Industry Committee on Feb. 7th, 2008

[The Chair, Conservative, James Rajotte]

Our time is ending here.

[Bill Rutsey]

I can briefly respond to that.

There's a term known as “responsible gambling”, and it's a touchstone of the industry in Canada and around the world. People are trained to look for people with problems and to intervene to the extent they can, given privacy and human rights concerns and things of that nature. It's certainly an issue that's top of mind for everyone. No one wants to see a single person injured, and the industry takes that very seriously.

[The Chair, Conservative, James Rajotte]

Thank you very much.

Unfortunately, we are very limited in our time today. We do have two sessions. This is the conclusion of our first session.

I want to thank you all for your participation and your presentations. All of your presentations will be distributed to all of the members. If you have anything further to submit, please do so through the clerk, and we will ensure they get it.

Members, we will suspend for about two minutes, and then resume with our next session.

[The Chair, Conservative, James Rajotte]

Ladies and gentlemen, order.

We will start our second session with respect to the impact of the appreciating value of the Canadian dollar on the Canadian economy.

We have two organizations here before us.

We have the Canadian Pork Council. We have Mr. Martin Rice, the executive director, and Catherine Scovil, who is the executive associate.

Secondly, we have the Centre for Spatial Economics. We have Mr. Robert Fairholm, director, economic forecasting services.

If you could limit your presentations to five minutes, then we will have more time for questions from members.

Mr. Rice, we'll start right away with you.

[Martin Rice, Executive Director, Canadian Pork Council]

Thank you very much.

My president, Clare Schlegel, who was scheduled to come, sends his apologies for not being able to make it up from southwestern Ontario. His farm situation required him to be there today.

We appreciate this opportunity because the Canadian dollar impact has been, I guess, the single defining characteristic of what separates us from the rest of the world in the pork industry. We are an industry that's heavily exposed to the global economy. Roughly two-thirds of our production is subject to export, either as live animals or as pork products. That industry generates around $3-plus billion of foreign exchange, and when we put on the multipliers, etc., it generates about $10 billion of economic activity in the country.

Some members of the committee will have heard of the stress the Canadian livestock industry is experiencing. I include in that the beef industry because they, like us, are very much export oriented, very much exposed to the world market conditions and, of course, the Canadian dollar.

We are currently looking at losses in the range of $40 to $60 per pig. We will explain that if we had exchange rates of even two years ago, we would at be in at least a break-even situation currently.

I would draw your attention to a little handout. Has it been distributed, Madam Clerk? Thank you.

On the first page is an excerpt from a study we had done in the fall of 2003 and actually updated more recently. We should probably make that available to the committee. But I would just ask you to look at the numerated lines of what determines Canadian pork and hog prices.

Number one is the U.S. price, because the U.S. production dominates the North American market we operate in. Number two is exchange rate values. Then number three is the price spread, which would be the difference between Canada and the U.S. that is determined by whether we export or import on a net basis.

So it is very much a U.S.-determined price. The Canadian dollar is simply the medium by which we are paid for our products. We do not have a made-in-Canada price.

The impact of the Canadian dollar exchange rate difference, I think, is very well illustrated on this next chart, where we have simply taken the series of Canadian prices and U.S. prices in their own currencies—so this would be the nominal prices in their own currencies—and indexed them both so that January 2003 equals 100.

One can observe on the pink line how our price in Canada has spread so far from the United States' as the dollar has appreciated—looking across the line—whereas the United States has prices today that, even though they are depressed, are still 10% above what they were in January 2003. Our prices—by the pink line—have fallen to a level that's about 70%. So U.S. producers are suffering, yes, but they are not experiencing anything like what we are experiencing.

The world pork economy has been impacted, first, by high grain prices, which have been driven very much by the U.S. biofuels policy. That has assisted, certainly, the grains industry, which was terribly in need of better prices, but it has resulted in quite a steep increase in those grain input costs. Secondly, the world pork economy has gone into a bit of a downturn. On top of that, then, is our dollar impact, which I think this graph explains very well.

We do experience some gains as the Canadian dollar appreciates....

Should I slow down or stop?

[The Chair, Conservative, James Rajotte]

Just wrap up, please.

[Martin Rice]

Okay, one minute.

Another table in here explains the impact on the cost situation.

I'll close off with a point about the flexible exchange rates. We wouldn't argue against them as being an important tool for economies to adjust to changes in cost conditions, but we have this huge impact of the Chinese, the Taiwanese, the Hong Kong, and some other Asian economies that are essentially pegged to the U.S. dollar. They've moved a bit, but as the U.S. dollar depreciates, what should happen is that those currencies appreciate, the U.S. economy starts to adjust, and we won't have this huge spread. The trouble is that with those currencies being pegged to the U.S. dollar, the adjustments that should be taking place in the world economy are being frustrated. We think the spread between the Canadian and U.S. dollars has been exaggerated by that situation.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Rice.

We'll now go to Mr. Fairholm, please.

[Robert Fairholm, Director, Economic Forescasting Services, Centre for Spatial Economics]

Thank you for inviting me to speak today.

Let me say that the impact on the Canadian economy from the appreciation of the Canadian dollar is going to be far worse this time than earlier appreciations, for five reasons.

First of all, in previous periods the U.S. economy was quite strong, which tended to suck a lot of imports into the U.S. economy and help offset the negative impact on Canadian exporters from the rise in the Canadian dollar. That effect is no longer there.This time the U.S. economy is quite weak, if not in recession, so we're going to have the full impact of the rise of the Canadian dollar impact Canadian exports, which will certainly make the situation directly worse.

Also of course, you have the impact on Canadian import-competing firms. They will also suffer more than before, in part because the Canadian dollar has risen versus other currencies this time. Unlike previous episodes where the Canadian dollar ran up and other currencies also appreciated, it was really a decline in the U.S. dollar. This time the Canadian dollar rose versus those other major currencies. So Canada has become less competitive not only vis-à-vis U.S. producers but vis-à-vis third-country producers in the U.S. market, and also in the those third countries as well as in Canada. So Canadian companies are getting a double whammy in terms of the appreciation of the Canadian dollar because of that.

Also, the Canadian dollar has risen astronomically relative to Canada's productivity level versus U.S. business productivity level. When the Canadian dollar rises significantly above that level of relative productivity, you have an impact on Canadian businesses. The further we go above this underlying value of the Canadian dollar, the greater the impact; that is, there are non-linearities in the degree of impact. Ultimately companies will give up on the U.S. marketplace or other marketplaces, and you'll have a disproportionately large negative impact.

Finally, the volatility in the exchange rate makes it impossible for business people to know what the future holds. The exchange rate volatility has gone off the charts, and research shows that businesses reduce investment when they don't have a clear sense of what the future holds. Increased volatility in the exchange rate reduces business investment, which is one of the lifebloods of productivity for the Canadian economy. The implication of that is that firms need help to offset some of these negative impacts. Possible options would be to continue with the accelerated CCA write-offs or advance in the corporate tax cuts.

In research, looking at the flexibility of the product and labour markets and the impact on the Canadian economy from an external shock such as the Canadian dollar appreciation, we found that the more flexible the economy, the greater it is able to withstand these shocks and come back to an equilibrium position. Enhancing product and labour market flexibility is another important step that policy-makers can take to try to mitigate the impact of these shocks.

They will continue in the future. Today it's the Canadian dollar, but in another few years there could be another type of shock. You have to try to encourage the flexibility of product and labour markets. Certainly reducing the interprovincial trade and labour barriers is one step in that policy area. You want to ease labour flows; they are barriers to labour building within the country.

We have skill shortages in a number of occupations, and there tends to be a reluctance on the part of some employers to hire people even though they have the basic required education qualifications. In research we did last year, there is a reluctance on the part of employers to do what they call the double transition of both the occupation as well as the industry, even though there were highly qualified individuals. Some of the solution has to be a better way for people to participate in the labour market to demonstrate their competencies. So prior learning assessment mechanisms, such as what they have in Australia and New Zealand, will be useful, as will be those countries' current competency assessments. And further work to improve foreign credentials recognition would also be helpful.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Fairholm

We'll now go to questions from members.

We'll start with Mr. Simard.

[Raymond Simard, Liberal, Saint Boniface, MB]

Thank you very much, Mr. Chair. I'll be sharing my time with Mr. McTeague.

I actually have three questions for Mr. Rice. I'll just pose them for you to then answer.

I guess the first one is about the pork industry and its famous cycle of good times and tough times. I wonder if you can tell us where we are in that cycle right now, in this perfect storm of high grain costs and an increasing dollar that has hit us.

My second question is about the global demand for pork. Did we contribute to this by overproducing in the past? The industry was fairly healthy over the last five, six, or seven years, but did we overproduce?

The third one is with regards to the urgency of the situation. I know my colleague from Prince Edward Island was saying that half the hog industry on the island is gone, and it happened in a very short period of time. I have friends in the industry who are losing $40,000 a week in Manitoba. So it is urgent.

My understanding is that the industry is asking for short-term relief that is repayable. Can you talk to us about that?

[Martin Rice]

Thank you very much.

This pork cycle exists, but it is not nearly as predictable as it once was, primarily because we are more of a global industry. At one time, we really just had cycles that were related to grain price cycles, and they were contained in North America.

We are in a cyclical downturn, but it is not a result of a massive increase in production. Actually, the chart I referred to says that U.S. prices are what they were four or five years ago in nominal terms, but costs have increased so much due to the feed input side. So I would actually say we are underproducing, in the sense that if we had better access into China, a country that is short of pork right now—it's a political issue—but that has chosen not yet to open up to the world market....

Indeed, we are dealing with an extremely urgent situation—and thank you for raising it—for the survival of the industry. We have had meetings with each of the caucuses—and I'm guessing your colleague might be Wayne Easter, who has been talking about this situation very much as well. We are really looking at the next eight weeks, I guess, as being crucial for producers to be able to have a basis to answer to their financial creditors how they are going to meet the cash requirements of production. Indeed, we are looking at a repayable loan—with interest, we've suggested. We are looking at minimizing any issue of countervailing duties from the U.S. side. I know that people do wonder why we are worrying about that if we are worried about surviving, but for the long term countervail duties are miserable things to ever get rid of.

[The Chair, Conservative, James Rajotte]

Mr. McTeague.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Chair, and thank you, Mr. Simard.

Mr. Fairholm, there is an emerging concern, which I think all of us are watching, about the intensity of commodity prices, particularly in developing nations, which continue to see stable and increasing prices of commodities—commodities that Canada, of course, can sell in large volumes, thereby propping up or continuing the upward pressure on the value of the Canadian dollar, while at the same time the consequences of this rise for the agricultural and manufacturing sectors are becoming self-evident.

How long do you think the two economies that we're seeing will continue, one being led by commodities because the emerging nations are not seeing the slowdown or reduction in demand in the United States for manufacturers' prices?

I don't have a crystal ball in front of me, but it seems to me that if Asia and other parts of the world are going to continue to purchase and show an unabated desire for our commodities, prices for our commodities are going to remain firm and high, as will the Canadian dollar, while other sectors of the economy, particularly in manufacturing, are going to be hurt.

Have you given any thought to that dichotomy or economic conundrum?

[Robert Fairholm]

Certainly it's a conundrum for manufacturers in southern Ontario and pork producers and those who have not had the run-up in commodity prices.

The Canadian dollar has been driven largely by commodity prices. The correlation between the exchange rate and the price of oil, up until fairly recently, was 0.97, so it's almost perfect. Commodity prices are driving the Canadian dollar. It's one of the important factors. Certainly the U.S. dollar's weakness during much of that period had something to do with it, but recently, the run-up in the Canadian dollar was driven by commodity prices in part.

My concern at the moment is that the run-up in the Canadian dollar was above and beyond what our models would suggest the Canadian dollar should have appreciated to, based upon where commodity prices went. That's a naked exposure, if you will, to pure exchange rate shock. That's why you're getting more and more industries being negatively affected by the run-up--because it's gone beyond what would normally be the case.

What is going to happen in the future? You have 2.5 billion people in China and India. You have 30 million people in Canada. The weight will go towards them, not us. They are rapidly industrializing. It doesn't matter to the global flows that the Canadian dollar is overvalued. It doesn't matter to the global flows that it's decimating Ontario and Quebec's manufacturing sector. It's a question of 2.5 billion versus 30 million. That's as far as you need to think about it.

The rapid industrialization is broad and material-intensive in China and India. That will cause those commodity prices to stay high relative to what they were in the recent past. It's not going to be a straight line. These things go in cycles. If the U.S. economy goes into recession, it's going to mean weakness in commodity prices for the near term. Over the long haul, it's going to mean high commodity prices with a high Canadian dollar. You need to adjust policy to reflect that reality.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Fairholm.

Thank you, Mr. McTeague.

We'll now go to Mr. Vincent.

[Robert Vincent, Bloc, Shefford, QC]

I am going to give you my own analysis of the situation in the pork industry. I know that it is not a pretty picture, but what we are hearing is that there are virtually no pork slaughterhouses left that are Canadian-owned. We are hearing that American conglomerates bought them up when our dollar was worth 80¢, and so it was cheaper to slaughter hogs in Canada.

We have also heard about hog exports to China. The Chinese have imported a lot of Canadian hogs, but then they used those hogs to establish hog farms that now produce pork that is equal in quality to Canadian pork. That situation means that we are exporting less pork to China. We also hear that on the market at present, American pork export levels are higher than for Canadian pork.

Could you tell me whether I have left anything out? When you talked about the price of grain this week, I was at the Agriculture Committee meeting. We discussed the fact that the price of potash was so high that because of the rise in the value of the dollar it was no longer possible to operate.

I would like to hear your comments on these questions.

[Martin Rice]

First of all, thank you, Mr. Vincent.

The slaughterhouses are primarily Canadian owned and Canadian controlled. That's on the pork side. On the beef side, they are largely U.S. owned. I think we do have a challenge to reach the levels of scale of some of the U.S. companies. At the same time, we are facing some costs that the U.S. don't have. We have costs of inspection. We have costs of certifying exports, which our U.S. competitors don't have. Certainly that has affected the competitiveness of our industry vis-à-vis the U.S.

We have increasing foreign ownership in our value chain at the retail level. For example, Costco, as far as we can understand, buys their meat from one supplier. As a result, all of the pork in Costco stores seems to be U.S. pork. We are having to work at that, because certainly U.S. product has become much more competitive in our market. That's why there's increasing interest in a Canadian branding program, not one that is mandatory, but one that does enable us to make it more apparent to consumers whose product they are purchasing.

As I mentioned, there are definitely increased imports from the U.S. They've become far more competitive on the world market. I think we really have quite a number of areas in which we will have to continue to work with governments to address that gap in competitiveness, which is attributable to regulations and some other issues.

[Robert Vincent, Bloc, Shefford, QC]

I would also like to know whether we are exporting a lot or a lot less to China at present.

[Martin Rice]

We are increasing our exports to China, primarily in the products that are not used as much at the consumer level in Canada. These would be primarily the organs of the animal—the heart, lungs, liver, etc. We hope that is going to result in increased pig meat exports.

However, China does still maintain some requirements on food safety, which are alleged to be food safety issues but which most other countries would not regard as food safety issues, and these can take a long time to be addressed. We would prefer to deal with that through an ongoing dialogue rather than through trade challenges, but we certainly see some of these barriers not being supported by evidence. Until we get those properly addressed, we will be limited in how much product we can export to China.

[Robert Vincent, Bloc, Shefford, QC]

If you had one recommendation to make to the committee to save the pork industry, what would it be?

[Martin Rice]

It would not be specific to exchange rates, but for us to cope with the exchange rate changes and to be able to generate enough revenue and cashflow to keep our farms in business, we definitely need support for the loans that we've asked for from the government to tide us over to where we can see this market recovery, which we expect will take place and begin generating enough revenue to get us out of the hole we're in. The loans we've requested would be the single most important request.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Merci, Monsieur Vincent.

We'll go to Mr. Stanton, please.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

I'll try to divide my six minutes equally. I'd like to direct one question, at least, to each of you.

First, Mr. Fairholm, I know you appeared before the finance committee last fall. I believe this was perhaps in the wake of fiscal update 2007, the fall economic update. You had some suggestions there about hoping the independent Bank of Canada would ease up on interest rates. I notice that they have done that—in fact, by a quarter point last week.

But you also touched on, even in your remarks today, the importance of this flexible wage-price scenario for the country. I wonder if you could just take a minute or two to expand on how important that is in terms of backstopping the dollar's strength here in Canada.

[Robert Fairholm]

We did some research for Industry Canada a few years ago looking at the appreciation of the Canadian dollar at that point. We looked at different scenarios of how the economy adjusts to these sorts of shocks. In one of the scenarios we did for them, we purposely made the adjustment mechanisms in the product and labour markets slower, and the result was that the full impact was 50% larger. For example, rather than a 1% negative decline from a 10% appreciation, it would be 1.5% or more. I think it was a bit more than that. So it's very significant.

There are only so many ways an economy can adjust. One way is that the exchange rate adjusts. Another way is that product and labour markets adjust. It's more painful for product and labour markets to adjust if they adjust slowly. Germany is a perfect example. They had a lost decade because their labour markets didn't adjust very quickly to the negative shocks that they experienced in the 1990s. The more flexible your markets are, the quicker they adjust. They reallocate resources from where they're not needed to where they're needed.