Agriculture Committee on Oct. 29th, 2009

[The Chair, Conservative, Larry Miller]

I'm going to call the meeting to order. We still have some members on their way, but our meeting is supposed to start at 3:15. I want to remind everybody that the meeting is scheduled to adjourn at 5:15, as we are starting early. We're going move on, and we'll save some time for committee business at the end.

We have today witnesses here from the Canadian Association of Agri-Retailers and the Canadian Sheep Federation. We're going to start with Mr. David MacKay and Mr. Ken Clancy. Thank you to all three of you for being here.

[David MacKay, Executive Director, Canadian Association of Agri-Retailers]

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.

Thank you.

[The Chair, Conservative, Larry Miller]

Thank you very much, Mr. MacKay.

Now from the Canadian Sheep Federation, we have Ms. MacTavish for 10 minutes or less, please.

[Jennifer MacTavish, Executive Director, Canadian Sheep Federation]

Thank you, Mr. Chairman.

Thank you, members of the committee, for the opportunity to be here today.

The Canadian Sheep Federation is a national non-profit organization that represents over 11,000 sheep producers. It has eight provincial members and three associate members: the Canadian Cooperative Wool Growers, the Canadian Sheep Breeders' Association, and the Canadian National Goat Federation.

The Canadian Sheep Federation did appear before the subcommittee on food safety and briefly brought up the issue of competitiveness then, particularly as it related to the need for Canadian producers to be price competitive. During that presentation it was noted that programs such as the food safe farm practices program and the Canadian sheep identification program have the potential to increase production costs for lamb producers, as they have limited options in terms of cost recovery. Additionally, the impetus for the development and implementation of these programs is often cited as public demand or public good. The ongoing costs of these programs can be quite burdensome and can represent a significant barrier, not only to on-farm profits, but also to the competitiveness of the small ruminant industry.

The small ruminant industry is recommending that federal and provincial governments commit to providing long-term funding for both traceability and on-farm food safety programming. The issue of competitiveness is quite complex and extends beyond both being price competitive and the cost of implementing various programs. The purpose today is to provide some insight into some of the issues that are impacting the Canadian sheep industry's ability to not only be competitive but also to meet its potential.

Since 2004 the sheep industry has seen its breeding flock shrink by 100,000 ewes, which has resulted in an 8% drop in the number of lambs processed in Canada. This is occurring at the same time when demand for lamb has increased by 10%. In fact, lamb is one of the only protein groups that is experiencing a consistent increase in demand. The Canadian sheep industry could double its production and still not meet the current demand. The question is this. Why are Canadian shepherds not increasing their productivity? The reality is that encouraging producers to increase their production becomes an uphill battle when they are faced with issues such as predation, an inability to access medication and vaccines, a border that remains closed, and rising input costs.

Predation is a major deterrent to the growth of the Canadian sheep industry and is a contributing factor to the ongoing attrition of Canadian sheep farmers. Predators are responsible for the devastating loss of valuable livestock and farm income. For example, one Saskatchewan farmer has lost 150 lambs this year alone to predators, worth a total of $30,000. The cost of predation is high for provincial governments as well. In 2007 the Alberta government paid out close to $1 million on predation claims, while the Saskatchewan government paid out over $600,000. In 2008 the Ontario government paid out $1.33 million to producers of all livestock due to predation.

The industry is holding a meeting on predation on November 9 in Toronto, and the goal of the meeting is to start a discussion with provincial governments on the need to address the issue of predation, what tools producers are currently using, and how we can expand the number of tools available. We are, however, experiencing difficulty in getting the people who need to participate to be there. Considering that predation falls under provincial jurisdiction, it's important that provincial representatives, not only from the ministries of agriculture but also from natural resources and the environment, are present. However, many provincial governments have suspended funding for travel, and Agriculture and Agri-Food Canada cannot cover the travel costs for provincial employees. The result is that the outcome of the meeting may be compromised because not all parties are present. The issue of predation, especially in terms of mitigation, needs to be addressed at both national and provincial levels and across ministries. Therefore, it is recommended that government policies be flexible enough to mobilize the people and resources needed to address an issue that is impacting producers, particularly an issue that is directly linked to producers leaving an industry.

The lack of availability of pharmaceutical drugs and vaccine is disadvantaging the small ruminant industry compared to other livestock commodities in Canada and compared to other major lamb exporting countries such as New Zealand. The lack of licensed pharmaceuticals and vaccines for the treatment and prevention of disease in small ruminants is of grave concern to the industry, not only in terms of its ability to increase production and to remain competitive, but also to meet the requirements of the food safe farm practices program. For example, one of the core requirements of the program is that all drugs used on sheep must have a drug identification number, meaning that the drug has been approved for use in Canada by the Canadian veterinary directorate. Frustratingly, though, drugs that are commonly used in other sheep-rearing countries are not available in Canada, even through the proviso “own use importation”. An example of this is moxidectin, which is a sheep drench used to control internal parasites. It is available around the world but not in Canada.

The VDD has instituted a minor use, minor species approval track to help this problem, but it's currently in its infancy and no drugs have yet to come through the program. A similar program to have vaccines approved through the Canadian Food Inspection Agency is also required.

Earlier, it was mentioned that the Canadian breeding flock has shrunk by 100,000 ewes since 2004. It is worth mentioning that the industry was in the midst of a real growth phase until the border closed, and since then the industry has been contracting.

Prior to 2003, trade in market lambs to the U.S. represented as much as 20% of our annual production. The border closure also meant the loss of very significant markets for breeding stock into the U.S. and Mexico. Prior to the border closure, importers from the aforementioned countries were intensely interested in Canadian genetics. In 2002, the small ruminants exported from Canada totalled $12.5 million, a value that was expected to increase 71% in 2003.

Over the past six years the Canadian small ruminant industry has been working diligently to regain access to the U.S. and Mexican markets. Together with the CFIA, the industry has implemented the voluntary flock scrapie certification program and the national scrapie genotyping program. The implementation of scrapie eradication programs is key to helping ensure that the small ruminant industry is able to re-access its markets.

While the CFIA has announced its commitment to a national active scrapie surveillance program, the industry has yet to be able to access long-term funding for surveillance as well as funding to determine the prevalence of scrapie in Canada. Determining its prevalence is extremely important so that the industry is able to set a target eradication date.

The U.S. has invested $120 million in scrapie eradication since 2001 and has declared that their country will be scrapie free by 2017. Canada must take similar strides. If we do not, we risk not being able to re-access the U.S. and Mexican markets. Additionally, we also risk losing markets that we have recently gained, for example Russia, because the U.S. will be a major threat on the international scene due to their scrapie-free status.

It is critical that policy on importation and exportation be based on science, and that when a border remains closed for six years, the Canadian government actively assist and lobby to open it again. We are asking that the same effort that has been given to the other livestock commodity groups be put in to helping the small ruminant industries regain the U.S. market.

Canadian shepherds are also facing increasing costs of production. For example, it has been reported that this year producers are dealing with feed costs that are approximately 25% higher than they were last year. Couple this with high land costs, low value of and returns on food production due to long-term cheap food policies, and the loss of access to labour and support resources and the potential result is the loss of critical mass in the national flock due to low margins. This is seriously jeopardizing production and industry infrastructure.

There is a need for a strategy designed specifically to address these issues so that the sheep industry can both keep existing producers and attract new ones.

There is real potential for growth in the Canadian sheep industry. This is an industry that can expand its production without negatively impacting any other livestock commodity. To do this, though, the small ruminant industry needs the government to assist in dealing with key issues such as traceability, food safety, wildlife damage, animal health, market access, and long-term sustainability of producers involved in animal-based agriculture.

Thank you.

[The Chair, Conservative, Larry Miller]

Thank you very much, Ms. MacTavish.

We'll now move to Mr. Eyking for seven minutes, please.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chairman.

I thank the guests for coming. I have two questions. One will be to Mr. MacKay and then I'll have my second question to Ms. MacTavish.

Mr. MacKay, I can sense your frustration with the government's lack of cooperation. You've been up here three years now and that's how long they've been up here. You articulate it very clearly. I guess my question is very simple. How has, and how will, their inaction translate to extra costs or extra services down on the farm?

[David MacKay]

Thanks for the question. Clearly what agri-retailers have to incur in terms of costs, just from a standpoint of recovery, always gets translated to their customers. There's a minimal margin that every agri-retailer would like to make. Ken can probably testify to that. He's an agri-retailer himself, and of course whenever he bears a cost of marketing a product, he must transfer that cost to growers. So whether it's regulatory burden or acquisition prices, markups are fairly standard and fairly thin, probably in the 8% to 10% range on average. So they're not fat, but we do have to pass our costs on. Inevitably, if we incur them, we're going to have to price accordingly, and always at the end of any market the user is the one who bears the brunt of those costs.

[Ken Clancy, Chairman, Canadian Association of Agri-Retailers]

As chairman of CAAR, I own and operate an agri-retail facility in British Columbia. One of the concerns that we have, as retailers, is that we see this increasing regulatory burden coming at us. Given the lean margins and the extremely difficult year we had, these kinds of security upgrades are being put off. Our concern is that something could happen in the future to force these changes upon agri-retailers. If that happens, many people will not be able to bear those costs.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

So you're probably going to see increased costs, plus less service, because there'll be fewer retailers owing to the extra costs.

[Ken Clancy]

That's our concern.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

And they would have more competition now. Other countries that are more retailer-friendly are going to have a cheaper product for their farmers.

[David MacKay]

That's right. The U.S. has provided an agri-business tax security credit. They have a marked advantage because their security costs have been subsidized by their government. They don't have to pass those costs on. This is a global market, and we have to compete with them as much as we do with our own neighbours.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

And you have to take the brunt of the costs.

[David MacKay]

That's correct. We're not competitive any more because we have to price in all that overhead.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Ms. MacTavish, I used to be a sheep farmer, and I know what it's like having predators and how much havoc they can wreak. Even though you might get a pittance with the compensation, that doesn't help your customers and you never get the full thing. Plus there's the stress of seeing your animals get killed.

I've been in New Zealand, and I've seen the amount of lamb they produce. It's great to see that the demand for lamb has gone up 10%, but our fear is that the New Zealanders are going to gobble up that demand.

My question has to do with the pharmaceuticals and vaccines that are not available here but are available in New Zealand. You mentioned that the Canadian Food Inspection Agency is responsible for approving these products, which are under the watch of the Minister of Agriculture. What are they saying about it? They're just not going to let you use them?

[Jennifer MacTavish]

There are different ways we can use them. If we're going to be in line with our food safety program, it's better for us to have them labelled for use in sheep. There was a backlog for years at the VDD, and it took three or four years to get medications in. They've cleared that up and they've assured us that they've put together a way to bring in products—minor use, minor species products. We're trying to get them to look at research that's done in other countries and validate it so that drug companies don't have to pay to do research on Canadian soil.

As for the vaccine issue, we need a similar route for vaccines for the small ruminants. We need products that are labelled for sheep. The problem right now is that they're either not available in Canada or they're not labelled for sheep. This means the producers have to get vet scrips, which increases their costs of compliance.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Some of the vaccines and whatnot would be approved safe in Europe, Argentina, Australia, or New Zealand.

[Jennifer MacTavish]

Yes.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Yet our government will decide to go through this whole testing period, which takes years.

[Jennifer MacTavish]

And it costs a lot of money. We're thinking that if New Zealand and Australia, who are supplying 50% of our market, deem it safe—

[Mark Eyking, Liberal, Sydney—Victoria, NS]

And we're eating their lamb.

[Jennifer MacTavish]

—then why can't we use their product and their science?

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Yes, exactly.

How are the retailers treating your product, with regard to shelf space, labelling, and promotion? How are you dealing with the demand? Are you being more consistent with lamb the year around? Some of the big New Zealand companies that ship in here are almost monopolies.

[Jennifer MacTavish]

It's interesting you should say that. You mentioned earlier about increased demand and New Zealand coming and gobbling it up. There's a world-wide shortage of lamb, and New Zealand and Australia are actually having their flocks shrink. So the question we're asking is, if they're not going to be able to fill the demand for us, why can't we fill it?

We had a couple of meetings with retailers and processing plants last year. They said they would do whatever they could to get local product, local lamb, in the market for consumers, but that we needed to increase our supply. So in the coming years, that's what we're going to focus on, which is why we're trying to address predation and access to medication. This way we can help producers minimize some of the barriers to increased production.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

On the predators, I guess you have to have cooperation federally and provincially, because--