International Trade Committee on Feb. 25th, 2014

[Gary McInerney]

We do. Our plants are strategically located in southwestern Ontario, one south of Ottawa, and one on the south shore in Varennes, close to corn country, close to the ethanol demand, and where there is CO₂ demand as well.

[Randy Hoback, Conservative, Prince Albert, SK]

You look at expansion, and you look at the European market in the big picture, in the long-term picture, and having access to that market. I understand there are some barriers that we need to work through, which you've identified. Thank you for doing that.

In reality, though, for corn farmers right across Canada, it's fairly positive in this scenario because you won't be shipping corn to Europe. We'll probably be processing it either into something other than corn itself or products like you make, for example.

[Gary McInerney]

That's correct. In our industry, the potential would be ethanol. Having said that, it is a global market. We have to look at what's going on in the world and not just between Canada and Europe. Our biggest trading partner, the U.S., is also the largest producer of ethanol in the world. They're also the most cost-effective producer of ethanol in the world. Our Canadian industry has to be cognizant of that and cannot make any decision just based on what's going on between Canada and Europe. It's a global decision, so you have to balance this.

[Randy Hoback, Conservative, Prince Albert, SK]

But you're going to have nice preferential access to Europe, hopefully, in relationship to the U.S. Is that not fair to say?

[Gary McInerney]

Compared to the U.S., yes, but how long will it be until the U.S. gets a free trade agreement?

[Randy Hoback, Conservative, Prince Albert, SK]

So it's important that we get this deal done as quickly as possible and try to leverage that.

[Gary McInerney]

I think it's important. It gives us a couple of years' head start.

[Randy Hoback, Conservative, Prince Albert, SK]

You talked about the amount of consumption we have here in Canada and the production that you have. At least roughly about a third of that volume is still being filled by imports from the U.S. What do we have to do to get that consumption or that manufacturing of ethanol products so we're actually manufacturing what we consume?

[Gary McInerney]

That's a great question.

You look at that and you realize that we're importing a third of our demand. What can we do about it? You have to keep in mind that there are a couple of factors here. Our trade between Canada and the United States and the ethanol industry is north-south rather than east-west trade. Logistics are critical. There will be, unless there's ethanol production in western Canada, imports in the United States because there's no duty as you know from ethanol coming into the United States, and transportation will trump all.

You also have to keep in mind that gasoline demands are very seasonal; therefore, ethanol demand is very seasonal. There are three to four months of the year when the demand is up a good 15%. In Canadian industry, at least in our business, we like to run 100% all the time. We've designed and built our plant based on supply and demand so that we can have 100% inclusion rate outside of those demand peak periods. We sure don't want to be exporting. As an industry, to your point, we would like to see the industry more closer in balance and not tipping the scales into export mode, but continue as an import mode because you know that's when your industry's getting the highest possible price.

It is a balance. It's very difficult to get investment to build plants when you know that there are issues. In terms of free trade between Canada and the United States, you look at the industry in the United States, there are issues down there with blend walls. There are issues down there with mandates. Until those things get resolved, it's very hard for investment. Even companies like ours, as our balance sheets get stronger are saying that we should plot down and build another plant. We have sites selected, but the risk associated with that at this point in time has us sitting back and focusing on the cost of production.

[Randy Hoback, Conservative, Prince Albert, SK]

It's fair to say that risks are related to the fact of the markets they sell the product in. You need to have that market access in order to eliminate a lot of those risks that you can justify the investment. Is that correct?

[Gary McInerney]

Absolutely correct, but it is a global market. We have to be cognizant of that. Investment decisions need to be made keeping in mind what's going on globally.

[Randy Hoback, Conservative, Prince Albert, SK]

Just for the record, I'm glad you talked about the north-south flows and how important the free trade agreement with the U.S. is. For example, in Saskatchewan, we're starting to grow more corn, but we don't...and of course the conversion rate off corn for ethanol is so much more than off feed wheats and feed grains. Again, just explain how that works so that my fellow committee members understand that.

[Gary McInerney]

You're absolutely right. Another co-product of the ethanol industry is animal feed. Canada for years had been the number two importer of distillers grains, which is the animal feed component of that, but has now slipped to position number four. All those imports were in western Canada because of the beef industry in western Canada and the proximity to the U.S. ethanol market.

[Randy Hoback, Conservative, Prince Albert, SK]

Let's change and talk about the speciality products that you make, the other alcohols. How did you describe them? Was it as non-conformity alcohols?

[Gary McInerney]

When I talk about speciality alcohols, it's a host of things. I like to break down our industry by saying that we make three specific products: we make fuel ethanol for the automobile industry and we make industrial and beverage grade alcohols.

As the name implies, industrial alcohol goes into every application in the manufacturing of many products. It's probably the most commonly used chemical in the world. For many products that you use every day, alcohol has been in their production. It's in everything from mouthwash to hair spray. Vinegar is manufactured from it. There are all sorts of other chemical intermediates produced from the ethyl compound.

Then the beverage industry, as you know, is very large. It's for the vodkas and the coolers of the world. As Canadians, we're having success in exporting our alcohol south of the border because marketing people want to put imports on their label. So we're getting a piece of the import market into the U.S. It's the same with the other part, exporting outside of Canada. We're in a unique Canadian position to be doing that. Our trade is in both the U.S. and other countries around the world.

[Randy Hoback, Conservative, Prince Albert, SK]

Mr. Chair, I think all of us around this committee table would agree that we would like to try some of that beverage alcohol with a Quebec fine cheese. I think we'd all enjoy that. I know the agriculture committee got to enjoy their cheese here a little while ago. It's definitely some of the best cheese in the world.

[The Vice-Chair, NDP, Don Davies]

Thank you.

Madam Liu, you may have about three minutes.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

Thank you, Mr. Chair.

Mr. Arsenault, I am very proud to tell you that the official opposition's deputy agriculture critic, Ruth Ellen Brosseau, tabled a motion in the House of Commons today to make sure that the Conservatives keep their promise of providing adequate compensation to cheese producers. Rest assured that some members of Parliament will be monitoring this very closely.

I am also concerned by the fact that the Conservatives are still refusing to table the text of the agreement in Parliament. In addition, they proposed nothing by way of compensation in the last federal budget. That is one more reason why we must be on our guard.

My question is about supply management. We know that Canada is taking part in other negotiations, specifically involving the trans-Pacific partnership. We also know that other countries taking part in those negotiations disagree with our system of supply management. Australia is one of them.

Do you think that our system could be put at risk because of those negotiations?

[Louis Arsenault]

Actually, that is more or less the question we asked the chief negotiator: to what extent can it continue to be breached, as has happened recently in the agreement with the European Union? Of course, he does not know the answer and neither do we. However, it is true that, if NAFTA is reopened or with the new agreements that are about to be made, as you said, supply management no longer makes any sense. And if that is the case, if supply management is not protected, the dairy sector will inevitably feel the repercussions.

We also have to understand that supply management currently has a very significant benefit. It actually provides the guarantee of a decent income for our producers of cow's milk. That is a major sector and I feel that it is important for us to keep it. Let us not forget that we are in a northern country. In the United States, average dairy herds are 1,200 head, but here it is 75 head. Essentially, I think that says it all.

So, if supply management goes under, the sector will become hugely more fragile. It will be worse for goat and sheep producers, because we will be ending up with price gaps that are clearly bigger.

[Laurin Liu, NDP, Rivière-des-Mille-Îles, QC]

I do not have a lot of time left. I would like to hear your comments about the geographical considerations. The Dairy Farmers of Canada have said that Canada should not give in to demands from the European Union.

Are you satisfied so far with what you have seen in the technical summary?

[Louis Arsenault]

You have to understand that it is not something that we as artisanal producers and processors were necessarily looking for. It certainly may benefit some of our members, but they do not even represent 5%. So it was not a major concern of ours.

That said, the only question to be asked is whether it was necessary to sacrifice a large amount in terms of major imports of cheeses in order to be able to protect those brands. That is the question that I am more concerned with.

[The Vice-Chair, NDP, Don Davies]

We'll go to Mr. Hiebert for the final three minutes.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

I'm going to focus on Mr. Arsenault with my questions.

You've described a situation in which you're very pessimistic, I would suggest, out of fear that these foreign cheeses are going to come in and take over market share.

You focused a lot on price. Can you tell me what difference in price you think there would be between the cheeses you currently sell and the cheese that you expect to come in from Europe?

[Louis Arsenault]

I am sorry to give you that impression, but, to a certain extent, I feel that it is quite realistic.

As I was telling you, the current average price of products coming in is C$10 per kilogram. When they get to market, those products sell for about C$30 per kilogram. So you are going to end up with fine cheeses, like cave-aged Gruyère, Comté, Cantal, or Salers. Those are all French cheeses with high added value. They will compete with our cheeses like Louis D'Or, which has won a lot of prizes in Quebec, in Canada and in the United States. It retails for $65 or $70 per kilogram.

Louis D'Or is a Gruyère-style cheese that compares well to Emmenthal, to Comté and to all those cheeses. Consumers may well like it, but they are rational too.

We have done a lot of work in recent years to develop our consumer market. With such a price difference, we are going to lose it quite quickly. That is certain to happen because those products are going to literally invade our markets.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Yes.

When we were in Vancouver, we had testimony from a cheese manufacturer from the Lower Mainland of British Columbia who was very optimistic about the opportunity to export their cheese. I think you call it an artisanal cheese.