Transport Committee on Sept. 20th, 2016

[The Vice-Chair, Conservative, Luc Berthold]

Does that conclude your remarks, Mr. Ruest?

[Jean-Marc Ruest]

That is what I wanted to say this morning.

[The Vice-Chair, Conservative, Luc Berthold]

Thank you very much.

Ms. Cook, from the Grain Producers of Canada, you may now take the floor.

[Fiona Cook, Executive Director, Grain Growers of Canada]

Thank you, Mr. Chair.

My thanks to the members of the committee for the opportunity to appear today and to comment on certain provisions of Bill C-30, the Fair Rail for Grain Farmers Act.

My name is Fiona Cook and I'm executive director for the Grain Growers of Canada. The Grain Growers of Canada acts as a national voice for over 50,000 farmers across Canada, who actively grow and care for a variety of crops, including wheat, durum, barley, canola, oats, corn, soybeans, peas, and lentils.

We welcome the government's decision earlier this year to extend certain provisions of Bill C-30 for an additional year, effective until the end of July 2017. Today I would like to focus on the extended interswitching distance of 160 kilometres for the prairie provinces. I am here to tell you why this measure is so important for individual farmers and why we believe it should be made permanent.

On an annual basis, roughly 50% of Canada's grain crop is exported, with 94% of it moving by rail. Of these exports, 77% are exported by rail to port; 17% are direct rail, for example into the U.S. and Mexico; and approximately 5% are by road. Close to 70% of our wheat is exported, and some commodities are even more dependent on export. Over 90% of Canadian canola, including seed, meal, and oil, is exported annually. Over 90% of Canadian oats is exported to the U.S. Canadian pulses are a big success story—they're exported to over 150 countries. In fact, we are the world's largest exporter of lentils and peas.

It's not just about the exports. We have value-added domestic processors that also need access to reliable and consistent rail service: wheat millers, canola crush plants, oat millers, and barley malters are critically reliant on domestic shipments of raw product via the rail system. In many cases, they also depend on rail to transport the finished product to Canadian as well as export markets. Many of these facilities operate very lean production lines, employing just-in-time delivery, with smaller amounts of raw and finished product moving in and out on a timely basis. Most of these operations, like the grain elevators, are captive to one railway. They are therefore essentially operating in a monopoly-like environment.

Interswitching is an effective regulatory tool that can address captive situations and encourage behaviours in the rail industry that market forces would normally drive in a competitive environment. The extension of interswitching rights to a 160-kilometre radius was put in place in August 2014. It commits a rail carrier to pick up cars from a shipper and move product to a junction with another railway. Increased access to the lines of competing railways is good for farmers. It provides new options for grain handlers and processing operations in routing, as well as a new tool in negotiating with the railways better service, rates, and terms and conditions.

Extending the radius to 160 kilometres better reflects the large expanse of the prairies and the nature of grain transportation in western Canada. The original 30-kilometre radius was intended for urban centres and moving product at port. It encompassed very few grain-loading facilities: 6% had access at 30 kilometres. Now at 160 km, 92% have access.

When grain handlers and processors experience rail service issues, this directly affects the farmer's ability to sell grain and generate cash flow for their operations. It also negatively affects the price grain handlers pay for Canada's grain, oilseed, and specialty crops.

Every order for grain hopper counts. In a complex supply chain spanning an average of 1,520 kilometres, the ability of the railways to get agricultural products to an export position is crucial to every player in the value chain, especially the farmer. When the grain handlers or processors can't move product, the result is reduced orders and lower prices to farmers, to act as a signal to reduce the amount of grain they put up for offer. This means lost revenue to farmers when they have to sell grain outside peak periods. It can also affect future sales through a loss of confidence in Canadian shippers and their ability to deliver on time.

Rail interswitching provides grain producers with alternative options for rail services. The rule has already made for more competitive freight rates and service, and has directly benefited farmers. Not only have farmers noted reduced costs, they have also gained more leverage in getting rail capacity where needed.

In fact, the greatest use of interswitching has been a passive one. Some elevators operationalize the right to interchange by applying for an interswitching rate, while others use it as a leverage in negotiations with the railways. The mere existence of the option can provide shippers with the necessary leverage to obtain better terms and conditions. Shippers report that after using interswitching and the alternate line to move shipments, the originating carrier has often come forward to offer better rates and terms of service.

According to the grain monitoring program, for the crop year up to May 20, 2016, interswitching resulted in savings of almost $4 million and almost 1,300 additional railcars put into service.

Canadian grain production has seen steady growth of about 3% per year for more than a decade, a trend we expect to continue. It's been confirmed by my colleagues here this morning. Future production is not only contingent on a farmer's ability to access and utilize new technology, but also our ability to capitalize on growing opportunities and established and new export markets, many supported by Canada's active trade agenda. The 2015-16 crop year is expected to be another big one, with estimates ranging from 70 million to 75 million tonnes. Canada's 2013-14 crop year was recording-breaking, with over 90 million tonnes harvested. We expect these trends to continue.

In conclusion, the new interswitching provision has proven itself to be an effective tool, and for this reason we believe that it should become permanent.

Thank you very much.

[The Vice-Chair, Conservative, Luc Berthold]

Thank you very much, Ms. Cook.

We will now move on to the first round of questions.

You have the floor for six minutes, Mrs. Block.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I want to welcome our witnesses to this discussion that we're having today.

To put it into context, I'm a member of Parliament from Saskatchewan. The riding I represent stretches east and west, north and south. It shares a boundary with nine of the other 13 ridings in the province and it is 29,000 square kilometres, which is half the size of Nova Scotia, or six times bigger than Prince Edward Island.

You can imagine that, when you drive across it, you might see a diversity of crops being grown, and also a diversity of conditions that they are being grown under. I've heard from the producers in my riding that this crop year is going to be an exceptional year, and, as you've pointed out, probably becoming the norm.

I'm very engaged in the conversation that we're having today, coming from a landlocked province where many of my constituents rely on the provisions in this piece of legislation.

I want to ask any of you to answer this. Would you say that on the whole you have greater confidence that grain will reach port in a timely manner today than you did three years ago?

[Jean-Marc Ruest]

I think so. We've heard statements from the railways saying that they are prepared to move the crop. They've been advised of the size of the crop, and we fully expect them to be prepared to do so.

I think the circumstances are somewhat different than they were in 2013. The demand for shipping of other bulk commodities has declined. Therefore, there ought to be more capacity available for grain. We don't know, at this point in time, how cold the winter will get. It gets cold every year in Canada but we're optimistic. We hope that the pieces will be in place to move this crop.

If I may add one comment. One of the differences between this crop versus 2013—the magnitude is similar—is that we're seeing a difference in quality in the crop; it is a much less homogeneous quality crop, which makes it a tough crop to move. A hundred railcars of wheat isn't just a hundred railcars of wheat. If they are of different quality or have different characteristics because of the regions, they cannot just be thrown together. Sequencing and precision of rail movement is going to be very important this year.

[Humphrey Banack]

I believe that we will see better logistics this time around. I think it's a matter of time. Everyone throughout the grain transportation and grain value chain here learned from 2013, from Richardson and the grain companies, understanding what grain we need at the ports to meet those demands, to the railways making sure we get there. I think we can expect more. If we can't learn from past experiences...and I'm sure that people throughout the value chain have learned...the railways, too, are there. As Jean-Marc said, we're seeing good shipping today. Our off-combine shipments have been good today. We just hope that they continue through the year.

Weather will be a challenge here. Who knows what the weather will bring over the winter? If you're from northeastern Saskatchewan, you will have truly understood the challenges there were in 2013 from some of the farthest shipping points in western Canada and the volume-related process we went through, as I noted in my remarks. If you lived in western Alberta, there were points there that had more shipping than ever because it was the shortest distance to port, and that's where the railways move the grain from.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

Thank you.

I know you've mentioned some of the benefits of the measures existing in Bill C-30 up until now, but can you speak to whether the changes introduced in the bill change the way shippers time their requests for pickup in order to maximize the price they get?

[Jean-Marc Ruest]

That's a tough question. I don't think it has changed the timing because that timing is always based on market signals and market demands and customer demands, etc. I don't think that has changed. It may have changed the frequency with which the railways have responded to those demands. As we've heard this morning from the witnesses from the CTA on behalf of shippers, we believe that the interswitching provisions in particular have been beneficial to increase the level of service and the reliability of service.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

Okay.

One of the recommendations made in the Emerson report was to exempt containerized grain from the maximum revenue entitlement. I'm just wondering whether the shippers you represent would take up this opportunity if the railroads could offer it.

[Jean-Marc Ruest]

The shippers that are members of Cereals Canada are all bulk shippers, and we operate networks of grain elevators and port terminal elevators that are built for bulk shipment, and virtually 90%, 95% of at least the western Canadian crop is moved through bulk movement. It's the most efficient movement.

Whether individual players might want to invest in their systems to participate more fully in containerized movement, possibly, but it's not an inexpensive proposition, nor do I think it necessarily adds efficiency to the system. The system efficiency is based on moving as much grain as you can as quickly as you can.

[The Vice-Chair, Conservative, Luc Berthold]

Thank you very much, Mr. Ruest.

I will now turn it over to Mr. Iacono for six minutes.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

Thank you, Mr. Chair.

Thank you, members of the panel for coming here today.

I'm sharing my time with my colleague Julie.

This question is addressed to all three of you. The quickest and cheapest way to ship prairie grain crops to the international market is via the west route, mainly through the Port of Vancouver, but as there seems to be a problem with congestion and availability for this route, is it possible to ship a portion of the grain via the east route, to the Port of Montreal, for example, which already handles a certain volume of grains?

[Jean-Marc Ruest]

It truly becomes a question of economics. If you have more capacity to move through other ports, but the cost of doing so because of vessel logistics, etc., surpasses the commercial price.... We are sellers to the international world. The international customer is pricing Canada against other jurisdictions, so our price has to be competitive, and in that come all the elements of transportation—vessel, rail, etc.—so there are points where it makes commercial economic sense to go east versus west, and others where it doesn't. What we have seen is with lower vessel freight rates, which is, to a shipper, a benefit of a downturn economically worldwide, that line where it makes commercial sense to go east versus west has gone further west. It used to be in eastern Saskatchewan. Now it is moving, and it makes more and more sense to go further west to go east, but there does become a point in time where it is not commercially feasible to go east from western destinations.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

What's the volume you have so far going to the east?

[Jean-Marc Ruest]

I'm sorry, I don't know.

[Fiona Cook]

I can find out for you, if you like.

[Humphrey Banack]

I guess for us it's important. As Jean-Marc said, we are great growers of grain and providers to the grain companies, and it's really their commercial decision to move east or west. From our perspective, as Jean-Marc said, we're competing in a world market. We have to provide these products to the end market at a fair price, so whichever way makes the best sense, I guess, is the best sense, in my pocketbook, in western Canada.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

With respect to extended 160-kilometre interswitching limits being an important negotiation tool, what if it's not there anymore? How will this affect negotiations?

[Jean-Marc Ruest]

I guess we'll go back to the status quo of the previous environment that existed prior to Bill C-30 being adopted. We'll go back to limited interswitching being used because there are very few connection points between the grain elevators that currently exist and a connecting railway 30 kilometres.... I don't know what the numbers are, but I would say probably 6% of the grain shippers would have access to an interswitching spot, so you lose the ability to actually interswitch and you lose the ability to use that as a point of leverage in negotiations on rates and service with rail carriers.

[Angelo Iacono, Liberal, Alfred-Pellan, QC]

That's it. Thank you.

[Julie Dzerowicz, Liberal, Davenport, ON]

I'm in downtown Toronto. There are 13 kilometres of railway tracks that go through it. So, that's interesting to me. I have a quick question. It seems like all of you are very much in favour of interswitching, but longer term, given the rapid pace of competition, things changing worldwide, and climate change, do you think it's the only solution, or are there other solutions that we should be considering?

It seems obvious that interswitching is beneficial for grain and for moving cereals. Is it also beneficial for other commodities? Do you have any comments on that?

[Fiona Cook]

I can answer the latter part of your question about other commodities. It would be beneficial, but for the other commodities produced in western Canada, it would need to be extended even further. The limit wasn't extended enough for a large portion of fertilizer companies, or petrochemical companies, that operate in that area. We talk about 160, but for coming back to grain, ideally, we would like to see it go to 250, because then all the grain elevators would have access to an interchange. It definitely benefits other commodities, but longer distance would be required.

[Jean-Marc Ruest]

Regarding your first question, is it the only measure, I would say no, it's not. As I said in my comments, the issue that we are dealing with is the lack of competition. As a captive shipper, your ability to negotiate fair rates and a reasonable service that would otherwise be expected in a commercial relationship are absent because you don't have the ability to switch suppliers. The extended interswitching provides you with at least one of those tools, the ability to move to another competitor, so you create a regulatory legislative lease in that competitive marketplace.

The other part, as I mentioned in my comments, is the ability to negotiate service agreements, because rather than being under the constant threat of moving service, we would rather be in a position to negotiate service agreements that replicate what would be in a commercially negotiated competitive type of agreement. Those are the other types of provisions that we believe need to be provided.