Thank you very much for the invitation to the committee, and to the members who invited me.
I think one of the reasons we're here is the strength of Canada's agriculture and food sector. Canada has a massive endowment of agricultural assets. We have more arable land per capita than any advanced economy in the world except Australia. That makes the effective marketing of our agricultural goods and trade relations with our foreign buyers very important.
The first part of marketing is the assessment of a market to see if you can produce something you know consumers want at a price that makes you some money. We know the world wants our commodities. We're at historically low stocks in both grains and oilseeds, and prices have risen to reflect that situation.
The marketing challenges for our commodities focus on meeting the needs of our buyers with efficient chains of transportation, storage, and quality assurance at prevailing world prices. The role of the government includes the policing of private firms in the supply chain, and to some extent supporting the primary producer with effective risk, research, extension, and promotion programs.
A significant portion of Canada's agriculture and food GDP is generated after the farm gate. The marketing needs of these industries are different than the commodity-based handling and transportation concerns. As food gets closer to the consumer, we need to provide assurance of food safety and quality. We're also developing new products that the consumer has not heard of before, so we need market assessment of those new products.
I think the investments that the Growing Forward marketing programs have made are well spent. There has been a review of beef marketing investments from the beef check-off by John Cranfield from Guelph, who said that the benefit-to-cost ratio of marketing investments was 7.6:1, which is pretty good, but the returns for the research category of those check-off dollars was 46:1. I haven't seen anything that comes close to that in business risk management returns.
It seems to me that food safety and quality are the key challenges to the processing and retailing members of the supply chain, and there are some trends in concentration that should be monitored by the Competition Bureau. The information needed for that monitoring would be invaluable to the whole sector, including to us as researchers of agricultural markets.
As for the commodity sector, there are a few key things I want to bring to your attention. I think they relate to the way we think about our future programming.
The first is the shocking rise of ethanol production. It's not a shock to the committee, I'm sure, but the size of it is amazing. I think it's had the biggest impact on grain stocks since 1929.
The new demand, which is forecast to be 40% of the total corn crop in the United States next year, has come on us in only eight years. That's meant an incredible change on the demand for energy and feedstocks, and I think it's had a negative effect on the demand for protein. Feed barley, which used to trade at a premium above corn, now trades at a discount because the protein that was in the barley is now cheaply available in DDGs. Hard red spring wheat still has a premium because of the gluten form of its protein, but other protein sources are getting pretty cheap.
I haven't done a detailed review of all of the non-BRM Growing Forward programs, but they appear well suited to the things I see as a concern, especially in the supply chain further up from farmers.
I know of two programs in some detail because of my own involvement. I was a board member of the Manitoba Rural Adaptation Council, MRAC, for two years, and witnessed their project reviews for funding under the Canadian agricultural adaptation program, and I hope they didn't say no to some of your programs, Rickey.
However, they do try to apply due diligence when they're reviewing projects. They're experts in the area, so they aren't quite a flexible type of program delivery.
The other program I was involved with was enabling policy research for competitive agriculture, ERCA. The networks fostered research on strategic policy topics, including agricultural trade, innovation and regulation, the environment, consumers, and market structure. Graduate students funded under ERCA have gone on to be key analysts in Agriculture and Agri-Food Canada and industry, and most of my colleagues in agricultural economics in Canadian universities are members of one of these five policy networks.
Actually, Shelley and David got funding for the paper you quoted under the innovation network.
The ERCA networks can be found by searching ERCA on the AAFC main website.
One last program I want to support here is the value chain roundtables. I believe our agricultural sector can address a number of broad challenges only by looking at the whole supply chain. Consumers' concerns need to be reflected along the supply chain and addressed in the most efficient way possible. Individuals, firms, and agencies that jeopardize the Canadian brand need to be held accountable.
There were two main shifts in policy that were related to commodities. Ethanol was the first one, and I've gone through that. The second one is the major change facing the commodities sector, which is the new environment for marketing barley and wheat. The way the sector is getting together, the initial offerings from grain companies and the new ICE wheat contracts seem to be signalling they're going to manage the sector a lot like canola. I think that's a logical way forward and will probably work in the long run, but I just want to point out three significant differences in those two commodities.
The first major difference is the market for seed. With hybrid varieties and technical use agreements, TUAs, there is a lot of funding coming from the seed sales to private sectors, so it's a viable private industry. Canola seed production is a viable seed industry, and that's led the private sector to solving some of the supply chains, even in terms of pests. However, consumers don't want GM wheat right now—at least, it's not a viable option anywhere that I've seen—so technical use agreement funding is not going to be part of the wheat supply chain, and we haven’t figured out a way to commercially produce hybrid wheats yet. Both of those things mean that we're going to need either some high level of public breeding in wheat or a producer check-off.
The second key difference between wheat and canola is the quality variation. Canola has essentially two grades. Wheat grades currently posted by the CWB total 14, and there are 47 protein categories and another 10 classes of eastern wheat. In North Dakota, researchers have explored the risk in durum wheat: 62% of the durum crop does not make number one hard amber durum, and the discounts farmers face for failing to meet that grade reach as high as $4 a bushel, more than half their current price. Therefore, I'd like to see the Canadian Grain Commission reviewing quality discounts and posting those discounts in the same way that they post elevator tariffs.
Finally, the domestic processing of wheat may not be as profitable as the domestic processing of canola. Around the world, wheat milling tends to happen closer to the final consumer. The quantity of world flour exports is roughly 8% of the wheat exports. The quantity of canola oil exports is 28% of canola seed, and there are meal exports on top of that, so we have to be careful where we locate some of that processing, because the consumer must tell us where it's most viable.
In conclusion, the Growing Forward programs seem well suited to increasing innovation, addressing some food safety and environmental concerns, and reducing farm production and income risks. What I'm more concerned about is the evolving structure of our major commodity markets and the power of monitoring agencies to police us from unfair practices.
The growing concentration of sectors such as farm inputs, food processing, retail, rail transportation, and grain handling is troubling. It may be caused by efficiency and scale economies that have the potential to make our sector more competitive, but when there are only a few firms, there will be a temptation to extract excessive fees. That's the concern of a theoretical economist, but we can test these things if we get enough data. I think that's one of the most important things that we can do in government for the next period: to diligently monitor our sector for concentration and make sure that consumers' demands are reflected right down to the farmer.