I hope you’re not sick of the grains logistics controversy, because I thoroughly enjoyed having the opportunity to talk to Derek Tallon, a grain producer from Lafleche, Sask., at the 2014 Grain Summit in Saskatoon. Tallon had the daunting task of tackling the “Next Steps for Engagement and Finding Solutions.”
Related: Hear from Ian McCreary — Solving Logistics Challenges, the Revenue Cap & More)
After Tallon’s presentation, we sat down in a location with less-than-ideal acoustics, but I didn’t want this one to go unpublished. Following is our interview, scribed for your interest.
When you presented, you said one of the solutions to the grain crisis should not be deregulation. Can you tell us why you don’t think that’s an option?
Well, just like Mark Hemmes, Quorum Corp., said, he doesn’t see how deregulating it and letting them charge basically whatever price they like in a noncompetitive market place would result in them moving more grain. If it’s not competitive, it’s not going to be competitive no matter what they charge. So, he doesn’t really have any evidence that’s going to improve things in the long run.It’s just going to make for higher freight rates is really all it would do.
What about the combination of deregulating and making it more competitive?
Yeah, I don’t know if we can really do both of them. I don’t know how you would ever make it more competitive unless you had somewhat open running rights… Currently, the rail lines all own the infrastructure and own their rail lines so unless you’re telling somebody that you get to operate on their rail line, then the competition aspect isn’t going to be there.
Explain seasonal change incentives.
With the revenue cap currently how it’s structured is: you’re just basically going to get paid the same amount, a dollar per tonne plus the tonne/km…the formula is going to figure out what you’re going to get to move that tonne of grain. And right now, if your costs are going to be higher a certain time of year compared to another time of year, it would only makes sense that you would have that fluctuate seasonly (and with the weather) to ensure you’re making the same margin so there’s no disincentive to not move grain in the winter time because it’s a higher cost.
You also mentioned penalties aren’t happening all along the supply chain but perhaps they should?
Well, yeah, some type of contractual agreement between the grain companies and the rail lines I think should be in place and when they don’t meet their obligations of delivery on time…they should have some type of penalty. If they’re not being penalized, then the grain company doesn’t have anything in their contract to the farmers where they’re paying storage or interest fees on it and it just can’t move all the way down the chain back to the farmers unless there’s property rights or penalties implied all the way up the line.
What did you mean by reducing large car spot incentives?
Right now I believe it’s around $9/tonne for a company to load the 100-112 car train run right now. So if a terminal can take a 112 car spot from CP, they’ll get roughly $100 000 to load that block of cars at one time. If they were to split that — even within the same town, split it between two elevators — they’re only going to receive about$3/tonne. If they’re going to split it into three or more parcels then they’re not going to receive any incentives. So, to offer that $100 000 in a freight discount, when the costs associated with breaking that train into 56-and-56 are nowhere near represented in cost savings. It just doesn’t make sense… It’s just created an environment for consolidation beyond the point that would normally be economically viable… But it’s encouraged the consolidation that we’ve seen in the grain handling system…
What do you think is the next step?
I guess the next step would be to see what the federal government comes out in their legislation, how much teeth it has as far as the service obligations, the penalties and contractual agreements… as well as if they actually mandate specific volumes. It’s all going to depend on the details and what the federal government comes out with this spring.
If you could change three things about the system as it is today, what would you change?
I guess tweaking the revenue cap to try to make it replicate a competitive market a little better instead of having a broad basic dollar value is what it comes to at the end of the day… That would be one. The other one would probably be to enforce maybe a maximum incentive car-lot discount they can offer, maybe say if $9 is what they’re offering now for a 112-car spot and the cost savings are only $2.50 or $3, maybe somewhere between there could be a maximum that they’re allowed to offer as an incentive. And the third one: just try and set up some contractual agreements between the grain companies and farmers, and then the grain companies and railways, just to get things a little more efficient and having some obligations all the way along the handling and transportation network.