Canada’s two major railways appear to have caught up with a bumper grain harvest, but not before a slow start triggered demands for an overhaul of transportation policy that critics say is too easy on the country’s railroad duopoly.

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Canada's railways defy critics by pulling off one of the biggest grain hauls on record Back to video

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Recent reporting by Canadian National Railway Co. and Canadian Pacific Railway Ltd. shows the two companies have moved more than 30 million tonnes of Prairie grain since the summer. That’s an above-average performance, and the railways are using it to deflect a push for more competition in the sector.

CN and CP are used to criticism, especially from farmers who depend on the railways to get their product to market. But this harvest was different. It came in the middle of the worst food inflation since the early 1980s and worries that Russia’s invasion of Ukraine would cause mass starvation by choking off the supply of wheat and corn from one of the world’s most important bread baskets. The world needed Canada’s grain, and CN and CP controlled the infrastructure connecting fields to ports.

The two companies quickly fell behind, angering the grain industry and sparking calls for the government to step in and curb their market power. But as of the end of January, CN, the larger of the two, had moved 15.2 million tonnes of grain since the summer — about 1.5 million tonnes more than the three-year average for this time of year, according to David Przednowek, the head of CN’s grain unit.

CN went into the harvest expecting to ship between 24.5 to 27 million tonnes. Based on the grain forecasts, “a big chunk of it has already moved,” Przednowek said on Feb. 1. “You’d expect that, from this point forward, eventually demand will start tailing off.”

The progress comes despite deep freezes and snow storms in Western Canada around the holidays that caused the fulfillment rate for grain trains in the Prairies to plummet to 52 per cent, according to the Ag Transport Coalition. Conditions improved in January, allowing CN to run trains as fast as they would in the fall. “For the most part, everything has been clicking really well,” Przednowek said. “We had the second-best November ever. Second-best December ever. Second-best January ever.”

CP said it did even better. In a news release on Feb. 2, the company said it shipped a record 2.29 million tonnes of grain in January. Since the summer, CP has moved 15 million tonnes — 45 per cent more than this time last year, after the 2021 drought devastated crop yields in Western Canada. This year, CP is through roughly 60 per cent of the 25 million tonnes of grain it was expecting to ship between July 2022 and August 2023.

“The performance of the rail companies is never as perfect as we would like it to be. But overall, it’s been pretty solid,” said Tom Steve, general manager of the Alberta Wheat and Barley Commissions, a farm lobby group.

The remarks sounded like something close to a truce. In May, Steve described the railways’ performance during the previous year’s harvest as “horrible.”

The back story

Western Canada’s farmers harvested 74.8 million tonnes of grain this fall, the fourth-largest harvest on record, according to the latest estimates in December.

The flood of grain wasn’t a surprise to anyone, as Statistics Canada’s tallies of planted acres through the spring showed that the Prairies were headed for one of the biggest harvests of all time.

Nor was anyone surprised by ravenous demand for grain, and farmers’ desire to take full advantage of elevated prices. It was one of the most anticipated Canadian harvests in memory.

“Every kernel that’s harvested this year is going to want to move,” CN chief executive Tracy Robinson told the Bank of America’s transportation conference on May 17. “We need to be ready for that.”

But when grain started coming off the fields, CN and CP struggled to provide enough railcars to get it onto waiting ships in Vancouver. In one week in mid-September, a coalition of agriculture lobby groups said the railroads stiffed them on about 30 per cent of railcar orders.

At the time, Przednowek at CN said it was unreasonable for grain companies to try to push an entire grain harvest through a single corridor in the Rockies all at once. “If it all wants to get pointed in one direction, it’s not going to fit,” he said in September, urging grain companies to take some pressure off the western rail system by shipping out of Thunder Bay or the St. Lawrence River.

Then, a washout in southern British Colombia severed CN’s main line to the Port of Vancouver for a week and in October, a bridge burned down and cut off rail access to a major growing region in northern Alberta. Plus, persistent autumn rain in Vancouver forced dozens of trains to wait on tracks or at grain elevators, since ports in British Columbia seldom load grain in bad weather.

Grain companies lashed out. John Heimbecker, chief executive of Winnipeg-based Parrish and Heimbecker Ltd. — one Canada’s top grain exporters — said he was getting slapped with late penalties around the world because of the rail delays. “This is the heavy shipping period and they’re already behind. And you know, once you get behind, it’s very hard to catch up,” he said in October. “Those costs are massive. They’re enormous.”

You can't build a church for Easter Sunday

CP chief executive Keith Creel

The railways’ response was, effectively, that they were doing the best they reasonably could. They haul more than just grain, and there was intense demand for coal, oil and potash. During a wide-ranging interview with the Knowledge Project podcast in November, CP chief executive Keith Creel said designing a rail system to be able to handle the occasional peak in demand is like building a church to seat everyone who shows up for Easter. It’ll have empty seats the rest of the year.

“You can’t build a church for Easter Sunday,” Creel said, quoting the pioneering rail executive Hunter Harrison. “We can’t do something that’s so unhealthy for the company to satisfy one customer’s 10-year or 100-year harvest.”

Time for a change

The backlogs this fall helped force a national reckoning on the state of the supply chain, to the point that industry leaders were calling on the government to break CN and CP’s stranglehold on the rail system.

Supply chains have been out of whack for almost three years, starting in 2020 when the pandemic caused wild spikes in demand as households around the world abruptly changed their buying habits. Manufacturers and shipping companies struggled to keep up, as outbreaks and public health rules slashed their productivity. Wildfires, drought, an obstruction in the Suez Canal and flooding in B.C. in 2021, and the outbreak of war in Europe, all made matters worse.

Transport Minister Omar Alghabra formed a national supply chain task force in the wake of Russia’s invasion of Ukraine. In October, the task force released a report warning the supply chain “is nearing its breaking point.”  The report gave 21 recommendations for the government to avert disaster, including a call to inject more competition into the rail industry by expanding a federal rule that allows shippers to order CN trains to a facility on CP tracks, or vice versa. Some experts suggested the government could go even further, and force CN and CP to lease their tracks to upstart railways.

The railways have different ideas. CN and CP are blaming this fall’s struggles mostly on rules at the port of Vancouver that prevents grain ships from loading in the rain.

“At one point we had upwards of 20 trains staged, waiting to advance,” Przednowek, the CN grain boss, said. “Once the sun came out and the rains abated, for us, things really roared back.”

This week, CP suggested change might be coming on the rain troubles.

“CP appreciates the attention of both government and industry to this matter, and looks forward to stakeholders finding pragmatic and safe solutions to maximize throughput for Canada’s export grain supply chain,” Joan Hardy, CP’s vice-president of sales and marketing for grain and fertilizers, said in a news release on Feb. 2.

Last month, the heads of two major Canadian exporters said they are still waiting for the government to make changes to the supply chain, more than three months after the task force called for the government to take urgent action.

“The issue has only escalated, and we’ve run out of time,” Susannah Pierce, the head of Shell PLC’s Canadian unit, and Murad Al-Katib, chief executive of AGT Food and Ingredients Inc., wrote in an opinion piece in the Financial Post.

The two said the government should be investing in alternate routes across the country, so shippers can still get their products to market when primary routes are wiped out, like the washout that cut off CN’s line to Vancouver this fall.

Alghabra is “carefully reviewing” the task force report, according to spokesperson Nadine Ramadan. She said the government will provide details on a national supply chain strategy in the 2023 federal budget.

Despite the problems this fall, both railways posted profit gains in their fourth-quarter earnings. CP increased earnings per share to a better-than-expected $1.14, on an adjusted basis, up about 19 per cent over last year — though RBC Dominion Securities Inc. analyst Walter Spracklin said it was a “weak” showing helped along by a low tax rate. Revenue from grain shipments jumped 49 per cent to $655 million, the most CP made on any commodity in the quarter ending Dec. 31, according to the Jan. 31 report.

CN reported adjusted earnings per share jumped 25 per cent in the quarter to $7.46, assisted by a 48 per cent increase in revenues from grain and fertilizer.

Spracklin called it “an impressive result to say the least.”

• Email: jedmiston@nationalpost.com | Twitter: jakeedmiston