Economic Regulation and Profitability in Canadian Grain Transportation: Implications for CN and CPKC

The Canadian grain transportation sector operates under a unique regulatory framework designed to balance the interests of railways, farmers, and consumers. At the heart of this system is the Maximum Revenue Entitlement (MRE) policy, a mechanism under the Canada Transportation Act that caps the revenue railways can earn from grain shipments. While intended to prevent monopolistic pricing and ensure fair access to transportation services, the MRE policy has created divergent financial and operational outcomes for Canada's two major grain railways, Canadian National Railway Company (CN) and Canadian Pacific Kansas City (CPKC). Recent rulings and academic critiques highlight both the risks and opportunities inherent in this regulatory structure, offering critical insights for investors.

Divergent Financial Outcomes: CN and CPKC in the MRE Framework

The 2023–2024 and 2024–2025 crop years underscore the contrasting impacts of MRE rulings on CN and CPKC. In 2023–2024, CN's grain revenue fell $34.3 million short of its MRE ceiling, while CPKC exceeded its entitlement by $1.8 million, incurring a 5% penalty to the Western Grains Research Foundation. By 2024–2025, CN remained $5.9 million below its MRE, whereas CPKC again overshot its limit by $2.66 million, triggering another penalty. These outcomes reflect differing operational strategies and market dynamics.

For CN, falling short of its MRE suggests either underutilized capacity or pricing constraints. Conversely, CPKC's repeated overperformance-despite penalties-indicates a more aggressive approach to maximizing revenue within the regulatory bounds. However, the penalties imposed on CPKC e.g., $91,204 in 2023–2024 and an additional $133,012 in 2024–2025 represent a direct drag on profitability, particularly for a company already navigating a competitive landscape.

Volume Trends and Operational Implications

The MRE policy's influence extends beyond revenue caps to shape transportation volumes and strategies. In 2023–2024, grain transportation volume declined by 3.5% due to lower crop exports according to transportation data. However, the 2024–2025 crop year saw a 12.1% increase in Western grain transportation, with 49.0 million tonnes moved as reported by industry sources. This rebound highlights the sector's resilience but also raises questions about how railways allocate resources.

Academic analyses suggest the MRE policy may inadvertently incentivize longer-distance movements, as railways seek to optimize revenue within fixed ceilings. This behavioral tendency could lead to operational inefficiencies, such as underutilized short-haul routes or increased infrastructure strain on long-haul corridors. For investors, these dynamics underscore the importance of monitoring how CN and CPKC adapt their networks to regulatory constraints while maintaining service reliability.

Regulatory Scrutiny and Policy Reassessment

The MRE policy, in place since 2000, is increasingly under academic and regulatory scrutiny. A 2025 study warns that the policy may require re-evaluation to align with evolving economic and operational realities. Critics argue that the fixed revenue ceilings fail to account for variables such as inflation, input costs, and market volatility, potentially stifling innovation and investment in the sector.

For CN and CPKC, the risk of policy changes looms large. A shift toward more flexible pricing mechanisms or performance-based regulation could alter revenue streams and operational strategies. Conversely, maintaining the status quo may perpetuate the current asymmetry in how the two railways navigate MRE constraints.

Investment Considerations: Risks and Opportunities

Investors must weigh several factors when assessing the MRE policy's impact on CN and CPKC. For CN, the consistent underperformance relative to its MRE suggests potential for revenue growth if transportation volumes rebound or pricing flexibility increases. However, this also implies vulnerability to further declines in grain exports or regulatory tightening.

CPKC, meanwhile, faces the dual challenge of managing penalties while optimizing its revenue within the MRE framework. Its ability to absorb these costs without eroding profit margins will be critical. Additionally, CPKC's repeated overperformance may signal a more aggressive operational stance, which could either be a strength in a stable regulatory environment or a liability if penalties escalate.

From a broader perspective, the MRE policy's potential overhaul presents both risks and opportunities. A more flexible regulatory approach could enhance profitability for both railways but may also introduce uncertainty during the transition. Conversely, a rigid adherence to the current system could perpetuate inefficiencies and limit long-term growth.

Conclusion

The MRE policy remains a cornerstone of Canada's grain transportation regulatory framework, but its implications for CN and CPKC are far from neutral. While the policy aims to ensure equitable access and prevent monopolistic practices, its unintended consequences-such as divergent financial outcomes and operational inefficiencies-pose significant challenges. For investors, the key lies in understanding how each railway navigates these constraints and the potential for regulatory evolution. As the sector moves forward, the interplay between economic regulation and profitability will remain a defining factor in the performance of Canada's grain railways.