Changing Canadian Grains Policies: Implications For Montana'S Grain Industry

In Canada many changes have been made, and more are pending, to their grain transportation policies. This package of policy changes has two offsetting impacts on freight rates for Canadian grain producers. The removal of transportation subsidies on grain for export offshore has roughly doubled the cost of transporting grain for the Canadian producer. In addition, the change in pooling points will increase freight rates even more for producers in the eastern part of the prairies. Whether federally owned grain hopper cars are sold to the railways, or to an association of Canadian producers, the cost of the sale is likely to be born by producers through increased freight rates over a number of years. In addition, Canadian producers will bear the cost of investing in new cars, a cost that was previously born by the government. The combined impact of all of these changes is to more than double freight rates for producers in the western part of the Prairies, with larger freight rate increases for eastern Prairie producers. A number of other policy changes including rail line abandonment and car allocation procedures, and the privatization of CN railway, are likely to increase the responsiveness and efficiency of the rail system, and to reduce freight costs over the medium to long run. Changes in the elevator system, port privatization and the construction of high throughput country and terminal elevators are likely to increase the efficiency of the grain handling system. In addition, if the correct incentives for investment in grain hopper cars are adopted, it is possible that the shortage of hopper cars that has occurred in the past might be eased, further increasing the efficiency of the delivery system. The increased cost of exporting to offshore markets has increased the economic incentive for Canadian producers and grain companies to export to the U.S. market. However, due to control of exports by the Canadian Wheat Board, and their concern over the political consequences of large flows of grain to the U.S., those exports may not occur. The uncertainty surrounding the Wheat Board's actions may make it difficult for grain handling companies to anticipate trade flows and make adjustments to the infrastructure in the United States needed to accommodate increased grain flows. The large increase in freight rates occurred when grain prices were at high levels, dampening the impact of increased freight rates on Canadian producers. If all other factors remain equal, increased costs of that size are likely to result in a shift in the production patterns on the Prairies. The extent of adjustment will depend on the production alternatives facing Prairie producers. The large increase in freight rates prompted Canadian transportation specialists to re-examine the feasibility of transshipment of Canadian grain through U.S. ports. Shipping Prairie grain through Pacific North West ports was not found to be cost effective at this time. While the cost of shipping through the Gulf was found to be comparable to shipping through Canadian ports, institutional constraints are likely to prevent substantial transshipment. Some policy changes are likely to increase the viability of the Canadian rail transportation and handling and reduce the cost of shipping over time. However, it seems unlikely that these efficiency improvements will fully offset the large increase in transportation costs that Canadian grain producers have just experienced. This means that the increased economic incentive for some Canadian producers to ship to the U.S. market, compared to offshore markets, is likely to remain.