CN warns of breakdown as grain moves through overloaded system

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The head of Canadian National Railway Co. is warning that the country's grain terminals, elevators and ports cannot cope with the number of rail cars needed to fulfill a government order to move more of the commodity.

Claude Mongeau, CN chief executive officer, said proposed legislation aimed at clearing the grain backlog after a massive crop and a tough winter is bad public policy crafted in the heat of the moment, and an attempt to beat up on the railways that have been historically unpopular in Western Canada.

Ottawa has ordered CN and Canadian Pacific Railway Ltd. to move a combined one million tonnes of wheat, corn and other grains – about 11,000 rail cars a week – or face a fine of $100,000 a day. The order was followed by legislation that takes other measures intended to address complaints by farmers and the companies that buy and sell their crops.

Mr. Mongeau said the company will begin hitting the minimum car mark shortly, but the elevators and port terminals owned by the grain companies do not have the staff or facilities to handle the added volume.

"It's my personal belief that as CN and CP ramp up … within weeks we will show that the entire supply chain capacity is something less than around 11,000 cars," said Mr. Mongeau, adding that 9,000 a week was the previous record.

"I'm saying watch me – pretty soon they won't be able to unload the cars I'm bringing," he said.

The 2013 harvest was about 35 per cent bigger than average, mainly due to good weather and improved growing techniques. But much of the 76-million-tonne crop spent the winter in farmers' storage bins or in elevators awaiting service from the railways, whose ability to respond was limited by the unexpected size of the harvest and the extremely cold winter that slowed train traffic. Many farmers were unable to sell even a bushel, and now face cash shortages as they try to buy seed and fertilizer for this year's crop.

"What we have this year is a giant crop in a tough winter," Mr. Mongeau told The Globe and Mail's editorial board on Wednesday. "Everybody ganged up on the railroads. And we had a government without much due process that decided to look tough and impose a Fair Rail for Grain Farmers Act at a time the system has already rebounded from a tough winter. And I'm telling you, in a few weeks, we will show it's not a rail problem."

The Western Grain Elevator Association disagrees with Mr. Mongeu. The group that represents the grain companies, including Cargill and Richardson, said the industry can load and unload 14,000 grain cars a week as long as the railways use all five main corridors.

"If the railways ignore certain corridors and focus all movement into others, then it stands to reason that port terminals could face challenges unloading rail cars," said Wade Sobkowich, the group's executive director. "Similarly, if the railways don't bring trains in to port terminals for three or four days, then flood the terminals with multiple trains over a two-day period, we could face similar challenges. However, as long as the railway companies spot and deliver the rail cars at a consistent rate, apportioned appropriately among the corridors, we are not concerned with our ability to handle the volume."

Agriculture Minister Gerry Ritz, who represents a rural riding in Saskatchewan, has led the push for the legislation. He told a parliamentary committee on Monday that the 11,000-rail-car or one-million-tonne target was discussed with the railways and grain companies in February. At the meeting, all parties mapped out the capacity for each corridor, and he was assured the targets could be reached without hurting shipments of other commodities.

The legislation, which expires in August, 2016, also allows grain companies to choose another railway within 160 kilometres, an increase from 30 kilometres. These expanded "interswitching" rights will give about 150 grain elevators access to two railways, up from 14 elevators. Mr. Mongeau said this provision amounted to a "re-regulation" of the railways, and left them open to competition from U.S. rivals on all commodities in Western Canada. He said it is too soon to estimate the effect this might have on the company's revenue, and that he hopes Ottawa restricts the change to grain.

Grain companies say the legislation did not go far enough. They said the expanded interswitching rule was a needed attempt to break the duopolistic grip of the railways.

Editor's note: Interswitching, not intershipping, is the railway term that describes the movement of rail cars between two companies' tracks.