Grain Train Runs Away From Canadian Farmers

Canadian grain exports to the U.S. have fallen sharply as railways expand the more-lucrative cross-border crude-oil shipments, a shift that Canada’s farmers say is pushing their crops to lower-priced overseas markets.

The shift of Canadian grain abroad is likely to prop up prices for U.S. farmers and consumers, analysts say. In particular, wheat growers in states such as North Dakota and Minnesota could see higher bids for supplies from U.S. buyers with less access to cheaper wheat across the border.

The decline in grain exports is an unintended consequence of recent regulatory changes aimed at guaranteeing farmers rail time in the face of stiff competition from crude by rail. Those changes aren’t always helping farmers, as rail companies look for quicker journeys for grain to meet federal requirements, sending cargoes to ports in Vancouver and along the St. Lawrence River.

“If you’re looking to get the best asset utilization, you go to the ports,” Mark Hemmes, president of Quorum Corp., an Edmonton-based consultancy that monitors grain shipments for Canada’s government. “That’s one of the major unintended consequences of the government’s order.”

ENLARGE

Last March, the Canadian government said that shippers such as Canadian National Railway Co. and Canadian Pacific Railway Ltd. each had to transport a minimum volume of grain every week. Farmers pushed for the rule after their failure to secure railcar space meant some crops weren’t shipped or rotted in the field, underscoring the scarcity of train capacity amid extremely cold weather in the winter, a record grain crop and increased competition from crude.

Farmers typically don’t decide where their product goes. Grain and rail companies make those decisions based on such factors as price, timing and resource use.

Now, as shippers transport grains to Canadian ports, the share of exports to the U.S., Canada’s biggest wheat customer, has hit a six-year low. That is despite the higher price that Canadian grain had been fetching in the U.S. and lower transportation costs compared with overseas destinations.

The new rail rules mean that flour millers in the U.S. likely will have to rely more heavily on domestic wheat crops in lieu of grain from Canada, which typically trades at a discount to U.S. supplies. The added business could push up prices that some U.S. farmers receive for wheat in the U.S. Midwest, though it is unlikely to significantly affect futures markets, analysts said.

On Wednesday, wheat futures for December delivery on the Chicago Board of Trade fell 7.25 cents, or 1.2%, to $5.9325 a bushel. Prices for the grain have risen 24% since Oct. 1, due in part to concerns that adverse weather could trim global output of the crop. March-dated futures, the most actively traded contract, fell four cents, or 0.7%, to $5.8175 a bushel Wednesday.

The turnaround time for a railcar delivered from a grain terminal in the Canadian prairies to the U.S. Midwest is about 28 to 30 days, twice as long as it takes to ship to a Canadian port such as Thunder Bay or Vancouver, Mr. Hemmes said.

The journey into the U.S. has been increasingly hit by bottlenecks in the U.S. Midwest tied to the shipment of crude and other commodities such as fertilizer.

Farmers and other industry observers say the Canadian government’s minimum-shipment order was too broad and didn’t give enough specifics on where the railroad companies should be transporting the crops.

“We think the market should be determining where the grain goes, not the railways,” said Blair Rutter, executive director of Western Canadian Wheat Growers. The group contends the March ruling was a special order given to the railways amid extenuating circumstances. Now that Canadian grains are moving relatively better than during last winter’s delays there, they say, the order should be lifted entirely, to allow the market to determine where the grain goes.

ENLARGE

Railcars of wheat on the Canadian Pacific Railway line in Alberta. The share of Canadian grain exports to the U.S. has reached a six-year low. REUTERS

Canadian National Railway spokesman Mark Hallman said the railroad is working closely with its grain customers “to make sure all end-market segments receive proper service.” A spokesman for Canadian Pacific Railway didn’t return phone calls seeking comment.

Wheat is Canada’s biggest crop, accounting for 40% of total grains produced during last year’s record crop.

In the first three months of the current crop year, Canadian wheat exports to the U.S. fell 36% from a year earlier to 210,700 metric tons, according to the Canadian Grain Commission.

Last month, Canada exported a total of 1.2 million metric tons of wheat. Of that amount, the U.S. imported 56,900 metric tons by rail and 17,300 metric tons from Ontario ports. The remaining exports were taken to Canada’s East and West Coast ports to be shipped overseas.

Canada Agriculture Minister Gerry Ritz declined to comment on the fall of grain exports to the U.S., but said the government’s volume requirements are designed to ensure that the grain supply chain functions “effectively and efficiently.”

Gerrid Gust, a farmer in Davidson, Saskatchewan, said he has had to pay an additional 50,000 Canadian dollars (US$44,000) to haul 2,000 metric tons of durum wheat by truck after not receiving enough railcars to move his grains to the U.S. last month.

“Our reputation to the U.S. will suffer if we keep having trouble delivering there,” Mr. Gust said.

Write to David George-Cosh at [email protected] and Jesse Newman at[email protected]