By Keith Norbury

Canada’s total wheat production ballooned to 37.5 million tonnes in 2013, according to Statistics Canada figures. That’s 10.3 million tonnes, or 37 per cent higher than the 27.2 million tonnes produced in 2012. It’s also a far bigger bumper crop than the 10 to 15 per cent increase that industry experts were anticipating as 2013 drew to a close.

However, wheat — which includes durum, spring, and winter varieties — makes up only about half of Canada’s grain crop, pointed out Mark Hemmes, President of Edmonton-based Quorum Corp., which monitors Canada’s grain transportation system on behalf of the federal government.

Not all grain, including wheat, is exported. In the 2012-2013 crop year that ended last Aug. 1, only 14.47 million tonnes of wheat left the country, or about 53 per cent, according to Statistics Canada figures. But industry insiders say the vast majority of the additional 10.3 million tonnes produced in the current crop year is destined for the export market — if it can get there. It’s the same with a surplus of canola, barley, oats and other major grains that also experienced bumper crops in the 2013 harvest. Overall, the grain harvest was 33.4 per cent greater in 2013.

Canada’s two major railways — Canadian National and Canadian Pacific — have been moving about two per cent more grain than last year, Mr. Hemmes said. In fact, by mid May the railways had been going “great guns” for several weeks to move the grain. That was about a million tonnes a week, just as the federal government had mandated in its March 7 cabinet order. But even that pace won’t be enough to clear what farmers and others in the grain industry expect will be a gargantuan backlog by the time farmers harvest the next crop this September. “If we could move everything to port right now, it would all get sold,” said Mr. Hemmes, who estimated the grain surplus, or “carry out,” will be about 20 million tonnes by the end of the crop year.

Storing that grain “is going to be a huge burden for farmers,” said Gary Stanford, President of Grain Growers of Canada. Farmers have been asked to grow more grain to feed a growing population. They have responded by leveraging better technology and growing techniques to increase production. “If we’re having this much trouble now, in ten years if we continue to produce better crops, how are we going to handle it?” said Mr. Stanford, who farms 5,000 acres near Magrath, Alta.

Wade Subkowich, Executive Director of Winnipeg-based Western Grain Elevator Association, predicted that by Aug. 1 when this crop year ends, there will be a surplus of 23 million tonnes of grain awaiting export. Should the railways move that grain at the rate they have since early April, it will still leave a surplus of 17 million to 18 million tonnes by the time the next harvest starts in mid September, he said. “We still have outstanding orders for 63,920 rail cars,” Mr. Sobkowich said in mid May. “That’s unfulfilled demand.”

Bumper crop coincides with wheat board changes

The bumper crop has also coincided with the implementation last Aug. 1 of the federal Marketing Freedom for Grain Farmers Act, which stripped the Canadian Wheat Board of its near-monopoly on the sale of western Canadian wheat. Opponents of that move blame the removal of that “single desk” system for contributing to the chaos and the transportation bottlenecks of the bumper crop. However, defenders of the new regime argue that it gives farmers more choice over their business decisions, and actually makes the system more efficient. They say that the transportation difficulties are largely a result of the huge volumes produced.

Mr. Hemmes said the railways were keeping up with the demand until the end of October with volumes a little higher to the west coast ports and quite a bit lower at Thunder Bay, which he attributed largely to record low ocean freight rates on the west coast. Then there were three derailments, on a CP line and two on CN lines. “And then it got cold,” Mr. Hemmes said. “Basically they just couldn’t keep up.”

Federal government steps in

In March, the federal government issued an order-in-council that requires each railway to ramp up grain shipments by a minimum of 500,000 tonnes a week or face a maximum fine of $100,000. The government has also introduced the Fair Rail for Grain Farmers Act that will pick up where the order-in-council left off. That bill, C-30, had passed third reading in the House of Commons and was awaiting approval in the Senate as this article went to press.

“The federal government’s grain legislation is unfair and heavy-handed,” CN spokesperson Mark Hallman said via email. “CN is disappointed that the government has decided to hit railways with re-regulation for an outsized crop and winter conditions beyond their control. The proposed legislation does not address the root cause of the current situation and will do little to move more grain, now or in the future.”

Meanwhile CP spokesperson Ed Greenberg said CP was complying with the order-in-council and continues to meet or exceed its requirements. His boss, CEO Hunter Harrison, however, called the federal response “a very knee jerk reaction,” the Calgary Herald reported in April.

Mr. Sobkowich said overall grain thresholds are a good idea but there should also be minimum thresholds on the various routes to ensure that grain from all over the Prairies gets to market. To say that the grain companies and the railways aren’t seeing eye-to-eye on how to confront the backlog is an understatement. Both sides have been sniping at each other for months. The grain companies have accused the railways of not providing enough rolling stock and staff to move the grain, for example. And the railways have shot back, accusing the grain companies of overbooking and of not being prepared to load the grain quickly when it arrives at port.

Mr. Hemmes said both sides share some of the blame in what he calls a “crisis.” But the biggest problem is lack of communication, he said. The order-in-council has definitely pressured the railways to move more grain, Mr. Hemmes said. But on the downside, “they’re doing it in such a way that they take the grain that’s easiest to access.”

Another bumper crop would complicate matters

While Mr. Sobkowich said last fall that a large crop is a good problem to have, he has come to realize that “having a crop that you can’t move is not worth very much.” His organization represents seven major grain handling companies: Cargill Canada, Richardson International, Louis Dreyfus Canada, Paterson Grain, Parrish & Heimbecker, Viterra Inc., and Weyburn Inland Terminal Ltd. Collectively, they handle about 90 per cent of western Canada’s grain crop.

“You do have two sides the story,” Mr. Hemmes said. “On the one side, the railways will say that this is what we planned for and we can’t turn around in a very short period and make sure that the resources are in place. And the shipper is coming at it from the perspective that, well, you should have surge capacity in place to take care of exactly this kind of occurrence.”

CP’s Ed Greenberg said, though, that “Canada’s grain handling system is just not built to handle this record amount of grain.” Nevertheless CP is collaborating with its customers to move all the grain it can. “This is a complex supply chain issue involving not just the railways, but all participants,” Mr. Greenberg said. Compared with the five-year average, CP moved 15 per cent more grain from September through to April, and 10 per cent more than the previous year, he said. From March to April, after the extreme weather lifted, volumes were up 11 per cent compared to last year and 14 per cent over the five-year average. At almost 80 million tonnes, the grain crop is 27 per cent greater than the previous record of 2008-2009 and 37 per cent higher than the five-year average, Mr. Greenberg pointed out. That means moving an extra 22 million tonnes of grain to export position on top of the usual 33 million to 34 million tonnes, he said. “Rail is only one element of the supply chain,” Mr. Greenberg said. “Canadian Pacific is calling on all stakeholders in Canada’s grain handling and transportation system to work through this situation by having constructive dialogue. This way, all stakeholders would have a better understanding of supply chain realities and everything CP is doing to move record amounts of grain.”

Mr. Sobkowich said the railways are actually providing more rail cars than in past years. But even that hasn’t solved the backlog. “We need more rail capacity to move this crop,” he said. He noted the railways are providing the 11,000 cars a week required by the order-in-council, but about 2,000 of those cars are carrying canola oil and canola meal, which he doesn’t consider to be grain. Meanwhile the order-in-council requirements don’t include soybeans, which Mr. Sobkowich’s organization thinks ought to be included. He also accused the railways of adopting a “work to rule type of mentality” by moving grain on the mainlines where it is easily accessible and not serving farmers in the hinterlands. “Right now we’re getting good shipping to the west coast and we’re getting good shipping to Thunder Bay,” Mr. Sobkowich said. “We’re not getting very much capacity to the United States. We’re not getting enough to eastern Canada.” To that, CP’s Mr. Greenberg responded: “CP is moving record amounts of grain and is continuing to move grain in all available lanes as we work closely with our customers.”

Bill Gehl, Chair of the Saskatchewan Wheat Development Commission and a past chair of the Canadian Wheat Board Alliance, said wheat is moving on the mainline in Regina near his farm. However, farmers in the north of the province and on the eastern Prairies have had trouble moving their grain. “I was on a (conference) call the other day and I think it was three out of seven guys that hadn’t moved really much grain at all to speak of,” Mr. Gehl said. “They were moving some canola but a not a lot of wheat.”

Another contentious part of Bill C-30 is expansion of the “interswitching” radius to 160 kilometres from the current 30 kilometres. Interswitching enables a shipper to book grain on one carrier but move it on a competitor’s tracks for part of the journey. Mr. Sobkowich said expanding the radius will benefit farmers because “there are only very few grain elevators that are currently within proximity of an interswitch.” However, the railways fear that the expanded interswitch zones will open them up to poaching by U.S. railways, Mr. Hallman said.

Demand for wheat from China and beyond

Not only is production of Canadian wheat rising, but so is demand for wheat from a hungry world. As with many commodities, China is driving this demand as it continues its relentless transformation from a peasant society to one of industrialized urban dwellers.

China itself produces a lot of wheat — 120 million tonnes in 2012, according to the Food and Agricultural Organization of the United Nations. That was over four times Canada’s production of 27 million tonnes that year. India, which also has a growing appetite for wheat as its middle class expands, produced 94.9 million tonnes in 2012.

“If Canada is to compete in this global marketplace then Canada as a whole must be able to deliver on all levels on time, or another country will,” Mr. Sobkowich said. Among those potential competitors are France, which produced 40 million tonnes of wheat in 2012, the U.S., which produced 61.8 million tonnes, Russia with 37 million tonnes, and Australia with 29 million tonnes.

According to the U.S. Department of Agriculture, the U.S. is the world’s largest exporter of wheat, with exports of 27.4 million tonnes in 2012-13. The European Union (dominated by France) was second at 22.6 million tonnes, while Canada was third at 19 million tonnes, just ahead of Australia with 18.7 million tonnes.

Meanwhile, the Comprehensive Economic and Trade Agreement, or CETA, that Canada signed in the fall of 2013 with the European Union will phase out existing tariffs on wheat, of up to 90 euros per tonne, over a seven-year period once the deal is ratified. That ratification process by 28 EU countries and 10 Canadian provinces is expected to take until at least 2015. “This deal is hugely important for western Canadian grain farmers,” Levi Wood, President of the Western Canadian Wheat Growers Association, said in a news release shortly after the CETA deal was announced.

Removal of the Wheat Board’s single desk

Quorum’s most recent annual report noted that the removal of the single desk from the Wheat Board was one of the most significant changes in Canadian grain transport in three generations. “Fortunately, this change was accompanied by favourable environmental conditions, characterized by good production, near-record grain prices and a fairly well-performing logistics system,” the report said. It added that the transition was largely problem free, has increased competition among grain companies, and offers farmers more flexibility.

“Essentially the Wheat Board controlled and directed 60 per cent of the entire grain movement,” Mr. Hemmes said. “When you take somebody right out of it wholesale like that, of course there is going to be change … And that’s what we’ve been seeing.”

On the positive side, the grain companies and owners of the storage facilities have done a good job of finding ways to coordinate their efforts, he said. For example, the country elevators (in the countryside of the Prairies) as well as the elevators at the ports are now more efficient “because they’re in total and complete control,” Mr. Hemmes said. On the other hand, he acknowledged that the Wheat Board did a good job of coordinating grain from multiple shippers into a single vessel. The board also had “significant influence” on the allocation of railcars. “Well that’s pretty much the purview of the railways now,” Mr. Hemmes said.

Mr. Gehl said the loss of the single desk means that the Wheat Board can no longer direct grain shipments to the proper terminals at the proper times for loading. “The problem is the grain’s getting out there but it’s not really the proper grain or the grade or the type that’s needed for that sale,” said Mr. Gehl, whose alliance represents a few hundred farmers who opposed the loss of the single desk. Under the old system, the Wheat Board could more easily redirect grain to another terminal or ship. “Now in a private market that’s not possible because all the different companies are competing with another,” Mr. Gehl said. A result has been that ships have had to wait at anchor for weeks to finish loading. Such delays also incur demurrage costs of thousands of dollars a day, which “do get passed on to farmers one way or the other,” Mr. Gehl said.

The most recent Quorum annual report also noted a “sharp rise in demurrage costs, which rose to $22.6 million from $14.9 million the year previous.” That increase was most pronounced on the Pacific seaboard, where demurrage spiked by 62.4 per cent to $19.9 million from $12.3 million the previous year.

“The grain companies went out and they booked vessels on the basis they thought that the railways had committed to a certain level of car supply,” Mr. Hemmes said. “They didn’t meet that and consequently the vessels started to back up on the west coast.”

At one point 53 vessels were waiting to load between Prince Rupert and Vancouver, he said. “And they’re sitting there for 30 and 40 days.” Mr. Sobkowich is of the opinion, though, that the logistics troubles are happening despite the changes at the Wheat Board, not because of them. “Now that we have an open market system, each grain handler gets to plan its logistics chain for all the crops for their entire pipeline,” Mr. Sobkowich said. “So that’s generated some efficiencies in the system.”

Wheat also has to compete with other commodities

Western Canadian Wheat Growers Association President Levi Wood told Canadian Sailings late last year that another factor in the recent wheat transportation chaos is the competition for rail capacity from other commodities. “We’re seeing a big increase in Saskatchewan of potash going on rail, as well as oil,” said Mr. Wood, whose group represents a few hundred farmers who support the changes at the Wheat Board.

CN’s Mark Hallman said via email, however, that while CN’s crude oil business has grown, it only accounted for 1.4 per cent of freight car loadings in 2013. “It’s a small part of CN’s overall business, and the company has ample capacity to move all merchandise and commodities across its network,” he said. He added that, as part of its C$2 billion overall 2013 capital program, CN has increased its network capacity, including $100 million in enhancements to its Edmonton-Winnipeg corridor. Completed in late 2013, that work included C$70 million on the Edmonton-Winnipeg mainline for extended sidings, sections of double track, and “yard track extensions in Winnipeg, Saskatoon and Wainwright.” Another C$30 million was for improvements to CN’s Prairie North Line, which runs principally between Saskatoon and Edmonton and serves as a new “relief valve” for the main corridor, Mr. Hallman said.

CP meanwhile has responded to the record crop of grain loadings with an “efficiency drive,” Mr. Greenberg said in late 2013. The drive “involves the disciplined execution of our operating plan, better locomotive and rail car utilization, such as turning around cars much quicker and providing customers longer grain trains where possible,” he said. What CP needs, though, are more railworkers and locomotives, said Gary Stanford of Grain Growers of Canada. He blames much of the transportation woes on CP’s layoffs of thousands of employees in recent years. “We say, look, you’ve got to hire some of those employees back,” Mr. Stanford said.

But that isn’t so easy, Mr. Hemmes pointed out. Many of those skilled workers who were let go have found lucrative employment elsewhere, such as in the Alberta oil patch, and they aren’t coming back to the railway. “The kind of resources that they need, for instance crews and locomotives, you don’t get them overnight,” Mr. Hemmes said.

But CP’s Greenberg said the layoffs aren’t part of the problem. “The targeted positions that were reduced were mainly through natural attrition and IT contract jobs,” Mr. Greenberg said. “Our railway continues to have the right people in the right jobs for our customers.”

Demand snowballed over the winter

By late November, the demand for rail cars had snowballed, Mr. Sobkowich said, pointing to figures on CP’s website for its Grain Car Request Program service report for the week of Nov. 25 to Dec. 1. At that time, the planned service for the week was 5,420 cars. However, the open requests, which included the planned service, was 13,373 cars. “It hasn’t been to this magnitude to my recollection,” Mr. Sobkowich said. “It’s just because of the size of the crop.”

CP has stopped posting those figures on its website. The railway now emails that information directly to its customers “so they have it quicker and do not have to go to the Internet to find it,” Mr. Greenberg said. He did not have current figures.

CN, however, still posts its outstanding orders on its website. By May 4, they had reached 27,849 cars on top of 5,424 cars to be spotted that week. That was up from 8,800 standing orders for cars in late November on top of 5,000 that were in service hauling grain.

Mr. Hallman, however, said the problem isn’t one of rail-car capacity. “The issue is that Western Canadian farmers have grown the biggest grain crop in history, and the supply chain — country elevators, rail, and port terminals — cannot move a whole year’s crop in three months. It is not physically possible,” he said.

In CN’s view, putting more hopper cars into service without addressing the rest of the supply chain deficiencies is like putting more cars onto a highway during rush-hour gridlock. “You put too many cars on the road, the road plugs up, and everything slows to a crawl,” Mr. Hallman said.

Put the difficulties in context

Mr. Hemmes said it’s important to put the rail difficulties in context. The main point is that the railways planned to move the same volume of grain this past crop year as they did the previous year only to be hit with a huge increase in demand. “There wasn’t any surge capacity,” Mr. Hemmes said. “There wasn’t any kind of flexibility built into it.”

Not having a buffer angers shippers because they view the railways as an essential link to their markets, Mr. Hemmes said. About 98 per cent of western Canadian crops move by rail, if only because of the prohibitive cost of trucking grain any distance. “And so, right off the bat, as soon as you have a great year off the fields, the acrimony starts,” Mr. Hemmes said.

While the railways say they are doing the best they can under the circumstances, they have also accused the grain companies of overbooking rail cars and of not doing enough to deal with the backlog themselves, such as by staffing the terminal elevators 24 hours a day and seven days a week. “Instead of cars sitting waiting to be loaded or unloaded, those cars could be cycling back to the Prairie elevators and ports,” CP’s Mr. Greenberg said. “CP’s position is that the entire supply chain needs to be thinking velocity to create additional available capacity.”

Mr. Sobkowich wasn’t impressed with that idea. He said grain terminals are already paying workers to wait around for rail cars to arrive. “The issue isn’t whether we’re there 24/7. The issue is whether we’re there to unload and load the rail cars when they’re available for loading and unloading. And we are,” Mr. Subkowich said.

The problem isn’t one of capacity at the terminals either. Mr. Hemmes estimated the grain companies invested about $350 million in their facilities just last year. At present, those facilities can now handle about 14,000 rail cars of bulk grain weekly, well above the 9,000 cars of grain the railways are now delivering each week, Mr. Subkowich said. “So there is not a lot of incentive to invest in more capacity when you’re not using the existing capacity that you have,” he said.

As for the overbooking allegations, Mr. Hemmes noted that the railways charge penalties for phantom booking. And Mr. Sobkowich said, “In fact what you see is the outstanding orders that exist are orders for actual sales.”

Mr. Hallman of CN said the challenges have a lot of do with “growing pains” of the new system. However, he also accused the grain companies of dropping the ball early in the harvest last year. “They got off to a very slow start in August 2013 while the huge crop was maturing in their own backyard,” he said. “They unfortunately failed to take advantage of at least 10,000 carloads of rail capacity that was available on CN at the time.”

Sea change seen in grain marketplace

The reluctance of the railways to provide “surge capacity” to serve a bumper wheat crop is lost on farmers, who often invest in expensive equipment like combines that sit idle for most of the year, noted both Mr. Sobkowich and Mr. Hemmes. “If we had competitive alternatives we wouldn’t be in this mess. We would be using those competitive alternatives because that’s the nature of an open market of competition,” Mr. Sobkowich said. “But we don’t have that competition. If you’re an elevator and you are planted in the middle of Saskatchewan with a CN line running to your facility, you have no choice but to ship product on a CN line.”

In the U.S., there’s more competition, which results in better rates, Mr. Sobkowich said. The railways also have to compete with the Mississippi barge system. For Mr. Gehl, the latter, combined with support from a hefty farm bill in the U.S. means tough competition for a Canadian Prairie farmer who is thousands of kilometres from tidewater. He also said the Wheat Board had more power to negotiate with the railways over freight prices and service levels. “They had the ability to take the railways on,” Mr. Gehl said. “I as a farmer have no ability for that. None.” That said, he added that his beef isn’t with the railways but with the logistical capabilities of the grain companies to ensure “that the proper grain is at port in a timely manner.”

Where is the basis going?

A bigger issue, Mr. Gehl said, is the fees, called the export basis, that the grain companies charge farmers for handling the grain. When the Wheat Board operated the single desk, those charges were much smaller. This winter they spiked. “The asking price of grain at port at the end of February was around $11 and, out here on the Prairies, farmers were getting around $5,” Mr. Gehl said. “It takes about a buck and a half to $2 to elevate and transport that grain to the west coast. So where’s all the rest of the money gone?”

Mr. Sobkowich said it didn’t go anywhere because nobody was selling grain when the basis was high. It was set high to send a signal to farmers not to bring their grain to the elevators because the system was plugged. “We’re not buying grain at that price,” Mr. Sobkowich said. “What we’re doing is trying to hold grain so we can bring in grain that was previously contracted from farmers that we already have commitments on at different prices, better prices.”

Problems with producer cars

Farmers don’t have to ship via the grain companies’ elevator systems. They can order their own cars directly from the railways to transport their crops to port. Use of these cars had dropped off significantly in recent years — about 40 per cent, Mr. Gehl said. It’s a reduction he attributes to the stripping of the Wheat Board’s powers. “The Wheat Board had the ability to assure that your car was unloaded at port,” Mr. Gehl said, adding that in years past almost all producer-car grain was Canadian Wheat Board product. However, with the large crop, he expects farmers will turn to using producer cars and related vehicles, called dealer cars. Producers load both car types but the dealer cars are allocated directly to the grain companies, according to the Alberta government’s Agricultural Marketing Glossary.

Mr. Hemmes said the use of producer cars has already rebounded since last year. “We’re probably going to set a record in producer car loadings this year,” he said in mid May. “There’s 18,000 orders in there right now.” Mr. Wood also affirmed the importance of producer cars, which the Canada Grain Act stipulates must be made available to farmers. However, Mr. Wood said the reduction in their use last year was because “farmers have been getting such a good price at the farm gate.” He also noted (as did Mr. Sobkowich) that producer cars “certainly are more work and they certainly are more risk.”

Nevertheless, Mr. Sobkowich said the elevator operators support the right of farmers to use producer cars. But the motivations for shipping via producer cars have changed. In the past, the grain companies didn’t take ownership of the grain. So a farmer who didn’t want to pay handling fees via the Wheat Board could avoid those fees with a producer car. Today, a grain company accepts ownership of the grain and competes with other grain handlers to buy that grain at a competitive price.

“It’s not a standard handling fee that is being paid to all grain companies across the system,” Mr. Sobkowich said. A farmer might also book a producer car through the Canadian Grain Commission if the grain companies’ elevators are all full, he added. “So it might not necessarily be about the price. It could be about shipping.”

The changes at the Wheat Board also mean a more complicated calculation for farmers, who now have to parse out their transportation costs. “Then they compare that against what the grain elevator is offering under a competitive country elevator system,” Mr. Sobkowich said. “And they’re deciding, OK, is this worth my while or not.”

Paradigm shift underway

For everyone involved in the production and transportation of wheat — and for the country as a whole — it’s important to get that product to market. But doing so, if production remains as high as is expected, is going to become increasingly challenging for the country’s transportation systems. That “paradigm shift” has already begun, Mr. Sobkowich said. “The demand for cars is going to remain high and the unfulfilled demand will remain higher than what the railways are going to deliver on for the foreseeable future,” Mr. Sobkowich said in mid May. “Unless there’s such a major disaster in the next harvest that there is barely any crop to move, we’re going to see demand for rail cars, in all corridors, exceeding the supply.”