Agriculture Committee on Jan. 28th, 2021

[The Chair, Liberal, Pat Finnigan]

Welcome, everyone. Everybody seems to be in a great mood today and so am I. Everything has started well and hopefully we'll have good communication right through.

With that, I'll call the meeting to order.

Welcome to meeting number 14 of the House of Commons Standing Committee on Agriculture and Agri-Food. Pursuant to Standing Order 108(2) and the motion adopted by the committee on October 24, 2020, the committee is resuming its study on processing capacity.

Today's meeting is also taking place in the new webinar format. Webinars are for public committee meetings and are available only to members, their staff and witnesses. Members may have remarked that the entry to the meeting was much quicker and that they immediately entered as an active participant. All functionalities for active participants remain the same. Staff will be non-active participants only and can therefore only view the meeting in the gallery view.

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During our last meeting, we experienced interpretation difficulties during Richard Davies' testimony, which elicited a reaction and comments from members, and justifiably so. As there was another place available for witness testimony on February 16, 2021, Mr. Davies will be invited to appear again in front of the committee on that day. Committee members will be given the opportunity to question Mr. Davies at that time.

I would like now to welcome our witnesses. Today we have, from Apple Valley Foods, Jeff Sarsfield, owner and executive director. Welcome, Mr. Sarsfield, to our committee. From Qu'Appelle Beef, we have Jason Aitken, chief executive officer. Welcome.

With that, we shall start with your opening statements.

We'll start with Mr. Sarsfield. You have seven and a half minutes.

[Jeff Sarsfield, President, Apple Valley Foods Inc.]

Good afternoon, everyone. Thanks for the invitation.

I'm Jeff Sarsfield, president of Apple Valley. We're located in Kentville, Nova Scotia. We started the business back in 2000. We're a frozen fruit pie supplier, shipping all across Canada and the U.S. We mostly concentrate on private label customers in the retail food service business. We have 68% of our sales currently in Canada and 40% in the U.S.

Last year, we grew substantially, more in Canada than in the U.S. We're up to about 400 people now operating in two production plants, both located in the same industrial park here in Kentville. We did a major expansion back in 2014-15, where we tripled our capacity at the time for both Canadian sales and exports.

In the last plant we put together, we were about 80% automated in that plant. Then due to overall growth that we've had since then, we've upgraded our original plant a fair bit. We originally planned on shutting that facility down or changing it to a totally different product line. That has provided lots of additional sales growth during the last five years.

However, this past year, our major constraint for capacity was labour. We had four production lines, and there was one complete line that we were not able to staff. Basically, with COVID, we have seen a major decline in applications from new employees. We are fortunate that we had applications from foreign workers in place. By the end of the year, we saw our first foreign workers come into our facility. We originally brought in nine foreign workers back in late December, and just last week, we had another 11 workers come in. We are able to start increasing our fourth production line, which will give us some further growth for this year.

Ending last year, we were well in excess of $100 million in sales. Our main growth is from the fact that we concentrate on providing top-quality, homestyle products. We are one of the very few North American producers that grow, process and put together apple pies from scratch.

We grow some of our own apples. We buy direct from local farmers. We peel, core and slice them in our bakery and put them directly into the pies, which gives us a unique homestyle product. That's been a big secret of our growth. We also have good local staff, who are able to train for some of the technologies that we put into our process at the two facilities.

Going forward, we still have lots of opportunities to continue our automation to help become more efficient and competitive in the marketplace.

There is one other thing. FCC and ACOA and the province helped us out when we initially started the business and were quite instrumental in us being able to start at the level we did. We have done numerous expansions over the years, and FCC and ACOA have always been there. That's been a big part of why we are still around and why we continue to grow.

I just wanted to let the committee know how important those two programs have been, along with the agri-innovate fund, which was also in there as well.

It definitely has really helped us to expand when we needed to. I guess I'll leave it at that.

[The Chair, Liberal, Pat Finnigan]

Thank you, Mr. Sarsfield.

We'll go next to Qu'Appelle Beef.

Jason Aitken, you have seven and a half minutes.

[Jason Aitken, President, Northern Natural Processing LP]

Good afternoon, everyone.

My name is Jason Aitken, and I'm the president of Northern Natural Processing. I'm here to directly address the goal that the Barton report is trying to achieve: specifically, to increase production capacity to meet an export objective of $75 billion in 2025.

Northern Natural Processing owns the only CFIA federally licensed beef slaughter facilities in Saskatchewan, and we do business under the brand name Qu'Appelle Beef. We're independent and to date have focused on delivering high-quality, value-added beef products.

We own two CFIA federally licensed facilities, both outside of Regina. The cattle harvest facility, CFIA establishment 659, is approximately 33,000 square feet and is in Neudorf. The beef value-added further processing facility, CFIA establishment 519, is approximately 22,000 square feet and is in Wolseley. Recently, we obtained export licences for the U.S., South Korea and Japan.

Saskatchewan accounts for more than 40% of arable land in Canada, yet 85% of the cattle born in Saskatchewan leave on trucks, with half of them going south to the U.S. Why can't we keep the cattle in Canada and process them locally?

Canada is currently a net importer of beef, so we're here to change this. It's about food security and value creation at home for the benefit of Canadian producers and families in our local communities. Our mission is to be a net exporter of high-quality value-added beef products, not just an exporter of live cattle.

Let me break down the remainder of my time into two segments: the barriers that hold us back as a beef processor and the opportunities ahead.

The three main barriers are capital funding, critical mass and market power.

On capital funding, the capital expenditure required to be competitive in beef processing is significant. The strength of the two main incumbents—both foreign players that control 90% of the market—is well acknowledged. Cargill has 14 billionaires as family members, and JBS's largest shareholder is 25% owned by the Brazilian government.

Capitalization for smaller processors is a critical issue. We've privately raised over $40 million from scratch from investors over the last decade since I founded the business. This represents a 10:1 ratio versus any government funding that we have received.

If Canada wants to have made-in-Canada beef and true self-sufficiency and to avoid the supply and procurement issues being witnessed currently with PPE and vaccines, I would submit that all parties would mutually benefit from greater stimulus participation from the Government of Canada.

On the topic of critical mass, the operating expenditure required to be competitive in beef processing is significant. By that, I mean funding for the working capital requirements for essential inputs like cattle, labour, packaging and utilities. Let me use a simple analogy. Think of a 747 airplane: Does it economically make sense to run it if you only have five people aboard? There must be enough cattle throughput to cover fixed costs. We've succeeded in selling over five million pounds of beef across the country to customers such as Metro, Longo's, Costco, Save-on-Foods and A&W, to name a few, but it's still not enough to realize break-even plant capacity. This is where international markets are critical.

On market power, as you know, the beef industry is incredibly concentrated, so much so that four players control 80% of the U.S. market, where there have recently been antitrust probes led by the Department of Justice. In Canada, two main players have 90% of the market. Cargill and JBS can sell steaks and ground beef as loss leaders because of their global reach. Think of it like a Sony PlayStation or Xbox that embeds their platform with entrenched consumers; they make all their profit with scalability on software and tie-in products. As any parent with teenage kids knows, they get you hooked.

The best way to make money in the beef-processing industry is to consider steaks as almost a by-product of what you do. The Better Beef slaughter plant in Guelph, Ontario, set an important precedent by building a by-product capture plant with strong distribution into Japan. Their success resulted in a high-value acquisition by Cargill at a twelve times EBITDA multiple. Don't let anyone tell you that beef processors can't make money for their stakeholders.

Let’s bring this back to the bigger opportunity and the reason why we’re here: the Barton report and $75 billion in exports by 2025. This gets very personal for me. I've spent 15 years living outside Canada: seven years in Japan and seven and a half in the U.S. I speak Japanese. I've done 1,500 company visits on site in Japan, Korea and China. If there's one thing I'm sure about, it's rising per capita protein consumption in those regions. It's an unstoppable long-term trend.

We have an amazing export opportunity. Asia-Pacific wants to do business with Canada, but they require stability and guaranteed supply. The only way to guarantee this is to develop the hard assets and truly invest in the necessary infrastructure.

This brings us to two points to leave you with.

The path forward is access to funds and greater flexibility. Canada has done a good job of providing funds and initiatives to lay the foundation for export opportunities, for example, the recent CPTPP treaty and the recent announcement of a $4-billion irrigation project in Saskatchewan. However, broader access to funds remains severely limited. Until application and performance criteria are revised, Canada is not encouraging the innovation and participation required to achieve the Barton report export objectives.

Finally, here are the benefits that a true commitment to funding would have. We'd increase the number of long-term skilled jobs and high-value jobs. It’s worth noting that indigenous people make up over 50% of our workforce at Qu’Appelle Valley. We'd create and realize significantly higher prices for local Canadian agricultural inputs. We would provide a reliable, guaranteed, high-quality supply of beef for Canadians; promote integrity and brand value for the region; promote Canadian interests, both domestically and abroad; and finally create a successful template for the business development of healthy value-added products, which can be replicated in other provinces around the country.

With that, I’d like to open it to questions. Thank you so much for your time.

[The Chair, Liberal, Pat Finnigan]

Thank you very much, Mr. Aiken.

Now we will start our questioning round.

To start us off with six minutes, we have Ms. Rood.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Mr. Chair.

Thank you, Mr. Aiken, for agreeing to appear here today. Thank you for reminding us the Barton report has set an export objective of $75 million by 2025 for Canada's agri-foods.

I see the agri-food table increased the objectives to $85 billion in agri-food exports by 2025. In the last meeting we heard how the pandemic has affected processing capacity. I want to commend you for seeing an opportunity in your field, and for privately raising $40 million in capital to keep your business up and running. I'm just wondering if you can comment on how your processing capacity has been affected by the pandemic, and how the federal government's pandemic funding or other funding has helped you or not helped you in any way.

[Jason Aitken]

Thank you, Lianne.

Essentially cutting to the chase, the issue is we're not capitalized effectively. I outlined to you the critical mass of capital funding issues we face with two extremely strong incumbents in the area. What I think is the issue is during the pandemic, when there was a dire need suddenly for beef, we would receive calls from customers, and they would say, “We need beef now.” Payment from the customer is going to be in 30 days, and yet the cattle rancher will need to be paid right away. That working capital gap is a huge issue.

Related to government programs, and how they could help, really, there are two things at stake here: there's capital expenditure and there's operating expenditure. On the capital expenditure, the emergency processing fund is a great start, because it can focus on addressing the capacity constraints that you have in the facility. As it relates to the operating expenditure, the regional development funds can be useful, such as the western diversification program and specifically the business scale-up program because it allows you to scale up the working capital.

There has been a challenge. I guess it's established in tech companies. There have been years of no profits. But the scalability of going into export markets is enormous. It has to be nurtured over time. The traditional financial scoring system may not reflect some of the strategic realities of starting a new plan. These things have to be nurtured. It's the expectation that you're going to have setbacks, the expectation that things will go wrong. I think there has to be patience with that process. When I look at the strategic objectives of Canada, I'm not saying we can replace Cargill or JBS—that's like the power system. But if you were a hospital, wouldn't you want to have a backup power generator in case? The pandemic has really underscored that vulnerability. The lesson here is that nobody is infallible and you can't put all your eggs in one basket.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

You mentioned there are barriers that hold you back as a beef processor. You're being licensed by the Canadian Food Inspection Agency, CFIA. We've heard from stakeholders across the food-processing industry, and in fact, in our last meeting, we heard that the CFIA isn't consistent, that is, the CFIA inspectors are inconsistent with their inspections and application of the regulations. Have you found this to be the case? If so, does this inconsistency represent a barrier that holds you back?

[Jason Aitken]

There are always challenges. We went through many challenges on the regulatory in 2014 and 2015. We went through recalls, a licence suspension, many things that came with taking a provincially licensed plant to federal status, which we achieved. Since then, we've done a Costco proprietary audit, Whole Foods animal welfare addendum, BRC certification, all these things that make us robust so we can compete not just in Canada, but internationally.

As far as inconsistency, we did go through that, and it's cost us lots of money, but I like to look at it and think we raised our game, because customers at the end of the day can know, like a frosh in university, we went through the trials and tribulations to become better, and now I feel very proud of what is one of the most modern facilities in Canada, with a track record for providing incredible beef.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

You also mentioned the need for enough cattle coming through your processing facilities to cover your fixed costs; that you've not yet processed enough cattle to break even. Are you having trouble getting cattle producers to send the stock to your facilities? If so, what do you see as the solution?

[Jason Aitken]

I don't think the issue per se is supply, because as I said, almost half of farmland in Canada is in Saskatchewan; there are plenty of cattle around us. I think the issue is the scale. For example, if we went into international markets, it's the global reach—you need to be able to meet minimum container loads. All that has to be funded upfront with a massive capital expense, so it's the capital issue versus the supply that I think is the biggest barrier. That's where you run into the issues of the cattle collateralized by their bankers, so the bankers effectively control those cattle and they need to be paid in 48 hours, seven days at the most. That's really difficult when your customer isn't paying you for 30 days in some cases.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

Thank you so much, Mr. Aitken. I appreciate your time today.

[The Chair, Liberal, Pat Finnigan]

Now we'll move to Mr. Blois for six minutes.

[Kody Blois, Liberal, Kings—Hants, NS]

Thank you very much, Mr. Chair.

I'd like to thank both our witnesses for their testimony here today.

I'm going to start with Mr. Sarsfield. Jeff, it's great to see you. Obviously, your business plays an important role in the Annapolis Valley. I want to get to the point on labour, because we've had this conversation offline; we've heard it before on this committee. Is looking at increasing the 10% number of temporary foreign workers that is allowed for your workforce a good start? You also mentioned the seasonal agricultural worker program and allowing for transfers not only between producers, but perhaps producer to processor. Can you elaborate a little on that?

[Jeff Sarsfield]

On the agricultural side, our apple production side, it's totally crucial for them to have both the harvest labour and also labour earlier in the year for pruning and so on. There are definitely advantages. The longer they can bring up the temporary workers, the cheaper it would become for their housing and so on. Here at the plant the 10% allocation has definitely made a huge difference for us to get more lines running in our plant. Right now they're not available. If we do hire locals, it's like a lot of areas: we hire 10, and then after two weeks we have one or two left.

[Kody Blois, Liberal, Kings—Hants, NS]

There are certainly challenges. We mentioned those existed before the pandemic, obviously. As we've heard from some small business owners, the CERB, although a great program, has created challenges in that space. I don't think that's any secret there.

Specifically, as I understand it, looking at the seasonal agricultural worker program and allowing transfers, potentially, from producer to processor in an area could be something we should perhaps be looking at. Is that fair?

[Jeff Sarsfield]

Yes, particularly last fall it would have helped us pick up a few more millions of sales. We could have transferred some from our farming operations into our plant for the November-December time frame. We would have picked up sales that we shorted due to lack of labour.

[Kody Blois, Liberal, Kings—Hants, NS]

Certainly you mentioned Farm Credit Canada and the important role that ACOA has played. You mentioned the major expansion back in 2014 that tripled your production capacity. Is it fair to say that one of the recommendations that should be coming out of this committee is looking at the important role that Farm Credit Canada can play, along with the regional development agencies, to position processors to make these innovations?

[Jeff Sarsfield]

That is fair, I guess.

I just want to point out the fact that in our success for having capital available to us in rural Nova Scotia, they definitely met those requirements. As we go forward, we'd like to see that was still available to us.

[Kody Blois, Liberal, Kings—Hants, NS]

I've had the chance to be in your two facilities. They're impressive. It's amazing to see the number of pies going through your facility. I know you're looking to the future as well. You're looking at the price on pollution and the fact that the government is moving on a sustainability goal and agenda.

What can the government do to help ensure your business remains sustainable?

Are there ways we can partner with you to try to help ensure that the investments that are needed in your facility can keep pace with things like the price on pollution and others?

[Jeff Sarsfield]

I guess it's continued support for us for that funding that's become available. I know we received some through the agri-food fund for different automated projects that we've done. It's just that continual support and new programs to help us keep our plant modern and keep investing for automation. It's the combination of that and the foreign workers.

Basically our plant is full now. We're at that point now where we try to decide whether we increase our overall capacity. It's going to be a major...it could be $25 million to $30 million. It's definitely hard to get price increases with our customer base. Right now we're enjoying the fact that at least we have a full plant. Both of our plants run six days a week, 24 hours a day. When we increase for capacity and we're looking for sales, there's always that setback. We're in that time period where we're deciding whether we're going to move ahead with more expansion or just keep and modernize what we have.

[Kody Blois, Liberal, Kings—Hants, NS]

What I'm hearing then is it's important that we continue to have those measures in place that you've already been able to capitalize on. I know offline we've talked about some of the impacts in dealing with the major retailers because you market through them. Certainly we've heard a lot about the code of conduct. I think you referenced it.

Mr. Aitken, you talked about broadening government programs writ large. I really appreciate your testimony today. When you say broaden, what can government do? What exactly does that mean? Do you mean less program-specific and a little bit more just general ability to innovate and move you forward?

[Jason Aitken]

For example, the emergency processing fund has two categories. There's an emergency category and a strategic category. To my knowledge, not a single strategic investment has been approved in that fund. I understand that there might be a top-up. It needs to be funded and strategic projects need to be approved. Otherwise we're not going to get to that Barton report objective of international exports.

[Kody Blois, Liberal, Kings—Hants, NS]

That was certainly an emergency program, right?

[The Chair, Liberal, Pat Finnigan]

Thank you.

Mr. Perron, you have the floor for six minutes.