Industry Committee on Oct. 5th, 2016

[The Chair, Liberal, Dan Ruimy]

We are going to get started because we do have a second panel. The bells will ring at 5:30 so we want to get through this panel by 4:30, and then we can have roughly an hour for the second panel.

Everybody, welcome to meeting number 26 of the Standing Committee on Industry, Science and Technology. Today we have, from the Department of Agriculture and Agri-Food, Andrea Johnston, director general, sector development and analysis directorate, market and industry services branch. From the Canadian Food Inspection Agency, we have Lyzette Lamondin, acting executive director, food import export and consumer protection directorate.

We're going to give you each six minutes, and then we'll get into half an hour of questioning.

Ms. Johnston, please go ahead.

[Andrea Johnston, Director General, Sector Development and Analysis Directorate, Market and Industry Services Branch, Department of Agriculture and Agri-Food]

Thank you, Mr. Chair.

It's my pleasure to appear before this committee as you study potential ways to improve competitiveness in the Canadian manufacturing industry.

Today, I would like to provide you with some context on the Canadian food processing industry, including the importance of food processing as a manufacturing sector to Canada's economy, the challenges and opportunities facing the Canadian food processing sector, the state of innovation in this sector, and potential solutions to help improve the sector's global competitiveness.

First, I'd like to point out a few facts with respect to the economic importance of the food processing industry. With about 2% of Canada's GDP in 2015, it is the largest manufacturing industry in Canada in terms of GDP.

The industry employs close to 256,000 Canadians and is the largest manufacturing employer in the country. Employment in the food processing industry has been stable. In fact, it grew about 1% between 2008 and 2015, and it is the second-largest manufacturing industry in terms of revenue with about $106 billion in sales. As the largest purchaser of Canadian agricultural products and the largest manufacturing employer of rural areas, food processing is a key economic driver for rural Canada.

In looking at the industry's performance, industry sales continued to grow throughout the recession and grew by 3% last year. Exports for the industry totalled $31 billion in 2015, which is an 11.7% increase when compared to the previous year.

Canada's top five export markets for processed food and beverages, including seafood, were the United States with 74%, China with 6%, Japan with 5%, Mexico with 2% and South Korea with 1%.

The food processing industry has a high level of economic spinoff to the rest of the economy. For every additional $1 million in output generated by the food and beverage manufacturing industry, an additional $1.23 million in output is generated.

However, the food processing industry in Canada is also facing a number of challenges. As an example, the growth in the country's sales in exports of processed foods and beverages has not kept pace with the growth in imports, and as a result, Canada went from a trade surplus of $5 billion in 2004 to a $750 million deficit last year for processed foods.

Investment in processing plants and advanced technologies in Canada has not kept pace with that of its competitors, and therefore Canada's productivity is lagging behind other countries such as the United States. According to a study by the Ivey School of Business, there have been about 140 plant closures between 2006 and 2014.

With respect to innovation, Agriculture and Agri-Food Canada's engagement with the industry suggests that industry sees a key role for innovation in terms of supporting industry competitiveness.

Last year alone industry invested $139 million in research and development, a little under 0.2% of total sales. However, when compared to Canada's global competitors, this level of R and D investment is relatively low. For instance, in the Netherlands where the food processing industry is of equivalent size to the Canadian industry, food processors spend about double the amount on R and D as a percentage of sales as Canadian processors do, namely 0.4%. In the U.S., the industry also spends about 0.4% of sales on R and D.

Agriculture and Agri-Food Canada is working with other federal departments such as Innovation, Science and Economic Development Canada, as well as with provincial and territorial governments to better understand challenges facing the industry with respect to innovation and potential ways to address them.

Canada has a strong foundation in science within industry, academia, technology centres, and other research partners, but the level of collaboration between these stakeholders on innovation projects for the benefit of industry is relatively low, particularly if we compare it to global innovation leaders like the Dutch.

We also understand that the Canadian industry needs to have a greater capacity at a strategic level to identify key priorities or themes for precompetitive innovation that will procure a competitive advantage to Canada globally, or at least to the same extent that our competitors do.

With a growing demand for processed foods globally, there is a tremendous opportunity to grow the industry in the years to come. Agriculture and Agri-Food Canada has been working with the food processing industry to address these challenges through the food processing industry round table, which is a forum bringing together leaders from the Canadian food processing industry and governments to improve the industry's competitiveness. Through the round table, the industry has identified a vision for Canada as a food basket to the world, with the goal to grow industry sales to $135 billion, to increase the level of processing of Canadian agriculture products from 39% to 45% in total output, and to grow exports from 27% to 35% of sales.

Industry strategy includes investing in capital to improve productivity. The industry has asked for a government program to support capital investment, increasing innovation and differentiation to meet consumer demands, improving access to competitive ingredients, growing global exports, increasing access to labour and developing a globally competitive work force, and maintaining competitive and business-friendly regulations.

Through Growing Forward 2, which is the current federal, provincial and territorial policy framework for Canada's agriculture and agrifood sectors, federal and provincial governments have been supporting the food processing sector through a broad range of policies and programs. These include investment in machinery and equipment, innovation through supports to Canadian food innovators' food processing cluster, and market development in foreign markets.

Outside of Growing Forward 2, Agriculture Canada is also working with Employment and Social Development Canada on industries' access to labour. Going forward, supporting a vibrant and competitive food processing industry will require a clear focus on addressing the competitiveness challenges facing the industry. We need to help the industry improve its productivity by increasing its level of capital investment and by targeting support to specific strategic investments for broad economic benefits to Canada, such as production mandates or investment in leading-edge technologies.

We need to build the industry's innovation capacity by helping the sector to articulate an innovation strategy; enhancing the role of science and generating innovation products within the industry; increasing collaboration between industry, academics, and other innovation partners; and encouraging firms to engage in more scientific R and D with innovation partners.

We need to better understand the challenges that industry faces in expanding to offshore markets. We need to focus on initiatives to encourage companies to explore these new markets, including countries with which we sign new trade agreements in emerging markets where most of the growth will occur in the coming years.

Last, governments need to continue working collaboratively on improving industry's access to labour, including looking at potential options for the temporary foreign worker program in food processing subsectors and regions facing acute labour shortages.

In conclusion, while the Canadian food processing industry has been stable, it has been losing ground compared to its global competitors. There are three main strategic areas to focus on to support the industry's competitiveness: strategic investments to grow the industry and address productivity issues, Canada's innovation system and private sector R and D, and market development efforts and increased market share in offshore markets.

Co-ordination with other federal departments and with provincial and territorial governments in the next policy framework is crucial to support the industry. Agriculture and Agri-Food Canada is engaged with provincial and territorial governments in addressing the industry's competitiveness issues. Agriculture and Agri-Food Canada also continues to support Minister MacAulay in delivering on the commitments outlined in his mandate letter, such as the value-added agrifood investment fund.

Thank you again for this opportunity, Mr. Chair.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We're going to move right away to Ms. Lamondin.

[Lyzette Lamondin, Acting Executive Director, Food Import, Export and Consumer Protection Directorate, Canadian Food Inspection Agency]

Thank you, Mr. Chair.

I appreciate the opportunity to participate, and I would like to explain what the CFIA is doing to support harmonizing regulations for the food production sector.

The CFIA is a science-based regulatory agency dedicated to safeguarding plants, animals, and food. It reports to the Minister of Health. Our first priority is the health and safety of Canadians.

The CFIA also supports the Minister of Agriculture and Agri-Food in his responsibilities.

CFIA's approach to supporting harmonization with other countries has several dimensions. Perhaps the most important and foundational element we are working towards today is the implementation of the Safe Food for Canadians Act through new regulations. That act received royal assent on November 22, 2012, with support from all federal parties. The act establishes a modern legislative framework for food safety that shifts the focus from responding to food safety hazards and incidents to prevention. It also enables a new regulatory framework that is being developed and has so far been the subject of extensive consultation.

The proposed regulatory framework is modern and would allow for more efficient inspections based on risk and greater flexibility for industry innovation. Of particular relevance to today's discussion is that the new regulations will replace 13 existing inconsistent and prescriptive regulations with a single outcome-based regulation that applies to all food that is imported, exported, and traded between provinces.

What we mean by outcome-based is that as long as the food achieves the safety outcomes that are required, they can be achieved in multiple ways. This will significantly improve the ability of the food sector to innovate and the ability of Canadian exporters to meet not only Canadian but foreign requirements, while further strengthening the food safety system in Canada.

Finally, the Safe Food for Canadians Act and the regulations will instill even greater confidence that all food produced in Canada is safe and subject to the same requirements—requirements based on international standards established by Codex Alimentarius. That confidence is extremely important when it comes to exports. Perhaps the most important factors in maintaining and expanding access to foreign markets are the efficacy of the food safety system in Canada and the credibility of the competent authority, which is the CFIA.

The other element I want to talk about is specific to the U.S., the Canada-U.S. Regulatory Cooperation Council, or RCC. Canada and the U.S. have highly successful world-class regulatory systems that have evolved independently while their economies have grown closer. The RCC provides a structured and accountable process for Canada to work continuously with the U.S. to improve trade opportunities and enhance regulatory alignment. The RCC focuses on joint initiatives—both countries agree what they are going to work on—that seek to align regulatory systems and reduce unnecessary requirements.

For example, under the RCC, the CFIA and the United States Food and Drug Administration, the U.S. FDA, evaluated each other's food safety control systems and determined that they provide a similar level of health protection. A food safety systems recognition arrangement was subsequently signed this past April by the CFIA, Health Canada, and the FDA. The arrangement applies to fish, fresh fruit and vegetables, processed foods, and certain milk products. The recognition of an exporting country's food safety system as being comparable allows an importing country to focus its inspection resources on higher-risk foods and potentially higher-risk countries. Importers can be confident that the food source from the other country meets domestic requirements.

While the U.S. FDA covers most food, meat and poultry are the responsibility of the U.S. Department of Agriculture, the USDA. Canada and the U.S. routinely audit each other's meat inspection systems, which have been determined to be equivalent. However, in both countries, the regulatory frameworks for these products are much more prescriptive and entrenched than for other foods, making harmonization extremely difficult. The CFIA has a unique work plan with the USDA for meat and poultry. Both countries are committed to seeking greater harmonization and facilitating trade, and there has been some success. For example, in 2015, CFIA harmonized with the U.S. on meat nomenclature, essentially using the same terminology for beef products on both sides of the border.

I trust this sheds light on how the CFIA is working to support harmonizing regulations for the food production sector.

I look forward to any questions you may have.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We are going to jump right into this.

Mr. Arya, you have five minutes.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, witnesses, for coming here today.

Ms. Johnston, I have a couple of questions for you. You mentioned that the industry is stable, but losing ground. You also mentioned that the investment in the processed food industry is going down. What are the main reasons for it?

[Andrea Johnston]

Employment has always been stable, so that's a good thing, but in terms of investment in R and D, as I mentioned, in terms of benchmarks to other countries, like the U.S. and the Netherlands, it's just not at the same level. Why? I would say the recession has caused a lot of companies to focus on cutting costs and now that we're moving out of the recession, the companies are starting to look at new opportunities. Companies are also now starting to look at automation and starting to invest more in those technologies. Hopefully, we'll start to see a trend in terms of more private sector R and D in the years to come.

[Chandra Arya, Liberal, Nepean, ON]

That's the fact, but what is the reason it is not happening?

[Andrea Johnston]

Most of the companies right now are focused on cutting costs—efficiency.

[Chandra Arya, Liberal, Nepean, ON]

Okay.

You also mentioned that the collaboration between researchers and the industry is quite low. Why is that?

[Andrea Johnston]

In Canada, we just don't have a system that has a strong collaboration, particularly in the food processing area, between academics, universities, and the private sector. There's a lot of discovery-type research in universities, and then the private sector tends to focus on its own areas. There still is a need to make those connections between the two organizations.

[Chandra Arya, Liberal, Nepean, ON]

What you say worries me because we are emphasizing discovery research and we have increased funding for the research, but if that is not getting translated into something usable by the industry, then what is the point in investing so much money into research?

[Andrea Johnston]

We've done some research in the Netherlands, and a lot of the focus there is if a university gets funding, it has to be tied to industry commitment and collaboration and industry skin in the game. As we move forward, particularly in Agriculture and Agri-food Canada's innovation program, we're looking at a strong collaboration between industry and government and universities in terms of all partners putting money on the table.

[Chandra Arya, Liberal, Nepean, ON]

I take it that you own the research and development, and innovation that is not happening is not resulting in commercialization.

[Andrea Johnston]

In some cases, yes.

[Chandra Arya, Liberal, Nepean, ON]

One of things we heard from many other industry groups was about the lack of talent. What is your opinion on that?

[Andrea Johnston]

The food processing sector in Canada is very diverse. There's certainly a lot of areas in terms of where we need to attract global high-skilled talent, and many of the manufacturing sectors that you're investigating require that. Also, the food processing sector has the meat processing sector, and there's a huge shortage for what we call butchers or meat cutters. They are tremendously important to the growth of the meat processing sector. Canada signs international trade agreements. We get market access. We need to grow the meat processing sector and we need to have those types of skilled labour. Maybe it's not considered skilled from a Canadian sense, but it's certainly important for the meat processing sector.

[Chandra Arya, Liberal, Nepean, ON]

Several witnesses have said that the rural manufacturers face additional problems. What do you say about that?

[Andrea Johnston]

If we use the example again of the meat processors, they do have a challenge to attract employees. They're not located, obviously, in urban centres. They're further away from universities or colleges. You have to make almost a cultural commitment to move into rural Canada if you want to find jobs.

[Chandra Arya, Liberal, Nepean, ON]

What can we do? Can we develop any specific program to address that?

[Andrea Johnston]

It's not necessarily just programs, I see the companies actually taking lot of initiative in attracting prospective employers to these areas. They have training programs within those areas. They ensure that there is housing. I think it's more of a combination between government and industry working together.

[Chandra Arya, Liberal, Nepean, ON]

Okay.

I know the industry is stable but not growing. If anybody wants to start a new processing plant, what is the source of funding? Do you have any idea whether adequate funding is available for new manufacturing start-ups?

[Andrea Johnston]

There's likely seed funding within federal government programming.

[Chandra Arya, Liberal, Nepean, ON]

Thank you.

[The Chair, Liberal, Dan Ruimy]

Mr. Dreeshen, you have five minutes.