[Recorded by Electronic Apparatus]
Thursday, June 1, 1995
.1109 
[English]
The Chairman: Could we come to order, please.
I believe you have a short presentation as president of Unifarm, Ron. We'll then go questions.
Mr. Ron Leonhardt (President, Unifarm): Thank you. Mr. Chairman and members of the subcommittee, on behalf of Unifarm, I appreciate the opportunity to appear here and to present the view of Alberta's general farm organization.
The announcement of the reform of the WGTA came as no surprise to producers in western Canada. It was expected. Many were relieved that the debate about paying the railway or paying the producer was finally going to be over. For those who had long argued that the transportation subsidy was hindering value-added and diversification, it was welcome news.
.1110
While the announcement was no surprise, there was a surprise in the decision to make a one-time payment to landowners. After paying the railways for so many years, it was expected that a payment to producers phasing down over a number of years would be coming.
Unifarm recognizes the advantage of a lump-sum payment being treated as capital, but this method has created a number of complications that would have been better addressed by a longer-term payment to the producers on the land. All of the dollars would have remained in Canada, helping those who face the increased costs on August 1, and owners and renters would have had time to adjust their leases. However, the decision has been made and we now must deal with the issues that are before us.
We believe the initial impact of the change in the WGTA will be negative. Those producers who grow grain for the export market will see a sharp rise in their input costs. The resulting lower grain prices will encourage diversification and value-adding, and the final result will be a positive one.
Great changes will take place in western Canada. The question is how will producers be able to manage this change, and how long will it take? Some changes will be considered as positive, others negative. The crop mix will change. Some land will come out of grain production. Livestock numbers will increase. Elevator consolidation and railway abandonment will speed up, and movements by trucks will increase.
The change in the WGTA alone may not be enough to bring about the increased economic activity that has been predicted. We believe there will be large amounts of capital required to make adjustments, and it may be necessary to provide tax incentives to give a jump-start to value-added activities. The change in WGTA will greatly encourage commercial trucking, and there will be impact on roads. One-half of the $300 million adjustment fund could be directed to upgrade roads for the increased traffic.
Canada is at a disadvantage in grain transportation because of our geography. Our major areas of grain production are far from ports. We have no Mississippi River running through our country, and our capital costs and fuel costs are high.
Our greatest advantage is in marketing, because of the high quality of our products. We must continue to keep our standards high and to maintain our research programs. We are concerned about cut-backs in agricultural research, both in personnel and facilities. We believe it's vital that agricultural research be maintained, because it's going to be such an important asset to us in the future.
The discussion paper asked how system disruptions could be overcome. I believe we need a new system to handle disputes, a system of arbitration that kicks in before a major contract expires. The new system should include industry, labour and government. Our reputation as a reliable supplier of grain has been damaged, and the present system simply isn't working.
On the question of car allocation, we understand that the Senior Grain Transportation Committee has released a study on car allocation. We have not seen that report, but we would expect that it would contain some good recommendations.
On a personal note, I served on the Senior Grain Transportation Committee from 1984 to 1989. It became apparent to me, as a producer, that the railways and the grain companies placed far too much emphasis on protecting their market share in the allocation system. A new approach is required if we want a system that's going to be efficient and one that maximizes the return to the producer.
.1115
I think that last part is very important. We were told, on that Senior Grain Transportation Committee, that the goal should be to develop a system that would maximize returns to the producer, and I wonder if the system we're talking about today is concerned about the producer or if it's concerned about the entire agrifood industry.
On the question of car ownership, it has been suggested that the railway cars be sold to the railways, which would then pass on the cost to the shippers. One estimate was that $3 a tonne would be required, and we believe that is not acceptable at this time. Another suggestion was to sell the fleet to the railways for $1. We suggest that if that's going to be done, we'd better sell the cars to the producer for $1. If the producers owned a fleet of cars, they would have some bargaining power with the railroads.
We prefer Canadian grain moving through Canadian ports, providing employment for Canadian people, but the costs and the services must be competitive. I think we're going to need the ability to use the U.S. system to bring some competition to our own system. I believe the quality of our grain could be safeguarded if it went through an American port, provided that its identity was preserved and that it was not mixed in the handling of the commodity.
It's difficult to make any comments on the NTA when that act itself is presently under review. I guess the producers' main concerns are that in a completely deregulated system there will be areas or regions where producers are captive to one railway and their costs for transportation could be prohibitive. We support the use of a maximum tariff for five years. This is long enough to give us some experience with the system and we believe that a system of rewards and penalties may have to be used if the system fails to deliver. But we also believe that a system based on competition is more desirable than one based on regulation.
Railway performance will improve if competition exists, and where there is no competition we have no reason to believe anything will change. The only regulation that might be required is the obvious need to provide protection to those who are captive to one particular railway.
The question of the owner-renter was raised in the discussion paper, and we believe that in most cases the issue will be resolved, but it may not be resolved equitably. We have had reports to our organization of some landlords who have said that when they received some money from the government they would be adjusting the rental payment on the land. We also have reports where the owner has said, there is no way I am going to share money with you; you have a good deal and if you don't want to continue that way there is someone else who will rent the land and take it over. So there probably will be agreement, but it may not be equitable.
There needs to be arbitration in cases where no agreement is reached.
I have a few comments on the seaway pooling. We are very pleased, in Alberta, that seaway pooling has been moved forward to August 1, 1995, instead of in 1996. Western farm leaders, including those from Manitoba, who would be adversely affected agreed that the change should be made, and I think we are very pleased that it has happened.
I have a few words about the branch line situation. As producers, over the years we've been told that the greatest savings in efficiency could be made by removal of some of the high-cost branch lines from the system. Indeed, a committee has been set up to look at these high-cost branch lines, and much to our dismay, the railways have only submitted something over 500 miles to be reviewed. Those lines are so obvious that there doesn't really need to be any review.
.1120
An additional 1,000 miles, perhaps an additional 1,500 miles, should be added to those 500 miles. But the railways apparently are not pleased with the procedure that's being used, and they're very reluctant to do anything about submitting any more lines. I think that's a problem that's going to have to be addressed.
When great changes are being made, I believe there needs to be a transition period. Everyone in the industry needs time to adjust and must be given the proper market signals. If we work together as an industry, we believe we can develop a more efficient, reliable system and that Canada can remain competitive in the market. Anything that increases diversification and value-adding will benefit the whole economy, and we as producers are eager to work in that direction.
Thank you again for the opportunity to appear, and I look forward to discussing the matter further with you.
The Chairman: Thank you, Mr. Leonhardt. I'll turn to Mr. Penson first.
Mr. Penson (Peace River): Welcome, Mr. Leonhardt, to the subcommittee this morning.
There are a couple of areas I'd like to explore with you in a little bit more depth; that is, first of all, the whole area of the western grain transportation buy-out. There are a couple of items here. Regarding the lump-sum payment, you would like that treated as a capital payment as opposed to income. Have you any reason to believe that may not be the case?
Mr. Leonhardt: No, I think we recognize the advantage of that, and I'm sure it is going to be done in that way, that it will be treated as capital. That is the one advantage of doing it that way.
Mr. Penson: Okay. The other one really concerns me as the member for Peace River, an area that has a lot of forage. That area of the buy-out is not being planned to be part of the payment. Because so many people have this crop in a rotational basis on the same land base that grows wheat and barley and other crops in the course of a period of time, it would seem reasonable to me to have that included.
What's your view on that?
Mr. Leonhardt: I certainly agree with that. We were in contact with the federal Minister of Agriculture on two occasions by letter and once on a conference call and told him very strongly that Alberta producers would like to have forage included. Our argument was that forage is part of a crop rotation for many, many producers, and if summer fallow acres were included, which are also part of a crop rotation in some parts of the prairies, forages should also be included.
On Monday, at a meeting of the grain industry with Minister Goodale, I asked him the question, what do I tell producers in Alberta? He said the rationale was that they wanted to keep it more to WGTA grains, and that was the reason why forages were not included.
It may be that producers in Alberta will have some opportunity to have forages included, but my understanding is that it won't be under the WGTA. I don't know how it would apply to Saskatchewan or Manitoba, but Alberta producers were given the opportunity to opt out of GRIP, and a great number of them have done that. Apparently there was some federal money slated for the GRIP premiums, and I understand some negotiation is going on about maybe using some of those dollars to pay the forage producers. But I don't know how it relates to the other two provinces.
Mr. Penson: The other rationale I gather for this pay-out was that the discontinuation of the transportation subsidy means that probably the price of the land base is going to go down, or at least that was one of the rationale given for this buy-out.
I put it to you - and I guess I know your answer already, but I want you on record - it really is the same land we're talking about, whether it produces grain or forage on a rotational basis, and therefore it should considered.
I would like to follow up with some questions on rail competition. You've talked about an area that's important to me, because as you already stated, there are big parts of the country where essentially there is no competition in the rail industry, such as the Peace River country where CN serves the entire area. I've been trying to put forward a proposal that would suggest that the Canadian government already owns CN, which is about to be privatized, but if they just made a public roadbed like a highway system and allowed competition to exist on that public roadbed, maybe there would be two or three companies that might be interested in operating, which would develop a level of competition.
.1125
Would that seem to be a reasonable proposal or can you see any merit in that?
Mr. Leonhardt: I recognize what you're saying, and Alberta is a perfectly good example. We have CP Rail in the southern part of the province, CN in the north, and in many places they're 200 or 300 miles apart. So there is no way there is railway competition in those two systems.
If your suggestion were put into place, I suppose competition would be put into the system and it might be something that should be considered. I know it has been suggested by other people at times, but I don't think it's ever been really seriously discussed.
Mr. Penson: My concern is that if CN is privatized, all of a sudden we have a new company, but essentially they still have that area to themselves. There's really no competition introduced. So it's a matter of either trying to regulate it through the National Transportation Act or introducing a level of competition into it.
So your organization hasn't done any work in that area?
Mr. Leonhardt: Not in that area, but the only competition that will exist in the areas you're talking about, as you well know, would have to be from trucks.
Whether that's feasible in the Peace River country, I have some doubts. In southern Alberta there are some people who are talking about trucking grain, and of course there are producers in the south who very much look to the American market and say there is a market in the Pacific northwest and they can truck into that market - and they certainly can. As regulations are relaxed, there will be more competition coming into it.
There are areas where I believe the competition doesn't exist, and I think that's where you're going to have to have some kind of regulation, because if you don't - I can see it happening in Alberta. we have areas where the two major railways are 20 or 30 miles apart - the corridor from Calgary to Edmonton, for instance. In those areas I could see very competitive rates that could be dropped to very low levels. To compensate for this, people in the areas where there is no competition may see some very huge increases in freight rates so that it would be completely prohibitive for them to try to ship anything out of this area.
Mr. Collins (Souris - Moose Mountain): First of all, let me say I'm pleased with your presentation. It certainly gives a positive spin on changes that are going to come about. I'm happy to see this approach because for far too long people have just been sitting back, criticizing and complaining. The reality is that things are going to change, so you're either going to be a player who helps to move the change or you're going to be a cog in the wheel going in reverse.
Just with regard to pay-out, my understanding is - and I think it's clear from the minister - that there will be no pay-out made to any landowner who has a renter arrangement unless both parties agree to it.
Mr. Leonhardt: Yes.
Mr. Collins: I think that's a very significant point, because we don't want to leave the impression that some people are just going to be held out to dry by an owner. That was not the intent.
With regard to a couple of the others, because disputes are really always a major concern, in your presentation you said there may be a point where you could kick into the system prior to the dispute arising. How would you perceive doing that? I'd be interested in knowing.
Mr. Leonhardt: On labour disputes, I think what we need is a system of arbitration. What is happening right now is that a labour contract is going to expire and nobody really seems to be serious about doing anything about it, and the two sides know that work will continue, the contract will expire. Eventually there will be a strike. The government will step in to legislate them back to work. They'll send an arbitrator in. It finally gets arbitrated, but in the meantime we've had a strike that has damaged our reputation.
.1130
If you look back over a number of years, I believe nine times out of the last twelve, the government has sent arbitration in to settle those disputes. So it's happening anyway. All we're saying is if that's the pattern that's there, then you have a committee of labour, of management, of government, and they have to reach an agreement by the end of a contract.
The way it is now, there seems to be no incentive for anyone to reach any kind of agreement. So once their contract has expired in six months or a year, the inevitable thing is going to happen; the people who are working are eventually going to go on strike. I think the only thing you can do is say, look, there's an arbitration process here and you're going to have to agree to it.
I don't think we can afford to have the kind of work stoppages we had in the past. During this last one we had, I understand the Japanese particularly were very annoyed. They could not get their canola when they wanted it and they turned to other markets for canola. The price of canola took quite a drop after that happened, and some of it can be attributed to this very fact, that they pulled out of the market for a while.
I don't think you can declare the grain industry an essential service. I don't think labour would stand for that, and I know they're very reluctant to have anyone say that you have to submit to some kind of binding arbitration process. But I think that's the only way it's going to happen, because it's happening right now. They're not settling. Nobody's settling until the government legislates them back to work.
Mr. Collins: The problem with arbitration as I've seen it come along the way is that the people who come to the arbitration hearing and make the decision are not the people who pay the bill. I have some real reservations about people who have less than a serious conscience about how they'll dole out somebody else's funds. I don't know how we ever built that into the system. If they have to write the cheque at the bottom of the page their thinking may improve drastically, but at this point in time it doesn't.
I know in other countries, if they don't come to an agreement at the end of the time, there's a penalty imposed upon both sides and they have to come to an agreement.
I appreciated it when you said you're interested in making sure we move grain through our Canadian system. I think it's critical. All the players in the system are going to have to have a mind-set adjustment. Yesterday a professor from Alberta said we're all going to have to take a little adjustment here. If they don't change, things will change on them.
I listened to a presentation from a fellow who runs a short-line rail in the United States. They picked up a piece of line where they had 101 workers on that line, and they now work with 47. Not only that, the productivity improved because they share in the final pay-out. There's a profit motive in there.
With regard to some of the other features about trucking, of the $300 million pay-out I think you said about half should go to road rehabilitation. Have you any thoughts about where the other half might go?
Mr. Leonhardt: I think Minister Goodale at the meeting I was at in Winnipeg earlier this week said he had in his own mind probably about $100 million of it over a three-year period going toward the producers in Manitoba and eastern Saskatchewan to compensate them for the pooling change, and that there would be probably about $40 million over a four- or five-year period going to the dehydration industry in western Canada because they're also being adversely affected by this change.
So that would take roughly half of this $300 million, and the discussion at this meeting was that probably most of the other half of it could go to roads. There didn't seem to be a lot of dispute about this, because there's no question that the roads are going to be impacted by these changes. As the elevators consolidate and trucking distances become larger, the days of farmers hauling grain with their own trucks will keep on decreasing. I think that's already evident.
Commercial trucking will keep on increasing because they'll be more competitive. There's no way you can haul twenty or thirty miles with the three-tonne farm truck that's so typical in western Canada, and those trucks will be large trucks. They'll be B-trains or something of that nature. They will require some better roads than we have in some areas to transport that grain, and there's no question there's going to have to be road upgrading on a fairly large scale if we're going to start moving those quantities of grain.
.1135
Mr. Collins: With regards to the pay-off that's going to be coming, what are your thoughts on the renter who receives that pay-off and is going to be taxed on that money? As the landowner is going to get some benefit and he can be sheltered on his pay-off, what would your thoughts be if we say to the renter, okay, if you want to redirect that into agriculture and agrifood spin-offs, you get the same kind of tax benefits that would go to the owner? Would you accept a process like that?
Mr. Leonhardt: On behalf of producers, I obviously wouldn't disagree if you could do this. Certainly if that were possible, there wouldn't be any argument from any producer about it. It might be a fairway of doing it.
Mr. Collins: I think because of that $1.6 billion shrinking, if you're going to be taxed on it, why not We're going to get some balance in equity, and you're concerned about the producer. I think we should be able to build into the system at least some protection for that impact, because it's going to be very great.
Mr. Leonhardt: As I said, I think there's a capital requirement here that has been overlooked. As you go into diversification and into value-added and so on, not only from the producer level but also from those industries that want to try to start up - I mean, ethanol is a good example of something that certainly could develop in western Canada, but it needs to have something to encourage it a little bit. I don't say it needs to be subsidized or anything like that, but I believe in some way there has to be some incentive given to get these operations going.
A few of them are successful, but it takes a lot of capital, and I think that's where the shortage is going to be. Even on the farms, even though they are going to get this pay-out, it isn't a huge sum of money when it comes right down to looking at the increased transportation cost.
It will assist some producers to make some changes, but I believe some kind of incentives have to be given. If they were directed to value-added, then that would certainly give the value-added a boost, because we feel it's going to take a number of years before this value-added really gets to the point where we can say this has now become a very positive thing.
I know it's going to be positive. I know from my own area. I come from a wheat- and barley-growing area near Drumheller. In the last two years there has been a tremendous increase in field peas, canola, those kind of crops. Some of them have really never been grown very much in the area before. Producers are moving in that direction because they know what is coming already.
This diversification is already taking place, and there's no end to the amount that will take place. Producers will adapt quickly, but they have to have the right market signals given to them, and they have to be informed ahead of time. I think it's important that when we make these changes producers be told what's out there.
In the area of maximum freight rates for some of the regions, producers will be protected for five years, we're saying, and then maybe at the end of five years it will be completely deregulated. We don't know. If the costs of moving grain out of that area are so prohibitive, then I think producers should be given that information before the five years are over.
They should be told, look, there is no competition in this area; the true cost of moving grain out of here is x number of dollars a tonne, so four, three, or two years down the road when this five-year program phases out, this is what the costs are going to be. I think it's important that this happen, otherwise those producers will go on that rate for the next five years, and then if that rate is removed -
The Chairman: Just to interrupt, how do you get to what are the true costs, and what are the railways' inflated costs in those areas where there's lack of competition? That's the key in this argument.
Mr. Leonhardt: In the past we had to accept figures that were put forward. As producers, we didn't have the expertise or the people. We had to depend on the regulatory bodies who looked at these freight rates and so on, and I guess we had to assume they were done in a forthright and reasonable manner, and we did accept those costs.
.1140
Those costs have been identified. There has been a lot of work done on these lines over the years to try to identify what the costs were and so on. I don't know how we can assure ourselves that they are correct. As producers, I guess we've had to assume they were right.
I'm sure the railways put in all the costs they possibly could. I don't think there's any question about that. But I believe sometimes some of their costs were disallowed in some of the reviews. Hopefully, we did have somebody looking after our interests. I guess we simply had to trust that they were.
The Chairman: Plus a 20% return on capital for them, which doesn't happen in the farm community. But that system is not going to be around after 1999.
I guess my question to you is should the freight cap remain? There are amendments to Bill C-76 at the moment, which may or may not be enough. What's your view on that? Should there be a freight cap, or should there be a review? Should the onus be on the railways, or should the onus be on producers?
Mr. Leonhardt: I don't think there's any question that there has to be a review, and I think the five-year period is long enough. I think one of the discussion papers raised whether it should it be less or more. I think five years will give you enough experience to know what direction it's going in.
As far as who the onus should be on, some people say everybody is going to be so happy with this new system at the end of five years that we won't have to worry about it. I am not quite that optimistic, but I don't know. We don't even know what the NTA is going to look like exactly.
We've seen some of the discussion and so on, but we're not really quite sure what all the provisions are going to be. It's a very difficult question to answer. I think if everybody really wants to develop a good efficient system and wants to work together, I think it can be achieved. But I think the five-year review is long enough to do it.
The Chairman: I guess my greatest concern is that a lot of people are saying everybody is going to be so happy. But if we're not, the last thing I want to see is producers in a position where they're virtually powerless to do anything about it. The way it looks at the moment, the options to achieve power are not being left in the hands of the producers; they're being left in the hands of the railways.
Mr. Leonhardt: I feel that way, too. I wouldn't disagree with what you've said.
It's interesting, though, when you talk about efficiencies. I attended a meeting where an official from Transport Canada said that the railways had suggested to them that all of the efficiencies that were gained in the first five years should go to the railways, because the railways had a revenue problem. I think the producers who were at that meeting informed him that producers also had a revenue problem.
It's unrealistic to believe that efficiency gains should all go to the railways in the first five years. I don't think anybody is advocating that. But the railways certainly were to Transport Canada, and I think it's important as producers that we develop some efficiencies in that system. If we're going to pay for the whole cost of it, it had better be a system that comes down in cost rather than going up. We shouldn't be talking too much about cost increases. We had better be talking about a system that becomes more efficient and brings the costs down.
Mrs. Cowling (Dauphin - Swan River): I'm sorry I'm late and missed your presentation, but I'm pleased that you're here on behalf of Unifarm.
Mr. Leonhardt: Thank you.
Mrs. Cowling: I have some questions around efficiencies, and I'm not sure if this question was raised or not. It was about short lines. Was that discussed, Mr. Chairman?
The Chairman: No, not here.
Mrs. Cowling: We had a fellow in yesterday who spent a great deal of time with this committee on short lines, and after we had listened to him I think a lot of us felt far more comfortable with the short-line concept.
Has your organization explored the possibilities, when we take a look at rail line abandonment, of short lines? What kind of direction can you give this committee with respect to rail line abandonment and your thoughts on short lines?
Mr. Leonhardt: We have a short-line operation in Alberta, Central Western Railways. It's not very far from where I farm, although I don't deliver to that line. That operation appears to have been quite successful. The people who are on the line - the farmers, the elevator companies - are very, very pleased with the service. They claim the service is much better than they ever had before; the costs are lower than they were before.
.1145
One of the interesting things on that line is that while the line was being operated by CN it was a light-steel line. It wasn't in that great shape. The requirements were that the line had to be capable of carrying loaded hopper cars at 30 miles an hour. The line was not judged to be adequate for that, and so the hopper cars were loaded to two-thirds capacity. Since they cannot be topped up after they're loaded, they were shipped from there to a main line and went on to Vancouver two-thirds loaded. Anybody can realize that is a very poor use of cars, and it certainly was a money-losing proposition.
When Central Western Railway took the line over, they became a provincial railway. They no longer had to comply with the 30-mile-an-hour limit. So they loaded the cars to 100% capacity and pulled them at 15 miles an hour. They weren't in any big hurry. They were only going 100 miles to the end of the line. Then those cars were loaded to 100% of capacity and went out there. Almost 4,000 hopper cars a year went out there fully loaded instead of two-thirds loaded. That translates into a lot of dollars of saving to the whole system.
Also, of course, they operate that line without some of the labour contracts that are in place. Really, in this day and age - some of the contracts that have been negotiated by railway workers in the past don't look very realistic. I don't know where you can have a person who's employed for a period of eight years who then will be paid for the rest of their life if their job becomes redundant, and that's exactly what we have today.
The short-line operator that I'm familiar with says he pays his men an average of about $36,000 a year. I don't know if that's a lot or not. He says it's quite a bit under what the national railways were paying for a similar type of work. So by not having to follow some of those regulations he was able to cut his costs, provide better service, and he had fewer people working on the line.
You have to look at every line, line by line. I don't think you can make any broad statement. I think there may be room for short-line operations on some lines.
Where a good heavy highway exists that parallels some of these rail lines, then probably the lowest-cost option is to move by truck, because trucks will not greatly impact a heavy highway. But where you have light-paved roads that the grain has to move on, I think your road impacts are going to be terrific on those roads, and those roads will have to rebuilt. There I think you have to take a really good look at short-line operations, because if you have upgrade roads at an enormous cost, then I think short lines become much more attractive and there is some room for them to operate.
Mrs. Cowling: The individual told us yesterday that a bit of a death spiral happens with rail line abandonment before the short lines are put in place. He's hoping that this doesn't happen here in Canada. In referring to the death spiral, he talked about the elevator system going under. A lot of the short lines apparently like to keep the elevator system in place.
You represent a portion of farmers in Alberta. You have a lot of branch lines that may well come under branch line abandonment. I'm wondering if you as an organization have taken a look at those lines and what you might be able to do there to ensure that you can continue to farm as farmers do in that area.
Mr. Leonhardt: One of the things I mentioned in my report was this whole question of these branch lines. Of the 500 miles that are up for review by the review committee, 91 miles of them are in Alberta - that's all the railways submitted. They were so obvious that there wasn't any point in even considering them. Some way has to be found to add more lines for review.
I think producers honestly realize that with the amount of grain that is moving on them there can be alternate ways found to move that grain cheaper. While no one likes to lose their delivery point and their elevator, there is a point at which you cannot continue to operate if the costs are prohibitive. Something more has to be done so that the railways will come forward with more lines for review.
.1150
I think we have to look at short-line operations line by line. A lot of it has to do with the kind of road system you have. What's your alternative to that railway? If it is a heavily paved road, a main highway where road bans are not a big factor or anything - I live on a lightly paved road where for two and a half months every spring there's a 75% road ban.
Through our organization in Alberta, we have asked for the grain companies, the railways and the Department of Highways to get together and say what they see ten or fifteen years down the road and tell us where the delivery points are going to be. Companies are reluctant to do that. They don't want to do that. The grain companies don't want to identify where they think they're going to be. Nobody wants to do anything about it. But we're saying you're going to have to plan. If you're going to move this product and you want to move it year-round on good, heavy roads, then you'd better be concentrating on developing a road system that's going to serve that end.
If we could get those groups together to do that, I think it would be a big step forward. But today I don't think that coordination exists. Everybody sits back and they don't know what's going to happen to the rail lines. The railway doesn't want to do anything. The elevator company doesn't know what's going to happen. We don't know where the roads are going to be.
Mr. Taylor (The Battlefords - Meadow Lake): I'd like the witness to repeat something he said earlier, mostly for the benefit, I think, of Mr. Collins. It was regarding the possible disputes between landlords and tenants on the pay-out.
If I heard you correctly earlier, you were saying that agreements could be reached but they could be reached unfairly in that a landlord could use undue pressure, threatening to remove a contract should the landlord wish to do so. A tenant would sign an agreement based on a pay-out he doesn't agree with, simply under threat of losing the contract on his land. Is that what you said, in spite of what Mr. Collins suggested, that an agreement must be in place and therefore the mediation and agreement process will work, that it's not quite as fair as it's put out in the brochures?
Mr. Leonhardt: What I said was that I think most people will reach an agreement. I think they will reach an agreement.
Mr. Collins: Mark that down, Mr. Leonhardt.
Mr. Leonhardt: Again, what I'm saying to you is that there are cases - You know, if you're renting land, you have to have a good relationship between landlord and tenant, and I think in most cases that would exist.
As I say, we had a report from one of our members whose landlord flatly said, there's no way I'm going to share it with you; if you don't like it the way it is, I'll get somebody else to rent your land. So it may not always be equitable. It might be. I have no idea. We thought maybe 90% or 95% of the people might reach an equitable settlement, or whatever. I don't think you can step in and say you must do this, or you must make some - there's so much variation in those agreements. They really are a personal thing between the parties involved, but I think most producers, owners and renters are going to reach an agreement on it
On the other side, I've had a couple of people phone me to say they were contemplating renting out their land this spring and did I have any idea of how much the payment might be, because they were going to give their tenants some kind of break on it, but it wouldn't happen until they actually got some money.
I guess time will tell how it turns out. I think most of them will be settled - not always equitably, but I don't know how big a percentage that might be.
Mr. Taylor: I just wanted to clarify that because it is - Well, I won't go over it again.
Part of why I raised it is because I'm concerned that so much of the discussion out in the country is over the implementation of the elimination of the Crow subsidy and not about the long-term implications, which is one of the aspects of this committee. We're having a great deal of difficulty taking the future of agriculture beyond August 1, 1995. That's why I'm pleased this committee is taking on some of the examinations that it is.
.1155
My own vision of the future of agriculture is not arguing over inadequate payments and a ``make it up as you go along'' program, which seems to exist in this case, but about increasing the population in rural Canada, ensuring that communities can exist based on adequate incomes, whether it comes off the farm, which most of it would have to, or whether it comes from value-added industries and other things that can ensure increased income in rural Canada.
I'm just wondering if you or your organization have examined the next ten or fifteen years in agriculture. How do you feel decisions like this one are going to impact upon the repopulation of rural Canada and increased income? In that sense, when we talk about value-added, do you have investors knocking on your door to make up for the millions and millions of dollars that are annually going to be lost from these rural communities?
Mr. Leonhardt: I think that the shipping of bulk grain out of the country, which I guess was encouraged by the transportation subsidy, is really the lowest value that is put on that grain. Whatever you can do to enhance its value, of course, is going to be better. It's going to be better probably for the producer and certainly for the economy.
Say you could mill grain even in this country and sell it in the milled form, or refine canola oil and then find a market for it instead of shipping the raw seed out of the country. If you can add value, diversify, and create different industries and uses, then there's no question that it's going to add to and benefit the economy here.
Mr. Taylor: Will that happen?
Mr. Leonhardt: It will happen over time, I think, if everybody works at it and if some incentives are there for it to happen. I think it's going to take some time. How long that's going to take, I don't know. Until it does happen, I think the initial change is going to be negative.
But it will become positive if we work together at it. I think the producers are willing to do their share, but I think also we want to make sure the producers' incomes are enhanced by whatever happens.
Say, for instance, you develop an industry. Let's take ethanol. Say you were to develop a tremendous ethanol industry in western Canada that would use a large quantity of grain each year. If that results in simply the same price or a depressed price for that grain, then you haven't really done very much for the producer but you may be creating employment and so on for other people.
I'm saying to you that in some way we have to ensure that this new value-added and so on results in some increase also to the producer.
As for repopulating the rural areas, I don't think that's going to happen. The trend for larger, fewer farms has been going on for a long time. I don't know what will change that.
When you look at input costs today, you begin to wonder where how the farms of one and a half or two sections in western Canada will survive. The days of $200,000 combines are here. It's just economically impossible for a producer with those kinds of acreages to own that kind of equipment.
I don't think grain farming as we have seen it or anything like that - Look into the livestock industry. Certainly there are some very big feeding operations in Alberta. They have become very large commercial industries. We used to have 200 or 300 head of cattle in a feedlot. It's not uncommon now for many of those feedlots to sit empty. Those people have placed those cattle into commercial feedlots. We have lots of family farms in southern Alberta that are feeding 10,000 or 20,000 head of cattle. It's become a very big operation.
I don't think that's going to change. I think the danger in all of this is that the young, beginning farmers will be wiped out if we don't have some adequate safety net in place to protect them and if we have these kinds of increasing costs for transportation and so on during a downturn in the market or a marketing disaster. They'll exit the industry. That's what's going to happen to them.
I'm just saying to you that it's important for us to have some kind of protection there for producers, because costs have become that high in our farming, as any of you are familiar with.
.1200
On our own farm, we feel our input costs are $100 an acre. If you're seeding 1,000 acres, you're looking at putting $100,000 in the ground in the last month, and you don't have very much protection any more for that. We did in Alberta under GRIP. We don't have that any more. So I'm just saying it's a fairly big gamble. You're gambling on the weather, you're gambling on markets, and you're gambling on getting that return back.
The Chairman: We have a couple of quick questions. Before we go to those, because we're starting to run over time, you said in the beginning - and I think we agree with you - one of the key points is how will producers be able to manage in the future. The purpose of this committee is to try to look at the future. Given these changes - we're not arguing for or against them - how do we put ourselves in the position that farmers can manage, and what can the government do about that?
You suggest there's a number of things with regard to where the cars should go. You suggested selling the cars to producers. Now, who the heck are the producers when it comes to that? Is it the Canadian Wheat Board? Is it the pools? Is it individual producers? Who?
Mr. Penson: They already own them.
The Chairman: I know they already own them, but who do you mean specifically?
Mr. Leonhardt: I think I said it without thinking too much about it, because when I heard the suggestion that they were going to sell them to the railways for $1, I said, well, why not sell them to the producers for $1? That would be better than selling them to the railways for $1.
The producer doesn't have a lot of bargaining power, when it comes right down to it, to get freight rates changed. Maybe if producers had a fleet of cars, it might be interesting to say we're looking for some guys who have some engines who want to pull our grain somewhere. I think it could put a little competition into the system.
The Chairman: Would it be possible to see that as some aspect of the Canadian Wheat Board producer-controlled or something?
Mr. Leonhardt: It could possibly. It depends on what's going to happen to that organization and so on, and what's going to happen in the future. I personally support the Canadian Wheat Board. I think it's done a good job. I think there could be some changes made in that organization to improve it, but I don't have a lot of problem with the idea of the Canadian Wheat Board operating the way it has operated, really. But I think we're going to see some further opportunities to deliver grain in other ways and to market in other ways. When that occurs, I don't know - I haven't given any serious thought to how the producer -
The Chairman: Anyway, I think you've opened up a valid question, and it's something we can pursue.
You did say you were on the Senior Grain Transportation Committee as a representative, I believe, for a while.
Mr. Leonhardt: That is correct.
The Chairman: You indicated that from your perspective the railways and grain companies seemed to place too much emphasis on their share. You also indicated that you were told - by the powers that be, I guess - that the greatest savings can be made by the removal of branch lines.
One of my personal peeves with Ottawa has always been that this is what happens, this option put forward to us as if there are no others. It doesn't matter what it is; it's this option, this option only. The evidence is provided to support that option, and don't think about anything else; don't upset the apple cart.
There's was an interesting proposal put forward, an interesting discussion yesterday with Railtech, and I've been sleeping on this all night, I guess. In terms of the branch line network in western Canada, you're worried. Certainly, SARM's worried. Others are worried about the impact on the highways, and we recognize it's going to be there.
The push, mainly by the grain companies, is to get rid of some of those branch lines and move to road. I'm wondering if there's an inherent conflict of interest for the grain companies - I know they won't like my saying this - in that if they're going to build a high through-put elevator on a main line, then they wouldn't want to see those old elevators they may have on a branch line being used to fill cars to capacity, not using their high through-put elevator, whereas a short line might be able to use that branch line.
.1205
The point put to us yesterday, and Marlene mentioned it, was the death spiral that a branch line goes through. If we get to a situation where the elevators are closed down and are no longer on that branch line, then it's not viable to put a short line in because the loading capacity is not there for farmers who want to haul a short haul.
I believe Bernie asked if it would be possible to do a study of the branch lines that might be capable now of becoming short lines, might have the potential to become short lines in the future, prior to letting that happen. I wonder what your thoughts are on that.
Mr. Leonhardt: I think it would be an excellent idea. I think there is potential for short-line railways and it would be good to look at them. It just bothers me, when we now have a chance to come forward and review some of these high-cost lines, that suddenly the railways don't want to put them forward for review.
I suppose if you're being paid to operate them, what is the incentive? I understand they're supposed to pick up $10,000 a mile or something, but maybe they're better off to keep them in the system and keep collecting on them, I don't know. I don't understand their reluctance. They say they don't like the process and that's why they aren't putting their lines forward. I think that is a consideration, but I think it would be an excellent idea.
When I talked about being on the Senior Grain Transportation Committee, I guess as a producer going to that committee, I had never heard much about market share; it was just something you didn't talk about out on the farm or anywhere like that. But after sitting on that committee for five years I was involved in a car allocation study, which involved a lot of work and produced a lot of good recommendations that never went anywhere. That was the downfall, I believe, of the Senior Grain Transportation Committee. I was sorry to see the committee disbanded, because I think it did some valuable work. But the only problem was that nobody acted on its recommendations.
The Chairman: I'd like the name of that study. Last year, as a subcommittee, we had grave concerns with whether the GTA was really operating in the interests of anyone. The Auditor General's report on the GTA is scathing, and you're not the first who has said that maybe we need some kind of overseer group to protect the interests of producers.
Mr. Leonhardt: As I said, as a producer the market share was something I didn't hear about, but once you were on the committee for a while you'd hear them talking about ``our market share''. CN has a certain percentage of the market and they have to protect that. So does CP. Each of them has its percentage it has to protect.
Then there were the elevator companies, and whether they were cooperatives owned by the producers or private companies, they all had their market share and they were all really very careful to preserve their market share. It really made you wonder, then. The system is there and everybody is protecting his own interests; is it really there to do anything to protect the interests of the producer? I think there are some questions that have to be asked about this whole market share arrangement.
I think the car allocation system we've had in the past is going to have to be reviewed. I would like to see the recent report of the Senior Grain Transportation Committee. It would be available. The one I'm talking about was done back in the 1980s - I don't even recall the year - but there was a report on car allocation done at that time and no action was taken on it.
The recent report would be very interesting because it's a more recent one and would probably, I would think, have some good recommendations in it. But I have no idea what's in it.
The Chairman: Mr. Penson and Mr. Collins, do you have a short one? Make it very short because we're taking time from the next witnesses.
Mr. Penson: Mr. Leonhardt, it has been suggested by a lot of people that nothing focuses the mind better than being short of money. I know that's certainly the case on my farm, in my operations, and I suspect it's the same all over. What this discussion is really about today is government phasing down because of being short of money, not because of our need to meet GATT requirements, although there is a set of requirements that have to be met. However, we're far ahead of that.
.1210
I want to get back to the efficiencies in the rail system because what we really have to garner are some efficiencies here. I think this whole process has been beneficial in the fact that at least in western Canada we now will not have to support the seaway system through the pooling. I mean, that's one efficiency we can realize right away, and there will be others.
I wanted to ask you a question with respect to the discussion about branch lines and main line. We have to separate these out, in my view. In the part of the world I come from, the Peace River country, there are no branch lines to speak of. People haul grain 30 to 40 miles. The days of having a branch line where you can haul five miles to your local elevator seems to me to be a thing of the past.
The Chairman: Can we get to the question?
Mr. Penson: Shouldn't really the market sort of decide whether or not that line needs to be there? In other words, if there were a facility like a common rail bed, that would set the tone for whether somebody would be allowed to operate on that line or not.
I would like you to think more about that, because it's certainly one way of introducing some competition into the system. That's more of a statement, I guess, Mr. Chairman.
Mr. Collins: With regard to short lines - a couple of short lines - you mentioned one. Through some process that was not planned, they were left out of the system and now there are some amendments coming forward to accommodate them. I am sure you are aware of it.
Mr. Leonhardt: Right.
Mr. Collins: What are your thoughts on that?
Mr. Leonhardt: We had a discussion about that on Monday in the meeting I referred to, and there are arguments on both sides of it.
My own personal view is that if we're going to have some short lines in the future, their costs are going to be in the cost base. It's going to be in there in the future.
So I guess if you were to say to the two short lines - the one in Alberta and the one in Saskatchewan - you would leave them without anything, I don't think that would be fair because they would be put at a disadvantage completely. If you're going to look at short lines in the future and give them the opportunity to operate, then I think it only fair that you make some allowance for the existing short lines, the same type of allowance. I think their costs have to be in the system because otherwise it would be unfair to them. They would be disadvantaged if you didn't make any allowance for their operation.
The Chairman: Thank you very much for that answer. We do have to conclude.
I would like to thank you on behalf of the committee, Mr. Leonhardt. We will take your information under consideration.
Mr. Leonhardt: Thank you very much.
The Chairman: We now call on SARM, please. Mr. Ron Gleim and Patty Smith, welcome. I believe you have a video presentation. We will go through your presentation and go to questions from there. We are going to start to run short of time, I can tell you.
Mr. Ron Gleim (Director, Saskatchewan Association of Rural Municipalities): We'll just get at it, then. Thank you very much.
Good afternoon to the House of Commons Sub-Committee on Grain Transportation. The Saskatchewan Association of Rural Municipalities is privileged to have the opportunity to address you on grain transportation and transportation reform.
As you know, our association has had the opportunity to consult on several matters pertaining to the pay-out of the WGTA grain efficiencies and transportation reform measures.
Due to the limited time for our presentation, we will respond briefly to each of the questions you posed to us in your terms of reference. I also want to point out that we also hope to present a multi-media presentation to help substantiate several of the points we wish to make in our address today.
First, will agriculturally dependent and rural communities benefit from potential new value-added and diversification possibilities? How and in what form?
It is difficult to predict with any degree of accuracy whether the elimination of the Crow benefit will expedite the move toward diversification and value-added opportunities. We would argue that greater than the effect of the Crow benefit has been consistent years of low commodity pricing that has preceded the demise of the Crow benefit. We all know that farm income in the late 1980s and early 1990s was far below the cost of production. As a result, many farmers exited the industry.
.1215
The Chairman: Ron, perhaps you could highlight it to save time.
Mr. Gleim: We see that many farmers are either leaving the farm or going to alternate crops. For example, canola acreages have increased probably 500% over the last 20 years. Livestock numbers as a measure of diversification have been less dramatic than crops; however, the numbers have increased probably 370,000 over the last 20 years.
Our view is that crop diversification will continue to occur in Saskatchewan and value-added processing will become a more predominant sector in our agricultural industry. It must be mentioned that a lack of capital is a significant obstacle to the realization of many successful value-added businesses.
Your question 1(b) is whether the elimination of transportation subsidies is sufficient to generate value-added diversification activities. Our association has made consistent statements to federal and provincial governments that the establishment of equity in capital venture funds is necessary for Saskatchewan to fully realize growth in value-added processing.
Many farm families have small value-added businesses but lack the capital requirements necessary to establish their business nationally or internationally. We believe that the Farm Credit Corporation is well positioned to help Canadian people find capital for their business ideas.
For example, the Farm Credit Corporation could establish an agrifood equity fund whereby Saskatchewan, Canadian and international investors could invest in Saskatchewan projects with well laid-out business plans. In many cases valued-added processing businesses show a very high rate of return of investment superior to any bond or other equity market investments.
What other policy changes or initiatives would we suggest to achieve diversification? The first one would be accessibility to capital funds and assistance by federal and provincial agencies in putting together a business plan; second, putting together marketing plans and inviting trade delegations from other countries to meet with Canadian processors and having these meetings in the prairies instead of Vancouver and Toronto; and third, working at trade liberalization initiatives, specifically in the Pacific Rim countries.
Under 2(a) you ask what alternative transportation arrangements do we expect to arise and does the federal government have a role in maintaining the infrastructure for these alternative arrangements? Where could the adjustment fund be used and most usefully applied?
Our association believes that roads will continue to be the mode of transportation with branch line abandonment. As members of the Standing Committee on Agriculture and Agri-Food, we have made several presentations to you about the potential impact of further truck transportation of grain commodities.
We indicated to you that some rural municipalities will face increases of $275,000 to $375,000 per municipality, and these costs simply cannot be borne by existing property taxpayers in rural municipalities where an inland terminal will be built.
We developed a computer program that is able to quantify the effects of system rationalization on rural municipal roads, and this will be used by Marian Robson and Neil Thurston on the NTA review process. It is our position that part of the $300 million adjustment fund should go to rural municipalities.
In addition, we believe that all stakeholders in the grain transportation system must communicate regularly in order to achieve a least-cost transportation system for farmers. For example, we believe it is critical for elevator companies in rural municipalities to have discussions about building an inland terminal before it is actually constructed. A coordinated system of planning can only help to mitigate increased costs of transportation that are ultimately borne by the producer.
.1220
To further illustrate road impact costs due to branch line abandonment, I would like to draw your attention to a graph provided by Saskatchewan Highways and Transportation. This graph expresses the impact in dollars per tonne.
One initiative we have taken in Saskatchewan is to organize 100 municipalities - 49 rural and 60 urban - in the southwest, and we are talking with elevator companies, grain companies, hospitals, schools, mining companies, and anybody who uses the transportation system. We are trying to plan where we are going to spend the few dollars we have. We've had four meetings to date, and I will comment on that later if you wish.
We believe that short-line railways could be a significant transportation alternative as rail lines are abandoned by class-1 carriers. In many cases, short-line railways can be 30% to 50% less costly for farmers than if the line were operated by CN or CP. It is our position that when the rail lines are abandoned, municipalities, farmers, and other stakeholders should have an opportunity to assess whether they wish to operate that line as a short line before it is actually torn up.
We believe a short line rail system can provide lower freight costs for farmers and can complement the operations of class-1 carriers. They can encourage rate competition between class-1 carriers. It is imperative that the new NTA act allow for fair revenue divisions and interchange agreements with the class-1 carriers.
It is interesting to look at the American experience with short lines. Since 1980 they have created 263 new short lines and regional railroads. There are over 450 short lines and regional rail lines operating in 50 states. These railways operate almost 70,000 kilometres of track, which otherwise may have been abandoned. These short lines have helped increase the traffic density of the U.S. class-1 carriers.
U.S. short lines and regional railways account for 25% of the route miles, 11% of rail industry employment, and 9% of the U.S. rail industry revenue. If you refer to the map in your book, it shows the branch lines, which are all in orange. Many of these have significant tonnage and would be very good candidates for short lines.
A couple of comments were made earlier about whether a short line could operate if the elevators were to move their facilities. We have researched some of this. Hugh Campbell at Fort Qu'Appelle, right outside of Regina, has built his own elevator for $350,000, which will do as much as a $3 million inland terminal. Farmers have the opportunity; they do not need the elevator companies. If the elevator companies want to move, for a few thousand dollars apiece, farmers can build their own facilities that will clean, handle, and load the grain every bit as competently as any elevator company can do today.
The Chairman: I have a question on that graph - on light-steel lines, segment one, and other branch lines, point two. We've had some discussion in terms of the capacity of lines to carry various loads. In terms of the other branch lines, do you have any information on their steel density?
Ms Patty Smith (Manager, Agriculture and Communications, Saskatchewan Association of Rural Municipalities): They're 220,000 pounds. For the most part, those branch lines that are 220,000 pounds can carry cars to full capacity rather than the two-thirds. In many cases, if they operate under provincial jurisdiction, they are not subject to federal operating standards and they can perhaps go a bit slower than the class-1 carrier on those lines. You can then fill them to 100% capacity.
The Chairman: And the light-steel lines?
Ms Smith: Those light steels are 177,000 pounds, and you have to operate those at two-thirds capacity or you have to substantially decrease your speed to 30 or 15 miles an hour. So it's a bit more tedious, but it still can be done.
Mr. Gleim: We also were talking to the rail companies. We want them to put incentive rates on a branch line that can be operated by a short line. They really don't want to do that. We've also been meeting with a coalition of shippers in Saskatchewan that is looking at putting competition into the two railroads. We're looking at buying the line from Saskatoon to Portal, of which half is a branch line and the other half is light steel, which is up for abandonment. This would take two-thirds of Saskatchewan as a catchment area and have a third rail line for competition.
.1225
In question 2(b) you ask, in the transportation of their product, to what extent are Canadian producers at a relative cost disadvantage because of higher labour costs, higher levels of taxation, or higher input cost? To what extent do we have an advantage in transportation and marketing? How can these advantages be strengthened?
There's no question that higher labour costs, higher taxation and higher input costs have an effect on the competitive advantage of farmers. In the railway industry alone, Canadian labour productivity levels have been below those of the U.S. class-1 carrier. In 1983 they were 40% higher than for Canadian railroad revenues. By 1993 the gap had grown to 64%. The average weekly wage had risen from $538 to $886 from 1983 to 1993. This compares to a 46% increase for average wages in all sectors. Taxation levels for Canadian class-1 carriers are also higher than that of their American counterparts. These costs all come back to the producer by way of higher freight rates. Given the global trade consolidation, our costs must decrease if Canadian farmers are to remain competitive in the world market.
Canada has a very high-quality transportation system, superior to those in many countries around the world. However, Canada must focus its efforts on making the transportation system more north-south oriented rather than east-west, to reflect the growing trading patterns. Our system, while being high quality in terms of infrastructure, is fraught with inefficiencies that must be corrected.
To give you some examples of this statement, we ask that you focus your attention to the SARM video on west coast grain handling. While the total video is 30 minutes in length, we have taken excerpts from the video to highlight the lack of coordination and the inefficiencies existing in our Canadian system.
[Video Presentation]
.1235
Mr. Gleim: We had a very interesting tour out there. Every day we thought it couldn't get worse, but every day it did.
Before we leave this section, I'll talk about some of the advantages in the grain industry. Without question, Canada has some advantages. It has the most superior product in the world. Unlike the United States, most of our grain is shipped very clean and with strict varietal control. When millers buy Canadian grain, they know exactly what characteristics they are getting.
Ms Smith: You asked about the system disruptions, how they can be overcome with respect to labour problems, and how they hamper efficiencies. I think you saw quite clearly on the video that we do have some labour problems that need to be dealt with. But we believe those situations can only be addressed by working with the union directly to solve some of these problems.
For example, to show you what the cost for labour problems could be, if you had a work stoppage somewhere down the line, whether it's the railways or whatever company it may be, the farmer gets charged with demurrage charges through the Canadian Wheat Board pool accounts, which is farmers' money.
The ships are at the port waiting to be loaded, and the costs are very high. For example, if you look at the 1993-95 crop year, you'll see in the annual report of the Canadian Wheat Board that the demurrage and dispatch charges to the pool account for wheat were $23.9 million, almost $1 million for durum, $4.2 million for barley, and $312,000 for designated barley. That comes right out of the producer's cheque.
We find that an untenable situation. It's getting out of control. Every time the system misses in coordination or there are labour problems, the producer gets billed for a situation beyond his control. It's absolutely ridiculous.
Our plans are to sit down with the labour unions in the month of July. We've invited some of the major players, the heads of the major unions in the grain handling and transportation industries, to come to Saskatchewan. We're going to meet with them and talk about how we can work together to improve the system rather than working against each other.
.1240
On the issue of car allocation, we believe cars should be turned over to a producer-controlled agency. We think a producer-controlled agency would coordinate the system in an equitable and fair manner. We think a board of directors that would be elected by producers should be set up so that the commissioners who are responsible for coordinating the day-to-day operations of that new allocation agency would be producer controlled and producer elected. We believe it would then be a more responsive system.
How can we ensure efficiency gains are shared among all the stakeholders? To sort out several of the inefficiencies that exist in the grain transportation system is at this point something we see as an objective. But we believe that efficiency gains, if they are in fact made in the system, will show up in terms of lower costs for freight.
One thing we would like to point out and that we advocate strongly is selling grain f.o.b. the ship, because that would eliminate producers being billed for transportation disruptions beyond their control. The other point is that access to alternative transportation routes by using short lines and using U.S. port systems would cause the environment to be more competitive, with the efficiency gains accruing back to the producer.
In question 2(g) you ask what about Canadian grain being diverted to U.S. for export, and would our reputation as a quality grain supplier be hampered?
We had a meeting with the port of Portland officials. They came to Canada after we did this west coast tour. They want our grain and they want to try to work with us to coordinate the system right from Saskatchewan to the port of Portland to move Canadian grain through their system. In our opinion after our discussions with them, they have no problem with exporting Canadian grain on the basis of our high standard of cleanliness, our strict varietal control, or whatever grade specifications we have. So that is not a problem, and the port of Portland looks like an opportunity.
With respect to 3(a), you ask are producers well placed to adjust to the new regime?
We had some discussions with Andrew Elliott, who is a consultant for the federal government on this whole issue of deregulating the transportation industry. There was a survey done for CN, and it indicated that 90% of producers do expect change. They do not want it or necessarily like it, but they do expect it. But we think that in terms of their being well placed to adjust in the new regime, if you look at the graphs we indicated at the beginning of our presentation - we looked at the new crop mixes, with canola and specialty crop acreages increasing anywhere between 2% and 500% - producers are adjusting to the new regime.
We think the adjustments are going to be difficult, to begin with. There may be some retirements or bankruptcies that occur, but we think producers will adjust to the new environment. But we have to mitigate the impacts of the system changes by allowing the system to become competitive and efficient, and the producer must have more control over his or her destiny. That's why we support such alternative transportation measures such as short lines and the use of alternative export points like Portland.
What other regulations should be continued? We just said continuation should be the enhancement of public safety provisions.
Under question (c) you say that under the WGTA, railways were accountable to shippers and had to consult with them. Do you believe a system of performance assurances, rewards, etc. should be put in place?
We have always been in favour of a system like that at SARM. We believe selling grain f.o.b. the ship, as I said earlier, will result in a higher-performance system, because you have to get that grain from the farm gate to the port in time. There are costs associated with it if you don't. In that situation, if you sell f.o.b. the ship, there would be no pool accounts to pick up the extra costs of system inefficiencies, so you're going to make sure you're coordinated enough to get to the port just in time to capitalize on a well-coordinated and highly efficient system.
I just want to point out that Saskatchewan Highways and Transportation did some studies with A.T. Kearney, who is a consultant from Toronto. They looked at some alternatives and some cost savings right from the farm gate to the port, and if you just flip to the back of appendix A, I want to very quickly lead you through them.
It says our current system right now from the farm to on board the ship in Vancouver - the base is Vancouver - has a total operating cost of $55.21. At St. Lawrence, on the next page, it's $70.30. If you go to the first scenario they're proposing, which is mobile elevation, buying grain on the farm, short line usage, and limited port cleaning at Vancouver, the cost decreased to $43.55 a tonne. At Portland, in the same situation, it's $39.54. If we go to the St. Lawrence, again the costs come down to $58.66.
.1245
If we go to scenario B and look at inland cleaning and direct hit to ship in Vancouver, the cost decreases substantially at $36 a tonne. In Portland it's $32.63 a tonne, and at the St. Lawrence it's $51.02.
The last scenario they looked at was just-in-time in Vancouver; that is $30.70 a tonne. At Portland it is $28.31, and at the St. Lawrence it's $45.22.
They also looked at the New Orleans opportunity for moving grain, but I haven't included that. That also showed significant cost savings.
You can see that our current system involves a lot of grain handling, and every player who handles that Canadian grain has to be paid for handling it. We think the system can be streamlined substantially with the savings accruing to the producer.
In 3(d) you ask, given a weaker regulatory environment, is it likely that railway performance will improve? Why or why not?
The railways themselves argue that they can become more efficient and cost-competitive under a deregulated environment. They also point to their high taxation levels that will have to be looked at and they'll discuss their labour problems when 49% of their expenses are labour expenses, and that is quite high. So we have to take a look at that and do that in a concerted effort.
On 3(e), whether the NTA can accommodate a transparent, cost-based rate-setting system, I'm just going to paraphrase that. We believe it can be done.
If you look at the rates under a deregulated environment, certainly the rates would not be filed with a regulatory body. There would be shipper and carrier negotiations; the rates would likely be market-oriented; there would be provisions for CLRs, FOA and interswitching, which are essential to shippers; there would be confidential contracts if desired; and there would be provisions for mediation and dispute resolution mechanisms.
Then we just basically talk about the fact that in a market environment where there is no regulation, the rate will differ and can differ between commodities. For example, there could be a higher rate for canola than for wheat. There could be a higher rate at post-shipment, post-harvest times for shipments than there would be otherwise, and rates could differ depending on which port you're using, e.g., Thunder Bay, Vancouver, etc.
The other issue is equipment availability. The class-1 carriers could be reflected in the rates.
Even though the system is deregulated, what about the shippers being captive? We think that CLRs and FOA, as proposed in the NTA review, will protect shippers from monopoly situations.
Again, with respect to the regulatory regime, which must remain in place, we again point to public safety and definitely the preservation of shipper rights, such as the CLRs, the FOA and the ease-of-entry provisions for the creation of short-line railways. The other objective we must work at, at both the provincial and federal levels, is to harmonize the regulations that would govern short-line railways.
Mr. Gleim: I'd like to just mention something about owners and renters. We think if it weren't for the signature for renters, renters might get nothing. So when you look at it that way, it may not be that bad. We hope mediation is the way to settle most of these disagreements and that our arbitrary decisions will be the last resort.
We thank you very much for listening to us today and we'll be more than pleased to answer any questions you have. Thank you.
The Chairman: Thank you. We're going to have to be fairly hasty and our questioning will go to no more than five minutes.
Mr. Penson: Thank you for the excellent presentation. I see you've done a lot of work to prepare for this. I really appreciate the work that has been done in terms of the shipping costs, cleaning and so on at the different ports by comparing United States terminals and our own.
Ms Smith, with regard to labour, you mentioned that the situation could only be addressed by working with the labour-management unit out at the west coast. I suggest to you that bypassing that whole system would also put pressure. I'm sure that's what you're saying here.
Ms Smith: Yes.
Mr. Penson: It would also put pressure on our system to try to get some efficiencies into that system - in other words, reduce the labour-management costs at the west coast. I really believe that's one of the valuable tools we have available to us to do that.
.1250
I'm just looking at your charts on slide 120, regarding mobile elevation and shipping to Portland. Specifically I'm looking at the main-line costs of rail haul from Regina to Portland, which are at $19.57 a tonne. Then if we go to slide 127 and look at main-line costs to Portland, again they are $16.30.
I'm just wondering what the reason is for the difference.
Ms Smith: In that situation, if you look at the reference to mobile elevation short-line on page 120, the main haul from Regina to Portland, that is assuming the long haul is on the Canadian side and they hook up with Burlington Northern or Union Pacific at King's Gate. So that's assuming a Canadian long haul.
Scenario B on page 127 is assuming an American long haul and a negotiated confidential rate with BN.
Mr. Penson: Thank you for that. I really think you're on the right track.
I guess you would agree, then, that this is one of the main tools we have to put pressure on our own system to get some efficiency.
Ms Smith: I'd just like to point out that as producers we do not necessarily want to use the American system, but I think if we can point to the American system as being an alternative, it will drive efficiencies at Vancouver and bring our costs down where we still can use the Canadian system. I think we would still like to use our own system and preserve the jobs that are there.
Mr. Penson: I think everybody would agree with that. You may actually have to physically use the American system from time to time to make that correction.
Ms Smith: Right. Discipline.
Mr. Gleim: We made one comment to the union leaders when we went down on the west coast tour, to WESTAC and Canada Grains Council meetings. We met with many of the union leaders. We told them that the grain may have to go south. Once it starts it's going to be like a cancer; it will keep going, and we will weaken our rail system and the jobs on the west coast. We either have to hit this head on and something has to happen in the next year or two, or some of us aren't going to be here. I said, we're going to be here in Saskatchewan, but I'm not sure about you on the west coast, because when the grain goes south it may just keep going that way.
We've initiated a meeting for July with all the major union leaders to talk about those very things. They're quite eager to talk. They believe they will lose a lot of jobs. We're saying this is a win-win situation. If we can keep the grain here, if we can get the efficiencies in our system, we'll all win. You won't lose your jobs. In fact, we may get grain from the U.S. because the U.S. is looking at marketing grain through Churchill.
We don't have to go the other route. We can become more efficient and we can gain from the U.S. They seem to agree, but whether or not they're willing to actually make that commitment is -
Mr. Penson: This may sound strange coming from me in the Reform Party, but I believe management has to be included in that because they need to clean up their act in a lot of areas to realize efficiencies as well. It's part and parcel of the same thing.
You wouldn't agree with that, would you, Bernie?
The Chairman: We've heard stranger things from the Reform Party.
Mr. Collins.
Mr. Collins: Thank you, Mr. Chairman.
It's always a pleasure to have SARM here. Your presentations are always well researched, well prepared and well presented. I know that Marlene Cowling, although she's headed away, would want to ask you a couple.
Ron, with regard to capping that five-year rate, is it agreeable to you that we put that cap on that rate?
Mr. Gleim: Yes, I think it has to be, because farmers are saying today that if the efficiencies are achieved the cap probably won't be necessary. If we can gain efficiencies and create the competition, the cap shouldn't have to be there. But just in case we don't, we'd better leave it there.
Mr. Collins: I won't go through it because I think everything is there and pretty well stated. But we had some people yesterday who are really upset with the fact that when it comes to the short-line operators, we shouldn't be paying them, although they've been left out of the total picture. What are SARM's thoughts on consideration of those short lines?
Mr. Gleim: I'm not really sure about this 10¢. I know we talked about it with Ralph in Winnipeg, but I'm not really sure where that all fits in.
Our vision of short lines is that if they have a chance to negotiate a contract with the main line, they should be able to operate on their own. It should be the least costly method of moving the grain. If it's cheaper for the municipalities to put money into that short line, if that's a better option than building a road, then maybe that might have to be part of the criteria for running a branch line.
.1255
It may not work on its own, but when you add in all the costs of buying new trucks, building a new inland terminal and spending millions of dollars on a road, maybe the cheapest alternative is putting a few dollars into that branch line and running it as a short line.
Mr. Collins: One of the things that came up this morning was mentioned by one of the previous presenters. We were looking at ethanol, and I noticed that a portion of your discussion was on agriculture and agrifood.
What are your thoughts on where we would pay out to the renter through our taxing system and possibly through Paul Martin? Could we find a vehicle where with the incentive from a tax shelter that person could put that money into agriculture or agrifood? Do you have any thoughts on that?
Ms Smith: When I look at it on my farm, on one quarter of land, for example, there is an assessment of $3,000. I'll be receiving about a $1,650 payment on that one quarter in perpetuity because it is assessed a little lower as it is based on lower productivity.
I would argue that while they would like that tax shelter and might put it into a value-added processing initiative that would really benefit the economy, a lot of young farmers especially are looking at high fuel costs and high input costs. The taxation problem isn't a big problem for them. I have a real feeling that while that is a good initiative, many of these young farmers are going to put that $1,650 towards bills.
Mr. Collins: That's right. There are some who always get caught in that.
Ms Smith: Yes.
Mr. Collins: I'm just thinking that there are a number of players, though, who would like to access at least that kind of protection as the owner.
Ms Smith: Oh, yes.
Mr. Collins: I'm just saying if that vehicle is there, if you opt not to use it - But I certainly would like to see it put in there to protect them as well.
Mr. Gleim: There are many good projects out there in rural Saskatchewan. If they had a few dollars, we could create thousands and thousands of jobs in rural Saskatchewan in the next year with all the studies that have been completed for the agrifood industry.
Mr. Collins: I want to thank them, Mr. Chairman. Certainly coming from Saskatchewan, and I know Mr. Taylor is from Saskatchewan, we're always pleased that SARM takes the time to be leading-edge people in both the direction they have taken in rural municipalities and, I know, the direction they'll take in the future.
Mr. Taylor: I'll echo Bernie's comments. Very well said, Bernie.
Thank you for being with us today. I have a couple of questions that take us beyond your presentation today. I, for one, appreciate the work you've done on efficiencies in transportation, certainly with the changes and the increased cost that apply to farmers. If something isn't done, we're going to find a lot more diversification out of wheat and export product. That in fact wouldn't hurt us in the long run in any case; since the demand for those products continues to exist, we can grow them and we can sell them.
Let me just go beyond this a little bit. With the elimination of the WGTA and even with increased efficiencies, each and every one of these scenarios will still result in increased costs to the producer. Regardless of whether you have the most efficient system or you have the worst, it's still going to cost the producer at the farm gate additional money over what they're paying today to get that product to market.
Therefore, we have to look at where rural municipalities, small communities, etc., find the funds necessary to continue maintaining road systems over long periods of time, funding library boards and maintaining the quality of life in rural Canada if there's less money on the farm.
I'm just wondering if in eliminating the Crow benefit you think we, the federal government, aren't moving too quickly in eliminating the benefit and then expecting everything to fall into place shortly thereafter. Ron from Unifarm talked about the need for a transition period. I'm just wondering if you share any of his thoughts in that regard.
.1300
Mr. Gleim: Well, I guess it's nice to have a transition period. We hope we don't need any government support, or that we can do without it, but hoping and praying doesn't pay the bills. There are going to be more expenses in the short term. If efficiencies are gained and things straighten out on the west coast, farmers will cope.
When you talk about diversification, one of the major ways of diversifying today is getting another job. That shouldn't be acceptable on the prairies, where your wife works, you work, and then you try to run a 3,000-acre farm on the side.
When it comes to whether the federal government is not obligated at all to help the producers, I would hope they wouldn't have to, but I think they may have moved a little too quickly, with not enough dollars up front. When you go from $7.2 billion to $1.6 billion in that short a time, many farmers are going to leave the industry.
Mr. Taylor: That, of course, has an impact on the quality of life in rural Canada -
Mr. Gleim: Definitely.
Mr. Taylor: - and on the numbers of people who are there.
Mr. Gleim: Actually, in our small town we're looking at building a major greenhouse that will employ 20 people. We only have about 600 people in our whole community. Those 20 jobs are already being applied for by people who have left and want to come back. People want to go back to rural Saskatchewan; they're just asking that something be there for them.
Mr. Taylor: If I might just add one other point, in northwest Saskatchewan, where I come from, with probably about 40 elevator points, each and everyone of those communities does have, as you've indicated, plans for something else. The town of Cut Knife, Glaslyn, and the larger community of Meadow Lake are all looking at ways to diversify into value-added products.
Do you think it's fair to expect that each and every one of those 40 communities in my area or 40 communities in your area can find investment dollars over the next couple of years and realize their goals?
Mr. Gleim: That probably won't happen. That is part of what we've started in the southwest. We're bringing communities together. Where you look at a community as three or four towns and municipalities together and you look at your strong points and your weak points and you start working together instead of worrying about your hockey team - we used to beat that hockey team and we're still mad at that town over something that happened 20 years ago. I think we have to get over that and we are. They're starting to pull together.
There are a lot of positive things that could happen in rural Saskatchewan, but the biggest thing is that the old people have the money and they're going to keep it. The young people have the ideas, they want to start something, and we need to get some equity money into value-added and new industry.
Mr. Taylor: Excellent. Thank you very much.
The Chairman: Thank you, Mr. Taylor.
We don't have time to go into depth in any of these areas, but I would say that on pages 3 and 4 there are a number of good suggestions in terms of accessing capital on diversification and so forth. We thank you for those.
You were here for the previous discussions. One of our concerns applies to Saskatchewan probably more than to the other two provinces. The whole branch line network and rail infrastructure, so to speak, impacts on communities and highways. What's your view on doing what we can to try to preserve some of that, either through short lines or other initiatives? I think the question I raised previously was possibly looking at some study to see which ones may hold potential before they lose their elevators, etc.
Mr. Gleim: Most of the study on just about all the branch lines in Saskatchewan is already completed. We don't have them with us, but we've already noted many of the lines that are good candidates for short lines. Probably the majority of the branch lines in Saskatchewan could be run as short lines and be very viable.
In our meetings with CP, CN and the elevator companies, they talk about market share and they don't want any part of it.
.1305
The Chairman: Can we get that information?
Mr. Gleim: Sure.
The Chairman: What's the reason for not wanting any part of it, their own profitability rather than the good of the system as a whole?
Ms Smith: It's competition, and I think when you look at the proposed NTA shipper provisions, they are allowing the short line to have running rights over the main line. While that may encourage more competition, you have to look at a system of the short lines and the class 1s being complementary to each other, where the short lines would have access to an interchange at the main lines rather than operating on the main-line track, because I think that's going to cause a lot of coordination problems.
It will create some competition, but I would argue that if those short lines can show increased economic sense and efficiency to bring that grain to the main line, there'll be a cost saving in itself. That main-line carrier can pick up those cars and go straight to Vancouver, resulting in a just-in-time situation where you get a lot of efficiencies and cost savings accruing back to producers.
On that map opposite page 7, if you look at setting up a short line from north of Saskatoon, running to Regina, down the Lewvan sub and hooking up through Northgate to the Burlington Northern, you will then have a short line where you have an interchange at both CN and CP and at BN. So you have 30 million tonnes of grain produced in Saskatchewan that have access to this short line to use as an alternative, and you can hook up with CN, CP or BN in either of those situations, creating a real competitive environment with the savings accruing back to the producer.
In a situation like that, producers do have market choice on which transportation system and alternate route they want to use rather than just two main lines right across the province of Saskatchewan. I don't see that as resulting in the best transportation environment for producers.
The Chairman: On page 16 you talked about the monopoly situation, and we're concerned about being left with a natural monopoly. Do you want to elaborate on your point (f) on page 16?
Ms Smith: If you look at the southwest, for example, Swift Current, not far from where Ron lives, you have CP Rail line. You have a lot of light-steel branch lines that may go out of the system. If they are allowed only to have CP as a transportation alternative, you can well imagine what rates CP are going to charge those captive shippers. All you have to do is go on the other side of the border and look at the American experience.
When you look at what producers in Montana are paying Burlington Northern to move their product to Portland, it is through the roof. It is to the point where grain production is totally uneconomic. As soon as Burlington Northern faces a situation of a competitive environment across the line, their rates are lower than Canadian rates.
Mr. Gleim: One thing we're looking at in the southwest is trucking the grain. Half the grain in the southwest is closer to Burlington Northern than it is to CP on the main line. The farmers in that area are organizing. They've been talking with Columbia Grain and may build a terminal in Havre for Canadian grain. If we truck most of the grain across there, CP will not shut any of the branch lines down, yet they will not let a short-line operator run them because a short-line operator will run them for half of what CP is.
It's all market share, and if you put competition into the system, CP and CN will do many things differently from what they're doing today. We have a meeting set up in the next three weeks with Rick Sallee from CP and Sandi Meilitz of CN to talk about some of these scenarios.
The Chairman: I am sorry, we've run out of time. I'd certainly like to thank you for a very in-depth presentation, and we'll conclude with that.
The meeting is adjourned to the call of the chair.