March 7, 2014 / 5:24 PM / in 4 years

UPDATE 2-Canada orders railways to boost grain shipments to ease logjam

By Rod Nickel and David Ljunggren

WINNIPEG, Manitoba/OTTAWA, March 7 (Reuters) - Canada’s government took the drastic step on Friday of forcing the country’s two major rail companies to ship at least 500,000 tonnes of grain each a 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 and Canadian Pacific Railway Ltd, 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 worst. Still, ordering the railways to make minimum grain shipments is out of step 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 taking such steps before.

The railways, which have blamed delays on the unusually cold winter and the sheer size of last year’s harvest, can be fined up to C$100,000 ($90,000) a day if they do not meet the minimum shipping requirements.

Spokesmen for the two railways could not immediately be reached for comment.

The government 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 tonnes is more than double the current volume moving, according to the government.

“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.

Ritz said Ottawa later this year would introduce draft legislation to ensure Canadian shippers could get their products to market “in a predictable and timely way.” He gave no details.

Canada is the world’s biggest canola exporter and usually the No. 2 wheat exporter, but the 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 will be.

“I think we need to bring, clearly, accountability to all sides in rail transportation, and not just in agriculture.”

Whatever happens next, there will be much larger supplies than usual of last year’s crop left over by summmer, 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 of the coarse grain to make cereals and bars.

Chicago nearby oat futures, which hit an all-time high on Tuesday, dropped 4 percent by midday Friday.

CN and CP shares, which have been been trading near record levels, were little changed on Friday on the Toronto Stock Exchange. CP shares in New York, however, were down 1.3 perent at $156.45.

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