How Will CWB Privatization Affect Grain Markets and Rail Movements?
Date Posted: July 3, 2013
This article is reprinted from the USDA's July 4 Grain Transportation Report.
The United States and Canada are major grain producing and exporting countries, ranking first and seventh in terms of production and first and sixth in terms of exports, respectively.1
With many similarities between the grain markets of both countries, the recent dissolution of the Canadian Wheat Board’s single-desk status will likely further erode remaining differences as the two markets integrate.
Yet, differences will remain in key areas including rail transportation that can affect prices, transportation decisions, and competitiveness.
End of Mandatory Canadian Wheat Board
On August 1, 2012, the Marketing Freedom for Grain Farmers Act officially ended the Canadian Wheat Board’s (CWB) 77-year old government-mandated role as the sole buyer and seller of wheat and barley from Canada’s western provinces.
Since that time, the CWB has continued to operate as a voluntary organization and has entered a five-year transition period from a state enterprise to a private company. The CWB must be financially viable or face dissolution at the end of the five-year period.
The CWB uses price pooling to manage pricing risk for all wheat and barley exported or sold for domestic human consumption.
A price pool averages sales across a specific time period in different markets versus being subject to a specific day’s price in a specific market.
Although some producers will continue to use price pooling under the new voluntary format, others will weigh the risks of actively seeking opportunities to find prices that outperform the pool.
This may shift traditional marketing patterns as both U.S. and Canadian producers look across the border in search of the most lucrative prices.
Over the long term, this could involve more U.S. grain being sent directly to Canadian ports by rail and/or more Canadian grain being sent to U.S ports in the Pacific Northwest and along the Gulf of Mexico.
Some Canadian grain could also be railed to barge loading facilities along the Mississippi River.
Importance of Rail to Canadian Grain
Just as it does in the United States, rail transportation in Canada plays a vital role in helping grain reach domestic and international markets.
An analysis of weekly rail traffic between 2009 and 2012 shows that grain comprises roughly twice the total carload traffic on Canadian railroads as it does on U.S. railroads.2
Furthermore, the U.S. inland waterway system provides a competitive alternative to rail for many grainproducing regions in the United States.
However, Canada must rely more heavily on rail because of the long distances between grain-production regions and coastal ports or inland waterways.
A quick comparison of grains and soybeans transported by rail versus national production in 2012 shows that 85 percent of production went by rail in Canada compared to only 24 percent in the United States.3
Features of the Canadian Rail System
Although it is operationally similar, the partially deregulated Canadian rail market has some unique differences from that of the United States.
First, limits on individual rail freight rates for Canadian National (CN) and Canadian Pacific (CP) were removed in 2000 and replaced with an overall revenue cap for grain.
This gives each railroad the flexibility to price individual movements so long as the total revenues each receives on regulated grains stay beneath the mandated limit.
The railroads must return revenues in excess of the cap plus a five percent penalty to the farmer-financed and -directed Western Grains Research Foundation.
This applies to all regulated grain shipped via CN or CP from Canadian or U.S. origins to designated points within Canada.
Second, under the 1985 Canada Grain Act, grain producers have the right to order producer railway cars to ship their grain.
This option places a railcar in specific locations for the producer to load directly as an alternative to using the primary elevator system, allowing producers to market their grain directly to customers, but with added responsibilities such as meeting on-time delivery and the specified commodity quality.
Factors influencing the attractiveness of producer cars include rail line consolidation, grain elevator consolidation, grain prices, and freight rates.
Third, interswitching allows captive shippers to access a competing carrier’s service at a regulated rate.
Shippers are eligible if they have direct rail access to a single carrier and are located within 30 km of a competing carrier.
This gives shippers the option to choose which carrier they prefer, despite having physical access to only a single carrier.
Finally, the Fair Rail Freight Service Act became law June 26 as a complement to the Marketing Freedom for Grain Farmers Act.
It encourages service agreements between shippers and railroads and provides for arbitration if negotiations are not successful.
In addition, the Act enables the Canadian Transportation Agency to issue an administrative monetary penalty of up to C$100,000 for each violation of an arbitrated service-level agreement.
On the other hand, Canadian railroads may not immediately adopt the same level of technology that is present in the United States.4
For example, shuttle trains are a bigger component of grain rail transportation in the United States than in Canada.
Increased competition following the end of the CWB’s monopoly role may create a further incentive for the adoption of shuttle trains to achieve greater potential efficiencies.
Potential Shifts in Transportation Patterns
It is too soon to know how Canadian and U.S. grain markets will ultimately change as a result of the CWB’s transition to a private enterprise.
However, rail transportation is likely to play a critical role in determining individual producers’ marketing decisions and determining cross-border flows of grain.
1 USDA, Foreign Agriculture Service (FAS), Grain: World Markets and Trade, June 2013.
2 Association of American Railroads’ (AAR) Weekly Railroad Traffic, which includes all railroad operations under the nationality of the parent company, regardless of where the operation was performed.
3 AAR, Weekly Railroad Traffic; USDA, FAS, Grain: World Markets and Trade, June 2013.
4 Pates, Mikkel, “Market shift,” Agweek, January 3, 2012
For more information, call Surajudeen (Deen) Olowolayemo, USDA, at 202-694-3050.