Thank you, Mr. Chair.
As the chairman said, I'm Jan Westcott, the president of Spirits Canada. On behalf of the Canadian distilled spirits manufacturers, we are pleased to appear today to provide the spirits industry's views to the committee on its beverage sector supply chain study.
I'm certain that members will have already been exposed to the great diversity in the agrifood product supply chains in Canada through testimony from other witnesses. Distilled spirits will provide more unique circumstances for your consideration.
By way of background, Canadian distilled spirits manufacturers have very significant facilities across the country, with a heavy economic emphasis found in the provinces of Alberta, Manitoba, Ontario, and Quebec. For the most part, these plants source the vast majority of their cereal grains in close proximity to their premises, often from farmers with whom they have developed long-standing relationships over many years.
In fact, distilled spirits manufacturers have a unique dual role in the grains supply chain. We are both customers, buying various cereals that will form the basis of the final products we bottle and sell around the world, and suppliers back to cattle and hog farmers of distillers' dry grains used as feed.
Currently, spirits represent 25% of the Canadian beverage alcohol market by sales value and 27% by share of consumption occasions. As Canadian spirits sales grow, whether here in Canada or abroad, we buy more from Canadian farmers.
The four primary cereal grains that are the basis of all the spirits we make in Canada are corn, rye, wheat, and barley. In the most simple terms, adding certain enzymes and yeast to these grains is how ethanol is produced through the process of fermentation. For spirits production, this fermented alcohol is then distilled, matured in wooden casks for many of our products, and then bottled.
Today I'd like to take a moment to address three challenges currently facing spirits production in Canada.
To start, we've seen corn prices rise by some 135% since 2000, as one example. What's quite interesting for me as the president of the association is the fact that most days my members certainly aren't very shy about complaining about energy cost increases, new distribution costs, more expensive media buys, or higher liquor board fees, yet no one has complained to me about paying more to farmers for their grains.
As a number of master distillers will tell you if you ask them, if you don't start with truly excellent cereal grains, you can't make really great whisky. In this context, it's noteworthy that spirits manufacturers tend to buy the best of the best from the farmer and tend to pay a significant premium for that. In fact, we're quite proud of that. We drive the business up and forward.
More impactful on the business than the corn prices has been the rise of the Canadian dollar from about 65¢ to parity vis-à-vis the American dollar. The very high tax rates on spirits in Canada essentially have eliminated any fiscal flexibility for our manufacturers to deal with this magnitude of change in foreign exchange rates. Unfortunately, instead of reducing the tax burden on industry as the Canadian dollar rose, excise duties were actually raised, creating a double whammy for the industry.
Today in Canada the federal excise burden on spirits is nearly 20¢ per standard drink, versus 10¢ on beer. As members will be aware, the excise duty on Canadian wine was eliminated in its entirety in 2006, this despite the fact that these drinks, whether they're spirits, beer, or wine, all contain exactly the same amount of alcohol, and I mean exactly: 17.12 millilitres. The impact of these changes is that, despite representing less than 30% of the beverage alcohol market, spirits' share of excise payments has gone from 38% in 2006 to nearly 45% over the last six years.
In discussions with rye farmers in Alberta and Saskatchewan, and corn farmers and wheat farmers in Ontario and Quebec, we often get asked whether the government in Ottawa views their operations as less important or less valuable than those of grape growers. To be honest, given the excise duty burden that we bear, we're never quite certain how best to answer this question.
One very significant point of differentiation for spirits is our export intensity, with approximately 70% of what we make, locally produced, exported internationally. Last year, Canadian spirits manufacturers exported very nearly half a billion dollars, representing 65% of the value of all Canadian beverage alcohol, and our members are working hard to further grow the industry's shipments out of Canada.
Significant new export opportunities are before us, as a number of markets that heretofore have been largely closed to us, due either to prohibitively high import tariffs or various non-tariff trade barriers, are now or soon will be open. In fact, we commend the new free trade agreements now in place with Peru and Colombia and, most recently, with Panama.
We understand that while negotiations are progressing well with Europe, there remain a number of critical elements that need political direction to conclude, including complaints by the EU about the introduction in recent years of new provincial subsidies and policy advantages for local wines, disadvantaging imports and even Canadian wines and spirits from outside that particular province.
We encourage a continued strong commitment by Canada to finalize free trade deals with the EU as well as with Japan, India, Korea, and of course the members of the Trans-Pacific Partnership. Given the range of ongoing discussions, we are extremely appreciative of the efforts of federal trade officials at both Agriculture Canada and International Trade to keep us informed of each of these negotiations and of their commitment to address spirits priorities.
The adoption of modest tax reform to provide the industry the financial wherewithal to develop new markets, combined with the reduction in international trade barriers, can be a real boon to the Canadian spirits-producing industry and to the supplying farm community. Spirits producers are already very important buyers of Canadian cereals. For example, our Ontario plants are the fourth-largest purchaser from Ontario's corn farmers. We understand that one of our member companies in Alberta is the largest commercial rye purchaser in the country. Plus, as I said earlier, spirits pay premium prices for the premium products grown here.
To put this into perspective, think of a single railcar full of grain. It holds about 98 tonnes of corn. These 98 tonnes of corn will produce some 70,000 litres of what we call “cask-strength” alcohol—about 63% alcohol—enough to fill 350 barrels, the typical barrels you would see in one of our aging warehouses. Then, five, six, or seven years later, after losing 1% or 2% a year through evaporation—what they call “the angel's share”—there is enough whisky in those 350 barrels to fill 84,000 bottles.
A 10% increase in the industry's export sales would mean the purchase of some 300 more railcars of grain each year from Canadian farmers. That is a completely attainable goal, perhaps even a little bit conservative.
However, in order to prosper and have Canadian spirits reach their potential, governments and regulators in Canada need to start paying more attention to all of the various impediments and discriminatory practices that restrict the industry. A strong, healthy, and profitable home industry is a necessary precursor to securing sustained growth abroad—a point that I would reiterate.
I'm going to leave you with one final little thing that's happening right at the moment. The committee will probably be aware of a proposal by CFIA to require liquor importers to be registered and licensed under that agency's import licensing of non-federally regulated food and beverages.
It came as a great surprise to us that CFIA or anyone in the government could believe that spirits manufacturers are not federally regulated. I could give you a list of the acts. There are about eight of them.
In fact, we would say that alcohol manufacturers are the most heavily regulated industry in Canada at both the federal and provincial levels. A series of tough controls are already in place that ensure the safety of our products, and with a proven and tested record of effectiveness, yet CFIA proposes to duplicate systems already in place and impose new costs and red tape on our businesses for no demonstrable benefit to the health and safety of Canadians.
This is just one small example of the kind of ill-advised regulatory or policy intervention by federal and provincial governments that diverts industry resources away from productive endeavours that grow the business to non-productive exercises.
I'm going to close by just making my pitch.
In 2006 the Government of Canada made an investment in the wine industry in Canada and in the beer industry in Canada in providing some relief on excise duties. We would argue that those investments have made sense, have stimulated the industry, and have helped both the wine industry in Canada and the beer industry in Canada, particularly the small brewers, prosper and grow.
We're asking the Government of Canada to give the spirits industry equal consideration, particularly given the onerous level of excise taxes our products bear in this country. We need those extra dollars to drive our business forward, both to invest inside Canada on creating new products and improving our plant efficiencies and to go into new foreign markets to build our business. We have been extremely successful in exporting Canadian whisky around the world. As these new markets open up, we need to take advantage of this. We need some consideration from the government of our request.
Thank you very much. I'm happy to answer any questions.
