Thank you very much, Mr. Miller.
All of you have a copy of my presentation.
I was really looking at this as an opportunity to talk about some of the trends I see and some of the things I think we need to be thinking about looking forward.
First, when we talk about Canada's food supply chain, we often envision it as a flow of product from input suppliers to producers to processors to the consumer. Information flows both ways up and down the chain. Those processes in Canada actually don't work as well as they should. In reality, a food supply chain isn't really a chain; it's a network. The next slide illustrates how complex it is.
We have a lot of different players, and the dynamics are changing in the industry all the time. Right now, the big driver is the change in the Canadian dollar, which has made a huge difference. Consolidation at several levels is making a difference. And new international opportunities are also changing the chain.
I thought I'd talk through some of the things we're starting to see at the different levels and some of the areas where I think we may want to invest. I want to look at them from a policy perspective and in terms of an industry strategy.
In genetics, a lot of the major crops, in particular, with the exception of canola, are controlled by multinationals. A lot of the work is being done in other parts of the world. In Canada, we've been losing some of our capabilities in that area, and that's an area I think we may want to look at investing in, particularly in genetics that mean a Canadian difference. I think that's important. We're relatively strong in the dairy genetics, and we've done quite well around the world in that.
The input supply sector is changing a lot, and we're seeing consolidation there right across the country. We're seeing reorganization, and that's in response to consolidation at the farm level from having to supply bigger customers who are more sophisticated. But it's also in response to opportunities and competition from around the world.
From a competitiveness perspective, we have done a lot better lately. We were at a significant disadvantage in terms of chemicals and veterinary drugs, but we've made some advances in that area in aligning regulations between Canada and the U.S. Here at Ivey, we're involved with the Regulatory Cooperation Council and are trying to actually push those alignments a little further and make the border a little less of an issue for us.
Primary agriculture is changing. We still are in a situation where most of our policy is focused on primary agriculture. A lot of it is focused on business risk management programs and farm income. The industry remains dominated by small farms, but the reality is that the large farms produce most of the product. I think just recently we looked at some of the numbers and found that the biggest 7,000 farms produce more than the smallest 105,000 farms, using one-quarter of the resources. I think they produce about 50% more.
When you look at what assets it takes to produce $1 of revenue, for farms under $100,000 it's about $18; for farms over $2.5 million it's about $2.50 in assets. So there is a huge competitive disadvantage there. There are major economies of scale, but we still have an industry dominated by small players. But if you look at the future, it's an industry that is quite optimistic about where it's going, particularly if you're in the grain and oilseed business. The projections are for volatility. There will definitely be more volatility, but there will be pretty strong long-term markets.
I think our meat industry has now adapted pretty much to the higher Canadian dollar. We built up a huge export business to the U.S in both hogs and beef. That was under free trade. Since then, with the adjustment of the dollar, we've had to adjust the entire industry to lower exports. That's going to continue because this dollar's not going to go away.
There's lots of focus on local food, and that presents new opportunities for us and for some of the smaller players. If we are going to take advantage of the local food option, we're going to need to build up the networks to connect producers to consumers. Some of that will be through retail and some of it will be direct. That seems to be the biggest gap right now.
To me, local is an interesting market opportunity and a niche. It is not the way Canada really can view the future of our agriculture. We export almost half of what we produce at the farm level and over a quarter of what we produce at the food processing level, so we don't really want the world to go local. It's important for us to maintain our exports.
On food processing, though, Derek did a good job talking about some of the challenges in food processing: more competition, harder to get into the States. We've actually been relatively good in terms of maintaining employment. We are losing plants in food processing, but there's a definite need to modernize. There's also a need for larger scale, certainly in some areas.
Our food processing sector has a whole lot of small players. Derek was talking about private labels being a threat to processors. In some cases it's a threat; in other cases it's an opportunity for small processors to access big markets through private label. I know a lot of processors that actually survive predominantly on that.
That sector is going to change with the new pressures on health and sustainability, health in particular. You're going to see much more emphasis—and we should see more emphasis—on reducing salt, reducing fats, and so on. The sector right now is trying to come to grips with creating an innovation strategy, so what should they be focused on, looking ahead? We had a food innovation forum last May, and we're having another one this May, looking at food processing innovations. We saw a few things. Last year we saw...and it's not really any surprise, but the major drivers of food processing innovation are new markets, increasing market share, and reducing costs. Food safety, regulations, and health are driving some of the change a little bit less so.
They're doing a combination of both product and process innovation, adopting things like lean manufacturing methods and so on. They're doing it with internal teams, but they're also working extremely closely with suppliers and with customers. So food processing innovation tends to be a full-chain activity instead of just a single, inside-the-company activity. They also get ideas and help from government, universities, other companies, and consultants.
When we ask what's the biggest barrier to change and to innovation in food processing, resistance to change came up as the number one issue; and then money, because these guys are relatively small; and then there's time—they don't have much time for this; regulations to some extent; and in some cases finding good people.
Derek did a great job talking about the retail consolidation. That continues, as well as having new major foreign entrants—Walmart and Target—and we have only just begun to see the impact of having those players in the market. I think we're going to see a whole lot more change come out from that.
We're also seeing the power of consumers reaching back all the way to farms. Consumers are very simple. They like what's important to them, so health is an issue, and cost is always an issue. Retailers are telling us they're not as driven by sustainability yet, but you're seeing things like Walmart and their 15 questions. That will change what happens throughout the entire chain. Also, consumers are starting to expect more from food and more from food processors.