Fuel, labour to pull grain freight cost indices lower

The numbers that decide how much revenue Canada’s big two railways get to keep from Prairie grain handling have been marked downward for the 2020-21 crop year.

The Canadian Transportation Agency last week announced it will set the volume-related composite price index (VRCPI) at 1.4202 for Canadian National Railway (CN) and at 1.4205 for Canadian Pacific Railway (CP) — down 2.04 and 7.22 per cent respectively from 2019-20.

The VRCPI is a factor in the formula used to set each year’s maximum revenue entitlement (MRE) — the caps on the overall annual revenue CN and CP can earn shipping regulated grain.

The index is an inflation factor, reflecting a composite of forecast prices for railway labour, fuel, materials and capital purchases.

For the 2020-21 crop year, which begins Aug. 1, the decreases in the VRCPIs are based mainly on “expected declines in fuel and labour costs,” the CTA said in a release April 30.

The bigger decline in CP’s VRCPI can be chalked up to “debt raised for the purposes of share buyback,” the CTA said. Such activity is accounted for when determining the railways’ cost of capital.

Both CN and CP are projected to see increases in general wages, the CTA said — but for CN, those are expected to be offset by declines in “wage-related” items, such as bonuses, and a “small decline” in fringe benefits. For CP, wage increases are expected to be “more than offset by a large projected decline in fringe benefits, including pension-related items.”

As for fuel costs, the CTA forecasts a 3.95 per cent decline for CN and a 3.75 per cent decline for CP in 2020–21 crop year, based on a “significant decrease” in the price of crude oil in 2020 and “associated fluctuations” in the Canada-U.S. exchange rate. But the CTA also expects crude oil prices to recover in 2021, offsetting the 2020 decrease.

The new VRCPI will be applied when the CTA determines the MRE for the 2020-21 crop year, a decision due by Dec. 31 next year.

Any overages CN and CP make on Prairie grain in a given crop year, plus penalties, are paid into the Western Grains Research Foundation’s endowment fund, income from which is directed to research work.

CN and CP had both taken in grain revenue overages of seven figures above their MREs during each of the four crop years prior to 2018-19.

Both railways came in under their MREs for 2018-19 — partly because calculations for the VRCPIs and MREs were adjusted in the federal Transportation Modernization Act in May 2018. — Glacier FarmMedia Network