Agriculture Committee on Feb. 13th, 2023

[The Chair, Liberal, Kody Blois]

I call this meeting to order.

Good evening, everyone.

Welcome to meeting No. 49 of the House of Commons Standing Committee on Agriculture and Agri-food.

I will start with a few reminders.

Today’s meeting is taking place in a hybrid format. The proceedings will be made available via the House of Commons website. Just so you are aware, the webcast will always show the person speaking, rather than the entirety of the committee. Screenshots or taking photos of your screen is not permitted.

Colleagues, we're back at it, and we have a few substitutions. Welcome to Mr. Kurek, subbing in for Mr. Warren Steinley. We also have Mr. Iqwinder Gaheer subbing in for Mr. Turnbull; and Mrs. Soraya Martinez Ferrada subbing in for Ms. Taylor Roy.

Welcome to the agriculture committee, it's great to have you here.

Mr. Perron, all the witnesses this evening have done their sound tests. Everything should be working properly.

Pursuant to Standing Order 108(2), and the motion adopted by the committee on Wednesday, October 5, 2022, the committee is resuming it's study of food price inflation.

I would like to welcome our witnesses for the first one-hour panel. They're all joining us virtually. From Canadians for Tax Fairness, we have Dr. D.T. Cochrane, economist and policy researcher.

From the Conseil de la transformation alimentaire du Québec, we are welcoming its Chief Executive Officer, Sylvie Cloutier and Dimitri Fraeys, the Vice-President for Innovation and Economic Affairs.

From Restaurants Canada, we have Olivier Bourbeau, vice-president, federal and Quebec.

Welcome to you all. Each of you will have five minute for opening remarks, and then we're going to turn it over to questions.

I'm going to start with Dr. Cochrane, for up to five minutes, please.

[Dr. D.T. Cochrane, Economist and Policy Researcher, Canadians for Tax Fairness]

Thank you for inviting Canadians for Tax Fairness to comment on this important issue.

Inflation is a complex phenomenon. Unfortunately, an overly simplistic claim about the cause of inflation being too much money chasing too few goods has driven an overly simplistic policy solution: higher interest rates. This claim also lends itself to blaming the federal government for inflation, because of the money created to support Canadians during the pandemic. Because of this money, we are told, there is excess demand.

Here's a question for those parroting the “too much money” line: Who has too much money? Whose demand for food and other goods is illegitimate?

There is much more I could say about the problem of reflexively using interest rates to manage inflation, but let me get to the topic of food price inflation.

Our organization has been drawing attention to the role of corporate power in inflation. Last April, we released a report, “The Rise of Corporate Profits in the Time of Covid”, which shows the profit margin of Canadian corporations jumped significantly in 2021. From an average pre-tax margin of 9% over the previous two decades, the margin reached almost 16% in 2021. Preliminary data for 2022 suggests that profit margins remained elevated. Corporations are not just passing along higher costs. Many are taking advantage of turmoil throughout the global economy to boost profit margins.

The big retail grocery chains—Loblaws, Empire and Metro—have gotten much of the attention for food price inflation. This attention is absolutely deserved, as all three have had higher profit margins during the pandemic. However, this goes beyond the public face of food retail.

Grocers' costs include the profit margins of their suppliers. Therefore, when the grocers' costs are higher, some of that is likely paying for higher profit margins. At practically every step along food supply chains, there are corporations seeking the greatest possible profit. Some corporations will be able to pass along higher costs while preserving their profit margins, and some will pass along more than higher costs to claim even greater profits.

Some of these higher costs and margins will be borne by small food businesses, such as neighbourhood restaurants, because they are not able to pass along higher costs. However, much of these costs will be paid by students, pensioners, workers and their families—in other words, everyone who needs to eat. Of course, workers also want to pass along increased costs through higher wages and salaries. Some may be able to do so; most will not.

This is the step where central banks express concern about a wage-price spiral. However, there is no similar concern about a profit-price spiral, even though, one, most of the prices we face are set by for-profit corporations and, two, corporate profit growth is well outpacing wage growth. In fact, the Bank of Canada's monetary policy reports, which justified its recent interest rate hikes, make zero reference to profit.

Let me mention the profits associated with fossil fuels—a vital input to all our food, at many stages of production. In 2019, Canada's 10 largest oil and gas companies had combined pre-tax profits of $8.5 billion at an 8.5% profit margin. In 2021, their margin doubled to 17%, bringing them a combined $23.8 billion. Oh, and while collecting these record-high profits, seven of the 10 paid no income tax.

The question of who gets to pass along higher costs, who has to absorb higher costs, and who gets to pass along more than higher costs is one of power and redistribution. Currently, some of Canada's biggest corporations have a lot of pricing power. Unsurprisingly, they are taking advantage of it, to the detriment of Canadians.

I will finish by advocating two tax measures to address this situation.

The first is a minimum tax on reported profits. If we had a 15% minimum tax on the profits that corporations report to their shareholders, the 10 largest oil and gas companies would have paid a combined $3.6 billion instead of nothing.

The second is an excess profit tax, which reduces the incentive to hike margins at every opportunity. The revenue from an excess profit tax could be redistributed to Canadians to help cover their increased costs of living.

Thank you, again, for having me speak on this important topic. I look forward to the discussion.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Cochrane.

We will now go to the Conseil de la transformation alimentaire du Québec.

Ms. Cloutier or Mr. Fraeys, you have five minutes.

[Sylvie Cloutier, Chief Executive Officer, Conseil de la transformation alimentaire du Québec]

Thank you, Mr. Chair.

Good evening, members of the House of Commons Standing Committee on Agriculture and Agri-food. We are very pleased to be here to speak with you this evening.

The Conseil de la transformation alimentaire du Québec, or the CTAQ, is the largest consortium of Quebec food and beverage processing companies. The CTAQ is a federation of 13 sectoral associations with over 650 member businesses.

The food and beverage processing industry creates 75,000 jobs in Quebec and 300,000 jobs in Canada, making it the largest manufacturing employer. The industry consists mainly of small and medium-sized enterprises.

Food inflation began in the spring of 2021. The prices of staples like wheat, corn, sugar and soy began to increase in April 2021. Stocks were getting low and the markets expected low yields owing to the drought conditions in North America. North American production was very weak in 2021. Stocks remained at a very low level.

Let's look at wheat for example. The price of wheat increased by 50% between April and November 2021, from $6 to $9 a bushel. Then, following the Russian invasion of Ukraine, the price of wheat jumped by another 50% between March and July 2022, from $9 to $14 a bushel. The price of wheat has remained high in 2023, at around eight dollars a bushel, despite the good harvest in 2022.

In the fall of 2022, the bakery sector experienced shortages of butter, gluten, sugar and flour. The scarcity of some ingredients pushed prices up and further extended the two-year long inflationary period for the sector. The Farm Product Price Index, the FPPI, and the Industrial Product Price Index, the IPPI, have been growing by 20% since January 2021, pushing up the consumer price index for many food products by 10% or more at the end of 2022.

NielsenIQ purchasing data for all Quebec networks confirmed that by the end of the year, food inflation had risen by 8%. More specifically, the increase was 15% for bakery products and prepared foods, and 10% for grocery products.

The rising price of food is a global concern, including in the United States, France and the United Kingdom.

There are multiple causes of inflation. In addition to the increased prices for staples and ingredients, wages, energy, transportation, packaging and financial costs are all rising. In short, everything's going up.

The National Supply Chain Task Force confirmed that supply chains are fragile. Canada's factories are performing less well and less efficiently, prices are rising, and delivery times are slower. COVID‑19 pandemic confinement, the 2020 railway blockades, strikes at the Port of Montreal in 2020 and 2021 and the closing of the Ambassador Bridge in February 2022 made logistics and transportation more complex, whether by ship, truck or train, and led to inflated prices.

Systems are under pressure. The slightest incident has a serious impact on prices. One example was the partial closing of the Louis-Hippolyte-La Fontaine tunnel in Montreal. An internal survey showed that companies had to change their itineraries and delivery schedules, which meant increased costs for fuel and wages, as well as additional charges for late deliveries.

To keep commodities available and prevent long delays, companies are being forced to maintain larger stocks. The 2022 harvests were good, and warehouses are full. Businesses are going to have to finance 11 months of food stocks at high interest rates. Lines of credit are in high demand and negatively affect liquidity. After eight key lending rate hikes by the Bank of Canada, rates have peaked to 4.5%, a level unheard of since October 2007. These are all added financial burdens.

Workforce shortages are the most serious challenge for the industry. Twenty per cent of jobs are unfilled. The food and beverage industry is in competition with other manufacturing sectors to attract workers from a shrinking pool. The average wage hike in 2022 was 5.8% in Quebec and 5.1% in Canada.

To keep their factories in operation, companies are bringing in temporary foreign workers. Delays are long, administrative procedures are expensive, and at the end of the line, it costs $5 more per hour to hire a temporary foreign worker than a Canadian. So once again, costs are fuelling inflation.

For 2023, we can expect further price hikes over the coming weeks. Many major distributors have announced that they were analyzing thousands of price increase requests. According to the 2023 Annual Food Price Report, a 5% to 7% increase is expected in 2023. Energy prices and wages will both continue to rise.

We will have to wait for the crop and stock forecasts to comment on food staple price trends over the coming months. A slowdown in rising prices is expected.

Thank you for having given us this opportunity to speak to the committee.

We would be happy now to answer any questions you may have.

[The Chair, Liberal, Kody Blois]

Thank you very much, Ms. Cloutier.

I am now giving the floor to M. Bourbeau for five minutes.

[Olivier Bourbeau, Vice-President, Federal and Quebec, Restaurants Canada]

Thank you very much for having me.

I'm Olivier Bourbeau, vice-president, federal and Quebec, at Restaurants Canada.

Restaurants and the many small and medium-sized businesses that make up the Canadian food service sector are a critical pillar of our culture, economy, labour market and local communities. Prior to the pandemic, Canada's food service sector was a $95 billion industry, directly employing 1.2 million people and serving 22 million customers across the country every day. We launch careers, invest in training, and are the fourth largest employer in Canada.

While we see customers coming back to our restaurants, and sales slowly returning to pre-COVID levels, profitability is simply not at the rendezvous. Not a lot of people know this, but even prior to the pandemic, restaurants operated at razor-thin margins. Indeed, pre-COVID, an average restaurant made a pre-tax profit margin of only four per cent to five per cent, and now, with skyrocketing inflation, that margin has been whittled down to two per cent to three per cent. Morever, due to labour shortages, we operate at 80% capacity. Do the math: our restaurants are barely surviving, or not making money in many cases; 50% of operators are barely breaking even, or are operating at a loss, compared with 12% pre-COVID.

With inflation driving the costs of running a business up, being able to run a profitable food service establishment has gone from tough to nearly impossible. We are not talking about just a handful of ingredient prices going up. Everything has gone up: food, utilities, amenities, insurance—when we can get it—rent, and every single material that we use.

In our industry, we cannot simply pass the cost increases down to the consumers. We try to absorb as much as possible because there's a limit to what a person is willing to pay for a meal. Unfortunately, the elastic is stretched to its maximum.

Here are four industry priority recommendations.

Extend and restructure the CEBA loans to make repayment palatable. In order to ensure that the food service continues to play a major role in a strong economic recovery, taking into consideration that 20% of the restaurants that haven't reimbursed CEBA yet will not be able to repay it in part or entirely, we are urging the government to provide additional leniency to CEBA recipients by extending it by 36 months with a scaled down model for the forgivable part.

Number two, step back on the alcohol excise tax escalator, the automatic annual increase. The 6.3% excise tax increase for 2023 would result in a $750 million hit to the food service industry, an average of $36,000 per restaurant—imagine that—while our industry is still struggling.

Number three, lower the federal small business tax rate from nine per cent to eight per cent. Currently businesses have very little capital to reinvest in their operations. Lowering the small business tax rate allows them to pay off debt and invest in their employees.

Number four, work with all players to ensure that the plastic reduction requirements are attainable. The implementation timeline for the ban of single-use plastic items should be extended, and the government must work closely with the suppliers to ensure that the alternative products will be available in the needed quantities, on time, and at a reasonable price.

I'd like to briefly summarize our four priority recommendations: We are recommending a further extension of the Canada Emergency Business Account loans for Canadian businesses, with a scaled-down model of the forgivable part; we recommend a step back on the alcohol excise tax escalator because the enormous 6.3% excise tax increase announced for this year would represent enormous costs for restaurant owners; we recommend lowering the federal small business tax rate from 9% to 8%; lastly, with respect to single use plastic products, the government should ensure that alternative products will be available in the needed quantities at reasonable prices.

To finish, I remind you that the food service industry has lost nearly 5,000 restaurants across Canada since January 2021, and more than 13,000 since the beginning of COVID.

There are 51% of food service businesses currently operating at a loss or just breaking even, compared to 12% pre-COVID, with one in four independent table-service restaurants saying their business is not expected to recover. That's one in four.

Of the private sector job vacancies, one in five are in the food service industry. Restauranteurs are operating at an average of 80% of their normal capacity due to labour shortages.

Government support is more critical than ever to ensure that our industry can realistically relaunch, continue to employ 1.2 million Canadians, keep 98,000 businesses alive and feed Canada's recovery.

Thank you very much.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Bourbeau.

We are now beginning the first round of questions, starting with the Conservative Party.

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

[John Barlow, Conservative, Foothills, AB]

Thank you very much, Mr. Chair.

Thank you to our witnesses for being here this evening. I appreciate your excellent testimony. There was some good information.

I want to start with Mr. Bourbeau of Restaurants Canada.

I'm glad you raised the issue of the escalator tax. I'm sure when our Liberal colleagues and the Liberal government brought in the escalator tax and indexed it to inflation, they were expecting inflation to stick around that 1% or 2%. Now we see that increase at 6.3%.

As much as I think the escalator tax is undemocratic, since you have a tax increase without any public input or a vote within the House of Commons.... You mentioned that $30,000 increase for a typical restaurant that they're going to have to try to make up.

Mr. Bourbeau, I would like your assessment or your opinion.

When you talk about a profit margin of 4% to 5%, that's been cut down to maybe 2% with inflation. What kind of impact is that 6.3% going to have on the typical restaurant?

You said that one in four independent restaurants is not expected to recover. How does that number change on April 1, when that escalator tax goes up to 6.3%?

[Olivier Bourbeau]

The short answer is that more restaurants will close, unfortunately. It's extremely difficult.

Thank you very much for listening and taking notes about the numbers, because they are really important.

When I say that now, following COVID, the pre-tax profit margin is between 2% and 3%.... Today I was on the phone with a gentleman who owns several restaurants. He said, “I make my sales numbers every year. I make $30 million, but do you know what? At the end of the year, I make 1%.” It's not 2%. It's not 3%. It's 1%.

Every dollar counts. Every cent counts. Alcohol is where we make a bit more money. It is where our margins are a bit higher.

At the end of the day, an increase to 6.3% is absolutely terrible, because it will be the difference between making a couple of dollars at the end of the night and just breaking even, or losing money.

[John Barlow, Conservative, Foothills, AB]

To try to be specific, when you're talking about one in four of those independent restaurants not expecting to recover...I know this is probably hard for you to say, but are you saying let's double that to two in four, possibly, when you look at that additional $30,000?

I have a rural riding with lots of small, family-owned restaurants that are trying to recover post-COVID. The economic impact on our small communities.... Losing these businesses, jobs and economic income in those towns....

Have you done some work on that in terms of...? Does that one in four go to two in four? Do you know that yet?

[Olivier Bourbeau]

Unfortunately, I don't have that forecast.

Speaking of the local restaurants, what we also see is that the owners of these independent restaurants are working more and more, because labour costs have increased by 20% because of labour shortages. They were already working 50 to 55 hours a week. Now they're working 70 hours a week.

Should they close their restaurant, the majority of them will lose everything, because they rent the place. An important number of restaurant owners own the restaurant, but not the building and everything. Therefore, they will lose everything should inflation and prices continue to rise like that.

[John Barlow, Conservative, Foothills, AB]

Thank you for that. I know that's a hard question to specifically answer.

When we talk about all of these additional costs, certainly the labour costs up 20% and the escalator by 6.3%, we also see the carbon tax increasing again on April 1, which is again a tax on small business owners, specifically restaurant owners.

When my colleagues talk about eight out of 10 Canadian families getting more back in the carbon tax than they pay, we know from the Parliamentary Budget Officer that this is not the case. Even if it were, it's not the case for small business owners. Payroll taxes were increased on January 1, and now we are going to see an increase in the carbon tax.

What is the mood of your members out there when they continue to be hit with these additional costs on business? It must be exceedingly difficult for them to stay in it.

[Olivier Bourbeau]

If you allow me to be extremely honest, I receive calls—

[John Barlow, Conservative, Foothills, AB]

I would prefer that you be extremely honest.

[Olivier Bourbeau]

I receive calls, not only during the day but sometimes during weekends, from restaurant owners—independent ones mostly—literally crying over the phone, and saying that before COVID they had $200,000 in the bank, and now they are in debt by $200,000, $300,000, or $500,000. They took additional mortgages on their houses. It's terrible, and extremely difficult.

Yes, during COVID there was a movement through takeout and delivery, but it never covered, or replaced, the full service and the clients we had in our restaurants.

[John Barlow, Conservative, Foothills, AB]

Thank you very much, Mr. Bourbeau.

[The Chair, Liberal, Kody Blois]

Thank you, Mr. Bourbeau and Mr. Barlow.

Next, we have Mrs. Valdez, for up to six minutes.

[Rechie Valdez, Liberal, Mississauga—Streetsville, ON]

Thank you, Mr. Chair, and thank you to the witnesses who have joined us today.

Through you, Mr. Chair, I'll direct my questions to Dr. Cochrane. You've written about Canada's corporate tax gaps.

Can you share how those contribute to or drive up food inflation?

[Dr. D.T. Cochrane]

Our analysis of where corporate profits are coming from, and where they're going, has looked at both the higher margins during 2021, and how much tax these companies were paying compared with how much you would expect them to pay, given the tax rates. We found that in 2021, there was about $30 billion in total corporate tax avoidance.

This is money that remains in the hands of the predominantly largest, most powerful, and already most profitable companies that have conjoined this reduction in their effective tax rates with even higher profit margins.

As they're jacking up their profit margins, those profits have to come from somewhere. They're coming from predominantly smaller businesses, which—as Mr. Bourbeau said about restaurants—can't pass along the higher costs they're facing, and they're also coming out of the pockets of Canadians.

These are really two sides of the same coin. On the one hand, you have these higher profit margins. It's corporations doing what they're always going to do. People shouldn't act surprised that this is happening, but they have a right to be outraged. On the other side of the coin, they're trying to push their tax rates ever lower through whatever means they can leverage.

[Rechie Valdez, Liberal, Mississauga—Streetsville, ON]

Can you share what we can learn from other G7 countries? I know you also do quite a bit of research on that.

[Dr. D.T. Cochrane]

Other G7 countries use different tax mechanisms that we absolutely should be exploring. I can't speak in an informed way about this specific one, or that specific one. I'm pleased to hear there's an interest in what other countries are doing.

Absolutely, we should be looking at what other countries are doing. We know that other countries have a much fairer distribution of the social product than Canada has. We pride ourselves on being a country where we take care of each other, but we can live up to the example of other countries much more. Part of that is through having a fairer tax system that makes sure the big players are paying their fair share.

[Rechie Valdez, Liberal, Mississauga—Streetsville, ON]

Thank you. I'll now direct my next set of questions to Mr. Bourbeau.

Mr. Bourbeau, my riding is Mississauga—Streetsville, and I'm surrounded by many small businesses, particularly in the restaurant industry. I've spoken to them, and they've really appreciated all the supports our federal government has provided to them, especially with CEBA loans, which you mentioned earlier.

Do you agree that those CEBA loans have helped restaurants stay open through the pandemic?

[Olivier Bourbeau]

Yes, they definitely helped.

Definitely, we were pleased that the federal government was there and was present. Now what we want to make sure of is that everyone will be able to reimburse. We want the subsidies and the loans to be reimbursed. Also, you extended the CEBA loan twice, and we were extremely pleased with that.

That said, what we are presenting is a win-win solution to make sure that our restaurant owners will stay in business and not go bankrupt and that the government will get reimbursed. Plus, with the 36 months, with the scaled-down solution of the forgivable part, for the government it's really interesting, because the restaurant owners and the small business owners will want to reimburse as fast as they can, because they will.... Well, it's clear: we all understand that they will keep a larger forgivable part.

It's a way to help us survive and stay alive. Plus, it's a way for the government to make sure they will get reimbursed by a larger group of businesses.

[Rechie Valdez, Liberal, Mississauga—Streetsville, ON]

Thank you, Mr. Chair.

I know that Restaurants Canada is hosting the RC show that is coming up in April. One of the solutions you have presented on the website and that I think is pretty cool for restaurants is the “Inflation Life Raft”. Can you share with us what this is and how it will help restaurants deal with inflation? Earlier, you were talking about the drop in margins, so can you share that?

[Olivier Bourbeau]

Unfortunately, I don't have that information with me, and my apologies for that.