Trains & Grain: on Track or off the Rails?

Thursday, February 20, 2020

While railways and the grain sector have experienced ups and downs together, both players hope they're on the right track now.

by Geoff Geddes

The relationship between Canada's railways and the grain sector, like any other relationship, has featured strong teamwork, periodic spats and nights when they both went to bed mad.

Still, the relationship has endured for over a century through good times and bad. Problems exist on some fronts, but why they exist, and how best to address them, depends largely on perspective.

"Since 95 per cent of the grain grown in Canada must be moved to an export or port position, both farmers and grain companies heavily depend on our two major railroads: CN and CP," says Mark Hemmes, president of Quorum Corp. in Edmonton.

"That dependence is what makes the relationship so important and often acrimonious," he says. "If you go back 140 years, you can find ongoing friction between railways and the grain industry throughout that period."

In June 2000, the federal government passed Bill C-34 (An Act to amend the Public Service Labour Relations Act and Other Acts) which prescribed several changes to the handling and transportation of Prairie grain. The following year, the government appointed Quorum Corp. as an independent third party to monitor the system's efficiency.

Mutual understanding between the railways and the grain sector, just like understanding between friends or family members, can be critical to success.

"It is vital that the railways understand our business and what reliable delivery of grain looks like," says Alanna Koch, a farmer and chair of the Global Institute for Food Security at the University of Saskatchewan. "It's also important that farmers recognize the value of railways and seek to engage them constructively. We have been talking at each other but need to start talking to each other."

Though relationships are a two-way street, some stakeholders feel that the unique nature of grain farming cannot be stressed enough to the railways.

"Those companies must appreciate that grain cannot move until harvest comes off and that we sometimes command a premium for grains and oilseeds in the fall and winter," says Wade Sobkowich, the executive director of the Western Grain Elevator Association in Winnipeg.

"We were challenged earlier this year by one of the railways on why we weren't moving more grain when they had unused capacity," he says. "The reason was simple: the grain was still in the field."

Low blows

One of the low points in the relationship between the railways and the grain sector occurred in 2013-14, when a rail backlog left farmers stranded with the bulk of a record-breaking crop.

Cold weather played a part, hampering braking performance and forcing trains to run more slowly as a result. Yet most observers pointed to a lack of rail cars, power and crews, complaining that railways lacked proper capacity and, consequently, had to cancel more than 60,000 grain cars worth of orders.

In 2017-18, another capacity shortage caused a backlog of 28,000 carloads of grain. That crisis coincided with the abrupt departure of Luc Jobin, CN Rail's president and CEO, in March 2018.

After the 2013-14 backlog, the federal government initiated a comprehensive review of the Canada Transportation Act. As a result, the government introduced Bill C-49, the Transportation Modernization Act.

In May 2018, Bill C-49 became law. The act aimed to forge a more reliable and predictable transportation system for farmers, exporters and international customers. Among other things, the act included new reporting requirements for railways to increase transparency and incentives to invest more in the supply chain.

"Bill C-49 paved the way for both major railways to reinvest in hopper cars," says Tom Steve, general manager of the Alberta Wheat Commission in Calgary. "That was a big step, as the hopper car fleet had been aging and was almost obsolete."

In May 2018, CN declared its intention to purchase 1,000 new cars from National Steel Car over two years to enhance an aging fleet. One month later, CP Rail announced plans to invest more than $500 million in new high-capacity grain hopper cars over four years.

Though the act allows grain companies to negotiate meaningful penalties with railways over their lack of performance, those agreements have not yet materialized.

"The other key feature was provision for long-haul switching," says Steve. "It would give competing railways the ability to run on another company's tracks for certain distances for a fee, but that still needs to be tested."

Can we talk?

Whether the issue is the backlog of 2013-14 or 2017-18, the CN Rail strike of November 2019 or something else, everyone concerned must communicate to achieve the best results.

"We're seeing the railways starting to have more dialogue with different sectors, which is promising," says Jeff Nielsen, a cereal farmer with 1,200 acres near Olds, Alta. "We need that interaction at all levels."

Producers like Nielsen often work arm's length with the railways, but he knows their role is crucial to his bottom line. If the grain he unloads at the elevator doesn't get to port, he may not be able to deliver grain the next time because the elevator could still be full.

"If I can't move grain off my farm, it affects my ability to pay bills, which then impacts the local community if machinery dealers and others are not getting paid," says Nielsen. "The railways are a vital supply line that we must keep open."

Consistent grain movement also affects Canada on a global scale. As a grain-producing nation, we face much competition from the U.S., Australia and, increasingly, countries of the former Soviet Union such as Russia and Ukraine. While our grain is world class, prompt delivery is essential to customer retention.

"If we have issues in getting grain to ports where other countries can pick it up, they will look elsewhere," says Nielsen. "After the delays in 2017, the message from our international clients was blunt: 'We can't keep waiting on you guys. The quality may be there but, if you can't get it to the terminal, too bad.'"

In response to calls for better communication, CN Rail recently established an agricultural advisory council in Western Canada that includes farmer representatives from Manitoba, Alberta, Saskatchewan and British Columbia. The council's mandate is to build stronger ties with producers and achieve greater understanding between the rail industry and grain sector.

"Our overarching role will be to ensure CN has a better understanding of the issues that matter most to farmers," says Koch, who also chairs the advisory council. "That could include everything from trade challenges and regulatory barriers to the need for transportation infrastructure investment."

Lights, camera, action

While talking is a good first step, it must lead to meaningful action.

"We appreciate the railways reaching out to producers for input, but what we really need to see are results," says Todd Lewis, president of the Agricultural Producers Association of Saskatchewan in Regina. "We're hoping the current backlog from the CN strike will be addressed soon, and we'd like to see a costing review of the MRE (maximum revenue entitlements for moving Western Canadian grain), which is long overdue."

Late last year, the Canadian Transportation Agency ruled that CN generated grain-related revenues of $788 million in the 2017-18 crop year and exceeded its MRE by just over a million dollars. CP also exceeded its MRE by about $1.5 million on revenues of $709.5 million. The Canadian Transportation Agency forced the railways to repay the excess revenue, along with a 5 per cent penalty on the excess amount.

Action is also needed to address congestion at some Western Canadian ports.

"Container traffic is steadily increasing at the port of Vancouver, so that is a continual challenge," says Lewis. "A lot of aging infrastructure needs upgrading to get grain moving more efficiently."

Perhaps the greatest factor in the health of the railway grain-sector relationship is one common to many businesses: customer service.

"It comes down to how well the railways are performing," says Sobkowich. "Are they offering enough capacity for the grain sector to move product when the world demands it? Within the last year leading up to the CN strike, service has been excellent from both CN and CP."

Sobkowich acknowledges that Transport Canada legally obliges the railways to produce annual grain plans.

"I can't recall when service was this good, this late in the year, so that takes some pressure off the parties and results in a better relationship," he says.

Of course, for any pairing to prosper, both sides must be committed to success, and CN appears to be a motivated partner.

"Two-way communication with all stakeholders in the supply chain is essential," says Sean Finn, CN's executive vice-president of corporate services and chief legal officer. "We need less finger-pointing and more collaboration. CN is not perfect, but we are making an effort to address industry concerns with elements like the advisory council.

"The more that all supply chain partners understand the gives and takes and constraints of each party, the better we can address needs and not impact Canada's competitive advantage in getting products to market."

Following the eight-day strike at CN Rail in November, which saw 3,200 of the company's conductors, train workers and yard workers leave their posts, Finn was pleased at how employees worked to restore service as quickly as possible. He also appreciated the patience of customers and looks forward to greater collaboration this year.

"Part of the advisory council is looking at where we have common ground," says Finn. "There is power in teaming up with industry and making the case to Ottawa to improve infrastructure in Vancouver and other ports we share. When we approach decision makers as a united front, we send a powerful message."

Despite some challenging times for railways and the ag industry over the last decade, encouraging numbers exist. In November, CP moved more Canadian grain and grain products than in any month in its history, and CN is setting a record pace in the 2018-19 crop year for the cumulative total of grain tonnage moved.

"CN invested $7.4 billion in its railways over the last two years, so we're heading in the right direction," says Finn.

The numbers may be reassuring for some people in the grain sector who share the belief in continuous improvement.

"We are always learning as a sector how to make the system better and what investments must be made to increase efficiency," says Sobkowich. "We won't grow the economy if we can't be certain of more rail capacity."

People in many industries – including potash, forestry and mining – all rely on rail service, he says.

If the 2018 departure of CN's president and CEO marked a low point, is the relationship now headed onward and upward?

"The relationship between the railways and farmer groups has improved dramatically since the spring of 2018," says Steve. "There were a number of years of bad blood after the 2013-14 backlog, but we now see open lines of communication with CN and CP. During the bad times, farmers wondered if the railways took them for granted, but we're seeing a sea change in that now."

Made to measure

You need to measure to ensure that progress continues, but some people note that you can't manage what you don't measure. Hemmes, who runs a measurement program for the grain industry, is squarely in that camp.

"Because you're dealing with two monopolies in CN and CP, greater transparency is essential," says Hemmes. "We need to understand performance metrics and see accountability by all parties when those metrics aren't met.

"For meaningful change in the railway-industry relationship, there must be massive shifts in perspectives and attitudes," he says. "But that is a game of inches, not miles." BF