Grainswest - Fall 2021

Fall 2021 grainswest.com 35 DOWN THE LINE KCS routing opens new markets for Canadian farmers in the southern U.S. These include Missouri, Oklahoma, Texas, Louisiana, Mississippi and Alabama. It also allows direct access to central Mexico, Mexico City and the southern ports of Lazaro Cardenas on the Pacific coast and Tampico and Veracruz on the Gulf of Mexico. “A lot of Canadian grain is shipped to Mexico, but the vast majority goes by water rather than rail,” said Hemmes. “It must then be transloaded [transferred from one mode of transportation to another] and carried into the central part of Mexico at extra cost. By avoiding the dual expenses of transloading and interchanging [the process by which rail companies convey their competitors’ freight over their own lines], acquiring KCS could make some of those markets much more accessible.” The rail option could also become more attractive in the wake of rising freighter prices. “The cost of ocean freight has been rising steadily through 2021,” said Geoff Backman, manager, business development and markets for the Alberta Wheat and Barley Commissions. “Sometimes that trend makes rail a cheaper alternative, most recently in 2007/08 when there was a scramble to arrange rail service. Having an alternative route for Canadian grain into Mexico could really help us maintain a competitive price in the region.” For shipments by rail, the interchange process slows movement and increases expense. Their elimination is of significant value to shippers. This applies to grain as well as fertilizer, chemical products and manufactured items. “From a grain perspective, interchanging can be a difficult procedure and sometimes raise concerns over quality of service and delays in delivery,” said Backman. “A single carrier route could aid in alleviating those concerns.” This potential upside for a lone carrier was not lost on the two Canadian bidders for KCS, and largely explained their eagerness to own the U.S. line. “With regard to markets in the southern U.S. and Mexico, the existing scenario requires one or more interchanges between railways, which adds significant cost to the rail freight rate,” said Hemmes. “If the routing is a single railway, this will reduce the rail rate and make some of those markets more competitive and accessible.” Nonetheless, Hemmes stressed the creation of a single rail line from north to south will have limited impact on Canadian cereals export as shipment to the Port of Vancouver will remain the most cost-effective option. He grants there may be exceptions. Further to Backman’s point about the increase in ocean freight rates, continued cost increases could strengthen the rationale for more movement of products by rail into Mexico City. With the transport and transloading costs for products that now move by ocean vessel to Mexican ports being avoided, the rail option becomes more attractive. “In this case, the equation becomes a bit more complex, and the rail movement would not represent a significant volume,” said Hemmes. “Adding KCS to the mix won’t impact that traffic to a great extent. Despite the fact grain prices are rising, they aren’t going up enough to warrant doubling or tripling the length of the haul to a port position.” The average haul to Vancouver is 1,450 kilometres, whereas the trip to the Texas Gulf Coast is a 3,220-kilometre jaunt. The additional distance doubles the rail cost to move shipments. Hemmes believes grain companies will not be eager to increase their logistics costs to load grain for southerly destinations. “If wheat is $300 per tonne right now, you are probably spending between $50 and $60 per tonne getting it to port,” said Hemmes. “If you suddenly have to spend $70 or $80 per tonne because you want to move through the Texas Gulf Coast, that extra $20 bucks is coming out of your pocket, and who wants that? As well, going with the Texas option is not the most efficient use of railway equipment. You can usually turn around a hopper car from B.C. in about 18 days now, and sometimes as little as 12. Could they do the same thing going through the Texas Gulf Coast? The answer is a resounding ‘no,’ so Vancouver will always be the more efficient port for grain.” Also of concern to farmers is the potential impact oil traffic on the newly established north-south line may have on Canadian grain transportation. He said it remains unclear how the loss of the Keystone XL pipeline will play out on cross-border shipment. In the pipeline’s absence, however, the added north-south line would offer a viable alternative for shipping oil by rail, especially when it becomes a direct trip without an interchange. The result should be good news for the oil sector that would not come at the expense of grain sellers. “I don’t think oil movement will be especially impactful to the movement of grain,” said Hemmes. CRUSHING ON CANOLA There may also be good news for the Canadian canola sector in a KCS takeover. Canola industry leaders watched the merger battle with great interest as they pondered the implications for farmers. “Overall, adding KCS should increase the capacity for engine power by combining their fleet with that of CP,” said Ward Toma, general manager of Alberta Canola Producers Commission. Canola oil, meal and seed destined for Mexico now tend to go via freighter through the Port of Vancouver and down the coast. “If the KCS deal means rail customers can move product directly to Mexico through Western Canada, it might relieve some capacity constraints, especially for canola oil and meal,” said Toma. “Mexico is one of our largest customers, and they have a limited number of canola crushers, so this would improve their ability to buy finished product from us cheaply. In turn, that will increase the competitiveness of Canadian canola meal and oil in the Mexican marketplace.” Canola crushing capacity is set to increase in Saskatchewan, with Ceres Global Ag soon to build a plant near Estevan, SK.