As the 21st century unfolds, agricultural exports continue to play a major role in Canada’s economic growth. Market opportunities are emerging that could dramatically increase our country’s grain exports by 2050, and to seize this opportunity, Canada must ensure the reliable and timely delivery of grain from its farm gates to its ports.
However, efforts by successive Canadian governments to manage the export movement of grains through the 20th century did not serve western Canadian farmers well. Regulation by the federal government, and its agent the Canadian Wheat Board, of marketing, transportation and grain storage led to efficiency losses, massive investment deficits and large government subsidies.
Remnants of that old command-and- control regulatory framework remain. Specifically, the Maximum Grain Revenue Entitlement Program (Revenue Cap), which has been in force since 2000. It creates a ceiling on the total revenues that Canada’s Class 1 railways can earn from moving non-U.S.-bound export grain in a crop year, based on volume and length of haul. This cap is hurting the efficiency, growth and productivity of Canada’s grain handling and transportation system, by limiting the investments and innovation needed to competitively move Canadian grains to world export markets. That, in turn, is reducing farmers’ incomes.
Although CN and CP make large annual capital investments – in 2013, they invested some $1.8 billion back into their networks – the Revenue Cap removes the incentive for these companies to invest in GHTS-related efficiency and capacity. Between 2001 and 2013, railway grain revenues increased by just 14 per cent per tonne-kilometre – less than half the rate of increase for all other commodities. Grain rates have also not kept pace with inflation.
Canada’s grain handling and transportation system needs investment – in particular, to address the aging fleet of hopper cars. The number of serviceable hopper cars is now hovering around 8,366. If this fleet isn’t replaced quickly (which will cost an estimated $630 to $800 million), the capacity of Canada’s GHTS to move grain will be dramatically reduced.
The Revenue Cap also creates a disincentive for railways to move grain in containers, which could provide important additional capacity during periodic surges in grain export demand. Railways’ costs are higher for container movements, so the rates they charge are higher too. That extra revenue eats up the Revenue Cap more quickly. As a result, more grain shippers are forced to move their products to port by other means.
The regulation of grain transportation in Canada is unique. Unlike all other commodities – which are transported by rail through commercial arrangements that reflect market-based principles – the federal government has intervened continuously and, too often unsuccessfully, in the transportation of grain by rail.
Freeing western grain movements from the arcane regulatory approach of the past is essential to Canada’s international competitiveness. The Revenue Cap lies at the heart of the failures of Canada’s grain handling and transportation system, and stands as a threat to its continued health.
Western Canadian farmers have lost market share and incomes because the GHTS is inefficient. Delays in investment to modernize the GHTS mean that inefficiencies will continue to persist, and farmer incomes will be reduced. Finally, to the degree that grain transportation does not pay its full costs, other commodity shippers must. For that reason, the Revenue Cap acts like an export tax on all non-agricultural products.
Free markets work to create system efficiencies. In the end, western Canadian farmers have more to gain from recovering their share of a growing world grain market and the related increased income benefits, than whatever perceived protection Canada’s current regulatory system has to offer.
