When a farmer delivers board grains to an elevator, he receives payment for his grain, minus certain deductions. One of these deductions is freight. Freight is charged at the single car rate — the rate a shipper would pay to send a single car to Vancouver. Of course, elevators don’t ship in single car blocks. They normally ship in 50-or 100-car blocks (56 and 112 for CP lines) and by doing so, they are charged a lower price for freight.
Using Cargill at Camrose East as an example, CN charges $27.27 per tonne and $23.22 per tonne for 50 and 100 car blocks, respectively, shipped to Vancouver, and $31.31 for a single car. (These rates are from CN’s website.) Thus Cargill deducts $31.31 per tonne for freight from farmers, but may pay as little as $23.22 per tonne in actual freight charges. Cargill can use this difference for anything it sees fit. I would imagine a large share is used to pay trucking incentives, but it does not have to be used for that purpose. Basically, if you are receiving a trucking incentive of less than $8 per tonne, you are over paying for freight.
When I tell farmers the above, I usually get one of two responses. The first response goes something like: “That doesn’t seem right, elevators should only deduct what they actually pay for freight.” The second response I hear is: “OK sure. It makes sense that the elevators should gain some benefit from being able to load large blocks of cars. It must save the railroads lots of money.” At face value, both responses seem fair. Why shouldn’t cost savings of loading large blocks be passed onto the elevators, and then (possibly) onto the farmer who delivers grain? My problem is not with the railroads passing on savings to elevators. My problem is with the size of savings being passed on.
Our local line offers us a case study as to how much CN saves by having elevators ship in 50 car blocks. At the moment, we often move 50 car trains, but since they are not in a single spot, we are charged the single car rate. Imagine if we did spot all 50 cars at one place. We would then get a $4 per tonne discount, which is $360 per car and $18,000 per train. Do you honestly believe that CN would save $18,000 by simply dropping cars off in one spot rather than dropping them off at five spots? I do not. In fact, a recent study by John Edsforth has pegged the average cost savings of 100-car spots at around $3 per tonne, when compared to single cars, and savings of $2 per tonne for blocks of 10 to 24 cars. (John Edsforth is a rail analyst with Travacon Research. The Producer Car Shippers of Canada commissioned him to do a study on cost savings from shipping in multi-car blocks.)
So if the railroads are not saving $8 per tonne when elevators load 100 car spots, then why do they give an $8 savings? This may seem like poor business by the railroads, but in fact they could give $20 discounts and still make the same amount of profit! This may seem to make no sense, and for a normal business it certainly would not. But the railroads are not normal businesses. They are regulated by the Canadian Transportation Agency. (See www.cta.gc.cafor more info.) Under the current regulatory framework, the railroads are only allowed to generate so much revenue from hauling grain. This system is called the revenue cap. Under the revenue cap, railroads are free to charge whatever they want for freight, so long as they do not exceed the revenue cap. Thus, the railroads have a very real incentive to charge just enough to exactly meet the revenue cap. If they charge too little, then they have left that money on the table. If they charge too much, they (may) have to pay that back. (CP recently paid the excess they collected plus a 15 per cent penalty to the Western Grain Research Foundation.) This means that if CN/CP moves so many cars of grain so many miles, they can collect “X” dollars in freight. There is nothing saying how they get this X dollars. They can charge everyone the same amount for freight, or they can charge 100-car shippers half as much as everyone else. To CN and CP, it doesn’t matter as long as they collect a total of X dollars.
What does matter to CN and CP is their costs. Since their average revenue per tonne per mile is guaranteed, they can make more money by lowering their costs. Thus, if 100 car spots save them $2 per tonne, they will push for shippers to ship in 100 car blocks since this means $2 per tonne more profit for CN/CP. Their average revenue per tonne remains the same, but now their costs are lowered.
Does this matter to farmers? Yes! Currently single car freight rates are too high, and multi-car rates are too low. Multi-car shippers are being subsidized by small shippers with farmers’ money! I am not advocating that railroads should not be allowed to give discounts to large shippers — it only makes sense from an efficiency standpoint. All I want is for these discounts to be equal to the cost savings that the railroads realize.
Matt Enright farms near Rosalind, Alta.