Since harvest has wrapped up, grain markets have been acting out an epic interpretation of a three act Shakespearean tragedy. There has been mystery, intrigue, feelings of horror, hurt and betrayal, and rumours of foul play. That sums up how many of you may be feeling as the grain markets continue on this downward death spiral about which we are all too afraid to ask, “how low can it go?”
Prices have been historically high the past two years and we want to hold on to them as long as possible, even if it’s through tactics like avoidance or denial of the facts. The world grain supply has dramatically improved over the past 12 months. Avoiding this reality will not make it go away!
Supply and demand are balanced out by price! Too much of one or the other can impact price dramatically and we have just had too much supply. World demand is still there and growing, but there is no longer the same concern about there not being enough grain to meet the world’s demand as there was during the past two years, when world production was down dramatically due to weather events aroung the globe.
Now, add to this the unfortunate Canadian reality: a bottleneck in our railroad transportation system that will not allow us to move a record crop to market over a 12-month period. As a landlocked nation we are very reliant on railroads to move most of our import and export products. This has the system running at maximum capacity most of the time. To increase volumes beyond today’s levels, a lot of money needs to be spent laying down new track through the mountains. That is not a cheap or easy job that can be done quickly.
If grain volumes for export are going to continue to increase they are going to have to compete with all other products for track space, and right now grains are at a real disadvantage when it comes to rail car allocation because of the revenue cap that is in place. This cap helps keep grain producers’ freight costs down, but it also restricts the total revenues that the railroads can make hauling grain as compared to other products where there are no revenue caps in place — pretty much every other bulk commodity that they transport. As publically traded, for-profit corporations, why would the railroads allocate extra resources to a commodity that will generate them less revenue than all the other commodities they handle?
For grains to get enough cars to get to export position, the revenue cap is going to have to either be adjusted or eliminated to allow for a level playing field from a freight cost perspective.
Before railroads can build new tracks through the mountains they will have to convince their shareholders that they can make a profitable return on such an expensive venture. They must show projected increases in volumes that will lead to increases in total revenues and bottom line profits as part of their strategy. As an investor, if I saw a projection for an increased demand for grain movement but with a revenue cap in place, I would not be quite so eager to spend major dollars building new track unless I knew I could get the same return per unit from grain as I do from all the other products the railroad hauls.
What will come from this? My opinion is that you will see the railroads and grain companies lobby the federal government to adjust, but more likely outright eliminate the revenue cap and let the marketplace set the freight costs for grains, by letting grains compete with all other products for track space.
Grain companies want additional cars to move more grain, which means more profits for them. The only way they will get more cars is if the railroads can make as much or more from freighting grain as they do all other commodities that they move. For this to happen the revenue cap needs to be readjusted or eliminated.
This becomes a very strategic and profitable business opportunity for grain companies and railroads, as they would both have the ability to generate more revenues by moving more volume. This would be good for the future of the grain industry and farmers in general because we are so reliant on export markets to buy the majority of the grains we produce. We need to get our product to market in a timely manner or lose buyers. We need railways and grain companies to step up and invest in infrastructure to make sure we can meet the ever-increasing world market demand and not be left behind because of our system capacity restrictions.
The bad thing about readjusting or eliminating the revenue cap is that any increase in freight costs will flow back to grain producers and be deducted directly off of your grain cheques. Call it the cost of doing business to get your products to market! You don’t mind paying for something if you can see a net benefit to your business, such as increased market opportunity or better value for the products sold.
In our situation — a bumper crop without the capacity to move it in a timely manner — we’ll be forced to hold grain over into next year. If there should be another good crop world wide next year it is most likely that prices will continue to slide as supply continues to build. If you’re forced to hold grain over, you’re in danger of having to take an even lower price next year.
How do we fix this so it is not farmers who take the brunt of this risk and loss? That is a question for someone well above my pay grade, but a first step would be to talk to your MLA and MP, to try to get the provincial and federal governments to start looking into what needs to be done to improve our transportation network across Canada, as it impacts many sectors of our national economy. †Brian Wittal has 30 years of grain industry experience, and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd. (www.procommarketingltd.com).