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Shortline prospecting

Shortline railway companies are creating new opportunities for farm commodities, and for farmers too

Operating a shortline railway in Western Canada isn’t an easy proposition. Over the past 20 years, many companies have come, and ultimately gone, after trying to revive lines that CN and CP had abandoned in their waves of rationalization.

But now, a move from single-farm producer car loading to higher-volume sites might become the key to sustainable success for shortline railway companies, especially if it is combined with diversification in operations and commodities.

Today there are 50-plus shortlines in the country and, according to the Railway Association of Canada, they ship over $20 billion worth of freight at a cost of about three cents per kilometre for one tonne of goods.

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Impressively, in 2010 shortlines shipped 23 per cent of all carloads.

Saskatchewan has perhaps the largest and most cohesive shortline systems in the country, such as Great Western Railway in southwest Saskatchewan, a locally owned shortline that runs 375 miles of track and 40 siding locations, and that ships over 6,000 cars annually. It services the most producer loading sites in Canada, as well as two crude oil loading facilities.

The company also works on a yearly contractual basis to service 60 miles on the Fife Lake Railway and another 72 miles of the Red Coat Road and Rail in the southeast.

“That was a dog of a line in 1992,” says Mark Hemmes, referring to the line before GWR took over. Hemmes is president of Quorum Corporation, an agency appointed by the federal government in 2001 to act as monitor for the prairie grain handling and transportation system.

“There was no volume on it and the grain companies were bailing,” Hemmes recalls. “But they came in as a private operator with a producer mindset to support local. They’ve also been able to keep mainline grain companies on their tracks. Great Western Railway is a good model.”

With help from shortlines, Superior Pulses is bringing jobs and crucial infrastructure to rural Verwood.
photo: Jon Gillies

But still it ain’t easy, according to general manager Andrew Glastetter, who says the company is constantly turning over rocks to look for new opportunities to make a dollar. Aside from their primary business of moving grain, GWR services the potash and oil industry with storage for 2,000 cars, and it is building relationships with other companies for storage. They’ve also made arrangements to rail sand for the Saskatchewan oil field from southern Alberta into Moose Jaw.

“We focus on our core commitment to service local farmers,” says Glastetter. “But we have capacity on the line and we need to find ways to use that capacity so that in the soft grain years, we have ways to stay financially viable.”

And let’s not overlook that the local farmer has changed as well. While there are still instances of single auger sidings that ship in one or two car spots, the bulk of deliveries are now consolidated at elevator points, often with companies new to the industry. Glastetter says the biggest change he’s seen is a boom in pulses. A drastic drop in durum shipments to the U.S. from last year to this has been almost entirely offset by traffic in pulses.

It’s a common trend. In Western Canada, shipments of cereal grains declined 10 per cent from 2013 to 2014 crop years, but oilseeds and pulses more than made up the difference, according to Quorum’s 2015 annual report. And while it might not be a boom, there are companies with the required entrepreneurial spirit and risk tolerance looking for access to new markets and setting up shop on the shortlines.

“They (small companies) are usually shipping four or five cars at a time so the Class 1 carrier is not interested,” says Glastetter. “The shortlines can provide more intricate and detailed planning and switching… we have the flexibility to provide a high level of personalized service.”

In contrast to many of the small independent elevators, which only operate weekdays, Great Western Railway moves cars seven days a week in order to meet the needs of the Class 1 companies CN and CP. While an individual site might only do four or five cars per day, GWR is moving 25 to 30, often moving several cars in a day to several separate destinations.

It’s a lot of co-ordination, and the switching to various interchanges has to work with CP.

All cars are ordered by producers (or a line company) through the Canadian Grain Commission which passes them on to the shortline and Class 1 carrier. GWR will confirm with the Class 1 carriers and co-ordinate with them for supply and pickup. All are hauled under common carrier obligations and through shortline haulage agreements as set out by CN or CP.

“We need to be innovative, efficient and modernized, with a focus on the small- to medium-sized farmer in southern Saskatchewan. And we need to keep up with the Class 1. That’s not going to stop,” says Glastetter.

Mark Hemmes agrees. “It’s always going to be a tough business. (Shortlines) don’t have the luxury of large volumes and so are hurt bad by a bad crop. But the advantage of the shortline is that dealers have access to grain they might not otherwise get their hands on.”

Hemmes cites the example of a deal in northern Saskatchewan with Quaker Oats that sees hundreds of cars moved on shortlines into the U.S. to serve that company. A niche kind of thing, as he says.

“The bottom line is (shortlines) are still dependent on producer loading, and this is shifting to high-volume sites,” says Hemmes. “Shortlines will stay, but the trick will be efficient loading facilities. The old days of the guy with the auger and three-ton are gone. If they don’t have efficient loading and railside storage it’ll be a challenge.”

The steel hits the rail

A bit of history. Many shortlines began as an attempt to keep communities viable by servicing existing mainline elevator companies that provided good traffic at first.

Shortline companies such as McKenzie Northern, Carleton Trail and Hudson Rail acted as agents for the Class 1 lines, CP and CN. Haulage fees were attached to each station, but, according to Hemmes, as the mainline grain companies shuttered elevators along these lines, there was no way for the shortlines to manoeuvre in a commercial sense, and the money they received covered only operating costs.

Without cash for maintenance or capital costs, it was a slow death for many of them. And for the most part they were left to die.

But, early on, the Saskatchewan government took a different approach that might be paying off in ways that couldn’t have been predicted. The shortlines there were seen as a way to keep trucks off the road and to save on highway infrastructure, says Hemmes. The government provided low interest loans to shortlines and acted as guarantor.

Saskatchewan’s 14 shortlines now control 2,000 km of track, and in the last 10 years shipped 215,000 railcars of wheat.
photo: Jon Gillies

It seems it was a fortuitous decision, especially as the oilfield opened up and more oil was moved by rail.

According to the Saskatchewan Shortline Railway Association, with a combined expense budget of $31 million, 14 shortlines now operate on over 2,000 kms of track, or about 24 per cent of rail lines in the province. They run through 18 per cent of urban and 26 per cent of rural municipalities, employ 183 people and service 70 small- and medium-sized businesses, plus 79 producer car sites.

Over 10 years, Saskatchewan shortlines moved 215,000 railcars and 10 million tonnes of wheat.

Shortlines invest roughly 12 per cent of their annual revenues into maintenance of their own infrastructure, according to the Canadian Railway Association, while trucking companies operate on publicly funded roads and highways. And if the CRA claim that a 10 per cent shift from trucks to shortlines would result in a 500,000 tonne reduction in greenhouse gas emissions is accurate, it might be something all levels of government want to support, given the federal commitment to emissions targets.

The shortlines are aware of their advantage and they are prepared to seize the moment. “We are not afraid to go to the government for funding,” says the Great Western Railway’s Glastetter. Citing the environmental benefits of rail versus truck and the savings to highway infrastructure, Glastetter says government should be supporting shortline construction and rail infrastructure, and it should also encourage increased traffic on the shortlines.

In fact, the SSRA submitted a full response to rail transportation recommendations from the current Canadian Transportation Act review.

SSRA is asking for shortline inclusion in a formalized policy around a National Freight System, a tax credit program to offset track rehabilitation and maintenance, the ability to apply for federal infrastructure money without a government sponsor, assistance to secure reasonably priced insurance separate from that required of the Class 1 companies, and federal support to address the costs of regulatory changes around safety.

But public funding and support are only one part of the answer. “They (shortlines) all still work on a commercial agency relationship with the Class 1 companies,” says Hemmes. “They can’t really market their services outside those parameters… and the Class 1s see the shortlines as gravy for them.”

There is one recent exception. Mobil Grain, now owned by Alliance Grain Traders has managed to negotiate a rate structure with CN. Hemmes believes it’s working quite well and sees it as a test case. “If the negotiated rate structure works, it might give shortlines more stability and power over their company.”

“At the end of the day, it’s about how much money you get for each car you move,” Hemmes says. “They need to squeeze more money out of the Class 1 companies to make a margin. If they’re beholden to the Class 1s indefinitely, there’s likely a clock on them.”

The shortlines recognize their tenuous position. In its response to the CTA review, the SSRA is asking directly for rate protection for shortlines, and also asking that careful consideration be given of the proposed elimination of maximum revenue entitlement (MRE) provisions.

As much as short lines are independent operations, Hemmes says, many operating elements are at the mercy of the Class 1 railways. For example, car supply, schedule and rate structure are dictated by the Class 1s. As well, there are currently no arrangements or limitations for the rate relationship between short lines and Class 1s, as there are between shippers and Class 1s.

“Creating a protected rate for shortline operators increases the likelihood that grain will start its transit by rail closer to the farm, protecting the environment, public roads and middle class jobs” Hemmes adds.

The SSRA goes on to compare single and multiple car rates between MRE and non-MRE routes, citing in one example a 229 per cent spread per mile on non-MRE routes for small shippers.

While shortlines await the outcome of the CTA review, it’s obvious why Hemmes is watching the deal between CN and AGT’s Mobil Grain. “Shortlines might be able to strengthen their position. We’ll follow this story and see how successful it is.”

If change is a constant, the ability to keep up with it might be the key to success for Canada’s shortline railways. Looking to Saskatchewan’s example in general and Great Western Railway in particular, it seems adaptation to market demands, leveraging economic and environmental contributions, and pursuing positive relationships with the powers at CN and CP might make the difference for the future of shortlines and their ability to provide the kind of local, specialized service at which they excel.

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