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Canadian Grain Producers Eye Port Congestion, Winter Conditions


The 2019-20 crop year is well underway in Canada, and grain shippers are watching how Canadian National (NYSE: CNI) and Canadian Pacific (NYSE: CP)  will manage service levels during another year of potentially high grain volumes, particularly in the winter months when cold weather and competing commodities threaten rail performance. 

"It's tough to know how things will shake," said Greg Northey, vice president of corporate affairs for Pulse Canada, a trade group representing producers and traders of dry beans, chickpeas and lentils.

For now, the railways are anticipating high grain volumes this year, in line with volume highs from the previous year. In the 2019-20 crop year, which began Aug. 1 and runs through July 31 in Canada, wheat production is expected to rise to 33.3 million metric tonnes (mmt), compared with 31.8 million in 2018-19, according to the U.S. Department of Agriculture's latest monthly grain supply and demand report.

Both CNI and CP reported earlier this summer record grain hauls. CNI moved more than 27.5 mmt in 2018-19, while CP moved 26.8 mmt for the crop year.

Rail service issues can start to show up in December as volumes for other commodities can pick up. For instance, last winter the railways encountered congestion at the Port of Vancouver. The congestion and service issues led the Canadian Transportation Agency to examine earlier this year whether CNI and CP responded accordingly to service issues.

"We are concerned this could be a major pinch point again this year with demand for product in various sectors increasing on Vancouver's North Shore," said Wade Sobkowich, director of the Western Grain Elevator Association. "The Port of Vancouver has announced that it has secured federal dollars for infrastructure projects in the port to address this issue. However, those won't be completed for a number of years."

December, January and February are also the months when winter weather impacts can hamper service because frigid temperatures can restrict train speeds.

"The balancing act that the railways face is making sure they have the resources available so that they can run as close to capacity in the winter," Northey said.

Another issue that could affect rail service is CNI and CP's focus on higher volume throughputs. Both CNI and CP have bumped up their projected weekly railcar capacity for the grain sector to accommodate higher grain volumes. CP has increased its railcar capacity projects from 5,500 railcars per week to 5,700 for the new crop year for the periods of August to December 2019 and April to July 2020, and it increased its January-March capacity to 4,250 railcars/week, compared with 4,000 railcars/week in 2018-19. 

CNI increased its railcar capacity projections from 4,000 railcars/week to 4,150 railcars/week for wintertime bulk grain and 5,500 railcars/week to 5,650 railcars/week for non-winter bulk grain.

"These are numbers the industry can work with for the upcoming year and it is positive to see the railways increasing these numbers year-over-year. We will want to see annual increases going forward to catch us up to the crop size increases we've experienced over the last five or six years," Sobkowich said.  

He continued, "The big question will be how closely will the railways come to meeting these numbers. This we do not know, as neither CNI nor CP met last year's thresholds they set for themselves week in and week out."  

Northey said there's also some concern about whether smaller grain commodities will have the same rail service available to them given the trend toward higher-capacity grain trains. While there is a huge market for grain and a trend toward high-capacity trains and loop tracks, specialized products move in smaller blocks such as containerized movements. If the focus is on grain products that can be moved more easily on the high-capacity trains, grain producers who move products on container or hopper cars are watching to see if the railways will maintain their service levels for smaller customers. These grain products include lentils, peas, mustard seed, chickpeas, fava beans and malt barley.

"When your resources are stretched, you start moving things that are easy," Northey said.

But the railways are under common carrier obligations per the Canada Transportation Act, Sobkowich said, so if there is preferential treatment between groups of shippers, the railways open themselves up to the potential filing of level-of-service complaints to the Canadian Transportation Agency. 

"It is true that the railways undertake practices to encourage the loading of unit trains as much as possible to create efficiencies.This allows them to run fewer locomotives, fewer train slots and require fewer person hours to move the same volume and therefore earn the same revenue under the maximum revenue entitlement," he said. 

Shippers will be watching how the railways are performing through reports from the weekly Ag Transport Coalition indicating railcar order fulfillment percentages, weekly reports from the Grain Monitor looking at country stocks and vessel lineups and last-mile issues when delivering the railcars to the terminals for unloading, Sobkowich said.

The railways plan for hauling grain volumes

While grain shippers are unsure how rail service will perform this year, the railways are confident that capital investments to their networks will enable grain producers to haul more volumes for domestic and export use.

"CP's record performance and focus on innovation supports the entire grain supply chain in moving increased volume," said Joan Hardy, CP vice president of sales and marketing for grain and fertilizers. CP is in the midst of using and developing 8,500-foot loop tracks at several CP-served facilities as part of its high-efficiency product train model to load higher grain volumes. 

Both CP and CNI were required to submit 2019-20 grain plans to Minister of Transport Marc Garneau in July. CP's plan is available here.

"At CNI, we are confident that with the assets we have in place, and the innovative programs we continue to offer our customers, we have the capacity to meet the demand to move grain over the course of the 2019-2020 crop year," the railway said in its grain plan. CNI invested C$3.9 billion in 2019 in its western network to accommodate higher volumes. 

CNI has established an agricultural adviser council that will provide feedback on CNI's grain plan and its winter plan as well as serve as a forum to discuss policy issues such as international trade and regulatory barriers. The railway also said it is updating its grain plan monthly. 

"The creation of an advisory council became an obvious way to keep the discussion going on how to better serve our agriculture partners. We want them to raise issues and offer us unbiased and honest perspectives on what works, what does not, what needs to be improved and what are key future trends," said Sean Finn, executive vice president of corporate services and chief legal officer of CNI.

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