[Recorded by Electronic Apparatus]
Wednesday, May 3, 1995
.1709 
[English]
The Chairman: Could we come to order?
I'd like to welcome and thank Lorne Hehn, chief commissioner of the Canadian Wheat Board, for coming today. With him is Harvey Brooks, head of the corporate policy group. We'll turn it over to Lorne for their presentation and then move to questions.
Lorne.
Mr. Lorne Hehn (Chief Commissioner, Canadian Wheat Board): Thank you, Chairman. It is indeed a pleasure to be with you today.
I understand that in making the best use of our time, you wanted to deal more specifically with the basis deductions for the Canadian Wheat Board pool accounts that we have envisioned for western Canada. Keeping that in mind, we'll restrict our opening statements to that topic. However, if there are other questions you might have in transportation as it relates to Canadian Wheat Board and grains, we'd certainly be pleased to entertain them.
.1710
The Chairman: I might say, Lorne, that you can do other points as we move along. What we're trying to do as a subcommittee is to look at future impacts in the absence of the WGTA, such as car allocation, Wheat Board control, and so on, as well. At the end of the day we want to be able to come up with a package of recommendations to the minister to address some of the impacts as a result of these major changes and those things.
Mr. Hehn: The federal government in the budget document stated that the Canadian Wheat Board pool account basis deductions would be implemented August 1, 1996. Subsequent to that statement, Mr. Goodale, in a meeting with the farm organizations - the May 16 group, as it's known today - indicated that if industry consensus could be reached regarding the changes, he was prepared to look at moving that up to be implemented in the 1995-96 crop year, which would mean August 1, 1995.
As a background to the whole question of the pooling basis, up until when farmers delivered grain, the deductions made from their cash tickets to reflect the freight cost have been a basis in Thunder Bay or Vancouver. In effect, this means the board purchases grain from farmers who use the elevator companies as agents or intermediaries at these terminal positions. In turn, when the farmer delivers grain to a country elevator, he pays the elevator costs and the rail freight. His share of the rail freight, as it's currently known, is deducted from that cash ticket in one of these positions. The position chosen is the one that's closest to his farm at the moment.
Currently, the deduction is highest at a point that's equidistant from Vancouver and Thunder Bay. If you look at that on a north-south line, that's currently just inside the Saskatchewan side of the Alberta/Saskatchewan border at a station known as Scott, just west of Saskatoon and just west of Swift Current.
At one time, sales returns at Thunder Bay and Vancouver were approximately equal and a significant portion of our sales was made FOB Thunder Bay and they moved out on salt water vessels. Today, however, most of the grain we sell through the eastern ports is sold on either an FOB or in-store St. Lawrence basis and it's moved by laker vessel from Thunder Bay to the ports in the St. Lawrence.
At one time the premium at the St. Lawrence would have more than offset the transshipping costs from Thunder Bay to the St. Lawrence. That's not the case today. In fact, the premium that did exist has virtually disappeared and transshipment costs have risen by some $20 a tonne. So we have a situation now where the value of grain in the buyer's eyes is about the same at a St. Lawrence port compared to a Vancouver port, but we have a $20 additional freight cost of getting the grain from Thunder Bay to the St. Lawrence.
Secondly, a larger portion of our exports moves west today than when this first basis deduction was first envisioned. Historically, about 60% of our exports moved east and 40% moved west. Today, based on our experience this year and last year, about 65% of our exports will move west. The overall amount moving west could be higher but it is limited by shipping capacity at the west coast ports. That capacity constraint isn't always there, but it's certainly there at peak shipping periods, especially in the fall of each year.
While grain moving west moves a shorter distance in total, the distance travelled by rail to the west coast is somewhat further than to Thunder Bay; hence the anomalies. We feel there are two anomalies that need to be addressed. Number one, farmers in the eastern shipping region are currently receiving a higher net return even though their grain travels much further in total to reach port or export position.
.1715
Farmers between Scott, Saskatchewan and the most easterly portion of the west coast catchment area - and that's somewhere east of Regina at the moment - receive an equal and in some cases a higher net return than those west of Scott, even though their rail transportation is greater in terms of their being further away from the west coast port.
To facilitate a consensus on how these anomalies might be addressed, we undertook to hire a consultant. Dr. Richard Gray, who heads up the economics department at the University of Saskatchewan, did an independent study for us on this proposal. We asked him to outline what proposals for reform they would envision that would be fair and reasonable, given the anomalies I've just mentioned.
Mr. Chairman, we can certainly make a full copy of that report available to the committee if you feel that will help your deliberations.
The Chairman: Yes.
Mr. Hehn: Additionally, the producer payment panel, which examined all aspects of a change in the method of payment of the Crow benefit rail subsidy, also examined several proposals to change the pooling basis deductions as well. To sum up their findings, two prominent proposals came into view. First of all, there was the Canadian Wheat Board '85 proposal, as it's known today. This proposal recognized the equivalence of west coast and St. Lawrence ports in sales returns.
In that proposal the board recommended a change in the basis deductions from in-store Vancouver and in-store Thunder Bay to in-store Vancouver and in-store St. Lawrence. The board's '85 proposal would be an accurate reflection of the relative grain values if the Canadian system had a catchment area for the west coast that was not constrained.
However, that's not the case. It is constrained. It's constrained because of logistics in certain periods of the year. It's also constrained in that there are not unlimited market opportunities out there. Because there are constraints, implementing the '85 proposal at this time would not reflect to farmers the true relative value of their grain, in our opinion.
The second proposal the producer payment panel looked at was known as the NGB proposal. The National Grains Bureau in 1990 proposed a structure that would take into consideration these capacity constraints at the west coast I've mentioned on west coast exports. Under their proposal, west coast exports were considered to be constrained between 19 million and 23 million tonnes. Using the upper limit of that, the 23 million tonne figure...that constraint would move the west coast catchment area over to somewhere around Sintaluta, Saskatchewan. For those of you who are not familiar with Sintaluta, that's a station approximately 50 miles east of Regina.
The freight deducted at Sintaluta on a north-south line would be the highest paid by any farmer in the region. As you move east or west of Sintaluta, the freight rate deduction would reduce, based on the current freight mileage-based rate.
Since 1985 and 1990, when these two proposals first surfaced, we've witnessed a number of other changes that in our view should be considered when establishing the back-off or the basis deductions for freight. Shipments to the United States have increased and of course we are experiencing changes to the Western Grain Transportation Act that will tend to reinforce this movement south. Therefore consideration should be given to farmers, in our view, with a geographic or locational advantage with the U.S. market, when establishing these deductions or back-offs. In other words, a U.S. catchment area should be established as well as a west coast catchment area. The same kind of reasoned approach is applicable, I think, when one looks at Churchill, although the volume we're talking about is much smaller.
The west coast and the U.S. catchment areas also vary by grain type. Accordingly, we believe this should also receive consideration when establishing the back-off.
That was the reason we commissioned this independent study. We indicated to the consultant we wanted him to cover all the foregoing points I've raised. That study, along with our internal analysis, would support what we would call a modified National Grains Bureau to this back-off question.
.1720
I'm now going to ask Dr. Harvey Brooks, who heads up our corporate policy department, if he would touch on these key points and give you a little more detail in terms of how we see this shaking down. Certainly he will highlight the salient points of the modified NGB proposal.
We're going to use some audiovisual backup because this is a question for those of you who are not familiar with western Canada and the designated region. I think the audiovisuals will help you to understand this challenge much better.
Mr. Harvey Brooks (Head, Corporate Policy Group, Canadian Wheat Board): As Mr. Hehn said, the pooling proposal that we put forward attempts to achieve a few objectives. The objectives that are outlined for the National Grains Bureau proposal and the modification we made to it are to reflect as closely as possible a relative pricing basis, west, east, north and south, that would exist in a competitive market environment. Then this would reflect to producers a price signal that identifies the appropriate transportation advantage that one production location may have relative to another location.
In doing that through the National Grains Bureau proposal, the highest freight point is established at the edge of the west coast catchment area. Rates basis deductions decrease as you move east and west from the edge of that west coast catchment area. This will reflect the appropriate relative value to producers.
As Mr. Hehn also indicated, this has gone through quite an extensive analysis and debate in western Canada since 1985, when the CWB came out with its first proposal, and continuing through 1990 with the National Grains Bureau additional proposal. Then it went through the producer payment panel widespread review.
The addition that we felt was important to include was a recognition of the sales into the U.S to reflect a proximity to the U.S. market that some producers have in their basis differential.
As for the Wheat Board, if we can service the U.S. market by getting grain closer to the relative markets we're delivering into, it does return a higher value to our pool accounts. It is reasonable to reflect that higher return back to producers.
The catchment area we've designed here depends on the size of the Canadian export program into those specific areas. In particular, the areas would be the Minneapolis market for milling wheat, durum and designated barley. For feed barley it would be the feed grain markets in the Pacific northwest area of the United States.
The differential that is proposed to reflect back to producers is related to the transportation advantage that those areas in the catchment have relative to people outside of the catchment area. A logical maximum is really put on the differential by the transportation advantage.
Consider if the Wheat Board decided to provide a differential that was higher than the transportation advantage. Let's say we provided a differential that was $4 relative to a point one hundred miles north, where the transportation cost was only $2. Then people from one hundred miles north would just truck their grain into the catchment area and plug up that elevator location.
Really, in a competitive environment, the only differential that could exist would be the transportation differential. That is the way this proposal has been designed. That same concept is true for Churchill as well within the catchment area.
.1725
In designing some preliminary freight deductions for the 1995-96 crop year, we were presented with having to make a few assumptions. Because the 1995-96 rate environment is not yet determined and we will not know the quoted rates from the railways until approximately late June or early July - their legal requirement is to give us 30 days notification prior to August 1 - we were keying off the maximum rate scale that will be established under the proposed legislation. These will be mileage based and they will remove the rate kink that was in the previous WGTA rate scale.
The Chairman: I wonder, Harvey, what you mean by rate kink.
Mr. Brooks: The rates were at a lower level of rate-per-tonne mile until 1,200 miles, and at that point they went to a higher rate-per-tonne mile. Now it is a continuous rate-per-tonne mile across all distances. The effect of that was to lower the rate at lower mileages, raise it for the medium-term mileages, and lower it again for higher mileages.
In addition, two other key factors will change the way the industry approaches freight for the west coast market. One is the removal of route parity, which had deemed the mileage on the CN route from Edmonton to Vancouver to be equivalent to the mileage for CP from Calgary to Vancouver, even though the route was 123 miles longer. This will have the effect of having a maximum rate for CP routes that will be approximately $2.69 lower than the CN route for competitive positions.
The removal of port parity, which had deemed the mileage from Edmonton to Prince Rupert to be equivalent to the mileage from Edmonton to Vancouver on CN lines, will mean the maximum rate for the CN route from Edmonton to Prince Rupert will be approximately $4.75 higher than the CN rate from Edmonton to Vancouver. This means additional costs will be picked up in the western system, because we will be shipping a considerable volume through the port of Prince Rupert. That likely will not be reflected in the basis deduction from producers who were lower mileage to Vancouver. The CN adjustment had been worked into the freight deductions.
The removal of competitive and contiguous point regulations in the WGTA will create significant differences in how the two railways are able to price their rail freight services across the prairies. Just to explain this briefly, previously if two points were located close together and were competitive, the mileage at both was deemed to be the same or relatively close, even though the mileage might have been actually quite different in terms of the routes they took to port.
This will create all types of different scenarios in western Canada, and we won't know how that will play out until we see the final tariffs by the railways in July.
For this reason, we made the assumption that Canadian Pacific would establish a competitive environment, given that it is the lower maximum-rate railway to the west coast, and CN would have to be reasonably competitive with this rate or it would lose market share.
Having said that, these are still preliminary and we will obviously have to adjust all of the rates and all of the deductions we've put together here, depending on how the tariffs come out in July.
.1730
I will show the preliminary estimates here for the four pool accounts, and I'll start with feed barley.
This shows our average feed barley export patterns over the last three crop years. It shows that we send very little feed barley through the St. Lawrence Seaway, at just a little over 4,000 tonnes on average. The bulk of our shipments went through the west coast ports, 1.7 million tonnes; a minor amount through Churchill; and then about 650,000 tonnes on average into the United States, which was based off the PNW, Portland, feed markets. So the reality for the export pattern for feed barley is that it is west coast and U.S. driven.
When we reflect this in the basis deductions, we see these rates for most of the areas across the prairies. In this bar chart you see the black lines reflect the old basis deduction, or the current basis deduction, as we might say, and the white bar represents the proposed basis. We're running from west on this chart all the way over to Winnipeg. These are lined up on their distance from Vancouver.
We can see that previously the highest deduction was around Scott, Saskatchewan, and rates decreased on either side of that as you were either closer to Thunder Bay or closer to Vancouver. As I was saying, in the pool accounts we were deducting freight to Vancouver for points, or to Thunder Bay in the east, even though that grain was going to the west coast at this considerably higher rate. This difference between the white bar and the black bar was being made up out of the pool account.
It seems fair, given that this grain is predominantly going to the west coast, that it would be backed off from the west coast with a U.S. catchment for parts of western Alberta and southern Saskatchewan, and that this very closely approximates the CWB '85 proposal, giving producers the option of choosing their lowest-cost route to either Montreal or Vancouver.
Mr. Hehn: I could just mention, when you get our new annual report - and it was also in last year's annual report; you may already have the annual reports; I'm not sure; they haven't been tabled in the House yet - under each of the pools you will see a column that says ``Additional Freight to Terminals''. That's the charge that Harvey's talking about, and that's how it appears in the accounts.
Mr. Hoeppner (Lisgar - Marquette): Are these graphs in your annual report for 1993-94 or not?
Mr. Hehn: No, but we'll make this entire presentation available to you, so you'll have a chance to digest it.
Mr. Brooks: The catchment areas for this modified NGB feed barley proposal basically show that for the bulk of the designated area it is a west coast-driven system. The amounts that can go to the U.S. are most easily serviced from the area touching Peace River, southern Alberta, and parts of southwestern Saskatchewan. Again, given that if we are shipping into the U.S., if we can receive barley here, it is worth more to us in the pool account, given that we will incur less freight on that going into the United States.
To illustrate this for several points, I will use just one point, and I'll choose the point of Saskatoon. Under the current status, Saskatoon would be deducted freight from Thunder Bay, and the current shipper share rate for the 1995-96 year, if we use the rates, would have been $13.37 to Thunder Bay. If we go to the full compensatory rates or the maximum rates, as we would be, that would rise to $28.17, an increase of almost $15.
I'm now showing three different proposals: the National Grains Bureau, CWB '85, and modified National Grains Bureau.
If we go to this proposal, all of them would be the same for that point, at about $29.95. For this point there would be an additional $1. This would be about $1.30 for Saskatoon.
.1735
However, because the cost of this additional freight is not being covered by the pool account, there will be more money returned to producers because the pool account is not incurring this freight charge. That would be approximately $6.05 for the feed barley pool. We would be able to make a higher initial payment of approximately $6 to producers because we would be assured that we would not be incurring this type of freight cost in the pool account. For a point like Saskatoon, it means they would be better off by about $4.67.
Of course, as we go further east producers will not be as well off. I'll use Brandon as an example. Brandon would have been $10.46 to Thunder Bay, $20.34 under the full rate, and under this proposal, $39.96, which - if we received barley in Brandon and it was shipped to the west coast - is what we would have to pay in terms of freight to move it in that direction. This is an increase of $19 over the full compensatory rate, but there's a $6.05 higher initial payment, so it's an increase of about $12.57.
The Chairman: Harvey, one of the problems is that farmers won't realize that $6 until their final payment. Is that right?
Mr. Brooks: We can actually make it an initial payment because we would be assured that value wouldn't come out of the pool account in terms of extra freight charges.
The Chairman: Okay.
Mr. Hehn: Mr. Chairman, I think that would be taken into account when we send in the recommendation for the initial payment levels based on the calculations. That would be a firm figure, so we could entertain it as something without risk and therefore it would be part of that initial payment recommendation.
The Chairman: That's good to know.
Mr. Brooks: But it is a valid point that producers may have difficulty distinguishing this gain -
The Chairman: Yes.
Mr. Brooks: - relative to the hard costs that they see coming off their cash ticket.
In terms of malting barley, our previous experience was that we had approximately 400,000 tonnes of malting barley that would go to the west coast, a very minor amount of about 11,000 tonnes through the seaway, and the significant portion of a little over 300,000 tonnes to the United States.
This results in catchment areas for malting barley that closely approximate the current catchment areas, where the volumes just east of the Saskatchewan-Alberta border would be going west to satisfy our west coast customers, and then the rest of the volume would basically be priced off the Minneapolis market and would be in the U.S. catchment area. Even our domestic sales that go to Thunder Bay and further on to Toronto for some of our domestic malters are priced relative to the Minneapolis market, so, in a sense, they're priced in the same zone.
Using those figures, this results in a small change in the basis deductions for this pool account. In fact, this pool account would be more sensitive to our volume of program on the west coast.
Looking at what this would mean for a point, I will again start with Saskatoon. They would be $13.37 to Thunder Bay. That's rising to $28.17 under the full compensatory rates. Under this proposal it would be approximately the same. Under this calculation it resulted in $27.51, so Saskatoon would be almost indifferent given the relative uncertainty we have with regard to the freight rates for the next crop year, and this is true for all areas.
.1740
You can see from the bottom lines that the changes are less than a dollar per tonne. Again, this will be sensitive to the actual volume that we program off the west coast. That will certainly depend on the upcoming outlook for malting barley, both west coast and U.S.
Looking at the durum pool account - this is also using a forecast volume - we expect to be doing around 1.7 million tonnes through the St. Lawrence Seaway for the 1995-96 crop year and approximately 1.3 million tonnes through the west coast. Historically, we have done about 430,000 tonnes into the United States on an averaged basis, based on the twin cities market.
We have had considerable marketing difficulty in terms of attracting customers to the west coast. Many of our customers prefer east coast delivery. We did have success in this last year by having Libya serviced from the west coast. We anticipate that some other additional customers can be convinced this year, but it is a difficult challenge given that the customer is a fairly important link in this whole process and does make the decision.
Again, the result is catchment areas that are not too different from what the normal experience is. We have a west coast catchment area just inside the Saskatchewan-Alberta border, on the Saskatchewan side. We have a U.S. catchment - this is the first 430,000 tonnes - that is most conveniently located to service the U.S., and the rest is east coast catchment. As you can see by the relative consistency between the black line and the white line on the bar chart, this results in rates not all that much different, given these assumptions, from the current basis deduction.
Again, running through this same table for durum for Saskatoon, this $13.37 to Thunder Bay rises to $28 under the full compensatory rates and is not significantly different under the other proposals. By going across the bottom line, you can see that under these assumptions this seems to be a very minor change in the durum pool account deductions.
The wheat pool account will be significantly changed under this proposal. You can see from our experience here - this is based on a three-year average for wheat - that on average we were shipping four million tonnes of wheat through the St. Lawrence Seaway; about 13 million tonnes - 12.8 or 12.9 million to be exact - through the west coast ports; something over 200,000 through Churchill; and about 1.1-million-plus into the United States milling market, which is keyed out of Minneapolis. Drawing these catchment areas in and identifying those deliveries that would satisfy these demands would create a west coast catchment area that comes out roughly around Broadview, Saskatchewan, Sintaluta, or somewhere in that area.
The east coast catchment is east of that point, with about a million tonnes carved out in southern Manitoba for the U.S. catchment. That million tonnes is most conveniently located to service the U.S. market. Additionally, the most conveniently located areas for Churchill would be in a Churchill catchment zone.
.1745
Mr. Hoeppner: How many tonnes would be in a catchment area for Churchill? Do you have an estimate?
Mr. Brooks: We will be doing a firmer forecast in July, when our sales program is firmer. For this process, however, I believe it was 250,000 tonnes.
Mr. Hoeppner: So if the port was used to its full capacity, it would be a bigger area.
Mr. Brooks: Yes, it would be, and we will actually base the number in this catchment area on our sales program volume for that port for the next year.
This creates a basis deduction that is significantly different from the current basis, but again, remember that the highest basis deduction was approximately Scott, Saskatchewan, reflecting the fact that it is equidistant from Thunder Bay and Vancouver and that rates go down in either direction from there. This would create the highest rate zone at about Broadview, Saskatchewan, with Broadview being backed off from the west coast. The rates would then decline from that area eastward by the WGTA rate scale.
Remembering that there were four points between Scott and Broadview up to the current time, we had been deducting the rate to Thunder Bay and were shipping approximately that volume to Vancouver at the higher rate. This difference between the white bar and the black bar for these positions between Scott and Broadview, which is a lot of grain, was being paid out of the pool account. In addition, there were some seaway costs paid out of the pool account. The difference for points east of Broadview, between the black line and the white line, will cover some seaway deductions.
We believe this is a fairly accurate relative freight deduction or freight basis for producers, because all producers on the west coast catchment area are being paid in relation to their distance to port. Producers in the east coast catchment area are being paid according to how close they are relative to other points going in that direction. The point drawing the furthest in either direction is paying the highest freight basis.
From a North American perspective, if one were to ask where grain might have that highest freight rate deducted, one would expect it to be a little bit north and east of Minot, North Dakota, where you are somewhat equidistant, or at equal cost, from the St. Lawrence, gulf and Pacific northwest ports.
Looking at how these basis deductions would play out for the wheat pool account, Saskatoon would again be about $13.37 to Thunder Bay and at $28.17 at the full rate for the coming year. Under this proposal, that would rise to $29.95, which is the rate to Vancouver. There would be additional sums of money to be paid out of the pool account because the pool account will not be covering as much of the seaway costs or cross-haul costs. That will mean approximately $5 more coming out of the pool account. This would mean Saskatoon will be approximately $3.21 better off. At some point between Saskatoon and Regina there will be a point that will be approximately indifferent. According to these calculations, Regina will be paying about $3.40 more under this proposal.
I will run through the example for Brandon. At the current basis, Brandon would have been deducted $10.46 to Thunder Bay. The full compensatory rate is $20.34 as of August 1. Under this proposal they would be deducted $31.14. So with an additional $10.80 and an additional $5 out of the pool account, the net change for them would be about $5.80.
The Chairman: Harvey, do you have anything on the Peace River block?
.1750
Mr. Brooks: While I don't have anything in these calculations on the Peace River block, there are some numbers in the back of the submission I will be leaving with you. The Peace River will be deducted...the lower rate for those points to either Vancouver or Prince Rupert. Given that Prince Rupert will be subject to a higher maximum rate, most of these points - in fact I suspect all of them - will be deducted to Vancouver.
Mr. Hehn: Just in that context, nothing really changes for all of those stations west of Scott in terms of the deduction. What does change are the returns to the pool account, and as Harvey is showing on that map, Swift Current, Medicine Hat, Lethbridge and Calgary have a considerable gain in this exercise.
Mr. Brooks: Of approximately the $5.
Mr. Hehn: Yes. You'd see something similar to that I think in the Peace River country depending on how Prince Rupert rates and Vancouver rates shake down. That gets you back to this port parity and route parity concern that hasn't been sorted out as yet. We have some concerns about that, because here you have a situation where the rate to Prince Rupert could in fact be considerably higher than the rate to Vancouver, even though the mileage is only 183 miles. Yet you have a port that has invested a significant amount of capital in terms of efficiencies on the rail side. That is not really reflected in the rate if that rate in fact is higher.
Mrs. Cowling (Dauphin - Swan River): The 148 miles, the additional miles to Prince Rupert that the full system has picked up, is that calculated in your figures here?
Mr. Brooks: That's a good point. No, we assumed here that CN would be competitive, and if they choose to charge the maximum rate on that mileage it would result in approximately $1 a tonne for the pool account in additional cost, because we will be deducting from producers their rate to the lowest cost port, which would be Vancouver. Much of that grain, approximately 3.7 million tonnes of wheat on average, has been going to Prince Rupert. This would mean that we would be incurring extra costs on that wheat, which would mean about $1 per tonne coming out of the pool account.
So it would be roughly imbalanced here even at that. With this proposal there still will be some seaway costs coming out of the pool and they will approximately be, given these numbers, about $2 per tonne. That is noted in the footnotes of the material I will be leaving. So you will have about $2 per tonne on the seaway side but $1 per tonne potential on the Prince Rupert side, and then depending on how the volumes actually shake out.
Mr. Hehn: As Harvey says, we are assuming; we are not sure of that assumption but we are assuming that CN is going to be competitive with CP, with a CP Vancouver rate. They do have the option of going as high as $6 higher than the Vancouver rate under the rate ceilings, so it is an important point because of this change in route parity and port parity.
The Chairman: Could they go as high as $6?
Mr. Brooks: It will depend on the exact point, because we have also changed all these competitive and contiguous points. For points that weren't affected by that amount it will be approximately $7.50 above the CP rate to Vancouver, not the CN rate to Vancouver. The CN rate to Vancouver difference between the CN Vancouver and CN Prince Rupert will be about $4.50.
The Chairman: It's not directly related to this, but where do we find route maps? I know I used to have some; in fact I have some at home.
Lorne, do you know who has a really up-to-date map of rail lines, with the points they go through and so on, basically the branch-line network, indicated?
Mr. Hehn: We have them in our shop. We could certainly have those sent to you.
.1755
Mr. Brooks: When producers come to make their cropping decisions and see their returns, what they will be looking at, or should be looking at, will be their pool return outlooks net of these basis deductions. We would adjust then the PROs depending on how much of a payment differential. For wheat I mentioned $4.99 or $5, so the current mid-point for our April estimate for 1995-96 is $182 per metric tonne for number one CWRS. That would increase to about $187 under this proposal.
Mr. Hehn: Harvey, we should explain that we came out with the first 1995-96 pool return outlook in February of this year. We came out a month earlier than we did last year, strictly to give farmers a little more information in advance of seeding so they could make their plans.
When we came out with the 1995-96 pool return outlook estimate in February, we did not take into account any change in the pooling basis points. The only thing we took into account was the change in the WGTA rate and the move to full compensatory.... Hence, Harvey is suggesting now that if we got the green light to implement these new basis point changes on August 1, this would be reflected in the new PROs.
Mr. Brooks: So a producer at Sintaluta would look at their basis deduction relative to the PRO and for wheat would be deducting $34.75, for a net return of $152.24. They would still have to pay primary elevation from that.
For one CWAD they would look at a $24 basis deduction and a net return of roughly $145; for one CW barley, $101.50; and for special select six-row malting barley approximately $123.50. They would then look at their relative costs and their expected yield for those crops and could calculate the approximate best use of their land resources, given their rotational constraints and things of that nature.
The Chairman: Just on that point, Lorne, I guess in terms of the Wheat Board - and it's something we talked about in an earlier meeting today - if a decision's made to change the pooling point this August versus next August, and given the fact that some farmers are already on the land and have made their cropping decisions, how much criticism is the board going to find itself under for having come out with basically what you think the returns would be and being wrong? You made your decisions not on the pooling change but on the other changes. Will there be wide-ranging criticism of the board?
Mr. Hehn: I don't foresee any pronounced criticism, no. These changes aren't, I think, significant enough that they would necessarily drive a seeding decision, but they do reflect the anomalies that currently exist. Certainly, except in Manitoba, they're not of the magnitude that the WGTA change has been.
The Chairman: Okay.
Mr. Hehn: I think, by and large, some farmers may have already taken that into consideration as well. So I wouldn't see that as necessarily being a big factor at this stage.
Mrs. Cowling: I guess the magnitude of the change for Manitoba sends a very clear message about the adjustment of the $300 million that should go to Manitoba, so that -
Mr. Hehn: Again, that's going to depend on how that $60 million per year is allocated in the adjustment process and -
Mrs. Cowling: Eastern Saskatchewan, my pal here says.
Mr. Hehn: Yes, Regina was the break point. The two crops it's going to impact on, of course, are spring wheat and barley.
Mrs. Cowling: That's right.
Mr. Hehn: As Harvey showed you, really there's very little impact on malting barley or on durum wheat. So I don't think we need to concern ourselves with those two crops in terms of the magnitude of this decision as it would have impacted on seeding.
.1800
Mr. Brooks: We should point out a couple of things. As markets and sales programs change, this system would be flexible enough to incorporate that, and if the west coast catchment expanded either through our ability to program more customers off the west coast or through a general improvement of the use of resources at those ports, then the system would take that into account.
One thing we did hear out in the country when we were explaining this to producers is that they very much want to see what the long-term reality is, because they are making long-term capital investment decisions in terms of land purchase decisions, farm enterprise decisions, livestock versus intensive cropping - these types of things - and many of them will probably be making those decisions in the near future. So they very much wanted this information, and we tried to provide that as widely as possible.
Mrs. Cowling: Is it your perception that the farm community at large would like to move very quickly with this?
Mr. Hehn: That again would depend on how the funding is split in terms of the adjustment that needs to take place. I think we're hearing, by and large, from a good majority of the people we've talked to that are echoing what Harvey just said: ``Let's get on with it. Let's make these changes and work through them, and let's then also put together a good case for the adjustment funds in terms of helping us along with that adjustment.''
If they feel as if they've had fair access to the adjustment funds, then I don't foresee a lot of opposition.
On the question of the impact on seeding, at the moment I would be more concerned about the weather in the west and how that's impacting. Certainly, the increase in barley acres that Agriculture Canada has just issued in its first report surprised me, because the WGTA changes should have suggested perhaps somewhat lower acreage in barley - although when one looks at the malting barley return, they might have been influenced significantly by that. But I suspect the weather's going to have a lot more influence on seeding patterns this spring than any other single factor at the moment.
Mr. Brooks: That's essentially the end of the overhead presentation. So I can stop there in order to receive general questions.
Mr. Hoeppner: Mr. Hehn, how do you see the railways readjusting to bring some efficiencies into their system? You deal with them every day. Can we depend on some lower freight rates because of efficiencies? What is your view on that?
Mr. Hehn: There's no question, I think, that there is room for additional efficiencies. However, the way we go about getting them is to work together as an industry. In fact, the industry has commissioned a very in-depth logistical study done by the KPMG group out of Montreal. That study now is into its final phases, but the senior executive officers of all the major players in the grains industry, including the railroads, are a part of that study, and the whole idea of it is to look at this strictly from a logistical and an efficiency perspective, of course keeping in mind that those efficiencies have to carry right to the farm gate, as well.
There's room. The Wheat Board has worked very closely with Canadian National Railways and Prince Rupert Grain in the last two years on a study looking at where we might look at additional efficiencies in terms of moving grain from farms in the Prince Rupert region to Prince Rupert. We've looked at this in a total-system perspective, and we've been able to identify a number of what we call ``disconnects''.
.1805
These are areas, I think, that we can fix. We're working very closely now with both Prince Rupert and CN in this three-way participation to fix those things we can fix. We're now transplanting what we learned there to Vancouver. But I think that one of the big issues - this has been identified in the KPMG study - is that in order to do a lot of these things, we have to improve and invest on information technology. We are in the computer age. With the proper information, we can do a much better job of programming grain from a farm to the hold of the vessel.
Mr. Hoeppner: The reason I'm asking, Mr. Hehn, is that we had testimony yesterday from Tom Payne, who owns a short-line railway in Alberta. He was quoting us figures that show he's brought the cost down to about $5 a tonne from when he took over that railway. Is that the direction in which we'll have to go with some more short-line railways to get the efficiencies or not?
Mr. Hehn: I view a short-line railway - I'm certainly not an expert in terms of transportation - as something that's very much transitional. In many cases, these lines ultimately will likely disappear. But there is a transition that needs to take place, and not everyone can adjust immediately. So I think there's room for short lines, but certainly I see them very much in a transitional sense, rather than anything for the long term.
Mrs. Cowling: There was a term used, but I'm not quite certain exactly what it meant. It was ``continuous rate''
Mr. Hehn: Contiguous.
Mrs. Cowling: Contiguous. Does that take into consideration the mountain differential? Did you explore that when you did your study?
Mr. Brooks: Over time, it's been quite an issue as to whether or not there's a mountain differential in terms of a higher cost to move west versus east. The producer payment panel looked at that quite intently. Their conclusion, I believe, was that it was very minor. They couldn't come up with supporting evidence that it was significant, so we didn't take that into consideration for this.
In effect, we are going to reflect the cost to the pool account, which will be the costs that will be reflected to us. If that results in a higher rate going west, then the system would reflect it. So if in fact they put one in, this would reflect it, but it's not in the maximum rate scale that's proposed under the current legislation.
Mrs. Cowling: Just to follow up, Mr. Chairman, one of the things that the producer payment panel neglected to touch on was a part of their proposal that was then taken out. It was the cross-subsidization of the branch lines in northern Saskatchewan and northern Alberta that have been picked up by the system and by Manitoba producers.
When we talk about the adjustment package to Manitoba, we want to be sure that this is in there, because I think that plays a major role in those dollars that perhaps should come back to the province. You've said that wasn't a portion, or was it?
Mr. Brooks: For this study, no. For us, we're simply reflecting the rate to ourselves. That rate would be the maximum rate for that area. Those rates are strictly mileage-based; they don't depend on whether it's a main line or a branch line.
Mrs. Cowling: My last question is on the various catchment areas. What do you see as the long-term viability of the seaway under your proposal?
Mr. Hehn: I think that's going to depend very much on the customer base. We price grain, as you know, FOB or in-store St. Lawrence, whichever way the customer wants to buy it. In some cases, we actually price it on a CF basis, which is cost and freight to destination.
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But really it's customer driven. When one looks at what is occurring in Europe, I think one can be somewhat positive about the eastern system, although that's offset by what's happening in....
I should have said ``Western Europe''. What's happened in the EU with GATT and some of the revisions they're making...I think that has a positive impact in the long term. It'll be some time, however, before we start to feel that in additional volume. That's offset to some degree, though, by what's happening in eastern Europe, particularly in Russia.
As you know, Russia used to be our largest customer, and we have not sold Russia a tonne of grain since June 1993. We have sold one of the other states, Uzbekistan, a small amount, but that's the only business we've done with the former U.S.S.R. So I think that tends to be offset.
On the other side of the equation is the product durum wheat. North Africa certainly has become a very big customer of Canada's durum wheat. In fact this year - and Harvey, you can correct me if I'm off base by a large amount here - I believe we're going to represent something like 70% of the world trade in durum. Of that, the amount going to African countries approximates 50%. The African countries are becoming very big customers of ours.
Also, the Middle East is becoming a big customer of wheat. But the Middle East is more attracted to the west coast than they would be to the St. Lawrence. They'll use the St. Lawrence if the west coast is congested, but they're more attracted to the west coast.
I think it's a function also of what happens to ocean freight. Currently, ocean freight's a little tighter than it would have been a few months ago. So that changes the logistics considerably.
Mr. Hoeppner: The movement of durum to Africa: are they cash customers, or is that long-term financing?
Mr. Hehn: The only credit that's involved at the moment is a very short-term credit. The bulk of it is cash.
Mr. Brooks: I could make an additional comment on the seaway system. Increasingly the cost is becoming very critical in going right from Thunder Bay through the seaway. I think some realignment of the costing there might help out the product flow through that direction considerably. We can pay in some years approximately $2.50 per tonne in Thunder Bay taxation alone by going through Thunder Bay terminals. We pay approximately $1.50 of Province of Ontario taxes for roads and bridges that really are not a function of the grain movement through the seaway. Also, by use of the ocean-going vessels we may be able to get costs down a little.
It is a real challenge. I think the industry would see it as more advantageous if we could get costs down.
Mr. Hehn: If I could be so bold on that question, I think it's more a function of exchange rates at the moment and whether the gulf at some point might look attractive to us on an economic basis relative to the St. Lawrence. At the moment, with the current exchange rate situation, the gulf costs get very close at Winnipeg. But as soon as you go west of Winnipeg, with the current exchange rates you're out of the ball park. You're better off going east through the St. Lawrence. But it'll depend on the exchange rate situation.
The Chairman: You mean by the gulf...going through the U.S.
Mr. Hehn: Direct rail, Winnipeg to the gulf, yes.
The Chairman: Okay. You've probably seen the Elliott paper. It partly relates to Marlene's question. What would be the impact of increasing volumes going to the U.S. in the overall rate structure and on the seaway? I guess we would figure it would be high.
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Mr. Hehn: The rate would have to be fairly attractive for us to consider a gulf port, simply because most of the U.S. system does not have the processing capability we require and our customers are expecting.
We would look first at the differential and, second, whether we could move grain that had already been precleaned on the prairies through to those gulf ports. So it would depend on the processing capability on the prairies and the differential on the rate.
The Chairman: Can we ship the grain through that system and maintain our quality control?
Mr. Hehn: Only if it were kept separate all the way through the system. We'd have to have it identity-preserved, and that's the only way we'd ship it through their system. There's a cost to doing that as well.
The Chairman: Are there any other questions on pooling points before we leave it in its entirety?
What do you see as the overall impact on the Canadian Wheat Board itself as a result of the WGTA changes and the likely changes coming in the NTA? What do you suggest the government should do to address that impact, if there is any?
Mr. Hehn: That's a good question. You mentioned the National Transportation Act, and as a major shipper of product in western Canada we have some concern with shippers having access to some sort of shipper relief provisions.
There are significant shipper relief provisions in the NTA, 1987. They're not as significant as they are under WGTA, but with the loss of WGTA we believe it's imperative that shippers have access to shipper relief provisions.
We're not sure where the reforms to the National Transportation Act are going, but one of those shipper relief provisions at the moment is the common carrier obligation. In that obligation the National Transportation Agency has considerable clout and power. It can order the railways to provide suitable equipment and facilities it deems to be adequate for the service. If that common carrier obligation came under threat in any revisions to the NTA, we would be very concerned.
The Chairman: That moves me to my second question related to that, Lorne, in terms of hopper cars and so on and so forth. Do you have any idea what may happen there?
Mr. Hehn: Again, we would prefer to see a shipper-driven system rather than a railway-driven system because we tend to have a shipper-driven system today.
After all, grain is quite different from other bulk commodities railways move. It's different, first of all, because the producer of the product in the case of grain, except for producer cars, is not the shipper. The producer is one step removed from the shipping, whereas in bulk commodities the producer is in fact the shipper.
Secondly, you are originating product in an entirely different fashion. In most bulk commodities you're originating from a few mines and shipping to perhaps two or three locations. In the case of grains, you're originating at 120,000 farms at almost 1,000 delivery stations. So we're in quite a different situation, and in order to meet the terms of the sales contract the shipper has to be heavily involved in transportation, in our view.
We're of the strong view when it comes to the car fleet that the farmers of western Canada should retain ownership of that fleet in some way, shape or form. Whether that remains in terms of the federal government owning the cars and assigning them, for someone to administer, is one thing, but we believe that farmers should have some sense of ownership of that car fleet.
In our twelve district meetings in February and March, this subject came up in terms of questions as well as debate. We got a fairly clear message that if the cars were sold to the railways and these costs were reflected in the new rates, farmers would deem that they have paid for them twice. They paid for them once as a taxpayer, and then the capital cost was being assigned back to them by way of an increased freight rate. They were fairly vocal on that point.
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Secondly, until we have some sense of what the NTA provisions will be and what car allocation procedures will be and when they're sorted out, I would hesitate to make any changes to the ownership of that car fleet. Those two issues have to be resolved first, and then we will be able to talk about what we'll do with the car fleet.
The Chairman: Car allocation is certainly another question I have in my mind. I've sat in on some meetings of the finance committee and I listened to the rhetoric of some individual producers, in fact some producer organizations in the west, stating that they can do better on their own. I don't know how one gets the message across of how complicated this system is and how much preplanning and management there is to determine that a given carload of grain has to come out of a given location and be in the hold of this ship, or A, B, C, and D.
I'm worried about where we may go and how we can keep the Canadian Wheat Board in control and have a good car allocation system overall. I don't know what your thoughts are on that. I guess some trouble spots lie ahead and we have to find a way of pre-empting them.
Mr. Hehn: You've raised some excellent points. The bulk of the efficiencies that we have gained in western Canada have come about because of industry agreements. We have the industry agreements because we have a very complex system with a lot of players that are heavily involved in the industry. You have to have all of the parties involved in creating efficiencies if the system is going to work.
I think of car pooling at ports, for example. We've heard various estimates of what the efficiency factor has been as a result of just that simple industry agreement. The reports range anywhere from 15% to 24% as an efficiency factor on west coast shipments alone.
I think the car interchange agreement, north shore versus south shore, because CN originates a lot of product that goes into Rupert.... Because the bulk of the canola is grown in the north, a lot of it is shipped on CN lines. So there is an anomaly on the north shore, which is served by CN, where they have too much canola coming for the elevators and not enough wheat. So you have a car interchange agreement between the two railways that allows that to balance out and you use those terminals as efficiently as possible.
That gets me down to car allocation. Currently, as we all know, the system we have in place allows the GTA to make that first cut in cars. We understand that the GTA is going to be gone, but we also understand that an industry type of body will replace it, which could still make that first cut in cars, the board cars versus the non-board ones. The cars are then distributed according to an industry agreement.
Again I come back to an industry agreement. This was done by the players that are involved directly in the loading of those cars and the players that are involved in the shipping of the grain and that have a sales contract to complete. It's called an industry rail car allocation policy group. Over the years, that IRCAP group has developed a formula for car allocation. By and large, regardless of what you hear, that formula has worked fairly well.
The Chairman: Lorne, are you saying that we need to have that group in place?
Mr. Hehn: Definitely.
The Chairman: Will it be in place on its own, or is it going to have to be a regulatory measure of government or whatever?
Mr. Hehn: We've already had a meeting at the senior executive level. I hope the senior executive officers of the shipping industry will take ownership of the car allocation, rather than the railways. By the industry I mean the shipping industry. They would take ownership of the car allocation, and in a sense they already have through the IRCAP group, in any event. We would continue to come to some sort of formal agreement on how cars are to be allocated and how trains are to be made up that takes into account that some central coordination of the system is required.
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In the past, once you've made that first cut in cars and once the grain companies have given notice of where they want their non-board cars to be spotted, it makes sense then to build a boards program around those non-board cars and those train runs because we're the largest shipper of grain. That's precisely what has happened in the past and it's made a lot of sense and it's worked well, so I see no reason why we shouldn't continue to improve on it in the future and keep that sort of process in place. I think it far excels any market-driven tariff versus market-car approach that we might look at.
The Chairman: Jake, you have a couple of questions on that one.
Mr. Hoeppner: Yes. I'm interested in Mr. Hehn's remarks.
As you know, last year on the grain car allocation subcommittee we heard exactly the opposite testimony. The union boss - who was it? - from Vancouver said we should have a tsar to control this. This happened in the 1960s, I guess; they had to go away from the system and install one man who was impartial and put the whole system back into order. Now, this is contrary to what you're saying, Mr. Hehn.
Mr. Hehn: Well, you have to go back to the underlying reasons that the system got into such a disarray. Of course it did because of the Mississippi flood and the severe shortage of rail cars in North America. We ended up in a situation where we only had about 22,000 cars in the fleet when we really needed close to 30,000. Because we were sales driven, we also ended up with a situation where in fact we oversold the system. So I think that was Mr. Kancs's reference to a tsar.
We did eventually sort the thing out, but it took until June to sort it out. I might say that the Wheat Board played a very key role in sorting that out because we deferred and/or switched something like 2.5 million tonnes of grain out of the west coast in order for the system to begin to perform on a normal basis again.
My view is that we can have a sales driven system providing we all play by the rules. In cases where the system doesn't have the capacity to meet everyone's customers in terms of sales prospects, we can then move to a historical type of formula, which we did last fall in that particular case. We're back now to a sales system again. I think it can work if the players are sincere about making it work. We've shown over the years that it can indeed work.
When I look at our car cycle times compared to the U.S. car cycle times, quite frankly we measure right up there with the U.S.'s most efficient railroad, which is Burlington Northern. Our car cycle times in terms of board grains run in that 17- to 18-day mark and it's right on with the most efficient railroad in the U.S.
The Chairman: Marlene.
Mrs. Cowling: I want to come back again to the pooling of the seaway and the payment as it may be paid out. I'm wondering what your thoughts might be on sending those dollars through the Canadian Wheat Board pool accounts and then allowing them to be phased in with the increased freight rates to get the dollars to the people who are hurting most from the increased costs they will be picking up.
Mr. Hehn: The only concern I would have with that is that although it may make a lot of logistical sense and a lot of sense from an administration point of view, it may be viewed by the people in Brussels as the Wheat Board administering a subsidy and I don't know how they would react to that, Marlene. That's the only down side I see to it. I think we'd have to keep that in mind.
The Chairman: I have just two other questions, Lorne. One of our greatest concerns on this committee is the WGTA and the pooling changes. They're fairly evident, and what we want to limit against is those other problems down the line as a result of these changes that we may not see.
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I hear all this talk about the competition or mimicking competition with rail. I have never seen that done. They are a natural monopoly and the grain industry is the captive market to a certain extent.
You talked about rules. I'm wondering what can be done to assure that the rules are not weighted too much in favour of the railways so that we can ensure that those efficiencies gained within the system are indeed passed on to the shippers and that they are not staying in the coffers of the railways so they can buy more rail in the United States.
Mr. Hehn: As long as we're on a maximum rate scale, I haven't as a great a concern on the rate side. But I've already mentioned some concern on the performance side because rate is one thing and performing is another. Again, it'll depend on what happens to the NTA. Even on the maximum rate scale side, it makes sense to us to have a cost-based type of rate. We might argue about what the contribution to fixed costs should be. The variable costs are well-defined but.... And we might argue about what the contribution to fixed costs should be, but a cost-based rate makes a lot of sense to us because we are captive to rail in a good part of western Canada, and captive to one railroad, not only to rail.
So that makes sense to us and we believe it should be a permanent component of transportation policy. We have some concern about the current interpretation of the maximum rate scale being removed by 2000.
The Chairman: That was my next question. You are well aware of what happens in 1999. Prairie Pools have certainly made recommendations to the finance committee for a maximum rate and for reviews. What is your feeling on that? The year 1999 is going to come pretty quickly.
Mr. Hehn: I understand they are going to be removed unless the study suggests they ought not to be removed. I would prefer the reverse. I prefer that they have some permanency unless the study suggests they be removed. I think that's the proper approach. It's hard to predict. Obviously, if we didn't have cost-based rate we would then be in a fully commercial environment. It's hard to predict where rates would go in a fully commercial environment. I'm a firm believer that they wouldn't go down. They would certainly go up.
I say that because when I look at other commodities like potash, I see that currently potash is at two times variable, while grain is at variable plus 20% as a contribution to fixed. Sulphur is at variable plus 50%. Coal is at variable plus 70% to 80% of variable. All of the other bulk commodities move at significantly higher rates than grain does under full WGTA.
We can also compare our current full compensatory rates with Burlington Northern. If I were to use the rate going east to Duluth and compare that to a point in eastern Canada just north of the station to Duluth going east to Thunder Bay, we currently see a differential of about $12 in Burlington Northern's rate versus the compensatory rate. If I look west, we're looking at anywhere from $18 to $20 per tonne differentials, with Burlington Northern's rate higher.
It indicates to me that if we move to a commercial rate environment, we're definitely looking at something above - and it could be significantly above - what we have now in the maximum rate scale. That creates some concern for us. We also have another comparison we might use because we know from experience through the provisions of the CUSTA, everything we move now to the U.S. Pacific northwest by rail has to move out to Vancouver and then south. It moves out to Vancouver on full commercial rates, and those rates today are roughly $8 per tonne higher than what we would pay to Vancouver base as a full compensatory rate.
I believe we learned only recently that we've received the quotes for the rate to Portland from the railroads.
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Mr. Brooks: Right. Those rates going into the Portland and Seattle mills, for instance, on a Canadian National line from a central Alberta point, for instance Bonnyville, Alberta, would be $49.22. Our full compensatory rate from that location would be $25.80. So it's a full $23.50 difference to move into Portland on CN versus a move to Vancouver.
The Chairman: Any other questions, Marlene?
Mrs. Cowling: No.
Mr. Hehn: If I could just elaborate on your question, we have two concerns. As long as they're taken care of, it would alleviate a lot of nervousness on our part. One of them I've already mentioned. I think we're of the view that a maximum rate scale should be a permanent component of policy. Secondly, with the loss of WGTA, it's imperative that shippers have access to shipper relief provisions of the new transportation act. And they have to have teeth.
The Chairman: Good suggestions.
I'd like to thank you. Could I remind you again to forward a map and the study and a copy of your overheads. That would be helpful. Thank you very much for coming, Lorne and Harvey.
Mr. Hehn: Thank you.
The Chairman: The meeting is adjourned.