If there’s one thing Karl Gerrand understands, it’s that Canada’s newest grain company can’t afford to be just another “me too” operator.
Gerrand is heading up Global Grain Group, or G3 as it has quickly been dubbed in the business, a phoenix arising from the ashes of the former Canadian Wheat Board with the backing of global grain giant Bunge and the Saudi Arabian government.
Under Gerrand, the company’s goal is to create a pipeline flowing with Prairie grain headed for Vancouver, all carried by dedicated trains cycling back and forth more quickly and efficiently than anything Canada has ever seen
Making this happen means investing heavily in a network of modern facilities with loop track loading systems that enable trains to be filled in hours, not days. In fact, they’ll load so fast, the engines won’t even decouple from the cars, but will rather idle around the track as each car is filled in just minutes. At port, similar logistical systems will unload trains with equal speed, with zero car shunting and lost time.
For railways, this will make G3 their most efficient shipping partner, Gerrand says, which will lead in turn to lower average freight rates and better service for G3 as well as benefits for growers. It will also mean simpler and faster grain movement, which will translate into a greater ability to capture otherwise missed market opportunities.
For the company, it means a key point of differentiation, which Gerrand predicts will pave a path to success.
“We believe, coming in as a small player in this industry, we’re going to have to provide a different value proposition to the farmer and the market,” Gerrand explains during an interview in his office in downtown Winnipeg.
Faster, faster, faster
Gerrand says the need for an evolution of the grain shipping model can be seen very clearly in recent events. Just two winters ago the western system groaned under the combined strain of a brutal winter and a bumper crop.
Grain movement was close to a standstill at times, and growers suffered from lost market opportunities and constantly rising costs through shipping demurrage — the penalty a shipper must pay for being unprepared to load a cargo by the agreed upon time.
“The farmer, as you’ll recall two years ago, couldn’t get grain into elevators because they were full and we couldn’t move grain to port because the ports were jammed up,” Gerrand says. “There were upwards of 45 vessels sitting in the Vancouver port area at any one time. All the grain companies were paying demurrage for poor freight efficiency, and that all ultimately flows back to the farmer.”
The heart of the G3 model will be a Vancouver terminal elevator with a loop track, and the company is currently in the consultation and evaluation phase of the project, after filing their application with the port. Gerrand says a lot of details remain to be worked out, but early signs are good.
The local government appears keen on the plan, and area residents are willing to give it a look with an open mind. Two key attributes of the project might prevent the rise of project-killing NIMBY-ism, Gerrand says. First there’s the fact the terminal ships grain, which is correctly viewed as a very safe product to ship. Then there are the benefits of the design itself.
“When we explain to them how the loop track will work, and that there won’t be shunting cars back and forth and all that banging and noise, they’re generally very happy,” Gerrand says.
Without building the loop track system at port, it would be impossible for G3 to capture the full efficiency of its model, Gerrand says. He also added that this would hinder any of the company’s competition from going down the same road, even though some are already buildling loop tracks at country positions. The complicated and crowded geography makes replicating this model very hard for any of the other players at the port.
“None of the other companies have room at their existing locations to install a loop track,” Gerrand says. “If you don’t have the west coast port capacity to unload those cars just as quickly as you can load them, you lose the freight value. To the railways, the value is in keeping that train together and bringing it back without breaking it apart. That’s the real keystone to our model.”
The new G3 strategy
This admission reveals one of the true ironies of the evolution of the former CWB. One of its greatest weaknesses might actually turn out to be its unexpected strength.
In the western grain echo chamber, there have always been experts to say the CWB could never succeed because of its lack of physical assets.
It never owned and operated elevators, but instead acted as a central marketing agency for the western wheat and barley crop, with logistics being handled by the established grain handling firms.
Once the monopoly was lost, the story went, it would only be a matter of time before the inevitable obituary would be written and the wake would be held. After all, what incentive would the elevator companies have for playing ball with the new CWB, which was really just another commercial competitor? Sure, it might limp on for a few seasons, but the writing was on the wall.
And building elevators? Not a viable option, according to this thinking. Grain handling assets are expensive and extremely long-lived, it says, and they face a long and slow payback period. It’s not coincidental that until now the recent action in the grain business has been largely financial, as one pool of capital acquired another, and the system continued to rationalize.
But where others saw an insurmountable barrier, Gerrand and his team see an opportunity to build a new system from the ground up, based on a strategy of optimizing every step to remove bottlenecks and ensure uninterrupted flow of grain from Prairie to port.
Which is where the irony comes to the forefront. The reason this works for G3, Gerrand explains, is that while other grain companies try to cobble together the best possible system with their existing facilities through merger, acquisition or legacy ownership, the industry has moved on, especially since today’s larger crops and time-sensitive global markets make moving the grain to port on time and on spec more important than ever.
“We think we’re building the right system for today,” Gerrand says.
What will that system look like? It’s too soon to say for sure, but it will be larger than the current seven high-capacity elevators that are in operation in Manitoba and eastern Saskatchewan. It will likely expand to something in the mid-to-high 20s, giving the company a bigger geographic footprint to source grain from.
“Most of our future expansion will concentrate on Alberta and Saskatchewan, I can say that with certainty,” Gerrand says. “We’re actually quite well represented in the eastern part of the region.”
In the end, Gerrand sees that footprint placing most growers within striking distance of one of the company’s elevators, i.e. it will be realistic for them to ship a Super B of grain.
Meanwhile, this will also meet the needs of the company in terms of lower risk through geographic diversity and enough capacity to keep trains full and running.
Hurdles in the way
It’s an impressive vision, but one observer says success and failure will both be in the details.
Paul Earl is a legendary and, at times, controversial voice in occasionally fractious grain transportation debate. He held senior positions with United Grain Growers, and the Canadian Transportation Agency, and these days is a senior scholar with the Asper School of Business and an associate of the Transport Institute, both at the University of Manitoba.
Earl says greater efficiency in the grain-handling system is always a worthy goal, and G3 is headed down the right track by seeking it. He’s less convinced that it’s going to necessarily result in a lot of benefits for the company or its farmer customers.
“I don’t want to rain on anyone’s parade or denigrate what they’re doing, because greater efficiency is always a worthy goal,” Earl says. “What I will say is that there are some questions that I think still need to be answered.”
First and foremost is whether the railways will in fact respond to the incentives that G3 is placing in front of them with better service and lower rates. Earl says they may, but then again, they may not.
“The railway is not their customer, and I do wonder,” Earl says, “are they looking at it that way?”
The leverage question
The size question may be crucial. Does G3 have the scale to get attractive deals from the rail sector? Plus, G3 has two quite large competitors in Viterra and Richardson. They’re unlikely to stand idly by while an upstart company begins to eat up their market share, Earl says.
“They’re big enough to meet this competition without putting themselves at risk. Even with the additional facilities they’re going to be building, G3 is still going to be relatively small — they’ll be about the same size as a Parrish and Heimbecker or Paterson.”
Earl says he’s also a bit concerned at how the company appears to be betting heavily on its logistics program and accepting on faith that it will have the sales program to support it.
“In economic theory, we describe transportation as a derived demand,” Earl says. “I just wonder if they’re not looking at transportation to drive sales, rather than sales to drive transportation.”
And then there’s the complicating mix of regulatory and revenue-cap issues, which can prove fraught and sometimes political.
One point both Earl and Gerrand agree upon is the necessity for the financial backers of the venture to take the long view and not expect short-term results.
“These grain handling assets don’t pay back very fast,” Earl says.
Gerrand, who was one of the founders of CanOat Milling, says he’s very familiar with the challenges of attracting capital to agriculture, and in no small part the quality of investors is going to be key to the company’s success.
“It’s not easy to build greenfield projects in the grain industry,” Gerrand admits. “The returns aren’t as attractive in the very short term as other investments.”
But, he adds, “We have some very patient investors who are taking the long view.”
This article was originally published as, “High velocity,” in the February 16, 2016, issue of Country Guide