Fisheries Committee on April 1st, 2009

[The Chair, Conservative, Rodney Weston]

I call the meeting to order this morning.

I'd like to welcome the mayor of Yarmouth here this morning. The mayor has very graciously joined us this morning to welcome us to his community.

Mr. Mayor, I'll give you the podium.

[Philip Mooney, Mayor, Town of Yarmouth]

Thank you, Mr. Chairman.

Welcome, everybody, to Yarmouth. Thank you for coming.

I was surprised to get a call from Mr. Andrews last week, inviting me just for a little chat. I know you're going to keep me to 20 seconds, but if anybody ever sees the acrimony in the House of Commons and saw the camaraderie last night at supper between all parties, it was something that all Canadians should probably see. They treated each other very well and had a very good conversation about western Nova Scotia.

Today you'll find out about our lobster industry, which drives the economy here in Yarmouth and Yarmouth County—and the tri-counties actually. The only other thing to know is what I told the boys last night, that I was going out to do two things. I was going out to see the Chicago Blackhawks beat the Montreal Canadiens and I was going out to play poker last night. I wanted to accomplish two things, to win money on one, but when the Black Hawks lost I still won $5. But I want to switch it the other way.

Mr. Chairman, thank you for the 30 or 40 seconds. Thank you for bringing everybody to Yarmouth. Hopefully, you can get those guys down to the lobster pound.

Thank you very much.

[Applause]

[The Chair, Conservative, Rodney Weston]

Thank you, Mr. Mayor. We really, really appreciate your coming here this morning.

Mr. Kerr would like to say a couple of words as well.

[Greg Kerr, Conservative, West Nova, NS]

Thank you, Mr. Chair.

I just want to say to everybody, thank you for being in West Nova. Yes, we had a very restful evening last night. I thought it was funny because Phil arrived just to say hi, and he had his Blackhawks hat on then. Monsieur Blais indicated he might not arrive this morning with it on, and sure enough he didn't arrive with his Blackhawks hat on today!

[Voices]

Oh, oh!

[Greg Kerr, Conservative, West Nova, NS]

Once again, the Habs won that round.

I just want to say briefly that you heard me reference lobster—and, yes, it does make the economy. When you flew in you will have noticed that Yarmouth is a long way away from a lot other built-up areas. It's a very independent and very strong community.

We started years and years ago, obviously when Mr. Champlain and Mr. Poutrincourt arrived in Port Royal and went up the way in West Nova and then went on to Quebec. It's always been attached to the sea.

People noticed the houses last night. Up until early last century, it was a thriving sea community with a lot of commercial ships, wooden sailing ships, etc. They've never lost the tradition, but today the dependence is more and more on primary resources, and the fishery is critical to the area's economy. And lobster has grown in importance steadily in the last number of years.

I know the residents and the people who are in the industry very much appreciate the committee being here, and I just want to say welcome, and I hope you enjoy it. As they say in Nova Scotia, come back often and spend lots of money.

Thank you, sir.

[The Chair, Conservative, Rodney Weston]

Thank you, Mr. Kerr.

Before we start this morning, Mr. Stoffer tells me that our friends from Newfoundland and Labrador are celebrating a special occasion today. I don't know if he's trying to pull an April fool's joke on me or not, because he's already tried once this morning.

Is it correct that last night was a special anniversary in Newfoundland?

[An hon. member]

At midnight.

[Scott Andrews, Liberal, Avalon, NL]

Actually, it was last night at 11:59.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Actually, it is a special anniversary for the territory of Nunavut today as well. However, we couldn't celebrate that today. You need to have a celebration.

[Voices]

Oh, oh!

[Lawrence MacAulay, Liberal, Cardigan, PE]

We're always big on celebrations.

[Voices]

Oh, oh!

[Greg Kerr, Conservative, West Nova, NS]

Do you need a reason?

[The Chair, Conservative, Rodney Weston]

Now we'll get down to the business we came to town for.

This morning we have with us Mr. Colin MacDonald from the Clearwater Seafoods Limited Partnership.

Mr. MacDonald, we allow 10 minutes for the initial presentation and then there are timeframes allotted to each individual member, or to each individual party, for questioning on your presentation. I know you have quite a lengthy presentation, and don't be offended if I cut you off, because we'll probably get to a lot of the material through the questioning process as well.

Mr. MacDonald, I invite you at this time to proceed with your presentation.

[Colin MacDonald, Chief Executive Officer, Clearwater Seafoods Limited Partnership]

Thank you, sir, and ladies and gentlemen.

I've left a copy of my presentation, so you're welcome to distribute it and read it. I think the points I make are salient to the issue.

Thank you for the opportunity to present my views on the Canadian lobster fishery.

I've been in the lobster fishery as a buyer and an exporter of lobsters for 32 years. In that time, I've been accused of being plain-spoken and frank and a holder of unpopular views in the industry. Obviously, nothing I will say today will dissuade anybody from that perspective.

I also agree that the problems facing the industry are complex in nature, and my solutions are not meant to over-simplify the complexity of the problems. But I believe the problems the industry is facing have their roots in the very history and structure of the industry. It's my strongly held belief that the challenges we are confronting today go much deeper than just price. They go right to the core of the industry structure. They have been exacerbated and made more apparent by the global economic crisis. However, even in the face of the enormity of these challenges, we have an unprecedented opportunity to offer a new and more sustainable future for the Canadian lobster industry.

Whether you are a fisherman, a buyer, a shipper, a retailer, a restaurateur, or a provincial or federal member of the government bureaucracy, the very first issue we should all think about when we discuss the lobster business is, who is our customer and what is our customer's experience with the product? When you think of the customer, it is important that you consider two broad levels: the distribution system—which is how we get the product to the ultimate consumer—and the consumer.

The lobster industry needs to promise and deliver two things to be successful, first and foremost: an incredible eating experience each and every time; and secondly, and as important, a reasonable profit to the distribution network. Otherwise, neither the consumer nor the distribution system has a reason to buy, handle, or eat lobsters. The industry has failed to do either of these consistently. Proof is seen in how quickly the market deserted the product. As I stated, the current economic crisis only exacerbates and accentuates the industry's failed structure.

Our biggest single failure is that our customers do not profit from the experience of buying or trading in lobsters. The industry forgets that although lobsters may carry the prestige and lure of caviar and champagne, just like the latter, they are not a necessity and can be quickly replaced in our customers' purchasing priority list by other more necessary products in times of economic upheaval, or by other luxury products, should we fail to deliver on our promise. Ask GM or Chrysler.

It is my contention that in December, when there was abundant supply, we felt the perfect storm of both events. We were replaced on the priority list by necessities; and where a treat was desired and purchased, we were replaced by other more reliable luxury products. The industry has disappointed far too many of our customers far too often and has made the lobster business unprofitable for our distribution network, because we have failed to deliver on our promise of consistent quality, consistent supply, consistent and predictable pricing, and outstanding service. It is a sad statement to make, but we abused our reputation and our customers far too long.

It is my contention that the industry is the author of its own misfortune. Actually, the 100-year-old structure of the industry is the cause of all of our problems. It does not encourage or even allow investment in either technology, market development, or profitability, other than at the most rudimentary level above the level of the harvester. Doing so immediately encumbers you with an overhead structure that makes you uncompetitive in a market where the chief marketing tool of your competitor is, “We are cheaper than the next guy”.

I have often described the lobster industry as one of desperation—again above the primary harvester's level. Desperate men and women are trying to buy a stake in the industry by competing for the precious cargo of lobsters, and then are doubly desperate to sell it into the market before the product dies, or the best before date expires, or the market collapses under the weight of actual supply, or even pending supply, or the banks simply ask for their money back. The harvesters are the only participants with a short access to supply, so they are the only ones who are sure they will have a product to sell.

In this scenario, you have to be as crazy as a company called Clearwater to invest in technologies to overcome the industry's problems and to risk being held hostage by an industry that rewards a low-investment competitor. As a now bankrupt competitor once proudly proclaimed to me, “Colin, I can pay more and sell for less than you every day of the week because I don't have your overhead burden.”

His was a winning formula, as he quickly went bankrupt, taking several million hard-earned dollars out of the industry and distributing it around the world, along with the lobsters he either didn't protect well enough or sold unwisely to less than creditworthy customers. However, I hardly had time to blink before he was back in business, with a new company name, buying against me on the shore and paying more. And as his price so proudly proclaims, “We are cheaper than Clearwater.”

What is the solution? The solution isn't for the government to bail out the industry. The solution is for the industry to deliver on the promise. To do that, we need the government, because the government controls the structure of the industry. It controls the game. It makes the rules and it has the power to enforce them.

However, the industry does not need government money. To do that would be a huge mistake, as industry must start paying its own way. For far too long, the industry has long abdicated responsibility for self-management.

I won't tell you about Clearwater.

[Voices]

Oh, oh!

[Colin MacDonald]

All the investment we've made and all the innovations we've brought to the table, including the dry land pound, an MRI machine that tells you how much meat is in the animal, blood-protein testing, and banding the lobsters, and all the markets we've developed in Asia, Japan, China, Europe, and the Middle East, are frustrated by the fact that we have absolutely no control over our landed cost or supply.

Secondly, and just as bad, there is absolutely no control over landed quality. To a fisherman, a lobster is a lobster. He sells it by weight. It doesn't matter if it's soft, weak, a cull, or the ugliest 10- to 20-pound jumbo you have ever seen. It is all money to him. Unfortunately, to a customer and the consumers, it does make a difference.

Consumers are looking for a perfectly formed and sized one- to two-pound lobster on their plate. Although we have tried to influence quality by educating our fishermen through our lobster university, you can't blame them when they say, “Why should we care about quality when my uncle who fishes in the next cove is getting paid the same with half the effort and he lands everything that crawls into his traps?”

A third and equally frustrating problem with the industry is that as soon as we develop a new market of customers, the well-intentioned staff of Canada's trade department lets it be known to all and sundry who ask for the information, and they immediately send out a price list saying, “We're cheaper than Clearwater.”

An indication of how important landed quality and handling practices are to the industry can be seen in the oft-quoted numbers of the industry mortality. Fifteen per cent of all the lobsters caught each year go to the garbage can instead of going to the market. That's 15 million pounds and roughly $150 million worth of value, all because of bad handling practices

I'd swear the industry is structured so that it is a race to the bottom. If it weren't so tragic, I would say it was the stuff of a Monty Python movie. Don't take me wrong; I'm not bitching about the industry being unfair to Clearwater. It isn't unfair, and even if it is, I was a big boy when I got in and when we made all our investments. We entered the game with our eyes open.

We came to the lobster industry bound and determined to make a difference, to be a force, and to chart a new direction, whether it is the new markets we have developed in Japan, China, Southeast Asia, Hong Kong, the Middle East, Europe, Russia, the U.S., or Canada, or our use of science to develop the techniques of health determinants through blood-protein testing or our patented mini-MRI system, our dry land pound technology, our high-pressured shucking of raw lobster, or simply our lobster university and the use of elastic bands to immobilize lobster claws. Everyone at Clearwater is extremely proud of the difference we have made through our industry leadership and our global reputation for supplying our customers with finest quality lobsters.

Here are my suggestions for solutions.

One, you do not want to do more of the same. I believe it was Albert Einstein who said something to the effect that it is a fool who keeps repeating the same things expecting a different result.

Two, we need to change the industry structure to encourage investment, not by government, but by the industry participants--those who stand to gain by the investment. At the moment that appears to be limited to the fishermen. But it could quickly shift to the entire industry if the same limited entry was afforded to the buying side, with rules covering volume so you would limit the buyers on the shore so it would become a viable investment for the enterprise.

Although seen as anathema by the fishermen, apply a quota. This would go a long way to controlling periods of either oversupply or undersupply to the market, and it would provide pricing consistency. An example is the west coast halibut fishery.

And outlaw culls and big ugly jumbos over six pounds. This would immediately make every landed lobster more valuable and more precious. It would limit waste and improve handling dramatically, as many culls are created by handling after the animal is caught. It would also add to the reproductive base of the animal.

Ensure that the fishermen pay for all government programs through a tax-per-pound on lobsters landed. This would go a long way to changing their attitude of disrespect for DFO and science. I have often heard them say that they want responsibility for the industry. Give it to them, and make them fund it. It will become much more meaningful.

Similarly, if you're hell-bent on a marketing program, then the fishermen should support it with a per-pound charge. They are the ones who will ultimately reap the benefits.

In thinking about what the solutions should be, I think we all have to ask ourselves what the end gain is. I believe it is to sell the precious Canadian resource for the most dollars possible, while respecting the animal's right to live and ensuring our harvesting practices are sustainable. Then let those dollars come back to work in Canada.

We are not doing this now. I contend that not only is the resource being callously wasted by mismanagement and bad handling, it's being given away in the market for lack of a disciplined and principled approach to delivering on the promise to the customer, and because no one is guarding the reputation of the lobsters, especially those who have the most to lose.

Ladies and gentlemen, it's time to stop finding excuses for our failure and start to take actions that will ensure success. I, with some trepidation, say that the ball is still in your court. Please stop and think carefully before you return the ball. We can either craft a new, sustainable industry that delivers on its promise or we can cut another large chunk out of the lobster's reputation and population.

Good luck. I encourage you to have the courage to do what is right, although it may not be popular to the industry.

[The Chair, Conservative, Rodney Weston]

Thank you very much, Mr. MacDonald.

Mr. Byrne.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you very much, Mr. Chair.

And thank you to Colin MacDonald, our witness, for providing a no-punches description of some of the concerns your industry has.

Before I begin, I do want to say a special thank you for the great welcome our colleague Greg has given us and the contribution he has made on this committee as we investigate this issue.

Mr. MacDonald, you gave a pretty good overview of some of the concerns you have, but there is an 800-pound gorilla that you didn't bring into this room, and that's the news that Clearwater recently wrote down $102 million on its balance sheets from losses last year. What you didn't talk about was Clearwater's relationship with Icelandic foreign banks, your financing structure, and those financial aspects that directly impact your particular business.

As I listened to your presentation...the majority of the concerns facing Clearwater in the lobster industry stem back to 100 years ago. If I am reading correctly between the lines, you were saying that it really has to do with the relationship between the fleet separation, that harvesters and processors ne'er shall meet. Is it Clearwater's ambition to change the structure of this industry to allow integration of the processor with the harvester so that Clearwater becomes more of a harvesting entity, plus a marketing entity?

Can you comment on that $102 million writedown that Clearwater presumably had, and the impact that has on the company? Specifically, was there any contributing factor from the fact that the banks you received your financing from were not Canadian--they were Icelandic, as I understand it--and that those Icelandic banks went into receivership?

[Colin MacDonald]

Sure. I'm happy to comment on all three things.

First, the writedown was composed primarily of mark-to-market. The Canadian dollar collapsed in October. It went from parity to about $1.30. We, as do most exporters in this country, carry futures contracts, FX contracts, on the currencies we are going to sell into to protect our prices and our margins. They go out from 12 to 18 months. We had booked futures contracts at what were considered to be good rates at the time. The dollar was basically at parity and we were at $1 to $1.04.

Unfortunately, once the dollar collapsed so dramatically, we incurred a large liability on those futures contracts--on several hundred million dollars of those futures contracts--of about 26¢. That kicked up about $40 million-odd, $48 million or $49 million, of the $102 million loss, which was totally unrelated to the core business of buying and selling seafood.

About $51 million to $60 million of that was tied to the collapse of the Icelandic banks you referred to. It's mark-to-market, non-cash, so it didn't cost the company any money. In fact, it simply is on the books because of accounting rules. We have legal advice that because of the bankruptcy of the Icelandic bank Glitnir, those moneys will never be realized either way. We'll actually have a non-cash profit show up in our financial statement at some future date in 2009 or 2010, but the operative word is “non-cash”. It has no value.

The $40 million-odd loss that was actually incurred in the foreign exchange is really an opportunity currency loss, because we're effectively selling a portion of our product at the old exchange rate as opposed to the prevailing exchange rate. That's what kicks up those losses.

As well, $8 million of the loss was created by the failed privatization. When the Glitnir Bank collapsed and the world markets collapsed, Glitnir was about 10% of the privatization financing. We lost that. We had it replaced several times, but the stock markets kept collapsing in the same week and through the month of October. As a consequence, all lenders got cold feet and backed away from the situation. We had to take some restructuring costs on our financial statement that normally would have been buried in the privatization.

In terms of the borrowing from Glitnir, from the Icelandic banks in lieu of Canadian banks lending to the industry, Glitnir and the Icelandic nation are very familiar with the seafood industry and have a great deal of faith in it, as do the Scandinavian nations, who are big lenders to the industry as well. Their demise removed a large source of funds for the industry. Many players were borrowers from the Icelandic banks. We've replaced, successfully, we believe, our term debt. We operate with about $16 million worth of cash on our books, so from a financial perspective, we're a healthy company.

My comments about the industry are not toward the consolidation of harvesting and processing, but are simply about creating the same level of control and protection for the processing side, or the buying side, that we do on the harvesting side. Right now, the buying side of the industry is a Klondike-like affair, in that anybody can do it. You can do it. I can go out and buy tomorrow. You don't need any particular structure to do it. I just need to rent a half-ton, one-ton, or two-ton truck, go out and pay the fishermen 25¢ more, driving the shore price up, show up one day a week or not, buy 10,000 or 20,000 pounds once, run it down to Boston, and make 50¢ a pound. I could make myself $5,000, $10,000, $15,000, or $20,000 on a load. It's nice easy money if you have no investment in the industry. That's part of the problem with the industry.

The other part of the problem that I try to get across is that we don't take care of the quality of the product, from the time it comes into the trap to when it gets to the marketplace. You're throwing away 15 million pounds of product, or 15% of the resource, because we beat it up; we don't treat it with respect. That's because you have a fishing effort that is very nearly comparable to a Klondike-type effort because there's no control. Everybody goes out and tries to grab as much of the pie as they can, as opposed to having a quota system, where they go out and intelligently fish it to the marketplace. You're going to destroy the industry. It's only a matter of time.

That's what happened to the cod fishery. We ultimately destroyed it because of greed and stupidity. We're practising the same thing here with the lobster fishery. We've been successful because we don't have a cod fishery eating the young animals, and we've improved our technology immensely over the past decade. You've got GPS now as opposed to Loran-C as opposed to just a plain compass. You've got better traps and you've got much more effective boats.

Yet with all that increased technology, the catch rates have not increased over the last decade or so. We've simply stayed apace. My contention is that you're taking more of the resource out of the water. Evidence of that is seen in the average size of the animal you're pulling off the bottom.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

One of the many blessings of Southwest Nova is that you have close to a year-round fishery. In other areas of Atlantic Canada and Quebec, the constraints on resource harvesting would be tied to the biological cycles of the season. It's a much shorter season. In fact, most lobster fishing areas north of Southwest Nova would only actually be fishing lobster for nine weeks a year.

Is that a constraint? Would you consider that a constraint to quota harvesting and the timing issue that you referred to? Realistically, anyone trying to pull back on the amount of lobsters harvested in a nine-week season--or even in a six-week season, which actually occurs in many lobster fishing areas.... Is that genuinely considered an Atlantic-wide practical solution?

What is Clearwater's position in terms of holding pounds? One of the blessings of this industry is that you can actually hold lobsters, unlike other fish commodities. You can hold them live for a period of time until the market ripens. Could you talk a little bit about that for us?

[Colin MacDonald]

Effectively, southwest Nova Scotia is only about 10 weeks. Eighty per cent of the lobsters caught in the wintertime are caught in the first nine days of the season here. The balance is caught throughout the rest of the winter period. Effectively you only start fishing again in late April-May, because the water temperature doesn't warm up. So you probably get a week to two weeks in December and five to six weeks in the April-May period before the fishery is over. Towards the end of May, the fishery peters out and runs into problems.

All segments have the same issue with time. Planning the harvest...maybe we don't take as much out of the water. You have processors in New Brunswick and P.E.I. who put tractor trailerloads of lobster in the yard, crank down the temperature when there's a glut, and freeze them in the tractor trailer. It's 40,000 pounds at a time.

Let me assure you, nothing freezes before it rots in that thing. Then they put them in a freezer and process them later into broken meat, into a byproduct that's just abhorrent. If we looked at what gets dumped on the shore here from what's being held in crates and cars at the wharf, the mortality that goes on.... I've watched them pull away from the wharf by the boatload and dump them out in a hole in the ocean or on land. The amount of product that's actually destroyed because of the way we catch it.... If we don't have the capacity to handle it properly or take it to the market--or if neither we nor the market has the capacity to properly store it--then we shouldn't be taking it out of the water. That's my contention. We could leave it there for the future.

Our holding capacity is about three million pounds. We have developed a holding system that's based on the animals' natural overwintering environment, and we invested a tremendous amount of money and biology and science into it. We crank the temperature down to two degrees Celsius so that the animal effectively hibernates. We also predetermine whether the animal can be stored. Our biologist does blood-protein testing and puts it through an MRI-type machine, so we know the animal is actually full-meated and adequately healthy to survive.

The traditional holding systems and the copies that are based on our system lack the level of sophistication necessary to adequately hold the lobster. You're quite right, the lobster is held until the market ripens or until the market is short, but the lobsters are generally severely weakened by the process--unless you actually put the investment in place to make sure they're not weakened by the process, obviously. If they're severely weakened and they go begging to the market, that creates this tremendous shell disease and a number of problems within the distribution system.

In terms of mortality for your customers who are trying to distribute, the system is by far not a perfect system. The old holding worked well when you paid 25¢ a pound for the lobster and you could sell it for $2.

[The Chair, Conservative, Rodney Weston]

Thank you, Mr. MacDonald.

Mr. Blais.

[Raynald Blais, Bloc, Gaspésie—Îles-de-la-Madeleine, QC]

Thank you, Mr. Chairman.

Today, I am in a rather happy frame of mind, given our wonderful victory of last night. I wish to salute Greg and tell the people here that I much appreciated the breakfast I shared with him this morning. It allowed me to get to know him better. The members of this committee come from different political parties, whose views differ, but when dealing with the fisheries and their future, we all work as one.

Mr. MacDonald, I would like to get to know you better before putting questions to you. Your statements were quite sharp. The solutions that you put forward could even be described as provocative. You are the Vice-President here of Clearwater. What does that involve? What about your position of Chief Executive Officer?