policy decisions affecting rationalization of the prairie grain transportation system: implications...

INTRODUCTION Sales and transportation of grains is strongly influenced by the location where grains are produced and where they are consumed. Production is based on com- parative advantage. This is certainly true for the Canadian Prairies and the United States Great Plains. This area on both sides of the common border is one of the lowest-cost production areas in the world. Production from these areas must be transported to be used domestically or it must be exported to consumers in other parts of the world.

Exports are sensitive to all factors influencing costs to the consumer. Changes in grain-handling technology that affect costs can also alter the manner in which grains are exported. Efficiency gains in one mode can have drastic impacts on costs and revenues in other modes. Changes in market share can add efficiencies to one mode while volume loss makes a competing mode less competitive. That is the risk currently facing the St. Lawrence Seaway System as other modes incor- porate new management and technology.

PRESENT SITUATION Radical changes in the Canadian grain-handling system could increase efficiency and incomes to Canadian grain producers. Prairie grain-handling systems were set up in the days when railroads and horses were the principle means of transportation. Local delivery points were designed to permit a producer to deliver a load of grain, to purchase needed supplies and to return home the same day. Horses were the major source of power for these movements. Railroads brought in supplies and provided the transport for farm products to eastern markets and export points.

Today, a major share of inputs for rural communities arrive by truck, while the numbers of people in rural areas have declined since the population peak in the 1930s. As a result, less freight is moving into rural areas and grains are the

Canadian Journal of Agricultural Economics 36 (1988) 941-950 94 1

942 CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS

principle commodity moving out. Major segments of the branch line system fo collecting grain are inadequate for the larger-capacity equipment currently beini used to transport grains. Major new investments are required to update and main tain the physical plant. In cases, the annual interest cost of the new investmen exceeds the value of the product shipped annually (e.g., the Big River branch lint improvement in Saskatchewan).

Applying the standard of permitting the producer to make one return trip per day would suggest that, with present trucks and roads permitting travel at 80 km/h, the grain assembly points could be up to 160 km from the farm and still permit an easy return trip in one day. That is far more elevator consolidation than is currently being considered. A key related question is how many tonnes annually the optimum size of elevator can handle. Size influences the assembly area nec- essary to keep elevator operations at an efficient level.

Can Canada afford to have duplicate transportation systems for trucks and rails? In many rural areas, the principle highway leading to and from the assembly point parallels the tracks. The problem is often one of who pays and who benefits from system changes. The branch line rail system is directly paid for by the railroads and indirectly by the federal government through grains payments, branch line rehabilitation payments and tax measures such as investment credit. The local road system is paid for by rural municipalities and the provincial government. Generally, producers feel that rationalizing the system will present them with more costs through greater trucking distances and through higher taxes to support road improvements.

Saskatchewan had 577 grain collection points as of August 1986 (Canadian Grain Commission 1986). It also had a 67,278-km road system (Saskatchewan Department of Highways). The province has 6,700 km of grain-dependent branch lines. The result is a large investment in grain collection, handling and transporting infrastructure. Currently, the average grain haul from the producers’ farm to the collection point is 10 km. The roads used for the first step of the haul are largely financed by rural municipalities. The rail lines to the collection points were built by the rail companies many years ago and are improved through funds from the federal government. Abandonment of rail lines permits cost savings for the railroads through reductions in fixed plant and greater utilization of the remaining plant. That lowers average costs. The federal government saves through smaller payments to rehabilitate branch lines. However, possible increases in road maintenance and improvement costs for rural municipalities and provinces as well as possible trucking cost increases for producers create concern about changes. Thus, rural political sentiment has favored retaining the present system because increased private costs are seen and the private benefits to grain producers have not been quantified in a manner that producers feel reflects what they will receive and/or compensates for the risk associated with the revised system.

PRAIRIE GRAIN TRANSPORTATION SYSTEM 943

Financial pressures of the world grain market are being felt on every farm and ranch in Canada. These pressures are forcing reevaluation of how grain is produced and exported, along with renewed efforts to improve performance of the system. Revision of the system should take advantage of two principal factors. Changes should capitalize on economies of scale and economies of utilization to reduce per unit costs of moving grains from the producer to the consumer. This is important because exports compete in a world market. Prices of grains are set at the world level. Canadian producers on the Prairies receive the world price minus transportation and handling charges. Each cent of reduction in transportation and handling costs offers the possibility of competing for more market share and/or paying the producer a higher price.

GRAIN ASSEMBLY Costs for grain assembly are based on estimates developed by Manz (1987). The estimated costs include trucking, elevation, rail operations and road costs. They vary from a high of $70 .30~ on poor subgrade thin payments of the existing system to a low of $36.96/t assembly costs for full abandonment and gravel collection roads. For this analysis, the gravel road system is used as a base. Major cost savings come in elevation reductions, $3.46/t, and in rail operating costs, $22.88/t. The rail efficiencies come from reduced labor costs and increased utilization of rail equipment. Both factors are extremely important in assembly costs. These two combined estimates could add $26.34/t to cost savings. Even if actual values are half the estimates, $13/t added to producer revenues would be welcomed in these troubled times.

USING RAIL TO BYPASS THE! ST. LAWRENCE SEAWAY Using rail to move grain the complete distance from the assembly point to export point eliminates several handlings. Each handling eliminated offers the opportu- nity to reduce costs and improve quality while improving Canadian producers’ competitive advantage and/or their market share. When grain is transported in unit trains, several rail yards are avoided, thus increasing efficiency and reducing rail costs. A model developed at North Dakota State University and adapted to Cana- dian conditions is used to estimate costs for direct shipments. The Upper Great Plains Transportation Institute (UGPTI) model predicts shipment costs under a range of operating conditions and service assumptions (Tolliver and Wilson 1985). The computer algorithm utilizes inputs from Phase 11, Worktable E of the United States Uniform Railroad Costing System (URCS), in conjunction with user-sup- plied values, to produce estimates of variable and fully allocated costs for particular rail movements. The UFGTI program is based upon an independent system design and entails particular emphasis on “service level” or rate structure costing.

The primary objective of the UGPTI program is to aid in the analysis of agricultural or bulk commodity movements. It is capable of estimating the costs


of single-car shipments, multi-origin and multi-destination shipments, trainload shipments (single-origin or multi-origin shipments to a single destination) and unit- train shipments (single-origin to single-destination shipments). Runs in this analysis are adjusted to represent current inflation as well as the fact that a major share (70%) of grain hopper cars used in Canada are purchased by the federal and provincial governments and are given to the railroads to use for the maintenance costs.

For analysis of the Canadian system, it is assumed that the same proportional efficiencies gained in the U.S. system under alternative service levels could also be gained through changes in the Canadian rail system. Reductions of Canadian rail rates in the analysis as shown in Table 1 are based on proportional reductions from single-car rates to calculate unit-train-per-tonne rates. The important values for consideration are the magnitudes of the potential cost changes, not the actual values. Because of the difficulty in securing hard numbers for the road cost alter- natives, those values also must be considered with caution and only on an order- of-magnitude basis.

MODEL ESTIMATES OF COSTS FOR VARIOUS LEVELS OF SERVICE The basis for comparison are costs published by the Canadian Wheat Board (1985), updated by Canadian National Railways for the variable rate hearings held during the spring of 1987. Cost estimates are based on rail miles from a common point in Saskatchewan to export points. Table 2 shows rail miles to Canadian export points from various locations in Saskatchewan. In cases where differences in rail miles exist, the shortest distance is used to estimate costs. The values for the present system are described in first columns of Tables 3, 4, 5 and 6. Farm-to- elevator assembly costs are based on estimates developed by Manz (1987). They must be considered with caution and evaluated on an order-of-magnitude basis. Assembly costs are total costs based on Manz (1 987,137). The case used is gravel main roads and compares the existing system with full branch line abandonment. In cases where “B” pavement exists, the assembly costs are similar to gravel roads. Earlier work by Meyer and Sparks (1987), which considered only the direct costs of assembly, showed estimates lower than those shown in the Manz study. The rail cost estimates are based on shipment from a common point after the grain has been assembled.

Base Case The base case assumes an assembly cost of $63.29/t for the haul from the farm to the assembly elevator. The tariff includes elevation, grid roads, rail rehabilitation, rail operating, main road maintenance and trucking. Railroad transport charges are estimated to be $30.43/t to Thunder Bay from Saskatoon, of which $5.87/t is paid by the producer and $24.56/t is paid by the federal government. Various terminal charges add $7.89/t, for a total cost from farm to Lakehead terminal of $101.62/t (Table 3). Base cases are also estimated for shipments to Montreal,


Table 1. Proportional relationships of single-car to unit-train freight rates for export wheat (grain assembly costs not included)

Destination and payer Baseab Unit train'

Thunder Bay Shipper Government

Total Model base Proportion of base (%)

Shipper Government


Vancouver Shipper Government


Prince Rupert Shipper Government

Total Model base FYouortion of base ($1

Montreal

($/t) 5.87

24.56 30.43 27.48 -

16.13 14.52 (47%) .

59.77 24.56 84.33d 51.68

6.66 27.86 34.52 32.39 -

6.66 27.86 34.52 37.10

- 48.07" 29.32 (43%)

18.64 17.64 (46%)

- 18.99 20.40 (45%)

"Published rates for 198687 crop year; Source: CN Western Canada Grain Train Run Directory, 1986. bExtra service of transit is included in U.S . single-car rate and not in the Canadian; therefore the U .S . proportional decrease from base could be more. 'Canadian terms refer to this service as a trainload. "This rate is the summation of the WGTA rate to Thunder Bay and the commercial rate from there to Montreal. These rates are proportional based on assumption 4.

$123.34/t; Vancouver, $103.04/t; andPrinceRupert, $103.04/t, as showninTables 4, 5 and 6.

Unit Train The unit train estimates assume a single destination and no assembly on a branch line. Total cost for assembling grain are estimated to be $39.96/t (Manz 1987,


Table 2. Rail distance to various Canadian grain destinations (miles)

Destination Thunder Prince

Origin and carrier Bay Vancouver Rupert Montreal

Saskatoon CP 889 1297 - 1870 CN 905 1088 1279 1823”

CP 81 1 1075 - 1791 CN 842 1283 1475 -

CP 688 1346 - 1668 CN 738 1302 1493 -

CP 903 1166 - 1883 CN 785 1326 1517 -

CP CN 1002 1016 1207 -

CP CN 956 1147 1338 -

Tisdale CP CN 840 1235 1427 -

CP CN

Watson CP CN 832 1189 1381 -

Moose Jaw

Yorkton

Weybum

Battleford - - - -

Prince Albert - - - -

- - - -

Swift Current - - - - - - - -

- - - -

‘Via Armstrong; route via Thunder Bay is 1924 rail miles.

137). The regional elevator tariff is included in the assembly cost. Rail cost estimates using the UGPTI model are $16.13/t for transport to Thunder Bay. That sums to a total cost of $53.02/t or $40.63/t less than for the base case. Savings for delivery to other ports are $42.21/t to Vancouver, $41.86/t to Prince Rupert and $33.44/t by direct rail to Montreal.

IMPLICATIONS FOR THE SEAWAY Consolidating delivery points and assembling grain with trucks would permit reducing grain-dependent branch lines in Saskatchewan. Unit-train shipments


Table 3. Unit costs of transporting wheat from high-cost branch lines in the Saskatoon area to Thunder Bay position using single-car and unit-train configurations" ($/t)

Present Model value, system unit train

Assembly costsb Rail costs'

Producers' share Federal government

Subtotal Cost to Lakehead Lake terminal

CGC fee Terminal in and out Terminal storage Dryins Lake Shippers Clearance A m . Superintendance Forward brokerage

Subtotal Total cost

63.29

5.87 24.56 30.43 93.72

0.80 4.31 1.43 1.22 0.07 0.015 0.046 7.89

101.62

36.96

- - 16.13 53.Wb

0.80 4.31 1.43 1.22 0.07 0.015 0.046 7.89

60.98

"Dockage in export grain: Currently, grain is cleaned to export standards at the point of export for westward shipments and at Thunder Bay for eastbound shipments. As a result, the inclusion of this extra cargo occupies space and weight in shipments to port. The average dockage in in recent years varied from a low of 1.43% to a high of 3.29%. The average for the last 10 years has been 2.458%. Permissible dockage is 0.4%; therefore, 2.1% extra weight is shipped. bValues are taken from Manz (1 987). 'Rail distance traveled is 889 miles.

could also reduce transport costs for Prairie grains to export points. Elevator consolidation, branch line abandonment and special rail rates combined would be expected to reduce costs for grain transportation and handling. These conclusions are based on some numbers that need further research to more closely define the values. Reduced investment, greater utilization of transportation and handling infrastructure, and labor savings are the major sources of cost savings. However, producers would be required to haul grain farther to assembly points. The addi- tional trucking distance may or may not increase trucking costs, depending on the distance, the equipment, and the utilization level of equipment. Politically, re- verting thin pavements to gravel could be a difficult question to resolve. intuitively, even numbers half the orders of magnitude offer considerable potential for increasing efficiency and improving Prairie producers' incomes.


Table 4. Unit costs of transporting wheat from high-cost branch lines in the Saskatoon arei to Montreal export position using rail/lakers, single-car and unit-train configuration" ($/t)

Model values Present Unit Single-car system train via Thunder Bay

Assembly costsb Rail costs'


Subtotal Lake terminal

CGC fee Terminal in and out Terminal Storage

Lake Shippers Clearance Assn. Superintendance Forward brokerage

hying

Subtotal From Thunder Bay eastward

Lake freight Lake freight brokerage Cargo rates Insurance on lake freight cargo Welland canal tolls St. Lawarence Seaway tolls Inward elevation and transfer

Subtotal In-store to vessel loading (FOB)

Outward elevation Superintendance Forwarding brokerage Wharfage CGC fees

Subtotal Total cost

63.29

5.87 24.56 30.43

0.80 4.31 1.43 1.22 0.07 0.015 0.046 7.89

15.07 0.10 0.065 0.702 0.40 0.52 2.47

19.33

1.38 0.105 0.046 0.22 0.74 2.40

123.34

36.96

- - 48.07

2.47 2.47

63.29

59.77 24.56 84.33

2.47 2.47

2.40 2.40 89.90 152.49

"Dockage in export grain: Currently, grain is cleaned to export standards at the point of export for westward shipments and at Thunder Bay for eastbound shipments. As a result, the inclusion of this extra cargo occupies space and weight in shipments to port. The average dockage in in recent years varied from a low of 1.43% to a high of 3.29%. The average for the last 10 years has been 2.458%. Permissible dockage is 0.4%; therefore, 2.1% extra weight is shipped. bValues are taken from Manz (1987). 'Rail distance traveled is 1870 miles for present system and single car via Thunder Bay and 1823 miles for unit train.


Table 5. Unit costs of transporting wheat from high-cost branch lines in the Saskatoon area to Vancouver export position using single-car, trainload and unit-train configurations" ($/t)

~~

Model value, Present unit system train

Assembly costsb 63.29 36.96 Rail costs'


Subtotal

6.66 27.86 34.52

- - 18.64

West coast E!evation (same as for Thunder Bay) 4.31 4.31 Wharfage 0.09 0.09 CGC fees 0.80 0.80 B.C. Clearance Assn. 0.03 0.03

Subtotal 5.23 5.23 Total cost 103.04 60.83

'Dockage in export grain: Currently, grain is cleaned to export standards at the point of export for westward shipments and at Thunder Bay for eastbound shipments. As a result, the inclusion of this extra cargo occupies space and weight in shipments to port. The average dockage in in recent years varied from a low of 1.43% to a high of 3.29%. The average for the last 10 years has been 2.458%. Permissible dockage is 0.4%; therefore, 2.1% extra weight is shipped. bValues are taken from Manz (1 987). 'Rail distance traveled is 1088 miles.

The danger to the Seaway of changes on the Prairies comes from the efficiencies to be gained through direct rail movements to export points. As rail's fixed costs become a smaller proportion of total costs through abandonment of fixed assets and increased utilization of equipment, railroads are better able to compete with the present system.

Currently, direct rail shipments to Montreal show a potential savings of more than $33/t. That value could expand if more lines are abandoned, thus reducing rail's fixed investment and increasing equipment utilization. The net effect would be very strong competition for the existing system. This is further complicated by the location of new market growth. Rail movements to the western ports appear cheaper than movements to eastern ports. If world freight rates are sufficiently low, grains destined to all parts of the world could move west, further depriving the Seaway and central Canadian ports of the volume needed to maintain com- petitiveness. If the Seaway is to remain competitive, efforts must be made to

950 CANADIAN JOURNAL OF AGFUCULTURAL ECONOMICS

Table 6. Unit costs of transporting wheat from high-cost branch lines in the Saskatoon area to Prince Rupert position using single-car, trainload and unit-train configuration" ($/t)

Model value, Present unit system train

Assembly costs Rail costs'


Subtotal West coast

Elevation (same as for Thunder Bay) Wharfage CGC fees B.C. Clearance Assn.

Subtotal Total cost

63.29

6.66 27.86 34.52

4.31 0.09 0.80 0.03 5.23

103.04

36.96

- 18.99

4.31 0.09 0.80 0.03 5.23

61.18

"Dockage in export grain: Currently, grain is cleaned to export standards at the point of export for westward shipments and at Thunder Bay for eastbound shipments. As a result, the inclusion of this extra cargo occupies space and weight in shipments to port. The average dockage in in recent years varied from a low of 1.43% to a high of 3.29%. The average for the last 10 years has been 2.458%. Permissible dockage is 0.4%; therefore, 2.1% extra weight is shipped unnecessarily. bValues are taken from Manz (1987). 'Rail distance traveled is 1279 miles.

improve efficiency and to reduce costs. If these cannot be accomplished, the future is not bright.

REFERENCES Canadian Grain Commission. 1986. Grain Elevators of Canada. Crop Year 1985-86. Winnipeg: CGC. Tolliver, D. and W. Wilson. 1985. Railroad Costing SoSnyare for Analysis of Agricultural and Bulk Commodity Shipments: Documentation and Users Guide. Upper Great Plains Transportation Institute. Fargo: North Dakota State University, 14 September. Canadian Wheat, Board. 1985. Grain Matrers. Winnipeg: CWB [updated by Canadian National Railways for Variable Rate Hearings, 19871. Meyer, N. and G. Sparks. 1987. The economic cost of transporting grains from farm to market. Journal of The Transportation Research Forum 18(1). Manz, Bernd Jocken. 1987. Potential contributions to producer's net income through rationalization of the grain assembly system. MSc thesis. Saskatoon: University of Sas- katchewan, Department of Civil Engineering.

policy decisions affecting rationalization of the prairie grain transportation system: implications...

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