Agriculture Committee on May 9th, 2016

[The Chair, Liberal, Pat Finnigan]

Welcome, everyone, to our Standing Committee on Agriculture and Agri-Food.

I would like to thank the witnesses for being with us here today.

With us this afternoon we have from the Department of Agriculture and Agri-Food, Mr. Fred Gorrell, assistant deputy minister, market and industry services branch.

From Innovation, Science and Economic Development Canada, we have Mark Schaan, director general, marketplace framework policy branch, strategic policy sector, and also have Mr. Paul Morrison, senior policy analyst in the corporate, insolvency, and competition policy directorate, strategic policy sector—that was a long one.

They are here to tell us what PACA, the Perishable Agricultural Commodities Act, is and to answer our questions.

We will start with a 10-minute opening statement, if you wish.

The floor is yours. Thank you.

[Fred Gorrell, Assistant Deputy Minister, Market and Industry Services Branch, Department of Agriculture and Agri-Food]

Thank you very much, Chair. I'm very happy to be here.

Thank you for the opportunity to discuss financial protection measures for Canada's fresh produce sector.

The Canadian fresh produce sector is an integral component of our agriculture and agri-food sector. In 2014, the Canadian fresh produce industry produced $4.4 billion of fresh fruits and vegetables. In the same year, Canadian global exports of fresh fruits and vegetables were $1.6 billion, of which almost 95%, or $1.5 billion, went to the United States.

Canada's primary vegetable exports to the U.S. are greenhouse tomatoes, peppers and cucumbers, as well as mushrooms. Canada's primary fruit exports to the U.S. are predominantly blueberries, followed by cranberries and apples. Canada also imported $6.6 billion of fresh fruits and vegetables, 55% or $3.6 billion of which was from the United States. The horticulture industry benefits from access to numerous federal and cost-shared programs.

Since 2007, federal-provincial-territorial governments have provided $1.3 billion in support through business risk management programs to producers of fruits, vegetables and potatoes. In 2014, horticultural producers were advanced $131 million through the advance payments program. Additionally, the horticulture industry has received $37 million from our department for innovation and marketing initiatives.

Finally, the sector also has access to the AgriRisk initiatives program which supports industry in its efforts to research, develop and implement new agricultural risk management tools.

The U.S. Perishable Agricultural Commodities Act, also known as PACA, is a legislative mechanism for the fresh produce industry to resolve non-payment and is administered by the U.S. Department of Agriculture.

It requires licensing of all buyers, it can suspend or revoke buyer licences for non-payment, and it provides mitigation and arbitration services between buyers and sellers. It also includes a deemed trust, which requires buyers' property to be held in trust to secure payment of any amount owed to a seller ahead of all other creditors. PACA addresses non-payment by both solvent and insolvent buyers.

Under the Canada-U.S. regulatory co-operation council initiative, Agriculture and Agri-Food Canada and the U.S. Department of Agriculture committed to establish comparable approaches to achieve the common goal of protecting Canadian and U.S. fresh produce sellers and buyers that default on their payment obligations.

As part of our commitment, between 2012 and 2014, the Government of Canada amended the Canadian Food Inspection Agency's Safe Food for Canadians Act to provide authority for regulations that will require membership in a third-party single-dispute body for fresh produce sellers who trade interprovincially and internationally.

Currently the Canadian Food Inspection Agency's licensing and arbitration regulations require buyers of fresh produce who sell interprovincially or internationally to be members of the dispute resolution corporation, or be licensed by the Canadian Food Inspection Agency. Both entities provide dispute resolution services and can require the posting of financial security by buyers as a risk mitigating measure. Unfortunately certain buyers have used the dual entities to evade seller payment and posting of financial security.

Exemptions within the current licensing and arbitration regulations have also permitted fraudulent activities. For example, buyers who buy produce from sellers located within their province are able to trade internationally and interprovincially without a DRC membership or a CFI licence, and therefore, they do not adhere to the trading rules pertaining to payment.

The Government of Canada is committed to the continued financial viability of the fresh produce sector. The government's priority is to implement the Safe Food for Canadians Act regulations. The regulations will require sellers and buyers of fresh produce, who trade interprovincially or internationally, to be members of a single-dispute resolution body, likely the DRC.

These regulations will ensure the adherence of fresh fruit and vegetable buyers to a unified set of trading rules that govern against slow, partial, or no payment by buyers, with strict penalties for buyer non-payment. This approach should address the majority of non-payment issues faced by sellers of fresh produce.

Non-payment also occurs between fresh produce sellers and buyers at the interprovincial level, but interprovincial trade does not fall within the federal government's jurisdiction. The Government of Canada will work with the provinces to create a comprehensive national framework that will help to ensure all Canadian buyers of fresh produce adhere to fair and ethical trading practices.

As of October 1, 2014, the U.S. no longer permitted Canadian fresh produce sellers free access to the formal dispute resolution process of PACA because they did not consider the Government of Canada's financial protection approach as comparable to theirs. Canadian companies trying to recover unpaid bills that are not resolved at the informal dispute resolution stage now need to post a bond to move forward with a formal claim.

Canadian sellers of fresh produce still have access to PACA and its dispute resolution services as well as the deemed trust. No interruption in trade or increased incidences of non-payment has been found subsequent to the October 1 announcement.

Regarding Canada's fresh produce sector's ability to recover any non-payments from U.S. buyers, statistics provided by the U.S. Department of Agriculture reveal that 90% of non-payments are resolved at the informal dispute resolution stage at no cost to the Canadian industry to initiate the process.

Further, the trade of fresh produce between Canada and the U.S. has continued to rise over the last four years, by 55% for fresh fruits and 26% for fresh vegetables, showing that the U.S. remains an important market for Canadian fresh produce.

The Government of Canada continues to explore approaches that will enhance financial protection for sellers of fresh produce and any decisions will be evidence-based.

Thank you.

[The Chair, Liberal, Pat Finnigan]

Thank you.

Mr. Schaan.

[Mark Schaan, Director General, Marketplace Framework Policy Branch, Strategic Policy Sector, Innovation, Science and Economic Development Canada]

Mr. Chair, we're splitting our time, if that's okay.

[The Chair, Liberal, Pat Finnigan]

Sure. Go ahead.

[Mark Schaan]

Excellent.

Honourable members, I also appreciate this opportunity to build on the remarks of my colleague from Agriculture and Agri-Food Canada and to talk a little bit about the marketplace framework supports in place for all sectors, but particularly from a fresh produce perspective.

To start, it should be noted that our marketplace frameworks are, for the most part, laws of general application working to support an efficient and effective marketplace, with predictability and stability for business, and sufficient transparency and protections for consumers. While Canada's insolvency regimes contain strong protections for creditors, including fresh produce sellers, some stakeholders have advocated for a perishable agricultural commodities act, or PACA-like system. Here it's worth elaborating how our insolvency regime works and why the adoption of a PACA-like system could pose some challenges.

The insolvency regime provides an orderly, transparent set of rules for distributing assets of an insolvent business amongst creditors. Because it deals with the rights of creditors, the integrity of the insolvency regime is crucial for well-functioning credit markets, a growing economy, and an innovative business environment. To this end, the insolvency regime seeks to balance competing interests amongst creditors while being mindful of the economy as a whole.

In addition to the cost sharing programs and regulatory protections discussed by my colleague at Agriculture Canada, insolvency law contains financial safeguards for suppliers and farmers.

The Bankruptcy and Insolvency Act gives suppliers of goods the right to repossess those goods under certain conditions. Canadian farmers, fishers, and aquaculturists have a deemed trust over the inventory of a bankrupt debtor for products delivered within 15 days of a bankruptcy or the appointment of a receiver.

As you can see, the system already attempts to look at all interests in its aim for balance and strong economic outputs. That said, we have continued to investigate whether additional innovations are required. The government has taken a considered, evidence-based approach to assessing financial protection options for all players in insolvency, including for produce suppliers.

For example, financial risk mitigation options were studied by federal-provincial working groups between 2007 and 2009. The industry's financial losses due to insolvency were found to be very small. It was reported that greater insolvency protections would not protect sellers against more significant sources of loss, such as fraud, disputes over quality, or slow payment. Financial protection for produce sellers was included in the agenda of the regulatory co-operation council, or RCC, in 2012.

In public consultations on insolvency legislation held in 2014, stakeholders were asked about increased protections for fresh produce sellers in insolvency. The adoption of a PACA-like regime was supported by the fresh produce industry. However, lenders, legal experts, and insolvency professionals urged caution due to potential negative economic implications. In particular, there were concerns that a PACA-like system could result in the shifting of losses amongst creditors. Lenders and creditor groups cautioned that altering priorities in insolvency could have a negative impact on the costs and availability of credit for business.

While there have been some studies and mixed views on pursuing a PACA-like system in Canada, particularly in insolvency, it is also important to note that PACA is a comprehensive regulatory regime that goes beyond insolvency. The U.S. PACA deemed trust applies in all cases of non-payment, such as for quality disputes, fraud, and slow payments. A deemed trust and insolvency would not protect against these losses. A PACA-like system such as this would fall outside of federal insolvency jurisdiction and require provincial legislation.

As my colleagues have already noted, we continue to engage with the fresh produce sector to understand their business and how best to ensure they achieve solid market outcomes.

With respect to any specific proposal for changes in insolvency, we will continue to consider evidence-based proposals that can further the goals of this important marketplace framework.

Thank you. We will certainly be pleased to take any questions you may have.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Schaan.

Mr. Morrison, did you want to add something?

[Paul Morrison, Senior Policy Analyst, Corporate, Insolvency and Competition Policy Directorate, Strategic Policy Sector, Innovation, Science and Economic Development Canada]

No, thank you, sir.

[The Chair, Liberal, Pat Finnigan]

Thank you.

We'll start our question period with Mr. Warkentin, for six minutes.

[Chris Warkentin, Conservative, Grande Prairie—Mackenzie, AB]

Thank you very much and we certainly appreciate your coming in this afternoon. It was late notice, but we appreciate the fact that you've come and they've given us some time to ask some questions.

We're going to have an opportunity to hear from the industry here shortly, so we'll probably get a different perspective in terms of the expectations and maybe their assessment as to the benefit of a PACA-like system and/or the challenges to implement one. There seems to be a significant demand. As a matter of fact, every time I've met with anybody who's involved in fresh produce, they bring up PACA. It seems to be something that is largely their number one concern. Obviously you've heard that and I think you've reflected on that somewhat.

I would turn to Mr. Schaan.

In your testimony, you've said that lenders and creditor groups caution that altering priorities in insolvency could lead to negative impacts on the constant availability of credit for businesses. That is often the case, as any time that you bring in creditors and the banks, they often say that if you change things, it will be more difficult for them to give money to those people who are looking for that.

You've talked about evidence-based decision-making. They've said this, but did they give you any assessment as to how much more difficult it would be for them to lend? Obviously, the American banks are lending to their produce farmers. Have they given you any indication as to what they would have to alter for a PACA-like system to be implemented?

[Mark Schaan]

I'll say a couple of things. With respect to the cost of credit, one of the tricky aspects of a marketplace framework like insolvency is that we're constantly balancing the interests of all creditors across an insolvency. As you can imagine, for an insolvent firm, it is often the worst time possible to be having to make determinations about how to divvy up assets because there's obviously no going concern for the firm. We're no longer able to allow for that firm to potentially enter out of a CBCA or CCAA process. They are insolvent.

Our statute essentially plays that balancing act of trying to ensure that we can look across the shifts across all creditors. The cost of credit is one issue among many. Super-priorities and deemed trusts that favour some creditors over others in insolvency can have significant negative economic impacts on credit costs, but they also shift losses among creditors. As such, they are exceptional remedies that are usually reserved for compelling policy objectives.

We actually did see, when we increased the overall amount of lost wages that were eligible under insolvency, that there was an actual rise in the cost of credit. There has been some evidence that increasing super-priorities or adding deemed trusts into the system does create additional risk for lenders and has, in some cases, resulted in additional costs to creditors.

[Chris Warkentin, Conservative, Grande Prairie—Mackenzie, AB]

Yes, it'll be interesting to see what the dollar figure would look like. Obviously, that's important information when we talk to farmers that are looking for this protection. They'd like to know their cost of credit, how you're assessing the increase, the ability to get credit, and how that would change if, in fact, something like this were to be implemented.

Any time we're doing business with the United States, when we have freer trade as we look to freer trade, the challenge is that our farmers are expected to compete with American farmers and the American farmers have this PACA protection. They also seem to be able to get money from the lenders. I guess the question is, how could we better reflect the Canadian system to mirror that of the United States?

The challenge is that we expect our folks to be competitive with the United States, but we don't seem to be giving them all of the tools that the Americans seem to be giving their produce farmers.

Obviously, we have a different type of system. We have both provincial and federal jurisdictions that are incorporated. If there are provisions at the provincial level that need to be undertaken, what would you suggest we recommend to the minister responsible for interprovincial trade to encourage our provincial counterparts to undertake if, in fact, it does fall into provincial jurisdiction? Where do the hang-ups seem to be?

[Fred Gorrell]

First, you started off with a very good comment about managing our expectations among what we've been doing in industry. That's a very good part of the discussion and why we're here today.

Relative to the provinces, the one area where we've noticed a hole, if I may say, in our system is for interprovincial trade; that's within a province. One of the things we're looking at, especially with the large provinces, is whether there is a possibility that the provinces could reference, for example, that you would have to be licensed with the DRC, if that ends up being our single body.

That means if you're trading within a province, you still would have to be a member of the DRC and you would be obligated to follow the rules of trade as incorporated across Canada. It doesn't deal with the PACA thing, with the trust provisions; that's really on bankruptcy and insolvency. However, that is one of the areas we've identified where there is possibly a hole that we are trying to close.

[Mark Schaan]

I'll take a stab at that with respect to the insolvency portion. One of the comments I made at the close of my remarks was that PACA is not just about insolvency-related disputes. There's a significant amount of PACA that's actually about pre-insolvency-related disputes.

As my testimony indicated, insolvency-related costs associated with fresh produce are extremely low. They're a very small proportion of the overall amount of business. On the non-insolvency-related pieces, there are aspects that are very much within provincial jurisdiction.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Schaan and Mr. Warkentin.

Next is Mrs. Lockhart.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

Mr. Gorrell and all of you, thank you very much for your testimony.

Mr. Gorrell, you mentioned in your testimony that Canadian companies trying to recover unpaid bills that are not the result of the informal resolution stage now need to post a bond. I understand that's double the value of the claim. Is this a viable option for producers?

[Fred Gorrell]

Yes, and with an explanation, if I may. One of the things we've lost now is that Canada is being treated like all other countries. All other countries, including Canada, have access to PACA, the informal process, and we have the ability to have complaints dealt with.

In the United States, there is a regulatory requirement for the people who are licensed under PACA to pay their bills. However, there are always going to be some times when there are problems or things that we can't understand. Right now, for example, if you have a complaint for $10,000, you do have to post a bond for $20,000. If you're found to be in the right, that money of course is returned to you. Is it the best type of thing? No, but it is levelling the playing field with all the other countries such as Mexico and that.

We've been looking at it and we've been following up with PACA every month. We call them. My office has been talking to them, very much because we're trying to get what is the impact of us no longer having free access to the formal process. The number of complaints registered is very low. We're looking at three to seven. The total numbers are about $160,000 in total. Right now, we are tracking this.

I understand for some small companies that double the bond could be a significant amount, but in the context of the entire fresh fruit and vegetable industry and what we're trading between Canada and the United States, it is a very small amount of money. But I'm not belittling the fact that it can be a significant impact to a producer.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

Yes, I would think that it would have a particular impact on smaller producers, obviously.

You said that it takes us onto a level playing field with all the other countries, but isn't it true that we were in a preferential position before? That doesn't sound advantageous to me.

[Fred Gorrell]

If I may, one of the conditions.... Actually, this has been going on for a number of years. This hasn't just been starting. At the end of the day, our legislative base in the United States is different. They've always said that our system was close to theirs—close, but not the same—and at the end of the day we are being treated as all other countries that trade with the United States are being treated.

As one point you could say, at least from the point of view of the United States, it's very fair. I know we're not talking about the United States today, but they're making the same rules for all of us.

On what they took away from us, as they finally said, under the RCC, we agreed to comparable outcomes, and that's because we have limitations in our legislation, as my colleague said, from the bankruptcy and insolvency side. We talked about having comparable outcomes, and what that meant for us is looking at the Safe Food for Canadians Act regulations. We believe that with the implementation of that and the single dispute resolution body that's responsible for all licensing will greatly reduce the majority of all the no-pay, slow-pay, and partial payments, which is a big issue.

The real issue for the United States is the fact that we do not have comparable or similar bankruptcy and insolvency. That is the one area where the United States has deemed they would require to be a comparable system, and that is the area that we are at this time not able to respond to.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

What I think I hear you saying is that there's really nothing that we're pursuing from a regulatory standpoint that would take us back to having that.

[Fred Gorrell]

Correct, and right now we are doing everything we can, as I indicated to your colleague, to fill the hole from a provincial point of view.

Relative to getting deemed trust back, the United States and the USDA have been very clear that they would be looking for a deemed trust to allow us to have a conversation on whether they would give us back the treatment we had previously.

[Alaina Lockhart, Liberal, Fundy Royal, NB]

Thank you.

[The Chair, Liberal, Pat Finnigan]

Madam Brosseau.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Thank you, Mr. Chair.

I would like to thank the witnesses for being here today. I think this is an important study.

I remember in the last session we talked a lot about PACA at the agriculture committee and the importance of moving forward and then, whenever we meet with farmers, it is something that comes up quite often.

I don't know if you'd be able to answer this question, but I know some farmers have lost money. Would you be able to tell us how much has been lost over the last two years by farmers? I've heard stories and I've met with a lot of people. There are some examples of people in British Columbia, and Driediger Farms—Blueridge Produce was forced to accept only $60,000; therefore, they lost $67,632. In Ontario there are losses of $27,000. Is that something you have access to?

[Mark Schaan]

I can't speak to the specifics of those instances that you've talked about as to whether or not they're insolvency related or potentially a function of non-payments, low payment, or fraudulent payments. What I can speak to is the produce insolvencies as a function of total liabilities in insolvencies.

For wholesalers, the the net liabilities is a percentage of the total sales in 2014. That's all of the liabilities minus the assets on hand. That's all liabilities, including rent and any of the outgoing liabilities. If we take the full definition, and even if we assume all of those liabilities were potentially to farmers, which would not be the case because that would include all liabilities, as a percentage it represented 0.04% of 2014 sales in the wholesaler category.

In the supermarket category it represented 0.06% of that category, and for fruit and vegetable markets it was 0.61%. So as a total percentage of total sales, the net liabilities are a very small proportion, and in the federal-provincial-territorial working groups that looked at this issue, that's consistent with those findings that insolvency claims for fresh produce are extremely low. The more significant ones are slow payment, non-payment, or contested payment.