In the next 2 weeks I hope to be starting in on harvest. Of course harvest represents many things, but at the end of the day it represents transporting grain to an end user. In Western Canada and large parts of the US farm belt that might be done by putting grain in transports and moving toward ports. In other areas like Southwestern Ontario, we still use gravity wagons to transfer to local elevators. There is nothing particularly sexy about grain transportation, but in essence it’s a key linchpin to a successful agricultural economy.
One of the most difficult aspects of agricultural marketing is understanding how cash pricing works. To be more specific, maybe it’s more about how cash basis of grains work. They are one and the same and can be very confusing in my opinion if you think too much about it. At the end of the day a grain end user will only pay what they will pay. That’s where basis comes in and of course it has much to do with grain transportation costs to wherever that grain is going.
I’ve have often said if governments want to do something to improve the lot of farmers they should improve infrastructure to transport grain quickly, efficiently and competitively. However, generally speaking if I mentioned any of that to a Canadian politician I would get blank stares. That has about as much appeal to politicians as spraying mace into voter’s faces. It might make a little bit more sense in Western Canada where farmers are beholden to the railroads to move their grain out of the prairies. However, in Québec and Ontario talking about grain transportation costs and improving infrastructure to our politicians wouldn’t get us very far. Some issues are just too complex to categorize down into talking points.
So it was interesting last week to see that the federal government is actually going to fine CN rail for not complying with the federal order to move a minimum amount of grain each week. This came from the Minister of Transportation Lisa Raitt. The fine can be up to $100,000 per week and is at the discretion of the minister. Both the Minister of Agriculture and the Minister of Transportation had threatened it before, as Western grain was piling up last winter. What will come of this I don’t know, but it certainly got CN’s attention.
CN responded that the demand for rail cars has not been as great over the past week and that storage space had mitigated part of the abundance of grain, which needed to be moved. From my perspective, it just looked like a bit of stickhandling around a preemptive strike by the federal government to get grain moving faster. The truth certainly got covered up a long time ago. The depressed cash values for grain because of this mess has cost Western Canadian farmers millions.
The situation in Eastern Canada is a bit different. We have a lot more population and a lot more processing than Western Canada. Any surplus of corn, soybeans or wheat in Ontario leaves by truck, train or vessel on the Great Lakes. There is also grain shipped out the St. Lawrence Seaway system. As you get closer to Québec in Ontario, grain is trucked into Montréal, where it can be loaded to go out the St. Lawrence River. Grain transportation costs are all still important, but it is a world of difference between Eastern and Western Canada.
I’ve said it a million times that increased grain transportation infrastructure is a bit of a double’s edge sword for farmers in Ontario. We often talk about how we’d like to have greater access into US markets when we have a surplus of corn all winter long. The only problem is if we had better infrastructure, it works both ways. We would have increased imports of American grain at a time when maybe we don’t want it. So grain transportation costs are all about basis and all about arbitrage and all about opportunity. Put the Canadian dollar value into the mix and it just gets that much more interesting.
Of course it does not end there, as each country in the world has tremendous advantages with regard to grain transportation cost to specific markets. For instance, Argentina has some of the most efficient ways of transporting soybeans into China. Their soybean production areas are close to major ports, allowing a more streamlined shipment to Asia. Brazil, on the other hand has their logistic issues. How do you transport 98 MMT in 2015 to port? The answer is one truck at a time. I haven’t even begun to talk about Black Sea wheat, which can be loaded on small boats on the rivers leading to the Sea of Asov and floated down to North Africa. Proximity helps in grain transportation.
So that leaves us where we are in Canada. Our biggest market lies to our south. Competition is relentless. That said there is no option. Better transport infrastructure is needed for grains to move to market. That’s what our government needs to do. At the end of the day, minus renewed business risk programs, a more efficient infrastructure for our grains to move cannot be underestimated or ignored.