Agriculture Committee on March 11th, 2008

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

Thank you, Mr. Chairman.

And to our witnesses, thanks very much for coming today.

I don't usually sugar-coat things, and everybody's been skirting around the whole issue here. What's going on here, gentlemen--and nobody can deny it--is price gouging.

I'm not going to sit here and say that there isn't an increase in demand around the world. At the same time, I don't think any of you can expect me to believe that developing countries, which are usually poorer countries and quite often third world countries, can afford to pay the same prices as farmers are paying especially in North America and I presume Europe. It just doesn't hold water.

When prices are hot, companies or industries have a tendency to see the hot market, and up they go. There was a comment made by somebody here that when demand drops, the prices come down. I'm a farmer—I've been farming for over thirty years—and I can dang well tell you guys that doesn't happen. Or if and when it does happen in any way, it doesn't happen nearly as fast or dramatically on the down drop as it does when you're going up.

Some of the things here.... You seem to point out pre-purchasing as if it were the solve-all and end-all of this problem, and we all know that isn't true. Over the years when I purchased, sometimes it made sense to buy in the fall of the year; at other times it just plain didn't. At other times I didn't have the money to do it.

But that's one tool. It's only going to take care of a minor corner of this. Let's be realistic about the real problem and where these prices have gone.

There are some things that have bothered me that I'd like to hear some comments on.

There was a boatload from Russia that came into Churchill. I'm not sure of the timelines on it, but I presume it was some time last fall. It's hard for me to imagine how and why we would bring fertilizer in there, first of all, when we have such a supply in Saskatchewan—I know we have it in other places in Canada, but Saskatchewan is certainly the big one—and can do it with the kind of product we already have here, and further, do it cheaper.

Can anybody comment on that?

[Roger Larson]

Mr. Miller, I think we'll have to wait to find out whether or not it was in fact cheaper, when you consider all the circumstances, including the quality of the product, the time of year it came in, whether the farmers had to store it all winter, what shape the product was in when it came to spring and they went to use that product, and all of the other factors.

As to the drop in prices, between 1985 and 2000 the price of fertilizer dropped 25%.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

What years?

[Roger Larson]

Between 1985 and 2000. So when the markets are soft the price does go down.

What we've seen since 2000 is that 40% of the production capacity of the U.S. nitrogen fertilizer industry was permanently closed because of high natural gas costs and the fact that those plants were not able to compete globally. The price of fertilizer was relatively flat around the world. Those plants closed and that production was lost to us.

I do remember coming before the committee and members of Parliament to say that we were very concerned about the cost of natural gas, which is a primary feedstock raw material for nitrogen fertilizers, and about the ability of our industry to compete and succeed in the future, given the high natural gas costs in North America compared with the rest of the world.

So the U.S. plants close, demand starts to go up, and you have this very tight supply-demand situation. I understand that farmers are not happy with the fact that prices have probably doubled in the last couple of years. It is a significant price increase.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

They have more than doubled.

[Roger Larson]

It is a significant price increase. The price of oil is over $100 a barrel today, and it was less than $40 a few years ago. That's the reality.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

Mr. Larson, just because the time is running out.... I know all about the price of oil, and what have you, and I'm in no way saying that the fertilizer industry, or any industry, should absorb that. I'm simply saying, and I think we will find when the committee gets all the facts it needs, that there's a lot more to this price that's attributable to other things than just that. But I do fully recognize the price of that.

I believe Mr. Atamanenko touched on this when he listed some figures from the United States. I've heard many reports from some friends and relatives who are farming in western Canada about the product mined in Saskatchewan. That same product is trucked south of the border, and yet I'm hearing it's selling anywhere from $60 to $120 a tonne cheaper there than in Canada. I've heard this so often that I find it pretty hard to doubt it.

Can anybody speak to that?

[Greg Haney]

Mr. Miller, first of all, speaking as a retailer and putting on my retailer's hat, we load at the port of Montreal, where our product is normally stored. And I've been in a situation where my truck is behind a truck of another retailer, and sometimes that of a farmer, who is paying $120 a tonne less than I am, loading at the same supplier. Can you explain that?

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

Is my time up?

[The Chair, Conservative, James Bezan]

Your time is up.

I just have a quick question for Mr. Larson, because you mentioned natural gas prices and how they affect the nitrogen production, with 40% of the plants shutting down in the United States.

Natural gas prices over the last year or year and a half have been fairly flat, yet we saw nitrogen prices increase quite substantially over the last 12 months. What's going to happen now? In the last four weeks, natural gas prices on the futures market have escalated substantially. If I look at the data out of the U.S., it has moved somewhere from around $8 up to $10 in the last couple of days. So we're talking about an increase in price of over 25%.

Is that going to drive up anhydrous ammonia and nitrogen prices even further?

[Roger Larson]

That's really difficult to say. A lot of people speculate on the direct correlation: how much the price of nitrogen fertilizer, for example, can be explained by natural gas costs. I think Ag Canada came up with a correlation of 80%. Somebody else—I think it was the George Morris Centre—did a correlation on the price in southern Manitoba and said it was something like 27%.

I've seen different numbers. What the cost of natural gas will do—and it's about 80% to 90% of the cash costs of producing nitrogen fertilizer, by the way—is set the floor, and if that level of price is not achieved by the fertilizer manufacturer, it will cease production. It will shut down the plant because it can't afford to buy the gas to convert it.

By way of comparison, the global prices of natural gas would range anywhere from about $1 to $2 in the Middle East to $3 or $4 in, for example, Trinidad, to the North American price, which is similar to the European price for natural gas, $8 to $10. It's hard to say whether or not there's going to be any change.

[The Chair, Conservative, James Bezan]

Mr. Easter.

[Wayne Easter, Liberal, Malpeque, PE]

Thanks, Mr. Chair.

I have much the same question as you had on natural gas, and I was going to ask you, Roger, the various prices around the world. But what's the reason for natural gas being so much higher in North America and, to a great extent, Europe than it is elsewhere? Do you know?

[Roger Larson]

Certainly the fact that we don't have a significant import capacity for natural gas is one of the things. We need liquefied natural gas facilities. Alan Greenspan said it much better than I can. I don't know if I can find his quote in time, but basically what he said was that you need an effective liquefied natural gas import capacity into North America in order to provide price stability.

The other thing that I would say is driving it is that every time we shut down a coal electricity generating plant without providing natural gas producers with the ability to increase supply, it's a zero sum game. If we shut down coal plants and we don't build the Mackenzie Valley pipeline, then we're not going to have enough natural gas to feed our industries in North America in the future.

[Wayne Easter, Liberal, Malpeque, PE]

This is good to know. There are two LNG proposals on the east coast.

I want to come back to Greg's point from earlier about interest-free cash advances to the retailers from the farmers.

The problem we have here, Greg, is that interest-free cash advance programs for farmers' advance payments were originally established so that farmers wouldn't dump product on the market at harvest time. This has changed substantially, now that we have a spring cash advance as well.

The programs were designed for the farm community, but we seem to be consistently losing the benefits of those programs. We supported using the advance payment program to assist the hog and livestock industry. The problem is that it is borrowing against future income; that's all it really is.

Now we're finding, with the spring advance payment program, that there are requests for more money in that program so that farmers can pay you guys earlier and take advantage of early buy options. It's one of those situations wherein the benefits of programs designed to assist the farm community, who direly need it, are accruing elsewhere. When you guys don't have a farm community you don't have a business either. That's my point. I have no argument with you in terms of your having costs too.

Coming back to the point about China and India that Larry was on, number one....

I don't want to lose this point, but I think Roger mentioned going to the Competition Bureau, who said there's no need to investigate.

Roger, the Competition Bureau in this country isn't worth the paper it's written on when it comes to protecting farmers' interests; it just isn't. That's something we've made recommendations on before.

But concerning China and India, from your perspective as ag retailers—and as I said, you have to have the farm community to have a future too—we're up against countries whose labour and environmental standards are such that we really can't compete. What's your view on that? We have to have trade agreements that level this playing field. We're in a high cost environment in Canada on labour, our environmental regulations are higher, our food safety standards are higher, our chemical regulations are higher. We have to have trade agreements and we have to insert labour and environment into them or, quite honestly, we're not going to be in business.

What's your view on that?

[Clyde Graham]

I would like to react, since you pointed to it, to the point Mr. Miller made. He was questioning the ability of farmers in some of these developing countries to purchase fertilizer. They have the means to do it ,and increasingly they are very aggressive in the marketplace.

I was at an international conference last week where there was quite a bit of discussion about the way agriculture is working in some of these developing countries. In many of these places, farmers have holdings of less than one acre. They're buying their fertilizer by the bag, in quantities that a homeowner would buy to put on their lawn. They're putting three crops on that holding of less than an acre. For them, the cost of the fertilizer is not really that significant, but they're paying a lot per tonne for the product. This is the new reality.

In terms of international trade, Canadian farmers are very competitive internationally. I think there will be new opportunities to come out of the development of more prosperous agriculture in the third world. There will be opportunities to produce genetic material, breeding stock, seed, and value-added crops. We have to look at those opportunities as we move into the future. Continuing to do the same thing as we always do isn't necessarily a good idea.

[The Chair, Conservative, James Bezan]

Thank you.

Mr. Lauzon.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Thank you, Mr. Chairman. I'd like to ask Mr. Haney a question.

You said that, if you bought a product three or four months ahead of time, you could save up to 27% on costs. Is that correct?

[Greg Haney]

My reference period, Mr. Lauzon, was between, let's say, November 2006 and late April or early May 2007.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

It was in fact 27%?

[Greg Haney]

That's it.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Is that true for all products?

[Greg Haney]

At that time, that was the cost of nitrogen.

[Guy Lauzon, Conservative, Stormont—Dundas—South Glengarry, ON]

Merci.

Mr. MacKay, I would like to get back to this business about the security and safety.

First of all, you said there are approximately 800 ag retailers across Canada.

[David MacKay]

There are actually 1,500 ag retailers, but about half of them would be in fertilizer to any major degree.