MAKING THE CONNECTIONS
SHORT-LINE RAILWAYS LINK RURAL COMMUNITIES TO OPPORTUNITY
BY TAMARA LEIGH
Long after the fall of the grain elevators, the rail lines that served them continue to criss-cross the Prairies, connecting rural communities and their businesses to main-line railways. While Canada’s two Class 1 freight carriers, CN and CP, abandon lines to focus on moving high volumes through core transportation corridors, farmers are among those leading the charge to buy old branch lines and build a network of short-line rail companies to keep Prairie grain and other commodities moving.
A “short-line” refers to an independent rail company that operates over a relatively short distance. They are important players in moving freight from remote areas and rural communities to interchanges where they can be picked up by the main-line railways and moved to market. Across the Prairie provinces, there are now 20 short-line railways covering more than 3,900 kilometres of track and moving thousands of producer grain cars and other goods each year.
In an industry fixated on moving high volumes at high speeds to international markets, short-line rail companies offer personalized service, higher returns to producers and less time on the road. They are hyper-local businesses in an increasingly global world.
“Our size is our advantage,” said Perry Pellerin, CEO of Great Sandhills, SK Railway (GSR), which runs 198 kilometres of track from Sandhills to Swift Current, SK. “If you’re a producer who wants to load a car, you can call and talk to a short-line—it’s communication that you would never get from a Class 1. We are easier to deal with, and we provide better information and service to our customers.”
Modern short-line railways emerged from changes to the 1996 Canada Transportation Act that allowed the two national freight carriers to stop operations in parts of their network by selling or leasing less-profitable, low-volume lines. Facing the spectre of losing not just the service but also the infrastructure that connected them to other markets, some communities rallied to buy the branch lines and operate them on their own. Between 1996 and 2009, the number of short-lines in Canada boomed from 12 to 50.
“What emerged was almost a transitional plan where the lines were transferred to a group of people who believed they could make them viable, but it was contingent on the idea that the grain elevator companies could change the economics and make small crib elevators viable as well,” explained Marcel Beaulieu, rail industry analyst with Quorum Corporation, the group mandated by the federal government to monitor the Prairie grain handling and transportation system. “Unfortunately, the grain companies had an agenda to get rid of the smaller elevators. As the elevators closed, a lot of folks tried to replace elevator loss with producer car sites.”
With their fortunes tied to decisions in a system beyond their control, today’s short-line operators are nimble and diversified—traits shared by anyone who has succeeded in the grain sector.
“The ones that have survived have community coming together to try to save the short-line as a first step,” said Beaulieu. “On top of that, they have also developed producer car-loading capacity, recasting themselves as integrated commercial concerns that have rail car loading and grain gathering on their line.”
Alberta’s only short-line, Battle River Railway, is an example
of the kind of community-based collaboration and “get it done” work ethic that characterizes much of the short-line industry. The former CN branch line runs 90 kilometres from Alliance to Camrose, and the operators have consistently increased their volumes and diversified their business since buying the line in 2010.
“We initially bought the line to maintain a piece of transportation infrastructure, and then realized it had the ability to generate business and keep money in our communities,” said Battle River Railway chairman Ken Eshpeter, who farms near Forestburg. “When we move 3,000 cars, we keep $2 million in our community that otherwise would have left.”
When CN announced plans to shut down the line in 2008, Eshpeter led the effort to secure interest and investors to buy the line. They formed a new generation co-operative in 2009, and started negotiating with CN. New generation cooperatives are increasingly common producer-led value-added enterprises that have a closed membership, and use a system of delivery rights and obligations to encourage business loyalty and provide a form of vertical integration.
“We talked to every farmer in our catchment area in their kitchens over coffee, and sold 153 A-shares, 463 B-shares and 122 C-shares. In total, we raised $3.5 million through share sales, then put that together with financing to buy the line,” he said.
Now entering its fifth year, Battle River Railway is a bare-bones operation focused on delivering personalized service to the farmers and other shippers on the line—something that depends entirely on car allocations from CN and the tariffs that CN sets for hauling goods from its interchange.
“Running the rail line is straightforward—talk to farmers, quote prices, organize the grain and get it loaded. It’s negotiating with CN to get the cars, get them moving and get them back that’s a challenge,” said Eshpeter, adding that Battle River Railway moved 2,100 cars last year. “If we could get CN to respond positively to our need for cars, within a year and a half we could be moving 5,000 cars per year, but they don’t want to go there.”
The relationship with the national rail providers is a delicate point for all short-line railways. Regardless of their capacity or aspirations, they are totally dependent on the main-line carriers for rail car supply. It is the Achilles heel of the short-line operation. The issue hit a peak in early 2014 when the federal government set minimum targets for CN and CP to get the backlogged 2013 harvest moving.
“When the government stepped in, the main-line carriers favoured their own high-throughput elevators where they could get more commercial bang for the buck instead of servicing short-lines,” Beaulieu observed.
For their part, CN and CP acknowledge the service that short-lines provide.
“We proudly work with short-line partners so we can move goods to almost any North American location, even beyond the reach of our own rail network,” said CP spokesperson Jeremy Berry. “In 2013, we moved approximately 35,000 carloads with connecting short-lines across the Prairies.”
In the past year, both companies have issued new rail car allocation policies that limit the number of cars that a short-line can request within a certain time period. What neither company offers in its policies is any commitment to service standards for car allocation or delivery to the short-lines, making planning difficult and limiting business opportunities.
At the federal level, the minister of transport and the minister of agriculture and agri-food have asked CN and CP to submit plans outlining how they intend to improve services for producer cars and short-line railways for the remainder of the 2014/15 crop year. Both CN and CP have submitted the requested winter plans, which are being reviewed, according to Transport Canada.
Gerald Gauthier is the Railway Association of Canada’s (RAC) vice-president of public and corporate affairs and says the biggest regulatory risks to short-line rail companies are unintended consequences. The association advocates to the federal government on behalf of the entire industry, including Class 1 and short-line freight, passenger, urban and commuter rail.
“People see rail issues, but don’t necessarily think of all of the players. We are pushing for a short-line lens,” said Gauthier, pointing to the Fair Rail for Grain Farmers Act and the Order in Council intended to clear the backlog on the 2013 harvest as an example of creating one problem while trying to solve another.
“The legislation that was trying to address this issue might seem to settle the issue for farmers, but doesn’t factor in impact on other commodities and short-lines. As a result, the short-lines didn’t get as many cars as they needed,” Gauthier explained.
The RAC is also working with government on changes to regulations requiring upgrades to public crossings, safety regulations and insurance requirements.
“We are trying to explain to government how to make regulations in a way that will not damage the operators,” he said. “We have to remind them to help smaller railways because they don’t have the same resources as the big railways, and government should facilitate that. It’s not for the railways, it’s for the shippers.”
Across the Prairies, each province has taken a different approach to short-line railways. Alberta offers no funding or support for short-line purchases or track maintenance. In Manitoba, the government has provided loans to help companies buy branch lines and get established. In Saskatchewan, a government program provides cost-shared funding to offset the cost of rail maintenance.
“Saskatchewan’s network of short-line railways is vital for getting grains to market and an increasingly important factor in oil transport, as well,” said Nancy Heppner, highways and infrastructure minister and minister responsible for the Saskatchewan Grain Car Corporation. “The short-lines are a Saskatchewan success story and we’re proud to continue our investment in railway infrastructure so they can continue to be viable into the future.”
Saskatchewan’s policy recognizes the social, economic and environmental value of keeping industrial traffic on the rails and off the roads. While taxpayers pay the costs of maintaining roads and highways, rail companies pay the costs of maintaining tracks on their own. Based on cargo capacity alone, one car on the rails keeps at least four trucks off the road. Since the program started in 2008, Saskatchewan’s short-line industry has grown to 13 from eight companies and added over 900 kilometres of rail to the network.
“When railways were first built in Saskatchewan, the towns and villages were built with them. You can see the decline where the branch lines have gone and all those towns have dried up and gone away,” said Roger Gadd, general manager of Great Western Railway (GWR). “We are keeping our part of southwest Saskatchewan alive and vibrant just by being there.”
Spread out along 495 kilometres of track, GWR is the largest short-line railway in Saskatchewan. With over 40 siding locations, it services the most producer loading sites in Canada, as well as two crude oil loading facilities. When CP operated the line, it employed no more than six people; today, GWR employs 26 between its head office in Shaunovan, its maintenance shop in Assiniboia and at each of the producer sites along the line.
It’s not just the Saskatchewan provincial government that sees the value. Like many short-lines, GWR’s shareholders include farmers, private citizens, regional government and municipalities on the line. That kind of investment creates a stability of its own.
In southern Manitoba, Lake Line Railway has knit together a diverse portfolio of business opportunities and is strengthening the local value chain as a result. The 50-kilometre stretch of track between Gimli and Selkirk was purchased from CP in 2012, just as grain marketing shifted away from the single desk.
“We did the business plan in the CWB era when there was a $1,000-per-car advantage to selling grain to the line company, but by our starting date CWB was gone,” said Randy Penner, president of Lake Line.
However, he explained that the end of the single desk created an opportunity for the short-line to engage with U.S.-based grain buyers.
“We are fitting more into niche or smaller markets that larger companies aren’t interested in serving,” Penner explained. “There are smaller companies buying from individual farmers that are more grain-specific, loading three or four cars and sending them south to a specific mill. We’ve created activity in the area by having a short-line.”
Lake Line isn’t just feeding markets to the south. The railway also works closely with the Diageo Distillery in Gimli, the only distillery in the world that makes Crown Royal. Lake Line collects, cleans and delivers fall rye from farmers on the line to the distillery, and hauls tankers of the finished product to the main line destined for the bottling plant.
“We open the doors to other companies to be competitive, or for niche marketing like the fall rye,” said Penner. “It’s a small market, but if we can create a need for it in this area, farmers will grow it.”
Despite the challenges, optimism is pervasive in the short-line industry. As environmental and social pressures push for more efficient, sustainable options, the outlook for rail continues to improve.
“Short-lines have proven that we can develop a plan that brings long-term viability to a line, and hope to communities,” said GSR’s Pellerin. “We see a lot of things come and go, but the rail lines have been around for 100 years, and will likely be around for 100 more.”