Agriculture Committee on Nov. 27th, 2018

[The Chair, Liberal, Pat Finnigan]

Good morning, everyone.

This morning, pursuant to Standing Order 108, the committee proceeds to a briefing on the provisions for the transport of grain during winter 2018-19 to find out what it looks like for the coming year.

With us this morning from CN, we have Mr. Sean Finn, Executive Vice-President and Chief Legal Officer, Corporate Services, and Mr. Michael Cory, Chief Operating Officer and Executive Vice-President.

We also have, via video conference, from the Canadian Pacific Railway, Joan Hardy, Vice-President, Sales and Marketing, Grain and Fertilizers.

We'll start with opening statements.

Mr. Finn, you have up to seven minutes, if you want to give us the latest.

[Sean Finn, Executive Vice President Corporate Services and Chief Legal Officer, Canadian National Railway Company]

Thank you, Mr. Chair.

I would like to thank you very much for giving me the opportunity to testify before the committee this morning.

There have been several positive developments in the past nine months, since we last appeared before you in March. We value the fact that you have invited us to present to you the implementation of our western Canadian grain plan for the 2018-19 crop year.

Let me say at the outset that we believe the current crop year to be pivotal. The issue is clear. We must overcome the challenges the grain-handling system faced in the previous crop year. To meet the needs of western producers and all our customers, CN is in the midst of an unparalleled $3.5-billion capital investment in our infrastructure and human capital. That is up $700 million from last year and represents 25% of our gross revenues. For every dollar we earn, 25¢ goes back into the properties to improve our capability of delivering our customers' goods over a long period of time.

On July 31, we tabled, pursuant to Bill C-49, a copy of the grain plan—you have a copy in your material—that sets out how CN intends to move the grain crop through the grain year 2018-19. Pursuant to Bill C-49, on October 1 we filed a winter plan that sets out in detail how the railway will move the grain crop with other commodities through the more challenging winter period.

As part of Bill C-49, we were able to consult our stakeholders in detail. We didn't just prepare a plan for grain transportation and a winter operating plan. We took the time to meet with our customers, shippers and the entire western Canadian agricultural community. The idea was to consult them before tabling the plan on July 31. We were very pleased with this opportunity to table the plan, but more importantly to consult with stakeholders in the agriculture industry and western Canadian grain producers.

On that note, it's my great pleasure to introduce my colleague Mike Cory, EVP, chief operating officer, to update you on the movement of grain this year.

Mike.

[Michael Cory, Chief Operating Officer and Executive Vice-President, Canadian National Railway Company]

Good morning, everyone. Thanks for the invitation.

How are we doing? The crop year is off to a very strong start, in spite of some challenges caused by early weather issues across western Canada, which, in some regions, delayed the harvest by many weeks. To this point, CN is on a record pace for grain movements out of western Canada. From week one through week 17, we've shipped 9.38 million metric tons of grain and processed grain products, as compared to our previous best of 9.07 million metric tonnes in 2016-17. This is 3% ahead of our former record.

We could have even done better. The reality is that there were more than 8,000 car orders cancelled since the start of the crop year, and in large part this is the result of the lack of grain availability caused by the delayed harvest. Now that most of the grain is off, producers and grain companies are dealing with the consequences of a late harvest and a lot of damp grain, which also slows down the system. In our grain report, we've indicated that we expect to move 5,500 hopper cars from the CN supply fleet each week during the peak months when the port of Thunder Bay is open and 4,000 cars per week when it is closed during the winter months.

We also move close to 700 to 900 private grain cars controlled by our customers. We've been consistently shipping this range per week in addition to the CN cars. This represents a significant evolution in the system. Four years ago, the number of private cars moved would have been in the order of just 20 to 30 private cars a week.

What has changed since we last met you back on March 19 and what has enabled us to significantly improve our performance? At that time, we indicated that our service had deteriorated due to a dramatic increase in traffic across virtually all areas of our business. This increase significantly exceeded both our expectations and those of our customers. In response, we've made very significant investments in both people and infrastructure. As Sean mentioned at the beginning of his remarks, the decision was made to increase our capital spending for 2018 to a record $3.5 billion, with the emphasis on capacity and enhancing projects in western Canada where the bulk of the traffic increase has occurred.

Specifically, we've installed more than 60 miles of double track in areas where congestion has been causing delays. We added or lengthened 10 sidings in the Vancouver and Prince Rupert corridors and we have increased yard capacity in key locations such as Winnipeg, Edmonton and Melville. These priority projects, most of which are now complete, have already had a positive impact on the fluidity of our network. At the same time, we've been focusing on increasing our workforce. Our Winnipeg training centre has been working at capacity for the past year, ensuring we have sufficient trained operating people in place. As a result, we now have 1,250 new qualified conductors in the field, which is a significant increase from last year.

We have also made significant investments in equipment. Specifically, we've ordered 260 new locomotives to be delivered over the next three years, with 60 in place before the end of 2018. We've also ordered 1,000 new high-capacity grain hopper cars, which will enable us to begin replacing the aging Government of Canada car fleet. We expect 500 of these new hopper cars will be delivered prior to the end of the crop year. We have ordered additional new centerbeam cars to serve our forest product customers.

Make no mistake, while we are pleased with the progress we have made, challenges remain. With the harvest finally complete, demand over the past several weeks has been well beyond what the grain supply chain can realistically handle. For example, in week 16, we received almost over 7,000 car orders, which significantly exceeds what can be handled, particularly with some congestion challenges at port terminals.

We expect demand for grain cars will remain strong well into the spring. The thousands of cars that did not move in September and October because of delayed harvest is capacity that was lost. It can't be transferred into months where we are already operating at capacity. Farming, like railroading, is an outdoor enterprise and we are both at the mercy of nature. For example, the inability of terminals in Vancouver to load when it's raining continues to present problems, especially during the rainy winter months on the west coast. The inability to load in the rain can lead to terminal congestion forcing us to hold trains en route to the port, or in the country. This leads to increased car cycle times, which reduces the overall capacity of the system.

Finally, I would note, the increase in the shipment of crude by rail due to a lack of pipeline capacity has received a lot of attention in the recent weeks. We recognize the critical importance of the oil sector to the west and will do our utmost to move additional volumes of crude when we have the capacity available. While we will do our best, we cannot increase our crude oil transport to the detriment of the other customers, particularly western grain producers. While recent weeks have seen an increase in crude traffic, we've also seen a slowdown in the movement of some other products, such as frac sand.

As I stated previously, we've increased our overall network capacity through significant investment, so no one should assume that more crude moving means less grain. In that regard, it is important to remember that very little crude moves west, which is the primary destination for these other commodities.

In conclusion, we are in a much better place than we were last crop year. That said, we need to be clear-eyed about the challenges that lie ahead. Winter always creates issues, and the impact of the late harvest will be felt throughout the crop year. However, with the investments we have made and the focus that we have brought, we are confident that CN is up to the challenges and we will continue to get the job done.

Thank you.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Cory.

Now, we will go to Ms. Hardy for up to seven minutes.

[Joan Hardy, Vice-President, Sales and Marketing, Grain and Fertilizers, Canadian Pacific Railway]

Good morning.

Thank you, Mr. Chair.

I appreciate the opportunity to meet all of you. I am sorry that I couldn't be there in person, but it's good to meet you remotely.

Mr. Dreeshen, it's good to see you again. We met at the Paterson elevator opening this fall near Calgary.

I am CP's Vice-President of Sales and Marketing for Grain and Fertilizers. Just by way of background, prior to joining CP earlier this year, I spent many years working for a grain shipper in Winnipeg.

Thank you for the invitation to speak with you this morning. CP appreciates the opportunity to discuss our plan to move Canada's grain during this crop year and the upcoming winter.

CP operates a 13,000-mile transcontinental rail network across Canada and the U.S. Our rail network is a critical component of North America's integrated supply chain. Grain is CP's largest line of business. It represents nearly one-quarter of our total revenue.

CP stands ready to safely and efficiently move grain during this crop year and we are off to a good start already. This year's Canadian grain crop is large. Our current estimate is that the crop is between 70 million and 72 million metric tons. When we add in the higher-than-normal carry from the previous year's production, the total crop to move is approximately 83 million metric tons, which is 5% higher than the prior five-year average.

Even though we are currently seeing strong demand from many other lines of business, our railway is performing very well, and our focus on grain is unrelenting. In fact, we broke our all-time record for the movement of grain in October, moving 2.64 million metric tons of Canadian grain and grain products.

Because of strong demand, CP is investing in significant new resources. We have more than 1,200 employees in training. The majority are running trades employees—the men and women who operate the trains. They are being deployed over the coming months. We've all added more than 100 fully remanufactured high-horsepower locomotives, which increases our road power fleet by about 20%.

Based on current forecasts, CP's operating team plans to consistently spot 5,500 hopper cars weekly for the movement of Canadian whole grains through the fall. We've done just that again with 5,540 hopper cars spotted last week. We plan to continue at this pace until the closure of the port of Thunder Bay in late December. Thunder Bay is an important outlet for Canadian grain. Through the winter months with Thunder Bay closed, CP plans to supply approximately 4,000 cars per week with CP equipment for the loading of grain.

Further, CP anticipates moving, on average, an additional 850 cars weekly of grain products in mostly customer-supplied cars throughout the crop year. These expectations, of course, are contingent on strong co-operation from, and coordination with, all components of the supply chain.

CP has significantly increased our capital investment in 2018. We are investing $1.6 billion dollars this year to enhance both safety and service. A significant portion of that—approximately half a billion dollars—is dedicated to new high-capacity grain hopper cars. We placed an initial order for 1,000 cars with National Steel Car of Hamilton, Ontario. CP has already received 261 of these new hopper cars. We will have 500 in service by the end of 2018 and then another 500 in the first quarter of 2019.

Over the next four years, with these 1,000 cars as the base, we plan to purchase a total of 5,900 new hopper cars, which will fully replace the old low-capacity Government of Canada hopper cars. The new car design is shorter and lighter, and it features a three-pocket configuration that allows for more efficient loading and unloading, and simpler maintenance. The new hopper cars can handle 15% more grain by volume, and 10% more load weight than can the cars being retired. Their shorter frame allows more cars in a train of the same length, though a train of the same length as today's standard—7,000 feet—will carry 16% more grain with these new hopper cars.

CP is also driving the new standard in grain transportation—a high throughput elevator capable of loading an 8,500-foot train clear of CP's main line track in 16 hours or less.

These new elevators will use a power-on model, which means that CP's locomotives stay with the train and are used by the elevator for the loading operation. When the loading is done, the power is there, allowing for quick and seamless departure from the elevator. Along with our new fleet of high-capacity hopper cars, this new standard will significantly increase the volume of grain the supply chain can move over a crop year.

CP currently services seven 8,500-foot loop-track elevators across the Prairies. Four additional 8,500-foot-capable facilities have been announced on our network this year. CP is continuing to negotiate and work with our customers to upgrade most of the network to an 8,500-foot model.

Now, let me make some comments about our winter planning at CP. We all know that harsh winter conditions are an operating reality for all modes of transportation in Canada. Winter conditions can profoundly affect railway operations and our ability to maintain service to our customers. As we Canadians know, not every winter is the same. The severity, duration and geographical scope of harsh winter conditions can vary significantly.

When temperatures drop below -25°C, a train's speed, length and weight must be reduced to ensure safety, which is always CP's number one priority. The reduction of these factors unavoidably constrains the rail system's velocity and throughput for a period of time, which in turn, reduces the supply chain's overall capacity. CP is employing a distributed power configuration on trains, placing locomotives in mid and end positions, which partially mitigates the need to reduce train length in cold temperatures by adding air pressure to the brake system throughout the train.

We also need to be constantly vigilant to the threat of avalanches through our mountain corridors in Alberta and B.C.

CP deploys significant resources each year to forecast and plan for winter, and then to mitigate the impacts as much as possible. Fortunately, CP has achieved improvements to winter performance in recent years through significant investments in track infrastructure and rolling stock and strong winter planning with our customers and the broader supply chain. Nevertheless, the impact of winter on a railway's performance can never be eliminated. No matter what action is taken, tough winter conditions will always constrain the system's capacity, impacting service through some periods. Proper planning is essential, but it can never completely insulate a railway from the effects of winter.

Again, I thank you for the opportunity to speak with you this morning, and I'm happy to take any questions.

[The Chair, Liberal, Pat Finnigan]

Thank you, Ms. Hardy.

Now we'll start our question round.

Mr. Berthold, you have six minutes.

[Luc Berthold, Conservative, Mégantic—L'Érable, QC]

Thank you very much, Mr. Chair.

Mr. Finn and Mr. Cory, thank you very much for coming and being with us today.

Good morning, Ms. Hardy.

Since last year, a lot of work has been done by both companies. You didn't wait for Bill C-49 to pass to adopt measures and try to correct a situation that was of great concern to farmers and grain producers.

You have already admitted that there are significant challenges this year due to the late grain harvest. What makes a railway company give priority to one customer over another? That's the question I get asked the most. You said there was an increase in demand in all sectors. What guides a railway company in its decision to move grain or oil?

Mr. Finn can answer first, then Ms. Hardy.

[Sean Finn]

Thank you very much for asking this excellent question.

First, it's important to understand that the rail system extends over 26,000 miles across North America. It is also important to realize that it's an external network.

We have to make choices every day. We have an obligation to provide our customers with services that meet the standards we impose on ourselves so that their goods reach the market in a timely manner. In making our decisions, we ask ourselves how we can ensure the network operates smoothly while serving our customers. It isn't as if, one morning, we make the decision to move grain that day, coal the next, and oil next week. We must transport all goods on a daily basis.

We must take into account certain situations. For example, if there is no more space at the Port of Vancouver because cars aren't unloaded while it is raining and, for logistical reasons, the boats haven't arrived yet, we often transport the wheat to Kamloops and wait until the boat is in position before bringing our cars into Vancouver to serve the customer. If we sent all the wheat cars to Vancouver, we would risk clogging the Vancouver terminal.

These are choices that are made on a daily basis. People's perception that we choose one commodity over another is unfounded. We have to serve all our customers and it's a fairly complex network. Railroading is a team sport. It is also a sport that becomes more difficult during the winter, but that is no reason not to serve our customers.

I assure you that the choices are made daily by the people on the farm, so that all our customers receive the services to which they are entitled and that their goods reach the market. If we do not do so, we will damage the reputation of grain producers, the reputation of Western Canada, but more importantly, Canada's reputation as a commodity exporting country.

[Luc Berthold, Conservative, Mégantic—L'Érable, QC]

Ms. Hardy, would you like to add anything?

[Joan Hardy]

Thank you.

Of course, as a common carrier, we have an obligation to move all commodities that are offered to us. Grain is a very large and important commodity for us. Twenty-four per cent of our revenue is associated with grain, so it's a very important one for us but so are the other commodity groups.

It is a daily balancing. We are really managing supply chains with our customers. Just as certain supply chains require surges in service, for example, to meet a vessel or satisfy a sale, we're balancing all the time with the shippers we're dealing with. Really, our objective is to provide sustainable, balanced service to all of the commodity groups. Certainly, we're cognizant of what our shippers are requiring on a day-to-day basis, to make sure that we are meeting their demands as fully as possible.

[Luc Berthold, Conservative, Mégantic—L'Érable, QC]

As parliamentarians, we are sometimes forced to intervene in the market. However, it isn't always with pleasure that we do so. I think your presence here indicates that the committee is interested in following the matter throughout the winter. Indeed, for an act to be amended, there must be major concern in the market. Without transportation, that is, if we can't export our products and have access to foreign markets, the Canadian economy is worthless. You play a major role in this.

In your opinion, what are the consequences of this year's late harvest? What kind of season can we expect? You must already have an idea about this.

[Sean Finn]

You're right. We had a particular challenge this fall. We had committed to placing a minimum of 5,500 cars per week during the normal period and 4,000 cars during the more difficult period. The harvest is good this year, above average over the last three years, but perhaps a little late, based on the western Canadian region. That is one of the aspects. For example, during September and October, we had the capacity to deliver cars, but the grain had not yet been harvested. It is no one's fault; it is simply that there was snow on the ground, particularly in Alberta. As a result, many car orders were cancelled in September and October. Demand has now resumed. Challenges lie ahead for the coming year, as capacity that was not used in September and October cannot be transferred in December, January or February.

[Luc Berthold, Conservative, Mégantic—L'Érable, QC]

Do you have this capacity, or will you be delayed on the shipping side?

[Sean Finn]

I would like to point out that, for example, we placed 7,200 cars last week. This includes government cars and our own. That's 2,000 more than we thought we could place that week. The fact that the winter has been a little milder so far in western Canada has allowed us to catch up.

The capacity is there, but we'll never be able to get back what's been lost. The challenge for us is to provide a consistent service.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Berthold.

Mr. Longfield, you have six minutes.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you, and thanks to both companies for coming in to give us an update.

As you know, at the beginning of last year, we had an emergency meeting to talk about the dire situation we were facing. It looks like we've had some progress. I know we've had some progress legislatively through Bill C-49.

Part of Bill C-49 talked about data sharing and transparency between the networks. How is that going between CN and CP, in terms of transparency of capacity, data sharing between the rail lines, and interchanging opportunities because of that?

[Michael Cory]

I could start, Joan.

I think the two railways understand that to make the supply chain work, they collectively have to work with each other to get the right grain to the port at the right time. When it comes to sharing, we talk daily. We talk weekly. We share information to make sure that each railway knows where their traffic is and how their network is performing. We fill in each other's gaps when need be.

[Lloyd Longfield, Liberal, Guelph, ON]

Okay.

Ms. Hardy.

[Joan Hardy]

If I could just comment, as Mike says, the collaboration is quite incredible.

I just mentioned in my comments a minute ago about how we manage supply chains. Supply chains of grain companies are very integrated between CN and CP because typically they have elevators on both networks. Every day, for each of our major shippers, we have calls where data is shared about what trains are coming in from CN and CP, heading into the terminals. We actually transmit documents on a daily basis. It's very collaborative.

It's similar with interchanges. We're working very closely with each other when trains are coming through interchanges, so there is very much a data-sharing process.

CP—and I know, CN as well—publishes information every week on our website about how much grain we have moved in the previous week, so we're sharing that with our customers. We're also working very closely with customers on sharing data about their demand and their measurement of our service so that we are understanding their perspectives on how well we're doing.

[Michael Cory]

Our goal is to maximize every asset we have to get more grain to the port, both companies and with our producer shipping companies.

[Lloyd Longfield, Liberal, Guelph, ON]

That's terrific. Thank you.

Ms. Hardy, you mentioned the distributed power solution. Something we talked about last year was about cold temperatures and how you get the pneumatics working on the brakes, putting mid-train power sources.... Is that a new system you're doing? Is it something that both rail lines are doing? Could you comment on if we get hit by another severe temperature in January or February...? Is that something new that you're going to be implementing this year?

[Joan Hardy]

No, this is not new for CP. We've been doing it for many years, but we are doing it much more consistently. Basically, our design is looking into winter and saying that in certain temperatures we need to make sure that we have a certain number of locomotives, both the mid- and end-of-train. We have been using distributed power, though, for many years.

[Michael Cory]

It's the same with us. We also have air compressor cars. We increased our fleet. These are boxcars with air compressors that, again, can be used either at the end, to Joan's point, or mid-train.

We increased our fleet this year by 33%, as well as purchasing new distributed power locomotives.

[Lloyd Longfield, Liberal, Guelph, ON]

In terms of increasing by 33%, we're trying to get to $75 billion in exports, and a big part of that is going to be up to you folks to move those exports to market. You've made that investment, yet we're going to be behind because of the delayed harvest. Where's the shortage? Is it in locomotives? It sounds like you're training a lot of people.

[Michael Cory]

No, I think it's the capacity of the entire supply chain. It's how quick the crane cars can be unloaded at the port terminals. It's the distance once you take away the short cycle going to Thunder Bay, where you now have to move those cars to eastern Canada or to places in the U.S.