CANADIAN TRANSPORTATION AND GRAIN HANDLING: ISSUES AFFECTING THE NORTH AMERICAN BARLEY SECTOR

Transcription

1 Agricultural Economics Report No. 427 September 1999 CANADIAN TRANSPORTATION AND GRAIN HANDLING: ISSUES AFFECTING THE NORTH AMERICAN BARLEY SECTOR Joon J. Park William W. Wilson D. Demcey Johnson Department of Agricultural Economics Agricultural Experiment Station North Dakota State University Fargo, ND

2 ACKNOWLEDGMENTS The authors thank Denver Tolliver, John Bitzan, and George Flaskerud for constructive comments, and Carol Jensen for preparing the manuscript. All remaining errors are the author s responsibility. Funding for this research was obtained from the North Dakota Barley Council, and through a cooperative agreement with the Economic Research Service of USDA, entitled Government Intervention in the Canadian Barley Sector and Its Influence on Trade, #43-3AEK We would be happy to provide a single copy of this publication free of charge. You can address your inquiry to: Carol Jensen, Department of Agricultural Economics, North Dakota State University, P.O. Box 5636, Fargo, ND, , Ph , Fax , cjensen@ndsuext.nodak.edu. This publication is also available electronically at this web site: NOTICE: The analyses and views reported in this paper are those of the author. They are not necessarily endorsed by the Department of Agricultural Economics or by North Dakota State University. North Dakota State University is committed to the policy that all persons shall have equal access to its programs, and employment without regard to race, color, creed, religion, national origin, sex, age, marital status, disability, public assistance status, veteran status, or sexual orientation. Information on other titles in this series may be obtained from: Department of Agricultural Economics, North Dakota State University, P.O. Box 5636, Fargo, ND Telephone: , Fax: , or cjensen@ndsuext.nodak.edu. Copyright 1999 by Joon J. Park, William W. Wilson, and D. Demcey Johnson. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

3 TABLE OF CONTENTS Page List of Tables... i List of Figures...ii Abstract... Highlights... iii iv I. Introduction... 1 II. Background... 1 A. Malting Barley... 4 B. Feed Barley...12 III. Transportation Mechanisms and Issues A. Rail Rates...13 B. Railcar Ownership C. Railcar Allocation Current Mechanism D. Cost Pooling E. Grain Trucking IV. Grain Handling A. Handling Costs B. Cleaning Regulations and Practices C. Export Logistics V. Rationalization A. Primary Elevators B. Efficiency C. Abandonment of Rail Branch Line and Short Lines VI. Current Policy Issues in Canada A. Rail Deregulation B. Trucking C. Port Buying VII. Implications for Barley Trade A. Changes in Grain Handling B. Reciprocal Access to Marketing Functions C. Elimination of Rate Caps...39 D. Likely Paths for Estey s Recommendations References...42 Appendix A - Cross-border Barley Movements Appendix B - Manitoba Truck Types...46

4 LIST OF TABLES Table Page 1 Structure of Grain Handling and Transportation in the Canadian GHTS Regulatory Structure of the Canadian GHTS Structural Comparisons in Grain Handling (Country Elevation) Handling Cost Comparisons between Canada and the United States Wheat or Barley Cleaning Costs and Returns for Canadian and U.S. Elevators Some Known Inefficiencies in Western Canadian Grain Handling & Transportation U.S. Grain Through Canada In-transit Program as of Week of May 12, Costs of Representative Barley Shipments...40 LIST OF FIGURES Figure Page 1 Physical Elements of Canadian Logistics System and Average Time Load of Canadian Grain Clearances of Canadian Bulk Grain by Port Areas Barley Trade Flows Between the United States and Canada Canadian Barley Supplies Canadian Barley Disposition Canadian Barley Disposition by Markets Canadian Bulk Barley Exports by Areas Canadian Malting Barley Exports by Areas Canadian Railcar Allocation Zones by Railways Canadian Railcar Allocation Process The Canadian Rail and Trucking Rate Functions Truck Rates Comparison between Canada and the United States The Canadian Grain Handling & Transportation and Logistics Chain ii

5 ABSTRACT The Canadian grain handling and transportation system has undergone substantial change in recent years, particularly since the elimination of rail subsidies in Competitive pressures and branch line abandonment have forced many primary elevators to close, while scores of new highthroughput elevators have been constructed across the Prairies. Rationalization of the grain handling system and proposals for further deregulation of rail transportation are driven by the need to improve system efficiency. Policy recommendations of the Estey Report notably, the elimination of rail rate caps, and port buying by the Canadian Wheat Board would have important consequences for the grain trade and are contentious issues within Canada. Changes in grain handling, reciprocal access to marketing functions, and elimination of rate caps may have a significant impact on cross-border barley flows. Key words: grain handling, transportation, barley, Canadian Wheat Board, regulatory reform, rationalization. iii

6 HIGHLIGHTS The Canadian grain handling and transportation system is undergoing substantial change. Rationalization is underway in the grain handling system, and major reforms are proposed for the rail system and logistical functions of the Canadian Wheat Board (CWB). These changes could have important implications for barley marketing within North America. The CWB acts as single-desk seller for all western-grown wheat and barley for human consumption (e.g., malting) or export. The CWB plays a key role in getting its grain to port positions, but does not own or operate any elevators. The overall performance of Canada s grain transportation and handling system is heavily influenced by the CWB, which accounts for over 60 percent of all grain shipments. Railcars are now allocated to grain companies through an administrative mechanism in which the CWB plays a major role. Logistics costs are the largest input cost for grain and are typically in the range of Cdn$60-80 per ton. Large volumes (around 27 million tons) are exported each year, originating at various production points across the Prairies. Rising Asian demand has made Vancouver and Prince Rupert the major export ports (61 percent of bulk grains, 56 percent of bulk barley, and 37 percent of malting barley). While there are strong similarities in climate, geography, cropping patterns, markets and even ethnic origins, Canada and the United States have developed very different grain handling and transportation systems. There is more intense competition in key elements of the U.S. system. This competition has led to a large number of efficiency incentives to improve service and realize operating savings. The Canadian grain handling and transportation system is undergoing a transition from a highly regulated system characterized by inflated costs, to a more competitive system in which firms are forced to adopt more efficient practices. In recent years, Canadian grain companies have increasingly offered trucking premiums to farmers. Trucking premiums offer elevators a way to encourage deliveries from greater distances, increasing total volume. Such practices are an important competitive tool, particularly for procurement of board grains. Although most grain cleaning occurs at export terminals, there has been an increase in grain cleaning at interior elevators. Freight rates for grain movements to ports are no longer subsidized, and the cost borne by shippers has increased significantly since By cleaning grain at interior locations, savings are realized on freight costs. Grain companies have also constructed high-throughput elevators on the Prairies with capacity for cleaning grain to tight export standards. In Canada, several grain marketing functions are discriminatory with respect to country of origin. These include access to lower regulated rail rates, access to railcars (in terms of both ownership and control), and regulations concerning testing and segregation of inbound grain. In contrast, functions performed in the U.S. marketing system are nondiscriminatory. U.S. railroads are common carriers and iv

7 licensed U.S. elevators are public warehouses; as such they must offer the same services to all customers. Reciprocal access is likely to remain a thorny issue in U.S.-Canada trade relations. To improve efficiency in Canada s grain handling and transportation system, a process of rationalization is underway. The closure of many primary elevators and abandonment of railroad branch lines are closely related. High-throughput elevators are being built across the Prairies, and the number of elevators is decreasing. The Canadian grain industry is heavily dependent on efficient rail service to compete in world markets. Rail transportation is the largest single cost in the production, handling, and movement of grain to export ports. There has been growing concern about the efficiency of the logistics system. For these reasons, grain producers have an important stake in proposed regulatory reforms. Among the recommendations of the Estey Report were elimination of rail rate caps for grain, and port buying by the CWB (which would mean an end to the CWB s role as logistical coordinator). Impacts of such deregulation on cross-border flows of barley are difficult to anticipate. It is possible (but not assured) that, with elimination of rate caps, costs of shipping to West Coast ports will increase, and flows to U.S. destinations will become more attractive. v

8 CANADIAN TRANSPORTATION AND GRAIN HANDLING ISSUES AFFECTING THE NORTH AMERICAN BARLEY SECTOR Joon J. Park, William W. Wilson, and D. Demcey Johnson * I. INTRODUCTION The Canadian grain handling and transportation system is undergoing substantial change. The transition is from a highly regulated system in which high cost handling practices are protected, to a more competitive system in which firms are forced to adopt more efficient handling and shipping practices. Numerous factors are contributing to these changes, and the result is a highly dynamic competitive process with important implications for commercial policies. This study provides an overview of Canada s grain transportation and handling system, with particular reference to barley and North American trade. Salient features of the system are identified and described, and issues of current policy interest are summarized. The objective of this study is to provide a description of important institutional features and trade practices, as well as background on recent and prospective policy changes. Where possible, the likely impacts of institutional features and policies on barley trade are indicated. The paper is organized as follows. The second section provides some background on the Canadian barley sector and reviews some previous studies that have focused on barley trade and logistics. The third section describes important features of the Canadian grain transportation system, and the fourth discusses grain handling. The fifth section provides an overview of the rationalization process in Canada i.e., rail line abandonment and reduction in the number of elevators. The sixth section provides a short survey of the major policy issues now confronting Canada with regard to grain transportation and handling. The paper concludes with a discussion of implications for continental barley trade and U.S. barley producers. II. BACKGROUND Two main areas produce grains and oilseeds in Canada: the Prairies, including Alberta, Saskatchewan, Manitoba, and the Peace River district of British Columbia; and Ontario and Quebec. The Prairie provinces, which are the largest grain and oilseed producing region in Canada, accounted for 82 percent of total farm cash receipts in this agricultural sector in This region produces wheat, oats, barley, canola, rye, and flaxseed. Ontario and Quebec are Canada s major producers of corn and soybeans. Wheat, including durum, and winter and spring wheat, is the number one crop produced in Canada and accounted for more than 45 percent of total production in However, a decrease in the number of planted acres has been observed in the last decade due to an increase in the * Research Associate, Professor, and Associate Professor, respectively, in the Department of Agricultural Economics, North Dakota State University, Fargo.

9 production of other grains and oilseeds, particularly canola. The second largest crop in Canada in 1996 was barley at 24 percent of total production followed by corn at 11 percent. Canola, which was barely grown 20 years ago, was the fourth largest crop in the country in 1996 and accounted for 8 percent of total grains and oilseeds production. Canola is a high-valued crop. In 1996, canola generated C$1.9 billion, or 21 percent of total grains and oilseeds receipts. Other crops which accounted for the remainder of Canada s production in 1996 include oats at 6.5 percent, soybeans at 3 percent, and flaxseed at 1 percent. (CFA, 1998, p.6). The Canadian Wheat Board (CWB) acts as single-desk seller for all wheat and barley for human consumption (e.g., malting) and export. All other grains and grain products are marketed competitively by grain companies, cooperatives, and producers. The CWB plays a key role in getting its grain to export port positions, but does not own or operate any elevators. The CWB relies on grain companies and cooperatives, acting as its agents, to handle its grains from the point of origination to export. The overall performance of Canada s grain transportation and handling system is heavily influenced by CWB, which accounts for over 60 percent of all grain shipments. Because grains and oilseeds are transported long distances in order to reach export points, producers are highly dependent on rail transportation. Before August 1, 1995, policies were in place to subsidize grain transportation charges and guarantee protection against railway non-performance. However, the Western Grain Transportation Act (WGTA), which set freight rates along with service and infrastructure levels, was removed in 1995, resulting in an immediate doubling of freight charges paid by producers in some areas. 1 Furthermore, the removal of the WGTA also meant the removal of most restrictions on branchline abandonment. The transportation of grains and oilseeds in Canada is currently under review. The first phase of the review has now been completed with release in December, 1998 of the final report of the Estey Commission. (Numerous references to the Estey report will be made in later sections.) Canadian grain spends an average of 68 days in the logistics pipeline from the farmer s bin to port position (40 days in storage at the country elevator, 12 days in transit to the port, and 16 days in terminal elevator storage) (Figure 1). There is considerable variation about this 68 day average, particularly in the lead time from ordering cars for loading and unloading time at export ports (WESTAC, p.9). Uncertainty in lead times makes planning and management difficult for all system participants (farmers, grain companies, railways, CWB, and federal and provincial governments). Logistical uncertainties also affect customer perceptions about the reliability of the Canadian system. Canada s handling and transportation system has been identified by importers as a significant disadvantage (McKinsey, p. 13). 1 Between and crop years, weighted average deductions from farmers for freight increased 146, 118, and 153 percent for wheat, durum, and barley, respectively (CWB, Statistical Tables, p.18). 2

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11 Logistics costs are the largest input cost for grain and are typically in the range of $60-80 per ton (WESTAC, 1998). Large volumes (around 27 million tons) are exported each year, originating at various production points across the Prairies. The St. Lawrence Seaway route through Thunder Bay was once the main grain export route. Rising Asian markets have made Vancouver and Prince Rupert the major export ports (61 percent of bulk grains, 56 percent of bulk barley, and 37 percent of malting barley) (Figure 2 ). Figure 3 shows barley trade flows between the United States and Canada. The rectangular boxes in the middle of Figure 3 represent the countries of origin for barley shipments, and the ovalshaped boxes represent the domestic and offshore markets. A. Malting Barley In Western Canada approximately 70 percent of total barley acreage is seeded to malting barley varieties. The remaining 30 percent is seeded to varieties suitable for livestock feed only. Tworow varieties with a yellow aleurone are seeded on two-thirds of the malting barley area in Western Canada. Six-row malting barley varieties are seeded on the remaining one-third of the area (CWB, Grains from Western Canada: Wheat & Barley, p.16). During , Canadian barley supply averaged around 16 mmt (Figure 4). Disposition of the crop is shown in Figures 5 and 6. Canada exported 3.2 mmt of bulk barley, on average; major destinations were Asia, the United States, and the Western Hemisphere (Figure 7) (CWB, Statistical Tables, p.18). Malting barley is sold on the basis of buyer specifications (type of barley, required germination level, maximum protein content, minimum variety purity, degree of kernel plumpness, maximum tolerances for damaged kernels and other quality factors). If the sample is acceptable, the farmer is asked to deliver the barley when needed for shipment. The Canadian Grain Commission (CGC) grades the barley and also provides analysis on the export vessel to confirm that it meets contract specifications (CWB, Grains from Western Canada: Wheat & Barley, 1998). Canada supplied 1.3 mmt of malting barley to the world market, on average, during 1994 to Major destinations were the United States, Asia, and the Western Hemisphere (Figure 8) (CWB, Statistical Tables, 1998). 2 Marketing of malting barley begins with a selection process involving a malt user such as a domestic maltster or a CWB accredited barley exporter. Selection is done by the malt user, not by the CWB or the CGC. The CWB handles the process of delivering barley and gives a permit to the elevator company to allow designated barley delivery when a barley sample is determined to be acceptable for malting (Alberta Agriculture, Food And Rural Development: ). In the crop year, the United States imported 26.1 million bushels of Canadian designated barley, a record level ( ). 2 For additional background, see D. Johnson, Grain Quality in the Canadian Barley Sector: A Review of Regulations, Industry Practices, and Policy Issues. 4

12 Figure 2. Clearances of Canadian Bulk Grain by Port Areas (Thousand Ton) 4-Year Average ( ) 10-Year Average ( ) Total Export: (26734)* 5 Prince Rupert/Vancouver 61% (62%) (16490) Churchill 1% (1%) 274 (288) Thunder Bay 28% (31%) 7495 (8422) U.S. 10% (6%) 2663 (1534) Source: CWB *Numbers before and within parentheses indicate 4-year average and 10-year average, respectively

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14 Figure 4. Canadian Barley Supplies (Thousand Tons) % % % 7 Thousands 10 Production Commercial Farm % % 13% % % %

15 Figure 5. Canadian Barley Disposition (Thousand Tons) 8 Thousands % % % % % % % % 0 4-Year Average Total Outward Carryover (July 31st) Exports Barley & Barley Products 10-Year Average Disappearance Commerical Domestic Farm

16 Figure 6. Canadian Barley Disposition By Markets (Thousand Tons) Farm = 6904 (6543) 44.9% (43.9%) Commercial = 2811 (2198) 18.3% (14.7%) Carryover = 2516 (2724) 16.4% (18.3%) Domestic Total= (11465) 79.5% (76.9%) 4-Year Average ( ) 10-Year Average ( ) Total Barley: (14907)* Barley products are excluded Europe 6 (419) 0.03% (2.8%) 9 Asia 1772 (2217) 11.5% (14.9%) Oceania 17 (7) 0.1% (0.05%) Africa 23 (25) 0.1% (0.2%) Western Hemisphere 137 (120) 0.9% (0.8%) Total Barley: (14907) Malt Barley Equivalent: 483 (358) Grand Total: (15265) U.S (655) 7.8% (4.4%) *Numbers before and within parentheses indicate 4-year average and 10-year average, respectively.

17 Figure 7. Canadian Bulk Barley Exports by Areas (Thousand Tons) 4-Year Average ( ) 10-Year Average ( ) Total Exports: 3158 (3442)* Barley products are excluded Europe 6 (419) 0.2% (12%) 10 Asia 1772 (2217) 56% (64%) Africa 23 (25) 0.7% (0.7%) Oceania 17 (7) 0.5% (0.2%) Western Hemisphere 137 (120) 4% (3.5%) Total Barley: 3158 (3443) Malt Barley Equivalent: 483 (358) Grand Total: 3641 (3801) U.S (655) 38% (19%) *Numbers before and within parentheses indicate 4-year average and 10-year average, respectively.

18 Figure 8. Canadian Malting Barley Exports by Areas (Thousand Tons) 4-Year Average ( ) 10-Year Average ( ) Total Export: 1267 (797)* Asia 450 (306) 36% (38%) Europe 4 (9) 0.3% (1%) 11 Africa 5 (2) 0.4 (0.3%) Oceania 11 (4) 1% (0.5%) Western Hemisphere 115 (95) 9% (12%) Source: CWB *Numbers before and within parentheses indicate 4-year average and 10-year average, respectively. U.S. 682 (381) 54% (48%) 11

19 B. Feed Barley Canada Western feed barley accounts for a large share of domestic feed grain use, particularly on the Prairies where livestock numbers have increased sharply in recent years. Canada also produces hulless barley for feed and food use. Barley is the major feed grain in Canada. Of the million tons (55.2 to 64.4 million bushels) of barley grown in Canada each year, about half is produced in Alberta. Alberta produces an average 6 to 7 million tons of barley a year, surpassing other grains and oilseeds production. About 2 million tons of barley are shipped by rail to Thunder Bay or Vancouver for export. The other two-thirds, about 4 million tons per year, stays in Alberta where it is fed to cattle and hogs. Of the portion of barley that stays in Alberta, about 70 percent is fed to cattle, 24 percent to hogs, and the remainder to poultry. Within Alberta, however, there is an asymmetry between where the barley is produced and where it is consumed. Barley production is concentrated on the northern portion of the province. The cattle feeding industry is concentrated in the south. The hog industry is centered around Edmonton. As a result, large amounts of feed barley are shipped from north to south. (Alberta Agriculture, Food And Rural Development: ). In total, 57.5 million bushels of feed barley were produced in Western Canada in the crop year, down from 69 million bushels in due to a drop in barley acreage. As Canadian domestic feed barley demand has increased because of growth in the Canadian hog and beef industries, total exports of Canadian feed barley have dropped substantially. ( ). III. TRANSPORTATION MECHANISMS AND ISSUES The Canadian rail system is dominated by two rail carriers: the Canadian National (CN) and Canadian Pacific (CP). CN, formerly owned by the federal government, was privatized in Both carriers have major lines with an east-west configuration, facilitating shipments of grain from Prairie locations to Pacific ports (Vancouver or Prince Rupert) or the Great Lakes and St. Lawrence Seaway. The main CP lines are generally south of the CN lines in the Prairies. Both carriers also have rail lines or hauling rights in the United States. CP, through ownership of the former Soo Line, has lines through North Dakota, Minnesota, and Wisconsin, giving it direct access to major U.S. consumption points for malting barley. The Canada Transportation Act (CTA) of 1996 made it possible for new shortline railways to be formed; however, these are in an early stage of development and do not diminish the relative importance of CN and CP in grain transportation. Concerns about the market power of the two main carriers have been raised in discussions about the removal of rate caps (see below). 12

20 A. Rail Rates While the National Transportation Act (NTA) of 1987 and the CTA of 1996 deregulated most railway movements in Canada, western grains remained an exception. Rate caps apply for grain movements; these are generally cost-based and related to distance. The Canadian agricultural industry is heavily dependent on efficient rail service to compete in world markets. For grains, the long distances of the Prairies from major export ports and the bulky nature of the products give rail an inherent advantage over trucking. The logistics environment has been strongly influenced by rail rate regulation dating back a century (Crow Rates) and centralized, government-controlled marketing. Canadian grain shippers have been treated differently than other shippers because of the long distances to markets, the bulky nature and the relatively low value of the product, absence of alternative modes of transportation such as the Mississippi river system, widely dispersed shipping points, and presence of only one serving railway at many locations. Changes in the WGTA (Western Grain Transportation Act) increased rail shipping costs paid directly by shippers (previously, a portion was paid directly by the government of Canada to the railroads). The rail freight tariff regulation which had governed the movement of all rail freight for more than a century was repealed in 1988 and now all movements in Canada, other than western grain, are based on rates established by contracts between the railway and the shipper. Western grain was regulated under the Crow Rates and later the WGTA. Since the WGTA had been repealed in 1995, railway freight rates for western grain have been regulated by tariff freight rates governed by a rate cap (Estey Final Report, p.30). The rate cap is the maximum rate which may be recovered by the railway for grain movements over 25-mile blocks and is used by the railways to develop freight rates for each of the possible origin/destination pairs on the western rail system (Estey Final Report, p.30). The rate cap applies to both non-board grain and Board grain on all rail lines west of Armstrong, Ontario, excluding rail lines leading to export destinations in the United States. The British Columbia Agricultural Council has drawn attention to the fact that while the rate cap applies to the transportation of feed grains to the export market, it does not apply to the transportation of feed grain for Canadian domestic use. Since the advent of the rate cap, freight rates for western grain have risen 9.3 percent as of the crop year. These rates fell back slightly for the crop year (Estey Final Report, p.30). The significance of freight rates to the western farmer is clear, since transportation by rail is the largest single cost in the production, handling, and movement of grain to export ports. For example, in recent years rail transportation represented about 40 percent of all the cost of production, handling, and transportation of wheat from the farm to the offshore customer s location (Estey Final Report, p.30). 13

21 B. Railcar Ownership During the period 1972 to 1986, the Canadian federal government acquired 14,000 hopper cars for the grain handling fleet in Western Canada. During the same period, the CWB acquired, by purchase and long-term lease, 4,000 hoppers cars, and the provinces of Alberta and Saskatchewan acquired another 2,000 cars for the same purpose. These cars are provided to the two railways, CN and CP, in about equal numbers and are used, with some exceptions, entirely for hauling grain to domestic and foreign buyers. Since the cars are provided to the railways without charge, the cost base of the current regulated rate scale does not reflect any allowance for the ownership cost of these cars (Esty Final Report, p.27). When the Canadian federal government announced in February of 1995 that the WGTA was to be abolished, it was also announced that they intended to sell the fleet of 13,000 hopper cars that they had acquired over the previous two decades. Producer groups have indicated that the hopper cars should be sold to them rather than to the railways. On March 1996, it was announced that the railcars were available for sale. Any party purchasing the cars must make appropriate operating arrangements before the party s bid will be considered. The purchasing group would be awarded a $0.75 per ton surcharge on grain shipments by the total car fleet for an indefinite period of time to help offset the annual cost of owning the cars, beginning with the crop year (Vercammen et al., 1996). The potential sale of the 13,000 hopper cars owned by the government of Canada raised ownership issues in 1998: to whom should these cars be sold in the interest of efficient transportation service? An organization owned and controlled by producers formed a coalition to express an interest in purchasing these cars. Ownership of cars would allow producers to enter into policy discussions concerning the employment of hopper cars. Other stakeholders have expressed their view that ownership of cars does not have much, if any, influence on the actual operations of the car allocation system. The desire to acquire these cars is strongest among producer groups (Estey, 1998). Vercammen et al.(1996) discussed car ownership by producers, concluding: Producers will benefit from car ownership if, as a result of their ownership, they are able to negotiate lower freight rates for grain movements. This scenario has important implications if the current freight cap is abolished as a result of the 1999 review of the current legislation. The extent to which a producer railcar coalition would be effective when bargaining with the railways is highly uncertain. 14

22 C. Railcar Allocation 3 Car allocation is an important part of the Canadian grain transportation system because for some portion of every crop year there is a transportation capacity constraint. Usually in a non-rate regulated system, rates determine rail demand and supply. However, in the Canadian grain transportation system, non-price mechanisms allocate the limited transportation services among those who demand them. Car allocation policies have changed numerous times during the last few decades roughly as follows. Pre 1969 Bulk allocation 1969 Block shipping Train run allocation Space cars June % Performance allocation November % Performance allocation September 1998 Zone allocation In October 1998, the CWB moved from a train run allocation system, based in handling percentage and performance, to a zone allocation system. Under the new system, the CWB allocates to a wider geographic area instead of allocating railcars to the grain companies along one piece of train track. For clarity, the following terms are explained: CWB Grains: Non-Administered Grain: Non-Board Grains: Producer Cars: Principal Grains: NBA: wheat, durum, barley, designated barley for CWB (export and domestic). Rye, flax, special crops (all other grains not defined as CWB or Non-Board grains). Oats, canola and non-board feed wheat and barley (export and domestic). Railcars authorized by CWB and/or CGC basis individual producer applications. Wheat, durum, oats, barely, rye, flax, and canola. Non-Board Allocation Officer responsible for the allocation of oats, canola, non-feed grains for CN/CP. 3 This section is a survey of material contained in, CWB, Grain Matters, Zone Allocation, and Car Allocation ,

23 Wilson and Dahl describe Canadian railcar allocation as follows: Railcar allocation in Canada is highly administrated based on past shipping practices. One important distinction is between the allocation of cars for shipment of CWB grains versus non- Board commodities. CWB cars are allocated by the railroads for movements of CWB grains, and those cars are allocated by the CWB to its designated shippers and train runs for the movement of CWB grains. The other portion is allocated by the CAPG (Car Allocation Policy Group, a temporary mechanism to replace a previous regime called the Grain Transportation Authority) as non-board allocator, for the movement of non-board grains (i.e., for movements not controlled by the CWB). Normally, these are oats, canola, etc., but would also include any shipment of U.S. grains to or through the Canadian grain marketing system. Thus, allocation of railcars in Canada for shipment of U.S. grain would affect the viability of trade flows to the extent that there are differences between CWB and non-cwb grains. This is in contrast to U.S. railroads which do not distinguish country of origin in allocation of cars, i.e., Canadian shippers have equal access to U.S. railcars through tariff and contractual allocation mechanisms. (Wilson and Dahl, pp. 8-9). 1. Current Mechanism In November 1995, the senior executive officers of the grain industry developed a proposal to suggest that the CWB allocate railcar orders by zone rather than train run and that run programming be transferred to the railways. In October 1998, zone allocation replaced the previous train run allocation system. Under the old system, the CWB allocated its share of the total car supply to grain companies along one piece of train track, known as a train run. Under the zone allocation system, railcars are allocated to zones which are larger geographical areas comprised of 10 to 20 train run (Figure 9). Within theses areas, the elevator companies, not the CWB, decide which elevators will receive railcars for loading. The CWB retains its critical role in transportation and still ensures the right grain gets to the right place at the right time to meet sales requirements. Zone allocation is designed to provide the opportunity for system efficiencies resulting from direct hits and reduced cycle times to be passed on to farmers through cost reduction and incentives (CWB, Zone Allocation, 1998). In Canada, there are currently over 200 train runs. These are grouped into 12 zones, 7 on CN and 5 on CP. At the same time that industry moved to zone allocation, the railways assumed responsibility for train run programming. This function has been traditionally performed by the CWB and involves combining all CWB and non-cwb orders into a finalized loading plan. Under railway train run programming, grain companies negotiate weekly rail service directly with the railways for both CWB and non-cwb grains. With this change, grain companies and the railways have greater control of their assets and the railways take greater responsibility for directional and other efficiency movements. Figure 10 shows a graphical representation of the car allocation process. 16

24 Figure 9. Canadian Railcar Allocation Zones by Railways 17 Source: CWB

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26 D. Cost Pooling Historically, the Canadian grain transportation system has been shaped by several objectives (CWB, 1995): C All farmers should have equal access to the market and the transportation system. C All farmers should receive the same price for the same type and grade of grain. C All farmers should pay equal per mile rail costs regardless of where they are located or the type of grain they ship. In Canada, all costs of marketing Board grains are aggregated and deducted from total sale revenue. Practically, the pooling of costs is inseparable from the pooling of sale prices, yet some implications of cost pooling are worth drawing out. Although transportation differentials figure into the final prices received by producers in different locations, these bear no necessary relationship to actual shipment patterns. Unlike in the United States, where values of grain adjust instantaneously to changes in sale prices and shipping costs to the market that the grain is shipped, in Canada the pooling mechanism masks the values (costs and prospective returns) for individual transactions. Consequently any costs associated with inefficient grain movements are absorbed by all Canadian producers who sell through the CWB. This is clearly viewed as a problem in CanadaSconcerns about systemic inefficiencies underlie the controversy about whether the CWB should retain its single seller status. With losses on individual transactions obscured through cost-averaging, it is harder to gauge the fairness of Canadian sale prices. (For that matter, it is hard for Canadian producers to know the value of their grain in terms of current sale opportunities.) If marketing costs for Board grains are inflated, the effect may be to accentuate the gap between U.S. and Canadian producer prices, creating greater incentive for crossborder arbitrage (Johnson, 1998). E. Grain Trucking In recent years, elevator companies have increasingly offered trucking premiums to attract certain farmers who want to offset part of the cost of transporting grain by road. Trucking premiums effectively offer elevators a way to offer different tariff rates to different farmers for the purpose of increasing their grain volume. This is accomplished by targeting trucking premiums to farmers in some specific part of their market area (Vercammen et al., 1996). Farmers truck their grain to stations so as to maximize their net return. When grain companies offer competitive financial incentives to farmers to deliver grains to specific locations, companies and local elevators and/or terminal grading practice can change the relationship in the country between road and rail transportation and the distance over which trucks are competitive with railways. The growth in the Alberta feeding industry creates more demand for feed grains with truck transportation. These factors affect the competitive framework for grain handling in Canada. 19

27 In Canada, the farm trucks are larger than the older two axle, ten ton farm truck. The newer hopper trucks travel further, pull large trailers, have more axles, and carry more grain. Many major grain companies offer trucking premiums to attract more grains to their company. These premiums have ranged from $2 per ton to as high as $5 per ton, depending on grade, quality, and location and market condition at specific times of the year. Figure 11 shows trucking has a cost advantage within 112 miles against rail (before premium), and the distance can increase to 160 miles, 185 miles, and 235 miles with $2, $3, and $5 trucking premiums, respectively (Parsons, 1998). 4 Based on Canada s current infrastructure, approximately 85 percent of grain delivery points are within 50 miles of a competing railway. It has been suggested that trucking premiums and a large scale trucking program could be implemented that would move grain between Canadian National (CN) and Canadian Pacific (CP) and even to the main east-west Burlington Northern and Santa Fe (BNSF) line which lies just south of the U.S. border (CGC, Industry Update, August 6, 1997). Large grain companies have the ability to truck between competing railways. Thus, the grain company may act as a competitive intermediary between the farmer and the railway. Trucking between elevators within a single company has become a routine activity in order to access the multiple car loading efficiencies railways offer at the most efficient locations. Trucking is, therefore, a part of a large number of economic activities that have direct and indirect effects on the competitive environment. Seven forms of competitive activity related to the markets for grain handling and transportation in the Prairies were identified by Parsons (pp.22-3): C grain company trucking premiums; C access to more grain companies at delivery destinations; C access to more railways by farmer and grain companies; C lower railway incentive rates at high through-put locations with multiple car loading facilities; C access to U.S. railways and grain companies by trucking across the border; C grain company trucking between railways; and C delivering by truck to alternative uses for export grain within the Prairies. Opportunities for cross-border arbitrage will be heavily influenced by changes in transportation rates. Direct cross-border shipping has become more feasible. It is performed by trucks and rail, with loading at handling facilities located near U.S. border points. This includes the joint ventures between Alberta Pool and General Mills at Sweetgrass and the venture between Saskatchewan Wheat Pool and General Mills at Northgate. 4 See Parsons pp.3-4 for a more detailed discussion and a trucking cost function. 20

28 Figure 11. The Canadian Rail and Trucking Rate Functions Price per Ton (C$) Truck Rate Truck Rate with C$5 Trucking Premium Rail Rate Miles T = X R = X where, T = transportation cost of trucking in C$ per ton R = transportation cost of railway in C$ per ton X = distance of transportation in miles Source: Parsons, pp

29 The North American Free Trade Agreement (NAFTA) is shifting trade from domestic to a transborder pattern. From 1992 to 1994, Manitoba southbound truck movements have increased from 390 to 543 trucks daily. The commercial trucking sector is focusing on heavy, long haul moves almost exclusively by Super B and tri-axle combinations. 5 Industry structure is shifting in favor of the larger intra and extra provincial carriers that have an adequate fleet and backhaul to incorporate grain trucking in their operations. The commercial sector, which currently dominates the heavy and long haul market, anticipates a drop in all distance categories under 124 miles (200 kilometers) in favor of trips over 124 miles. Commercial truckers foresee that an increasing proportion of agricultural hauls will originate at the farmgate (Prentice, p.38). Truck rating behavior is different between Canada and the United States. Rate comparisons are shown in Figure 12. Canadian truck rates are higher than those of the United States in short and long hauls. IV. GRAIN HANDLING Canada s grain handling and transportation systems (GHTS) developed over the years as an administered system closely controlled by the federal government through national transportation legislation [currently the Canada Transportation Act (CTA) and the Canadian Wheat Board (CWB) Act]. The system consists of five main services that together move grain to export position. These are country collection, country elevation, long distance transport, terminal elevation, and port handling. Table 1 and Figure 13 describe the relevant regulations and structural characteristics of the industry. Government intervention has important effects on rates and quantities in the grain handling and transportation system (Table 2). Before the early 1990s, the Canadian grain handling industry was largely dominated by Canadian pools, a few Canadian private firms, and Cargill which is the only major U.S. firm with Canadian handling assets. Numerous pressures have emerged for structural change. As a result, Canadian firms and pools are in a process of rationalization and confronting new competitors. Two major U.S. firms, ConAgra and ADM, have entered the industry in addition to Louis Dreyfus, a major international grain firm. These changes will lead to greater handling capacity and efficiency, lower marginal costs, and more intense competition for origination. 5 Tandem trailers are the largest single type of truck configuration. These vehicles are used predominately for cross-border moves and for farm to elevator shipments. Respondents of the study by Prentice indicated that they will increase the size of this fleet by 14 units in the next 5 years. The second largest group of truck configurations is the Super B Combo. These vehicles are used for long haul (greater than 200 kilometers), often for elevator to elevator moves. For configurations, see Appendix B. 22

30 Figure 12. Truck Rates Comparison between Canada and the United States Rate (US$/bu) Canadian Truck Rate U.S. Truck Rate Miles Canadian Truck Rate = (Miles) U.S. Truck Rate = (Miles) *In 1998 the average exchange rate between the U.S. and Canada was US$0.68 to C$1.00. To convert mt into bushel 48lb/bu is used. Source: Canadian Truck Rate: Parsons, U.S. truck rate: derived from data from industry sources. 23

31 Table 1. Structure of Grain Handling and Transportation in the Canadian GHTS Transport Service Characteristic Significance Farmers Country Collection Grain Handling Long distance Terminal Handling Port Services Widely dispersed across the Prairies Short distance movement Increasing Competition Government Rate and service regulation Administered Market Recently privatized 80% of grain to CWB monopoly buyer with many farmers (100,000+) who must market export wheat and barley through the Canadian Wheat Board (CWB). Deliveries managed by the CWB through contract calls and permit books. CWB export grains account for 84% of total Prairie exports (22.3 million tonnes) with the balance in non-board grains (4.2 million tonnes - 16%) Grain moved off farm by truck to country elevators. Further country movement is by truck and by railway branch line and short line railways to mainline train assembly points. Truck movements have been short (10-20 miles) but have increased with branch line closure and grain company economic incentives to attract grain to inland terminals. Handling tariffs are not regulated but monitored by the Canadian Grain Commission, who also issue elevator operating licenses. Elevators can only receive CWB grains for movement on the regulated system, Three major Canadian companies that have developed from four provincial cooperatives. (UGG, SWP and Agricore account for 68% of the current Prairie handling capacity) Other companies (Pioneer, Paterson, Parrish and Heimbpcker, and other smaller, often farmer owned) account for the remainder of capacity. In total there are some 1104 country elevators. US companies have become major players in the country collection system. Cargill entered decades ago but has been joined more recently by Archer Daniels Midland, ConAgra and the French company Louis Dreyfus. Mainly by rail at statutory maximum rates based on cost-estimates of movement set in Canada Transportation Act. Two major railways - Canadian National Railway and Canadian Pacific Railway. Distances moved are often in excess of 1,000 miles. Movements are mainly in the form of mixed trains with a minority of units trains. Trains are commonly characterized by multiple origins in the country, multiple terminal destinations at port and multiple grades of grain and other commodities. High levels of corporate concentration with little competition since terminal deliveries reflect company country collection performance and further allocation and delivery instructions from the CWB. Three major ports of Vancouver and Prince Rupert on the West Coast and Thunder Bay at the Lakehead. Border crossings to the US account for 15% of the total movement. There are small movements through Churchill. Port movements are highly regulated through port union labor agreements that closely control working hours and shift changes. System Efficiency Widely recognized as inefficient. Many bottlenecks and system constraints including multiple origins and destinations, car allocation, limited use of most efficient elevators and unit trains, grade mix ups, excess tough and damp storage, impurities in grain, high demurrage. Information Source: Parsons and Wilson. Logistics information and requirements generated through committees. 24

32 Figure 13. The Canadian Grain Handling & Transportation and Logistics Chain Farm Country Collection Country Elevation Long Distance Terminal Port Production by Truck and Rail & Storage Movement Elevation Handling &Storage Widely Short Distance Widely Dispersed 1,000 miles+ Cleaning Loading Dispersed Movements Small Scale Mainly Rail Grading Vessels REGULATORY FRAMEWORK Canada Transportation Act Statutory Freight Rates and Caps - Cost Based Rates - Branch Line Exit Controls Canadian Wheat Board Permit Books - Contract Calls - Elevator Collection - Car Allocation - Freight Adjustment Factors - Terminal Delivery Canadian Grain Commission Licensing Elevators - Country Grain Grading - Terminal Grain Grading - Licensing Tariffs - Quality Inspection Provincial Governments Rural Road and Highways - Provincial Railway Legislation - Road and Rail Taxation Source: Parsons and Wilson. 25

33 Table 2. Regulatory Structure of the Canadian GHTS Transport Service Regulatory Authority Commentary Farmers Country Collection CWB, CTA, Provincial Governments CWB, CTA, Provincial Governments CWB controls deliveries through permit books and contract calls. CTA regulates prices and service availability on branch lines. Provincial governments manage road maintenance and construction, and license trucks. Farmer paid 80% as initial payment by CWB at time of delivery (except malting barley). Balance paid some 6 to 12 months later after final sale price has been received and all marketing, handling and port deductions are made by the CWB. CTA places maximum prices on branch line rail movement. CWB call grain into the system. Provinces license trucks and construct and maintain rural road systems. Grain Handling CGC Federal Grain Commission licenses elevators and monitors prices, which were deregulated several years ago. Competition is growing in country elevator pricing, often through the use of trucking premiums. Long Distance Movement Terminal Handling CT, AAPG CWB CGC CWB Regulated through statutory maximum price cap and distance related, cost based rates. Branch line abandonment procedures streamlined but still regulated. Car allocation through a regulatory committee CAPG - the Car Allocation Policy Group involving the CWB, railways, grain companies and producers. Terminal facilities licensed by the CGC. Terminal deliveries reflect country collection performance on the basis of a CWB/Grain Companies Agreement. Port Services Canada Port Act In transition towards privatization through the creation of community port authorities with federally chartered local monopolies. System Provincial Fiscal Highways Railways Federal Source: Parsons and Wilson. Federal and Provincial taxes levied differentially on road and rail taxes creating export taxes on grain movements, 15 Provinces responsible for road maintenance and upgrading. Provinces responsible for short line railway legislation. Federal Government also responsible for short line railway legislation. 26