The Canadian Transportation Agency (CTA) on Thursday announced the volume-related composite price index (VRCPI) for Canadian National Railway (CN) for 2023-24 will be 1.8295, up 12.11 per cent from 2022-23.

CPKC’s (Canadian Pacific Kansas City), meanwhile, will be 1.7616, up 5.43 per cent.

The VRCPI is the major variable in the formula that decides the railways’ maximum revenue entitlements (MREs) each crop year. Set each year by the CTA, based on submissions from CN and CPKC, the VRCPI is an inflation factor based on a composite of forecast prices for railway labour, fuel, material and capital purchases.

For the 2023-24 crop year beginning Aug. 1, much of the difference between forecasted and actual cost increases that’s reflected in the increased VRCPI is “directly linked to unexpectedly high fuel and related material costs in 2022,” the CTA said in a release.

The CTA said its fuel model for 2022-23, based on third-party forecasts at the time, projected the railways’ fuel costs would rise by just over 30 per cent.

However, in 2022, those costs actually rose by over 63 per cent on “a notable shortage in the supply of diesel fuel in North America and increased global demand.”

Adjustments were also made for other cost components, including the railways’ “material component,” the CTA said. The agency already determined the cost-of-capital rates for each railway for the new VRCPI in separate rulings last Thursday (April 20).

With the VRCPIs now in place, the MREs — the upper-limit dollar figures on the revenue CN and CPKC can earn for shipping regulated grain in a given crop year — must be set by the CTA for 2023-24 by Dec. 31, 2024 at the latest.

The MRE limits the revenue CN and CPKC can earn for movement of western grain as far east as Thunder Bay or Armstrong, Ont., or up to Churchill, Man., or to ports in British Columbia.

If Prairie grain revenue in a given crop year overshoots their MREs, the two railways’ overages would then be payable to the Western Grain Research Foundation, the mandated beneficiary. — Glacier FarmMedia Network

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The Canadian Transportation Agency, which sets the maximum revenue entitlements (MREs) each crop year for Prairie grain handled by Canadian National Railway (CN) and Canadian Pacific Railway (CP), on Thursday ruled both railways overshot their maximums for the 2021-22 crop year.

The CTA’s determination found CN’s regulated grain revenue came in $3,068,088 above its MRE of $589,140,501 for the crop year, while CP’s came in $2,363,775 above its MRE of $513,144,863.

As per grain handling regulations, those overages must be forfeited in the next 30 days to the Western Grains Research Foundation (WGRF), along with penalties of five per cent ($153,404 for CN, $118,189 for CP) — for a combined payout of $5,703,456.

The CTA’s figures show CN and CP moved a combined 28.4 million tonnes of western grain in 2021-22 crop year — a “notable drop” of 46 per cent from their combined record 52.3 million-tonne handle in 2020-21, “due mainly to the drought conditions experienced in Western Canada during the (2021-22) growing season.”

The CTA’s calculations showed the average lengths of haul for CN and CP in 2021-22 to be 977 miles and 909 miles respectively, for a combined weighted average length of haul of 946 miles, down from 966 in 2020-21.

In 2020-21, by comparison, the CTA had found CN overshot its MRE by almost $2.4 million, while CP came in about $20.25 million below its MRE. Prior to that, both railways overshot their MREs in five of six crop years, except for 2018-19 when grain revenue came in below both railways’ MREs.

The MREs, commonly described as revenue caps, are calculated using a formula factoring in each railway’s annual grain handle and average length of haul along with the volume-related composite price index (VRCPI), an inflation index reflecting the railways’ costs for labour, fuel, materials and capital purchases.

The 2021-22 crop year is the fourth in which CN and CP have separate VRCPIs, following amendments to the Canada Transportation Act in 2018.

CN’s 2021-22 VRCPI was set at 1.4572, up from 1.4441 in 2020-21, while CP’s was set at 1.4826, down from 1.5055.

Those figures were reached after both railways applied for, and received, adjustments to their previously-announced 2021-22 VRCPIs. CP sought an adjustment based on its purchases of 1,400 new hopper cars and CN, for purchasing and leasing 1,075 additional hopper cars — transactions which weren’t accounted for when the VRCPIs were first set.

The WGRF’s research fund, the agreed-upon beneficiary from MRE overages since 2000, is a Saskatoon-based, producer-directed fund that backs crop research to “enhance the profitability and sustainability” of western Canadian grain farmers. — Glacier FarmMedia Network

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The Canadian Transportation Agency (CTA) on Thursday announced its decisions on the volume-related composite price index (VRCPI) for 2021-22. The index is the major variable in the formula that decides the railways’ maximum revenue entitlements (MREs) each crop year.

For the new crop year starting Aug. 1, Canadian National Railway’s VRCPI will be 1.4505, up 0.5 per cent from its figure for 2020-21, while Canadian Pacific Railway’s will be 1.4787, down 1.78 per cent.

Set each year by the CTA based on submissions from CN and CP, the VRCPI is an inflation factor based on a composite of forecast prices for railway labour, fuel, material and capital purchases.

Both railways expect to pay higher prices for fuel in 2021-22, but for CN, fuel prices were offset by relatively “moderate” increases in labour costs and material prices and a “projected decline” in its cost of capital, the agency said.

For CP, “expected declines in labour prices and cost of capital more than offset projected increases in fuel prices.”

With the new VRCPIs now in place, the MREs — the upper-limit dollar figures on the revenue CN and CP can earn for shipping regulated grain in a given crop year — must be set by the CTA for 2021-22 by Dec. 31, 2022 at the latest.

If Prairie grain revenue in a given crop year overshoots their MREs, the railways’ overages would then be payable to the Western Grain Research Foundation, the mandated beneficiary.

Revisions

The 2020-21 VRCPIs for both CN and CP have both shifted upward this year since they were first set in a CTA ruling in April 2020.

CN, in January this year, asked that its 2020-21 VRCPI be recalculated to account for costs it incurred obtaining hopper cars, “pursuant to 10 car supply agreements and three purchase agreements,” the CTA said.

The agency said March 24 it would bump up CN’s 2020-21 VRCPI from 1.4202 to 1.4433.

CP’s 2020-21 VRCPI, meanwhile, was reset Thursday in the wake of an April 9 decision by the Federal Court of Appeal, quashing a decision the CTA made in April last year over the rate at which it sets CP’s eligible cost of capital.

The appeals court ordered the CTA to set CP’s 2020-21 cost of capital rate using the same methodology it used for 2019-20 — a reset which bumps up CP’s 2020-21 VRCPI from 1.4205 to 1.5055.

The new 2020-21 VRCPIs will be used when the CTA calculates the railways’ 2020-21 MREs, a decision due by Dec. 31 this year.

The CTA said it had run consultations in late 2020 and early 2021 dealing with cost-of-capital issues, “with a view to addressing differences between the reporting of CN and CP through a single standard for both railway companies.”

Now, however, following the Court of Appeal’s decision, the CTA said it will run more consultations between now and late summer with CN, CP and “other interested stakeholders,” on the issue of whether to allocate the big two railways’ “general purpose” debt to their Canadian rail operations.

If the new round of consultations leads to a new reporting standard that would change how the agency determines CP’s cost of capital rate, the CTA said it will go back and review Thursday’s decision on the railways’ 2021-22 VRCPIs. — Glacier FarmMedia Network

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The Canadian Transportation Agency (CTA) on Dec. 22 ruled Canadian National Railway (CN) and Canadian Pacific Railway (CP) each overshot their maximum revenue entitlements (MREs) for the year, by $3,170,615 and $2,170,010 respectively.

The overages, plus respective five per cent penalties of $158,531 and $108,501, are payable to the Western Grains Research Foundation (WGRF), the agreed-upon beneficiary, within 30 days of the ruling date, the agency said.

The railways’ allowable MREs for the crop year were $930,331,426 and $997,060,798 respectively.

CN’s qualifying Prairie grain movements in 2019-20 totalled 23,525,161 tonnes, while CP’s reached 24,498,737. Their average lengths of haul came in at 1,013 and 918 miles respectively, the CTA said.

Combined, their grain handle was up 4.3 per cent on the year, while their combined average length of haul, at 965 miles, was down 1.4 per cent, the agency said.

The two railways’ annual MREs, commonly described as their revenue caps, are calculated using a formula factoring in their grain handles and average length of haul along with the volume-related composite price index (VRCPI), an inflation index reflecting the railways’ costs for labour, fuel, materials and capital purchases.

The CTA in May 2019 set the 2019-20 VRCPIs at 1.4371 for CN and 1.5148 for CP, both up from 2018-19. Both railways later sought and got adjustments from the agency, which raised CN’s 2019-20 index to 1.4498 and CP’s to 1.5311.

The 2019-20 crop year marked the second in which CN and CP have separate VRCPIs, following amendments to the Canada Transportation Act in 2018.

The CTA in May 2019 said the increased VRCPIs for 2019-20 were based mainly on “modest increases in the fuel and material components” of the index, and from the “recognition of costs for the acquisition of hopper cars.”

CN and CP in 2018-19 both came in below their MREs, after both booking overages of seven figures above their MREs during each of the previous four crop years. — Glacier FarmMedia Network

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The Canadian Transportation Agency last week announced it will set the volume-related composite price index (VRCPI) at 1.4202 for Canadian National Railway (CN) and at 1.4205 for Canadian Pacific Railway (CP) — down 2.04 and 7.22 per cent respectively from 2019-20.

The VRCPI is a factor in the formula used to set each year’s maximum revenue entitlement (MRE) — the caps on the overall annual revenue CN and CP can earn shipping regulated grain.

The index is an inflation factor, reflecting a composite of forecast prices for railway labour, fuel, materials and capital purchases.

For the 2020-21 crop year, which begins Aug. 1, the decreases in the VRCPIs are based mainly on “expected declines in fuel and labour costs,” the CTA said in a release April 30.

The bigger decline in CP’s VRCPI can be chalked up to “debt raised for the purposes of share buyback,” the CTA said. Such activity is accounted for when determining the railways’ cost of capital.

Both CN and CP are projected to see increases in general wages, the CTA said — but for CN, those are expected to be offset by declines in “wage-related” items, such as bonuses, and a “small decline” in fringe benefits. For CP, wage increases are expected to be “more than offset by a large projected decline in fringe benefits, including pension-related items.”

As for fuel costs, the CTA forecasts a 3.95 per cent decline for CN and a 3.75 per cent decline for CP in 2020–21 crop year, based on a “significant decrease” in the price of crude oil in 2020 and “associated fluctuations” in the Canada-U.S. exchange rate. But the CTA also expects crude oil prices to recover in 2021, offsetting the 2020 decrease.

The new VRCPI will be applied when the CTA determines the MRE for the 2020-21 crop year, a decision due by Dec. 31 next year.

Any overages CN and CP make on Prairie grain in a given crop year, plus penalties, are paid into the Western Grains Research Foundation’s endowment fund, income from which is directed to research work.

CN and CP had both taken in grain revenue overages of seven figures above their MREs during each of the four crop years prior to 2018-19.

Both railways came in under their MREs for 2018-19 — partly because calculations for the VRCPIs and MREs were adjusted in the federal Transportation Modernization Act in May 2018. — Glacier FarmMedia Network

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The Canadian Transportation Agency on Monday announced Canadian National Railway (CN) booked 2018-19 Prairie grain revenue of $933,357,710, a figure $371,116 below what the CTA set as the company’s maximum revenue entitlement (MRE) for the year.

Canadian Pacific Railway’s (CP) grain revenue for the same crop year came in at $862,734,965, or $764,101 below its 2018-19 MRE, the agency said.

CN and CP had both taken in grain revenue overages of seven figures above their MREs during each of the previous four crop years.

In such cases, their revenue overages, plus penalties of five per cent, were required to be paid to the Western Grain Research Foundation, the mandated beneficiary. However, “no overage-related payouts or penalties were assessed” for 2018-19, the CTA said Monday.

The annual MREs for CN and CP are calculated by the CTA using a formula involving the actual tonnage of Prairie grain hauled and the average length of haul for each railway, along with the volume‑related composite price index (VRCPI), which the CTA sets no later than April 30 every year.

The VRCPI is an inflation index, reflecting forecast changes to the railways’ costs for labour, fuel, material and capital purchases in a given crop year.

In 2018-19, CN and CP moved a combined 46,060,737 tonnes of Prairie grain were moved under the MRE program, up 13.4 per cent from the previous crop year, for an average haul length of haul of 979 miles, up 2.7 per cent.

More specifically, CN moved 24,059,409 tonnes of Prairie grain with an average haul length of 1,023 miles; CP moved 22,001,328 tonnes, with an average haul length of 931 miles.

The MRE varies with the tonnage moved, so a railway can come in under its cap so long as it doesn’t charge more than the average rate per tonne as set by the first part of the MRE formula.

Each tolled separately

Changes to federal regulations under Bill C-49, the Transportation Modernization Act, had previously been expected to take effect starting with the 2019-20 crop year, if the bill didn’t get royal assent until after Aug. 1, 2018.

But when C-49 got royal assent on May 23, 2018, it included a provision requiring the CTA to recalculate the VRCPIs for CN and CP for 2018-19.

With C-49 in play, 2018-19 becomes the first crop year in which CN and CP each get separately calculated VRCPIs.

C-49 also adjusted the VRCPI to subtract costs associated with regulated interswitching activities and containerized grain movements, which now won’t be included as revenues toward the MRE.

C-49 also requires the CTA, in its calculations, to recognize certain costs CN and CP incur to obtain and maintain the hopper cars they use to handle Prairie grain. — Glacier FarmMedia Network

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The Canadian Transportation Agency (CTA) on Tuesday announced it will set the volume-related composite price index (VRCPI) at 1.4371 for Canadian National Railway (CN) and 1.5148 for Canadian Pacific Railway (CP) for the 2019-20 crop year starting Aug. 1.

The 2019-20 crop year will be the second in which CN and CP get separate VRCPIs, following amendments passed last year to the Canada Transportation Act dealing with the maximum revenue entitlement (MRE) program, which sets revenue caps for Prairie grain freight.

The VRCPI is an inflation factor, reflecting a composite of forecast prices for railway labour, fuel, materials and capital purchases.

The changes in the VRCPIs for 2019-20 stem mainly from “modest increases in the fuel and material components” of the VRCPI, and from the “recognition of costs for the acquisition of hopper cars.”

Specifically, the CTA forecasts fuel price increases of 2.25 per cent for CN and 2.79 per cent for CP, taking into account increases in “fuel-related taxes” along with a projected decline in the price of crude oil in 2019, to be offset in part by a “small projected increase” in 2020.

The agency also expects “moderate increases for fabricated metals products, refined petroleum and coal products.”

The CTA said it might also have to make further adjustments to CP’s VRCPI, because the railway handed in its projected cost figures for maintenance of hopper cars on April 5, leaving the agency “insufficient time to make an informed determination on this matter given the statutory deadline of April 30.”

The annual MREs for CN and CP are calculated each year using a formula based on total grain tonnage and average length of haul, along with the VRCPI. The index numbers announced Tuesday will be used when the CTA sets the 2019-20 MREs, a decision due by Dec. 31, 2020.

Any overages CN and CP make on Prairie grain in a given crop year, plus penalties, are paid into the Western Grains Research Foundation’s endowment fund, income from which is directed to research work.

The CTA in December found CP and CN overtopped their 2017-18 MREs by about $1.5 million and $1.05 million respectively. — Glacier FarmMedia Network

Correction from source, May 6, 2019 — An earlier version of this article cited the initial April 30 press release from the Canadian Transportation Agency which incorrectly listed the VRCPI for CN at 1.4373.

Correction, Jan. 7, 2021 — An earlier version of this article incorrectly stated 2019-20 would be the first year in which CN and CP received separate VRCPIs. In fact, the CTA had set a single VRCPI for 2018-19 in April 2018, but in October 2018 it re-determined the VRCPIs separately for the two railways for 2018-19, making 2019-20 the second year with separate VRCPIs. We regret the error.

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The Canadian Transportation Agency on Monday announced Canadian Pacific Railway and Canadian National Railway overtopped their maximum revenue entitlements (MREs) for the crop year by $1,500,513 and $1,047,285 respectively.

CN’s MRE-covered grain revenue for 2017-18 hit $788.06 million, while CP’s came in at $709.5 million, the CTA said.

The two companies now have 30 days to pay those MRE overages, plus penalties of five per cent (for CN, $52,364; for CP, $75,026), to the Western Grains Research Foundation (WGRF), the mandated beneficiary. Income from the WGRF’s endowment fund is directed to research work.

In all, the CTA said, the two railways moved 40,618,285 tonnes of MRE-covered western grains during 2017-18, down six per cent from the previous crop year. CN moved 20.98 million tonnes, while CP moved 19.63 million.

The CTA said the average length of haul in 2017-18 came in unchanged from 2016-17, at 953 miles (1,534 km), with CN’s at 1,007 miles and CP’s at 896.

The railways’ annual MREs are calculated by way of a formula factoring in the tonnage of grain and average length of haul along with the volume‑related composite price index (VRCPI), a figure the CTA determines by April 30 each year.

The VRCPI — an inflation index reflecting a “composite” of forecast price changes for railway labour, fuel, material and capital purchases — was set in late April last year at 1.3817, up 4.1 per cent from 2016-17, based mainly on an expected 3.5 per cent increase in forecast price changes for “railway inputs.”

That forecast hike was based mainly on expectations for a rise in West Texas Intermediate (WTI) crude oil values on average in 2017, the CTA said at the time.

The VRCPI’s increase for 2018-19, meanwhile, was limited to 2.8 per cent, due in part to the CTA replacing its 2017 railway input price forecasts with actual data.

Since 2000-01, the VRCPI has grown at an average annual rate of around two per cent.

In recent crop years, CN and CP both overshot their MREs in 2016-17 for a combined overage and penalties of almost $7.2 million; in 2015-16, for over $4.4 million; in 2014-15, for over $9.45 million; and in 2011-12, for over $672,000. CN overtopped its MRE in 2013-14, while CP exceeded its MREs in 2012-13 and 2010-11. — Glacier FarmMedia Network

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CP moved 25.8 million tonnes of western Canadian grain, grain products, soybeans and non-regulated principal field crops during the 2017-18 crop year. That’s a one per cent increase from the previous crop year and one percent greater than CP’s three-year average.

Canadian National Railway shipped four per cent less in 2017-18 than it did in the previous year, with 24 million tonnes carried.

Higher-than-expected yields and cold weather caused grain backlogs in the early part of 2018. Cold weather forces the railways to run shorter trains.

The railways are under increased scrutiny this year following the federal government’s passing of the Transportation Modernization Act earlier this year. The Act contains provisions to allow long-haul interswitching, requires railways to file winter grain movement reports and changes maximum revenue entitlements (MRE), a pricing structure that sets out what railways can charge to ship grain.

Another aspect of the Act which will impose financial penalties on railways for failing to deliver on promised service will take a year before a process can be established to hear complaints and administer rulings.

Neither railway responded to interview requests in time for this story.

In a report to federal Transport Minister Marc Garneau, CP published its plan for the upcoming shipping season. It expected the western Canadian crop to come in at 70.8 million tonnes. With carry-over stocks from the 2017-18 crop year, the system will move about 83.4 million tonnes this marketing year, said CP. That is five per cent larger than the previous five-year average.

Those estimates can vary wildly once the harvest starts to come off, CP’s document stated. Last year’s crop was originally estimated at 65 million tonnes, but ended up at about 71 million, a difference of almost 10 per cent.

“Our agricultural shippers have needs that are unique within our book of business, and we believe an ongoing dialogue with those companies is essential to understanding and meeting their needs,” Joan Hardy, CP’s vice-president of sales and marketing for grain and fertilizers, said in a news release. “Our plans for moving this year’s crop reflect that.”

CP said it plans to supply 5,500 hopper cars each week to meet grain-shipping requirements through autumn, until the Port of Thunder Bay closes for the season. After that it is aiming to supply 4,000 cars per week.

CP said it has more than 700 employees that are currently being trained and it expects to have more than 100 remodeled locomotives added to its fleet by the end of summer.

CP added it planned to spend in excess of $1.55 billion to replace track assets and upgrade its network.

Both railways said changes to the MRE enabled them to invest more into their grain-handling assets.

CN said it planned to have 1,000 new hopper cars in place over the next two years, 200 new locomotives over three years and about 1,200 new locomotive conductors. It also embarked on a $3.5 billion capital spending plan.

— Terry Fries writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting.

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Wade Sobkowich, executive director of the Western Grain Elevator Association, said despite the heat stress that has hit many crops this year, grain companies expect this year’s overall crop to be roughly equivalent to those of the past two years, when shipping backlogs were an issue.

“There’s been a lot of heat stress but we’re still seeing a crop size that is going to be somewhere in the neighbourhood of 70 million tonnes, 71 million tonnes. So, it’s still a very sizable crop in Western Canada.

“We’re still talking about the new normal here; what is a very large crop in Western Canada.”

He said it remains to be seen whether provisions in the new Transportation Modernization Act (formerly Bill C-49) will benefit shippers.

Some of the provisions in the act will be in place, Sobkowich said. Those include long-haul interswitching, requirements for railways to file reports on winter grain movement and changes to the maximum revenue entitlement (MRE), which sets down a pricing structure that railways can charge to carry grain.

However, a key aspect of the transportation regulatory changes made this spring — the provision that allows for reciprocal penalties for service failures — will not be available this crop year. That’s because a lengthy process is needed to establish what service contracts should look like and what the penalties should be.

“That’s something we hope will be in place for the 2019–20 crop year,” Sobkowich said.

Both national railways have announced capital spending programs designed to help avoid a repeat of the recent grain backlogs.

Sobkowich said it’s difficult to say what effect those changes will have until the busy shipping season arrives.

“Rail service now is pretty good, but it’s always good this time of year. What happens after the harvest comes off, that is the most important time.”

World demand for Canadian grain, pulses and oilseeds runs in earnest from mid-September to April — and that’s when when railway performance will be judged, he said.

Global trade disruptions this year could make the situation less predictable for grain companies trying to assess market risks, he said, but grain movement is fairly stable.

“That doesn’t have much of an impact on movement, though, because they’re going to move as much as they can during that peak period.”

Sobkowich said the premium markets will remain off the West Coast and grain shippers will still use terminals there as much as possible.

Most grain shipper members of the WGEA have signed onto shipping programs with one of the railways, he said, but only because they see it as better than having no agreement at all. Over the long term, they want reciprocal agreements with service standards and penalties, he said.

As well, the WGEA would like railway grain service plans filed with the federal government to be based on actual car delivery targets, not maximums.

The railways have promised a maximum of 5,500 cars per week until the weather gets cold, then a maximum of 4,000 cars per week.

Sobkowich said he’d rather see minimum guarantees from the railways with the expectation they would then strive to beat those numbers.

“We’ll see this year. They’re promising the same numbers (as last year). Maybe they’ll come closer to meeting these numbers, we don’t know yet.”

This summer, Canadian National Railway (CN) budgeted $3.5 billion in capital spending to upgrade its locomotive fleet, rail cars and improve track.

Canadian Pacific Railway (CP) promised to have 15 per cent more locomotives available to haul grain this autumn and is investing $500 million on new grain cars. It hoped to have 500 in place for this crop year.

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