There are very few factors which have impacted the grain markets in Canada as much as the rail car shortage in the Prairies this winter. While producers in Ontario and Quebec are far less reliant on railways to move their grain to market, the impact of those logistics challenges can still be felt here, but perhaps not in the ways that one might think.
By the end of February, the grain elevators in Western Canada were back ordered 51,000 grain cars since the start of November. At a typical payload of 90 tonnes per car, the short fall in rail car positioning effectively trapped 4.59 million tonnes of grain on Prairie farms which would have moved to market if the transportation had been in place to deliver it there. The lack of rail movement in the Prairies has resulted in unusual congestion in the ports. We have all seen pictures of the vessel line ups in Brazilian harbors due during their soybean harvest due to their poor infrastructure, but two weeks ago there were 37 grain ships waiting in Vancouver and 17 more lined up in Prince Rupert waiting for the grain to load them to arrive.
In addition to the obvious anxieties of farmers who can’t create cash flow because they can’t deliver grain, and the grain elevators who can’t do business because they can’t load grain, trapping stocks in the countryside is very bad for price. Markets rally when grain is scarce, and if the world can’t consume grain because it is held at origin, it gets tough to create scarcity. A great example of this is in the two major oilseed crops grown in North America. Since the fall, soybeans values have rallied, bulled up by incredible export movement and dwindling domestic stocks. Canola futures on the other hand have plummeted because the crop is not moving out, and every bushel of unrealized export business is a straight addition to ending stocks.
Last week when Federal Transport Minister Lisa Raitt, announced that the government would mandate the railways to place enough cars to ship at least 500,000 tonnes of grain per week off the Canadian Prairies, there was an enormous sigh of relief from the Western agricultural sector, but is it enough to solve the problem?
The situation is much like a log jam in a creek, which is holding back the spring run off. In order to get the markets moving, we have to let the flood waters get away. The requirement for 500,000 tonnes per week of grain movement is about double the pace of rail shipping which the industry saw in the coldest part of the winter. This would suggest that we could conceivably dig into the backlog of inventory at a pace of about 250,000 tonnes per week. At this pace it will take a minimum of 18 weeks to even get caught up, and the reality is that the current baseline shipping pace was not adequate to begin with. While it is fair to say that everyone is pleased with the federal government’s decision to act, the back log in shipping is now so big that it would appear that more than a quarter of the Prairie farmer’s 2013 crop will still be in his bins when the 2014 crop harvest begins.
There is a silver lining on this cloud if you are a grain producer in Eastern Canada. While the Western farmer has been unable to move grain, and forced to watch prices plummet while this goes on, for Eastern growers of crops typically supplied out of the West, there have been opportunities. In crops like oats, where the majority of the continental production is trapped in the prairie bins, demand for, and prices, of oats produced in other areas have super heated during the supply shortage. The same is true for rye, and canola basis levels in the East are firmer than would be typical as buyers worry about supply. If the rail-shipping situation begins to sort itself out, and supply lines can be restored, then cash values on these crops are certain to ease lower. As Prairie movement improves, Eastern cash values will not, and the market for these commodities will return to more traditional levels.