Bloomberg News

Grain Boom Busting Canada Farmers on Clogged Rails: Commodities

March 04, 2014

Grain Railway Cars Sit near the Viterra Inc. Grain Terminal

Grain railway cars sit near the Viterra Inc. grain terminal in Vancouver, British Columbia. Farmers collected more wheat, canola and corn than ever before in 2013, and surges from multiple crops in the same season placed unprecedented pressure on rail lines that handle 95 percent of Canada’s output. Photographer: Lyle Stafford/Bloomberg

Canada’s grain-supply boom is turning into a bust for farmers as record harvests and railroad logjams make sales almost impossible.

Consider Dennis Gallant, 76. He has yet to collect one cent on the wheat, canola, barley and oats harvested last year on the 1,000-acre farm in Warren, Manitoba, he has run since 1960. He has called the local grain elevator every 10 days since October. The answer since is always the same. No thanks. We’re full.

“This is crazy,” said Gallant, who normally has unloaded half his crop by March. The delays mean C$200,000 ($180,000) in lost revenue as prices slumped, and Gallant says he needs a C$100,000 loan to cover expenses. “We’re bloody strapped.”

Four months after the harvest, the crush of new supply is overwhelming a rail system needed to get grain to export depots across Canada, the world’s top canola and oat supplier and No. 2 shipper of wheat. A backlog of rail-car orders tops 60,000, eight times more than a year ago, boosting transport costs as most crop prices drop. The National Farmers Union estimates lost sales at C$3.5 billion, and Agriculture Minister Gerry Ritz threatened mandates if railroads don’t fix the problem.

Constraints in moving crops for Canadian Pacific Railway Ltd. and Canadian National Railway Co. (CNR) have been exacerbated by an unusually frigid winter across the Prairie Provinces and a surge in shipments of crude by rail in Canada, the top supplier of imported oil to the U.S. Grain companies halted purchases of some crops and pulled back on sales, prompting the biggest crisis for the industry since the government dismantled the grain-marketing monopoly of the Canadian Wheat Board in 2012.

Record Harvest

Farmers collected more wheat, canola and corn than ever before in 2013, and surges from multiple crops in the same season placed unprecedented pressure on rail lines that handle 95 percent of Canada’s output.

More than 60,000 rail-car orders wait to be filled by railways, compared with a backlog last year of 7,300, said Mark Hemmes, the president of Edmonton-based Quorum Corp., which was appointed by the federal government to monitor Canada’s grain transportation system. Railroads are allocating fewer grain cars in the Prairies, where most crops are stranded, he said. They plan to send an average of 3,800 per week, down from about 5,000 in late 2013, he said. Each car can carry 90 metric tons.

Expanding Surplus

The delays have left more stockpiles of the two biggest crops than a year earlier. As of Dec. 31, wheat inventories were up 38 percent at 28.31 million tons and canola jumped 55 percent to 12.6 million tons, Statistics Canada data show. Reserves of coarse grains, including corn, barley and oats, increased 19 percent.

“This is the highest backlog ever,” said Wade Sobkowich, executive director of the Winnipeg-based Western Grain Elevator Association, which represents handlers including Glencore Xstrata Plc’s Viterra unit and Richardson International. “We are many weeks behind in shipping, and we are paying vessel demurrage and contract-extension penalties on the sales in place right now.”

As grain sits unsold, prices are dropping. Last year’s record Canadian wheat crop of 37.5 million tons helped to expand the global surplus. World output will reach a record 708 million tons in the 12 months that end in June, the London-based International Grains Council said Feb. 27.

Price Outlook

The price of wheat, Canada’s biggest crop, is down 10 percent in the past year to $6.30 a bushel on the Chicago Board of Trade, while canola in Winnipeg tumbled 30 percent to C$440.70 a ton. The Standard & Poor’s GSCI Spot Index of 24 commodities rose 2.2 percent in the past 12 months, while the MSCI All-Country World Index of equities jumped 16 percent. The Bloomberg Treasury Bond Index fell 1 percent.

Goldman Sachs Group Inc. predicts wheat will tumble to $5.75 in 12 months, analysts led by Jeffrey Currie said in Feb. 12 report. Agricultural commodities will drop 9 percent over the next year, trailing only a 14 percent drop for precious metals among projections for raw materials, Currie said.

Lower prices will contribute to a 1 percent drop in domestic farm income to C$53.4 billion in 2014, and crop receipts will slide 3 percent to C$29.1 billion, the government’s Agriculture and Agri-Food Canada said Feb. 19.

Farm Credit Canada, the largest agricultural lender, sent letters to 16,000 farmers who may have trouble making payments offering access to short-term loans, Remi Lemoine, executive vice-president and chief operating officer, said from Regina, Saskatchewan.

Cash Advances

Applications for federal cash advances jumped to 12,500 from 10,000 a year ago because of the backlog, said Rick White, general manager of the Winnipeg-based Canadian Canola Growers Association, the largest administrator of the government loan program. Average loan requests were C$130,000, up from about C$105,000, and a record 650 applied for the C$400,000 maximum because they can’t sell their grain, he said.

“There’s a lot of growers out there that have very little sold, and they just don’t know what to do,” said Jonathon Driedger, senior market analyst at FarmLink Marketing Solutions in Winnipeg. “The price has tanked, and they’re having a tough time finding delivery space for it.”

Harvest-season delays aren’t unusual in Canada, and the impact on farm income probably will be limited, said Jerry Klassen, the manager of Canadian operations and trading in Winnipeg for GAP SA. “Farmers will have to get creative over the next few months with financing because of limited delivery opportunities, but eventually the grain will move,” he said.

Strong Financials

Growers also are in better financial condition than in years past. Farm debt of C$72.63 billion in 2012, the most recent data available, was equal to 17.7 percent of assets valued at C$408.1 billion, down from 19 percent in 2009 and the lowest in at least a decade, according to Agriculture and Agri-Food Canada. The number of bankruptcies plunged to 46 in 2012 from 235 in 2005, government data show.

Railroads say backlogs will ease once extreme cold subsides. Canadian National plans to allocate more than 4,000 rail cars a week when temperatures return to normal and is lining up crews and locomotives to send as many as 5,500 to country elevators once the Port of Thunder Bay reopens on Lake Superior, possibly in early April, Mark Hallman, a spokesman for the Montreal-based company, said in an e-mailed statement.

Deep Freeze

CN runs shorter trains when temperatures drop below minus 25 degrees Celsius (minus 13 Fahrenheit), boosting the need for more crews and slowing operations, Hallman said. The frequency and duration of extreme freezes across the Prairies and the northern U.S. have been “the most challenging,” Hallman said.

“Our railway will be returning to levels from the heavy harvest period in the fall,” said Ed Greenberg, a spokesman for Calgary-based Canadian Pacific.

That’s not soon enough for Saskatchewan Premier Brad Wall, who called on the federal government to pass an emergency law to clear the backlog on rails controlled by Canadian Pacific and Canadian National. “We have a duopoly here,” Wall said Feb. 28 in Ottawa, after meeting with Prime Minister Stephen Harper. “There’s two options, and the product’s not moving.”

In Saskatchewan, the biggest wheat-growing province, farmers face delays as long as three months for grain deliveries, and some may not be able to meet loan payments to finance operations, the Agricultural Producers Association of Saskatchewan, a farmer group in Regina, said in a Jan. 13 statement. After grain output jumped 40 percent last year, exports as of Jan. 5 were up just 2 percent, the group said.

Mandate Changes

With Canadian farmers expected to expand canola output by 40 percent in a decade and global demand set to surge over the next 20 years, railroads will have to make changes or else the government will step in to mandate them, said Ritz, the agriculture minister.

“We need the shipping capacity for what we produce today and must establish the capacity for what we will produce tomorrow as well,” he said at a Winnipeg conference on Feb. 24.

Canada should amend the grain-revenue cap to give railways a greater incentive, according to the Western Canadian Wheat Growers Association. The Canadian Transportation Agency caps how much the companies can earn handling regulated grain.

In December, railways loaded 18,640 rail cars with wheat, down from 23,283 in November, the most recent government data show. Fuel oils and crude petroleum were loaded on 16,031 rail cars in December, up from 15,672 in November. Expanding output from Canadian oil sands and pipeline bottlenecks are boosting demand for rail shipments and calls for improved safety, after a July derailment in Lac-Megantic, Quebec, killed 47 people.

Slowing Sales

Shipments of grain will be 11 weeks behind schedule if railways continue allocating grain cars at current levels, Sobkowich said. Prairie elevators are at capacity, and some companies have told farmers they will not be able to take deliveries of grain until late spring or early summer, he said.

The delays are affecting sales. Japan bought 46,849 tons of U.S. wheat Feb. 6 as an alternative to Canadian supply. The Asian nation will probably need to depend more on American wheat as the bottlenecks continue, according to Nobuyuki Chino, who has traded grains for more than three decades and is the president of Continental Rice Corp. in Tokyo.

Canada exported 1.1 million tons of wheat in January, down 9.6 percent from the same month in 2013, and canola shipments dropped 30 percent to 498,100 tons, Canadian Grain Commission data show.

Wheat Board

The logjam is partly a consequence of the government’s decision to end the monopoly of the Canadian Wheat Board in 2012, said Bill Gehl, a Saskatchewan farmer and chairman of a group that opposed the change. The CWB, which was the world’s largest marketer of wheat and barley, had more power to negotiate with railroads than the private companies do and had more control over coordinating movements to ports, he said.

“This squarely rests on the shoulder of the federal government,” said Gehl, who estimates farmers will be stuck with more than 40 percent of their 2013 crops before this year’s harvest. “They got rid of the single-desk. That’s it.”

The few elevators that are purchasing in January were offering C$4 a bushel for the top grade of high-protein wheat, half the C$8 farmers got a year earlier, said Norm Hall, a farmer and president of the Agricultural Producers of Saskatchewan.

“It’s ironic after such a big crop being grown, Canadian farmers are victims of our logistics and transportation,” said Doug Chorney, the president of Winnipeg-based Keystone Agricultural Producers. “This is really unprecedented.”

To contact the reporter on this story: Jen Skerritt in Winnipeg at jskerritt1@bloomberg.net

To contact the editor responsible for this story: Millie Munshi at mmunshi@bloomberg.net


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