Canada: Federal Government’s Mandatory Grain Shipment Rules Not Extended

The grain shipment rules (Rules) enacted by the Canadian government—the most recent iteration of which expired on March 28, 2015—have not been renewed. Thus, for the first time since March 7, 2014, the Canadian National Railway Company (CN) and the Canadian Pacific Railway Company (CP) are not subject to special shipment requirements designed to ensure the elimination of backlogs of grain resulting from a bumper Western Canada 2013 crop and the adverse impact on normal railway operations resulting from cold temperatures during the winter of 2013-14.

BACKGROUND

The Rules were first implemented on March 7, 2014 by way of an order-in-council made under subsection 47(1) of the Canada Transportation Act (CTA). Those rules took immediate effect and set out minimum volumes of grain that CN and CP were required to move. CN and CP were made subject to heavy fines in the event of failure to comply with the grain shipment requirements set out in the Rules.

The initial Rules were followed by amendments to the CTA and the Canada Grain Act, which took effect on May 29, 2014 and imposed requirements that until August 3, 2014, CN and CP each move 500,000 metric tonnes of grain per week.

On July 31, 2014, the Canadian government enacted an order extending the Rules to November 29, 2014. Under the extended rules, the weekly shipment requirement imposed on each of CN and CP was increased to 536,250 metric tonnes and substantial penalties for non-compliance were maintained.

On November 28, 2014, the Rules were again extended by order of the Canadian government. Under the last iteration of the Rules, varying levels of minimum weekly grain shipment levels were imposed, ranging from 200,000 metric tonnes during the end-of-year holiday season to 465,000 metric tonnes during the week of March 22, 2015 to March 28, 2015.

On March 28, the Canadian government announced that the Rules would not be further extended, noting that CN and CP had overall exceeded the shipping requirements established by the Rules and that stored grain backlogs are now back at historical levels for this point in the annual production cycle.

COMMENTARY

The fact that the Rules were invoked in the first place is reflective of the difficult and politically sensitive nature of the process by which grain produced in Western Canada is shipped from the producer to its ultimate purchaser. Given the size of the annual crop (the 2013 crop was 75.8 million metric tonnes of grain) and the related economic issues stemming from any disruption in the shipment of the grain crop to export markets, there is clearly a strong political motivation for ensuring that undesired backlogs of grain are avoided. Coupled with political risks, though, are the difficulties associated with finding a balance between (1) producer and grain company demands for prompt shipment of grain when and where desired, and (2) the capacity of the Canadian rail system to provide the necessary shipment capability as and when required.

We expect that the market tension resulting from the competing market demand and supply determinants will be addressed through further government initiative, including through a consultative process in respect of the CTA and subsequent legislative amendments. We are monitoring developments in this area and will report further on them as they evolve.

In the meantime, the Canadian government's initiative in establishing the Rules serves as a clear confirmation of a commitment by the Government of Canada to address risks to our domestic agricultural sector and to Canada's reputation as not only a significant exporter of grain to the world market, but also as a nation with efficient and effective domestic transport capabilities in delivering grain to the international marketplace.

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