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Grain Monitoring Program – 2008-09 Crop Year Annual Report –July 2010

Production and Volumes

As reported in the Q2 report, favourable growing conditions across much of the prairies proved responsible for a significant increase in yield for the 2008-09 crop year. Generally good conditions allowed farmers to bring harvest to completion ahead of normal, and contributed to an improvement in overall grain quality. Although by historical standards global grain prices have stood up fairly well, prices moved lower from the record levels of the previous crop year due to a loosening in overall grain supplies brought on by an end of drought conditions in Australia and the Ukraine. Prices were further pressured by the mounting crisis in financial and credit markets which exerted downward pressure on all commodities.

It should be noted that throughput and volume increases were seen in all areas of the GHTS in the third quarter of this crop year such that a trend of reduction over the previous crop year was reversed. Concurrent with this the GHTS also saw improvements in performance in all three sectors of the logistics chain (country elevator, railway and terminal handling).

Overall grain production for the 2008-09 crop year climbed to 60.4 million tonnes, an increase of 24.4% from a year earlier and ranked as the largest crop yet witnessed during the GMP. The previous production record of 56.0 million tonnes was set in the 2005-06 crop year. There were increases in all grains with the exception of oats. CWB grains posted the largest relative gain, climbing to a near record 36.7 million tonnes. Non-CWB grains rose to 23.6 million tonnes, setting a new production record during the GMP for a second year in a row.

When combined with 5.6 million tonnes of carry-forward stocks, the overall grain supply for the 2008-09 crop year reached 66.0 million tonnes, a gain of 17.9% over the previous crop year’s 56.0 million tonnes. This constituted the second largest grain supply recorded during the GMP.

The amount of regulated grain moved by rail to western Canadian ports increased by 20.1% in the 2008-09 crop year, with the total volume rising to a record 27.3 million tonnes from 22.8 million tonnes in the previous year. The port of Vancouver remained the principal export destination, with an overall increase of 25.5% raising its traffic volume to a record 15.7 million tonnes. Shipments to Prince Rupert rose by 5.1% to 4.7 million tonnes. Thunder Bay is still ranked as the second largest export destination for the GHTS, with an increase of 26.2% to 6.5 million tonnes. Churchill experienced a decline in volume of 0.4 million tonnes, or 32.9% compared to the previous crop year. Overall, port terminal facilities unloaded 294,335 covered hopper cars, a gain of 20.0% over the previous year.

CP displaced CN as the GHTS’s largest grain handler, taking an overall share of 50.8% versus 49.2% respectively.

Infrastructure

The decline in the number of licensed country elevators in western Canada remains one of the most visible facets of the GHTS’s continuing evolution. At the outset of the 1999-2000 crop year, there were 1,004 licensed primary and process elevators on the prairies. By the close of the 2008-09 crop year the total number of licensed elevators in western Canada had been reduced to 366. The limited scope of the changes recorded in the last six crop years suggests that the grain companies have effectively completed their major elevator rationalization programs.

The GHTS’s storage capacity fell by a modest 13.8% in this same period. This lower rate of decline reflects the grain companies’ strategies to close less-efficient smaller elevators and to replacing them with the larger high-through put elevators. High-throughput facilities accounted for 50.5% of all elevators, and 81.0% of overall storage capacity by the end of the 2008-09 crop year, a change from 11.9% and 39.4% respectively held at the beginning of the GMP. Much of this transformation came as a result of the initiatives taken by the predecessors of today’s Viterra Inc., whose collective actions accounted for 94.0% of the net reduction in licensed elevators.

The licensed terminal elevator network in western Canada stood unchanged and the close of the 2008-09 crop year, comprising a total of 15 facilities with an associated storage capacity of 2.5 million tonnes.

Another 73.3 route-miles were removed from the rail system in the 2008-09 crop year, attributable to CN’s abandonment of a number of branch lines, most of which were located in Saskatchewan. Over the term of the GMP the western Canadian railway infrastructure has been reduced by 8.0% to 17,904.7 route-miles, The largest portion of this came from the abandonment of 1,363.1 route-miles of light-density, grain-dependent branch lines.

The origin of the traffic moved through the GHTS continues to reflect the changes that have been made in both the elevator and railway networks. Over the term of the GMP, the tonnage forwarded from points on non-grain-dependent lines rose by 12.9%, while volumes transported from the grain-dependent network declined by 12.6%. Despite the minor impact caused by the repurchase of certain short lines by CN in the past 3 years, the overall trend also shows the tonnage originated by shortline carriers has declined far more precipitously than tonnage originated by the Class 1 carriers since the beginning of the GMP.

CWB Tendering and Advanced Awards

The 2008-09 crop year was the ninth for the Canadian Wheat Board’s (CWB) tendering program and the sixth year in which the CWB targeted to move a fixed 40% of its overall grain movement to the four ports in western Canada using a combination of tendering and advance car awards. Under the terms of this arrangement, about half of this volume – representing a maximum of 20% of its overall grain movements – was to be tendered.

The CWB issued a total of 266 tenders calling for the shipment of approximately 3.4 million tonnes of grain, an increase of 80.6% over the 1.9 million tonnes that had been sought a year earlier. The calls were met by 822 bids offering to move 5.6 million tonnes of grain. A total of 316 contracts were subsequently signed for the movement of 2.2 million tonnes of grain. This represented 14.4% of the tonnage shipped by the CWB to western Canadian ports during the 2008-09 crop year, falling 25% short of its target.

Of the tonnage moved, 42.6% was shipped to Prince Rupert, 38.9% to Vancouver, and 18.5% to Thunder Bay. In addition to showing a diminished role for Vancouver and Churchill, these results mark the fourth time that Thunder Bay failed to place at least second in terms of the largest export gateways for tendered grain.

Discounts advanced on wheat in the first quarter averaged $23.01 per tonne. However, they began to move substantially lower in the second quarter. Eventually discounts dropped to a low of $7.11 per tonne by the end of the crop year. The fourth quarter produced some of the lowest recorded bids in five years. Despite the decline of the discounts, the transportation savings accruing to the CWB – and ultimately passed back to producers through its pool accounts – actually increased to $34.5 million in the 2008-09 crop year. The CWB estimates that the savings generated from tendering and other sources increased by 12.7% over the previous year.

A total of 1.9 million tonnes of grain moved under the advance car awards program during the 2008-09 crop year representing 12.2% of the CWB’s total shipments to western Canadian ports, 1.5% lower than the year before.

With a combined target of 40%, a total of 26.5% of the CWB’s shipments moved under these two programs, and lower than the 28.0% that had been handled in the 2007-08 crop year.

CWB Tendering and Advance Awards Programs

During the first three quarters of the crop year, the CWB awarded a total of 282 contracts for the movement of 2.0 million tonnes of grain under its tendering program, a increase of 25.9% from the 1.6 million tonnes handled in the first three quarters of the previous crop year. A further 1.2 million tonnes was moved under the advance awards program. In aggregate, 30.7% of the CWB’s total grain shipments moved under the two programs to western Canadian ports. The CWB reported that its Transportation Savings had increased by 5.8% in the first three quarters, rising to $23.8 million from $22.5 million.

Commercial Relations

Among other important commercial events recorded during the 2008-09 crop year were:

• In September 2007, dissatisfaction over CN service led six grain shippers to bring level-of-service complaints against the carrier to the Canadian Transportation Agency. One year later, the Agency released its final decision, finding that CN had breached its level-of-service obligations to four of the six complainants. Prescribing a remedy with performance-based standards, the Agency directed CN to ensure that these four grain companies henceforth received at least 80% of their weekly car orders, 90% of the time. But complaints about the carrier’s service were not to end there. In March 2009, Western Grain Trade Ltd. lodged a similar complaint against CN for the service it had been receiving. By the close of the 2008-09 crop year, a decision in the matter had still not been rendered.
• At the end of the 2007-08 crop year, the federal government ended the use of Kernel Visual Distinguishability (KVD) to classify western Canadian wheat. From 1 August 2008, KVD was replaced by a system involving farmer-based declarations. Following the adoption of this new declaration process, a long-standing concern over farmers inadvertently delivering wheat varieties that were no longer registered began to take on new urgency. Although few such deliveries of non-registered grain were made, the Canadian Grain Commission and the Canadian Food Inspection Agency recognized that an enhanced notification system was needed in order to avoid future occurrences. Both organizations committed to address these issues.
• As has been the case since 2003, ocean freight rates continued to fluctuate dramatically through this crop year. After wide fluctuations over the previous 18 months, ocean freight rates as measured by the Baltic Dry Index (BDI), reached an all time high of almost 12,000 points in June 2008. Following the course of the financial and economic collapse through the summer of 2008, the BDI fell to 8,600 points by the close of the 2007-08 crop year. By the end of October 2008, the BDI had fallen another 7,800 points to stand at just over 850 points. This represented a decline of 90% over the course of less than six months. The negative impact on the ocean movement of raw materials, especially to China, produced an extraordinary excess in shipping capacity. While Western Canadian grain usually trades at a freight disadvantage in many parts of the world owing to the greater distances involved in shipping it to market, the reverse is also true, with Canada’s ability to compete often enhanced when ocean freight rates fall. Consequently, the ocean vessel capacity released from the downturn in other commodities contributed to the ability of the GHTS to handle a record volume of export grain through to the end of the crop year.
• Although the revenue cap was adjusted in the 2007-08 crop year to reflect a one-time adjustment to the maintenance allowances accorded to CN and CP, both carriers appealed the Canadian Transportation Agency’s final determination. The Federal Court of Appeal ruled against the railways, upholding the Agency’s determination and the one-time adjustment of $72.2 million. The Supreme Court of Canada also dismissed a subsequent application by the railways.

System Efficiency and Reliability

To examine the speed with which grain moves through the GHTS, the GMP uses the supply chain model. In the 2008-09, the average time to move grain through the supply chain fell by 8.9 days to 51.2 days compared to the previous year. There were reductions in each of the primary supply chain elements with the result that this average was the lowest recorded during the GMP:

Other notable observations concerning the performance of the GHTS in the 2008-09 crop year include:

• Although western Canada had the potential to move 66.0 million tonnes, good harvests in many countries and replenished world supplies resulted in lower volumes of Canadian grain being exported in the first six months of the 2008-2009 crop year.
• The timing of the financial crisis led to a reduction in demand and price for many commodities. While grain was spared the worst of this, the impact of decreased demand in other sectors resulted in a sharp decline in the demand for rail service. For the GHTS, however, the decreased demand in other sectors the allowed the railways to readily accommodate the surge in grain volume that came in the third and fourth quarter. The volume handled by the GHTS in the second half of the crop year far surpassed that moved during any comparable period in the last decade and more than compensated for the weaknesses of the first half of the year This resulted in the largest annual grain movement witnessed during the GMP.
• It is important to note that the pace at which grain moved through the GHTS proved slower in the first half of the crop year, and accelerated rapidly in the last half, leading to the record levels of performance. From an average of 60.3 days in the first quarter, it fell to a record-setting 44.6 days in the fourth quarter. Much of the improvement came from a reduction in the amount of time spent by grain in inventory, particularly in the port terminals. Complementing this was a significant improvement in the railways’ average loaded transit time. Overall performance saw country elevator storage time fall by 3.4 days, loaded railway transit time fall by 1.2 days and terminal elevator storage time, fall by 4.3 days. The GHTS’s performance in the 2008-09 crop year marked its most productive during the GMP, and revealed how effective the system can be when all of its elements are working in closer harmony.
• The GMP examines terminal stock levels against both the stated requirements and actual shipments of vessels loading at western Canadian ports as a means of gauging the reliability of the GHTS. These ratios provide an indication of whether or not sufficient quantities of grain were available at the terminals to meet the demand presented by the vessels loading during any particular week. For the GHTS as a whole, stock-to-vessel-requirement, and stock-to-shipment, ratios with values of about 1.0 are considered optimal targets since they would indicate an effective balance between supply and demand. Since the beginning of the GMP these stocks generally exceed the immediate needs of these vessels by a comfortable margin - three to five times the tonnage needed. They are also well above those tonnages necessary to determine that a delivery system has met the minimum standards for reliability. To the extent that the reliability of any supply chain can be gauged by its ability to actually deliver product at the time and place specified, the western Canadian GHTS can be deemed reliable.

Producer Impact

An examination of the per-tonne financial returns to producers of wheat, durum, canola, and large yellow peas, indicates that all have improved significantly since the 1999-2000 crop year. These gains ranged from a low of 50.6% in the case of large yellow peas, to a high of 98.9% for 1CWA durum. In all instances, these improvements have been fuelled by substantive increases in the market price of the commodity itself.

The year-over-year sensitivity of the producer’s netback to changes in price were again in evidence in the 2008-09 crop year as a consequence of the 2008 financial crisis, which did much to disrupt grain sales and destabilize prices. Although in comparison to other commodity markets, the impact on Canadian grain prices proved minimal. In comparison to the last crop year, the impact ranged from a reduction of just 5.1% in the price of large yellow peas, to a more substantive 26.2% decrease in the final price of 1CWA durum. These price reductions were echoed in corresponding reductions in producers’ financial returns.

However, the influence on the export basis was substantially less, stemming predominantly from a difference in the scale of the cost components themselves:

The increase for CWB grains was contained by improvements in the financial benefits accruing to producers, whether in the form of trucking premiums or CWB transportation savings. These benefits, which amounted to $7.87 per tonne and $8.17 per tonne for wheat and durum respectively, acted as partial counterweights to increases in the direct cost of railway freight, elevation, cleaning, and storage.

Non-CWB commodities however (canola and large yellow peas) receive significantly less in terms of premiums than CWB grains do. More significantly, the trucking premiums paid for both commodities has declined significantly over the course of the past decade with premiums for canola falling from $2.48 per tonne in the 1999-2000 crop year to $1.20 per tonne.

This year saw the largest movement of producer cars since the GMP began. The 13,243 carloads represented 4.5% of the grain moved in the 2008-09 crop year and represent 7.3% of CWB grain shipments. This compares favourably with the 1.2% share of movements that producer cars achieved in 1999-2000.

This increase in producer-car shipments has come as a result of many factors, not the least of which is the formation of producer-car loading groups. While they take a variety of forms, the most common of these sees local producers working together, either through an agent or a centrally-controlled entity, to oversee the loading of producer cars in larger blocks than would be possible on an individual basis. These range from small groups loading their own cars using mobile augers on a designated siding, to much more sophisticated organizations with significant investments in fixed trackside storage and car loading facilities. Some have gone so far as to purchase branch lines being abandoned by CN or CP, establishing a shortline railway that becomes an integral element in the larger grain-handling operation.

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Page last updated on: July 21, 2010 9:23 AM