jEOX FP)1.0 CANADIAN TRANSPORTATION RESEARCH FORUM Lip LE GROUPE DE RECHERCHES SUR LES TRANSPORTS AU CANADA 20th ANNUAL MEETING PROCEEDINGS TORONTO, ONTARIO MAY 1985 379 THE POTENTIAL IMPACT OF CROW RATE RATIONALIZATION FOR DIVERTING CANADIAN GRAIN EXPORTS THROUGH UNITED STATES GULF PORTS JERRY E. FRUIN LONNIE DICKERSON Department of Agricultural & Applied Economics University of Minnesota, St. Paul, Minnesota BACKGROUND As long as rail rates for Canadian export grain move- ments were restrained by law (the "Crow Rates") to a level substantially below variable costs, there was no incentive for Canadian export grain to be moved by low-cost land or water routes through the United States. However, our pre- vious research (1) indicated that as transport costs in- crease as a result of Crow Rate rationalization, the total logistics costs for some of Canada's export grain shipments could be reduced by utilizing barge transportation on the Mississippi River system or unit trains to deep-water ports on the U.S. Gulf. The objectives of this study were to de- termine the quantities of Canadian export grain that would be moved through the U.S. and the resulting, cost savings if such routes were utilized while minimizing the total logis- tics costs of Canadian grain exports. Our analysis included several combinations of possible rail rate levels and Mis- sissippi barge rate levels. The study looked at actual exports in 1981-82 and projected exports for 1990. Fruin & 1 Dickerson 380 THE GENERAL MODELA/ A linear programming cost minimization transshipment model was constructed. The model provided for moving three export grains from 21 supply regions over five possible routes to North American ports, and then by ocean vessel to 34 importing ports serving 32 importing countries. The three grains were the major export crops of durum, wheat other than durum, and barley. The 21 supply origins were formed by combining 47 crop reporting districts in western Canada so that each supply region had historical shipments totaling one to 1.5 million tons of wheat, durum and barley. A central location in each supply region was selected as the country elevator rail shipping point for that region. Each of the 21 shipping points had linkages (i.e. ,they could ship) to any of the five export ports. Three of the five export routes were by direct rail to the export eleva- tors at Prince Rupert and Vancouver on the West Coast, and to Galveston, Texas on the U.S. Gulf coast. The fourth route from the country shipping points was by rail to Min- neapolis/St. Paul for transshipment by Mississippi River barge to Gulf export elevators on the lower Mississippi. The fifth route was by rail to Thunder Bay for transshipment by laker to export elevators on the Gulf of St. Lawrence. Major grain ports for each of the thirty-two importing countries were selected as destination points. The / The model and all data are described in detail in (2). Fruin & 2 Dickerson 381 thirty-two destination countries were those which received more than .5% of Canadian exports of one or more of the three grains in 1981-82. These countries accounted for approximately 98% of total Canadian grain exports (3). Three Russian destinations were included corresponding to Baltic, Black Sea and Far Eastern ports. Ocean routes between the five export ports and the 34 importing ports completed the model. About 80% of the 170 Possible routes were considered feasible and were included in the model. EXPORT AND IMPORT QUANTITIES Quantities were determined for two time periods: the actual data was obtained for 1981-82 (the most recent years for which complete data was available), and projections were made for 1990. Export Aupplies for 1981-82 were based on the shipments in that crop year from primary elevators in each of the 21 supply regions. Projections of 1990 ex- port supplies for each of the supply regions were developed from production estimates for 1990 found in Prospect for the Prairie Grain Industry, 1990 (4). These projections are based on a production target for the prairie provinces of 50 million metric tons of all grains. This represents a Production increase of about 9 million metric tons over 1981. The 1990 projections assume an increase in exports of about 18%. Country imports for each grain for 1981-82 were set equal to their imports from Canada in that year. Import 3 FbiCRetson 382 projections by country for 1990 were estimated by determin- ing each country's average percentage of Canadian exports of each grain for the four years 1979-80 to 1982-83 and applying that percentage to Canada's 1990 projected grain exports (3). TRANSPORTATION AND HANDLING COSTS All costs were stated in U.S. dollars. Canadian rates and costs were converted to U.S. dollars at the 1981-82 average exchange rate of U.S. $0.8225 per $1 Canadian (5, p. 20). Model runs using the 1990 grain export projections used 1981-82 costs and rates rather than attempting to esti- mate 1990 cost levels. This can be interpreted as assuming that the cost relationships between modes will be propor- tionately the same in 1990 as in 1981-82 regardless of changes in the general price level. The following logistics costs were included in the cost minimization computations. a. Rail charges from each of the 21 country shipping points to the five exporting or transshipping points. All rail charges from country locations to points in the U.S. were set at "compensatory levels" using estimates of rates equal to approxi- mately 110% of variable costs. These estimates were derived from a mileage-based linear regression function obtained from actual 1981 U.S. unit train rates (2). Rail charges from country shipping points to Fruin & 4 Dickerson 383 Canadian locations varied depending on the analy- sis and included the Crow Rates and estimates of compensatory rates approximating 110% of U.S. var- iable unit train rates derived from the regression function described above. Examples of these rates and rate estimates are shown in Table 1. b. Fobbing costs at the five export ports and two transshipping points. These were the average costs for Canadian ports in 1981-82 (3) and are shown in Table 2. Export fobbing at Galveston was set equal. to those at the Canadian west coast ports. Minnea- polis fobbing was set equal to Thunder Bay, and Mississippi River Gulf seaboard fobbing was set equal to St. Lawrence seaboard fobbing. c. 'Lake transportation costs from Thunder h.ay to St. Lawrence ports. The 1981-82 average of U.S. $13.01 was obtained from Canadian Grain Exports(3). d. Barge transportation costs from Minneapolis/ St. Paul to Gulf export ports. Barge transporta- tion rates on the Mississippi River are determined by market demand and can be anywhere from 100 to 400% of the tariff rates in Bargeload Bulk Grain Tariff (6). Barge rates are negotiable and highly variable depending on season, points of origin, and supply and demand conditions. The average barge rate from Minneapolis to the Gulf during 1981 and 1982 was approximately 170% 5 Fruin & Dickerson 384 TABLE 1 EXAMPLES OF RAIL RATES PER METRIC TON IN U.S. DOLLARS Variable • Cost Shipment Rail Crow Based Point To Mileage Rate Rate Brandon, MT Thunder Bay 553 2.90 11.64 MB2 Vancouver 1,333 5.44 37.83 PrinceRupert 1,626 5.44 47.68 Minneapolis 578 _.... 12.47 Galveston 1,896 __ 56.74 Swan River, MT Thunder Bay 720 3.45 17.24 MB5 Vancouver 1,359 5.44 38.71 Prince Rupert 1,551 5.44 45.16 Minneapolis 745 -- 18.08 Galveston 2,063 ........ 62.35 Gravelbourg, SK Thunder Bay 954 3.99 25.10 SN4 Vancouver 1,397 5.62 39.98 Prince Rupert 1,588 5.62 46.40 Minneapolis 789 ....... 19.56 Galveston 2,107 _.... 63.83 Saskatoon, SK Thunder Bay 899 3.99 23.26 SN6 Vancouver 1,088 4.35 29.60 Prince Rupert 1,280 4.35 36.05 Minneapolis 915 ....... 23.79 Galveston 2,262 __. 69.04 Medicine Hat, AB Thunder Bay 1,076 4.35 29.20 AA1 Vancouver 871 4.35 22.32 Prince Rupert 1,353 4.35 38.51 Minneapolis 976 ....... 25.84 Galveston 2,294 ...._. 70.11 Calgary, AB Thunder Bay 1,244 4.71 34.84 AA3 Vancouver 642 3.63 14.62 Prince Rupert 1,185 3.63 32.86 Minneapolis 1,153 -- 31.79 Galveston 2,049 ...._ 61.88 Edmonton, AB Thunder Bay 1,228 4.71 34.31 AA5 Vancouver 765 3.63 18.76 Prince Rupert 957 3.63 25.20 Minneapolis 1,241 _.... 34.74 Galveston 2,243 68.40 • Fruin & 6 Dickerson 385 of tariff or U.S. $11.60 (7). This was the rate generally used throughout the study, although the impact of barge rates was analyzed in several scenarios. The different barge rate levels are shown in Table 3. e. Ocean freight rates from North American export ports to the importing ports. Average ocean % freight rates for wheat in 1981-82 were obtained from World Wheat Statistics (8,9). In some in- stances, rates were not available to specific countries, and rates to importing ports in the same geographic area were obtained from World Wheat Statistics. Actual rates from Drewry's Shipping Statistics (10) were used in some instances where rates were not available in World Wheat Statistics. Because of the great variability in distances and phys- ical facilities, logistics costs such as the costs of move- ments from farm to the country elevator, country elevator storage and handling and movement costs from importing Ports to interior destinations were not considered.