservative, Bev Shipley]

Thank you very much for your presentation, Mr. Dahl.

We'll go to the NDP for five minutes.

Madame Raynault.

[Francine Raynault, NDP, Joliette, QC]

Thank you, Mr. Chair.

I thank the witnesses for being here with us tonight.

We heard several witnesses tell us about the transport-related issue. Harvests were very good and I congratulate the producers for that. This means that the sowing and temperatures allowed them to have bigger harvests. However, they don't have any more money in their pockets or in the bank since the grain has not been delivered. In the meantime, it is probably losing some quality. We run the risk of seeing the price go down, and so the producers will obtain less money for it.

My question is addressed to all of the witnesses.

All of this grain is transported by train. Do you think that fines of $100,000 for rail companies are sufficient? If not, what amount would you like to see per day? That amount could be given to the producers who have lost income, rather than being returned to government coffers.

What do you thing about that? Any of you may answer me.

[The Chair, Conservative, Bev Shipley]

Mr. Enns, would you like to start?

[Art Enns]

I think it's important when we deal with contracts that we don't worry about the fines as much as making commitments. Most of us have contracts in our daily walk, and very few are exercised. I think it's important that we get a relationship built up and a system in place whereby we all play by the same rules. Right now, the system is pretty dysfunctional, and we have different sets of rules for different people.

I think it's important that we get together and then work out the rest of it. I think the details of it are getting a system in place in which all the players know what the rules are, so that I as a farmer know when I make a contract that I will be able to deliver it to the grain terminal, because he knows the railway cars are coming. Right now, I can have an agreement—we always have agreements with it—but it doesn't necessarily mean that the grain terminal is going to get the cars, so why should I take my grain terminal to court when he's not getting the cars? It needs to be a continuous flow.

[The Chair, Conservative, Bev Shipley]

Thank you.

Mr. Sobkowich.

[Wade Sobkowich]

To get to the heart of the question, I think the $100,000 penalty is probably light in the grand scheme of things, but the railways have shown that they're starting to comply with the order since it was passed on March 7, so I think that's a positive move. Again, we're after the service, primarily, more so than we're after the compensation.

However, there are two elements to the penalties. One is penalties on a macro level for volume thresholds in the different corridors, and then there are the penalties that would get paid to an individual shipper for failure to meet the terms of a service level agreement.

That's why the regulatory process to arrive at the specific definition of what is an operational term in a service level agreement is so important. If we can identify that the penalties payable to the shipper in service level agreements are on the table for the government arbitrator to rule into a service level agreement, and that the dispute resolution process for liquidated damages could also be arbitrated into a service level agreement, then the grain shippers would have the ability to recover damages, within the terms of that service level agreement, from a rail carrier that doesn't provide good service. Then those damages and penalties could be passed through to the producer who doesn't get to deliver to the elevator because of inadequate rail service.

I see it as two elements: the $100,000 fine paid to the government on a macro national sense for being able to provide adequate capacity into the various corridors, and then penalties payable to specific shippers through the service level agreement process.

[Cam Dahl]

I'll quickly add a couple of points. I think Art and Wade have made most of the points, but our goal as an industry is not to continually be in a situation where these special orders are in place and these fines are on the table. Our goal is to get to a place where the level of service is sufficient to meet our demand as an industry to move Canada's crop offshore.

For some of the other elements you've heard about that would help establish mutual accountability across the system, if we can move forward on those points, then we won't be in a situation where those fines will be in play, simply because the service level hopefully will be sufficient to meet the demand of the industry.

[The Chair, Conservative, Bev Shipley]

Thank you very much.

I'll now go to the Conservatives.

Mr. Zimmer, please, for five minutes.

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

Thank you for appearing before committee at this late hour. Maybe it's not a late hour in Winnipeg, but it's getting there. I guess there's no Jets game on tonight anyway.

I will preface my comments with a preamble.

CN and CP appeared before the committee, and we asked them to explain themselves because they blamed the weather.

Now all of us who are Canadians and have ever worn a toque—I've worn one probably since I was one year old—we know weather is going to be a factor in Canada every year. To us, that's not a good enough excuse. Further, CN made comments to the effect that before the weather had hit us this particular winter, weather was not the factor. They blamed other things, such as a lack of infrastructure and that no matter how many cars they wanted to put on the rails, they could only get so many of them on the rails.

To me, I see a direct move by the rail companies to avoid responsibility in what they're putting back in infrastructure. We all understand. We all want rail companies in Canada to service people well and to make money. We're not opposed to that, but when they're not held to a standard, that becomes a problem such as we are talking about tonight.

There is another topic I want to address before I ask a question. My brother used to work at a mill in B.C. We're in northeastern B.C. where we sell grain and many other things. About four years ago, he told me that they had to stop production in their mill because of a shortage of railcars. So this problem has been going on for many years.

Somebody mentioned teeth and whether there were sufficient teeth. I want to ask you and Mr. Enns too, whether you think $100,000 a day is adequate. The desire that we have on this side, and both sides really, is to cause enough pressure to cause the rail companies to act, because they haven't prior to this. They simply haven't.

I can't remember your name, the person in Winnipeg, but you've said you've already seen some changes on the Prairies in getting the cars to your producers.

I want to ask the other witnesses who haven't answered, Mr. Dahl from Cereals Canada, and also Mr. Enns. I've been hearing positive things. That $100,000 does seem to have an effect and it is working.

Have you seen a positive change because of that?

[Wade Sobkowich]

Are you asking me to comment?

[The Chair, Conservative, Bev Shipley]

Why don't you go first.

[Wade Sobkowich]

I think, if I understand the question, you're asking if the $100,000 is effective and if we have seen changes. As to whether the $100,000 is effective, it's hard to say. What we are seeing is a railway striving to meet the commitments that have been set before them. I don't want to speak for them, but I think they would strive for that, just because of the order, and so, $100,000—

[The Chair, Conservative, Bev Shipley]

You just froze up. Oh, there we go. You're back again. You froze up on us so you'll have to turn your microphone back on. Try it now.

You're back on. Sorry, it was a technical problem.

[Wade Sobkowich]

Okay.

We have seen improvements in service in the recent past. We have seen warmer weather, but I believe CN in the most recent week has moved around 5,000 railcars. They're on their way to hitting 5,500 and that's good. What's important is that we get the railcars to the corridors we need and the markets we need. It's as if you had a package you wanted to ship through a courier company and you needed it shipped to the United States and the courier company said it would be better for them if they shipped it to Vancouver. It doesn't work that way. You need to ship the product to where the markets are.

Although the railways are starting to, and we are seeing increased shipping volumes, which is good, we need that shipping in the corridors where we have sales.

[The Chair, Conservative, Bev Shipley]

Mr. Enns, go ahead.

[Art Enns]

I want to say the same thing, as far as where it's going. Some of the corridors are being serviced very well, but Pulse Canada was saying it was having troubles. We're having massive troubles with oats going into the south. I was talking to a producer in the Peace River area who hasn't delivered any wheat since October, and he says the first new contract he would be able to sign today would be in January 2015.

It gives you an indication that it's not quite there yet.

[The Chair, Conservative, Bev Shipley]

Thank you very much.

We'll now go to Mr. Goodale, for five minutes, please.

[Ralph Goodale, Liberal, Wascana, SK]

Once again, thank you to this bank of witnesses for their helpful testimony tonight.

What strikes me, having sat through most of the deliberations of the transport committee a year ago in dealing with Bill C-52, is that most of these same proposals were made a year ago in relation to Bill C-52, but they were not accepted at that time, and the legislation was put through Parliament without the various considerations that are being put on the table once again.

I wonder if the witnesses tonight can give us some sense of what went so wrong. Obviously, a year ago the government didn't think these things were necessary, and then along came 2013-14 and this obvious disaster in terms of grain movement.

As this problem developed from the summer through the fall—the big crop, the weather, all of that—who was doing the system planning last year to try to anticipate these things and make sure that the system was ready to cope? Who was doing the coordination of the various elements in what is a very complicated logistics chain here in order to get the right grain, at the right place, at the right time? Who was looking at capacity?

It seems that the capacity remains now what it was a year ago. It may be in the last little while being used a bit more efficiently, but is there any significant improvement in capacity?

Who was doing the planning? Who was doing the coordinating? What's happened to capacity? Why has it been so inadequate this year? Why is that basis calculation in terms of the deductions coming off the farmer's price? Why is basis now gobbling up effectively 50% of the world price before it gets into the farmer's hands?

Can we shed some light on just what has gone so wrong from about a year ago now, when it was the considered judgment of the government that these sorts of amendments were not necessary?

[The Chair, Conservative, Bev Shipley]

Who do you want to answer?

[Ralph Goodale, Liberal, Wascana, SK]

Mr. Enns, would you like to start, and then maybe Mr. Sobkowich.

[Art Enns]

I think one of the things you had was the perfect makings of a perfect storm. You had huge demands for our crops offshore, so farmers responded by growing. We had a tremendous crop come in, much higher than anybody anticipated. Nobody anticipated the huge demand, and we also had huge demand on railway services for other commodities besides grain, where some of the cars were being moved to.

So I don't think anybody could have anticipated what happened a year ago. Unfortunately, the wheels have come off in a big way and we need to address it now and go back and revisit some of the changes that maybe weren't made at that time.