The Canadian government will require the country's two big railways to ship more than the current minimum of 1 million tonnes of crops a week through the autumn harvest period as it tries to prevent a repeat of last season's massive backlog.
The regulations announced on Friday in the world's third-biggest wheat exporter require Canadian National Railway Co and Canadian Pacific Railway Ltd to each move 536,250 tonnes of grain and other crops each week starting this Sunday and lasting through November 29. Failing to move that volume can incur penalties of C$100,000 ($92,000) per violation.
In March, the Conservative government forced the railways to each move 500,000 tonnes weekly to unclog a huge backlog that followed record 2013 Canadian wheat and canola harvests and shipment delays caused by a brutal winter. Those requirements were due to expire on Sunday. "Harvest looks like it might be late again. If that's the case, then there is still a lot of grain to move through August and September," Agriculture Minister Gerry Ritz said in an interview.
Ottawa's decision keeps the pressure on the railway companies, which angered farmers during the winter by delivering insufficient numbers of cars to crop elevators. The railways say they did the best they could given the circumstances. "It's truly unfortunate that the federal government has decided to introduce extensive regulations in reaction to a 100-year grain crop that has been handled reasonably well in the normal course of business," said CN Chief Executive Officer Claude Mongeau.
CN and CP shares were down 0.9 percent and 1.2 percent, respectively, in afternoon trading on the Toronto Stock Exchange, off earlier lows. The railway backlog, which left billions of dollars worth of crops on farms in winter, has eased considerably as CN and CP picked up the pace and summer weather allowed for more fluid movement. But leftover grains and oilseeds from 2013 were still an estimated 20.9 million tonnes as of Thursday, more than double the previous year's stockpile, according to the Canadian agriculture department.
The next wheat crop, despite flooding problems, has potential for the second-largest yields on record, according to a crop tour this week. "This gives us some comfort that we'll have the capacity to move the supply we have," said Brant Randles, president of Louis Dreyfus Commodities, the Canadian arm of the global grain trader. "We were assuming these kind of thresholds would continue."
The volume thresholds are realistic, according to the Western Grain Elevator Association, which represents grain handlers such as Viterra, Richardson International and Cargill Ltd, even though the handlers had wanted the government to set minimum requirements for shipments to the United States and on other individual rail corridors. The government also said it would require CN and CP to provide more data on grain movement and will continue to allow interswitching in more parts of Alberta, Saskatchewan and Manitoba that are normally served by a single railway.
Interswitching, which applies to all commodities on the Prairies, involves the transfer of cars from one railway's line to the line of another. Ottawa's measures also clarify which terms in commercial negotiations between shippers and railways can be arbitrated by the regulatory Canadian Transportation Agency. The measures also give farmers more clout in their contracts with grain companies. Farmers complained last year that grain handlers did not accept delivery of their crops as required by sales contracts.