Agriculture Committee on April 2nd, 2014

[The Chair, Conservative, Bev Shipley]

I call the meeting to order.

I apologize. We are running a little late. We had about an hour of votes and bells that interrupted our schedule a bit. I want to thank the staff for getting us back on track.

With that, we'll begin our next panel in terms of the study on Bill C-30.

I want to welcome from the Western Barley Growers Association, Brian Otto, director, and Caitlan Schnitzler, public relations coordinator.

From the Mining Association of Canada, we welcome Pierre Gratton, president and chief executive officer, and Brendan Marshall, director of economic affairs.

By video conference from Moose Jaw, Saskatchewan, we welcome Mr. Ian McCreary, as an individual.

I think I will start with you, Mr. McCreary, just in case something happens; you're participating at a distance, via video conference.

Please begin, Mr. McCreary. You have eight minutes.

[Ian McCreary, Farmer, As an Individual]

Mr. Chairman, honourable committee members, thank you for the opportunity to appear to discuss this critical issue facing the grain and oilseed industry in western Canada.

I've been involved in transportation issues throughout my adult life, and I thank the committee for providing me this opportunity to provide my perspective on a path toward the solution to this complex problem. I'd like to offer my assessment of the problem, suggest what is needed to find a solution, and identify the strength and weaknesses of this bill in moving us towards a solution.

First, the problem. Western Canada is a landlocked region that is further from tidewater than any other major exporting region. The transportation corridors to market are constrained. Further, the two main export channels are very different in total costs. The cost of movement from my delivery point in central Saskatchewan to the west coast is approximately $72 a tonne, while the cost of moving east is around $100 per tonne. Thus, in periods of relatively inexpensive ocean freight rates such as we have right now, it's less expensive to move grain to all offshore destinations from my farm through the west coast. However, the west coast can only handle approximately 21 million tonnes of grain per year. Western Canada regularly produces 35 million tonnes of exportable supply, and this year has produced more than 50 million tonnes of exportable supply. The result is that the price spread between what the price farmers are paid for the grain and west coast prices has risen dramatically.

Currently, farm prices for wheat have fallen to $170 per tonne, below west coast export values. Only $70 of this can be accounted for in the cost of movement and handling, so farmers are paying grain companies an extra $100 a tonne for the privilege of selling our grain. This extra cost to farmers has been there since mid-October, and if production stays at average to above average levels, this new grain robbery as it is being seen on the Prairies, will be there for the foreseeable future. Alternatively stated, current international prices are very strong, and western Canadian farmers are the only ones not to gain from this strong market.

The current problem has no solution under the current regulatory framework. Shippers are the only ones with standing with the agency. Shippers are the grain companies, which are making record profits from the current basis; thus a solution through the agency is unlikely.

To solve this transportation and marketing juggernaut requires action at a number of levels.

First, the industry needs a body that guarantees an aggregate level of service for grains and oilseed exports.

Second, there needs to be a way of apportioning the constrained capacity among competing users. Remember, every merchant will make the most money by shipping west, yet only 40% can go west.

Third, improvements are required in transparency, both in prices and in grain flow. Improved information improves the market function, and we can go some distance simply by getting better information out in public.

Fourth, the revenue cap needs review, but must be maintained. Producer cars and single-point shippers need to be protected.

Fifth, the competitive position of farmers depends on the existence of independents and alternate channels. The current regulatory framework puts both of those marketing channels at risk.

Sixth, we require improved rail competition. Done properly, this has the potential to improve service, increase capacity, and reduce rail costs.

Finally and perhaps more importantly, we need a long-term plan to develop an increase in capacity in both export corridors with a focus on fixing some of the issues at the west coast.

Moving specifically to the current bill, Bill C-30 provides one tool to deal with aggregate levels of service, and does wave a flag at rail competition through potential changes to interswitching. Both of these are positive; however, this bill will not solve the problem. The problem has many components, and the bill deals only with rail.

I would like to suggest additional pieces that I feel need to be part of a long-term solution for the western grain industry.

I'd like to start by suggesting reinventing the GTA or a GTA-like organization. In 1979, the then Conservative government pulled the responsibility for aggregate service levels from the Canadian Wheat Board and established the Grain Transportation Authority. This group was responsible for aggregate service, apportioning cars, long-term planning, and information flows. This worked well until it was ended in the 1995 federal budget.

The CTA level of service claims subsequently placed the Canadian Wheat Board back into the position of responsibility for aggregate service. When the government chose to end the Canadian Wheat Board, none of the transportation services were understood or replaced. The result is the current mess. Now is the time to re-establish the office of the Grain Transportation Authority to provide aggregate service, car apportioning, and the desperately needed long-term planning for the growth of our industry.

In addition, I think the long-term planning.... If we do move in the direction of establishing a body such as the agency, many of the functions can be dealt with directly through there, specifically the price transparency and the transparency on movement and flows. Some work has been done by the minister with the changes in the mandate of Quorum, which again is positive, but the price transparency component is a potential addition that could be done through the Canadian Grain Commission with additional amendments to the Canada Grain Act.

The rail competition on the interswitching side is unlikely to be aggressive enough to do what's required on the additional capacity and the long-term effects on prices.

Mr. Chairman, it's my hope that we can all pause and look to a solution that has the potential to be longer term. It is my view that if we have an average to above average crop, the bill that is before us will not change adequately to adjust basis levels in the foreseeable future. I think we still have more work to do, and I hope everyone can work together to find the solutions required.

Thank you, Mr. Chairman.

[The Chair, Conservative, Bev Shipley]

Thank you very much for your presentation.

We'll now go to the Western Barley Growers and Mr. Otto.

[Brian Otto, Director, Western Barley Growers Association]

Thank you, Mr. Chairman.

Good evening to everybody. I appreciate your taking the time to listen to us this evening. I know it's been a long day, so I'll try to be as brief as I can.

Thank you for inviting me here today to discuss the rail transportation issues on behalf of the Barley Council of Canada and the Western Barley Growers Association.

My name is Brian Otto. I'm the chairman of the Barley Council of Canada. I have sat on numerous boards, I have been a director with Alberta Barley, the Western Grains Research Foundation, and I am the past president of the Western Barley Growers Association. I have a mixed farming operation at Warner, Alberta, which is just north of the Montana-Alberta border. I am chairman of the Barley Council of Canada, which represents farmers from across Canada, as well as the entire supply chain for barley from the malting and brewing industry to the livestock industry.

At the Barley Council of Canada we believe the government's initiative to address the rail transportation issues is a good first step in addressing a larger problem within the system. This problem is that the rail system is simply not working efficiently for Canadian shippers. While we respect the work that's being done to make railway work, at the end of the day it's the smaller businesses, such as malt companies, that will buy smaller volumes of barley that aren't able to do business effectively under the current conditions. These businesses provide a diversity to our economy that brings significant value to all Canadians.

Our transportation issues at home are affecting our international reputation. In the coming months we need to take the united approach being suggested by the government to ensure that all commodities are represented. Canada is pro-trade. We are on the verge of signing two major international trade agreements, but we have to prove that we are reliable trading partners.

We are not here today to pit farmers against anyone. Farming is an economic driver, and we simply want to help drive the economy forward. The stakes could not be higher. The barley industry is ready for growth and prosperity. We formed a national organization across the supply chain. We brought partners together. We have buy-in from our value chain. We have the supply and the quality, but there are hurdles restricting our ability to conduct good business. Hurdles such as market access issues, falling behind our competitors on trade agreements, lack of transportation efficiencies and logistics are holding us back from maximizing our potential.

We want the grain industry to have fair and equal access under a transparent system and we want our industry to grow in conjunction with other commodities. In particular, we recognize the challenges faced by our colleagues in the forestry, potash, mining, coal, and other sectors. This is why we want a solution for transportation in Canada that's focused on a collaborative effort involving everyone in the value chain. We believe it is in Canada's national economic security interest that a competitive rail system is developed for all commodities. We also believe that the work we do for agriculture now is just as important as the ongoing debates over oil pipelines and other economic priorities.

The good news is that we never hear any complaints when we have full grain trains. But we do know that we need a more transparent system, and that we need better communication throughout the system for it to operate efficiently. Canada's national economic security depends on our ability to respond to a growing demand for our quality products. Canada's international reputation was built over time and has required significant investment from a cross-sector of stakeholders. There is mounting evidence that Canada's reputation as a reliable shipper is in jeopardy as many of our customers have started to source product from our competitors.

At least one General Mills facility in the United States is turning to Scandinavia as a result of the challenge they experienced accessing oats from our traditional suppliers in Saskatchewan and Manitoba. Japanese buyers who have purchased Canadian wheat for years are now turning to the United States after one of our ships sat waiting in Port Metro Vancouver for three weeks.

In addition to these issues, I'd like to focus a little bit more on what's happening to our small businesses that are affected by the rail transportation issues. Encouraging east-west access means more grain is moving along the major routes at the expense of the smaller shippers, like our malt companies that move product north and south.

Remembering the importance of our largest trading partner to the south is paramount as transportation corridors are being affected by the new legislation. It's important to encourage all shipping to all ports, not just Vancouver, Prince Rupert, and Thunder Bay. Our transportation difficulties could be more manageable when we involve our shipping partners to the south.

Some of our niche shippers, malt barley shippers in particular, aren't able to get any cars to ship south. This affects our ability to do business and impacts our reputation as a country with our international customers. It's not the way to do business.

Following the example of the Barley Council of Canada, we believe everyone needs to be at the table to fix transportation in Canada, the entire value chain. By working together, I believe we can fix the problem, and by taking the time to fix the system now, we are better able to ensure our national economic security for the future for our children and grandchildren.

The Barley Council of Canada supports the proposed changes in Bill C-30 and looks forward to a more secure future for our value chain. We see the government's recent efforts as a good first step, while looking forward to a time when the system will function better for all in the future.

Thank you.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Mr. Otto.

We'll now move to the Mining Association of Canada.

Welcome, Mr. Pierre Gratton and Mr. Brendan Marshall, for eight minutes, please.

[Pierre Gratton, President and Chief Executive Officer, Mining Association of Canada]

Thank you, Mr. Chair, members of the committee, clerk, and fellow attendees. I appreciate this opportunity. I didn't think I'd have an opportunity to speak to the agriculture committee in this role of mine.

The Canadian mining industry is a major economic driver contributing over $52 billion to gross domestic product in 2012, employing some 400,000 people, and accounting for $92 billion, or over 20% of the value, of Canada's total exports.

As a consequence of this international reach, mining is one of the largest users of Canada's transportation sector. We represent the single largest industrial customer group of Canadian railways, and consistently account for over half of the total rail freight revenue and the largest share of total volume carried.

Having recently polled our membership, I can report that poor rail service has been causing a range of challenges for miners since the fall of 2013, including unacceptable ratios, with some 50% to 60% of cars ordered versus cars delivered, resulting in some instances in the downscaling of production and operations. Just today I learned that CP Rail verbally communicated that it will no longer transport uranium, a decision contrary to the common carrier obligation that could adversely affect investment in Canada's world-class uranium resources and undermine all of the excellent work and leadership that the government has undertaken to secure access to Asian markets for uranium.

There is a cost to the Canadian economy resulting from poor rail service. Railways do not produce the goods for exports that allow trade to grow, our economy to expand, and employment to increase. Rather, they are an essential conduit for Canadian industry to receive crucial inputs and get its goods to market. Without a healthy and reliable railway network, Canada's reputation and success as a trading nation are seriously hampered.

With respect to this bill, MAC is sympathetic to the grain growers' difficult circumstances and to the government's motivation in assisting them. We also appreciate the sincere effort at reform. However, we are concerned about the unintended consequences that will befall other Canadian sectors reliant on rail service, including mining, as a result of the measures contained in Bill C-30.

Specifically, we have three areas of concern.

The first area of concern is the grain volume commitments. Enacting grain sector specific volume commitments will exacerbate existing rail capacity constraints to the detriment of all the other shipping sectors, including ours. Mining companies are also concerned that enacting grain sector specific volume commitments will undermine the legal remedies available to shippers in the Canada Transportation Act. How can mining companies forced to operate outside the provisions of Bill C-30 upon enactment make a service case against a railway that is legally obligated, through pain of penalty, to serve grain companies? A railway's unwillingness to break the law requiring it to move grain is a defence against the legal remedies available to other rail customers seeking to address their service challenges.

Our second area of concern is the limited extension of interswitching provisions to the Prairies. We are concerned the new interswitching provisions will result in the railways being forced to do more short-hauls, which are operationally more expensive than longer ones. A consequence of this is a reduction in rail freight revenue due to the interswitching rate being federally regulated, which will leave the railways to make up for lost revenue by either reducing service to better optimize their assets and/or increasing rates for shippers who are captive, or have uncompetitive options. While MAC is not opposed to interswitching regulations in principle, we would encourage appropriate consultation on their potential positive and negative impacts on the effectiveness of Canada's rail network as a whole before implementing them.

Our third area of concern has to do with regulating improvements to the service level agreement mechanism. Bill C-30 proposes amendments that would give the Canadian Transportation Agency the authority to regulate prescribed elements in arbitrated service level agreements, the details of which would be determined through a consultation process. While this measure may seem promising, we do not believe it will be effective. The service level agreement provisions in the act mandate that an arbitrator take a rail company's service obligations to other shippers into account before rendering a decision. If Bill C-30 passes, an arbitrator will be bound to consider the railway's legal obligation to transport grain against the elements of service that a non-grain shipper is seeking, superseding any regulation designed to enhance a non-grain shipper's position in an arbitrated service level agreement.

In summary, we do not think the legislation will address the challenges faced by all shippers, and it could make the situation worse for some. I am also very concerned by an approach to rail reform that attempts to address rail issues piecemeal, one commodity at a time.

We support a collaborative approach to addressing rail service challenges in Canada and strongly advise against government or Parliament picking winners and losers. Exacerbating the rail service challenges that miners already experience is not the right way to go. As I mentioned earlier, we are responsible for over 50% of rail revenues. If those decline because mines aren't able to operate, the costs of the overall transportation system will go up for everyone.

We need to take a step back and look at the whole supply chain and the kind of transportation Canada needs to succeed as an export-driven country rich in natural resources. We need solutions that are based on commercial market-based principles. A long-standing MAC recommendation to ameliorate the commercial balance between railways and their customers, for example, would be to insert a new stand-alone section in the act that would define “adequate and suitable accommodation” and “service obligations”. This would not regulate the railways; it would merely define an existing measure available to shippers to pursue in their contract negotiations with the railways.

Second, we need policies informed by accurate data. The president and CEO of CN appeared before this committee last night and emphasized in his presentation the need for better alignment across the supply chain and accountability for performance. MAC supports the spirit of these remarks and recommends that the government require railways to provide both regular monthly public rail performance data on a sector basis and confidential company-specific performance data upon request.

Such a measure as is already being undertaken in the grain sector will provide all parties with the tools to quantitatively understand the nature of rail service challenges and causally identify why service failures occur and where the capacity choke points are forming, and based on such analysis, determine what can be done to fix the problems.

Increased transparency should improve the relationship between railways and shippers, as both parties, in possession of the same facts, will be more motivated to find solutions that are mutually beneficial and that provide the government with better information to guide its own actions.

While MAC remains sympathetic to the agriculture sector's difficult circumstances and acknowledges that the government's motivation is to try to ameliorate the situation, we would be remiss if we did not raise concern about the unintended consequences that will befall other Canadian sectors that rely on rail service, including mining, if the measures currently contained in Bill C-30 become law.

Thank you.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Mr. Gratton.

Now we'll go to our rounds of questions by members.

We'll start with Mr. Malcolm Allen of the NDP, for five minutes.

[Malcolm Allen, NDP, Welland, ON]

Thank you, everyone, for your attendance.

Mr. McCreary, maybe I can start with you, because you had quite an extensive piece that you talked about.

Were you at the panel in Saskatchewan on Wednesday, the transportation piece?

[Ian McCreary]

I was.

[Malcolm Allen, NDP, Welland, ON]

I've heard from a couple of other folks about a GTA or some sort of transportation authority. It was around many years ago, and it went away and then it came back. Can you give me an aggregate sense of what the old CWB used to do versus what the GTA could look like vis-à-vis that?

[Ian McCreary]

I can do my best.

Essentially what the GTA did was define and make transparent the aggregate service that would be available to the agriculture sector. Then it apportioned those cars first between the Wheat Board for the movement of board grains and the various non-board players that required service.

I think it's interesting that Mr. Otto mentioned the plight of some of the smaller players with regard to this particular bill. One of the pieces that has to be considered as we move forward in a regulatory framework is to make sure that all of the niche players in this system get access to their share of cars. That was something the Grain Transportation Authority used to be accountable for, to make sure that all the players got a piece.

The bill that's before us provides a bit of a perverse incentive to the railways to service only, or primarily, fast-turnaround large-block movers. As Brian Otto mentioned, it's really important to our sector that all of the other pieces get done.

In terms of the Canadian Wheat Board, the big piece that was different is that a portion of grain that could not be moved was essentially not contracted with farmers, so it didn't overhang the market and it did not drive basis levels to the current levels. The Canadian Wheat Board system would have resulted in perhaps modestly more grain movement, or perhaps modestly less. That is immaterial. What's material is the fact that the cost of movement—the difference between the international values and the farm values—would not have been anything other than the cost of movement. So, this current situation would not have resulted in $4 billion or $5 billion of transfer from farmers to grain companies.

[Malcolm Allen, NDP, Welland, ON]

The other thing I've heard, and I think you raised it as well, is this issue about how much really can go out the port of Vancouver. All things being equal, if there were enough locomotives and cars and crews to move all this stuff and the average temperatures in this country were 20°C 12 months of the year, we still couldn't get all of the crop and, to be fair to the mining group, the mining group stuff, and lumber and everything else, out the port of Vancouver, for all those who want to go in that direction.

How do we balance that? Is there a mechanism that says stuff has to go east? In fact, we're in the east at the moment, so we actually want stuff to come this way agriculturally. Is there any suggestion as to how that works to balance it, recognizing it's more expensive to bring it here than it is to go to the west coast, from the Prairies specifically?

[Ian McCreary]

The key is that you do need an aggregate agency-type player so that you have either an administrative or a market mechanism to send the signal to the players the amount that can go west has been contracted. As Mr. Otto suggested, there is also the southern move, which is an important export corridor, and the eastern move. Both of those are pieces of the puzzle that have to be considered. The fact remains that the difficulty right now is that no one is apportioning that west coast capacity.

As the railways said, yes, it was a cold winter, but even if it had been a warm winter, there would have only been another 10,000 cars. That wouldn't have materially changed where we are right now. The outcome still needs to be one in which there's a central body, a grain transportation authority or some other player, that sends the market or administrative signal to the grain companies that the west coast is sold out, and they're going to find another way to get this grain to market.

Frankly, as Canada, we need to do some work to build on other export corridors. Before the Canadian Wheat Board was ended, it had a line to buy a fleet of lakers. That was part of the recognition that we needed surge capacity in this country to get grain out. We're way better off paying the extra $20 or $25 to go east than we are paying $100 a tonne on every tonne that sits on the Prairies.

[The Chair, Conservative, Bev Shipley]

Thank you very much, Mr. Allen.

We're going to move on to Mr. Lemieux, for five minutes please.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you to the witnesses.

Mr. McCreary, you're a pretty strong advocate for an aggregate agency, be it a GTA or the Wheat Board. Were you involved with the Wheat Board before?

[Ian McCreary]

Yes. I was a director of the Canadian Wheat Board. I chaired the Canadian Wheat Board's transportation committee, which was responsible for the negotiation of the previous commercial arrangements which resulted in a net dispatch earning for 10 years of movement through that program. It is fair to say that my frame of reference was largely framed from that time period.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you.

When we had Richard Phillips from the Canada Grains Council here, he was recommending that stakeholders in the industry work more closely together to find stakeholder solutions. He certainly mentioned the crop logistics working group, a $3-million initiative to help bring stakeholders together to put in place initiatives to improve the logistics system. It didn't sound like he was talking about an aggregate agency. I think of a bureaucratic level in there that's going to be orchestrating all of this.

But Mr. Otto is right here. I'd like to ask Mr. Otto his thoughts on that.

Do you see the Wheat Board running this or do you see another GTA coming in, some sort of aggregate agency? Is that going to be helpful to this sector, or do you prefer the solution of key stakeholders working together to identify how they may share data to their own benefit?

[Brian Otto]

No, I believe in a commercial system, as little regulation as possible. I believe a commercial system will work. What we need right now, in my opinion, is transparency in the transportation system.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Right.

[Brian Otto]

We have to have a tracking system so that we know where our cars are, and what grain has to be moved. We need good communication between the railroads and the shippers so that we can work this out.

I firmly believe that we need to get all the players to sit around the table and work this out.

The Barley Council of Canada is an example. We've put all the players at the table in the barley industry, from the producer right through to the end users, the processors, the feeders. If we have a problem in barley, we have all the people in the value chain together to sit there and work out a solution.

That's what has to happen in this transportation system. We need to get everybody that's involved in it to sit down and work this thing out. I truly believe that if we have everybody at the table, there are solutions to this. But we don't know the challenges of each sector. Until we understand those challenges across the value chain, it's going to be very difficult to arrive at a solution.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

I want to thank you for your response, because I think this is the first opportunity we've had to ask a stakeholder, “What do you think about having an industry-led solution that's more commercially based, or what do you think about having a more bureaucratic solution that's aggregate agency based?” What I hear in your answer is what I heard without having asked the question. It's what our other witnesses said, and how they're viewing this situation on how crop logistics should improve.

I think it's just fair to say that the NDP and Liberals are advocating more of an aggregate agency position. We are not. I think we're very much more on the side of the comments that you just made, which is, I think, that greater visibility of all the moving parts of performance metrics, of what is actually being delivered, and having that tuned by the industry itself is actually the solution. In this case, as I mentioned to our witnesses beforehand, we have taken a legislative approach to not manipulate all the little details about rail movement, but instead to put in place a goal. It's very action oriented: deliver this goal; this is your target. As opposed to being management focused, it's action focused in terms of achieving goals.

Do you want to make a comment on that?

[Brian Otto]

The only thing I'd like to say on this is that in a truly commercial system, the whole value chain has to be responsible for their sector. In other words, just to use an example as a producer, if I sign a forward-pricing contract with a grain company, I'm responsible for delivery of that grain at a certain period of time, and they're responsible for the price that I've signed up for and to take delivery of it. If that contract breaks down either from my side or from their side, there are penalties that apply.

Unfortunately, that's where the chain breaks. We don't have any way to apply penalties to the railroads if they don't supply service, and they're responsible for the problem if the grain company can't take delivery of it or I can't deliver.

That's where I see that we have to address this situation. It's been referred to as reciprocal penalties, but I don't care what you call it. I'm a firm believer that if I'm a producer and I have not honoured my contract, yes, I have to pay the penalty. So does the grain company. The way I look at it is, if the railroad is the problem, they should pay the penalty. There's a cost to this, and whoever's responsible for that cost should be responsible for picking it up.

[The Chair, Conservative, Bev Shipley]

Thank you very much.

We're going to Mr. Easter, for five minutes, please.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, witnesses, for all your presentations. It was really good to hear from the mining industry and the impact that this could have on that industry as well.

Mr. Otto certainly mentioned the boomerang effect of some of the smaller players in the system when the railways are basically going to be obligated to move 11,000 cars a week to wherever they can find the capacity.

To you first, Mr. Otto, and I would comment on Mr. Lemieux's point.

Simply put, if this system was working under the theory that you're talking about, we certainly wouldn't need this legislation today. I think history has shown that you do need some kind of GTA to have the authority to make the system work as you would like it to.

Mr. Otto, if a clear statement was put into the CTA that the principal purpose is to serve domestic shippers and domestic and foreign buyers, would that in any way give any authority? Would you support that kind of a statement?

[Brian Otto]

Before I could comment on that, I think we have to define what that service is. The act right now is pretty vague on what service is. Before we can answer that question, we have to define that.

As a grain producer, and for any shipper who's involved in moving product by railway, that has to come first.