Canadian grain producers anticipate industrywide costs of the recent rail blockades will total roughly C$300 million overall by the time network capacity returns to normal later this year.
The costs come from fees such as demurrage, contract penalties and lost sales, according to Grain Growers of Canada Executive Director Erin Gowriluk. She estimates it could take 12-14 weeks before grain capacity returns to normal.
"A lot of folks are saying that this is a modest calculation because it doesn't take into consideration lost sales," Gowriluk said. As of last week, the backlog of grain volumes totaled about 1.25 million metric tonnes, she said.
The Canadian freight railways, and Canadian National (NYSE: CNI) in particular, faced disruptions to the rail networks because of protesters blocking portions of the rail network in support of a First Nations' group's objections to the proposed route of a fracked gas pipeline in northern British Columbia. The protests began around Feb. 6 and lasted for more than two weeks, with the last blockade remaining on a stretch of Canadian Pacific's (NYSE: CP) network through this past Thursday.
During the protests, trade groups were alarmed at the impacts that the rail blockades were having on Canada's supply chain. The disruptions forced Canadian National (CN) to shut down its eastern operations for over two weeks.
The Western Grain Elevator Association (WGEA) estimates that the Canadian grain sector must absorb costs of nearly C$30 million per week in lost sales because on an incapacity to meet sales demand, while an additional C$22.7 million per week in costs can be attributed to lower prices resulting from deferring product delivery to a later date.
Costs are still accumulating even though the rail blockades have ended because of delays in getting backlogged grain to the ports. After the blockades ended, grain vessels at the ports of Vancouver and Prince Rupert were still waiting to pick up grain shipments, according to WGEA Executive Director Wade Sobkowich.
The number of grain vessels waiting at this time of year at the West Coast ports would normally be about 25-30, but over 50 were waiting on March 4, with roughly 30 vessels waiting more than 13 days at Vancouver and Prince Rupert, Sobkowich said.
Meanwhile, capacity at Canada's grain storage elevators was at roughly 90% last week, Gowriluk said. To get the grain to the ports and to the vessels will require CP and CN to prioritize the movement of grain and coordinate with the ports to determine which vessels get which grain shipments, she said.
Canadian grain carloads (RTOGR.CAN) are down over a year ago. According to the Association of American Railroads (AAR), year-to-date grain carloads for the week ending Feb. 29 are down nearly 13% to 61,818 carloads. Source: SONAR/AAR
Although farmers bearing the brunt of the blockade-related costs is one concern to Gowriluk and Sobkowich, another is Canada's reputation as a global exporter, particularly as rail disruptions also occurred last November when the Teamsters Canada Rail Conference conducted a strike at CN.
"Buyers in other countries have an array of options available to them in sourcing grains, oilseeds and pulse crops. When we cannot deliver grain within the specified contract window, it reflects poorly on Canada as a country," Sobkowich said.
"Normally, less sophisticated and developing countries are the ones that cannot honor their sales commitments due to poor logistics systems and political unrest. That Canadian exporters are increasingly triggering these provisions reflects poorly on Canada as a reliable supplier. Next time, they will place a risk premium on grain from Canada, and/or prioritize other more reliable countries when sourcing product," he said.
The pace of the federal government's response to the rail blockades also can be seen as a risk to foreign buyers, Gowriluk said.
The resolution of the rail blockades "took longer than it should have, and we have significant concerns about whether or not [the government is] going to be prepared to act quickly if something happens again," Gowriluk said.
Meanwhile, although Sobkowich views the rail blockades and the ramifications of the coronavirus outbreak as two separate issues, the timing of the outbreak following the blockades "certainly isn't helping."
"The coronavirus is having an impact on the global economy in general and therefore is impacting the grain sector. Due to the slowdown of processing in countries such as China there is a cooling of demand for grains and oilseeds and therefore it is likely to impact prices," Sobkowich said.
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