WINNIPEG, Manitoba/OTTAWA (Reuters) - Canada’s government took the drastic step on Friday of forcing the country’s two major rail companies to each ship at least 500,000 tons of grain per week to ease a massive backlog that is hurting farmers.
Record crops of wheat and canola, along with frigid weather, have overwhelmed Canadian National Railway Co (CNR.TO) and Canadian Pacific Railway Ltd (CP.TO), resulting in overdue orders for tens of thousands of grain cars.
“Farmers are becoming increasingly frustrated by the continued poor performance of the railways. The railways dropped the ball. This situation is not acceptable,” Agriculture Minister Gerry Ritz said in Winnipeg.
The governing Conservative party has a strong rural base in Western Canada, where the grain transportation bottlenecks are the worst. Still, ordering the railways to make minimum grain shipments is seemingly at odds with the right-leaning government’s pro-market philosophy.
“There must have been a lot of political pressure because this government is not one to quickly intervene in the marketplace, for sure,” said Paul Earl, acting director of the University of Manitoba’s Transport Institute.
He added that he could not recall Canada ever taking such a step before.
The railways, which have blamed delays on the unusually cold winter and the sheer size of last year’s bumper harvest, can be fined up to C$100,000 ($90,000) a day if they do not meet the minimum shipping requirements.
Moving 500,000 tons per week is at the upper limit of CN’s abilities, but achievable if the entire supply chain works together, said Jim Feeny, spokesman for the Montreal-based railroad.
The extra grain volume that needs to move this year is similar to the total volumes of some other commodities that CN transports, he said.
“No supply chain in the world could handle that big an increase on such short notice as we received with this crop last fall,” Feeny said.
CP spokesman Ed Greenberg said the railway was disappointed with the government’s action.
“CP’s position remains that moving grain from the farm to the port is a complex pipeline involving many parties and requires all participants of the Canadian grain handling and transportation system to work together, which requires a 24/7 commitment similar to the railways,” Greenberg said, adding that CP is committed to matching its record fall volumes, which would align with the government’s order.
The order takes effect immediately and will last for 90 days, although it can be renewed. It gives the two rail companies four weeks to ramp up deliveries.
The eventual weekly volume requirement of a combined 1 million tons is more than double the current volume moving, according to official figures, though Feeny said CN is already more than halfway to its target.
“Canada risks losing our global reputation as a reliable grain producer,” said Transport Minister Lisa Raitt.
Canada’s railways are also big shippers of coal, fertilizer and, increasingly, crude oil. Raitt said the government arrived at its minimum levels based on how much grain it knows the railways can ship without affecting the other commodities.
But others questioned the move.
“There’s likely a real weather element to this,” said Canaccord Genuity analyst David Tyerman, who covers the railroads. “It’s almost like we’re trying to regulate a situation that is being caused by factors beyond the control of the railroad itself.”
The agriculture minister said Ottawa would introduce draft legislation later this year to ensure Canadian shippers could get their products to market “in a predictable and timely way.” He gave no details.
But CN’s Feeny said introducing more regulation into the rail industry would be counter-productive.
Canada is the world’s biggest canola exporter and usually the No. 2 wheat exporter, but shipping bottlenecks have left crops landlocked.
Curt Vossen, president of Richardson International Limited, one of the country’s biggest grain handlers, said he needed more details before knowing how effective the government’s actions would be.
“I think we need to bring, clearly, accountability to all sides in rail transportation, and not just in agriculture,” he said.
Whatever happens next, there will be much larger supplies than usual of last year’s crop left over by summer, Vossen said.
As a result of the backlog, grain handlers have incurred penalties for keeping ships waiting at port and farmers have been forced to hold onto crops that grain handlers were unable to buy and move.
A lack of rail cars going to the United States has had an especially big impact on U.S. oat millers, who depend on top exporter Canada for supplies to make cereals and bars.
Chicago nearby oat futures, which hit an all-time high on Tuesday, dropped nearly 5 percent on Friday.
CN and CP shares, which have been trading near record levels, were little changed on Friday on the Toronto Stock Exchange. CP shares in New York (CP.N), however, dropped 1.6 percent.
($1 = $1.11 Canadian)
Additional reporting by Solarina Ho in Toronto; editing by James Dalgleish, Jonathan Oatis and G Crosse