Agriculture Committee on May 7th, 2009

[The Vice-Chair, Bloc, André Bellavance]

Thank you.

Mr. Hoback, you have five minutes.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, gentlemen, for coming out again.

Actually, I'm going to continue along the same line as Wayne, because Wayne started some things here that I think really need some answers.

Being a farmer coming from Saskatchewan, I have a love-hate relationship with potash. As a taxpayer, I love the fact that 20% of our revenue is coming from potash. It has paid off a big chunk of our deficit this last year. And I have to give the Saskatchewan Party compliments for creating an environment for the expansion of these new mines. I know the previous government would never allow that environment to happen, and it shows you what happens when you let free enterprise reign.

One concern I really have--and it showed up last spring, and it's going to show up again this spring--is logistics. It's getting the product to the farmer. We had scenarios last spring where farmers were waiting for anhydrous, they were waiting for fertilizer, sulphur, and it seemed like the industry did not anticipate that. That surprised me, because they knew that the previous year's fall usage was down. So they know that there's going to be x amount of product going on, yet you were unable to supply the product in a timely manner.

Can you guarantee to me this year that you're actually going to make sure that all of this fertilizer is delivered and that farmers are going to get the product when they need it?

[Clyde Graham]

I want to go back and relate to the pipeline statement that Mr. Miller made and Wayne alluded to about production shutdowns.

Part of the reason that companies were forced to shut down, not only in Canada but in many parts of the world, is that farmers were not coming forward with their orders. There is a limited amount--

[Randy Hoback, Conservative, Prince Albert, SK]

Is it fair to say, then, that the mechanism you use for pricing fertilizer is not reactive or quick enough to respond to the demand in the marketplace?

Last September and October we saw that guys were not putting it on. You knew that, but you kept the price up. You kept it up until December 31 because you knew guys had to do a year-end buy. You actually went to your fertilizer agents and said, “You'd better book your stocks now or you won't have them this spring.” You guys pushed it right to the chain. You knew what was going on in Europe and everywhere else in the world. You also know now, this spring, that all of a sudden we're going to have a huge logistics battle. Who's to blame for that? It's not the farmer.

[Clyde Graham]

One thing you have to remember is that there is no “you guys”. The fertilizer industry, in terms of our member companies, is made up of 43 companies that operate in Canada, plus there are many other smaller companies that are important players in the market as well. Everybody in the market, because it is a free market, operates and makes their own decisions.

We knew last fall that there was a significant change in the marketplace. Certainly some people in the retail industry were caught on the wrong side of the market with higher-priced inventories. That leaves retail companies in a difficult position. They either have to hold on to the price, or they have to mark it down. Over the last year, companies have been making decisions related to that.

Farmers have been making difficult decisions as well. Farmers have been saying they may want to hold on and see if the price comes down. But if farmers delay booking their orders, the risk is that there's a chance they may not have supply. Those are the kinds of tough decisions that occur in a marketplace, when you have a shock that occurs to it like it did last summer.

[Randy Hoback, Conservative, Prince Albert, SK]

Earlier you referred to the market meltdown and the issues around the market meltdown. The market meltdown started in September or October of last year. In November we were in the heart of it. If we're going to have a market meltdown, your prices should have started melting down then, not in January-February.

Another reason I say I have this love-hate relationship with potash.... I think potash right now is about $950 a tonne. We're shutting down mines. I've talked to a few agents--who asked that I not pass their name forward, so I won't--who are very concerned about whether they're actually going to get physical supplies, yet you're saying there's a surplus of potash. Well, not in Canada then, if they're concerned that they're not going to get supplies.

Another issue now is that if we're going to see barley go into the ground without potash, it means we'll probably have a reduction in yield, more disease, and other pressures. Mr. Whalen might be correct; you're generating a self-fulfilling prophecy of reduction in food.

[Clyde Graham]

I would go back to the statement put forward by the Canola Council. The Canola Council is one of the most science-based organizations out there, and canola farmers are part of the Canola Council. They've looked at the fertilizer prices as well, and they're saying that at today's prices for canola it makes sense to fertilize to the recommended rates in terms of their net profit. I think that all farmers have to make tough decisions this year, as do retailers.

[The Vice-Chair, Bloc, André Bellavance]

Your time is up, Mr. Hoback.

I had just sat down in the chair's seat when Mr. Lemieux made a point of order. I was in the process of adjusting my earset and, unfortunately, I did not hear the comments made by Mr. Easter. You were under the impression that I did not say anything, and that was the case. I would like to tell you that here, in committee, the rules are less strict than they are at the House of Commons.

However, I would like to point out that in the vast majority of cases, we have always been respectful of one another and I would like this to continue. So I would like us to agree that our comments will be as respectful as possible.

Ms. Bonsant.

[France Bonsant, Bloc, Compton—Stanstead, QC]

Thank you, Mr. Chairman.

Earlier, if I understood correctly, you said that your companies reduced greenhouse gas emissions as a result of investments they made in their industries. Is that accurate?

[A voice]

Yes.

[France Bonsant, Bloc, Compton—Stanstead, QC]

If the government—and I'm going to be polite—showed some backbone and implemented the carbon market, would that enable you to be more competitive with respect to other countries? Indeed, according to the Kyoto Agreement, you could get credits for reducing your greenhouse gas emissions.

[Clyde Graham]

I think one of the issues you're talking about is early action. That's an issue that was addressed in “Turning the Corner” and will probably have to be addressed in a cap and trade system. At this point in the regulatory regimes we have seen, we would not get adequate compensation for the early action our industry has taken. In any of these regimes, I think you tend to look for a starting point and then you reduce from that. A lot of our reductions in emissions occurred in the 1990s, I guess, and that was through engineering.

What happened, of course, is that we were dealing with high natural gas prices, and of course, any plant manager says that if they're purchasing natural gas at a very high price, they want to be as efficient as they can. So you take down what you call the low-hanging fruit; you do the easy things that make you more efficient. But now we're at the point where we've done all of that stuff and anything further is either extremely expensive or just isn't available.

[France Bonsant, Bloc, Compton—Stanstead, QC]

I understand what you are saying with respect to the carbon market, because the Bloc Québécois has been fighting to have 1990 be the reference year. Quebec has done a lot of work on this as well. Despite this, the federal government has decided that the reference year will be 2006. As a result, we have lost 16 years.

I would like to ask you something else. You stated that the government is currently studying alternate solutions, such as a cap and trade system, in order to harmonize its approach with that of the United States. You also added that the fertilizer industry sensed that the American cap and trade proposals would hurt farmers because of the tremendous price volatility.

I don't know what you mean exactly. Could you please provide further explanation?

[Clyde Graham]

I'm not as familiar with the U.S. system as ours, but one of the concerns in the United States is that their system as its being developed—and it's a very fluid situation down there, with the Congress and what's being proposed—would increase the price of fuels such as natural gas, which would flow to energy intensive industries. That's one of the issues.

As well, there's the same issue that there are very limited opportunities for further efficiencies in the fertilizer industry, because our chemistry is very simple and the engineering is well developed. There are not a lot of magic bullets out there for our industry.

[France Bonsant, Bloc, Compton—Stanstead, QC]

Would you like to add anything? I have another question.

You mentioned the train. I know that the railways have been neglected somewhat, and I am well aware of the fact that railways were the cornerstone for Canada's development.

Is this a means of transport that could help you broaden your borders for delivering goods, or is this just another way of saving on transportation costs?

[Roger Larson]

We are probably the third largest user of Canada's railways in terms of the tonnage we ship and the dollars we pay to the railways. So we're a huge customer. You have grain, coal, fertilizer, and forest products; those would be the four big users of the railways.

Our companies have developed close partnerships with the railways as part of their business, because in the fertilizer industry, you have to have that kind of partner relationship to keep your costs down and to deliver the product to the farmers.

And there are innovative things being done. For example, if you look at Canpotex, they've invested in a special railcar that is sized just to carry potash. It allows, I think, a 160-car unit train to expand to 210 cars. That's done to reduce the cost of transportation to get the product to Vancouver.

So our member companies are doing that. And yes, railway is the most important mode of transportation for us.

[France Bonsant, Bloc, Compton—Stanstead, QC]

All right.

[The Vice-Chair, Bloc, André Bellavance]

Ms. Bonsant, your time is up. Mr. Storseth, for five minutes.

Mr. Storseth, if you want to let your colleague have your five minutes, you are entitled to do so.

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

Thank you, gentlemen, for coming today. I know you sometimes have a difficult task when you come to this committee.

I would first like to set the record straight about some of Mr. Easter's comments on the U.S. Farm Bill. It was actually a Liberal government that signed the WTO agreement that allowed massive U.S. subsidies in their farm bills--as well as European subsidies--while at the same time selling out our farmers by not allowing us to do the same thing.

But there really must be a problem here when I actually agree with Mr. Easter on a topic. There has to be something going on with you guys. I say “you guys” because when the markets are up farmers lose out, and when the markets are down farmers lose out. You came here last year and testified, and every time it was about increased prices--this is why it has always been driven this way, and farmers know that; they put more on when they're making more money.

Today you're talking about current canola prices and saying they should be putting more product on, but the fact is that farm income is simply not a free market justification. I cannot stress enough how tired am of hearing that as a justification for why prices rise and stay that way. Then you start decreasing the amount of commodity your organizations are putting out.

My farmers in particular have been hit hard by this. Some ships have come over, and Mr. Easter talked about that. A lot of my producers in the Westlock, Bon Accord, and Gibbons areas don't want to go to Russia; they don't want to go overseas. They want to deal with their local guy.

You came to us last year and recommended we give farmers access to credit year round so they can buy in the low points. But there were no low points last year. Some people here have said they've been kept artificially high. Whatever you want to say, the fact is they were kept ridiculously high throughout the entire buying season and only got higher when farmers had no choice but to buy. So access to credit really was not a determining factor in my area, and I can speak only for my area.

My first question is, when are my farmers going to see a reduction in their rates due to the lower natural gas prices we've been experiencing and that you talked about last year?

[Roger Larson]

I agree that farm income is not a free market explanation. When you look at it on a global basis, it is an indication of why farmers around the world would increase their demand for fertilizer, creating competition for the available supplies. That's what, in equilibrium, delivers the prices.

To your question on natural gas, when the price of natural gas in North America has gone down, it has lowered the cost of production in manufacturing in North America. The cost of natural gas in North America is still dramatically higher than in other parts of the world, such as the Middle East. So you have to keep things in perspective. But if you were to look at the quarterly results published by publicly traded companies, such as Agrium and CF Industries, and the prices at which they are selling their products, you would find that in the last five months their prices have come down. That is a big part of the reason why, two days ago, Agrium announced a $60 million loss in their first quarter.

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

You talked about an increased demand for fertilizer and then said you have to shut down some of these things because of the economic meltdown. There really seem to be some contradictory statements.

I don't want to put words in your mouth, but at the end of the day, I do know one thing for sure. I do know that you're starting to say that our plants are better environmentally, so we need to make sure that.... You're setting it up so that we look after our industry here, and from what I'm hearing, we need to put some tariffs on anybody who may want to import into this country, because you know, they're not competitive environmentally and their natural gas prices are so much lower. But at the end of the day, until you give our farmers a break, I don't know why we should use their taxpayers' dollars to give your industry a break.

[Roger Larson]

We're not asking for tariffs on imported fertilizer. Half our member companies are importers of fertilizer, and they'd probably be very supportive of that point of view. We have warned that if the U.S. cap and trade system comes in and imposes border adjustments, it could have a dramatic effect on the 60% of the fertilizer that's produced in Alberta and exported to the United States.

[The Vice-Chair, Bloc, André Bellavance]

I would like to follow up on a comment made by Mr. Storseth about the price of natural gas. The price has gone down quite considerably, but that is not the case for fertilizer. You can understand that if the price of fertilizer remains high compared to the price of natural gas, this may obviously result in lower demand, and producers may also decide to grow a crop requiring less fertilizer. I know that in Quebec, for example, the Federation of Quebec Producers of Cash Crops has noted that many producers have decided to grow soy, which requires less nitrogen.

I would like you to provide me with a brief explanation of why this is happening. In all economic sectors, when we see a drop in inputs, we would, at the very least, expect there also to be a drop in the product required for these inputs. That is the case with natural gas. So I'm asking myself a lot of questions.

[Roger Larson]

Coop fédérée would likely sit down with you and say that they bought their fertilizers for Quebec last year in the fall, and that they paid a price that was in effect before the global economy collapsed. They have the cost of their inventory, and they would say that when they buy and the price goes up, they supply their farmers according to the lower cost of their inventory. This year they got caught with very high-cost inventory, and they would be looking at a dramatic writedown in their costs.

This is a matter of debate. Some farmers are looking at bringing in containers and bypassing the retail system. The retail system, though, operates with a view to long-term service to their farmers. They have made investments in the ports. They've made investments in retail facilities. They've made investments in providing expertise to their agricultural producers. They buy their product throughout the year. This year they would probably say they got nailed by the global economic chaos.

The marketplace will need to sort it out. Difficult decisions will need to be made by both buyers and sellers.

[The Vice-Chair, Bloc, André Bellavance]

Mr. Murphy, you have five minutes.