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Bumper crop starved for market

Unfair to blame railways for outstripped capacity

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High commodity prices, marketing freedom and ideal weather created a record grain crop in Western Canada last fall. This challenged the grain-handling system to cope with a 25 per cent increase in shipping demand. Farm grain storages are full and piles of grain are stored on the ground under tarps. Country elevators are filled to capacity while ships are left waiting at the ports for grain to be delivered.

Fingers are being pointed at the federal government and at the railways for failing to provide sufficient transportation service to the bulk-handling system. Some commentators allege the movement of oil trains may be stealing rail capacity from grain shipments. There is even the suggestion of indifference; whether the railways move the grain now or later, they will still get paid.

The real problem is more prosaic; simply the lack of surge capacity to meet a peak load demand.

Grain transportation fits the classic peak-load demand model. In August, immediately after harvest begins, Prairie farmers start delivering grain to the bulk-handling system. The demand increases until a peak is reached around New Year's, when competing crops in the Southern Hemisphere become available. Subsequently, the volume of Canadian grain exports slows down until the end of the crop year in July; then the annual cycle begins again. This results in a peak shipping period from August to December and an off-peak shipping period from January to July.

The covered hopper railcar supply is comprised of railway-owned equipment and railcars that are provided free of charge by the Government of Canada for the movement of grain.

The railways' earnings for grain transport are limited by the revenue cap (RC). They may adjust freight rates higher to shift peak demand and improve asset utilization; however the total bill for all grain-car movements must be within the RC. If the railways charge more at one time, they have to give it back later in lower rates. Consequently, the freight rates can be characterized as flat.

During an average crop year, railcar peak demand is always in excess of the available supply of equipment, locomotives and crews. During the off-peak, part of the railcar fleet sits unused. Miles of empty railcars can be seen gathering dust on unused Prairie branch lines in midsummer.

If more railcars are acquired to serve the peak demand, then more railcars sit empty during the off-peak. The maximum economic number of railcars is always less than the peak demand, because the railways require a minimum utilization to maintain costs within the RC.

In most years, this works out reasonably well, although service complaints are inevitable during the peak demand because some shippers are never able to get all the cars they want, when they want them.

A bumper crop, like 2013's, accentuates the peak-load capacity problem. More covered hopper railcars could be purchased, but they last approximately 40 years. Unless this new level of grain production is sustained, buying more covered hopper railcars is uneconomical and inefficient.

What can be done? If it was only Canada that had a bumper crop, additional railcars could be leased from the U.S. railways. However, the U.S. grain-car loadings are running seven per cent above normal, at volumes not seen since 2010/11. No extra U.S. railcars are to be found.

Farmers could truck their grain to elevators across the border and access the U.S. system, but American farmers do not have the RC protection. The peak load demand is managed by letting prices rise. Any shipper that wanted an extra railcar during the fall would be paying a premium of $300 or more, on rail freight rates that are already higher than in Canada. Consequently, farmers are paid less for their grain and must bear additional administrative costs if they truck grain south of the border.

A third alternative is to use containers to ship grain. About 10 per cent of Canadian grain is exported in containers each year; mainly in equipment that is otherwise shipped back to Asia empty. Containers could help alleviate the pressure on the bulk-handling system, but are unlikely to make more than a small dent in the current problem. It is difficult and costly to reposition containers to the Prairies, and few grain-to-container loading sites have been developed.

During the fall, the railways were loading over 11,000 railcars of grain per week, which is above the average. It is unfair to blame the railways when the real problem is simply a surge in peak load demand created by an unusually large crop. It would be more productive to develop the ability to utilize more containers to provide surge capacity at times like these.

 

Barry Prentice is a professor of supply-chain management at the University of Manitoba.

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