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This article was published 5/3/2014 (1267 days ago), so information in it may no longer be current.
Canada's grain-supply boom is turning into a bust for farmers as record harvests and railroad logjams make sales almost impossible.
Consider Dennis Gallant, 76. He has yet to collect one cent on the wheat, canola, barley and oats harvested last year on the 1,000-acre farm in Warren he has run since 1960. He has called the local grain elevator every 10 days since October. The answer is always the same. No thanks. We're full.
"This is crazy," said Gallant, who normally has unloaded half his crop by March. The delays mean $200,000 in lost revenue as prices slumped, and Gallant says he needs a $100,000 loan to cover expenses. "We're bloody strapped."
Four months after the harvest, the crush of new supply is overwhelming a rail system needed to get grain to export depots across Canada, the world's top canola and oat supplier and No. 2 shipper of wheat. A backlog of rail-car orders tops 60,000, eight times more than a year ago, boosting transport costs as most crop prices drop. The National Farmers Union estimates lost sales at $3.5 billion, and Agriculture Minister Gerry Ritz threatened mandates if railroads don't fix the problem.
Constraints in moving crops for Canadian Pacific Railway Ltd. and Canadian National Railway Co. have been exacerbated by an unusually frigid winter across the Prairie provinces and a surge in shipments of crude by rail in Canada, the top supplier of imported oil to the U.S. Grain companies halted purchases of some crops and pulled back on sales, prompting the biggest crisis for the industry since the government dismantled the grain-marketing monopoly of the Canadian Wheat Board in 2012.
Farmers collected more wheat, canola and corn in 2013 than ever before, and surges from multiple crops in the same season placed unprecedented pressure on rail lines that handle 95 per cent of Canada's output.
'We are many weeks behind in shipping, and we are paying vessel demurrage and contract-extension penalties on the sales in place right now'—Wade Sobkowich, executive director of the Western Grain Elevator Association
More than 60,000 rail-car orders wait to be filled by railways, compared with a backlog last year of 7,300, said Mark Hemmes, the president of Edmonton-based Quorum Corp., which was appointed by the federal government to monitor Canada's grain-transportation system. Railroads are allocating fewer grain cars in the Prairies, where most crops are stranded, he said. They plan to send an average of 3,800 per week, down from about 5,000 in late 2013, he said. Each car can carry 90 metric tons.
The delays have left more stockpiles of the two biggest crops than a year earlier. As of Dec. 31, wheat inventories were up 38 per cent at 28.31 million tons and canola jumped 55 per cent to 12.6 million tons, Statistics Canada data show. Reserves of coarse grains, including corn, barley and oats, increased 19 per cent.
"This is the highest backlog ever," said Wade Sobkowich, executive director of the Winnipeg-based Western Grain Elevator Association, which represents handlers including Glencore Xstrata Plc's Viterra unit and Richardson International. "We are many weeks behind in shipping, and we are paying vessel demurrage and contract-extension penalties on the sales in place right now."
As grain sits unsold, prices are dropping. Last year's record Canadian wheat crop of 37.5 million tons helped to expand the global surplus. World output will reach a record 708 million tons in the 12 months that end in June, the London-based International Grains Council said Feb. 27.
The price of wheat, Canada's biggest crop, is down 11 per cent in the past year to $6.245 a bushel on the Chicago Board of Trade, while canola in Winnipeg tumbled 30 per cent to $438 a ton. The Standard & Poor's GSCI Spot Index of 24 commodities rose two per cent in the past 12 months, while the MSCI All-Country World Index of equities jumped 15 per cent. The Bloomberg Treasury Bond Index fell 1.1 per cent.
Goldman Sachs Group Inc. predicts wheat will tumble to $5.75 in 12 months, analysts led by Jeffrey Currie said in a Feb. 12 report. Agricultural commodities will drop nine per cent during the next year, trailing only a 14 per cent drop for precious metals among projections for raw materials, Currie said.
Lower prices will contribute to a one per cent drop in domestic farm income to $53.4 billion in 2014, and crop receipts will slide three per cent to $29.1 billion, the government's Agriculture and Agri-Food Canada said Feb. 19.
Farm Credit Canada, the largest agricultural lender, sent letters to 16,000 farmers who may have trouble making payments, offering access to short-term loans, Remi Lemoine, executive vice-president and chief operating officer, said from Regina.
Applications for federal cash advances jumped to 12,500 from 10,000 a year ago because of the backlog, said Rick White, general manager of the Winnipeg-based Canadian Canola Growers Association, the largest administrator of the government loan program. Average loan requests were $130,000, up from about $105,000, and a record 650 applied for the $400,000 maximum because they can't sell their grain, he said.
"There's a lot of growers out there that have very little sold, and they just don't know what to do," said Jonathon Driedger, senior market analyst at FarmLink Marketing Solutions in Winnipeg. "The price has tanked, and they're having a tough time finding delivery space for it."
Harvest-season delays aren't unusual in Canada, and the effect on farm income probably will be limited, said Jerry Klassen, the manager of Canadian operations and trading in Winnipeg for GAP SA. "Farmers will have to get creative over the next few months with financing because of limited delivery opportunities, but eventually the grain will move," he said.
Growers also are in better financial condition than in years past. Farm debt of $72.63 billion in 2012, the most recent data available, was equal to 17.7 per cent of assets valued at $408.1 billion, down from 19 per cent in 2009 and the lowest in at least a decade, Agriculture and Agri- Food Canada figures show. The number of bankruptcies plunged to 46 in 2012 from 235 in 2005, government data show.
Railroads say backlogs will ease once the extreme cold subsides. Canadian National plans to allocate more than 4,000 rail cars a week when temperatures return to normal and is lining up crews and locomotives to send as many as 5,500 to country elevators once the Port of Thunder Bay reopens on Lake Superior, possibly in early April, Mark Hallman, a spokesman for the Montreal-based company, said in an emailed statement.
CN runs shorter trains when temperatures drop below -25 Celsius, boosting the need for more crews and slowing operations, Hallman said. The frequency and duration of extreme freezes across the Prairies and the northern U.S. have been "the most challenging," Hallman said.
"Our railway will be returning to levels from the heavy harvest period in the fall," said Ed Greenberg, a spokesman for Calgary-based Canadian Pacific.
That's not soon enough for Saskatchewan Premier Brad Wall, who called on the federal government to pass an emergency law to clear the backlog on rails controlled by Canadian Pacific and Canadian National. "We have a duopoly here," Wall said last week in Ottawa, after meeting with Prime Minister Stephen Harper. "There's two options, and the product's not moving."
With Canadian farmers expected to expand canola output by 40 per cent in a decade and global demand set to surge during the next 20 years, railroads will have to make changes or else the government will step in to mandate them, said Ritz, the agriculture minister.
"We need the shipping capacity for what we produce today and must establish the capacity for what we will produce tomorrow as well," he said at a Winnipeg conference last week.
Canada should amend the grain-revenue cap to give railways a greater incentive, according to the Western Canadian Wheat Growers Association. The Canadian Transportation Agency caps how much the companies can earn handling regulated grain.
In December, railways loaded 18,640 rail cars with wheat, down from 23,283 in November, the most recent government data show. Fuel oils and crude petroleum were loaded on 16,031 rail cars in December, up from 15,672 in November. Expanding output from Canadian oilsands and pipeline bottlenecks are boosting demand for rail shipments and calls for improved safety, after a July derailment in Lac-Mégantic, Que., killed 47 people.
Shipments of grain will be 11 weeks behind schedule if railways continue allocating grain cars at current levels, Sobkowich said. Prairie elevators are at capacity, and some companies have told farmers they will not be able to take deliveries of grain until late spring or early summer, he said.
The delays are affecting sales. Japan bought 46,849 tons of U.S. wheat Feb. 6 as an alternative to Canadian supply. The Asian nation will probably need to depend more on American wheat as the bottlenecks continue, said Nobuyuki Chino, president of Continental Rice Corp. in Tokyo.