Thank you, Mr. Chair and members of the committee, for permitting us to share time with you this morning.
The Canadian Association of Agri-Retailers and its 1,000 members across the country service the nation’s producers and are the front line of a fertilizer and chemical trade worth over $3 billion. Our members work closely with grain and oilseed growers to maximize the return on their crop input investments.
Often underrated as a facilitator in the value chain, agri-retailers do not set the price of inputs or trigger market volatility, but they do have a price stabilizing effect that benefits producers. Constantly buying bulk quantities through volume-discounted contracts, dealers are able to lock in best pricing for their customers.
As a result of these pre-season agreements, growers rarely have to pay the open market price. These agreements also guarantee supply and just-in-time delivery to prevent growers from having to store inputs. In other words, dealer contracts serve as a hedge against market volatility, and the value-added services they bundle into the contracts help offset the sting of higher prices for growers.
Contrary to some opinions, crop input dealers do not benefit from high market prices of inputs. They, too, incur the high cost of goods sold, and they typically work within set margins that do not change, regardless of the price of the product. If anything, retailers often find their margins pinched because they wish to placate disgruntled customers and reward loyalty or because volatility often puts the cost of replacement product higher than the original selling price. So you could say that retailers are literally caught in the middle, and as such, they feel the squeeze from both ends.
Despite being disadvantaged by record high fertilizer costs as much as growers are, retailers do not perceive the market to be the result of any untoward business practices. Rather, it's a culmination of several economic factors, including unprecedented worldwide demand, a shift in North American crop allocation due to biofuel initiatives, lag time to increase manufacturing capacity, and an open global market.
The very same commodity-related supply and demand dynamics that are driving record grain prices are also driving fertilizer markets. It would seem somewhat exploitative to cry foul on one aspect of the commodity equation while embracing the other. Growers will have an opportunity to offset input costs with strong returns from the sale of future outputs. We are all praying for a bumper crop this year.
Retailers, on the other hand, do not see this market as an opportunity to widen margins. Instead, they are hoping for a greater volume of crop input orders from growers who want to invest to maximize their yields. But those hopes are being challenged by two unexpected obstacles: a tight supply line and lost sales because of global fertilizer suppliers.
CAAR believes that the supply shortfall will eventually be addressed as greater manufacturing capacity comes online. In the short term, growers may benefit from potential adjustments to the cash advance program or other credit initiatives that facilitate pre-purchasing of inputs from retailers on a contract basis. That will help to guarantee supply, lock in the best pricing, and avoid exposure to open market volatility.
If members of the committee are interested in tackling more immediate and tangible drivers of high input costs, CAAR urges you to consider helping retailers address obstacles that will necessitate incremental costs being passed on to growers. I'm referring to the prohibitive cost of pending retail site security and safety regulations. CAAR has testified in front of this committee before regarding this issue and has briefed many of you personally. We thank you for that opportunity and would like to further update you on why this issue now takes on even more urgency.
The shipment of 9,000 tonnes of ammonium nitrate to Churchill last October from Russia has exposed a potentially serious security vulnerability. The new NRCan restricted components regulation, derived from the industry-created ammonium nitrate code of practice, stipulates rigorous security and safety practices and is awaiting publication in the Canada Gazette Part II.
Retailers support these codes because they set out the type of prudent stewardship under which we have always operated. In fact, we have worked with industry to help write stewardship codes, including the code of practice for anhydrous ammonia, which will be enforceable in varying degrees between now and 2011. This code will be particularly challenging for the retail sector in terms of implementation costs.
Interestingly, the ammonium nitrate code and all future codes will not have jurisdiction over end-users. So in a period when we are seeing more and more on-farm bulk storage of fertilizer, including ammonium nitrate, important security regulations will not apply there. That is a problem, perhaps, for a different committee, but it does highlight an inequitable playing field for agricultural retailers who must comply with these codes.
Some CAAR members have reported that growers who have taken delivery of the Russian ammonium nitrate are asking us to store the product for them. As you know, ammonium nitrate is a product that western growers and retailers have not handled for some time, so storage provisions tend to be challenging because of the inherent risk and liability associated with the product. As such, retailers are understandably declining these storage requests. However, with some financial assistance from the Government of Canada, dealers would be able to upgrade their facilities to store these products securely.
CAAR's concern is not the merit of the codes or the competition from global suppliers, but the fact that regardless of where growers choose to buy, retailers will be required to perform extremely expensive site upgrades, which will only add additional cost to the input value chain and drive our customers further away from us and into the hands of foreign suppliers. We refer to this scenario as compulsory economic suicide.
A number of government departments have reported that they have consulted with the industry and concluded that these initiatives would be cost-neutral or nominal. I can tell you they did not consult with agri-retailers. As the sector that has to incur these costs, we have done our research into the expenses, and they are anything but nominal.
Many of you have been presented with estimates based on actual government-approved expenses under a comparable security contribution program, the marine security contribution program. These costs extend into the multiple tens of thousands of dollars per site, a far cry from the government-estimated $120,000 for the entire agricultural retail sector.
In summary, CAAR is not advocating that grower access to world fertilizer or chemical markets be restricted. We are prepared to compete as best we can and recognize that growers are simply seeking alternative market opportunities. Their message is clear: crop input prices are becoming unbearable, so the last thing we as their suppliers want to do is introduce further cost into the system, only to see the customers who have sustained our livelihoods scatter for cheaper products.
The bottom line is that retailers want to continue to be responsible stewards of the products that are essential for sustaining crop production agriculture in Canada, but if the rules of engagement force retailers to economically alienate their own customers, then the system will inevitably break down. CAAR is respectfully asking for the government's help to neutralize this obstacle, uphold the practice of responsible stewardship, retain more trade within Canada, and prevent additional upward pressure on crop input prices.