There won’t be a quick fix for a ‘perfect storm’ that has set grain movement back by at least three months.
The problems started with the late harvest across the Prairies followed by the week-long CN Rail strike in November and then cold weather and mudslides. By the time the anti-pipeline rail blockades hit in February, rail deliveries to port were already close to 650,000 tonnes behind the same time last year, said Mark Hemmes, president of Quorum Corporation, the agency that monitors grain movement.
“The situation that we’re in right now is really something that’s compounding,” Hemmes said March 9. “We’re still 1.28 million tonnes behind the same time last year. A little less than half of that came on because of the blockades.”
For grain companies selling this year’s harvest before the crop is even in the ground, the rail delays have added a level of uncertainty — and some extra costs.
“We’re recovering, but we were already in recovery mode when the blockades started. The blockades just pushed us further behind,” said Wade Sobkowich, executive director of the Western Grain Elevator Association.
“Normally, we see somewhere between 25 and 30 vessels off the West Coast, and that’s how much we need to remain fluid. But right now, there are 50 — about double what we would normally want to see on the West Coast during this period of time. So that’s an indicator that we have not recovered yet.”
That’s roughly the same number of vessels backed up during the peak of the 2013-14 grain transport crisis, he added. Contract extension penalties and vessel demurrage are starting to add up.
“Now we are paying contract extension penalties big time on almost everything and paying vessel demurrage as the vessels are coming in,” said Sobkowich. “It’s been costing us about $9 million a day in contract extension penalties and lost productivity.”
Those costs are likely to trickle down to producers, Hemmes added.
“In the grain business, Canada is always going to be a price-taker, and when incremental costs are added into the system, they eventually make their way back to the producer.”
And these delays aren’t likely to resolve any time soon.
“We’re moving grain again, but we’re moving grain that was supposed to move two or three weeks ago,” said Sobkowich. “There is no added capacity in the rail system — we’re always in a state of rationing — so we’re likely to stay in a perpetual state of lateness for a long period of time.
“Without any extra capacity, we don’t have any real way of catching up.”
Price drop will hurt
Sobkowich expects that these delays could extend right into summer, or even fall, “when we have even more grain to move.”
“What we’re going to see is a larger-than-normal carry-in,” he said. “Normally it’s somewhere in the neighbourhood of seven million tonnes, but we’re going to see a carry-in this year that’s going to be way larger than that.
“We don’t know what the number is, but it’s going to be bigger.”
As a result, grain companies are rethinking their sales programs this year, selling outside the peak price periods at smaller levels than they normally would.
“You want to sell grain in that October to February period — that’s when you get your best price,” said Hemmes. “Typically, as we get into the spring and summer months, you’re going to take a hit of $25 a tonne, if not more.”
Even so, farmers shouldn’t panic yet.
Grain is moving again at higher levels than normally seen at this time of year. And while stocks in country elevators have reached about 90 per cent working capacity, the thing that sets this apart from the grain movement crisis of 2013-14 is the additional storage capacity that’s been built in the countryside, said Hemmes.
“There’s about 1.4 million tonnes’ worth of storage that’s been built out in the country that wasn’t there, and that makes a really big difference,” he said.
But this most recent grain transport crisis has underscored some systemic issues in Canada’s rail system that need to be resolved, Hemmes added.
“Not having a reliable and consistent logistics platform puts the buyer in the position of saying they want to take X number of dollars off the price because they’re not sure we can actually deliver it,” he said. “That reputational impact always ends up having been reflected in the price that you can actually obtain in the global marketplace, and that’s the impact people are most severely concerned with.”
“It’s always a question that comes up — is Canada going to be able to deliver?” he said. “Canada isn’t reliable, and when these customers buy, they need certainty of supply.
“We’re starting to see customers getting tired of us not being able to deliver every year we have some sort of rail problem.
“It’s a very real thing, and it’s probably the most costly out of all the different consequences related to the blockades.”
As Canada works to rebuild its reputation, the federal government will need to re-evaluate how it manages the rail transport system, said Sobkowich.
That means “controlling the things that can be controlled,” by resolving labour disputes quickly and enforcing the rule of law around any rail blockades.
“The government should be deeming rail service to be an essential service,” he said. “It should be recognizing in the legislation that the impact to the national economy is very important.”