If you ask grain farmers about their biggest input costs, they are likely to talk about equipment purchases, fertilizer prices or the cost of various crop protection products. One huge cost, grain freight rates are seldom top of mind because producers pay indirectly.
Grain buyers pay the huge cost of grain movement by rail and the cost is baked into the price they pay for grain. When a grain company bids $7.50 a bushel for wheat for example, there’s no indication of how much that price has been lowered by the freight bill. However, it’s a lot and it can vary dramatically through the year.
On grain movement to the major ports, the railways operate under a revenue cap called the Maximum Revenue Entitlement. Note that it’s a revenue cap and not a rate cap. The costs for each railway are assessed and adjusted for grain volume resulting in the VRCPI which stands for Volume-Related Composite Price Index.
For the new crop year that began August 1, the index for CN increased by 5.39 per cent while for CPKC it went up 6.49 per cent. The total freight bill for the two major railways has been more than $2 billion a year. With the increase to the index, it’s reasonable to assume more than $100 million in additional freight costs for this crop year versus last crop year.
So, what does it mean in dollars per tonne of grain? That’s complicated because each delivery point has a different tariff rate, the amount is different for each type of grain, the amount differs depending on whether shipment is to a bulk export terminal or a trans-loader and the tariff rate often changes each month or two.
Let’s use the example of wheat moving from Regina to a bulk export facility in Vancouver on CN. For the crop year that just ended, the tariff rate was as low as $59 a tonne and as high as $76 a tonne in other months.
Note that these are the single car rates. Elevators loading 100 cars at a time get an $8 a tonne discount. Facilities with loop tracks loading 134 cars get a $10 discount.
The most common discount would be $8, but that still means a freight bill of $51 to $68 a tonne for moving wheat from Regina to Vancouver. That’s $1.39 to $1.85 a bushel deducted from the price paid to producers.
The two major railways carefully manage their revenue cap. They don’t want to end up earning less than they are allowed, leaving money on the table. They often err just a bit on the high side and then the amount exceeding the Maximum Revenue Entitlement plus a small penalty must be paid to the Western Grains Research Foundation.
Freight costs are one of the largest farm expenses, but they are largely out of sight and therefore out of mind for farmers because the bill is paid indirectly.