Grain industry pushing for market-driven rail reform

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The federal government has stopped telling railways how much grain to haul, but farmers and agricultural companies are promising to find new ways to ensure they get the service they need from Canadian National Railway Co. and Canadian Pacific Railway Ltd.

The group that represents the major grain companies says it will push Ottawa to change the laws that govern railways so the country's trade in wheat, canola and other crops is driven by market demand, and not constrained by a limited number of rail cars, locomotives and train crews.

Wade Sobkowich, executive director of the Western Grain Elevator Association, said the group is urging the government in its review of the Transportation Act to better link railways' service levels to demands of commodity shippers. The group, which represents Viterra, Cargill and other companies that buy and sell crops globally, is also seeking the power to reach contracts with railways that specify weekly car orders, backed by the right to use a government-appointed arbitrator to settle disputes.

The federal government on Saturday said it would not renew measures put in place a year ago that required the railways move a minimum amount of crops every week, noting CN and CP had exceeded the thresholds and the backlog is at a historically normal level.

The regulations were enacted in response to complaints from farmers and grain companies, which said poor rail service was keeping a record crop from reaching foreign buyers, hammering farm cash flow and damaging Canada's reputation as a reliable trading partner. The grain industry said the poor service was a reflection of railway cuts and a focus on other, more lucrative commodities such as oil.

The rail companies denied these claims and said the harsh winter forced them to run shorter, slower trains for safety reasons. They said they moved record amounts of grain after a record harvest.

On Monday, spokesmen for both railways welcomed the removal of the thresholds, which had been recently lowered to reflect the reduced backlog and the smaller harvest in 2014-15.

Walter Spracklin, an equities analyst with Royal Bank of Canada, said the decision was "favourable" for the railways because it reduces operating restrictions and gives them greater flexibility to focus on the fluidity of their entire networks.

Mr. Sobkowich said the recent minimum standards were set "very low" and expected the railways would continue to meet them without the threat of a fine from the government.

"In the longer term, we have to understand what permanent measures will replace the thresholds to ensure that Canada moves to a demand-based system as opposed to today's rail-car-supply-based system," Mr. Sobkowich said in an interview from Winnipeg. "Right now the railways offer a certain level of supply, a certain level of service, and that drives how much shippers can sell.

"How are we going to create a more permanent solution, not only for grain, because we're not the only ones with problems, in a way that allows us to grow Canada's economy?" Mr. Sobkowich said. "We can't export more coal and forest products and manufactured goods and grain with the same rail network that we have today and the same number of locomotives, same number of rail cars. … We need the railways to expand that capacity. If our objective is to expand Canada's economy, then we're not going to do that without some major attention paid to the rail system."

The grain industry said one of the unintended consequences of the minimum volumes rule was that rail companies focused on elevators and railroads connected to the three major ports – Vancouver, Prince Rupert, B.C., and Thunder Bay, Ont. – while service suffered on smaller, slower rail lines and those that went to the United States.

Growers of such smaller crops as malting barley, lentils and oats that are sold to buyers in the U.S. or feed mills in B.C.'s Fraser Valley complained their rail service did not improve under the government intervention.

Gary Stanford, who farms in Magrath, Alta., saw this firsthand at his local elevator, which has grain capacity for 120 rail cars a month but was only getting 14. "I said if I brought you a couple car loads of flax, would you put it on train cars for me? They said we can't get any [rail] cars," said Mr. Stanford, who is president of the Grain Growers of Canada.

In a phone interview, Mr. Stanford said the group "can live without" the railways' minimum shipping thresholds, but will keep an eye on the weekly volumes and will lobby for changes in the review of the Transport Act.