UPDATE 2-Canada to force minimum rail grain shipments as backlog builds

Wed Mar 26, 2014 6:23pm EDT

* Government would set future grain volume minimums

* Grain companies to pay farmers for breaching contracts

* Legislation too narrow in scope -opposition (Adds details on timing, comments from opposition, farmer, CN Rail)

By Randall Palmer and Rod Nickel

OTTAWA/WINNIPEG, Manitoba, March 26 (Reuters) - The Canadian government introduced legislation on Wednesday that will allow it to set minimum levels of grain that railways must ship each year to avoid the huge crop backlogs that have hurt farmers' cash flow this winter.

The Conservative government earlier this month ordered the country's two dominant railroads, Canadian National Railway Co and Canadian Pacific Railway Ltd, to double their weekly grain volumes to 1 million tonnes combined over a four-week period to clear the massive crop logjam.

The new legislation enforces that requirement - 500,000 tonnes of grain weekly for each railway - through the balance of the 2013/14 crop year, which ends in August.

The bill also would allow the government to set similar grain movement targets in subsequent years, depending on the size of the harvest, with penalties of up to C$100,000 ($90,000) per day for noncompliance.

"Our government means business when it comes to getting our grain and other commodities moving throughout the marketplace," Agriculture Minister Gerry Ritz told reporters.

Record crops of wheat and canola, along with frigid weather, have overwhelmed the railways this winter, resulting in overdue orders for tens of thousands of grain cars. A government official said the value of the grain currently sitting in bins is an estimated C$14.5 billion to C$20 billion.

The bill would increase inter-switching distances in the Prairie provinces, which will allow more grain elevators to have access to service by more than a single railway.

The government also targeted grain companies that do not accept farmers' crops on the dates agreed to in contracts. In future, companies such as Richardson International Ltd, Cargill Ltd and Viterra would have to pay compensation to farmers for failing to accept grain on time. The amount of compensation would be determined by the Canadian Grain Commission or another arbitrator.

Shares of both CN Rail and CP Rail ended down about 1.3 percent on Wednesday on the Toronto Stock Exchange.

"CN is disturbed that the government has decided to punish railways with re-regulation for an outsized crop and winter conditions totally beyond their control," said CN Chief Executive Claude Mongeau, in a statement. "The legislation does not address the root cause of the current grain situation and will do little to move more grain, now or in the future."

A Canadian Pacific spokesman said the company was reviewing the legislation and could not immediately comment.

The opposition New Democratic and Liberal parties said they have agreed to fast-track the bill to a committee for review, which means it is not likely to pass for a couple of weeks.

"I don't think we'd be inclined to delay this, but we also would make the point that it's very narrow in scope and should be more ambitious," deputy Liberal leader Ralph Goodale said.

He said the C$100,000-a-day fine was too little to have much effect.

"From the railways' perspective, that's walking money."

But Ritz said the railways have already stepped up, moving closer to the government's requirements in recent weeks.

"That C$100,000-a-day penalty may not seem like a lot to a company the size of the railway but certainly the notoriety they bring upon themselves by not measuring up, I think it hurts them more."

NDP Member of Parliament Malcolm Allen blamed the new free-market system, which replaced the marketing control of the Canadian Wheat Board in 2012, for the fact that some farmers have not been able to move any grain.

"Under this new free-market system, it's whoever gets there first gets the big fish, and if you're there a little late you get none."

But one Manitoba farmer said the bill "appears to answer a lot of the calls from farmers. "For that I think we're going to see a lot of appreciation from producers who haven't been able to move their grain this winter," said Doug Chorney, president of the Keystone Agricultural Producers.

Chorney said the increase in inter-switching distances will be a powerful tool for shippers to negotiate better rail service. Interswitching involves the transfer of cars from one railway's line to the line of another railway.

Increasing those distances could open the door to "unfair poaching" by U.S. railways of Canadian railways' business, CN's Mongeau said.

The legislation would also give the government's Canadian Transportation Agency a bigger role in regulating service agreements between railways and shippers.

The Western Grain Elevator Association, which represents grain handlers, said it was reviewing the bill and could not comment. ($1 = $1.11 Canadian) (Additonal reporting by Louise Egan in Ottawa and Solarina Ho in Toronto; editing by Peter Galloway and Matthew Lewis)

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