Agriculture Committee on June 18th, 2018

[The Chair, Liberal, Pat Finnigan]

Welcome to the Standing Committee on Agriculture and Agri-Food. We have a table of witnesses here with us today, but just before we go forward, I would like to share with the committee an email I received this morning that I think is important. We'll take it to the business session of the meeting. It reads as follows:

On behalf of the Honourable, Lawrence MacAulay, PC, MP, Minister of Agriculture and Agri-Food, I would like to offer a briefing on the recent detection of genetically modified wheat in Alberta to the members of the Standing Committee on Agri-Food and Agriculture. Officials from the Canadian Food Inspection Agency and Agriculture and Agri-Food Canada will be made available to present an overview and answer questions from the committee.

I just wanted to let you know about this email. We received it at 11:50 this morning.

We will now turn to our witnesses.

I know the practice is always to have documents presented in both languages. We have one here that is in English only. There are a lot of slides in it. We would need consent. We have already sent it to translation and it will be distributed, but I will respect the committee's decision if it decides it wants to wait until copies in both languages are available.

Are there any comments?

What do you think, Mr. Poissant?

[Jean-Claude Poissant, Liberal, La Prairie, QC]

Will we get the documents later?

[The Chair, Liberal, Pat Finnigan]

Yes, they have been sent to translation.

Are we all agreed?

Mr. Wallener, we're going with your documents.

Does anyone object?

This is not standard practice.

[Pierre Breton, Liberal, Shefford, QC]

It's an exception.

[The Chair, Liberal, Pat Finnigan]

We're all good. We'll distribute them, and again, they have been sent to translation.

I'll introduce our witnesses.

From API Labs, we have Mr. Glen Metzler, chief executive officer, and Mr. Ryan Mercer, a board member. Welcome.

From EIO Diagnostics, we have Damir Wallener, chief executive officer. Welcome, Mr. Wallener.

From Maple Leaf Foods Inc., we have Mr. Rory McAlpine, senior vice-president, government and industry relations. Welcome.

Would you like to start, Mr. Wallener? You have up to seven minutes for your opening statement.

[Damir Wallener, Chief Executive Officer, EIO Diagnostics]

Thank you so much for indulging my presentation. This is my first time at a committee like this. I did not fully appreciate the procedural aspects, so thank you for that indulgence.

I am the founder and CEO of EIO Diagnostics, a company from the west coast, on Vancouver Island. We do early detection of illnesses in the udders of dairy animals, primarily mastitis. This is a $10-billion annual production loss for the global dairy industry.

What I think is interesting about our story is that we are now coming up on our 10-month anniversary as a company. We are very well funded through the private sector and we are engaged with large and small companies across the globe, essentially, at this point.

Turning to the slides, “2017: Origins” provides a little rundown on the timeline. The reason I'm sharing the timeline is that in my experience in building and starting companies, it is not always apparent to regulatory agencies where the actual challenges are in bootstrapping from nothing to an idea that generates jobs and exports.

Our story started in August with a proof of concept that was literally built on my kitchen table. The founders paid for that out of our own pockets, which is normal. Within one week of sharing a 90-second video of that proof of concept, we received an investment offer from an investment fund in the city of New York that specializes in food and ag tech. As part of that deal, they had us come to New York for three and a half months where, in addition to the investment, they opened up their network—particularly in CPG, consumer packaged goods, basically anything you buy in a grocery store that's not in the produce section—and introduced us to a whole series of investors in this space. That program was called Food-X.

At this point we still had no product and no revenue. It was just a proof of concept. In October we started our first commercial test at a dairy close to us on Vancouver Island, Balme Ayr Farm. At that point the Ministry of Agriculture in B.C. was kind enough to give us an innovation grant in the amount of $70,000.

I'm being particular about the numbers because it's important to the story. That $70,000—and we'll come back to this later—which is such a small amount in the big scheme of things, is the amount that kept EIO a Canadian company at that point. At that point we were already receiving additional investment offers from the U.S. The New York City Economic Development Corporation offered our entire founding team residency visas to move the company to New York. We received a long list of offers that we were able to push back on because we had a little bit of runway from our provincial government.

In November and December we made additional technological progress, and in December we had our coming-out party at a large event in New York, in Manhattan, hosted by Food-X. From there we developed all the relationships that we needed to get the company to the next level.

On the next slide there are some photos. The photo on the upper left shows our device in action at Gracemar Farms, a large dairy operation in the Fraser Valley.

We've also extended and are now working in Africa. In one of the images I am teaching a class to Namibian veterinary students, which I think is really funny because I just have a bachelor's degree and I'm not supposed to be teaching a university class anywhere.

As illustrated at the upper right, we were part of a survey to determine, as part of the social policy development in Namibia, how many of their dairy and meat goats are getting sick. Our tool is very portable, very inexpensive, and it goes out into the field. What isn't shown in that image is that shortly afterwards we ended up with heat stroke and dehydration. The whole thing was just a fantastic story that is too long to share in its entirety here.

At the bottom right is a photo of us in Kenya. The young woman holding the device is a veterinarian, recently graduated. After I showed her how this device is used to detect illnesses in animals, she immediately took it out of my hands and would not give it back at the end of the day unless we promised to come back. We are, in fact, going back in September, funded by both NGOs and by large and small producers in Kenya.

In 2018 the company has continued to grow. In Q2 we closed a substantial seed round.

Again I want to point out that we still did not actually have a product at this point. This was still more hope than reality. That is important, because every single one of our investment dollars was from the U.S. In our experience, Canadian private sector investors tend to be fairly risk-averse, while our international colleagues are risk-seeking.

At this point as well, we received our first federal assistance through NRC's IRAP, which is an absolutely fantastic program. We love this program. It, Mitacs, and a couple of the NSERC ones are fantastic. I cannot speak highly enough of them, and we are very grateful for that support. The IRAP support was instrumental to us while we were raising money to be able to push back and say yes, we will take your money, but no, we are not moving to Silicon Valley.

Later this year we will be actually at revenue and selling a product, but we have ongoing pilots with companies as large as Cargill, which is just a behemoth, down to individual farms in the western United States, which tend to be a little bit larger than Canadian farms.

In the next slide, at this point we are engaged on four separate continents, which is pretty amazing, because we're eight people at this point. Even that is kind of amazing, because in January we were two people, essentially unpaid. We were a start-up. We're in agriculture, but we're a tech start-up. Now we have eight people. Average salaries are basically six figures, so we are creating jobs and we are creating value. Investment dollars are flowing from the U.S. to our company and being spent in Canada. This is a good story.

We were lucky. It's not my first company, so I knew where some of the challenges would be. The next slide, with the big red box, indicates where a lot of other companies run into trouble. The real challenge for starting a business here is in that initial stage, in that $500 to $100,000 kind of investment. Most federal support and provincial support comes much later in the process, and by that point companies are already engaged overseas or in the U.S. and many of them have already moved.

The four pillars of being able to foster young companies are capital, talent, advisory services, and markets.

We're really good at the talent part. We produce many high-quality graduates in all the STEM fields. We're not very good at the capital side. It comes from the relatively risk-averse nature of Canadian investors, so most capital comes from outside the country. On markets, we're an exporting nation, so it's kind of built into our fabric to seek outside—

[The Chair, Liberal, Pat Finnigan]

You are a minute over, but you'll have a chance later. People will have the chance to question you, so if you can just—

[Damir Wallener]

The very last slide is just suggestions on a possible way to structure federal assistance to better seed young companies moving forward.

[The Chair, Liberal, Pat Finnigan]

Thank you very much, Mr. Wallener. That was very interesting.

Now we'll go to Maple Leaf Foods and Roy McAlpine, senior vice-president, government and industry relations.

[Rory McAlpine, Senior Vice-President, Government and Industry Relations, Maple Leaf Foods Inc.]

Thank you, Mr. Chair.

I appreciate the invitation to speak to you.

Your topics of innovation, competitiveness, and trade are very important to Maple Leaf. In fact, the viability of our business really lives in that interconnectedness between those topics every day.

I want to share a perspective, and it's rooted in perhaps three credentials, three facts, about our business recently.

The first is that in the past six years, Maple Leaf has invested more than $1.5 billion in capital upgrades for productivity and competitiveness gap closure in food processing in Canada. This is more investment than any other in our space, and it gives us a front-row seat to the challenges of the business case for investing in Canada.

In doing so, in fact, we bet the farm: we bet the equivalent of our market capitalization, which at the time was certainly more risk than most would take.

Second, though we're now looking at an additional $1 billion of investment in similar projects with similar objectives, unfortunately our board is struggling with this choice simply because the return on the Canadian investment can't offset the risk to the required capital. In this case it might be closer to 20% to 25% of our latest market capitalization. Of course, very few manufacturing companies in Canada are stepping up to that degree.

The third fact is that we have been involved in the government's agri-food economic strategy table, the food processing industry round table, and many other groups. In each of these groups we've achieved insight as to what other industry participants believe and what they're feeling in their businesses, and we are clearly in alignment with them. Our overarching observation is that productivity investments in this country, the ones that make a difference to our competitiveness, are really just a business case with a numerator, a denominator, and a risk profile. They are alternative uses to capital that our board has to weigh.

Let me be clear what they are not, in our experience.

They are not a function of corporate taxes, at least not until recently. Of course, there have been some changes south of the border on corporate taxes, but the evidence shows that perhaps not even now is that really an inhibiting factor.

They are not a willingness to take a well-calculated risk. As I mentioned, we are a good example of betting significant amounts of our market capitalization.

They're not a function of R and D spending or insights. In fact, we know precisely where the technology is around the world and we know how to apply it.

As well, they're not a talent issue. As my colleague said, we have great people with the skills to execute projects.

Our business case challenges continue to be rooted in the core fundamentals of that numerator and the denominator, i.e., the return on investment, as follows.

The first challenge is one of living in a sub-scale country. I say that while obviously recognizing that investments like this are scale equations. The latest technology in our industry is super-expensive capital, requiring large global-scale operations and market share to justify, and that's simply more challenging in a country of only 35 million people. Adding to this has been a Canadian history of an economic policy that often seeks to limit scale or perhaps equalize scale, other than in our primary resource sectors, where products are more easily exportable as commodities.

Second, construction costs are at least 25% higher in Canada. This is a hard reality. It's demonstrated repeatedly. Excess construction costs undermine the denominator relative to a similar investment in the United States in a material way. There are numerous drivers of this, and we could call on many operators of large-scale food operations on both sides of the border to corroborate this. We also work with U.S. construction and engineering firms that can explain why this is the case.

Third, the Canadian operating environment impairs performance of manufacturers of consumer packaged goods. This is a result of the cumulative effect of many factors, none of which moves the needle on its own, but all of which together make a clear difference. They include an uncompetitive regulatory environment with a gap that is widening recently; the effect of uncompetitive labour laws in some provinces, and not just minimum wage competitiveness; energy costs that are not in line with those in key U.S. jurisdictions; environmental requirements, which add relative cost; and a personal tax environment that makes it more challenging to attract top talent. Adding to this unfavourable environment is the investor anxiety around NAFTA at the moment.

Fourth, we note that U.S. jurisdictions are generally more willing to open their subsidy and tax wallets for large capital projects. While programs to attract investments certainly exist in Canada, our direct and rather frustrating experience is that the bias of federal and provincial governments is strongly in favour of foreign companies and disruptive innovation instead of scale plants—unless, of course, it's an auto plant—and applied technologies that are the first order of business for most manufacturing companies trying to close the competitiveness and productivity gap that I noted.

The program landscape is fragmented, confusing, and in our experience ill suited to mitigating the costs and risks that deter advanced food plant manufacturing investment in Canada.

In conclusion, I realize I may be disappointing the committee by challenging the assumption of your study that there's a direct line from innovation enabled by government strategies and programs and more aggressive corporate R and D to export growth for Canada's agrifood industry. From Maple Leaf's perspective as a long-established Canadian food manufacturing company, having a clear plan to address the drivers of the business case for investment would have more value than focusing on the elements that are at best incidental, such as, as I mentioned, corporate tax rates, innovation spending, or talent and skills acquisition.

For the Canadian food industry, solving this issue is vital to defending our home market share, let alone restoring our global market share, especially if the Canadian dollar returns to strength.

Thank you, and I welcome your questions.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. McAlpine. Those were certainly very interesting comments.

We will now move to Mr. Ryan Mercer and Mr. Glen Metzler for whoever wants to do the presentation for up to seven minutes.

[Glen Metzler, Chief Executive Officer, API Labs Inc.]

I will be speaking, Mr. Chairman.

[The Chair, Liberal, Pat Finnigan]

Okay. Go ahead, Mr. Metzler.

Thank you.

[Glen Metzler]

Thank you, Mr. Chairman.

Honourable members of the committee, good afternoon. My name is Glen Metzler and I am the CEO of API Labs, a company based in Lethbridge, Alberta, whose bold mission is to establish a fully fledged commercial poppy industry for Canada. I'm joined by Mr. Ryan Mercer of Mercer Seeds. He is an Alberta farmer, past president of the Alberta Seed Growers Association, and a board member for API Labs.

Forty years ago the canola industry was non-existent in Canada. Through Canadian innovation, we are now responsible for 25% of all farm gate sales and contribute nearly $27 billion to the Canadian economy. We would like to repeat this success with new crops like poppy seed production in Canada. This would offer diversification to the existing crop rotation, create export and economic opportunities, and further our collective mission to lead the world in agricultural practice. Here is how.

As a food crop, the value of poppy resides in the oil-rich seeds, which have a long tradition in a number of global cuisines. Today poppies are only commercially cultivated in a few countries, rendering them an import commodity for every other country on the globe. Canada and all of North America import 100% of their culinary poppy seeds. These seeds come from a number of sources. The integrity of the supply chain from seed to crop to packaged product is always a critical aspect of food safety.

Supporting commercially viable domestic poppy seed cultivation as a food crop would ensure our supply chain in Canada and present opportunities for export. Although poppy seeds are mainly processed as a condiment, additional novel uses, such as high-quality food grade oil, animal feed supplements, biofuel, and cosmetic and industrial applications may also be developed. Annual global exports for poppy seed are approximately 250,000 tonnes with an average price of $3,300 per tonne. Our company has already received opening orders for up to 10,000 tonnes per year, but we cannot get products to foreign markets without Health Canada approval. More on that in a minute.

For its part, Canada is the only G7 country that does not commercially produce or process poppies. The opportunity to move into new crops and sectors is synonymous with economic growth and is aligned with the federal Minister of Agriculture's partnership strategy and the Minister of Innovation, Science and Economic Development's innovation strategy. Countries such as the U.K., Portugal, France, and Australia have all established commercial poppy cultivation. Surely we can match and compete with the success seen in these countries.

The economic benefits of poppy cultivation are clear: job creation, capital expenditure projects, value-added processing, and a positive economic multiplier effect. Commercial poppy cultivation represents an untapped potential for crop diversification, for economic growth, and for harnessing the power of agriculture innovation to increase Canadian exports.

Since 2007, API Labs has been working towards the goal of commercializing poppy cultivation in Canada. We have built an excellent R and D program, and since 2015 we've been on the cusp of commercializing our technology for the benefit of Albertans and Canadians—but here is our central challenge. The federal government is encouraging innovation with one hand, but with the other hand, in our experience, it has blocked our ability to commercialize our innovation.

For example, API Labs has received over $2 million in investment and loans from the federal government, including a repayable loan under the Canadian agriculture adaptation program that cannot be paid back without a commercial revenue stream.

We have also raised several times that amount from investors and farmers from the prairies who are eager to add poppy seed to their crop rotation, but since 2015 we've been struggling to get the necessary regulatory approvals from Health Canada for the commercialization of poppy seed cultivation. Health Canada has given us approval to conduct research and development in this sector for the last several years, but they continue to delay and deny approval for us to commercialize. Our current application is only for eight hectares, as a basis to eventually scale up our production.

We're really frustrated and disappointed at the lack of progress. Surely this government and all parties want to recognize the value of agricultural innovation to help include our small, medium, and large producers as champions in a global marketplace. Let us get the right policy mix here at home for our farmers and businesses and all Canadians.

To achieve a thriving domestic poppy seed industry in Canada, we would respectfully make the following three policy recommendations for your consideration in your report.

First, we need to encourage private sector partnerships with academic institutions.

Second, we should also introduce more innovative financing mechanisms for small and medium-sized enterprises to raise private capital—for example, flow-through shares.

Third and most importantly, we must create a clear and transparent approvals system for agricultural products that are covered by the Health Canada jurisdiction.

Thank you for your time. I look forward to your questions.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Metzler. You have a minute left.

I just want to make it clear. Is the regulatory difficulty for poppy seeds because of their cousin, the poppy?

[Glen Metzler]

Yes. If I talk to you about Cannabis sativa, that could be hemp or that could be marijuana, but we have regulations for those, for both. If I say that, you will ask, “Well, is that hemp or is that marijuana?”, because the regulations are different.

With poppy seeds or poppies, the way the government has established it now is that it's the opium poppy. If I'm talking about a variety that has fewer than 150 parts per million of morphine, that's considered the same as a pharmaceutical variety that produces 2.5% morphine, yet there's no difference in jurisdiction.

When we speak with the Office of Controlled Substances in Health Canada, the response we always get is, “The regulations say 'opium poppy'.” We say we're not the same. They're comparing apples and oranges, but they say, “Well, that's what's in the regulations, so that's all we can do.”

[The Chair, Liberal, Pat Finnigan]

All right. I just wanted to clarify that was the roadblock.

[Glen Metzler]

Yes. Thank you, sir.

[The Chair, Liberal, Pat Finnigan]

Anyway, we'll go through the order for questions. Mr. Barlow, you have six minutes, sir.

[John Barlow, Conservative, Foothills, AB]

Thank you very much, Mr. Chair, and thanks to our witnesses for coming and participating in the study.

I want to start with Mr. Metzler and Mr. Mercer. You may have had a chance to respond to the chair's question, but the following issue has been raised many times during this study, and Mr. Wallener and Mr. McAlpine also raised it. It's that gap between being able to go from an idea and innovation to being able to commercialize.

One area is new crops. We talk about a $75-billion target by 2025. Certainly, Ryan, you could talk about how we never would have had pulses in southern Alberta 10 years ago, but now you have this opportunity. What's missing to get those new crops commercialized?

[Ryan Mercer, Board Member, API Labs Inc.]

I appreciate that, Mr. Barlow and Mr. Chairman. Coincidentally, my father was one of the founders of what was rapeseed back in his day in the 1960s and 1970s, which became canola.

We just see so much opportunity in agriculture. When you look at the various universities and government institutions and us, private development and innovation is so exciting, and that's what really makes Canadian agriculture different from other areas of the world. Of course, the next step after creating and innovating and doing research is to also take it to a commercial level. I just see so much opportunity to add to crop diversity and for additional revenue for farmers, but also there's processing. Why not grow that local home-grown food right here at home, as opposed to just importing it all from Australia and Europe?

[John Barlow, Conservative, Foothills, AB]

Did you want to add anything to that?

[Glen Metzler]

Yes, basically the gist of it is that we do need to see new crop opportunities, and this is one that we can definitely move in that direction. It's not an easy process to take a product from research to commercialization. I think Mr. Wallener has also explained that it has been difficult for his company too. As you start to grow, you go through constant growing pains.

The issue is that it doesn't help when you don't have alignment within your government processes. I can understand why there may be concerns, but if the concerns aren't founded, then there need to be processes or understanding that these things could be moved forward in a way that works for everybody.

I'm not suggesting we don't have a safe, healthy food supply in Canada—

[John Barlow, Conservative, Foothills, AB]

Right.

[Glen Metzler]

—and I think our government has done an excellent job with that, but there has to be an understanding that this is a continuing process that needs to be developed and that we need to work together more.