It's a pleasure to be here, Mr. Chair and committee.
Good afternoon. Thank you for the opportunity to speak. CAAR has appeared in front of this committee a number of times, and we submitted a written statement in April, which I trust you also have a copy of. We were in absentia then, and we apologize for our absence. But you can refer to that as well.
As it relates to competitiveness in agriculture, we can update you on some of the more recent developments in the crop input sector that bear directly on agri-retailers and farmers in Canada.
Since we last spoke, fertilizer dealers have suffered a number of setbacks and challenges. The outcomes and the consequences vary, but in all cases they have been detrimental to agri-retail profitability, which in turn has had an adverse effect on growers by denying access to product and reducing competition. The four major developments that have confronted agri-retailers and have affected competitiveness in the last year are as follows, and I'll outline these four in detail.
Number one is that many fertilizer dealers invested in longer-term positions on fertilizers in the summer of 2008 in an attempt to hedge against skyrocketing market prices and to avoid spot shortages. But these dealers were literally left holding the bag when the commodity market crashed in September 2008, leaving them with large inventories of fertilizer that were worth severalfold less than they had purchased them for. This so-called toxic inventory could only be marketed at a substantial loss, and as a result it forced dealers to incur millions of dollars in fertilizer writedowns. Dealers were simply attempting to secure adequate inventory for their customers and buffer them from open market prices when the floor caved in.
We have never witnessed this type of volatility before. When the dust settled, several dealers found that they had no choice but to turn over their operations to their suppliers because they could not cover their debt and because suppliers were rigidly enforcing what we call “contract integrity”. Those dealers who survived the writedowns are still enduring financial strain because the market has never completely recovered. Many would tell you that the fertilizer sales are still well below historic norms, making it even more difficult to cover their original losses.
Operational viability has become a serious concern, especially for smaller, independently owned retailers with limited access to capital. It is no longer a question of profitability; it is a question of survival.
Number two, while still reeling from these massively devalued inventory and product writedowns, dealers are now confronting prohibitive regulatory compliance costs for fertilizers and chemicals. Whether they are developed as an industry code or as a government regulation, these new standards translate to real operating costs, and agri-retailers are continually being stuck with the bill. In and of itself, no one regulation is the culprit. However, it is the cumulative cost of several existing and new requirements that is threatening the ability of many operations to run profitably. CSA B620, the ammonia code of practice, provincial boiler branch regulations, the Agrichemical Warehousing Standards Association, emergency response assistance programs, restricted components regulations, and now the new transport of dangerous goods security regulations have culminated in an insurmountable and near-futile hurdle for agri-retailers. This cumulative regulatory burden is simply too much to bear for most agri-retailers. The input market will not support price increases at a time when customers are already deferring their purchases and margins are thinned by the averaging in of higher-priced inventory.
CAAR has testified in front of this committee before about this issue and warned that if a site security and safety contribution program was not established, then dealers would be forced to drop products and even exit the market entirely. That is all coming to fruition now. Many dealers have analyzed their costs to maintain products like anhydrous ammonia and have concluded that it simply is not profitable to continue offering that product. Several dealers, including a major network in Alberta, have recently decided to stop selling anhydrous ammonia. Consequences to the growers are obvious: reduced competition, reduced access to product, increased transportation cost, and of course higher prices down the road.
This regulatory burden is now going to be further compounded by new security regulations being developed under the new and revised Transport of Dangerous Goods Act. Unfortunately, regulators and departments perceive each isolated regulation as minimally prescriptive, but from an agri-retail perspective, when they're considered collectively, because they have to be, then the cumulative burden becomes prohibitive. In other words, a death by a thousand cuts is just as lethal.
CAAR has previously proposed an integrated crop input security protocol that covers all input in a single initiative, so we do not have to address security with an inefficient product-by-product piecemeal approach. But that proposal continues to fall on deaf ears, despite supporting recommendations by both this House committee as well as the Senate agricultural committee.
Canadian agri-retailers and growers now find themselves at a competitive disadvantage versus their American counterparts, as a result of passage of the massive U.S. Farm Bill that contains an agri-business security tax credit that essentially splits the cost of site security between government and industry. The U.S. Congress has also passed a grant program for acquisition of specialty security equipment. This committee has already recognized the disadvantage this disparity poses for Canadian agriculture and reflected it in its recommendation previously. Still, nothing has been done about it.
I recently attended a chemical sector security summit in Baltimore, Maryland, hosted by the Department of Homeland Security, and I was astounded by the level of cooperation between government and industry on chemical security. Not only is the U.S. government sharing the cost, but industry task forces have been struck to advise and consult with the Department of Homeland Security on pragmatic solutions that do not threaten operational viability of the private sector.
Ironically, here in Canada, CAAR cannot even get the Department of Public Safety to engage us in a discussion. The Minister of Public Safety has instructed us to take this matter up with the Minister of Agriculture, who has then passed the file onto to Agriculture Canada.
Despite several meetings with AAFC officials, the file is essentially being ignored. In fact, a recent access to information request by CAAR reveals that AAFC is actually internally dodging and deflecting the issue at every opportunity. AAFC staff insisted that we should produce evidence of industry support for our proposal, so we obtained consensus from the Canadian fertilizer industry on the security costs and even received a letter of endorsement, but then the department insisted that grower support was required. So we brought the Grain Growers of Canada representatives with us, who sat shoulder to shoulder with us in meetings. We also presented letters of support from the CFA. That wasn't good enough. Now AAFC wants more evidence of consequences to industry, so we've copied them on the takeovers and foreclosures that are occurring, but still that's not enough. This has clearly become a game of fetch.
CAAR would like to know when the government intends to take the matter of input security seriously and engage industry stakeholders in good faith negotiations toward a shared solution. When will thousands of Canadian agri-retailers receive an answer to their question? Will government help level the competitive playing field in a critical sector by cost sharing with us on an initiative that benefits all Canadians? Our $10-billion-a-year sector has the right to ask, why is this issue being dismissed?
It appears that the recent headlines about the Toronto 18 have done nothing to remind us of the threat posed by terrorist cells that operate all around us, and that crop inputs are a preferred weapon for those who wish to harm Canadian citizens and infrastructure.
The toxic inventory issue, prohibitive regulatory costs, and competitive international disadvantages have all taken a substantial toll on the smaller, independently owned dealers in Canada, because they have limited access to capital and credit. As such, they have become so-called targets of opportunity to be acquired by larger agri-businesses, including fertilizer manufacturers. Recently, Viterra and Agrium have been aggressively acquiring independent dealers in Alberta. Both are committed to expanding their crop input divisions through takeover strategies. Agrium has a major retail presence in the U.S. and is clearly seeking a similar position in Canada. What can an independent retailer do when their supplier becomes their biggest competitor?
Each of you has been provided with a copy of a recent front-page article from The Western Producer that speaks to the concern about accelerated acquisitions of independent dealers in western Canada. CAAR has not taken a policy position on industry consolidation per se; in fact, it is a fact of life, but the net effect is undeniably reduced competition. Acquisitions are reducing the footprint of independent retailers in Canada, which will result in regional oligopolies for the major agri-businesses.
The current price war scenario that growers enjoy today will only be temporary and will eventually be replaced by limited options that compel them to contractually engage single-source suppliers for bundled services. Gone are the days of the handshake deal with their local dealer. Fewer dealers mean fewer choices. This can only lead to higher prices for growers, as they become part of a more captive market. It is unlikely that government can or even should intervene directly in these mergers and acquisitions, but it can help mitigate the conditions that drive agri-retailers to walk away in the first place.
In summary, the conditions and developments I have spoken of have come together in a perfect storm of adverse circumstances for agri-retailers. Some suggest it's a natural, almost Darwinian process of market rationalization, but the consequences are undeniably real and are irreparably changing the practice of agriculture and life in rural communities. The elimination of the independent retailer from the agricultural landscape is merely a symptom of a greater problem that has been ignored for years. Even in a healthy market, agri-retailers should not have to incur the entire brunt of regulatory requirements that have nothing to do with crop production, let alone at a time when they are incurring record losses.
The agri-retailer sector urgently needs the government's help to restore balance and competition in the market. CAAR has been on the Hill for no less than three years, proposing exactly the same solution and warning of the consequences that are now unfolding in front of us. But even after hundreds of meetings, letters, and appearances, no appreciable progress has been made. What is it going to take for government to listen and take action?
Agri-retailers are essential partners with growers in crop production agriculture in Canada, but they are under threat. A government cost-sharing program for crop input security would go a long way to revitalizing the sector and ensuring that healthy competition continues to serve Canadian growers well. We implore you to do everything in your power to make that happen.