Agriculture Committee on March 6th, 2023

[The Chair, Liberal, Kody Blois]

I call the meeting to order.

Colleagues, welcome back. It's great to see a full room here for today's meeting.

This is meeting number 51 of the House of Commons Standing Committee on Agriculture and Agri-Food.

I'm going to start with a few reminders.

Today’s meeting is taking place in a hybrid format, and 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.

Taking screenshots or photos of your screen is not permitted. My understanding is that this also includes those who are in the room. Please do not take photos during our proceedings.

We have a great crowd in here tonight. If you're not able to get access to a headset, we apologize. We're doing our best. For those who do have access, you are able to grab your instrument over there, and this fine gentleman will help you out if you need it.

Colleagues, pursuant to Standing Order 108(2) and the motion adopted by the committee on Wednesday, October 5, 2022, the committee is resuming its study of food price inflation.

I would now like to welcome our witnesses for the first one-hour panel.

With us in person today we have, from the Dairy Processors Association of Canada, Mathieu Frigon, who is the president and chief executive officer. Joining online is Philip Vanderpol, who is the chair of the board of directors. Welcome to you both.

From Food and Beverage Canada, we have James Donaldson, who serves as the chief executive officer of the BC Food and Beverage organization.

From Maple Leaf Foods Incorporated, we have Michael McCain, executive chair of the board and chief executive officer.

To all our witnesses, thank you so much for taking the time to be here, and we look forward to hearing from you.

The way this will work is we'll have five minutes of opening remarks for each organization and then we'll turn it over to questions from our colleagues.

I'm going to start with Dairy Processors Association of Canada.

You have up to five minutes. The floor is yours.

[Philip Vanderpol, Chair of the Board of Directors, Dairy Processors Association of Canada]

Good evening, Mr. Chair, and members of the committee.

Thank you for the invitation today to discuss dairy processors' views on food inflation in our country.

As you mentioned, I am the board chair of the Dairy Processors Association of Canada. As well, I'm the president and CEO of Vitalus Nutrition. With me today is Mathieu Frigon, president and CEO of DPAC.

DPAC represents more than 90% of the milk processed into dairy products in Canada.

There are two key areas we would like to discuss with you today from the perspective of the dairy processing industry. We would first like to discuss the inflationary factors affecting our industry, and second, the importance of a grocery code of conduct to promote contractual certainty and fair trading throughout the grocery supply chain.

As you know, the causes of inflation are multifactored. Geopolitical pressures, weather-related events and the pandemic with the associated macroeconomic stimulus all played a role.

In dairy processing, between 2020 and 2023 the cost of raw milk increased by 10.6%. The cost of energy more than doubled. Packaging and material rose by 24%, while the cost of machinery and labour increased by more than 10%. Dairy processors strive to make efficiency gains and work to mitigate the impacts affecting customers and consumers, but with cost increases of this magnitude, it is obvious that costs have had to be passed down the supply chain.

Statistics Canada data shows that prices for dairy products sold by Canadian processors increased by 9.5% from 2020 to 2022, which is still below the inflation cost pressure faced by dairy processors over the same time period. For reference, the average profitability of dairy processors as a sector has, for many years, been lagging behind the average of all CPG—consumer packaged goods—manufacturers in Canada.

The factors that have been at play in Canada have also been seen in the U.S. If we compare the evolution of the price of dairy products at retail in Canada and the U.S. between 2020 and 2022, we see that dairy products overall have increased by 11.7% in Canada, while prices have risen 13.6% in the U.S.

Over the last 10 years, the inflation on dairy products in Canada has been less than half that of the other foods at retail. Food prices have risen by 27%, while the price of dairy products has increased by 11%. Cost, including farm milk prices, has definitely risen more than 11% in the dairy sector, so the 11% increase in dairy retail prices over the last 10 years reflects the efficiency gains that have taken place in the dairy supply chain over that time period, most notably at the dairy processing level.

I will now have Mathieu Frigon, president and CEO, speak on the grocery code of conduct.

[Mathieu Frigon, President and Chief Executive Officer, Dairy Processors Association of Canada]

Along with other industry associations that have appeared before this committee, our association is part of the steering committee working on the development of a code of conduct for the grocery sector. We cannot overemphasize the importance of a Canadian code of conduct to improve efficiency and collaboration throughout the supply chain.

The code will aim to bring transparency and greater contractual certainty to business relationships through clear terms and agreements between suppliers and retailers. The code will ensure that agricultural producers, processors, wholesalers, and large and small retailers adhere to ethical standards and ensure fair transactions throughout the value chain.

The code will be more than a written document, because it will also aim to establish a dispute resolution process that will allow for the quick and efficient resolution of commercial disputes between suppliers and retailers, if they cannot resolve these disputes on their own.

It is important to note that the code will need to be business-friendly, which means that it will need to be clear and simple, rather than include overly rigid rules and cumbersome processes. The goal is to increase efficiency by reducing bureaucracy, certainly not the other way around.

My association believes that the code should be mandatory and enforceable so that it truly enhances the opportunity to achieve better collaboration between suppliers and retailers.

In conclusion, the dairy processing industry has been a strong contributor to the Canadian economy over the years and we believe that the inflationary pressures we have faced have been mitigated to the greatest extent possible through efficiency gains at the processing level. The implementation of a code of conduct for the grocery sector will help to make the sector more efficient and resilient, and therefore better equipped to meet the challenges that will undoubtedly arise in the future.

Thank you again for your time and consideration on this very important topic. We welcome any questions you may have.

[The Chair, Liberal, Kody Blois]

Thank you very much for your testimony, Mr. Frigon and Mr. Vanderpol.

I will now give the floor to Mr. Donaldson for five minutes.

[James Donaldson, Chief Executive Officer, BC Food and Beverage, Food and Beverage Canada]

Thank you and good evening, committee members. Thank you for the opportunity to speak to you this evening.

My name is James Donaldson. I'm CEO of BC Food and Beverage, which is an industry association supporting the food and beverage industry in B.C. I'm also vice-chair of Food and Beverage Canada, which is a national industry association formed by Canada's provincial food and beverage associations. It represents over a thousand food and beverage manufacturers.

There are almost 8,000 food and beverage manufacturing establishments in Canada, the majority of which are small and medium-sized businesses that employ 300,000 people. Despite the small average size of businesses in the industry, it's also our country's largest manufacturing sector, in addition to being an essential service. Processors are the largest purchasers of Canadian agricultural products. As a result, these sectors are intertwined in terms of their long-term success.

Inflation is something that every Canadian has had to deal with in all aspects of their life. Obviously, food price inflation is no exception. Escalating food prices are highly visible as groceries are purchased at least once per week in Canada.

The other challenge is that food is essential. Some of the drivers of this are beyond our control, such as the war in Ukraine, droughts that have impacted many crops in North America, the pandemic and global supply chain disruptions. That makes it imperative for Canada to focus on these issues that are within its control to ensure a stable and competitive industry.

In recent months, there's been a lot of talk in the media about grocery retail business practices, which is an issue I'll touch on in a moment. However, the causes of food inflation are a lot broader than that. There are labour challenges, transportation costs, ingredient costs, packaging material costs, pallet costs, the cost of feed, and the cost of manure and fertilizer. There's been a rise throughout the supply chain.

In exploring solutions to these challenges, we need to start to look at the entire food system, which is especially critical in a country with such a large land mass and a small population. A food system is like an ecosystem: It works seamlessly when it's in balance. Right now, it's out of balance, and that is putting our industry at risk.

Processors have unique challenges versus other components of the supply chain. While rising costs have impacted everyone, including retailers and food service distributors, other stakeholders in the supply chain have the ability to pass those costs on to their customers—but not our industry. Processors have had to absorb increases in ingredient costs of up to 40% and in freight costs of up to 400%, particularly in B.C. during the flood crisis. They skyrocketed due to the imbalance between the companies providing the food and Canada's largest retailers.

It's difficult, and at times impossible, to pass those costs on through pricing, due to blackout periods and flat out rejections by some retailers. This situation, along with the excessive fees and fines administered by retailers, which cannot be passed on, and the inability to even negotiate with retailers are all impacting our industry's ability to compete. Essentially, Canada's processors are getting squeezed from both sides, and it's not sustainable. Small to mid-sized processors, which comprise most of the industry, don't have the resources and cash flow to withstand these challenges on a continuous basis.

We've heard some of the past testimony from retailers, who cited that processor margins are stable and used examples such as Pepsi, Procter & Gamble and Kraft. Those are not typical examples, as they are not reflective of the majority of industry in Canada.

We've also seen them try to shift focus from their record profits to their low margin percentages. Sadly, I can tell you that of the processors we have spoken to, even those with the good fortune of experiencing top-line growth have struggled with eroding margins. The average processor does not have the luxury of rejecting price increases from their suppliers or charging them fees and levies with no backup or prior notice.

I just wanted to point out that this is not a high-margin industry to begin with.

I'd like to make the following recommendations for your consideration.

First is the need to focus on industry competitiveness, capacity and resiliency. A lot of important work has already been done in recent years, such as the agri-food economic strategy table and the supply chain task force. We ask that this important work be revisited and implemented to move us to a more competitive position locally and globally.

Second, work with industry to resolve its labour challenges. Continue to support industry labour initiatives such as the national workforce strategy for agriculture and food and beverage manufacturing and the Achieving Our Workforce Destination program. Create a clearer and faster track to permanent residency for foreign workers.

Third, support further investment and funding for technology and automation for food and beverage manufacturers. According to the Canadian Agri-Food Policy Institute, food and beverage manufacturers are underinvested in advanced manufacturing relative to other manufacturing sectors and relative to other countries. We're falling behind. Investment in automation and technology modernization is critical for our industry to control costs, to mitigate labour risk and to scale and grow.

Most of the innovation and technology grants provided by government are not applicable to food and beverage companies. We need to revisit a broader definition of “innovation” to allow our industry better access to grant funding and dedicated funding programs for the food and beverage sector.

Thank you.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Donaldson.

We'll now turn it over to Mr. McCain.

Mr. McCain, as the sole Atlantic Canadian member of Parliament on this committee, let me just recognize that I appreciate your work and your family's legacy in Atlantic Canada and indeed across the country, from a business sense and also from the investments you've made on the social side. Thank you for accepting our invitation.

The floor is yours for up to five minutes.

[Michael H. McCain, Executive Chair of the Board and Chief Executive Officer, Maple Leaf Foods Inc.]

Thank you.

Good evening, Mr. Chair and committee members. I am Michael McCain, CEO of Maple Leaf Foods.

Maple Leaf is one of Canada's leading meat and plant-based food processors. We employ over 14,000 people in Canada and the United States. We are pursuing a bold vision to be the most sustainable protein company on earth. In 2019, we became the world's first—and I emphasize “world's first”—scale food company to be carbon neutral.

Here are the things I intend to address in my remarks. Number one is the challenge of food inflation. Number two is the root causes. Number three is some suggestions we have on policy considerations going forward.

I happen to be old enough to have lived through previous periods of high inflation. Fortunately, in the past 30 years most industrialized countries have benefited from stable inflationary conditions. Induced by macroeconomic factors connected to the pandemic, Canada is now facing, as you know, inflation rates close to 7%. The good news is that it appears to be abating, although it's not going away yet. Because of other macro factors in addition to extreme sensitivity to global supply chains, food inflation has been running at over 10%. For comparison, on the other hand, food inflation in the U.K. and the EU has been over 16%.

As you know, this is having a very significant impact on Canadians. Research conducted by the Maple Leaf Centre for Food Security found that one-quarter of Canadians are very concerned about their ability to feed themselves, a rate that has doubled in two years. Among Canadians, 62% have ranked the rising price of essentials as their number one concern.

Food insecurity was a serious issue before the pandemic. Now reports from food banks show that the rising cost of living is forcing even more people to resort to emergency food relief to put food on the table. This is a serious problem that needs structural solutions and not food charity.

Our Centre for Food Security is working collaboratively to reduce food insecurity by 50% by 2030. We do this through funding innovative projects, advocating for a stronger social safety net and bringing together those on the ground to advance change.

I hope this committee's focus on food access and affordability stimulates a broader discussion and action on food insecurity. We need every voice behind this.

Many witnesses have appeared before you to discuss the root causes of food inflation. We would start with the central observation that this is not a Canadian problem; it's a global problem, with inflation rates that are at or above our own.

There are three overwhelming root causes. Number one is supply chain instability, including labour availability. Number two is the war in Ukraine. Number three is general inflation.

Food production operates in a global supply chain. This global supply chain reduces the cost of food day in and day out. It's a delicate, operationally sensitive supply chain, and the unprecedented impacts of the post-pandemic economy have been profound. Transportation costs ballooned. Supply became unreliable. Labour availability constricted. While it is getting better, it has not fully recovered.

Grain complex multi-year price charts, which weave their way into most every food cost in some way or other, illustrate the rapid rises experienced in these markets, exacerbated by the supply chain restrictions threatened or imposed due to the war in Ukraine.

Finally, general inflation has shown up across the food chain in everything from supplies to ocean freight rates to capital costs, packaging and everything else. They all contribute to the most turbulent market conditions I've experienced in my 40-plus years in the food industry.

The profit margins of any food participant in the food value chain are pennies on the dollar. In our case, spiralling inflation and market volatility have been a massive headwind. In the first three quarters of 2022, our adjusted operating earnings declined 60% to 70% compared to 2021. Our margins compressed materially as we tried to keep up. Of course, this is unsustainable, and we have no choice but to pass on higher cost inputs, but always in the context of highly price-competitive markets, regionally, nationally and internationally, with an open border for food imports, including imports from U.S. meat processors that are over 10 times our size.

The food industry has an important role in supporting food affordability. We meet that responsibility by operating as efficiently as we possibly can, by providing consumers choice in the marketplace and by investing in scale and technology to ensure our productivity is world class.

Food inflation and inflation in general are, simply put, global problems. There's little any of us in the room can do to modify or control that. Governments and public policy can, however, play a role in addressing the consequences of food inflation in building a better food system.

Our recommendations would include, one, focusing on fiscal discipline to restrain overall inflation; two, addressing historic labour shortages, including modernizing the immigration system to address skills gaps and mobility issues; three, setting a goal to reduce food insecurity by 50% by 2030, just as our centre has, and enlisting support from civil society and the private sector; and finally, building a focus on productivity and competitiveness in our economy, including regulatory competitiveness.

Thank you, Mr. Chair, for this opportunity, and I look forward to the discussion.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. McCain.

We're now going to questions.

We're going to begin with the Conservatives and Mr. Lehoux. You have six minutes, please.

[Richard Lehoux, Conservative, Beauce, QC]

Thank you, Mr. Chair.

I would like to thank the witnesses for being here this evening.

My first question is for the Dairy Processors Association of Canada.

In the current context, what connection do you draw between the code of conduct—which you referred to at the beginning of your presentation—and, generally speaking, the inflation that has affected your industry?

[Mathieu Frigon]

Thank you for the question.

The best way governments can help us deal with inflation is to increase supply chain efficiency. We believe this is precisely what a code of conduct would achieve for the grocery products sector, by improving contractual certainty and collaboration between the different links in the chain. The link between inflation and the code of conduct is probably an indirect one, but it's there nonetheless, in that it will improve supply chain efficiency and help manage inflationary pressure.

[Richard Lehoux, Conservative, Beauce, QC]

Thank you.

To follow up on that, why do you feel that the code of conduct should be binding rather than voluntary?

[Mathieu Frigon]

Precisely to meet the objectives I've just described.

[Richard Lehoux, Conservative, Beauce, QC]

So if it's voluntary, those objectives will not be met.

[Mathieu Frigon]

Let's say that it would be more difficult to achieve them. We certainly prefer a binding and enforceable code, to make sure that the code's objectives are met.

[Richard Lehoux, Conservative, Beauce, QC]

What obstacles do you feel stand in the way of enforcing the code?

[Mathieu Frigon]

We work well with the other parts of the chain, at this time. An industry committee is currently working on a code and consultations will be launched. Collaboration is very good and there have been marked improvements. So the next few months will be critical.

[Richard Lehoux, Conservative, Beauce, QC]

In your presentation, you mentioned the sector's strong contribution to the economy. To do processing, you need production.

If you break down the price of a product that is placed in‑store, do the producer, the processor and the retailer each receive one third of the revenue? Is that how you are seeing the revenue breakdown?

[Mathieu Frigon]

Each situation is different. It depends on the products and their added value. I'll refer to the dairy sector because it's the one I'm familiar with. For liquid milk, there is probably less added value. It involves pasteurization, among other things. In that case, the dairy producer's share will probably be higher. If you take products with higher added value, which would be the case for products that are more processed, it would be different.

So it's not only a matter of revenue breakdown...

[Richard Lehoux, Conservative, Beauce, QC]

Do you think we should ultimately aim for a fairly even breakdown, regardless of the product? If there are no producers, you won't have distributors. In any case, it would be managed very differently.

How do you see that? Processing is important, of course, but should we focus a little more on producers and retailers? Should the revenue breakdown be somewhat more even?

[Mathieu Frigon]

Yes, certainly. I believe that the code of conduct will help in that way. As I said, we want to improve efficiency and collaboration between all parts of the supply chain. The consumer will ultimately benefit. I'm not the one saying this; studies in the U.K. have shown it works. That's why the United Kingdom established a code of conduct.

To come back to your question, indeed, everyone needs to benefit, including consumers.

[Richard Lehoux, Conservative, Beauce, QC]

I take it your membership includes small, medium and large businesses.

How do they all get along?

We know that in larger markets the big brands are basically the more appealing ones.

Do medium-sized businesses have their fair share of the market in the current context?

Would a code of conduct even the playing field?

[Mathieu Frigon]

It's hard for a business of any size, especially for SMEs, given inflationary pressures, among other things. In addition, the different players don't necessarily get along as well as they could within the supply chain. I would say that SMEs have to deal with particular issues.

[Richard Lehoux, Conservative, Beauce, QC]

So SMEs are the ones facing more issues.

Thank you.

At the start, you mentioned that price increases in the United States were higher than in Canada. When you take a step back, it appears the way Canada manages its dairy sector does have some good things about it.

[Mathieu Frigon]

As Mr. McCain said, it's happening around the world. Inflationary pressures are not only happening in Canada. Dairy products have gone up in price in Canada, but less so than in the United States, as you said.

[Richard Lehoux, Conservative, Beauce, QC]

Mr. Frigon, you sometimes hear that some of Canada's systems don't benefit consumer pricing, but if you look at the numbers we're given, that might not necessarily be the case.