Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 1 - Evidence - December 4 meeting
OTTAWA, Thursday, December 4, 1997
The Standing Senate Committee on Agriculture and Forestry met this day at 9:06 a.m. to study the present state and future of agriculture in Canada (trade issues with the United States).
Senator Leonard J. Gustafson (Chairman) in the Chair.
[English]
The Chairman: Good morning, senators. We are pleased to have with us as witnesses today Mr. Gifford and Mr. Norman, who will be telling us about the trade aspects of agriculture. There has already been some discussion about trade, especially with the U.S., and I am sure that senators have many questions on the trade issue.
Gentlemen, I understand that you will make a short presentation and will then be prepared to answer questions. Mr. Gifford, will you begin?
Mr. Mike Gifford, Director General, International Trade Policy Directorate, Market and Industry Services Branch, Agriculture and Agri-Food Canada: Mr. Chairman and honourable senators, I know that you would prefer to ask questions rather than to hear us go on at length, so I will quickly sketch out some of the major highlights we have experienced in our agricultural relationship with the United States, particularly since the conclusion of the Canada-U.S. Free Trade Agreement.
We have done extremely well in terms of the evolution of trade over the last decade. Back in the 1960s and 1970s, the U.S. market accounted for about 20 per cent of Canada's agricultural exports. Today the number is over 56 per cent. We have been experiencing annual increases in exports to the United States in the order of 10 to 20 per cent a year, every year, over the last decade. These exports have been broadly based, ranging from primary agricultural commodities, such as wheat and barley and live hogs and live cattle, right through to and including highly processed food products.
Our trade performance vis-à-vis the United States stands in marked contrast to our export performance to offshore markets, where we are largely an exporter still of raw grains and oil seeds. Although our exports of other commodities are starting to increase, we certainly have not experienced the growth to offshore markets that we have experienced into the United States market. It is noteworthy that, traditionally, and certainly over the post-war period and probably going back to confederation, Canada has been a net importer of agricultural and agri-food products from the United States. However, starting in 1992, we have become a net exporter. Every year since 1992, our net export position has strengthened. It is anticipated that this year we will be a net exporter to the tune of $2 billion to $3 billion.
As to adjustments that the Canadian agricultural food sectors have had to make to the Canada-U.S. Free Trade Agreement, probably it is fair to say that the biggest adjustments have been made by the Canadian food-processing sector. Prior to the FTA, we had in Canada a branch-plant agri-food processing sector in which firms tried to produce a full range of products to service a market stretching from the Pacific to the Atlantic. That generated for the most part small production runs and relatively high costs, and resulted in a food-processing sector that was extremely domestic in orientation.
As a result of the free trade agreement with the United States, we have seen a major evolution in trade flows. There is much more north-south trade as opposed to east-west trade. We are seeing a shift in the natural marketing areas. If your food processing plant is, for example, in Quebec or Ontario, your natural marketing area now is New York, Philadelphia and Boston. Plants in Western Canada, say in British Columbia, now regard their domestic market as including Seattle and Los Angeles.
In other words, there has been a major change in the way the food processing sector regards itself. It now regards itself as part of a North American market and, increasingly, it specializes. Even the trans-national firms in Canada are competing for certain product mandates. They may only get a product mandate to produce, say, five lines of a product instead of 15 lines, but now they have longer production runs, their costs are down, they are exporting more, and their profitability and competitiveness have been enhanced.
Generally speaking, it is fair to say that over the past decade our experience with the United States has been positive for the evolution of agricultural trade, because our exports to them have increased; however, so have our imports from the United States, but our exports have increased faster than the imports. We are still the United States' number one market for fruits and vegetables. We are the second or third largest market for U.S. agricultural products overall.
That being said, it is clear that we have had some frictions with the United States over the past years, particularly in the grain sector. For many years, dating back to the 1930s and early 1940s, the United States had Section 22 import quotas on imports of wheat and barley from all sources, including Canada. As a consequence, wheat producers in North Dakota or barley producers in Montana never saw much in the way of Canadian grain moving south because they were limited by the existence of those small quotas. Those import quotas were eliminated in the early 1970s, but it was only when the free trade agreement was negotiated and the certainty and predictability of access to the U.S. became more evident that we started to export more wheat and more barley.
Unfortunately, however, there was a grass-roots negative reaction in North Dakota and Montana to increased imports of wheat and barley from Canada; that reaction was triggered essentially by major inflows of Canadian feed-grade wheat and feed-grade barley in 1993-94 that took place because, as a result of the Mississippi floods, the United States was relatively short of feed grains. Canada at that time had a relatively poor quality crop, and a lot of feed wheat and feed barley was shipped to the South, much of it being moved by truck instead of by rail. Consequently, we ended up saturating U.S. country elevators in the northern tier states. Not surprisingly, that has resulted in negative feelings along the northern border.
We have spent most of the last three or four years trying to explain to U.S. producers, U.S. politicians and the U.S. administration that what they are seeing in the way of movement of Canadian grains south reflects market forces.
We have developed three distinct markets there. Historically, we have had a nice little market there for malting barley; that has grown from roughly 200,000 tonnes 20 years ago to 800,000 tonnes today. We have a nice little market there for durum; it ranges from 300,000 to 500,000 tonnes. Increasingly, we are moving quantities of milling wheat, in the order of a million tonnes or so, into the U.S. on a regular basis. As far as we are concerned, what we have today is a trade of roughly 2 million tonnes of mainly western wheat, but some from Ontario, and primarily malting barley. That should be regarded as the norm for the future, rather than the exception.
As you are well aware, a number of promises or public commitments have been made by the U.S. administration recently, particularly in the context of the fast-track trade bill that the administration was trying to get through Congress a few months ago. Certainly, it is clear that probably the most sensitive area in U.S.-Canada agricultural trade is the grain sector. Several American senators, Senator Conrad in particular, have requested their General Accounting Office to do yet another study of Canada's exports of grains to the United States.
President Clinton has written Congressman Pomeroy from North Dakota, basically promising that the administration, under the terms of the NAFTA panel that was established to look at Canadian exports of durum wheat to the United States, will ask for a continuation of the audit that the panel recommended. You may recall that the panel's recommendation to the two countries was that, in order to ensure that Canada did not sell into the United States at below the acquisition price, which is defined as the initial payment, an audit would be performed. That audit was performed for one year and it clearly indicated that, apart from a couple of loads right at the beginning of the implementation period, the Wheat Board has consistently priced at or above the initial payment price.
A few other problems have also arisen from time to time. Regarding the potato trade in particular, historically, we have always had problems shipping potatoes from P.E.I. and New Brunswick into the Northeastern Seaboard. That has precipitated a great deal of political pressure from the congressional delegation from Maine. A number of studies have been done, but the bottom line always is that Maine producers are not producing the right variety of potatoes; they have a poor marketing system; and their competition is coming from Idaho and the other Pacific Northwest states rather than from New Brunswick and P.E.I.
It is indicative, though, of how successful we have become. Before the FTA, we were exporting one dollar's worth of potatoes and potato products to the U.S. for every dollar's worth that we imported. Today we are exporting three dollars' worth for every dollar we import. Most Canadians in the business are confident that we will continue to increase our share of the North American potato and potato-product market.
There has been a major expansion in the production of frozen French fries in Canada. Most of that new production is going to the United States.
There have been a couple of issues, Mr. Chairman, that we have settled recently. We had a fairly nasty squabble over sugar and sugar-containing products, which has now been resolved.
On the more positive side, we have tried to facilitate trade wherever we could. For example, there is a so-called Northwest Cattle Project under which we have sat down with the United States and figured out how we might facilitate the increased movement of feeder cattle from the U.S. into Alberta feed lots in particular, and on a reciprocal basis, facilitate the movement of Canadian cattle into the Pacific Northwest. That has been agreed to.
We are working hard to manage our trade relationship with the United States, particularly in the grain sector. We have made the point to Canadian producer groups that, while the Canadian Cattlemen's Association and the Canadian Pork Producers have done a first-rate job over the years of maintaining a close and continuing dialogue with their American counterparts, unfortunately, the same cannot be said for the Canadian grain sector.
However, over the last couple of years, a major effort has been made by various groups, from the Prairie pools to the Western Grain Producers, to open up a dialogue with their American counterparts to try to persuade them, as we in the government are trying to persuade the U.S. administration and the U.S. congress, that there are a lot of myths that need dispelling. Those myths have been repeated so often that they have taken on the appearance of reality and fact. We are trying to convince them that, although we have different marketing systems, for example, in the grain sector, with a single-desk selling agency in Canada and a private-sector marketing system in the United States, just because we have different marketing systems does not mean that one country is trading unfairly. The reality is that, while most Canadians in the agricultural foods sector have a very good knowledge of what U.S. policies and programs are like, unfortunately, the same cannot be said for most Americans in terms of their knowledge of Canadian agriculture and Canadian policies and programs.
To conclude, Mr. Chairman, probably our biggest challenge in the foreseeable future is to make sure that we do have a dialogue from province to state, from federal government to federal government, from producer group to producer group, from food processor association to food processor association, to make sure that our American friends get an accurate picture of what life is like in Canadian agriculture.
That is it, in a very abbreviated fashion, Mr. Chairman. Mr. Norman and I will be very happy to answer any questions you might have.
The Chairman: Thank you, Mr. Gifford.
Senator Hays: It occurs to me that I have not seen you for a while. 1999 is approaching, when you will start to have higher profiles as we get into the new negotiation on WTO.
I would like to ask a specific question that we have had some discussion on, which is the issue of butteroil and sugar blends for ice cream. I am going to follow our notes on this, to make the question as precise as I can.
Revenue Canada made an administrative decision when its officials decided to include the butteroil-sugar blends under a tariff line not subject to the high tariffs normally imposed on dairy products, which are the means by which we continue to practise supply management in the absence of Article 11. If that was an administrative error, why is it not possible to simply admit the error and make another administrative decision that would include the blends under the proper tariff line?
By way of comment, according to sections 58 and 61 of the Customs Act, the Minister may, within 2 years, "...make re-determinations of tariff classifications or re-appraisals of value for duty..." and so on. Why are those sections of the Customs Act not immediately used to change the tariff line for butteroil-sugar blends?
If I may make a further comment, Revenue Canada has respected its international obligations by following the procedures imposed by TRQs, but it is a Canadian statute that is governing the classification. Therefore, there seems to be a Canadian solution.
Mr. Gifford: Mr. Chairman, although this was initially an import problem largely from the United States, trade has now shifted. About 80 per cent, if memory serves me right, was coming in from the United States in 1995. In 1996 the trade shifted to New Zealand and to Mexico. We think most of the Mexican product is, in fact, from New Zealand, a butteroil mix probably with either Mexican or U.S. sugar. The U.S. is supplying a relatively small proportion of that particular blend.
National Revenue is mandated by the Customs Tariff Act with respect to how it classifies product for duty purposes. The conundrum that they are in is that they are obligated to follow not only the guidelines contained in the Canada Customs Tariff Act, but also the procedures of the Customs Cooperation Council, the world customs organization that is headquartered in Brussels.
When they are asked to provide an opinion on the appropriate duty classification, they go through standard procedures. Over the last 18 months or so, in response to various requests from the dairy farmers of Canada that this particular mixture of butteroil and sugar be reclassified, it has been National Revenue's opinion that the product is correctly classified in a tariff line that falls outside the tariff rate quota system.
Virtually all dairy products, certainly stand-alone dairy products, are covered by the tariff rate quota system. The difficulty that we are facing now is that there are certain tariff lines that fall outside the dairy chapter for customs tariff that contain various quantities of dairy products. The question has always been: Where do you draw the line? Taking the example of a frozen pizza, most of the value of a frozen pizza is in the mozzarella. Should that be classified as a dairy product or as a processed-food product?
It is clear that the exporters are taking advantage of knowing where the high tariffs are in the Canadian tariff and then trying to figure out where they can put product in at a lower tariff. That, in itself, is not illegal.
In the past, National Revenue has taken action against artificial products. For example, there was a scheme a few years ago whereby an exporter was exporting rock salt and skim milk powder. What he was doing was separating out the skim milk powder once it got to Canada, and sending the salt back, and the same salt went back and forth across the border. In those circumstances, it is clear that National Revenue can say, "This is an artificial product; it is obviously trying to circumvent the tariff." Therefore, they stop it.
The difficulty with this mixture of butteroil and sugar is that it is not an artificial product; it is used in the manufacture of lower priced, lower value ice creams. Therefore, technically, National Revenue is saying that, according to all the guidelines they are obligated to follow under both the Customs Tariff Act of Canada and the guidelines encompassed by the World Customs Organization in Brussels, the present classification is the correct classification.
Obviously, the end result, however, is that imports of dairy ingredients are coming into Canada; if Canadian producers do not lower the price to meet that competition, they are going to be forced either to reduce their sales or to sell the displaced Canadian product under the world market at lower world prices. That is the dilemma that is facing everybody in the dairy sector today.
Senator Hays: I understand that the industry estimates that it will cost them as much as $50 million in the current year. It clearly is a form of leakage which threatens the supply management system, and, of course, removing surpluses comes at a consumer cost. It is not only the dairy producer who is affected by this, but also the people who buy dairy products, and that aggravates the situation, which has worked fairly happily in Canada for a long time, since the mid-1960s, and can for a little while longer, at least.
We have the Customs Cooperative Council essentially making a sovereign decision for us. We do not have the flexibility to move this category into the dairy category. What is the solution? How do we address this issue? What are we doing about it?
Mr. Gifford: Mr. Chairman, I will comment on the $50 million figure. The dairy farmers of Canada have guesstimated that, if these imports continue unabated, it could displace in the future as much as 40 per cent of the manufacturing milk that is currently going into ice cream production. If they had to sell that milk on the world market at world market prices, it would result in a reduction of about $50 million in dairy producer revenues. That is not occurring today, but that is the maximum potential. That guesstimate is something we would say is a reasonable estimate of the dimension of the problem.
Of course, Mr. Chairman, in the "good old days", when agriculture was not subject to the rule of law, governments could do just about what they wanted in terms of putting up import barriers; and that certainly was the situation prior to the Uruguay Round in the GATT. Everybody had his own special exemption. The Americans had an exemption for Section 22 import quotas. Switzerland exempted its entire agricultural sector from the GATT. The bottom line was that governments freely took action at the frontier and simply did not worry about the consequences. They said, "Everybody is doing it and, if anybody complains, we will deal with it after the fact."
Governments collectively recognized in the Uruguay Round that that was a mug's game, that what that kind of action had done for 40 years was create anarchy in world agricultural trade, and that it was time to undertake a sea change whereby all countries, small and large, would be subject to the same rules; there would be no exemptions for special countries, no exemptions for special products; the rule of law would apply equally to all.
On January 1, 1995, Canada, together with all WTO members, signed the Uruguay Round Agreement on Agriculture, which provides us with protection against other countries unilaterally taking action against us.
I would suggest, Mr. Chairman, that the rule of law as found in the Canada-U.S. Free Trade Agreement has protected us from the American NAFTA challenge against Canada's supply management system. It is going to protect us against the challenge of the United States against Canada's dairy export pricing system in the WTO. However, we, like everybody else, cannot pick and choose which parts of the agreements we want to keep, which is what we did pre-1995.
The dilemma is that we have an economic problem and economic consequences for the dairy sector, and yet we have international rights and obligations that do not provide us the leeway to take action like we could have taken before 1995. That is the dilemma facing the government, Mr. Chairman, and that is the dilemma that they are trying to address right now.
Senator Hays: It sounds like you are saying there is nothing you can do about it. I do not know whether or not it is close enough to the case of the rock salt being used as a medium for skim milk powder, but there may be some argument to be made there. Is that not worth pursuing?
Mr. Gifford: We have certainly encouraged the dairy farmers to make representations to National Revenue to try to persuade National Revenue why it would be appropriate to change the classification. Unfortunately, none of the arguments to date have changed the decision of National Revenue classification experts that, in fact, the current classification is the appropriate classification. They are bound by Canadian law to classify it appropriately. They feel that they are classifying it appropriately.
Senator Rossiter: Mr. Gifford, I heard of this rock salt-skim milk case a while ago and it shocked me. Is that not a blatant fraud? Is there proof of it? Can it not be stopped?
Mr. Gifford: Indeed, senator, it was stopped. If memory serves me correctly, the importer took National Revenue to the Federal Court, and the Federal Court substantiated that National Revenue was right to treat this as an artificial product.
Senator Rossiter: Did they not turn around and do something different?
Mr. Gifford: They have now found a new technique, which is to combine butteroil with sugar, but it is not an artificial product; that product can be directly used by an ice cream manufacturer in the manufacture of ice cream.
Just as background, Mr. Chairman, the lower priced ice creams in Canada are typically not made with cream or whole milk. They are made with mixtures of skim milk powder, whole milk powder, evaporated milk, condensed milk, and all kinds of dairy ingredients. Some ice cream manufacturers are now obtaining most of their butterfat requirements for the low priced ice cream from this mixture. They have to use sugar anyway in ice cream. Sugar is an important content of any ice cream. Basically, it is a "legitimate" product. The problem, however, is that it is forcing dairy farmers in Canada either to price milk competitively with this import or to export at a price much lower than the made-in-Canada price they currently get.
Senator Rossiter: Is it a requirement that such ice cream be labelled "made with butteroil, not cream"? How do they justify their ingredients?
Mr. Gifford: Mr. Chairman, my recollection is that Health Canada does provide a standard of identity for ice cream. There is a standard procedure as to how you must report the ingredients on an ice cream package, but it does not require declaring that it is a butteroil-sugar mixture.
Senator Rossiter: Are these imported butteroil-sugar blends 100 per cent free of any growth hormones that may be used in the United States but are not used here?
Mr. Gifford: We cannot say, Mr. Chairman. As I was saying earlier, only about 67 per cent of the imports are coming from the United States, where BST is permitted. The bulk of the imports are from New Zealand and Mexico. It is essentially a New Zealand product, and New Zealand does not allow the use of BST.
Senator Rossiter: New Zealand can ship the product into Mexico.
Mr. Gifford: It is mixed with sugar and then sent up north.
Senator Rossiter: It is shipped to the United States and then it comes here?
Mr. Gifford: No, it is coming direct. It is coming from Mexico straight into Canada. The majority of the New Zealand product is being air-freighted. Most of it is being brought in through Toronto International.
Senator Rossiter: Is that cheaper than a product that is grown in Canada?
Mr. Gifford: I can only speculate, Mr. Chairman, that they are using airfreighters to bring in chilled and frozen lamb. Certainly, the chilled lamb is being shipped here on an air-freight basis, and they must benefit economically from shipping this mixture as well.
Senator Whelan: The lamb is from New Zealand.
Mr. Gifford: The lamb is from New Zealand, yes.
Senator Hays: As is the butteroil.
Senator Rossiter: I will have another question when we get to the subject of potatoes.
Senator Bryden: Is there any appeal from the classification experts in Revenue Canada?
Mr. Gifford: Yes, there is, senator. Any importer has the right to appeal a decision of National Revenue to the Canadian Import Trade Tribunal. The dairy farmers have been advised of that option. They would simply have to import a couple of pounds so that they were the importer of record, and then could appeal National Revenue's classification decision. So far, they have chosen not to do so.
A decision of National Revenue custom's officer is appealable up to the deputy minister of National Revenue; then it is appealable to the Canadian Import Tribunal and, after that, to the Federal Court and to the Supreme Court. However, the ruling of the Canadian Import Tribunal is authoritative and binding on National Revenue.
Senator Bryden: Without going through the device of becoming an importer, which is not what the dairy farmers are interested in, is there a mechanism for them to appeal on the basis that it is injurious to their business?
Mr. Gifford: Theoretically, Mr. Chairman, any Canadian industry can seek so-called safeguard protection against imports. That is subject to the rules of the WTO. The producer of the like product in Canada has to demonstrate that imports are threatening or are actually causing serious injury to the producer of the same goods.
In this case, however, my understanding would be that the dairy farmers would not have standing to launch a safeguard request. That request probably would have to come from a dairy co-op, a processor, because what you are talking about is basically a butteroil-sugar blend, and the producer of the like product is the dairy processor rather than the dairy farmer. That would require the dairy farmers to persuade their co-op members to seek recourse under the safeguard action. Then it would be incumbent on the dairy processing industry to demonstrate that these imports were causing, or threatening to cause, serious injury.
They have to demonstrate that to the Canadian Import Tribunal. If the tribunal agreed that there was injury or a threat of causing injury, then Canada would have the right under the WTO to put on either additional tariff protection or import quotas.
Senator Whelan: Mr. Gifford, was it during the Uruguay Round of trade that we lost those specific items? I mean, talking about ice cream products, is that not where we gave those away? I have it documented some place, but I did not search it out today.
Mr. Gifford: Mr. Chairman, what Senator Whelan is referring to is that, before the WTO came into force on January 1, 1995, dairy products were subject to import quotas, discretionary import licensing, which meant that there was an embargo on most dairy products under the Import Control List under the Export and Import Permits Act. It was finally agreed in the WTO that all countries would convert the import quotas into tariff equivalents, so we were then forced to change those import quotas into tariff lines. The trouble was that the items on the Import Control List were not defined in the same way as the Canadian Customs Tariff; consequently, there was an exercise done towards the end of the negotiations to try to convert those individual import quotas into tariff lines. That was part of the problem.
At the time, Mr. Chairman, we sat down with the dairy farmers of Canada, who had raised a concern about blends, and tried to identify as many of the potential blends as we could, while being consistent with our obligation only to tariffy those items that had been previously subject to import permit control. Where a judgment call or an arbitrary decision had to be made, it was made in favour of the dairy sector rather than the importer. Once those tariff lines were constructed, however, that basically locked us into the tariff schedule that now forms part of Canada's obligations under the WTO.
Senator Whelan: I believe you said that we import from Mexico ice cream that is made from butteroil that comes from New Zealand.
Mr. Gifford: That is our understanding, yes.
Senator Whelan: It has already been stated here, and confirmed by you, that New Zealand does not allow BST to be used on their cattle. Therefore, it may be more beneficial to our society that we import New Zealand butteroil. I am very much against BST. I cannot understand the reluctance of our government people to disallow it. There are several countries in the world that disallow BST. Europe has stiff restrictions on it.
Do you know the company that makes that product in Mexico? Is it an American company? Eighty per cent of our ice cream is manufactured in Canada by two foreign-owned companies. Is it one of those companies that is bringing that product in?
Mr. Gifford: I am not aware, Mr. Chairman, of precisely who is importing what from Mexico. Our only knowledge is that most of the butteroil is New Zealand product.
Senator Whelan: If I remember correctly, butteroil is generally made from butter that is in storage and you want to do something with it.
Mr. Gifford: That is right.
Senator Whelan: That is what we used to do, too, when we had surplus butter. We put it into oil and canned it and sold it wherever we could, generally at a lower price. Because it is a lower-priced product, it is hard to believe that it is shipped by air, unless there is vacant space on the airplane or something. When you estimate costs for a product coming into Canada, you use the normal air-freight cost, do you not, when you are making an argument?
Mr. Gifford: I can say, Mr. Chairman, that I was surprised, too, to see that the customs entries indicate that Toronto International is the main entry point for the New Zealand product. That butteroil, when it is mixed with sugar, comes out like a paste. It is not a liquid. It is a granular paste, as I understand it, because of the sugar content.
Often, when you are airfreighting product like chilled lamb, there is empty refrigerated space on the airfreighter, and presumably that is what they are taking advantage of. I am not sure exactly what the transportation costs would be under those circumstances.
Senator Whelan: I do not know what the situation is now, but I visited Mexican plants several years ago; they did not come even close to the standards that we imposed on our dairy processing plants here for cheese, butter, ice cream or whatever. Do we do any inspection of those plants for that product coming here?
Mr. Gifford: All agri-food products entering Canada are subject to spot inspections by Agri-Food Canada, senator.
Senator Whelan: Mr. Gifford, you and I both know that spot inspection amounts to very little; about 50 per cent of all our imports come in over the Ambassador Bridge, and they just race through there. They hand out a bill of lading; they fax the thing through to Toronto, and the guy faxes it back as it is, "Inspected". The inspection is a farce, as far as I am concerned.
We had the automobile people here the other day. They deal in a non-perishable product. It is not a pound of butter, a container of ice cream or a quart of milk, but they enjoy tremendous protection. They are going to have 60 per cent overproduction because they are producing more cars than the consumer will ever buy, but I do not think they will lower the price to us.
You have made a great statement about our trade. Well, we were one of the most freely trading countries in agriculture before the Uruguay Round, and we organized everything, Mr. Gifford, under GATT. Then they changed the rules of GATT to slap us down. Section 11 was changed. I forget what other parts of GATT they changed, but we organized those under GATT. If our dollar were at par with United States, which some people think it should be, although anybody who is trading knows it should not be, what would happen to our trade?
Mr. Gifford: Mr. Chairman, a columnist would love to debate that point. I share the view expressed by some that it probably ends up as a wash because so many of our imports are priced on the basis of the delivered-cost of U.S. product. Even though an appreciated Canadian dollar would make us less competitive in terms of export into the United States, our import costs would decline as a result of the relative depreciation of the U.S. dollar. What you might lose on the roundabout, you would gain on the swing.
It seems inescapable to me that the major result of the restructuring of agriculture, particularly the Canadian food processing sector, and of the changes that are ongoing in the Canadian primary-producing sector is that our competitiveness has increased substantially. One classic example of that is the Ontario Grape industry, who said they would be decimated and disappear off the face of the earth. They were producing inferior wine with the benefit of North American varieties of grapes that could not produce good wine. Each year they generated a surplus of wine that Agriculture Canada had to buy up as a surplus disposal activity. They relied on protection to ensure that they could sell their poor quality wine on the Canadian market.
That situation changed as a result of the FTA; the only adjustment assistance provided to the agri-food sector was a joint program between the Government of Ontario and the federal government, whereby all of the poor quality vines were torn out and replaced with high quality European varieties of grapes. We now have a wine industry in Ontario that is slightly smaller than it used to be under the old system, but it is producing high quality wines that are winning international prizes.
Senator Whelan: I have to follow that up. Mr. Gifford, I remember the wine industry as it was; I was its strongest supporter. There were good wines even in 1972. They were not all inferior. We had Inniskillin and other fine wines. We put all kinds of new vines in. We invested all kinds of money in research.
The Department of Agriculture now has cut back on research. There are five wineries in the Harrow district, but the Department of Agriculture has cut the wine viniculturists out of that area to save money. We had promoted viniculture at the time; it did not just come about by free trade. The wine industry was developed a long time before free trade. You do not get a new vine and a new wine in less than five years. Some people think that automatically, when the free trade agreement came, we got good wine. I never served anything when I was Minister of Agriculture but Canadian wine at any reception I had for over eleven years. I would ask you to take that remark about inferior wine off the record, please.
Mr. Gifford: Mr. Chairman, Senator Whelan is quite correct in saying that fifteen, twenty years ago, we did have pockets of good wine production in Ontario, these boutique wineries. He is quite right that one should not generalize, but I would say that, on average, the quality of Canadian wine and of wine in Ontario has improved dramatically in the last ten years relative to ten years ago. That is all I am saying, Mr. Chairman.
Senator Whelan: I am glad that is all you are saying, Mr. Gifford, because what you said about inferior wine was not accurate. We had wine tastings with Canadian wines even way back then, and the great French experts and the great Italian experts could not tell the difference between Inniskillin and some of the wines that we were using at that time.
I remember Mr. Gifford from years ago and some of his reservations about some of the things we used to do. We used to have some very frank discussions. If you think it is frank today, ask Mr. Gifford how frank they used to be.
Senator Stratton: As a consumer, I would absolutely agree with Mr. Gifford. Twenty years ago, I would not drink Ontario wine.
Senator Whelan: That was because you did not know what was there.
Senator Stratton: I could not drink Ontario wine.
The Chairman: This subject started with your remarks on the Canadian dollar. I have some concern about what would happen if the Canadian dollar went up to 95 cents or up to par.
I will give you an example, which I think Senator Hays would agree with. If, for example, a calf -- say calves fetch 100 cents today on the pound -- weighed 600 pounds or better, and the Canadian dollar was at 95 cents, the price would be below the cost of production. The American price on beef sets the price for Canadian beef. It just would not work out. I wonder how you can make that statement.
It seems to me that the safeguard for Canadian exports has been the low Canadian dollar. That is true for the lumber industry, the oil industry, the gas industry and the auto industry as well as for agriculture. Quite frankly, I am surprised that the Americans have not put a major push on to increase the Canadian dollar, but it seems to be going the other way these days. How can you make the statement that we could compete with the dollar at par, given the international trading situation we have today?
Mr. Gifford: Mr. Chairman, the bottom line is that Canadian agriculture, right through from the primary producer to the food processing sector, has increased its competitiveness and can now compete with any country in the world, including the United States. I could say the exchange rate will fluctuate. Economists differ widely as to what the impact would be with an exchange rate of 90 cents as opposed to 70 cents today. Perhaps I have been in agriculture too long. I am always an optimist that, given a fair trading environment, Canadian agriculture can compete under any terms.
The Chairman: It is very certain that something would have to change in the pricing or we could not compete. I made a phone call this morning on the grain situation. The price of No. 1 durum in Crosby today is right around $8 Canadian. The initial price of grain where I deliver grain is $4.05.
You made the statement that the Americans are calling for the Canadian Wheat Board not to go above the initial price.
Mr. Gifford: Not to sell below the initial price, Mr. Chairman.
The Chairman: The initial price is $4.05.
Mr. Gifford: Yes. Our obligation under the free trade agreement is not to sell wheat into the United States at below the initial price.
The Chairman: Where is the extra $4 going?
Mr. Gifford: Presumably, Mr. Chairman, in your supplementary payments that add up to your final payment from the Wheat Board, given the fact that you have a very strong international market for durum, at the end of the day you are going to have a final payment on durum from the Wheat Board that is very close to $8 Canadian a bushel.
The Chairman: That would mean that the durum payments would have to be $4 a bushel. If I may say so, that will never happen. They would be very fortunate to get $2; that is what history would tell us on the initial price. At any rate, I still do not understand why, if the Americans do not allow us to sell above the initial price, we are selling some very cheap grain into the United States.
Mr. Gifford: No, Mr. Chairman. The obligation under the free trade agreement is that we agreed not to use export subsidies on bilateral trade. Basically both countries have in effect what amounts to an offer-to-purchase price. The Americans had their "loan rate" for grains. They had their offer-to-purchase price for dairy products. In Canada, we had an offer-to-purchase price for cheese and for butter and skim milk powder and we had the initial payment system.
We say that the initial payment system, since it is guaranteed by the Government of Canada, is, in effect, equivalent to an offer-to-purchase price. The rules are that we cannot sell into the U.S. at below the initial price, but there is nothing to stop us from selling above.
We are on a rising market for durum now. The market is relatively short; prices are high. It is drawing more Canadian durum into the United States. If you look at the Wheat Board projections at the final realized price on durum, you will see it is much higher than it is for high protein springs.
The Chairman: I am well aware that durum is a special crop right now which Canadians want to sell specifically into the American market. What the farmers cannot understand is why there is the difference in dollars; experimentally, they have not been getting anywhere near $8 a bushel. Mr. Gifford, you know that, I know that, and every farmer along the border knows that. The Americans, at the same time, say that they are not subsidizing through the export enhancement program. So what is happening?
What is happening is the pool price. That means we must be selling some durum, especially hard wheats, into the international market at some very low prices.
Mr. Gifford: On durum, Mr. Chairman, as you are well aware, the board advises the government each year as to what the level of the initials should be. As a general rule, they try to set the initials at roughly 70, 75 per cent of the expected final realized return. I would suggest, Mr. Chairman, that when the board initially recommended the initials, it was not apparent at that time that the durum market was going to be as strong as it is today.
The latest projections of the board clearly indicate that the final payment expected by Canadian durum producers is going to be well in excess of their initial guesstimate when they set the initials.
The Chairman: You would certainly be aware that the farmers out west are very concerned, especially since President Clinton made his remarks on the fast trade. Quite frankly, I think we need to speed up the trade situation as far as Western Canada is concerned because the farmers or the agricultural area that is paying the price today are those in the grain industry and the beef industry. There has been fairly adequate protection for the marketing board sectors of dairy products and so on, although we see that slipping, as you pointed out today. Really, we have been traded off in Western Canada for the protection of the marketing board products in Eastern Canada. That is a pretty broad statement, but it is a reality.
There is no question that those 13 seats in Saskatchewan do not mean as much as 102 seats in Ontario. Now, I do not want to divide our senators here.
Senator Stratton: You go right ahead.
Senator Whelan: On a point of order, we can go back in history if you want. The beef farmers could have had the same thing as the dairy farmers, if they had wanted. They could have had the same thing as the chicken farmers. I had many meetings in Western Canada with them and talked about that, so do not say that these people are protected. Do not pit the east against the west, because that is just not fair. They could have had the same thing if they had wanted it, but your western people, under western members, fought to exempt beef from the supply management type of operation.
Do not tell us, Mr. Chairman, that the Wheat Board is so stupid that they are going to pay you $4 and sell it into the United States for $5, when the price is $8 a bushel. They have one of the best marketing systems in the world, and their returns will show what they have done for the farmers.
The Chairman: Senator Whelan, I can tell you that I was at the GATT with Mike Wilson and Bill McKnight, who was at that time the Minister of Agriculture. Our indications from our own government were that we must protect Chapter 11 at any price.
Now, Senator Hays will admit that. Senator Spivak was there. We went down to the U.S., met with senators, congressmen, and different people in the industry, and we were repeatedly told: "You take off the tariffs, you take off the trade restrictions on the milk industry, on the feather industry, and allow us free trade into Canada on those industries, and we will remove the barriers on grain and beef." It was as simple as that.
Senator Whelan: They do not have any barriers on the grain and the beef. You know that. We are the most free trading nation in the world on oil seeds and grains.
The Chairman: Then why are farmers trying to run grain across the border?
Senator Hays: Mr. Chairman and Mr. Deputy Chairman, I draw attention to the fact that we have some witnesses here who might be able to help us with some of these questions.
The Chairman: That is the answer I would like to get.
Senator Spivak: I want to get right into the issue of the Canadian Wheat Board and your views on it. I recall that during the future of the agriculture talks, which was a while back, there were some goals for Canada, apart from increasing trade to $20 billion, which we have probably surpassed by now. There was a question of food security; there was a question of quality; and there was a question of fair share for the producer.
I would like to know what percentage of world trade the Canadian Wheat Board occupies at this time. I would also like to have your view on recent developments in Manitoba with the United Grain Growers and the take-over. Should we acquiesce to the disappearance of the Canadian Wheat Board, on the basis of a short-term gain in prices which may or may not be ephemeral, would we not risk being taken over by American grain companies? What would be the impact on our farmers? I am wondering about the future of the hog industry in Canada. In other words, what is the relationship between the Wheat Board, the trade, and concentration of foreign ownership of our marketing companies in terms of the long-term impact on farmers?
As a committee, we are interested in agri-food and in all those companies, and interested in trade, but we are basically interested in the welfare of our producers. Sometimes we lose sight of that in all of these non-specific conversations.
I have other questions, but maybe you could address what the long-term prospect is for us of not caving into the American demand to demolish the Wheat Board or, indeed, to the domestic outcry here, perhaps influenced by American lobbyists, or legitimate demands of farmers to get rid of the Wheat Board.
Mr. Gifford: Mr. Chairman, Canada's choice of a marketing system for its agricultural products is a Canadian decision, and a Canadian decision alone. If we want to have a single-desk-selling agency for wheat, there is nothing in the international rules to prevent us from having that. As long, presumably, as the majority of Canadian wheat producers believe that the board is doing a good job for them, then it will continue to exist. The day that the majority of the wheat producers do not believe that the board is doing a good job, presumably, is the day that political support for the board will dissipate.
Certainly, it is my understanding, from all of the surveys that I have seen, that the majority of Canadian wheat producers do support the Canadian Wheat Board.
I will venture my view -- for what it is worth -- of foreign ownership of the Canadian agri-food sector. We saw in the beef sector that we had a first-rate production sector but a rather inefficient and fragmented beef-processing sector. That fact was recognized, and Cargill came in and then Iowa Beef Packers. Basically, Canada Packers folded up its tent.
Now we have two world-scale packing plants in Alberta that can kill two-thirds of the Canadian cattle kill. We have a first-rate production sector matched with a first-rate, world-scale processing sector.
The pork sector was exactly like the beef sector. The pork sector has always had a first-rate production sector but a high-cost fragmented processing sector. Maple Lead, a Canadian firm, has said that if they are going to survive, if they are going to be able to process live hogs in Canada as opposed to selling them to the United States, they have to develop a world-class pork-processing sector in Canada. And that is basically what they have done, by announcing the new plant in Brandon.
As I understand it from the people in the meat-processing sector, to have a world-scale plant to process pork, 2 million head a year has to be processed. Most of our pork processing plants do not approximate that scale. If we want to be as competitive in red meats as we should be, we have to bring up the processing sector to the same level of competitiveness as the primary production sector. I think that is what is happening.
In the case of beef, the problem was mainly because of American investment coming in. And hopefully, if Maple Leaf continues to do what they are doing and if the Saskatchewan Wheat Pool continues to do what they do, we will have a Canadian pork-processing sector that happens to be owned by Canadian firms.
Senator Spivak: Are you saying that it does not really matter who owns it in terms of the industrial strategy of Canada?
Mr. Gifford: Indeed, Mr. Chairman, that is what I am suggesting.
Senator Spivak: What is the Canadian Wheat Board's share of the market?
Mr. Gifford: The board has managed over the years to ensure Canada's market share of world wheat trade at anywhere from 19 to 21 per cent. It has fluctuated within a very narrow band.
The board has done extremely well to compete in a situation for much of the last post-war period where they have had to face U.S. and European export subsidies for much of that period.
Senator Spivak: Is there any truth to the accusation by the Americans that the Canadian Wheat Board manipulates the market?
Mr. Gifford: No, Mr. Chairman. There are many allegations about the perceived unfairness of the Canadian single-desk-selling agency for wheat. We keep telling the Americans to "put up or shut up". So far, they have not provided any documentation whatsoever to support their allegations that potentially -- and this is the word that they always use, "potentially" -- the board has the economic strength to, in effect, undercut world prices, or do this or do that. So far, Mr. Chairman, they have not been able to document a single instance.
The Chairman: Just one question related to ADM buying shares in United Grain Growers. We sell canola to ADM in Velva, North Dakota. Canola brings exactly the same price in the United States as it does in Canada. Today it is $8.36 in the U.S.
The Wheat Board sells most of its grain to ADM. There are those farmers who say that by involving the big players, the benefit will extend into the international global market in a positive way. We are moving into a global market. In Bill C-4, there is the suggestion that the Wheat Board would have the opportunity to take on oil seeds, as well as grain, wheat and durum. Some of the farmers are jumpy about this because they are getting world price now through ADM. The Saskatchewan Wheat Pool ships its grain to ADM. Pioneer ships grain; United Grain Growers ships it, as well. We are getting $8. If the Wheat Board takes that over, we might get $4. We cannot seem to get answers to these questions. That is why there is so much confusion in Western Canada as it relates to the pricing.
Twenty per cent of the farmers produce about 80 per cent of the product. If you check with those farmers, you will find out where they stand on the issues. Some very serious issues will come before us in Bill C-4 in this area of the Canadian Wheat Board.
I will admit this: Most farmers will stand for the Canadian Wheat Board, but they want to see changes. I stand for the Canadian Wheat Board because they have done a good job in the past, but we have to make some changes to deal with this global market.
Senator Spivak: Could you comment on the share of the market held by Archer Daniels Midland? What is their share of the market?
Mr. Gifford: Mr. Chairman, my understanding is that ADM does not trade much in wheat. The large trans-national grain companies are Cargill, Inter-Continental, Dreyfuss. It is true that as barriers have come down over the years, many more trans-national companies have sprung up. For example, in the oilseed-crushing sector, the same companies that dominate in North America dominate in Western Europe now. There are many large trans-national agri-food companies, including, for example, McCain Foods, which is probably the best known Canadian company. McCain's, which is a giant trans-national food company, is the largest manufacturer of frozen french fries in the world.
The Chairman: We seem to be moving to a North American market. If we have not realized the reality of that yet, we will within five years, without a doubt. What is the point of the Canadians and the Americans undercutting each other on prices when our real opposition is the European Common Market?
Mr. Gifford: Mr. Chairman, it is fair to say that the American market for Canadian wheat will never be the largest single market. Obviously, though, it is a high-price market. The board has half a dozen high-priced markets, including North America, Japan, and Western Europe. Depending on the level of export subsidies to third markets, it takes lower prices in other areas.
Often, we will export the same product out of one part of Canada and import it into another. We will export potatoes out of Eastern Canada and we will import potatoes into B.C. We will export live cattle and beef out of Western Canada to the United States, but we will import most of our hotel and restaurant beef into Eastern Canada from the U.S. There is nothing inherently wrong with this.
The North Dakota grain producer cannot comprehend why, if the United States is the world's largest exporter of wheat, the United States is importing 2 million tonnes of Canadian wheat. It is the market, Mr. Chairman.
Once you got rid of the section 22 import quotas and once you got rid of the overhanging threat of the Americans using those section 22 quotas, the board had the confidence to start shipping wheat into the United States. This trade has grown since the late 1980s. American buyers, Cargill, ADM, Canagra, now know that if they buy Canadian wheat, they are getting a better quality product than in the U.S. wheat because the Canadian quality control system for wheat is better than the American one. It is business, Mr. Chairman, that is dictating the trade flow, not government.
We told the Americans that it is a given that if EEP is reintroduced, a lot of Canadian grain is going to be driven south. That is the bottom line. If you put EEP on barley, EEP on wheat, the effect is to make the American market the highest-priced market in the world and that will just drive more Canadian wheat and barley south.
Mr. Chairman, because the world has become more globalized in the past ten or fifteen years, countries can no longer take what they think to be largely a domestic policy decision and ignore the international consequences of what they are doing. When North Dakota pressures the U.S. administration to put on export subsidies, the administration in Washington has to recognize -- which they do -- that if they do that, they are going to have far more Canadian wheat and barley moving south.
Senator Rossiter: What is EEP?
Mr. Gifford: The Export Enhancement Program. It is the American export subsidy program, senator.
Senator Stratton: I would like to go back, Mr. Gifford, to the debate that took place regarding the so-called protection of the milk and feather industry. The perception, right or wrong, held by western producers and Western Canadians is that the milk and feather industry is protected primarily for the producers in Eastern Canada, and that the grain and meat producers in Western Canada are free traders and that they are paying a price.
Mr. Gifford: Mr. Chairman, I would completely disagree with the regional characterization of who is pro-export and who is import-sensitive. I would suggest that it varies by commodity. If you are a pork producer in Eastern Canada, you are just as interested in gaining access to export markets as your colleague in Western Canada. The reality is that supply management is distributed across the country, although it is largely concentrated in Eastern Canada.
A number of allegations have been made over the years that somehow the interests of our export sectors have been traded off to protect our import-sensitive sectors. Mr. Norman and myself were the negotiators on agriculture in the WTO in the Uruguay Round. I can state categorically that the Canadian negotiating position did not result in a trade-off between supply management and our export interest.
The reason for that was simple: We had a credible negotiating position. Article 11 of the GATT existed since 1947. It provided for import quotas in support of supply management. We were willing to offer improved access and to take disciplines on exports in exchange for clarification of Article 11. However, at the end of the day, the rest of the world said that they want to get rid of import quotas and convert everything to tariffs, so we did that.
Mr. Chairman, I think what the senator perhaps is suggesting is that, in the next round, it will not be quite so easy to do what we did in the last round. I am categorical in saying that in the last round we managed to have our cake and eat it as well because we had a credible negotiating position that was tied to Article 11.
Article 11 is not a part of the WTO and, therefore, when it comes to market access, obviously, differences of view will arise between the import-sensitive sectors in Canada and the export-oriented sectors as to what should be Canada's negotiating position on market access in the next round. The government, supported by the provincial governments, has been saying to the industry, "We have a couple of years to prepare. These negotiations do not start until the fall of 1999. We had better start thinking hard and long about how we are going to reconcile these different interests in Canadian agriculture."
The Chairman: On that subject, how do you address the concerns of the dairy producers in B.C.? They say they have only 3 per cent of the quota -- I believe that is the figure -- with about 14 per cent of the population whereas Quebec has 49 per cent of the quota, and Ontario has a high per cent of the quota. The B.C. dairy producers say that they are not getting a fair crack at this situation. This was a pretty important issue to the dairy producers of Western Canada. I cannot recall Saskatchewan's percentage, but it is negligible.
Mr. Gifford: Mr. Chairman, we are straying out of the international area and into the domestic area. The only observation I would make is that the supply management industries have changed quite dramatically over the last four or five years, certainly in the dairy sector with the pooling that is now occurring and the possibility of joining the fluid milk market and the manufacturing milk market -- which is something that the industry in Canada is going to have to come to grips with in terms of their decision to allow, for example, inter-provincial transfer of quota. As I understand it, the dairy industry in particular is moving to a situation where it will be possible for quota to move from one province to the other. Again, this is a domestic decision. It really is not anybody else's business except Canada's.
The Chairman: It is certainly dollars and cents in one area of the country that the other area of the country does not experience.
Mr. Gifford: The supply management sector has been adapting to a changing environment and I guess it will continue to adapt, Mr. Chairman.
Senator Hays: Regarding the special classes of milk challenge, do they have a good case? If they win, what is the cost to our producers?
Mr. Gifford: Mr. Chairman, we believe that Canada's export pricing system for dairy products is consistent with our international rights and obligations. The United States disagrees. Because we are now operating under the law of the jungle system, the Americans, instead of taking unilateral action, are taking this dispute to the WTO. We are quite prepared and feel confident to argue before a panel that the Canadian system is, in fact, consistent with our obligations and rights under the WTO. We anticipate that this panel, if it gets established soon, will probably report by the summer.
Either party will appeal whatever the outcome is to the appellate body in the WTO. We assume that the appellate body will probably make a ruling toward the end of calendar year 1998 or possibly early 1999. If the panel supports the Canadian position, the U.S. producers, who have said very clearly to the U.S. government that if the panel supports the Canadian position, want the same system as the Canadians.
If the panel substantiates the view of the United States, in whole or in part, as a result of the reforms to the WTO in dispute settlement, a country whose measures have been found to be inconsistent with its WTO rights and obligations is given a period of about 15 months to bring its measures into conformity with the panel findings.
To put this all into some proper perspective, Canada has the right to use export subsidies because in the past some of our practices were defined as export subsidies. Our commitment in the GATT is not to use export subsidies on a volume in excess of those commitments. We are saying today that virtually all of our exports are no longer exported with the benefit of a producer-financed export subsidy but are simply priced on the basis of end use and end market. Certain states in the U.S., for example, California, price by class. It is our firm view that pricing by end use and market does not constitute an export subsidy.
Senator Hays: Are you saying that we can use export subsidies to deal with the situation if we lose the panel, or are you not yet answering the question about the stakes in the event we have an unfavourable decision?
Mr. Gifford: It depends very much, of course, Mr. Chairman, on the findings of the panel. As you know, the classified pricing system comprises a number of components. One such component is providing milk at U.S. competitive prices to certain food-processing sectors; for example, the confectionery industry and the baking industry. That milk is made available to the Canadian processing firms irrespective of whether the product is sold in Canada or exported.
You have another part of the classification system where the milk is sold to processors for export at prices lower than the U.S. price, lower than the Canadian price. Again, Mr. Chairman, depending on the panel's findings, even if certain of our practices were found to be export subsidies, there is no obligation to eliminate export subsidies under the Uruguay Round. Our only obligation is to keep within the limits that we have agreed to. Therefore, we do have a cushion, because of the earlier use of export subsidies, to export a certain amount of milk.
The dilemma to which you are referring is that because dairy farmers recognize that the domestic market is relatively limited, in fact, is shrinking for dairy products, and want to continue to grow and expand, the only opportunity is for exports. If the WTO does rule, in whole or in part, against certain parts of the Canadian export pricing system, the dairy industry, along with the provincial governments and the federal government, will have to determine a system that will allow us to compete in the international marketplace as well as serving the Canadian market.
It is hard to answer that hypothetical question without knowing the findings of the panel.
Senator Hays: Is one of the answers to the question that the long period of time for Canada to change its practice of supply management under tariffication surely would anticipate that adjustment would occur through exports, and that that would be anticipated by going to tariffication as a way of, in effect, over a long period of time, whether it is five years, ten years or fifteen years, adapting to a different trading environment?
Mr. Gifford: Mr. Chairman, the supply-management sector, the dairy sector in particular, has changed radically. People tend to forget that we used to be a major dairy exporter. We shipped 40,000 tons of cheddar cheese to the U.K., but then the international dairy market became distorted and international prices dropped. Governments were using export subsidies left, right and centre. There were all kinds of non-tariff barriers.
The Canadian dairy sector, in the late 1960s, decided to concentrate on servicing the domestic market and to forget about participating in the international market. The only time we exported was basically to get rid of structural surpluses. That is not marketing; it is getting rid of structural surpluses.
Now the industry is saying that if our domestic market is stagnant or shrinking, and if we want the industry to grow, the only way to do that is through participating in the international market. My understanding is that the players in the industry have been discussing this amongst themselves, and I think they are probably saying to themselves that they are not going to compete on the basis of butter or bulk commodities in the international dairy market.
To compete, they have to pick niches; high-quality, high-priced cheeses or dairy ingredients in chocolate, or whatever. The industry, slowly but surely, seems to be developing a consensus that to grow rather than shrink, they must figure out a way to compete on the international market, not just to get rid of structural surpluses.
Senator Whelan: You are talking about global marketing as if it is something new we are entering into. I have certain reservations about that. When Canada was first a country, it marketed wheat and lumber to Europe. We were, right from the beginning, an exporting country. The global market is really nothing new to us.
Mr. Gifford, you talked about the beef industry having obsolete plants. You cannot say that, can you, about the poultry industry or the dairy industry?
Mr. Gifford: No, Mr. Chairman. My understanding is that both the poultry sector and the dairy-processing sector have done a number of benchmark studies. In many areas, the Canadian plants are fully competitive on a plant-processing cost basis with their American counterparts. The major difference is their input prices for products compared to the U.S. plants. The plants themselves in the dairy sector, for example, tend to be world scale as opposed to small.
Senator Whelan: When you are talking about consuming in our livestock industry, and talking about the grains, is it not true that the largest customer in the world for our feed grains is our Canadian livestock industry, poultry, and so on? It is not export.
Mr. Gifford: Indeed, Mr. Chairman, the bulk of Canada's barley is, in fact, sold for domestic use. I think it is the view, particularly of people in Alberta, that in fact they can see the day -- and I think the board will agree -- that the only barley that we will be exporting in the future will be malting barley; and that, if anything, we will end up being a net importer of barley for feed purposes because of the tremendous expansion of livestock production in the west.
The Chairman: What is the percentage, though, of export of beef and pork, the end product?
Mr. Gifford: Increasingly, Mr. Chairman, we, like the Americans, are exporting our grains in the form of red meats. It is clear, I think, that with the elimination of the WTTA, what you see now is a major increase in investment, particularly in the hog industry in Western Canada. Increasingly, we will be exporting our grain in the form of higher-value red meats.
Senator Whelan: The first supply management ever started was not in Eastern Canada; it was started by the dairy farmers in British Columbia in 1924. Let us be fair about east and west. Who started supply management? It was that most efficient producing area that is probably run with the most sophisticated computers in British Columbia.
The Chairman: That is why they are concerned about their 3 per cent.
Senator Whelan: Mr. Gifford, does the U.S. government still use their government marketing orders? Do they have to get rid of those under the agreement? Is there a time limit on that? Many people do not understand that government orders have been there since Roosevelt was President of the United States of America. These are powerful organizations. In California, all the cashew nuts and citrus fruit is grown under government orders, and there are strict quotas for acreage. Are they still in effect?
Mr. Gifford: Yes, Mr. Chairman, there are a number of marketing orders, mainly in the fruit and vegetable sector, that are used to regulate what you can sell, grade standards. If they have a heavy crop, they might restrict, in effect, what goes on the market by imposing higher-grade standards on sizes, for example.
The United State's milk pricing system is still basing the price of milk out of Wisconsin. They have carved out the market. The further you get from Wisconsin, the higher the price of milk. There is still a fair amount of government intervention in the U.S. milk production and marketing system. There are also many fruits and vegetable products that benefit from the use of federal or state marketing orders.
Senator Bryden: I have a couple of comments to make on the effects of the free trade agreements on the exchange rate on our dollar. While the Canadian dollar is weakening against the U.S. dollar, and I think the British pound, it is strengthening dramatically against virtually every other currency in the world. In those areas such as Southeast Asia and Japan, which are part of our export markets, we are finding -- I am more familiar with the area of the forestry products -- that it is becoming very difficult to compete or to make any money. That indicates to me that the impact of the value of the currency is very significant.
That ties into your comment that the dollar could go to 90 cents. With offsetting factors, what goes around, comes around, and we would be in virtually the same position as a trader.
You referred to the McCain Foods, who are world traders. It is kind of interesting, actually, that the two that you mentioned from Canada are both McCain brothers: McCain Foods in Florenceville, and now Maple Leaf Foods that Wallace McCain is operating.
I remember, when free trade was being discussed, that their position was very categorical. They said that you can do whatever you want about free trade, but as soon as our dollar gets to 80 cents, it is going to be of no help to us. They believe that what has allowed them to trade, from a Canadian point of view, is a very competitive Canadian dollar against the U.S. dollar.
Similarly, I was at a conference where Tim O'Neill, an economist with the Bank of Montreal, said that before the turn of the century, the Canadian dollar would be up over 80 cents, perhaps approaching 90. Jim Irving was also at that conference and upon hearing Mr. O'Neill's remarks, said that without the benefit of the dollar somewhere in the 75-cent range, many of our commodity-based products, whether those be beef or potatoes or pulp or lumber, become very non-competitive trying to go into the U.S.
Is it not what has happened, to make our trade freer and more prosperous in the last 10 or 15 years, more dependent on the fact that we have had a very competitive currency than on GATT or the Free Trade Agreement?
Mr. Gifford: I would not dispute, senator, that a depreciated dollar probably has had a positive impact and has encouraged certain Canadian firms that have never before thought of exporting to get into the export business. I come back, though, to the basic competitiveness of the Canadian primary production sector and the food-processing sector. There have been a number of adjustments, particularly in the processing sector, that have made it much more competitive. They have had to adjust to the concept that North America is the domestic market, as opposed to trying to service a narrow 100-mile band from the Pacific to the Atlantic.
I am confident that we have the inherent competitive capacity in Canada in the Canadian agri-foods system to compete on a North American basis on any product, including milk.
Senator Bryden: Up to this point, we have been competitive by producing goods and services on a 75-cent, or less, dollar and selling then for a 100-cent dollar in North America. That is a huge markup. Take that markup away, and I think we would find that it would be very difficult to remain at that same competitive level.
Mr. Gifford: Mr. Chairman, there was no consensus in the economic profession as to exactly what the implications of the Canadian exchange rate are on the natural resource areas, including agriculture. That is a question that is going to have to be unanswered for a while, until there is more of a consensus.
Senator Bryden: Present company exempted, you were speaking about the lack of concurrence among economists. I am always reminded about the comment that the reason an economist will give you an opinion is not because he knows but because he is asked.
Senator Spivak: Apparently, Canada has won the battle respecting hormones in beef. That beef can not be exported to Europe, and elsewhere. I wonder why Canada is doing this, since excessive use of these hormones has been found not to be very beneficial to human health generally. I guess that is not your field.
The other area of concern for me is BSE, and the developments in Britain apparently just this morning. Are there any blood and gelatin products coming into Canada? Are there any concerns, anywhere, given the fact that there have been some very interesting developments on cause, and so on? What is the situation in Britain in terms of safety of the Canadian public?
Mr. Gifford: Regarding the so-called growth hormones that are used in the feed lot industry in North America, we and the United States took the European Union to a WTO panel on the grounds that the Europeans were being arbitrary in the way they were applying their health and safety concerns. The panel found in favour of Canada and the United States; that it was not legitimate for the Europeans to ban beef from North America simply because feed lot cattle in North America are fed growth promotents. The European community has now appealed that finding to the appellate body. We expect the appellate body to rule definitively on the issue between now and Christmas.
Senator Spivak: Has Canada no concerns about using growth hormones in beef?
Mr. Gifford: Mr. Chairman, the case that we and our American friends made to the WTO panel was that the World Health Organization and the Codex Alimentarius are on record as saying that if growth promotents are used under appropriate conditions, there are no concerns whatsoever for human health. It was on that basis, in part, that the panel ruled in favour of the Canadian-U.S. position.
Clearly, the bottom line is that every country, no matter what the international rules are, still has the right under the WTO to take whatever action is necessary to protect its human, plant, and animal population. A country cannot just use these regulations as a disguised barrier to trade; action must be based on science rather than political pressure.
Coming to BSE, the problem in Europe is that science has lost a great deal of its credibility because of the BSE scare in Europe. Increasingly, the European Union is taking decisions that purport to be in the interest of the human population; but it is not science that is driving the decisions, it is politics.
Senator Spivak: I beg to differ. I am sure you saw the news last night. They have just eliminated anything with a bone. I am thinking of the man who has just won a Nobel prize, who looked at the cause of the BSE. How many thousand new cases have they found in Britain? It is in the order of 18,000.
Senator Whelan: Are you speaking of mad cow disease?
Senator Spivak: Yes. It is basically our own fault. One ought never to have fed animal protein to cows. If you fool around with nature to that extent, you are going to get kicked back. That is what we are experiencing.
Mr. Gifford: Mr. Chairman, in the last couple of years, we have had an increasing number of access problems into Europe -- so-called technical barriers.
I was trying to express the point that because of the implications of the BSE incidence in Europe, the credibility of the scientific community, who makes recommendations on other areas of food safety, has diminished. Now there is paranoia. Scientists earlier said that BSE was safe; it turns out they were wrong, and this has spilled over into other products.
In terms of BSE coming to Canada, Finland is the only country that is certified to be able to ship beef to Canada from Europe. There are no plants elsewhere in Europe that are approved by the Canadian Food Inspection Agency to ship to Canada.
Senator Spivak: I was not asking specifically about the beef. I am referring to products that contain ground-up bone and by-products of beef. I think that is where the danger lies. Do you monitor that? Are those products banned? Is gelatin and beef by-products being looked at, or are they just coming in here without being looked at?
Mr. Gifford: Mr. Chairman, I am getting out of my depth on this one but my impression is that with exports of animal by-products such as you are talking about, the trade tends to be from Canada to Europe rather than the reverse. What we tend to import from Europe is highly processed food products rather than the raw or semi-processed products.
Senator Spivak: Mr. Chairman, could we ask that this issue be looked into? I think that it might be an area of concern. We do not want to assume that everything is fine and then find out a few years down the road that it is not. I would like some information on it. Thank you, Mr. Chairman.
Senator Rossiter: Could we get a statement or some information from you, Mr. Gifford, about the potato situation? New Brunswick and P.E.I. ship a great deal of potatoes into the United States. There is some speculation about an anti-dumping case. Could you get us some information about that?
Mr. Gifford: Certainly, senator. We will send it to the chairman.
The Chairman: Thank you very much, Mr. Gifford and Mr. Norman, for a very interesting morning.
The committee adjourned.