Thank you, Chairman and distinguished members of the committee, for the opportunity to present as you examine concerning matters related to COVID-19. My name is Denise Allen, and I am the president and CEO of Food Processors of Canada.
For more than 35 years, Food Processors of Canada has been the trusted, leading national voice of the Canadian food and beverage processing sector. Today, we find ourselves in uncharted territory. We have accepted that our future is irreversibly changed by the prolonged effects of this crisis, and this has forced us all, both in business and in our daily lives, to consider the interconnectedness of our societal, food and economic systems. The following submission is intended to respectfully inform you of the impending risks we observe in our food value chain and to offer a suggestion on how to offset the possibility that, if the issue of liquidity is left unaddressed, food shortages and food price inflation will be more severe than necessary.
Since early March, the COVID-19 pandemic has placed extraordinary strain on our entire supply chain. During this time, food processors have continued to manufacture safe, high-quality products under a difficult set of circumstances, which includes reduced operating capacity and sales, higher operating costs and wages, employee absenteeism, sourcing of personal protective equipment and other measures to ensure factories remain open while simultaneously safeguarding our employees' health. These changes to operating procedures are taking place under a backdrop of daily changing public health announcements and a nationwide state of emergency.
The disruption to the food sector in Canada has left certain sectors of our economy devastated. This prolonged disruption is marked like no other in history and bears a combination of unique characteristics that will require remediation to ensure that food products continue to flow uninterrupted to consumers. Our sector's commitment to produce essential products for Canadians during our crisis remains strong. As we look forward, we recognize that social distancing rules will remain in effect for the foreseeable future. This enormous change to how we plan and run our businesses day to day will have an ongoing effect on productivity and profitability, and has, therefore, forced us to broaden our analysis and risk mitigation plans to include the interconnected parts of our food system.
A return to a steadier economic state will require the recognition and support for the incremental expenses beyond PPE incurred to date, as well as a recognition of future financial risk in the form of liquidity in one important selling channel: the food service sector. Our government's recent announcement that it will provide targeted support to food processors by creating the emergency processing fund is welcomed support. However, this pool of funds is inadequate to cover the added operational burden of not only PPE but other incremental costs to ensure the safety of front-line workers and to meet increased demand from retailers.
Through the collection of source data from businesses, we have extrapolated an estimate of approximately $1 billion in added operational expenses assumed by food processors alone. FPC welcomes the assistance and support offered by the emergency processors fund. However, we respectfully ask that consideration be given to expanding this fund to offset the financial burden beyond that of PPE being shouldered by the food and beverage processing sector.
The credit risk posed by the devastation in the food service sector, primarily of independent restaurants, presents significant risk to the efficient workings of the entire Canadian food supply. Recently, government announced a rent subsidy program for independent businesses, which responds to one of the greatest challenges for independent restaurants. However, the sector is reporting low uptake of the benefits of the program. Even more worrisome is the working capital requirement to restock inventories, which will exceed that of rent default risk.
By contrast, the retail sector remains buoyant with little to no liquidity issues reported. Retailers currently have sufficient cash flow to pay food processors within established payment terms. The food service sector has had a significant erosion of sales, which presents liquidity risk in this second major selling channel for food processors and primary producers. This liquidity risk is severe and compounded by rent and other debt, low operating margins and shortened cash cycles. Their liquidity problem is not simply timing but an inability to generate cash from operations or to borrow sufficient funds to replenish inventories required to reopen.
When we examine the total food supply chain, it is apparent that many independent operators in this sector will not be able to honour past food orders and settle rent debt through further borrowing or sales. Unless independent restaurant operators can secure a source of funding in the form of long-term financing or grants, their rent debt alone will be a significant detriment to their ability to reopen profitably.
This gap translates into significant accounts receivable risk for both food distributors and food processors. Without immediate remedy, food distributors will not extend further credit to their restaurant customers, based on this restriction to working capital.
The backbone of the Canadian food supply chain is our farmers. The agricultural sector is the base producer of food for both selling channels. The liquidity issue presented by the food service sector will impact the agricultural sector's ability to see their product effectively reach the consumer market.
Our ability to focus on the total food system and supply chain in Canada will determine if there are food shortages and severe price inflation, which will disproportionately affect those most economically vulnerable. We are asking for an injection of working capital to backstop the credit risk posed by the food service sector and ensure that product continues to flow unfettered while protecting the Canadian small business owner.
In conclusion, Chairman, two immediate opportunities exist to protect and secure food supply for all Canadians.
First, expanding the scope and magnitude of the emergency processing fund to include other incremental operating expenses is needed to offset the increases and support public safety protocols expected to continue far into the future.
Second, an immediate injection of working capital is required to backstop a minimum of three to six months' worth of food orders to offset the receivables risk to distributors and discourage changes to payment terms.
With relative stability restored to our food system, our collective focus must then shift to an exit strategy for COVID-19.
Thank you.