Remember The Little Engine that Could? It’s a story about optimism, hard work and determination, which pretty much sums up the story of the Boundary Trail Railway Company (BTRC), a producer-owned, short-line railway in southern Manitoba.
In 2008, a group of Manitoba farmers, with no clue how to run a railway, signed a piece of paper agreeing to a seven-figure purchase price for 23 miles of former CP track that they would use to haul local farmers’ grain.
“We didn’t know where to get materials, how to fix the track, where to buy a locomotive, we didn’t know anything,” says Manitou area farmer, Geoffrey Young, one of the original group of farmers who formed BTRC.
What to do with an abandoned track?
A few years earlier when CP first announced it intended to abandon the 80 miles of track in southern Manitoba that run from Morden west to Killarney, a group of locals from the Killarney area had wanted to purchase the line and run it as a tourism operation.
In the end, that business case didn’t pan out, but the public meetings the group held were well attended and it was evident there was a lot of interest in saving the rail line, although no one had yet come up with a business plan that could attract investment.
Manitou-area farmer, Kevin Friesen, came away from one of those meetings with the idea of running a railway that farmers could use to market their grain. He enlisted the help of the Town of Manitou’s project development officer, Travis Long, and started talking to other area farmers, learning early on that their support would be crucial for the idea to move forward.
“At one of the very early meetings someone came out from a short line in Saskatchewan to speak,” recalls Long. “He said the support of farmers in your area is vital, because they are also going to be your customers. If they aren’t committed to the success of the line right from the get go, you’re not going to have success.”
Are you crazy?
A core group of progressive farmers and business owners quickly came together that was totally supportive of the idea, but there were more than a few in the coffee shops who thought they were crazy.
“I remember one fellow saying to me, the only tie I’ll ever buy is one around my neck, not underneath your rail,” says Friesen, a shareholder in BTRC who is also its vice-president of finance.
The group hired a consulting firm with experience in the railway industry to run a feasibility study. It found merit in the concept, leading to an equity drive for share offerings. Thus the hard work of raising equity began.
The task ahead of them was daunting. CP wanted a seven-figure sum of money as a non-refundable deposit before they would even negotiate formally with BTRC about a possible purchase of the line.
Another challenge quickly emerged. CP had already contracted with a salvage company to tear out the track. When BTRC tried to persuade the salvage company to cancel the contract, its reaction was to send two crews out to La Rivière (about 11 kilometres from Manitou) to tear up the track heading west.
What BTRC didn’t realize at the time was that the track east of La Rivière had been upgraded several years earlier to higher-quality steel than the track to the west of the village. “They started tearing out the western portion, which was an 85-lb. main line track, because it’s a lower grade of steel the salvage company had likely already resold,” says Long.
The only thing that saved the east bound line from being torn out at the same time was the fact that it was a heavier, 100-lb. track that CP wanted to retain in inventory to repair other sections of their main lines.
The hard work of fundraising begins
Losing the western portion of the track not only meant most of the potential investors from that area disappeared, but also changed the business plan. “Our first business plan was written for operating 80 miles of track, and we had to refocus and write a second business plan that focused on the east end and raising a significant amount of investment from producers on the east end,” says Long.
The fundraising began in earnest and it wasn’t always an easy sell. A big obstacle in persuading producers to invest was past history. “A lot of them had invested in things like cheese factories and hog barns that hadn’t worked out,” says Friesen. “What we did have going for us was that if the purchase went through, even if we couldn’t operate the line, we could rip out the rail which was worth more than what the investment was.”
Unfortunately, this argument for getting investors on board also worked against them. “It was 2008, and commodities were running up, which meant that the asset we were trying to purchase was increasing in value, but so was the purchase price,” says Long. “In the end, what we agreed to for a purchase price was 30 per cent higher per mile than what other short lines had been paying up to that point for a working track. We ended up with a higher-per-mile cost than most of our peers. So, the timing was good and bad.”
The other problem was there wasn’t much of a short-line industry in Manitoba at that point, so traditional lenders wouldn’t touch them. “No one was comfortable funding this project,” says Long. “We couldn’t even get meetings with a lot of traditional lenders to discuss the project. So another significant obstacle to startup was finding capital, not just investors but financing, and we had to go private.”
Although they managed to raise almost half the equity from local producers, it took a private bridging loan from John Buhler of Buhler Industries to help the company secure the deposit it needed and agree on a purchase price for the line with CP.
BTRC was also lobbying hard for support from the provincial and federal governments, hoping that it would receive similar bridge funding through no-interest loans that many short lines in Saskatchewan had received from their provincial government. But the only initial support came from local municipalities. As part of the abandonment process, CP had to pay a penalty to affected municipalities and towns to offset the effect it would have on their tax and economic base. The RM of Pembina and Town of Manitou councils gave a portion of that money back to BTRC. Eventually, the Manitoba government did come in with a $615,000 five-year, forgivable loan, after BTRC had already signed the purchase agreement with CP. The Federal government later followed suit with $1 million in funding.
With the purchase finally made, BTRC hired Long as its general manager and first full-time employee. “The directors were spending three days a week on the railway project and we realized that if it was going to go through we needed a competent manager,” says Friesen.
How do you run a railway?
It was also beginning to dawn on them just how little they knew about running a railway. The logistics were frightening. They needed locomotives and other equipment, operational staff like conductors and engineers to drive the trains, safety training, track maintenance training; the list was long. So when the consulting company that had worked on BTRC’s business plan offered a three-year contract to handle all these things they jumped at it.
Although it was invaluable to get them started, the arrangement didn’t quite work out as either party had planned, but it gave BTRC a chance to observe and learn how things were done. They also learned a lot about what not to do.
“The tremendous advantage was we saw the mistakes they made and learned from them,” says Friesen.
Once the contract was up, Long and the group knew a lot more about running a railway, and they decided to take over operations and hire their own staff.
Long’s main task in those first few years was educating local farmers about why they should ship with BTRC. “The basis for this railway operation is farmers shipping producer cars, and there wasn’t a lot of experience in this area for doing that,” says Long.
At the time there were some substantial financial incentives. “It was the last year of the Canadian Wheat Board (CWB) and it had made it quite advantageous to ship a producer car,” says Long.
Producer cars are a legislated right unique to Canadian farmers, enshrined in the Canada Grains Act. Farmers have the right to order a car directly from CP or CN and have it delivered to a siding for them to load themselves without the assistance of a primary elevator company.
“During the first year of operations, 400 cars were auger loaded off our line by farmers who hauled their equipment into town and elevated the grain themselves,” says Long. “They were saving the $13 a ton elevators were charging to elevate the grain into a railcar.”
Another part of the sales pitch was the fact that during the rail abandonment process, which took three years, there were no rail delivery options for farmers living in the vicinity of the 80-mile track, which forced them to truck their grain to one of several elevators 40 or 50 kilometres away. To encourage the producers to deliver to their terminals, the grain companies started offering trucking incentives which had escalated to around $14 a ton. By the time BTRC was negotiating with CP to purchase the line some of those incentives were beginning to erode and there was talk that they would soon disappear completely.
“One hook with investors was to say there’s no threat of competition in this part of the province any more. The elevators know that you have to haul to them,” says Long. “If we buy this line, we can reintroduce the threat of another competitive option for farmers that might assist you to renegotiate the retention of trucking incentives.”
The year that BTRC concluded its purchase, the trucking incentives were reinstated for a short while, even though the company didn’t see itself as much of a threat in the long term. “Our goal was to ship five to 20 per cent of the grain grown in the area,” says Friesen.
A bigger challenge looms
A much bigger challenge, however, was looming. In 2011, when the upcoming end to the CWB’s monopoly was announced, it had an immediate, negative effect on BTRC. Farmers held on to their wheat crop not knowing whether they would find a better market for it once the CWB was dissolved.
“The way we make money on the railway is pulling cars, and we weren’t pulling any cars,” says Friesen. “For months we didn’t know how we would pay Travis. His job became to try and figure out how we’re going to survive.”
With finances stretched paper thin, BTRC began to look for some alternative ways to keep afloat. Long and Young went to visit Northern Plains Railroad (NPR), a short line just over the border in North Dakota, to ask for some advice about how they might diversify their operations.
It was a fateful meeting because, not only did NPR give them some ideas and contacts that helped BTRC diversify and increase its revenue, they have remained an important mentor and business affiliate.
“They gave us contacts for car storage, which at the time we basically knew nothing about,” says Long. “The next thing you know we had a unit train of empty oil cars for storage and the revenue from that got us through that challenging financial period and bought us some time to get our feet under us again.”
Their relationship with NPR has grown and strengthened and is taking them in some strategic directions that have helped BTRC expand its operations. NPR is a much larger short line that runs 20,000 carloads a year, has 160 employees and does car repair, track inspection, locomotive sales and service, and industrial switching.
“To find that relationship and have the business mentored by a company that has lots of experience and could look at what we’re doing and provide some advice, contacts and networks has helped us tremendously,” says Young.
BTRC now owns two locomotives and leases another one. It has two full-time employees, and the equivalent of another two at its four producer-owned, trans-loading sites located on the line at Manitou, Darlingford and Binney Corner. It also contracts conductors and engineers on a part-time basis and hires a seasonal summer student. It’s shipping an average of 400 carloads of grain a year from around 50 area farmers.
Connecting farmers and buyers
With the CWB gone, it was no longer just a case of loading producer cars and shipping producers’ wheat directly to terminals; producers also had to find their own buyers for their grain, and BTRC realized it would have to play a role in connecting farmers and buyers.
“The first thing we had to do was find out where farmers’ wheat was going because with the CWB we didn’t really know,” says Long. “We always thought that it all went to Japan and we very quickly learned that a lot of our high-quality wheat was going to mills in the United States, and so we found a few of those companies.”
Although it takes an active role in connecting farmers to buyers that are interested in the product they have to sell, BTRC does not get involved in the actual transaction. “Once a contract decision is made, we jump back in and manage the logistics of delivering and shipping the grain,” says Long. “That’s different from a lot of other short lines where the onus is on the farmer to find a buyer, book his car and do the paperwork. We try to remove as many barriers as possible.”
Developing relationships in the industry has been key to BTRC’s success, and the company began to turn the corner about six years ago when it formed an alliance with Quaker and The Andersons Inc. Quaker sources most of the oats for its milling plant in Cedar Rapids, Iowa from Canada, mainly from northern Saskatchewan. Geographically, the BTRC catchment area is one of the closest oat growing areas to the plant, so Quaker, through its liaison with the Andersons began to offer guaranteed contracts at good prices to nearby oat growers who would sell directly to them and ship via producer cars through BTRC.
“The Andersons program guaranteed farmers a good price for their oats six to eight months ahead, and encouraged a lot of farmers in the area to start growing oats because they turned it into a competitive option versus wheat,” says Long. The program has been so successful that oats now make up the majority of all the grain BTRC ships.
The advantage for farmers is in secure contracts for the oats they grow at prices they know they can make money at, while for Quaker and The Andersons it provides better opportunities to manage their supply chain.
“There is a definite advantage to the millers because all oat varieties have different characteristics, so by using the producer car method, and identity preserving the grain by producer and by variety it allows the end-user to gain some milling efficiency on their end,” says Neil Schuller, account manager, food ingredients for The Andersons Inc. “The other benefit to us is that it allows us to connect and stay connected with individual growers. Every single rail car that we ship, we know exactly whose grain that is.”
Adversity brings business
Oddly, the rail crisis of 2013-14 proved beneficial to BTRC. Following a bumper harvest that produced record amounts of grain, elevators and ports quickly became clogged. Grain cars stopped moving and farmers had no option but to store on-farm through the winter.
“That year was partially the turning point for the oats program here because The Andersons relied on getting their traditional 400 carloads of oats from Torch River in northeastern Saskatchewan,” says Long. “Because it’s more remote than we are, when car supply was so tight, the logistics for CP to get cars out to Torch River were challenging enough that Torch received very poor service.”
Because BTRC is closer to Winnipeg it continued to receive a small supply of cars. “We were still able to trickle cars out to customers like The Andersons. We were 400 carloads behind ourselves, but at least we had some movement,” says Long.
At the same time, producers who had never shipped with BTRC were coming to them to try and get their grain moving. “In the end, our car volume wasn’t much higher that year than any other year prior, but our catchment area exploded,” says Long. “It exposed us to a much wider audience, which was positive for us.”
BTRC will continue to haul wheat, but it’s inherently a more challenging commodity because of weather-related grading issues. The company also does some specialty fertilizer hauling and would like to get into hauling other commodities such as canola and soybeans, although with crushing facilities close by that are already buying direct they have tough competition in that area.
Increasingly, BTRC is capitalizing on the knowledge and experience it has gained. It offers consulting and inspection services and hosts third-party training on its line for companies to do locomotive engineer and safety system management training.
A local heavy-duty mechanic in Manitou has been working over the last two years with BTRC and NPR learning how to service locomotives. “We’re all working together to grow a locomotive service and maintenance division and that’s a side opportunity for us,” says Long. “We get access to somebody to take care of our own fleet and are starting to earn some commission on business that we’re helping to arrange for NPR. Meanwhile, it’s helping a local business grow.”
Helping the local economy is at the core of BTRC’s vision. Its original goal — to save the rail line — has evolved into a business model that tries to add value to the local economy by creating infrastucture and jobs.
An astute group of farmers
None of it could have been achieved without the incredible support and foresight of local farmers and other investors and in return, for those who ship with the railway the workings of the grain industry are getting more transparent than some buyers would like. “Almost all the U.S. grain companies we deal with make the comment about how astute the farmers in this area are,” says Long. “Buyers find it’s harder to buy grain here because these producers are better marketers. They understand commodity pricing, world markets, the value of their crops, and The Andersons have learned to respect that, but some buyers are frustrated by it because they can’t put out a dummy price here and expect to get any sales.”
“We are getting accurate signals right from the-end user,” says Young. “Our market intelligence has definitely improved because we are in contact with the end-user and know what they want.”
The demise of CWB certainly was a major challenge for BTRC, but Long and the directors purposely took the view that they weren’t going to worry about what they couldn’t control.
“What we could control was how we reacted to it, and we chose to work around it, and try to figure out a solution,” says Long. “That assisted our reputation because other companies in the industry saw that rather than being afraid of the change, we were going to try to embrace it and find new opportunities.”
It certainly didn’t do them any harm with companies like Quaker and The Andersons. “We could tell that they really wanted to make it work and they were going to do whatever they could to make it work and were open to suggestions about what we saw that could help them,” says Schuller. “Since our company’s founding, we have valued partnerships. And after six years of doing business with BTRC, we still have conversations about what’s next.”
Meanwhile, everyone at BTRC believes that there is plenty of room for growth. “We’re only scratching the surface,” says Long.
“My goal is to pull 1,000,” says Friesen, who adds BTRC is currently run more like a community co-operative than a business. It hasn’t yet paid any dividends to shareholders, instead re-investing profits into the business and paying down debt.
“We could be like most other railways and set freight tariffs that are pretty high and walk away with lots of money for us and our shareholders but we don’t do that. We’re trying to run lean and pass that economic benefit back to the farm gate,” says Long. “That’s always been the philosophy.”
Business quotes for building a railway
1. Getting farmer support.
“The support of farmers in your area is vital, because they are also going to be your customers. If they aren’t committed to the success of the line right from the get go, you’re not going to have success.”
— Travis Long, BTRC manager
2. Raising equity.
“We couldn’t even get meetings with a lot of traditional lenders to discuss the project. So another significant obstacle to startup was finding capital, not just investors but financing, and we had to go private.”
— Travis Long, BTRC manager
3. Learning how to run a railway.
“We didn’t know where to get materials, how to fix the track, where to buy a locomotive, we didn’t know anything.”
— Geoffrey Young, farmer member
4. Taking obstacles head-on.
Re: the removal of the Canadian Wheat Board’s monopoly: “We chose to work around it, and try to figure out a solution. That assisted our reputation because other companies in the industry saw that rather than being afraid of the change, we were going to try to embrace it.”
— Travis Long, BTRC manager
5. Building relationships.
“It’s one thing for an entrepreneurial business to start out hungry, but it’s another thing to continue to look for ways that it can improve operations, better serve its customers and better serve end-users such as us. It’s that continuing desire to get better that is really impressive.”
— Neil Schuller, The Andersons Inc.
“We need to continue to… try and expand into other areas of rail service so that we can become a more diversified company with the main focus on bringing value to local producers.”
— Geoffrey Young, farmer member