Agriculture Committee on June 2nd, 2009

[The Chair, Conservative, Larry Miller]

Could everyone come to the table, please?

Because we're limited for time, I'm going to open it up.

We have with us Mr. Peter Clark, from Grey, Clark, Shih and Associates Limited, and Mr. Colin Busby from the C.D. Howe Institute.

Mr. Clark, we'll start off with you. You have ten minutes or less, please.

[Peter Clark, President, Grey, Clark, Shih and Associates Limited]

Thank you, Mr. Chair.

I'm sorry, I was travelling a bit and didn't have time to finish my text in time, but I will get it to the committee in both languages in the next few days. I'll try to hit a few of the high points.

I have reviewed what's been happening before you over the last few weeks, and it seems to me that the principal reasons why a more competitive agricultural sector in Canada is being inhibited are: a lack of free and open markets internationally; the pervasive and extensive use of subsidies by primarily the United States and the EU, but also other countries; excessive interference in the market due to sanitary and phytosanitary concerns that are not based in science; the disparity in size and market power between farmers and ranchers and their suppliers and customers; and frustration with the apparently contradictory goals of competition policy in Canada.

I was quite interested to review your hearings with the Competition Bureau, and a number of the members seemed to experience frustration. I would attribute that to the dual goals of Canadian competition policy, on the one hand to ensure that there's competitiveness in our marketplaces and on the other hand to not apply the rules so tightly that the large players in a rather small market are not prevented from competing internationally with much bigger players.

My normal focus is trade negotiations and trade policy, and international competition is the essential focus of trade policy. If we're not competitive, we won't be able to take advantage of the access we negotiate internationally, so competition is extremely important. But when it comes to competition issues, the farmer is really the ham in the sandwich. It's a function of size. There are tools to deal with abuse of marketing power, but these seem to run head-on into the dual responsibility of the competition law administrators.

With very few exceptions, farmers are dealing with oligopolies, in terms of their suppliers, and oligopsonies, in terms of their customers. The disadvantages of dealing with these customers can be reduced by joint selling activities, such as those that exist in supply-managed sectors and where there are government-mandated marketing boards.

As for suppliers, it's more difficult to cope with that because rationalization within North America in particular has led to consolidation, which has reduced competition and goes right across the board. For many farmers this lack of competition on both ends reduces their gross margins and incomes.

In the brief introductory period I have available to me, I want to touch a little on what's happening in our international competitive markets. There are still very heavy subsidies to the grains and oilseeds sectors in the United States and Europe. These subsidies promote the competitiveness of the livestock, poultry, and dairy industries in those countries.

On recent developments, the USDA was appropriated $28 billion in a stimulus package for U.S. farmers. Almost $20 billion of that is to increase the monthly amount of nutrition assistance, and that's about 40% of their normal budget.

There is money for other factors. The Farm Bill has expanded its scope. It's still very generous and it still deals with the basic root problems we have in competing in the grains and oilseeds sector and through the chain.

Just this morning the European Union decided--they've been looking at it for a while, so it's not an overnight decision--that direct payments, their so-called decoupled payments that aren't decoupled, will be much less relevant in the common agricultural policy beyond 2013.

I think I sent members of the committee a copy of the release this morning, but you may not have it yet.

This is very intriguing because the Europeans have nearly 30 countries and 30 agriculture ministers, all with different views, and Commissioner Fischer Boel with a view of her own, which is probably very appropriate. On the one hand, you have the Nordic countries like Sweden that would rather spend less and aren't terribly concerned about agriculture. On the other hand, you have the more southern countries.

The general view is that it is difficult to wean people off direct payments. One of the bigger problems appears to be that a number of the member states consider that in fact to be the modulation, as they call it—they have wonderful words, and that is where we get modalities, that is where we get modulation—of direct payment support into regional development support, from pillar one to pillar two, which has already gone too far.

They are not keen on more modulation. They are not keen on sharing for regional development. There are imbalances that have been pointed out by the new member states, in which the amount of direct aid per hectare, for example, in Greece is 20 times what it is in Latvia. So they are looking for a more uniform system within the EU.

What we can be sure of from what is said in that release is that the support to agriculture in the European Union is going to continue to be very generous.

Some of you may recall that when I appeared here a few years ago to talk to you about EU agricultural support, I characterized their single farm payment system as one that paid them support based on what they got in 2000 to 2002 and let them top up from the market. That works when the market is up, but when the market is down, as it is now, it creates problems.

That is why we've had Denmark trying to reinstitute its export restitutions on swine. The same thing has happened in France. In fact, there have been more general discussions on that issue within the European Union.

There have been problems with dairy throughout the European Union, and those problems, as they are with hogs, are related to significant oversupply and very low prices. The export restitutions on dairy have been reintroduced in the European Union, which has caused the United States to reintroduce the dairy export incentives program.

Mr. Chairman, we are in a race for the bottom, except Canada is not in the race. We don't have the money. We have never really dealt with export subsidies in that way, and we do have serious problems.

Other issues I'd be happy to touch on during the questions and answers relate to regulation and some of the deficiencies we see with the Food Inspection Agency. In my view, the Food Inspection Agency does a very good job of inspecting food in Canada, but it just doesn't have the staff or the funding to get involved in having other markets approved for us. And that is a serious matter. It takes far too long to negotiate these veterinary agreements. That could be addressed by funding.

Why do young farmers want to go into farming with all the uncertainties they face? The presentation the Canadian Pork Council made to you last week I believe touched on a lot of the problems that have affected the pork producers.

Pork producers and cattlemen deal with cyclical movements in the marketplace all the time. In some years there is too much and in other years there's not enough. The herd is either rebuilding or it's being culled. Those things they can deal with, but they really haven't been able to deal with the high grain prices, which were driven by U.S. energy policy. They haven't been able to cope with the dollar going up so rapidly. They haven't been able to cope with the country of origin labelling regulations and a number of others.

Why are young farmers going to go into farming unless they can really see something at the end of the road? I don't think we have the proper risk management policies to deal with that.

I was interested in Mr. Meredith's discussion with you and his staff on Bill C-29. It was all very interesting, but why are we putting people further into debt? That's not what's happening in other countries. There are grants in France for young farmers and other people.

I'll be happy to deal with this in more detail, Mr. Chairman. I think my ten minutes are up.

[The Chair, Conservative, Larry Miller]

Thank you very much.

Now we'll have Mr. Colin Busby from the C. D. Howe Institute. You have ten minutes or less, please.

[Colin Busby, Policy Analyst, C.D. Howe Institute]

Thank you, Mr. Chair. I'd also like to thank the committee for inviting me to speak here today.

I'd like to talk to everyone about the supply managed farm sector. It's Canada's dairy, poultry, and egg farmers that together comprise roughly 20% of Canada's agriculture. Under a supply managed system, domestic producers are able to control the price and the supply of their goods. Production quotas limit what leaves farm gates, and large trade tariffs block the entry of similar goods into the country.

Because this type of market intervention has benefits and costs, a straightforward economic analysis cannot answer whether it's a good policy. However, it can outline the issues and the affected parties. Such an analysis leads to some simple conclusions. Although a supply management system allows local producers to obtain larger and likely more stable revenues than otherwise possible, this comes at the expense of domestic consumers and robust competition.

New entrants are restrained. Tariffs shelter existing Canadian producers from foreign competition, and production limits prevent farmers from raising or lowering supplies to respond to changing economic conditions. Farmers who benefit from this system fiercely defend the policy, but competition and domestic consumers are harmed. Looking to the future, it's my opinion that we should develop a greater willingness for a gradual reduction in supply managed support.

The costs of supply management are most easily understood by examining the market value of quotas. Quotas are valuable to farmers because a quota entitles the holder access to the Canadian market and statutorily restrains others who might wish to do so from producing similar goods. The inflation-adjusted value of quotas sold in Canada has increased from $10 billion in 1982 to $30 billion in 2007. Each supply managed farm today possesses on average approximately $1.5 million worth of quota, but purchase quota has nothing to do with the costs of machinery, feed, land, labour, and knowledge that go into making the product.

Many factors have influenced the dramatic rise in quota prices: for instance, higher expectations that the government will maintain the current policy, expectations of higher future profits from production, lower costs of borrowing, and expectations of government buyouts. Further, financial innovation in the past two decades, such as treating quota as collateral, may have also increased its market value.

Since most quotas are openly traded, the quota price captures the value of future profits associated with producing a good, the supply of which is restrained by the quota system rather than by the market clearing price. People can invest money freely, and because all investors are searching for the best and most profitable returns, the rate of return on alternative investments tends to even out over time.

If people see higher profits from producing dairy, for example, they would invest in quota until the return matches investments with similar risks, so the extra profits from the supply managed system get built into the price of a quota. This is why many new entrants are discouraged. They perceive that they can earn similar profits in other lines of production.

Because the quota system restricts the supply of products that would otherwise make it to the market, the benefits that flow to supply managed producers come at high consumer costs. The Organisation for Economic Co-operation and Development measures the cost of Canadian supply management on domestic consumers in 2007 at $2.6 billion. This amounts to a transfer to farmers of roughly $209 annually by each Canadian household.

Despite rising global demand for milk and poultry products, Canadian producers have opted for control over the domestic market, which due to high domestic prices and an aging population appears likely to shrink in the future. They deter foreign access into Canada by imposing a tariff rate quota, otherwise known as a two-part tariff, under which high tariffs are applied on imports above a set level, a minimum access commitment, at a combined average around 250%.

Canada's support of supply management clearly has made it difficult to sustain a credible case for freer trade. As a matter of trade policy, the Canadian dairy and oat producer position is becoming entrenched. Agricultural subsidies, particularly those in the U.S., EU, India and China, led to the July 2008 negotiation collapse of the Doha Development Agenda.

In the short run, the quota system reduces revenue uncertainty for farmers, making supply-managed production less risky than other forms of agricultural production. In the short and long run, quotas act as a barrier to new entrants, because the price of quotas requires financial investments far beyond what would be otherwise be needed to enter the sector. By reducing competitive pressure, existing farmers benefit the most from owning the quota and can out-compete new firms. The ban on interprovincial quota transfers also limits cost-efficient production movements across provinces.

Finally, local restaurants, which compete for market share with food processors, must pay higher input costs because they are not permitted the same exemption from supply managed prices that processors have. Hence, they're placed at a competitive disadvantage.

Other countries’ experience in moving away from supply management has not been painless, but it has been successful nonetheless, and not as bad as many had anticipated. Canadian dairy policy could look to Australia and New Zealand for examples. Australia had a similar system in place until the year 2000, when quotas were eliminated. Prices were allowed to float, and transitional assistance programs were put in place. Dairy farmers reacted quickly. Some farmers expanded their herd sizes, others cut back production, and some producers also left the business. Importantly, however, milk production stabilized quickly and consumer prices dropped.

Canadians can ensure high-quality goods, diverse products, and lower retail prices by moving away gradually from a system of supply management to a system where production costs and consumer demand determine grocery store prices. But before import barriers are lowered, the industry would benefit from having time to adjust to international competitors.

In this context, the following intuitively appealing solutions exist for policy-makers: gradually increase the supply of quotas, forcing the quota price downwards; a full quota buyout, which is an expensive option, but likely the most politically attractive; policy-makers could also conduct a series of reverse quota auctions; offer transitional assistance based on the book value, not the market value, of quota--this would prevent producers from earning returns above the original purchase value of quota; and finally, they could apply a tax on consumers to help pay for transitional assistance.

Because consumers will be the main beneficiaries from reform, the last option, which is the tax on consumers to pay for transitional assistance, probably matches benefits the best in terms of lower prices to the total cost of any potential reform. Transitional assistance that's slightly below the book value of quotas is a sensible option. The obvious downside when phasing out supply management is that it leaves the door open for influence groups to reverse or dampen the reforms. Immediate and decisive reforms, like those in New Zealand and Australia, could be more successful.

To conclude, Canada and other nations seem deeply entrenched in their trade positions. Canada aggressively defends supply management, while developing countries make firm demands for proper access to foreign markets. I am aware of the political sensitivity of this issue, but the durability of a competitive Canadian agriculture and agrifood sector could be enhanced by seizing opportunities in growing international markets and expanding domestic producers’ export potential.

The costs of supply management fall squarely on domestic consumers. All Canadians would have a stake in reform.

Thank you.

[The Chair, Conservative, Larry Miller]

Thank you, gentlemen, for your time.

Mr. Routledge, just as late as yesterday, indicated he would be here. Maybe he got held up with his flight, or whatever. If it's okay with everybody, if he does come in, maybe we'll just allow him to present then.

In the meantime, we'll start our questioning.

Mr. Valeriote, you're up for your seven minutes.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you, Mr. Clark and Mr. Busby, for your time and for coming up here.

Mr. Clark, I met with a group of cattlemen from a particular province in Canada. They expressed concern about a disadvantage they are at with respect to the AgriFlex program, particularly the business risk management part of that program. They feel disadvantaged because Alberta has provided funds to fill the gap that exists--that they perceive, at least, exists--under the AgriFlex program business risk management.

I am just wondering if you feel that gap exists and whether, if one province subsidizes or pays money to fill that gap, they place people in other provinces at a disadvantage and how you might deal with that situation.

[The Chair, Conservative, Larry Miller]

A point of order, Mr. Storseth?

[Brian Storseth, Conservative, Westlock—St. Paul, AB]

Thank you, Mr. Chair.

Every one of the Liberals has taken a shot at this during the competitiveness study, and it's really getting quite tiresome to hear the constant attacks on Alberta producers. I would appreciate if the opposition would take the interests of Alberta producers the same as they do other producers across the country--

[Frank Valeriote, Liberal, Guelph, ON]

I'm happy to rephrase the question. Let's leave Alberta--

[Wayne Easter, Liberal, Malpeque, PE]

Just on that, Brian has said this several times. Nobody is questioning the farmer position in Alberta. But the reality is, in free-enterprise Alberta--they claim they're free enterprise--when they subsidize an operation in Alberta, it does have an impact on the rest of the country. That's the reality. It's a patchwork quilt of programs. We're not attacking Alberta, but what we need is a government with a national vision instead of this patchwork quilt of policies.

[The Chair, Conservative, Larry Miller]

Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

I'm just wondering if you could respond to my question and see if you have any opinion about whether the federal government, regardless of who forms that government, should be harmonizing and making sure those circumstances, those disincentives, don't exist in the future.

[Peter Clark]

I should indicate that from time to time I do work for the Canadian Cattlemen's Association, which as I recall is located in Alberta, as well as for the Ontario cattlemen.

The issues, which I began to address, about the European Union changing their single-farm payments where there are differences from state to state, are designed to achieve uniform benefits across the whole EU to avoid the type of situation where one area benefits over another. That's a basic fairness issue. But in Canada we have provinces that have the right to do what they want to do in a number of areas, including agricultural support, and that's a fact of life. I don't know if we want to end up in the Supreme Court, challenging Alberta's right to do that.

[Frank Valeriote, Liberal, Guelph, ON]

I'm not suggesting we challenge Alberta's right to do that. I'm wondering how the federal government might level the playing field for all farmers across Canada.

[Peter Clark]

The federal government could put a cap on the benefits across the country and reduce the federal payment or increase the federal payment to that level, related to provincial production.

[Frank Valeriote, Liberal, Guelph, ON]

Let me ask you about COOL. You mentioned COOL.

This committee is leaving for Washington on Wednesday evening to discuss the matter with those who are in the know in Washington--obviously an effort on our part to influence their efforts under COOL.

I'm wondering, given that Minister Ritz and Minister Day, as I understand it, both raised the issue--thankfully--but have been unsuccessful, if you have any advice to this committee before we go to Washington.

[Peter Clark]

The Secretary of Agriculture in the United States has been quite a surprise to me. Since he was appointed, he reversed previous decisions. I can't believe that Senator Chuck Grassley supports that position. I think that whom you see is going to matter as much as what you say. But I just can't understand where the Secretary of Agriculture in the United States is coming from.

[Frank Valeriote, Liberal, Guelph, ON]

Do you have any specific advice for us in our approach to these--

[Peter Clark]

Well, you haven't got anything you can really threaten them with, and that's the only thing they understand.

A two-by-four sometimes helps.

[Voices]

Oh, oh!

[Frank Valeriote, Liberal, Guelph, ON]

All right.

Mr. Busby, perhaps I can ask you a question. I'm a believer in supply management, just so it's obvious where I'm coming from. You say that it makes those who are in it sustainable; they profit, they grow. These are things that we're all struggling to achieve for various industries. We're told that we can't do it in the cattle or pork industry, that it just wouldn't work, and yet you're suggesting that we unveil and remove the system.

Would we not simply be exposing them to the same difficulties? We're losing 3,600 farms a year. I just see doing what you're suggesting as being a downward spiral for that industry.

[Colin Busby]

That's fine. I mean, you raise some of the obvious positive aspects about the program. It does provide a more stable source of income to a lot of farmers. It does protect them against good production years, bad production years, and those potential cyclical flows. I see that.

Like any policy, though, the costs of supply management can be shifted but not avoided. What I'm saying here is that the system itself shifts the cost of it squarely on domestic consumers. For example, by withholding what makes it to the market, essentially what you're doing is restricting supply and forcing the market price up above what it would otherwise be. That's where that steady income stream flows.

Now, how does that affect the average person? I mentioned the type of transfer the average Canadian is making to support the system. On average, per year, the OECD calculates that it's roughly $210 per household. Granted, dairy products and egg products make up only a small portion of what I walk out of the grocery store with, but when you look at the ripple effects on, say, a lower-income family, it becomes more significant.

Somewhat anecdotally, I was reading Jeffrey Simpson's article this Saturday in the Globe and Mail. In it he mentioned the fact that a lot of countries in the world, such as the United States, are considering creating a tax on soda pop, let's say, because it's just too cheap; we have this problem with obesity, and too many kids are getting fat because people are buying these goods. Well, consider it another way. If you are a low-income family and you go into a grocery store with $7 in your pocket to buy the appropriate amount of goods for a healthy meal for your kids, that $4.50 two-litre carton of milk looks a lot different when you compare it with an 89¢ two-litre bottle of pop.

What I'm saying is that I look at the benefits versus the costs, which have to be weighed against one another. Then I look at what's happening right now with the Doha development agenda. The fact is that it's being stalled. What potentially might come out of that we still don't exactly know. Essentially it's going to give us a 15-year time horizon looking in the future.

[Frank Valeriote, Liberal, Guelph, ON]

I have one last small question, Mr. Chair.

Can I ask you, if it weren't supply managed, what would a litre of milk cost? Any idea?

[Colin Busby]

I know that American prices are relatively 30% to 40% lower.

[The Chair, Conservative, Larry Miller]

Mr. Bellavance, seven minutes.