Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 22 - Evidence
OTTAWA, Thursday, November 5, 1998
The Standing Senate Committee on Agriculture and Forestry met this day at 9:05 a.m. to study the present state and future of agriculture in Canada (Farm Income).
Senator Leonard J. Gustafson (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, before we hear our witnesses, I should like to say a few things about the way I, as a farmer, see the state of agriculture.
I chaired the committee on drought in the mid-1980s, following which helpful programs were instituted. The situation today is more serious, given the problems of price and input costs facing farmers. The situation is very serious in Saskatchewan, Manitoba and parts of Alberta.
This morning, colleagues, we will hear from the Federation of Agriculture and the Canadian Wheat Board to get the facts on the situation in the Prairies, particularly the hog industry, and the state of agriculture across Canada in general.
We welcome Mr. Jack Wilkinson and Ms Sally Rutherford from the Canadian Federation of Agriculture. We look forward to hearing your presentation. Please proceed.
Mr. Jack Wilkinson, President, Canadian Federation of Agriculture: Honourable senators, the first part of the package with which we have provided you deals with how domestic support, international trade and export subsidies impact the price of products in Canada. When the Canadian Wheat Board gives their presentation, they will be able to speak to you in more detail about the numbers and volumes. I will leave those details to them.
We have provided you with some detail on how programs operate in other countries. We would be happy to answer questions on that during the question period.
We have also provided you with a copy of the presentation we made earlier this week to the House of Commons standing committee on the history of farm incomes in Canada, the current state of affairs, and what the future holds. That is probably of more immediate interest to the committee.
Agriculture is a very diverse business which requires much capital investment. It is subject to weather risks, international price fluctuations, and world food stocks. It has many variables.
Historically, governments have seen fit to put farm programs in place to help deal with those risks. It is, of course, the responsibility of farmers to do what is necessary to look after ourselves, but given the political nature of food and the huge variations that occur, farming has historically been supported by government.
That is still the case in countries such as the United States and in the European Union. At a meeting which I attended in San Diego three weeks ago, a program was announced with respect to farm organizations in Europe and Canada. I said that the only thing I like about the U.S. system is the frequency of their elections. Maybe we should have an election every year in Canada as that seems to create income support for farmers. That week, another $7 billion had been pledged to support producers in the United States.
We did start reform in Canada with the signing of World Trade Organization, but it put limits on how much money we could spend. For example, there was a requirement for a reduction of 36 per cent on export subsidies. Canada eliminated all of its export-oriented programs with the cutting of transportation subsidies -- the Crow and a host of other domestic programs.
Under the agreement, we were supposed to reduce domestic support by 20 per cent, which some countries are working toward. Canada reduced domestic support by 85 per cent. Many areas that were classified as green crow program expenditures were cut. Those were areas in which we could have done some things had we wanted. Cost recovery was introduced in 47 areas in the food system, in everything from marine services to inspection fees.
I do not believe that was done by the federal or provincial governments to be mean spirited. That was done at a time when prices were reasonably high and reasonably stable and farmers were achieving their goals of balanced budgets.
In 1986, program support reductions totalled $2.5 billion. This year, the federal government will spend approximately $670 million. In 1986, net farm income in Canada was around $3.5 billion. Last year, it was $1.8 billion.
In two weeks we have gained approximately $500 million in net farm income. Estimates of final income are not accurate, but it is forecast to be even lower next year. This is serious problem.
Hog prices have collapsed and change daily. They are down more than 40 per cent. People were quoting prices yesterday of 66 cents a kilogram dressed weight. That is about 30 cents a pound dressed weight. Sows and boars are down 10 cents a pound and orders are not coming in.
No one can exist for any length of time in those circumstances. We must determine what action to take. We do not want to create countervailing problems for our exports with the United States. We rely heavily on the U.S. market because of the previous trade agreements we have had with them. Even though they are subsidized four to five times the amount we are in wheat, we cannot bring a commodity-specific program in or we will run into trade problems.
We are advocating a general farm disaster relief program. That is one part of the safety net package that was never put in place and we have argued for it for more than a decade.
We want the measures taken to be whole farm in nature and income-based, so that we will not get into trade problems. That will meet the World Trade Organization requirements. A relief program must be cost-shared to some extent between the provinces and the federal government. Special consideration must be given to Saskatchewan and Manitoba with their large farm receipts and low tax base.
We do not want producers to be charged any premiums. If it is a disaster, it is absurd to charge premiums. It will be relatively low slung. It will not meet everyone's needs, but it is an absolute requirement. We must move quickly and aggressively. The last two pages of the documents we have provided you with contain the details of what we are proposing.
We would be happy to respond to your questions, Mr. Chairman.
Senator Hays: What is the best delivery mechanism, given that some provinces already have such things as farm income disaster programs? Alberta has such a program. Perhaps other provinces do as well. How much is needed?
Would you care to comment on the fact that the U.S. added about $7 billion in response to the crisis you have described?
Mr. Wilkinson: It is the erosion of the Asian and Russian markets that created this problem. It is not that we were producing food hoping that someone would buy it. These were real markets into which people were selling, pork in particular, and they vanished. Hence the problem.
The delivery mechanism we are looking for is similar to the Alberta program. We need to determine how to do this quickly and efficiently. It must have some significant changes from the Alberta model.
First, the Alberta program does not deal with negative margins. In a negative disaster program, negative margins must be covered off. Second, the Alberta program is very negative with regard to NISA. A NISA account must be drawn down very substantially before you can move into the companion program. That is inappropriate.
Three things must occur. First, NISA must be maintained. That will handle the normal fluctuations in price cycles. Second, crop insurance must be maintained. Third, a disaster program must be put in place.
British Columbia has a program similar to that of Alberta. Prince Edward Island has one which is somewhat similar. Our view is that each one of those can be improved while continuing to use the delivery mechanisms that are in place. The provincial systems mentioned are similar to each other with small modifications. Other provinces should follow suit.
Over the last five years, provinces have gone in different directions on the types of farm program they have in place. Saskatchewan improved crop insurance but eliminated price support. The same is true of Manitoba. Alberta brought in a disaster program that was slightly different than other ones. There is a huge discrepancy in coverage depending upon where you live and where you farm. We believe that must be fixed. We are suggesting the Alberta model with some modification and improvements.
Senator Hays: How much of an injection are you suggesting?
Mr. Wilkinson: That is a difficult question. I believe it will cost $500 million. We cannot put an exact number on it because all sorts of offsetting occurs on the farm when dealing with income change. We cannot pay farmers the amount that grain decreased in price because that we will create trade problems.
We suggest picking up the margin of the drop in entire farm income. If I grow both and canola, the drop in the price of wheat will not trigger payment because canola has held up reasonably well. The models that have been done suggest between $200 million and $400 million, depending on the day and how bad pork prices are.
Senator Hays: As you just said, agriculture has historically been supported by government in developed countries. We have gone a long way toward eliminating support in response to the agreement we made in 1994, as I understand it, in the Uruguay Round.
We have a mix of problems now. You have identified the one probably most directly related to the collapse of Asian markets, that being the pork sector. The break even point is 50 to 60 cents a pound, depending on how large and how efficient you are, and we are selling hogs for 30 to 35 cents a pound. That is a disaster akin to a drought. It is obviously an unexpected circumstance.
On the cereal side, we have a disaster with root crops as a result of the way in which the Uruguay Round was negotiated which allows a continuation of supports to encourage production and to subsidize exports. That is a disaster because we are producing at less than cost in any other than the most optimal areas.
The perverse signal is, "Do not grow these things because you cannot make money doing it even though you would normally have a comparative advantage." The Asian disaster will have a life different and more predictable than the other problems. How do you deal with that?
Mr. Wilkinson: I agree. We are talking about a disaster program and an income support base program, and we are looking for the same response. A disaster that causes that loss in income on your farm would be covered under this program regardless of the reason.
We would have other areas in which to respond. There is a lack of understanding by many people of just what we signed at the World Trade Organization, because we did not in theory need to eliminate. We had to change the way we supported grain transportation. I am not advocating that we should have kept it, but we were required to reduce export programs by 36 per cent on a certain amount of volume, the same as we were required to reduce domestic support by 20 per cent by the end of the deal on domestic programs.
I believe that because of budgetary pressures in Canada, both federally and provincially, much more reform took place in agricultural policy than was required under the World Trade Organization. I believe that we can very easily live within our commitments and put some money back into domestic support as long as we do it right and do not cause any countervailing actions from the United States. If a flood or an ice storm, such as occurred in eastern Ontario and Quebec, triggered a sufficient income margin change on an individual farm, in our view that would be covered by this program.
We are not talking about an ad hoc program. It would be institutionalized within the safety net system so that when a disaster occurs we would not need to discuss it further. Be it disease, flood or price war, it should be covered by this program.
The Chairman: You say that this should not be ad hoc. I recall that in 1993 Senator Hays and I were part of a joint committee of the House of Commons and the Senate. We were talking at that time, when things were relatively good, about bringing in a program. No program was introduced. We do not like the term "ad hoc," and farmers do not like to be seen to be begging from government or complaining all the time. Perhaps we have been too silent in the last year or two for that reason. We can give a program a fancy name, but if it does not put some money into the pockets of farmers immediately, we are in trouble.
In southern Saskatchewan, where I am from, two things are happening. The young farmers want out and are looking for jobs in the city. They cannot make it on the farm. They have no choice. Another group of farmers is putting their land up for sale. They will take what they can get and move on. I can name four farmers in my own area who are doing that. I do not know what that will do to the price of land.
Mr. Wilkinson: The price of land will collapse.
The Chairman:The term "ad hoc" carries a lot of weight.
Senator Stratton: How many years will this go on?
Mr. Wilkinson: We do not want an ad hoc program because under the ad hoc programs put in place for special grains, the cheques did not flow right away. People got false signals. People did not know when the money would come in. With an ad hoc program, the federal government will not act upon individual disasters. It only acts when a problem is big enough to attract sufficient political attention. We do not want to do that.
We are working very hard in our committee to put the details and delivery mechanisms of the program we are advocating in place so that when the federal government says it is ready to go, we will be ready to go. We will have our last meeting to work on details by next Tuesday. We hope to be sending a letter to the minister saying, "You can announce the program now. We have the details worked out."
I am not being flip about that. British Columbia modelled their program after that of another province. They started about this time and had cheques flowing by March. We think this is a bigger crisis. They were instituting a program under basically normal conditions. Once such a program is approved by cabinet, the federal minister must sit down with his provincial counterparts, but that can be done very quickly. A number of them said yesterday that they are ready to move on this. We think it can be operational with money flowing by March. A clear signal will be given to producers long before that, as soon as the federal government says that there will be a program.
We agree that it would be nice to put a cheque in the mailbox tomorrow, but it never happens that quickly so let us do it right. Let us pull out all the stops, work 24 hours a day, and get it done. Our organization is very serious about this.
The liquidation that is taking place in hogs, which is further driving down the price, is not only a Canadian problem but a worldwide problem. We have moved from having not enough pork to meet demand nine months ago to having an 8 to 10 per cent oversupply. With a perishable product, that causes the market to collapse. Because the losses are so high, after their sows farrow people are shipping everything. The numbers show liquidation in Europe and the United States as well.
I have been told that in the last three weeks the sow slaughter numbers are up to incredibly everywhere in the world. I believe there will be a correction because the liquidation is so severe, but it will take a while.
Grain is different matter. Grain can sit in bins for a while. In Europe, the farms are so insulated on price that they can make money growing under their domestic support program, not the world price. There, planting is actually up. Expectation of volumes is actually up.
In three years, we have gone through what used to be a 60-year price cycle in wheat. Three years ago, wheat prices were at a 30-year high. This year, they are at a 30-year low. It is pretty tough for any farm to be able to manage that kind of risk.
The Chairman: You mentioned the number of half a billion. Have you run any figures on what that would mean in dollars to the average farmer who is in trouble?
Mr. Wilkinson: I personally will not talk about average numbers, but you can very easily because we are modelling after current programs. We can put an individual farm scenario into that and show how much it will kick out, but because it is based on a margin change per farm it is an individual farm. For example, if I had a dairy operation and a few hundred acres of grain, I would get a totally different pay out than if I had a straight grain operation, because we are talking income.
We know we will be criticized for this by farmers, but we are talking about a disaster program which is based on income. If I have the type of diversification mix on my farm that helps to stabilize my income, I am not experiencing a price disaster and I will not get money out of this program.
We will be criticized for not putting in an ad hoc program that pays a certain amount per pound for pork and a certain amount for wheat. If we do that, we will have a countervail charge in 30 seconds from the United States and every taxpayer dollar that went to support a producer will be lost at the border. We must be practical about this and move money in a way that will not bring countervail charges.
The Chairman: That will be a very difficult approach. I recall the discontent of farmers in the mid-1980s because of the way the money was distributed.
Mr. Wilkinson: I will happily travel with the agriculture minister next week to help explain the program and take any criticism for the way it is modelled. We have done a great deal of work on this and it has passed our board. Every major commodity board, from cattle to pork to grain, will fight a commodity-specific program.
The cattle industry is currently being investigated. In December, the hog industry starts their sunset review. If a program is introduced that is commodity specific, they will be in a countervail case and they will lose it.
Senator Spivak: Which sector is in crisis? Producers across the board are in crisis, but not the processors and not the input sector. Why is that?
In some sense, it is caused by the collapse of markets for the producers, but it is also oversupply, for example, in hogs, because of the removal of support. In Manitoba, you cannot really ship grain. The prices have gone up so much.
Mr. Wilkinson: Not all farm sectors are affected right now. Horticulture has had fairly stable times. I am certain Senator Whelan could speak to why supply management should continue into the future because there is a great deal of stability in that sector. The problem is not universal.
The processing sector, for example, has fixed costs that they add on to whatever they bring in the door. They put that price on the product when they move it through their system. It is a sensible way to do business. In the end, it is often the individual producer who is the most vulnerable.
What you said about the change in the export program on transportation is true. Manitoba and Saskatchewan took the money from the pay out and diversified into other aspects of agriculture, in particular red meats, because they knew that with those transportation costs you could not get more for exported barley than they could sell it for as feed.
Some people borrowed money to build a hog operation, for example, and got it running just in time to see the price collapse. Literally everything they had is gone. That is very sad to see.
There was not an oversupply in hogs nine months ago. Asia was expanding and moving into a different types of diet. They were moving into protein, in particular pork. We once sold a great deal to Russia. With the collapse of both those economies, orders either were cancelled or downsized. We moved from a very stable industry nine to ten months ago to a situation of oversupply worldwide.
The U.S. increased its export of hogs by the amount of the entire Canadian production and it was all going to Asia as well, to a real market. Everyone geared up for Asia on everything and when they collapsed a third of the world's population suddenly stopped buying. That had a major impact and we are readjusting. Supply and demand will get back in line with a perishable product such as that, but until it does the consequences will be very serious for the producer.
Ms Sally Rutherford, Executive Director, The Canadian Federation of Agriculture: With regard to who is affected by this crisis, one of the problems is that primary agriculture is the pivotal point much of the time. For example, the farm machinery industry is not in great shape right now. Sales for particularly large machinery completely disappeared two and a half to three months ago. Plants have been closed down. Although it is not entirely a crisis for the farm machinery industry, it is a crisis for the people laid off in that industry. The industry itself is not necessarily losing a great amount of money. They are able to manage the risk by managing their inputs, and labour is the major input cost.
The problem of more concern is the impact of the price downturn on communities and the rural infrastructure. It will be very interesting to see what supply management does to prices over the next few months. The supply management system has changed as well. Turkey prices in the U.S. have begun to fall significantly because there is a huge glut of protein in the North American market.
When pork becomes that cheap, it affects the price of other protein. There starts to be a cumulative impact of the crisis. For example, people do not have the money to seed so they do not buy fertilizer or other inputs.
Senator Spivak: If you are looking at a program that is not ad hoc, you are looking at an income support program which will go through fluctuations. Is that the only answer? Is there not something structurally wrong with the way in which the farm economy works? Is it not unbalanced in terms of reward for the producer?
Mr. Wilkinson: In 1974, which was a very good year for farm income, we got back $5 billion, which was the net farm income in Canada. In 1986, the figure was $3.5 million. Last year, it was $1.8 million. Many people would say that that is not the way to encourage kids to come back to farming. Part of the problem has been the cost structure over the last five or so years. Even though gross sales of agriculture products have increased in Canada, expenses have outstripped that growth. Part of it is cost recovery.
We are not here to throw stones. However, many of the problems are the result of government actions on cost recovery and transportation. Approximately $750 million was removed from that system. The elimination of feed for aid assistance and other such measures added cost to producers on various fronts. We must try to manage as best we can within the system, but the margin has become tighter with massive pressure.
The net disposable income in Ottawa to buy food is the lowest of any capital city in the world. I believe it is 10.9 per cent. Someone must pay for that because it costs more than 10.9 per cent to wholesale, manufacture and feed people. Our margins get transferred over. Some would say that we have been subsidizing the consumer in the world for a long time with our labour and that it is time for realignment. We cannot change the international marketplace, so we must create a backstop domestically to deal with the income crisis which exists here.
The Chairman: The impact of this has already hit the farm equipment dealerships. In a neighbouring town to mine, a John Deere dealership that was in business for three generations, 84 years, has gone bankrupt. That demonstrates the urgency of the situation we face.
Mr. Wilkinson: People will not hang around this time to fight it out. For example, I am 47 years old and I went through the last price cycle. My wife and I are not interested in going through it again. That feeling is universal across the country. People know how devastating things can become if we get caught in a trade war.
Many people will lose all of their equity if they try to last until the end. This go around, people will leave early. They will walk away from their farms and say, "To hell with it. I am not going to lose everything trying to hang on through this."
We have gone through farmgate defences and debt review boards. Some 15,000 producers in Saskatchewan were the hardest hit during the last go around. Saskatchewan was not the only province affected. I remember attending debt review and farmgate defences and demonstrations in Ontario. The spokesman for the dairy farmers of Ontario implored the federal and provincial governments to act at the beginning rather than the end. Let us be proactive and move quickly. Let us send out the right signals. We know that it will not save everyone, but at least people will have the information on which to base business decisions and make meaningful choices. Give them the opportunity to make those decisions earlier rather than later.
Senator Whelan: Did you attend that meeting with the ministers yesterday?
Mr. Wilkinson: Yes.
Senator Whelan: I want to go back to what you said about the Uruguay Round. I have done quite a bit of research on this subject, as I am sure you have. I can find no record of any political party of any stripe in Canada, or any farm organization of any nature, asking that the GATT rules and regulations be changed. It is when the GATT rules were changed that we started losing supply management and we went to these great tariff protection measures.
Who requested that at Uruguay? Was it the Government of Canada without the knowledge of members of Parliament? I have a file on the proceedings of those hearings. Many people from the food industry who are concerned about what is going to happen in the world were there.
I am alarmed about what is happening to supply management. Ms Rutherford said that supply management is not immune to this. Under the formula that most supply managers use, if their input costs go down, they take less for their product. That saving is generally passed on to the consumer. An efficient operation can still make a good living because of the formula that is used for the input costs.
The Chairman mentioned the cost of fertilizer in that regard. Yesterday, we heard that the price of fertilizer will go up next year. It has gone up already for people who are ordering it now. Their costs for the product should be down.
Mr. Wilkinson: Ms Rutherford was trying to explain that when pork prices are as low as they are there are transfers in buying preferences, as well as in supply management because not many kilograms of product will move this year. Thus, the processor will want to negotiate lower margins and/or it will not move as much product. Even they will not be absolutely immune because a wash-out occurs when things are this bad everywhere.
As far as who requested the removal of the exemption under Article XI at the last World Trade Organization meeting under which supply management worked, I believe it is fair to say that the United States was one of the movers and shakers, along with other Cairns group countries who basically wanted to move away from people running those sorts of systems. Many would think that they were being driven by multinationals and others. They wished to increase their market access around the world. An organization like ours certainly did not ask for the removal, as you well know.
Senator Whelan: I know that. I thought you might know who it was. Was it our Canadian negotiators quietly advising the minister at that time?
Mr. Wilkinson: No.
Senator Whelan: They could have said that they will go along with this world situation. Some of these 132 countries could not put a chicken on the market; but they say there are 132 countries in this new great world trade order that we are entering. I was always suspicious of that. I said it will not work because you cannot have a world trade organization working without any world regulations.
We have seen what the banking people have done, which has caused the economic chaos in which we find ourselves. We all remember being told that Japan was the economic monster to watch; it was the economic driving force of the world. They were lending four times as much money as they should have been, according to good banking practices. They were the force around the world which was buying everything and building everything. They have destroyed agriculture. The financial institutions have done more damage than anyone else because they have lost their buying power.
We can do all the things we want in agriculture, but we have economic wizards in the Finance Department and Treasury Board telling us that global is the way to go. Do you think the farmers like this new globalized world?
Mr. Wilkinson: It varies depending on the type of production you have. I cannot solve all of the world's problems as president of a general farm organization. We have to live with the agreements that our governments sign. We try hard to encourage them to negotiate them in a way that is in the best interest of, or causes minimal damage to, our producers. We have tried hard to do that.
However, at the end of the day, we are not the government. We represent a group of producers. We must live with what has occurred, doing what we can. The exposure level is very high for Canadian producers because of a host of government and other actions in dealing with deficits and many other things. The Asian market collapse has driven prices through the floor. Hopefully, this committee will see fit to recommend to the government that there is a need for federal and provincial governments to bring in a program quickly.
With regard to your other points, Senator Whelan, obviously I cannot solve those problems.
Senator Whelan: When we had hearings out west on the Wheat Board, the talk was that Manitoba was about to become the hog capital of the world. All the economic advisers said that we had to be more diversified.
Mr. Wilkinson: I agree that there was an unrealistic amount of optimism at that time.
Senator Whelan: Mike Gifford is going around Ontario saying that this trade thing will come back. Does he know more than you?
Mr. Wilkinson: No, he does not.
Senator Whelan: It is said that ministers stay too long. If anyone has stayed too long negotiating on behalf of farmers, it is Mr. Gifford. I think that he should be transferred to Foreign Affairs. We should tell him to get out of the way and quit negotiating on our behalf. It is not your feelings or my feelings but his feelings which he presents to these world trade meetings.
Mr. Wilkinson: We work on the premise that a civil servant of the federal government will deliver the message they are asked to deliver by the government. We work hard to ensure that the trade policy we on the farm organization side want is the same as what the federal government wants.
I do not wish to comment on the other aspects of your question, senator.
Senator Whelan: Are you afraid to comment?
Mr. Wilkinson: No, I am not.
Senator Whelan: Do you think he might be mean to you?
Mr. Wilkinson: I am not easily pushed around.
Senator Whelan: Yesterday, the minister said that the problem is not universal, that not every sector of every region is being impacted by these downturns.
Mr. Wilkinson: That would fall with our analysis.
Senator Whelan: Supply management was the only thing that was saving people from the downturns. We got burnt several times by the great economists who accepted that supply management was bad for our system. You and I both know that we took a beating over this many times from people who had never even studied the issue. In Windsor alone, the auto industry represents over $24 billion a year. That is more than the entire productivity of Manitoba, but that is not free trade. It is agreed trade or arranged trade. However, it is working very well.
The perishable product called food is the most important thing in our lives. We are told that there must be globalization, that it must be worldwide. You and I both know that "globalization" means the United States of America. The trade officer who was there when I was the minister is still there today. In Washington the other day he said, "We must have more free trade because we must get rid of our surplus." They can destroy us with a statement just like that.
You do not seem overly concerned about this. You seem to be more concerned about not wanting to get into trouble with the United States of America. Are you really worried about that?
Mr. Wilkinson: We will fight the United States at the trade negotiations. We have an agreement right now that was signed by the federal government under which, if we bring in a commodity specific program that can identify actual income support to a particular commodity that is not universally and generally available, a countervail action will be brought against us. This has already happened with cattle. The advice of our trade people is that we will lose such a case.What is the point in taking limited taxpayers' dollars to support farmers because of devastated incomes when we can design a program that will work and will not create trade problems? That is what we are putting forward.
I am not afraid of the United States -- or any country, for that matter -- but it is stupid to put something in place when all your advisers and your organizational members, who have the experience, tell you that it will result in a countervail action. Hence, we have designed this program such that will not be challenged in that manner. We are not interested in losing it at the border to someone else.
Senator Whelan: Do you mean that what the United States has done with their subsidies is all right?
Mr. Wilkinson: No, it is not. You know how countervail works. It is not who gets the most who gets to pay. If they can show that we have done any damage to them, and if they can identify that there is a subsidization there that does not work within the rules of trade, they can launch a countervail action.
They have made some payments that many of us would say were illegal, but the only way to prove that they are illegal is to show damage where their exports have come into our country. We must then win the case before a panel.
There is little beef coming into Canada because the U.S. market is the market. Therefore, we export our beef there. I am not saying that their programs are clean, but countervail law does not work that way. You must prove damage and then look at programs. It becomes very complicated. Pork has been involved in countervail cases time after time and the producers do not wish to go back there again; nor do the cattle farmers. They have suggested that we need a new program design. They agree with the one that we are suggesting. It will move money to their producers, but in a way that it will not be challenged in a countervail case.
The Chairman: With the exports that we have, especially in the grain industry, it is quite a different situation than with the marketing board products that are used here in Canada and supported by the consumer of Canada.
Senator Whelan: What do you mean by "supported by the consumer of Canada"?
The Chairman: They are not exported into the international market. In the wheat industry, for instance, we export 80 per cent or more. Mr. Hehn will be here soon and he can explain this. We have no choice when Russia has no money. We had boatloads of wheat going to Russia. We just load it onto the boats, ship it out and ask no questions. Russia is broke today.
For Canadian farmers in an export market, this raises another subject that we are facing today; namely, how can we alone carry the cost of feeding the third world? They tell us that in Korea today 3 million people may starve. As grain producers, we cannot carry that load alone. The rest of society must help in that.
Globally, the problem is becoming more serious. We cannot just shut our eyes to the global situation; we must live in the real world. Poland, Russia, Asia and Korea do not have the money to buy our products.
Mr. Wilkinson: The European Union and the United States are looking at substantial food aid packages to respond to some of this. Some people say that if nothing is done in Russia this winter, the situation will be very serious. If big countries such as the United States and the European Union put large packages together, that will have an impact on price, especially in the meat sector.
If there is limited money for that in Canada, that is a separate issue. If the government wants to do something from a food aid point of view, that is fine, but we are not advocating that to support farm incomes because we think it will have a modest impact on Canadian prices because we are such a small country. The big players must move a lot to make a significant difference.
Senator Fairbairn: It is too bad that it took a crisis to initiate the most vigorous discussion of agriculture on Parliament Hill in recent memory. It is nice that we are having this discussion, not for the reason that it has happened.
Have you and your associates ever considered the tax system as an option for support?
Mr. Wilkinson: Yes, we have considered the possibility of using the tax system as a delivery mechanism. We would like to work toward that in the future because it would greatly lower the cost.
When you are doing margin calculations on individual businesses, you can use that as a tool so that when tax returns are filed, depending on the margin change, you can tie your farm program to it. As far as relief under the tax system, it does not do much good to have tax relief in general terms with such as severe downturn. It is safe to say that I and other producers in those commodities will not be paying income tax this year because there will not be any income.
In general, the tax structure can have an impact on our expenses. Two things must happen. First, we must deal with this crisis now in a program that we are advocating long term. Second, we must deal with the expense side in general. We want to keep these issues together. We want to keep the message simple for people who do not understand agriculture. We do not want to talk about two or three things at once. We want this disaster program now to deal with that. In the long term, we will have to deal with some fundamentals.
Senator Fairbairn: We have been talking for a very long time about the crippling effects of farm debt. That is not taking a back seat to the price discussion now; it is just that the immediate urgency of the price crisis, for the moment at any rate, has overshadowed the other issue.
Mr. Wilkinson: The last report of FCC actually showed a slight improvement in equity, but all these reports lag quite a bit and those numbers were from before this downturn. It is clear that prices this low will have very significant impacts on land values. There will be some very serious debt problems. Yes, agriculture debt is higher than in the United States, for example.
Senator Fairbairn: On the news this morning, I heard the end of an interview about the number of farmers who would be leaving the industry. Are you estimating anything like this? As you said earlier, there are many people who are not prepared to go through another price war.
Mr. Wilkinson: We have done absolutely no work on that. It is difficult to speculate because it depends on how long prices stay down. As Senator Gustafson has said, the ones who leave first will be the ones with the least amount of margin. Those tend to be young farmers and those who have made major structural changes on their farms that require capital.
Agriculture in Canada is a very capital intensive business and significant changes like this affect people very quickly. Bankers are nervous people by nature. In the last go-round, we worked hard to get the banks to stay in and invest. Some of them lost a little bit of money. They will move very quickly this time. Land prices will drop. A hog barn on a farm is not worth much money at these prices. With a collapse in price such as this, equity starts to slip quickly and that encourages bankers to move fast.
We need some signals that floors will be put in place so that there is not undue reaction. Urgency is very important for us. We need very clear signals from the federal and provincial government that there will be steps taken quickly.
Senator Fairbairn: You are looking for those signals this week?
Mr. Wilkinson: It would have been good if the minister had given more signals yesterday. He advertised it as an "analytical look at the numbers" type of meeting, which is fair, but we hope he will be going to cabinet soon with an options package. We hope that an early signal will be sent out from the federal government that there will be action very soon.
Senator Taylor: Many other taxpayers have seen their businesses go down the drain, or at least a lot of their equity disappear, whether they are in contracting, mining, oil or other natural resources. Farmers are not unique in being hurt in this way. I do not think we should be worried about encouraging farmers' kids to go into farming. No one is worrying about encouraging plumbers' kids to go into plumbing or contractors' kids to go into contracting. Yet, there seems to be an attitude that the public has a duty to ensure that people who want to farm should be able to do so.
Mr. Wilkinson: I believe you are going out of your way to misinterpret a casual comment. I said it is not the type of net farm income that would encourage a child to come back home to the farm.
Senator Taylor: That would not carry any weight if we were talking about plumbers or any other profession.
Senator Fairbairn spoke about the tax system. We have the NISA program which was intended to carry people over. Yet, many farmers did not participate in that program.
Could we use NISA to provide short-term aid? That would accomplish two things. It would encourage more of them to go back into NISA when times improved. I find that some of my farm brethren are free enterprisers when times are good, but want government help when times turn bad. They blame their misfortune on the Asian markets or something else.
I think we have all opted for a free market society rather than a supply management society. Supply management has its good points, but I do not think the farmers will be ready to switch tomorrow. They have to take the bad with the good. Would the use of NISA not make the point to them that they have to finance the low spots by putting something aside when times are good?
Mr. Wilkinson: We were supportive of the NISA program because it did help average incomes and encouraged investing money in good times for use in bad times. There are 142,000 NISA accounts among 280,000 farmers. There has been a great deal of participation in NISA, but as we pointed out earlier, NISA has limitations.
Under the formula, limited by the government, only 3 per cent can be contributed by each side in the general program, although there are some provincial variations. Hence, of the $2.5 billion in NISA accounts right now, half was put away by individual farmers. Of the 142,000 accounts, 40,000 have less than $1,000 in them. Money has been drawn out for various reasons. For example, in the Peace River district of Alberta, they had serious weather problems three years ago and again two years ago. This year they had a good crop, but poor prices.
One of the inherent flaws in NISA is that it takes a number of years of investment to build up an account balance that can carry you through a significant downturn. Many young farmers have not had the opportunity to put much money in because, as I said, they are limited to 3 per cent. We are supportive of NISA as a delivery mechanism.
Our only concern is that it is very difficult to target where the need is. The money goes into every aspect of Canadian agriculture. Often the ones with the most resources in NISA have had the most stable prices. For example, because of the high volume cost operations in horticulture, they tend to have the larger accounts right now, as do some large feed lot operators.
With limited resources, if you hope for it to trickle down from NISA, much will be absorbed on the way down. We are not asking the taxpayer to support the first dollar lost by a producer. If you do the calculations, you will see that this is a disaster program. Net farm incomes have to disappear entirely before this program will pay.
Quite frankly, in the many interviews I have done with urban media I have had no difficulty convincing taxpayers of the need for action. I explain the prices farmers are receiving, what their net disposable income is, how the trade war between the United States and European Union is driving down prices, and that it is government money we have to live with. There is a high level of agreement among Canadians that we should not allow our agricultural infrastructure to collapse since agriculture employs one in seven Canadians and does much for our balance of trade. It is understood that when something like this happens there is need for government action. That is why there are governments.
Senator Taylor: It appears that most of the problem is in the export part of agriculture. What about using export loans? The U.S., of course, has export subsidies. I am thinking of very generous, long-term loans that hog farmers and others could take without too much security which would get around the objections of the United States.
Mr. Wilkinson: The U.S. does use those. We are not against appropriate credit mechanisms to put together sales, so long as those tools are matched with the product. If they are to be used as a tool to make a sale of wheat, the Wheat Board and other agencies must have access to credit. If it is over too long a term and never expected to be repaid, we would view that as an export subsidy that the European Union and the United States, with their deep pockets, will use against us in a marketplace. Some of that occurs. The United States makes food sales on 30-year loans. That is nothing more than an export tool to give them a lever over us in the marketplace. They have being doing that consistently to steal markets from us.
Senator Taylor: Monkey see, monkey do.
Mr. Wilkinson: If took that approach, we would have all sorts of farm programs in Canada, but over the last number of years the federal and provincial treasuries have not been willing to match what is being done in other OECD countries. We are presently fourth from the bottom, and with this last aid program we will be moving up to third from the bottom, of OECD countries with regard to government support to agriculture. There have been massive cuts. Much of the deficit reduction done by the federal and provincial governments has been on the back of rural Canada. There have been reductions in farm support programs. As you well know, there have also been reductions in education, health and so on. Rural areas are hurt the worst by that. Downloading hurts them the worst because municipalities do not have the tax base to deal with that. As well, government programs have been slashed.
Now that we have some balance back in budgets it is time for some reinvestment, considering what has happened internationally.
Senator Hays: Before I ask a question, let me congratulate you and your organization on continuing to serve your constituency as you are doing here today. You have done a marvellous job under difficult circumstances.
How well are the federal and provincial governments getting along on this issue? You represent the whole country. Whether a program is delivered through a disaster program or the tax system, the federal government will obviously want to have some credit and the provincial governments would like to have credit too, and will probably be participants. Do you think we can make a quick deal on this?
Mr. Wilkinson: Just look at the reaction of the provincial agricultural ministers yesterday. Negotiations will take place on who should pay how much and under what circumstances. They will not be easy. Four provincial agriculture ministers made it clear that they see the critical nature of the issue and want to act in unison with the federal government. Some have a different view, for example the Alberta minister and others, because they already have a program in place, but some of their staff were on side with us.
The most important thing is for the federal government to move quickly. We hope that there will be negotiations. The Saskatchewan and Manitoba ministers said that the situation is critical and they are willing to act in conjunction with the federal government. I do not believe anyone has a political choice. With the crisis as deep as it is, it is obvious to the provincial cabinets that something must be done.
Senator Hays: What about Ontario and Quebec?
Mr. Wilkinson: Quebec has a completely different farm infrastructure program. Their individual producer would benefit very little from this program because Quebec has a host of farm support programs above this level. However, if this national program were put in place, there would probably be a better transfer of federal premiums to some of their existing programs.
In Ontario, the situation would vary. Market revenue programs, for example, were continued in Ontario on the cash crop sector, but the red meat sector in Ontario has nothing other than NISA. In our view, this could work to cover off those uncovered areas in Ontario.
Some will probably have concerns about equity, but I believe that can be worked through. The need exists.
Senator Hays: You mentioned a moment ago that Canada is the third-lowest among OECD countries in terms of its agriculture support programs. We have read much lately about the producer subsidy equivalents on a comparative basis, Canada being at 22 per cent, the U.S. at 15 or 16 per cent , and the European Union at just over 40 per cent of the value of farm production. In any event, it is a relative measure.
Where does Canada fit in if you exclude supply management? The minister was quoted as saying that the Government of Canada is a very generous supporter of Canadian agriculture, and he referred to these PSE numbers. You heard the comments of Senators Gustafson and Whelan about supply management being government support. Can you give us the number?
Mr. Wilkinson: I do not know if everyone is familiar with producer subsidy equivalents. That is a term that was coined at the OECD quite some time ago to describe a tool to measure how much support agriculture gets, either through regulation or direct support. We have never agreed with that method of calculation. To determine how much support goes to supply management, they take the world price of milk, which has been defined as the lowest cost producer in the world, and compare it to the Canadian price. Because we have different regulations and so on, everything in between is determined to be part of the producer subsidy equivalent. That is why 20 per cent is high compared to 15 per cent.
When you move into direct support to farmers for certain commodities, you get into a problem. For example, under the act wheat is 72 cents per bushel in the United States and 15 cents in Canada. They put in even more money in this last go around, with their injection of $7 billion, and then they use their export enhancement program on the world market that drives our price down.
We are old enough that we can see all this stuff coming around again. There will be a high price for wheat in the United States. We will sell into the States. They will demand that we put restrictions on our exports and sales into the United States and quota. You do not have to be very old to have experienced this before, and some of us have experienced it more than once before.
Ms Rutherford: The gentlemen from the Wheat Board have some more specific information on grains in particular.
Just as an example, the PSCs for supply managed products are higher than in the United States. It all depends on how you calculate this. What is included in a PSC does not necessarily constitute the entire support to that industry.
For example, eggs in the European Union have a 0.02 producer subsidy equivalent level whereas in Canada it is 0.44. The support that goes to egg producers in Europe is significantly higher than that. As an example, the Canadian PSC for wheat is 15. In the U.S., it is 72. In Europe, it is 116.
Senator Hays: The skepticism of my fellow Alberta senator about whether farmers need support is sometimes apparent. Senator Taylor often says we should look at Canada's spending on this. Quite frankly, I should do some of this homework myself.
Supply management has some benefits. Ms Rutherford gave the example of turkey. If we must cut back in the hog sector as now structured, marginal people will disappear totally. Those with some advantages and deeper pockets will stay in and benefit later. The turkey example has a quota solution; it will apply to all producers in a fair way. That is my understanding of how it should work. You can tell me if you believe that it will no longer work that way.
That is a different approach. We make our choices on that. In terms of PSCs, we will have those thrown at us. We need to know the PSC for Canadian agriculture without the supply management factor.
Mr. Wilkinson: We are not trying to be evasive. We do not have that documentation with us. We will talk to the supply managed commodities. They have worked out what it will be without their input and we can get that number to you.
Senator Whelan: I remind my good friend Senator Taylor from Alberta that we used to have bumper stickers on our cars that read: "Did you ever drink a quart of oil for supper?"
We can compare oil and mining. I was once chairman of a mining company and I know how much money we did not make in that operation.
I am very concerned to hear what Senator Hays is saying. I was shocked to note that the ministers for British Columbia, Alberta, Ontario, Quebec, New Brunswick and Nova Scotia were not present yesterday.
Quebec sells most of their beef into Ontario, but they still receive their Quebec subsidy. It is a very good system. However, when we proposed that system to the beef farmers of Canada, they told me to go and jump into the economic lake.
Perhaps I should not go back into history, but this was proposed at the same time and we were trying to provide stability. I found the pork and beef producers to be the most bull-headed group I had ever met. You could not tell them that there was a better system for marketing their product. Because Alberta had a program for beef farmers that no other province had, over 50 per cent of the cow-calf herd went to Alberta. That number eventually went up to 80 per cent.
We have broken down the system. Things are not the same south of the border. The Secretary of Agriculture in the United States of America has almost total authority. We have 10 ministers running around telling us what they want. Alberta has lots of money to provide programs which Saskatchewan and Manitoba cannot afford without oil and gas income.
Mr. Wilkinson: We believe that there is an opportunity for the federal government to help correct that. If you recommend and support our initiative here, we can go some way toward levelling the field among provinces.
Early on in this process we identified the problems that were being created. We were losing the degree of commonality in program design across the country. From our point of view, that created a very serious trade problem. The U.S. commerce law is generally available to keep away trouble. If a program is available to all producers in all provinces, countervail problems may be avoided.
We have been nervous about this growing discrepancy for a long time. We cautioned the minister. The time to act is when prices are relatively good, but politically it is difficult to get anyone to act then. If the government pushed hard, it could do a lot to solve some of these regional disparities.
Senator Whelan: It will be difficult for the government to come up with a program which is fair and equal across the board. Even British Columbia has a program for beef, but they are not a big hog producing province.
Do you have any figures on the feed industry? How much of the feed grain industry goes to the hog industry? I stand to be corrected, but I believe that at one time the biggest feed market for feed grain was the livestock industry in Canada. Do you know about the hog industry?
Mr. Wilkinson: No, but we can get that for you. I know the ratio of feed going to hogs is huge, but we cannot give you exact numbers now.
Senator Whelan: For the information of Senator Taylor, the agriculture department took a survey. Ninety-seven per cent of Canadian people are urban dwellers. Eighty-two per cent of Canadian people want good, safe Canadian food and they are willing to pay for it. The area which I represented for many years was 96 per cent urban and they want a healthy Canadian agriculture industry.
Senator Taylor: My constituency was largely rural and the people were fed up with the government helping out the losers and ignoring the winners. I am probably the only person here who has ever represented a rural area.
Mr. Wilkinson: The program we are discussing will not be a problem for your producers because, to a great extent, it is already available to them. This is part of the problem now. The huge variation across the country means the same crisis does not solicit the same response. The level of protection is so varied.
You would not have problems in your riding because most of them have this program available.
The Chairman: We will call the Canadian Wheat Board to the table.
Mr. Lorne Hehn, Chief Commissioner, Canadian Wheat Board: This morning we will give you the background information with respect to the causes of the problem. We will focus on wheat and barley because those are our areas of expertise.
In reply to a previous question regarding PSCs of the non-supply sector, I will provide information.
The 1997 PSC producer subsidy equivalents for wheat, according to OECD statistics, were 10 per cent for Canada and 32 per cent for the United States. That does not include the latest $7 billion because that it targeted for 1998. Europe is 36 per cent.
For other grains, the Canada T/ha is 7 per cent. The United States is 28 per cent, and Europe is 45 per cent.
For beef, Canada is 12 per cent, the United States is 4 per cent, and Europe is a huge 60 per cent.
Senator Taylor: Why is Canada higher on beef than the U.S.?
Mr. Hehn: I cannot answer that question. We are not experts on beef. Our job here today is wheat and barley.
It is dangerous to be looking at this from the point of view of producer subsidy equivalents between commodities. The competitive environment for the commodity is the important matter.
Dairy competes with dairy in other countries. The subsidy equivalent in each country is important.
I have with me Mr. Earl Geddes, who has the new responsibility of farmer relations. Mr. Peter Watts is one of our market analysts. He is responsible for maintaining current information of interest in Western Europe. Mr. Larry Sawatzky is the industry analyst for the North American region.
Yesterday, Mr. Geddes and I attended the meeting of ministers and farm leaders. They talked about the farm income situation in some detail. They talked also about how critical the situation has become in 1998 and how that will certainly spill over in to 1999, and even into the year 2000.
At that meeting, we gave our projections from the Canadian Wheat Board and the wheat and barley perspective. I will share those figures with you this morning.
We have now closed our four pool accounts for the 1997-98 crop year which reflects all the revenue and the volume marketed in terms of 1997 crop. The 1998 marketing campaign is now fully underway. We will share with you some of the projections we have on both a tonnage and a sales revenue basis. They are shocking figures in terms of the trend.
Looking first at the situation on a crop year basis, which is somewhat different from a pool year basis, we see our aggregate volume of exports dropping from 23 million tonnes in 1996-97 to a projected 15.7 million tonnes this year. That kind of drop has an impact on businesses providing goods and services to farmers, certainly, because the service industry is volume sensitive.
Milling wheat will drop from some 15.5 million tonnes last year to around 10 million tonnes this year. That is a very sharp drop in terms of volume at the elevator level, at the rail level and at that whole infrastructure level, to say nothing of the drop as far as farmers are concerned.
Our pool year or our selling year is the better one to use if looking at farm income. I say that because it reflects the total returns and the total volume from each of the crops years of 1996, 1997, and 1998.
In an aggregate of the four pools for which we are responsible -- milling wheat, durum wheat, malting barley or designated barley as we call it, and feed barley -- we see a 35 per cent reduction in sales volume and a 43 per cent reduction in sales revenue from the 1996 crop to the 1998 crop.
We marketed 28.5 million tonnes in 1996-97 out of those four pool accounts for sales revenues of $6.1 billion. For 1997-98, we marketed 21.7 million tonnes with an estimated sales revenue of $4.5 billion. That was a significant drop.
In 1998-99, the selling year we are now in, we are selling 1998 crop, which will comprise most of the 1999 income for grain farmers. We are projecting a sales volume of 18.3 million tonnes. At today's prices, looking at expected returns on a monthly basis and at the estimated pool return figures, we are projecting revenue of only $3.5 billion this year. That return will be from the same four pools which gave a return of $6.1 billion only two years ago.
This morning, we would like to explain the impact that international intervention is having on these two figures -- volume and revenue -- how it has impacted farmers in Western Canada who grow wheat and barley, and how it has impacted their planting decisions and their final returns. In other words, why has the volume of sales and why has revenue dropped to this degree when we see precisely the reverse happening in the European Union?
Peter Watts will make a presentation which clearly shows that in spite of the rapidly falling prices in cereal grains in the last two years, farmers in the European Union have dramatically expanded their production by seeding more and by growing more. Canadian farmers have taken precisely the reverse approach. They have reacted to the drop in price. They have reacted to the supply-demand fundamentals and sharply reduced their production, something which has sharply reduced their revenue in addition to the drop in price.
We have seen this coming for some time now. It is not new to us. In the fall of 1997, the commissioners and our staff raised it at every farm meeting we attended. We pointed these factors out to farmers. We pointed them out to the industry.
At the 1998 meeting of Grain World, which is the large industry outlook meeting we now hold in Winnipeg in the winter of each year -- I believe I sent Senator Whelan a copy of the opening remarks -- I expressed serious concerns about what I saw coming down the track at us as far as EU production was concerned and how it would impact on our farmers.
For those of you who read my opening comments, I mentioned that we had considerable trouble on the horizon and that we had better start to deal with it. I said we were heading down much the same road as we were in the late 1980s and early 1990s. I indicated that as industry leaders and as politicians we had to ask ourselves some very thought-provoking questions, including: Why does the European Union consistently increase its wheat production sharply when Canadian farmers are reacting to world signals and reducing their production? Why has EU wheat production increased 15 per cent since 1993-94, when in 1998 Canadian farmers seeded the smallest area to wheat in the last 19 years? That is an important question to be asking in trade ranks and in our future trade discussions. It is one to which I think the European Union should reply.
European Union wheat production this past year came in at 103 million tonnes. That is a full 13 million tonnes above their previous five-year average. Canada, on the other hand, had a wheat production figure for 1998 at 10 per cent below the five-year average.
Again, there is a lot to underscore here. Canadian farmers were paying attention to the market; they were reacting to market signals. However, they are competing with farmers in other parts of the world who are totally isolated from the market under that subsidy protection blanket we now call blue box support. It is the decoupled area support, and we will spend a fair bit of time on that and how it impacts on supply.
Yes, in Canada we have our supply managed sector, and it has a considerable amount of support. However, that sector undertakes to manage supply. In cereal grains, Europe has a lot of support, but they are not taking this business of managing supply seriously. They are dumping that oversupply into the market, thus creating all kinds of problems for people who are reacting to market signals and all kinds of problems for Canadian farmers.
If we look at Western Canada and red spring wheat production, which is our major crop in terms of wheat, the figures are even more striking. Our 1998 production was only 15.7 million tonnes. That is the lowest since the drought year of 1987. That compares with a five-year average of 20.1 million tonnes, which is a drop of 22 percentage points from the average. I just gave you the figures on how Europe has gone the other way with respect to the five-year average in that area.
To summarize, EU production went up 15 per cent in 1998 over the five-year average. We went down 22 per cent in 1998 over the five-year average. We are doing everything right in Canada to address the world supply problem, and Europe is doing everything wrong and continues to precipitate the problem into the future.
Senator Hays asked when this problem will go away. It will not go away until we address the blue box support and openly admit, as negotiators, politicians and farm leaders, that grain farming is a very capital intensive business. If a farmer is given a cheque -- and it does not matter if it is decoupled from production -- it will impact on his production decision-making because farmers are good at what they do. They will plough that cheque back into the business they know best, namely, the business of producing. That is precisely what is occurring in Europe.
Mr. Watts will take us through a complex array of domestic support programs and export subsidies in Europe. He will show you how that shields European Union farmers from the real price signals. He will show you the impact that is having on the Canadian market, on the world market and on the farmers' revenue side.
The European Union farmer is not alone in terms of substantive government support, so we will also talk about the support the U.S. farmer enjoys. It is not as substantive, but it is still substantive enough that it creates a competitive disadvantage and an unlevel playing field for farmers in Canada.
Mr. Sawatzky will talk about two major programs in the U.S. We could get into considerable detail on those programs, but we will cut the detail this morning. He will talk about the U.S. marketing assistance loan program and the accompanying deficiency payment system. That has created a situation in which we now have barley moving into Canada for values that are less than American farmers are being paid. In effect, there is a deficiency payment system in the U.S. which is acting much like an export subsidy, even though it is under the guise of a domestic subsidy. I am not afraid to say that. Frankly, I do not know why we are not countervailing it. Perhaps we should, but we do not have a handle yet on the amount of barley coming in because we do not get the August Customs' figures until the end of October, for example. We just received the August figure. This situation had not developed before late August.
I think the September barley figure will tell an interesting story, as will the October and November figures. The information we have is that considerable sales of barley have been made for a movement into the major feeding region of Western Canada, which is the southern Alberta region. Those values will be, in my view, below what the farmer was paid. It is a very big trade distortion.
Mr. Sawatzky will also talk about the production flexibility contract payment, which currently triggers a payment rate. It is the U.S. area payment or blue box support. Yes, it is still there. It pays their wheat farmers about one dollar a bushel Canadian right out of the USDA treasury.
Other factors impact on world prices today. You talked about them this morning, and we do not want to downplay them -- the Asian economic situation; the Russian situation; the spillover into Latin America. On the positive side, there are positive exchange rates from an export revenue perspective.
Our purpose today is to focus on government intervention, how that has created an unlevel playing field, and how we must deal with that issue in world trade talks before this situation will improve.
Mr. Chairman, Mr. Sawatzky will now give you an overview on the U.S. situation, and then Mr. Watts will give you an overview of the EU situation.
Mr. Larry Sawatzky, Industry Analyst, Canadian Wheat Board: Honourable senators, Mr. Hehn mentioned some of the subsidy levels that we are seeing in the international marketplace. I will review U.S. farm subsidies, and I am sure you will find that it will clearly illustrate that there is not a level playing field out there.
There are a number of farm subsidy programs in the U.S., but I will focus on the two main ones and review the impact that these subsidy programs have on the market.
In regard to the Marketing Assistance Loan Program, the United States Department of Agriculture sets national loan rate prices each year for various commodities. Essentially, it represents the price for which a farmer can receive a government loan to cover that particular commodity. The national loan rate price for wheat is $2.58 per bushel U.S., or about $3.93 per bushel Canadian. These marketing assistance loans are non-recourse in nature, which means that the farmer can forfeit the grain as payment for the loan.
The loan program was changed significantly in the 1996 U.S. farm bill. Under the old loan program, the farmer had to repay the loan at the loan rate price. That was really the key change that was made to the program.
Under the old program, if the cash price fell below the loan rate price, the farmer would simply forfeit the grain to the government. Therefore, the old program provided a floor price for U.S. farmers; and it also provided a de facto floor price for cash and futures prices. If the cash price fell below the loan rate price, grain would move off the market into government storage.
If the cash price falls below the loan rate price, producers forfeit the grain to the government. That is because if they repaid the loan at the higher loan rate price, they would suffer a loss. Therefore, in that situation, the loan rate program essentially provided a floor price for cash prices and a floor price for farmers.
The current loan program in the 1996 U.S. farm bill was changed so that if the cash price falls below the loan rate price, the farmer can repay the loan at the lower price, or at the cash price, or the USDA's estimate of what the cash price is. In that situation, the farmer either sells his grain on the cash market or he stores it. If the cash price is below the loan rate price, the farmers can simply forgo the loan program entirely. If they do not want the administrative hassle of entering into the loan program, farmers can simply receive a loan deficiency payment for the difference between the cash price and the loan rate price. Most farmers in the U.S. now take loan deficiency payments.
Loan deficiency payments have been made on about 34 million tonnes of wheat so far in the U.S. The average loan deficiency payment for wheat to this point has been about 29 cents per bushel U.S., or about 44 cents Canadian. That is simply a direct subsidy payment to producers.
The current loan program is designed to remove incentive for farmers to forfeit their grain to the government. The current loan program still provides a floor price for U.S. farmers, but it no longer provides a floor price for cash prices, futures prices or world prices. The current program adds further pressure to prices because farmers are much more willing sellers in a depressed market when prices are low because they are receiving these loan deficiency payments.
The loan deficiency payments are direct subsidies to farmers that are not decoupled from either prices or production. Farmers are able to receive these payments on all of their crop production. The loan deficiency payments act as a key de facto export subsidy since U.S. exporters are able to sell grain at a lower price than what the U.S. producers receive for that grain.
The export price for U.S. wheat has recently been as much as $25 per tonne U.S. lower than the price the farmer has been receiving. For feed barley, for example, the export price has recently been as much as $16 per tonne U.S. lower than the farm price.
The total spending on loan deficiency payments so far has been about $838 million U.S.
Mr. Hehn: What is the total wheat crop that has been covered so far?
Mr. Sawatzky: A little over 50 per cent.
Senator Taylor: The wheat in the U.S. has gone to storage. Where does that wheat go? If it is in storage, it does not hurt the competitive world market. Does the government unload it within a certain period of time? Where does it go?
Mr. Sawatzky: Under the old loan program, when that grain went into storage, the government would build up large stocks and then use their export enhancement program to sell those stocks on the world market.
Senator Taylor: That is what I am trying to determine. Giving the farmer money and repossessing the wheat does not run your price up. It is the selling of the wheat that is possessed which runs the price up. You do not say that anywhere.
Mr. Hehn: Under the old program, it had a positive impact on price. Under the old program, the loan rate actually became the world floor price. Pulling wheat off the market and putting it into government storage has a positive impact on price.
Under the new program, the loan rate is no longer the world floor price. The loan rate is now simply the floor price for the U.S. farmer. The exporter can now buy that wheat at below the loan rate and export it. That pulls price down. It has the reverse effect.
Mr. Sawatzky: Under the current program, if cash prices fall below the loan rate price, farmers simply repay the loan at the lower cash price. They then receive a loan deficiency payment. Therefore, they do not forfeit their grain to the government. They sell it on the market or store it themselves. In a depressed market, this program adds further pressure to prices.
The Chairman: Does the U.S. government store the product themselves or do they let the farmers store it on their farms?
Mr. Sawatzky: They let the farmers store the grain on their farms. The key change to this loan program was to remove the incentive for farmers to forfeit their grain to the government.
The Chairman: Do they pay the farmers for storage?
Mr. Sawatzky: No.
Senator Hays: Is this for every bushel they grow or only for qualifying amounts?
Mr. Sawatzky: For every bushel they grow they are eligible to receive a loan or a loan deficiency payment on a per bushel basis.
Senator Whelan: What happened to the government storage? They had big tank farms and silos. What did they do with those?
Mr. Hehn: They are still in place. The farmer is still moving a small portion into that storage. He has the option of taking this loan deficiency payment or putting his grain into storage. Those facilities are not being used much because the government is discouraging that from happening. They do not want to be in the business of storing grain. Therefore, they have arranged to have the loan deficiency payment cover that off so the exporter can now buy the grain at something below the loan price and sell it. There is no incentive for the farmer to put it into storage.
Senator Whelan: Did they not give away a significant amount of that starch for practically nothing to the farm bureau cooperatives and some of the private sector?
Mr. Hehn: My recollection is that government storage was all put in at the USDA's expense.
Mr. Sawatzky: If there are no more questions on the loan program, I will move on to the production flexibility contract program.
Senator Whelan: You say the loan program adds further pressure to prices and that farmers are more willing sellers in a depressed market. What do you mean by that? Most people do not want to sell in a depressed market if they think there is a chance that the market will improve.
Mr. Sawatzky: Under the current program, if cash prices fall below the loan rate price, farmers receive a loan deficiency payment. Therefore, they are not selling at the lower cash price. In essence, they are getting the higher price, that is, the loan rate price. If they were not receiving those loan deficiency payments, they would likely not be as willing a seller in that market. They would probably hold on to their grain, wait for a bit of a price recovery and then sell their grain.
Under this situation, since they are insulated from those lower prices, they will essentially dump their grain on the market in that environment.
Mr. Hehn: Senator Whelan, they will be willing sellers as long as they believe that the world price will not go above the loan price in that specific selling period. If they need the cash flow, and if they believe the world price will not exceed the loan price, they will definitely be willing sellers. That is because they are paid the difference.
Senator Taylor: If they are not paid for storage, that is another incentive to get rid of it.
Mr. Sawatzky: There are some other quirks in terms of the way the program is administered that also encourage farmers to sell in a depressed market.
The USDA establishes posted county prices which are supposed to reflect the local cash price. Often, they set these posted county prices below the local cash price. That gives farmers a signal to sell now if they are concerned that the USDA will raise the posted county price.
Senator Whelan: You say the exports are as low as $25 per tonne less than the farmer receives.
Mr. Sawatzky: The export price for U.S. soft white wheat out of the Pacific Northwest was the example I considered. If you look at that, you will see that the export price has been as low as $25 per tonne U.S. lower than the price that the U.S. farmer was receiving for that wheat. I looked at the loan rate price in the area in which the wheat was produced.
Senator Whelan: Would you not call that dumping?
Mr. Sawatzky: Absolutely.
The Chairman: Possibly we could allow Mr. Sawatzky to finish his report and then have senators ask their questions.
Mr. Hehn: Mr. Chairman, perhaps we could give the two reports first and then go to questions. Peter Watts' report might answer some of your questions.
The Chairman: That sounds good.
Mr. Sawatzky: Moving on to the production flexibility contract program, in the 1996 U.S. farm bill, producers who participated in the old farm programs were eligible to sign these production flexibility contracts. Essentially, they were seven-year contracts. Production flexibility payments are made on 85 per cent of the producer's historical base acres in each crop based on historical program yields. These production flexibility contract payments replace the old target price and deficiency payment system which was a completely separate program from the loan program and the loan deficiency payments. They replaced that program with a set of fixed annual payments that farmers receive regardless of price.
In 1998, the production flexibility contract payment rate for wheat was set at 66 cents U.S. per bushel, or about $1 Canadian. Farmers receive about $1 Canadian per bushel on 85 per cent of their historical base acres regardless of price.
These production flexibility contract payments are decoupled from both prices and from production because they are based on historical production. They are classified as green box payments under the WTO, which means they are excluded from the subsidy reduction commitments under that agreement.
Total production flexibility contract spending in 1998 is about $5.8 billion U.S. Of that amount, approximately $1.5 billion U.S. is for wheat.
Another key change in the 1996 U.S. farm bill was that producers were given full planting flexibility. Under the old farm programs, producers had to maintain acreage basis in each crop in order to be eligible for program payments, but under the current farm bill they have full planting flexibility.
Also, as part of that change, all the mandatory set-aside provisions were eliminated. The voluntary acreage diversion programs were also eliminated. These programs tended to offset the impact that the support programs had on encouraging production.
Total U.S. grain and oilseed production has definitely increased since 1996, since the last farm bill, relative to the average production prior to that time. Essentially, the subsidy payments create an artificial incentive for U.S. producers to overproduce in times of surplus production and lower prices.
To summarize U.S. farm subsidy spending, I added up spending on production flexibility contracts, that is, on loan deficiency payments. If you include the additional spending package of about $6 billion that President Clinton recently signed, I have estimated the total U.S. spending on direct subsidy payments this crop year at about $16 billion U.S., or about $24.5 billion Canadian. Of that amount, for wheat, the total is about $4.5 billion U.S. If you just look at U.S. wheat production this year, that works out to about $1.75 U.S. per bushel of wheat produced this year, or about $2.68 Canadian in direct subsidy payments to farmers.
One of the key points that I wish to make is that these subsidy programs create an unlevel playing field. They are detrimental to farmers in countries that do not have substantial subsidies.
Mr. Hehn: Mr. Chairman, I want to underscore what I said earlier. The figures are even more shocking in the U.S. case with this type of blue box support, this domestic support that is still in place. It is tied directly to historic production because it is decoupled from current decision making. However, it is fixed and it is paid every year, no matter what the price is. Jack Wilkinson said earlier that in 1996 we had the highest wheat price in 30 years. The U.S. farmer was paid that $1 per bushel over and above what he received from the marketplace, even though the price was the highest in 30 years. As long as that is there, and as long as they are not prepared to put in some system to manage production, we have a major problem.
All of those systems that used to be there and had some affect on managing production are now gone. That is a major headache for us. It is what creates the unlevel playing field.
Mr. Peter Watts, Market Analyst, Western Europe, Canadian Wheat Board:. Mr. Chairman and senators, it is a pleasure to be here today to present this report to you. I will try to go over the European Union programs to give you an idea of exactly what sort of levels of support they are realizing in the EU, how that support is affecting production and how it is affecting world prices both through overproduction and export subsidies. I will then highlight some of the key changes to which we might look toward in the future.
I will ask you to follow along with the handout you have received. It will be easier to follow the presentation if we go through it page by page.
Turning to page 1, you will see the heading "EU Wheat Production and Set Aside." Mr. Hehn has already discussed this. However, to put it to you in graph form, you can see that EU wheat production in 1998-99 resulted in the harvesting of 103 million tonnes of wheat, a record wheat harvest for the European Union. You can see that it is approximately 15 per cent, or 13 million tonnes, above the five-year average. That five-year average goes back to include the three countries of the European Union that were not there in 1992-93 and 1993-94. They are Finland, Sweden and Austria. It includes the production of those countries. They definitely have increased their production.
I included a line for the set aside. You can see that their mandatory set aside came down by a total of 10 per cent over that period. It definitely contributed to the increase in production; but it would be a net increase in area of approximately 5 per cent that has actually been shifted into wheat production. They really are expanding wheat production in the European Union.
In 1998-99, we have record EU production at a time when we are at the lowest world prices in 25 years. It is kind of crazy.
Going to page 2, just to show you how Canada's production compares, you can see that there is no question that we have come down significantly in the past two years in response to the lower prices that we have seen on the world market. That is natural. As Mr. Hehn mentioned earlier, this year will be the lowest in terms of wheat production in Canada in 19 years. Canadian producers are responding. The European producers are not. Why are they not responding to the lower prices?
On page 3, you will see a summary of the EU Direct Support Payments for Grains. The figures are fairly astounding. I have given a small calculation for background. The significant numbers here for the grain area payment are $430 Canadian per hectare, or $175 per acre. That is the direct area support payment received by all producers for all grains grown. It does not matter if it is wheat, barley, corn, rye or sorghum.
I have used an additional example below that for the durum area payment which is really astounding. I include that with the caveat that not everyone is eligible to receive it. The durum area payment is limited to traditional durum growing areas, in particular in Spain and Italy. I direct your attention to the subsidy at the bottom two bullets on that page. They are $909 Canadian per hectare, or $368 per acre. That is a direct area support payment before the farmer even sells his grain onto the market. You can see the significant payments producers are receiving.
Senator Hays: You have given us the U.S. in bushels. For an easy comparison, will you give us the European in bushels or, conversely, the American in acres?
Mr. Watts: We can figure that out.
The following page is entitled, "EU Intervention Support Prices." Mr. Hehn talked earlier about government storage in the U.S. In the EU, they have an extensive and elaborate system of storage and purchasing of grain from the producer. It provides a support price within the EU, which is really critical to the increase in wheat production. This is really the key element of their program which shields European farmers from world price movements. You can see there the support price is $205 Canadian per tonne at current exchange rates. European governments are obliged to buy the grains off farmers if they want to deliver them into storage. If market prices are falling, as they have been, the farmer can offer his wheat, barley, durum, rye, or corn to the intervention storage and the governments must purchase the product. As we will see in a minute, there has been a huge increase in the intervention stocks over the past year as a result of lower world prices. This measure shields the producer from the world price and allows them -- in fact, it encourages them in some cases -- to increase production of lower quality, high yielding wheat for which they receive a per-tonne payment. This encourages lower quality production of wheat in the EU.
I wish to point out that the last bullet point on that page shows a comparison. Currently, in 1998, Canadian wheat producers are projected to receive for No. 1 CWRS, which is 13.5 per cent protein and our benchmark, $154.50 per tonne at their elevator.This is some of the highest quality wheat in the world. The EU support price for all grains is $205 per tonne. You can see the significance of the support prices within the European Union.
I will show you next the build-up in stocks over the past year or two. The following page is entitled, "EU Wheat Carryout and Intervention Stocks." The bars represent the total wheat stocks within the EU. The lighter coloured portion at the bottom of the page represents the government-owned intervention stocks.
You can see the wheat stocks in 1998-99 are projected at approximately 18 million tonnes of carryout stocks. That is up from approximately 12 million or 13 million tonnes at the end of 1996-97. The figure for 1995-96 is just over 10 million tonnes. This represents a significant build-up in EU wheat stocks within the European Union, some of which is being purchased by the government.
On the following page, it is even more striking with regard to the increase in the barley stocks, in particular with respect to the government-owned stocks. You can see there that from 1995-96 total barley stocks in the EU were in the neighbourhood of 6-7 million tonnes. They have gone up to an estimated 13 million tonnes this year, and possibly 14 million tonnes by the end of this year.
You can see in the lighter coloured sections of the bar how much the government owns. It was at a little over 7.5 million tonnes at the end of 1997-98. What will the government do with those stocks? They will need to sell them on the world market. That will keep significant pressure on world grain prices over at least the course of the next year as the European Union attempts to liquidate those stocks.
Mr. Hehn: This chart is very revealing. You can see in the case of barley that we are already in a worse situation than we were at the height of the trade war in 1991, 1992 and 1993. You can see on the wheat side it is beginning to build toward that. That is what I meant when I said on a couple of occasions that the grain production freight train in Europe is going down the track out of control. No one has an engine there to break it. We are there on barley, which is why I do not think the situation will go away in a year or two.
Mr. Watts: I will now continue with the following page. While they were never taken away completely, European export subsidies have gone down. This graph is entitled, "EU Wheat Export Subsidies." There was a period in 1995-96 when world prices were high and EU subsidies were reduced. In some instances they had a tax on exports. You can see we are getting back into a situation in which export subsidies are increasing, which is a natural development with the reduction in world prices, but they will continue to increase and they will continue to pressure world prices as the European Union attempts to export the surplus they are producing.
The following page is entitled "EU Malt Subsidies." It should read, "EU Malt Export Subsidies." This is extremely significant. You can see the dramatic increase from last year to this year on malt exports. This is the product being sold to the brewers. You can see that between 1997-98 and 1998-99 we have gone up over $100 Canadian per tonne to export malt onto the world market. It is a dramatic increase. It was totally unnecessary in the environment in which it was introduced about one month and a half ago. We were shocked. Minister Vanclief responded with a letter to European Commissioner Fischler denouncing the export subsidies on malt. Of course, nothing was done.
Mr. Hehn: Senator Spivak asked: What about the downstream? The malting barley industry in Canada is one of the biggest success stories we have in terms of value added. Nothing has come close to it in terms of growth in the last few years. Mr. Geddes has been close to it as our value-added manager.
Currently, the malting industry in Canada malts close to 1 million tonnes of barley, only about 350,000 tonnes of which is used to make beer in Canada. All the rest is exported. We saw that export growth coming. We encouraged the industry to invest. The industry has invested. It is a real success story. Most of that investment has gone into Western Canada, which is where the barley is grown, in particular in Saskatchewan and Alberta. There is no question that if this continues that industry will be in serious trouble.
Senator Taylor: Is there cheap barley on the world market which they could buy?
Mr. Hehn: There is, but it is not being grown in North America. They would have to roll it in from Europe. I am not so sure you want a situation where subsidized barley from Europe is coming into Alberta and Saskatchewan to keep a malt plant going. You may have some farmers with something to say about that.
The only point I want to make is we talk a lot about value added and diversification. This is a prime example of where we went in Canada in terms of value added, and it is coming under extreme pressure.
Mr. Watts: The following page summarizes the current level of export subsidies in the European Union as of October 29, 1998. The Europeans have a weekly export tender. These were the most recent subsidies last week. They are summarized there in order to provide you with that information.
You can see there the figure of $45 Canadian per tonne on wheat export subsides; $108 per tonne on barley; and $139 per tonne on malt.
With regard to the subsidy on barley, it applies both to feed barley and malting barley.
To try to understand how the export subsidies impact prices, and how they can have the impact of driving down prices, it is obvious that with an export subsidy you are pushing more stocks on to the world market. That will have an impact on prices. In addition, in some cases, the Europeans are exporting below the world price of wheat or barley. That is resulting in the pulling down of wheat prices.
The next graph, entitled, "Comparison of Selective Wheat Prices" is a comparison of the soft red winter wheat price in the U.S. and the French soft wheat, which is the benchmark EU wheat which competes with the SRW. You can see that the thinner line represents the French soft wheat subsidized export price. It is consistently around $5, and sometimes $10, below the price of the SRW. In fact, Europe has a freight advantage into some of the markets in which they are competing with the SRW. Thus, you can consider that price even further below the SRW. They are pulling prices down when their policy sets the export price below the competitive price on the world market.
The following page gives a very clear example of how the EU subsidies have had an impact on barley prices and, in particular, malting barley prices this year. It is very significant.
In the middle of the graph you will see the bars marked March and April. The bars depict the export subsidy, while the line depicts the world price for malting barley.
On March 12, 1998, the European Union increased their export subsidy on barley by $20 per tonne in one go. In fact, they had a tender one day in which they granted licences for the export of over 1 million tonnes of barley in one day with an increased subsidy of $20 higher than the day before. The subsidy worked out to around $60 U.S. per tonne.
You can see what happened to malting barley prices because their barley export subsidy applies to both feed and malting barley. In April, world malting barley prices dropped -- surprise, surprise -- about $20 per tonne. That is significant revenue out of the pockets of Canadian producers, as the Wheat Board is a major exporter of malting barley on to the world market.
In the text which we will leave with you there is more detailed information on that particular situation and its impact.
Finally, producers often ask me: What the heck do we get out of the Uruguay Round GATT agreement if the Europeans continue to subsidize their exports?
The next graph shows the EU's wheat export subsidy reduction commitments. There are, indeed, reduction commitments which will take down the EU's level of allowable exportable wheat tonnage to a little over 14 million tonnes in 2000 and 2001. It will also reduce the level of expenditures allowed.
If you turn to the following page, you will see that under a provision of the Uruguay Round agreement if you did not use your total allowable limit in one year you could roll that amount into future years. That is exactly what happened with strong wheat prices in 1995-96. The EU did not have to use export subsidies, or at least not very large subsidies, during that year to export their wheat. Thus, they can roll over these quantities into the following years. You can see by the graph the allowable limits are unlimited right up until 2000-01, when in fact they cannot exceed the 14.4 million tonnes, which is the limit imposed under the GATT commitments. That will have an impact on us for the next three years.
Finally, we talked about OECD numbers and producer subsidy equivalents. I have provided you with some of the figures here. I will not spend much time on them as you can look over them yourselves. However, I will point out that on the far right-hand column where it says, "Crop PSE/Hectare," you can see that Canada is well below both the United States and the European Union. When Commissioner Fischler was here last June, he made a comment to the Canadian media that the European Union spent less per farmer than either Canada or the U.S. on agriculture. Mr. Fischler took the total agricultural budget of the European Union and divided it by what he said their number of farmers were, which was 7.5 million. He then took Canada's total agricultural budget and divided it by the number of farmers.
One of the significant factors in terms of support is the area of support. How much production is coming out of the European Union is critical. You can see the per hectare crop PSE in the European Union is $523 U.S. per hectare compared with $24 per hectare in Canada. If Mr. Fischler tries to come at you with that argument again, I think it will be pretty easy to refute.
I wish to mention the upcoming proposed changes. The European Union is going through a process now in which it is proposing changes to their program called "Post-Agenda 2000." The idea is to lower their support prices within the EU so that they do not have to use export subsidies as much to send their grain on to the world market, which is definitely a positive development. The problem is that they are not proposing to lower the intervention price significantly enough. You can see here the proposed price is 95 ecu, which is a step in the right direction.
They will increase their area payments in compensation for the lower domestic price up to about $211 per acre. They will still be providing significant amounts of money to the producers, which is critical.
The set-aside area was proposed to be fixed at zero, which would be a disaster if they moved away from that. This year it is set at 10 per cent. They will still have about 100 million tonnes of production to harvest next summer. They have moved away from that. Fischler has recanted on some of his ideas of moving to a zero set aside; but we have to ensure that that does not happen.
Mr. Hehn: Senator Hays asked us to comment on the supply side. We will give you the changes on the supply side in terms of the major exporters because that is what is important. That is what impacts us in the marketplace. I will ask Mr. Geddes do that.
Mr. Earl Geddes, Farmer Relations, Canadian Wheat Board: I will quickly go through the supply and the demand side pointing out what we see from last year.
The U.S. supplied 68.8 million metric tonnes; the EU, 94.7; Canada, 24.3; Australia, 19.4; and Argentina, 14.7. The overall supply for the world market in the 1997-98 year was 222 million metric tonnes, which is a normal level of supply to enter the marketplace.
This year, the major change is in the EU, where they move up to 103 million metric tonnes and Canada drops down to 22.5 metrics tonnes, for an overall increase of 229.1 million metrics tonnes, or an increased supply in the world marketplace of 7.2 million metric tonnes of wheat. That was on the production side.
On the demand side, we see world trade in 1997-98 was at 99.2 million metric tonnes. Our forecast for the upcoming crop that we are marketing now is 93.7 million metric tonnes, for a drop in demand of about 5.5 million metric tonnes. That combination of increased production and drop in demand gives us a serious situation that will take a number of years to work through the system.
I can leave those two overheads with the clerk of the committee.
The Chairman: Thank you for a very complete and helpful presentation.
Mr. Hehn: We are faced with a major challenge. This is a complex situation. We have a bank of about 32 phones at the Wheat Board and we have a toll-free line. We now take upward of 130,000 incoming calls per year. Farmers are free to call us and to ask whatever question they want about our business. If we cannot give them the answer immediately, we get it to them.
One of the most frequently asked questions in the last few months has been: Why are prices where they are when we have reduced production so much? You can see how complex the answer to that question is. We have a great deal of difficulty communicating that message to farmers because it is complicated. Maybe we have made it that complicated because of all these trade rules. Mr. Geddes has a major challenge in his new role.
We are surrounded by good people. We will find a way to communicate this in simple language, but it is not easy. We tried to simplify it for you today, but even as we went through it you can see that it is still complicated stuff.
The Chairman: I will ask you one complicated question right now. I do not know if there is an answer to it, but it is something that we must consider.
Given that we have moved away from the production and seeding of wheat -- and, as you pointed out, it has been dramatic -- farmers have put a lot of emphasis on crops such as canola, mustard and others. What do you see happening to the prices of those crops? Have you done any investigation in Europe about what is happening in subsidies in these other crops and other fields?
Mr. Hehn: Mr. Sawatzky will comment on that after I make some general comments.
On the vegetable oil side, prices appear to be holding. We have seen some softening in terms of the flaxseed market. We have seen the bottom fall out of the lentil market, and I do not think peas are that good, either. This might be a question for you to put to the pulse growers association.
The Chairman: We have had fair prices on canola, for instance, holding around $8, which is surprising to me. I would have expected by now that we might have $7 or $6.50.
Mr. Hehn: Oilseed prices are driven by the U.S. soybean market, which is largely driven by protein supply-demand fundamentals and not oil. Soybeans are 80 per cent meal and 20 per cent oil. Oilseed prices are not always affected by the acreage we put into oilseeds in Canada. They are more affected by the acreage that the United States puts into beans, and beans are grown for reasons other than producing oil. The other impact on oilseeds -- and I am not an expert -- is the big palm oil market. It depends how those palm trees produce in any given year as well.
Senator Hays: Thank you for an excellent presentation, gentlemen.
We have seen how you have felt the stress on Canadian farms in the course of our hearings on Bill C-4. It seems that things have not improved much and that they do not appear even to be on the way to improving.
I will preface my question, which is about the value to Canadian farmers of the agreement negotiated at the conclusion of the Uruguay Round, with a quote from our Department of Finance.
The rationale for what we did in 1994, after that long negotiation, is summed up in this statement:
The Uruguay Round will improve the economic well-being of all member countries because it is based on the simplest of thoughts in economics: by trading, we avoid having ourselves to produce everything we want to consume and, instead, produce what we are best at and trade it for what others produce better. International trade is no different from trade among individuals within a nation; it is distinguished only by the existence of national frontiers, which are not drawn on purely economic grounds.
That is a strong rationale for liberalized trade. We negotiated an agreement on agriculture for the first time in 1994. The negotiation, as you have indicated, was extraordinarily complex and we have seen it play out for fours years. However, from the point of view of the Canadian producer of the product in which you are interested, it seems that it has been a stunning failure. We have seen a continuation of support levels at the same or higher amounts than were the case before the negotiation. We have seen Canadian and other countries such as Australia respond with the reduction of programs which offend the rules. However, from what we have heard to date, it produced a bad result for us. Perhaps some would say in 10 or 50 years -- that is, if we can weather this out and negotiate a couple more rounds -- we will see this promised land described by the economist who wrote the paragraph I just read from our Department of Finance.
What do we do now? We talked earlier today with the CFA about supporting agriculture at a time of stress. That stress is caused not only by problems with the Uruguay Round but also by problems with a financial crisis in the world focused right now in Asia and spreading into Russia -- which is both Europe and Asia -- and into Latin America. Perhaps you could comment upon what Australia is doing under similar circumstances.
Mr. Hehn: Those are all good questions.
If we made a mistake -- and I think we did -- it was not analyzing the impact of the domestic support in terms of future decision making with respect to production in each of these countries.
I was among those under the illusion that if you decoupled domestic support from production decision making and based it on some historic measure, this would not drive production decisions. History has shown that that was a total misread.
In this current round, we are now beginning to prepare the agenda for the next round. That must be on the table. It is a major problem. In fact, Senator Hays, I think it is "the" problem. It was a total misread.
The other misread was this pent up support that they gained in 1995 and 1996 that allows them to far surpass the 35 per cent reduction on export subsidies and the 26 per cent reduction on expenditures until 2001. It was another major error.
Frankly, I did not know about that until about a year ago when we started to wonder how these guys could subsidize every tonne and were not following this scale down. That is when we found out about the pent up demand.
Two errors were made. I do not think we had a straight linear curve in terms of reduction. If you give a farmer a dollar, in a capital intensive business like grain farming he will do what he knows best, that is, produce grain.
Senator Hays: Could you comment on Australia?
Mr. Hehn: Australia is in much the same situation as we are. They do not have any options either. They have an even worse situation in that the only option they have for much of their producing region is sheep, and wool has been in the tank as well.
They do not have the advantages that some Canadian farmers have in some regions; the advantage of growing seven or eight major crops and setting up a rotation. There are parts of Australia where they are pretty well confined to either wool or wheat, according to many Australians to whom I speak.
In Queensland, Victoria and various other regions, they have all kinds of opportunities, like we have, but Western Australia, which is a major producing region, does not have very many options. They are trying durum wheat with some success, but this year that could be a major failure because disease has set in due to too much rain, which is odd for Australia near harvest time.
They are feeling the same kind of pressure and the same kind of intervention. They sell roughly the same volume into the export market as we do. They are just as exposed, in fact even more so, in terms of per cent produced versus per cent exported. They are facing the same type of competition.
Senator Hays: Would you think that a fair opening position a year from now for Canada, Australia and others who have been badly side-swiped, to say the least, by the agreement of four years ago, is to go back to where we were? This has been a type of fraud, really, in that we have negotiated and conducted our policy affairs in such a way as to lead to this good result that we knew, from statements that economists make, would help us in certain areas. We knew that we would have some adjustment pains and so on. However, not only has it not helped us, it has harmed us in that we find ourselves with governments -- and I am not speaking only for Canada here -- that have restructured policy in response to governments that have totally ignored this, in their own way, through the negotiation. I guess we have to credit them for creating blue boxes and green boxes to do this. For starters, we want to go back to where we were four years ago. Do you feel that is an unfair position in terms of where we should start this negotiation?
Mr. Hehn:We are getting into policy here. The Wheat Board is responsible for marketing, as you know, but I have been in policy long enough not to worry about that too much, so I will try to answer your question.
We gained a lot out of this agreement on market access. When I say "we," I am speaking strictly from a wheat and barley perspective. I would hate to give up on that side of it.
Regardless of what the Americans say in terms of what we sell into that country, as long as we are not dumping, we can now sell as much as we want. That sticks in their craw a bit too, but that is fine. We gained on market access in a big way.
Second, I would be the last to be critical of any country in terms of internal support, providing it is geared at producing what their consumers will consume. Providing it is geared to the need to feed their people, I would not be in a position to be critical of that. Every country has a right to do what they want internally in terms of feeding their people. It is when that incentive to produce to feed people exceeds what the people will use, and that overproduction gets dumped on to the market and creates an unlevel playing field for producers in other sectors of the world, that I get upset.
I think we have to go into this next negotiation with decoupled domestic support front and centre. It has to be the issue. The United States would like supply management and the STEs, as they call them, the state trading enterprises, to be the issue but, frankly, they are the people who manage supply. They do something about oversupply. Europe is not doing anything at the moment about oversupply.
The Wheat Board does not get into supply management because we do sell at market values. We do not get support from the government, other than the guarantee on initial payment, and you know that we are very careful about ensuring that we do not get support in that area unless something very big happens in the world.
I think that in the next round Canada must have as its number one agenda item blue box support; support that sends the wrong signals to producers in terms of production. They must address that and manage it. If that is done, many of these problems will begin to work in our favour and the playing field will tend to level out.
The Chairman: I have a question which deals with the internal workings of the system in Canada. It seems that the grain companies have made good profits. I called the Saskatchewan Wheat Pool at Midale yesterday so that I would be well versed on this subject today. Wheat that has no protein sells for $2.07 there. Wheat with 15 per cent protein sells for $3.07 or $3.08. When the company buys that grain, if they mix a No. 2 wheat with no protein with another wheat, who receives the profit on that? Does the Wheat Board have any way of protecting the farmer on that, or does the grain company make all that money?
Mr. Hehn: We pay the farmer through the elevator company for the protein when he delivers it. Currently, that is on one-half of 1 per cent splits. We have argued all along that we should have that based on one-tenth of 1 per cent so we do not get into the situation about which you are speaking. We have agreement from the industry to move to the one-tenth of 1 per cent on August 1, but at least we are at one-half of 1 per cent.
The Chairman: I do not think that farmers have any way of knowing exactly, but some record profits are being made at the same time that farmers are going broke.
Mr. Hehn: I do not think that is necessarily from mixing on the protein side. We watch that closely and we have enough control of that on the one-half of 1 per cent split. They have, I think, as many cars that unload just below as just above. If they unload just below a split, they, of course, are taking a hit.
The Chairman: Does the grain commission monitor that?
Mr. Hehn: Yes. It is important, though, from a farmer's perspective when he delivers, that he ensures he is getting paid for what he delivers. It is a driveway issue. If he does not, he has the recourse of sending a representative sample to the grain commission and demanding a settlement on that basis.
Grain companies are volume sensitive. I was there once and I know how volume sensitive that business is. In the last two years, they still had decent volumes, mainly because of the transportation problems we had, so some of that big 1996 crop spilled over into 1997 and 1998. They will really feel the pinch in 1999. I gave you the export figures.
Our spring wheat exports alone will drop from 15.5 million tonnes to 10 million tonnes. When you are in a volume sensitive business, like the grain elevator business is, I am sure, at least on the grain side of their business, that that will reflect on bottom line earnings next year. I do not want to stand here and defend elevator companies. However, while they had good earnings this year, I do not think you will see the same on their balance sheets next year.
Senator Whelan: There are so many questions I could ask. I go back to your presentation, which was excellent. If I would want anything changed, it would be that it were a little plainer so that I can understand it, because then any urban citizen would be able to understand it. Some of this is good, and we get the grasp of it, but as Senator Taylor said earlier, you have a problem with your urban people, and the majority of the members in the House of Commons are urban. You have to be able to explain it to them in a way they can understand. I am sure there is a lot of this they could understand.
You addressed us out west, and you were here before in Ottawa. You just said you think we got a bad deal in our negotiations, that we Canadians were Boy Scouts in accepting this and not going through it in a more thorough fashion.
Mr. Hehn: I think it is always easy to have hindsight. As I said earlier, I do not think we were fully able to comprehend the impact of this decoupled support on production, particularly in the European Community. To me, that was a major flaw in our thinking, and I think in everybody's thinking, in that round. That is something which must be addressed in this round and corrected. We were of the opinion, as were, I think, everyone at the negotiating table, including the Americans and the Australians, that if you decouple those payments directly from production and base them on some historic level, then production in countries such as those in Europe would level off and actually come down and begin to approach their domestic consumption. The reverse has occurred. Obviously, there was a flaw in our thinking. It is that flaw which we have to address in this round.
Senator Whelan: Many people do not understand decoupling. I used to use the description that if you had a big, powerful engine pulling a long train and you decoupled it, the engine could go wild if you left the throttle in the same position. It would probably jump the tracks. That appears to be what has happened here with the decoupling.
Mr. Hehn: There is a breaking engine in the middle of a train in the mountains to ensure that they do not lose their air and their braking power. I think we have a production train with no engine in the middle to put the brakes on in terms of managing the supply. There is no other way to describe it.
Senator Whelan: You talked about the blue box program. What is the blue box program?
Mr. Hehn: We had three kinds of support. We had the red, which was the export subsidies, and we all agreed they had to go over time. We had the yellow, which were somewhat trade distorting, so we had to deal with those as well over time. Finally, we had the green, which were things like research and so on, which were infrastructure kinds of investments necessary in any country.
When we decoupled domestic support, it did not fit any of those categories, so the negotiators coined another colour, blue. While our negotiators felt that it fit somewhere between yellow and green, history has shown that it fits somewhere between red and yellow. We got the slots mixed up. If you are asking me, yes, we screwed up. I do not know if there is any other blunt way to describe it.
Mr. Geddes: The whole blue box concept came out of the Blair House accords where the Americans and the Europeans sat down in the last couple of weeks to determine how they want to manage this process at the end of the day. They put all the programs they wanted to keep in a blue box. The rest of us had negotiated things in good faith into green or amber or eliminated the red and we ended up with what we have today. Some rethinking needs to go into that.
Senator Whelan: That is why I asked you to put it on the record. Many people think a blue box is for recycling.
Mr. Hehn: We have to recycle this provision.
Senator Whelan: That was suggested earlier by Senator Hays.
The other day we were talking about how under this NAFTA deal somebody can be exporting even poison to you, and if you cut them off from exporting the poison to you, they can sue you. It is astounding to most of the citizens of our country that we would be involved in such an agreement. They cannot believe that we have given away our rights or our sovereignty under that kind of an operation.
You pointed out the amount of money that the European farmers are receiving. You said that the Americans are dumping when they are selling at $25 per tonne less than they are paying their producers. I believe that is what you said. When you look at the European Community, it is even worse. With respect to durum, for instance, you state it amounts to $909 Canadian per hectare. Is that really what they pay them?
Mr. Geddes: Yes.
Mr. Hehn: In the traditional durum growing region of Spain, and in the durum growing region of Italy, that is exactly what they are paid. In addition, they are guaranteed the floor price that Mr. Watts gave you when they go to market their grain. In addition, if they grow a surplus, the government exports it with that huge export subsidy. Add all those up, and you have the degree of support that is there for durum wheat.
Senator Whelan: The president of the OECD is someone I know well. He comes on strong with this. He insists we must get rid of these subsidies, and we must have this world free trade, and so on, but the average Canadian, whether rural or urban, does not understand that this is still going on. We all know what has happened in Canada, what we have done to our subsidies and the Crow rate, how we have cut research. From what I understood, you worked that out. I have always argued that research is part of it. If you have a good government research program, that is a subsidy, not just to the wheat farmers but to society because they reap the benefits of having a higher quality product with the result that, perhaps, the farmer or producer will become more productive.
They do not know that this is going on. Many members of Parliament, I think even some members of the cabinet, do not know this is going on. When Mr. Johnston came here from the OECD to visit us, he did not even let us have a question period with him. I wanted to question him about that.
The ambassador from the OECD was even stronger about this great new World Trade Organization. If I understand you correctly, are we getting imported barley into Canada now, too?
Mr. Hehn: With barley, I cannot say what is happening now.
Senator Taylor: I asked him that question.
Mr. Hehn: We have seen a small increase in barley values. Barley values, world-wide, are starting to approach the loan price again.
During the September-October period, we had situations in which we saw the barley PMW price moving back to the country below the loan price. We had a situation in which barley was moving out of the United States either into Japan or Canada at values below what the farmer was being paid. You are correct, sir. That spread at one time was as high as, I believe, $18.
Mr. Sawatzky: The feed barley was as high as $16 per tonne U.S.
Senator Taylor: I have some interest in barley because in southern Alberta they were bringing barley in from Montana for a while.
There are a couple of bright lights at the end of your tunnel. I do not seem to be getting the calls I used to from some of my right-wing buddies in the southern parts of the province asking about all the huge prices in the U.S. They are being forced to go through the Wheat Board. That seems to have dried up a bit for the big markets across the border.
The second light would be found on Mr. Watts' graph on export subsidy carry-forward potential. It seems the slack that we have given the EU should be used up by around 2001.
If they cannot subsidize, it will be a real cold shower for the EU farmer. They should be making some moves before 2001 to get the boys used to the idea before it disappears entirely, if indeed they will follow the agreement.
As another light, if that EU subsidy goes away, will the world market price also go up?
Mr. Hehn: In the near term, it could have the reverse effect. In barley, there are considerable stocks in intervention now. That barley must be unloaded before 2000. They have to subsidize it to unload it. They will not have this carry-forward potential after 2000. That unloading could have a very detrimental impact on world values of barley.
They have already started to build up intervention stocks in wheat. They have to unload those as well before 2000. In the near term, this could be serious.
Senator Taylor: They must unload it as well as stopping the subsidy. I thought they could still carry forward their stock but they could not subsidize it any longer.
Mr. Hehn: They will be limited in the tonnage they can subsidize and the value.
Mr. Watts: They will still have the stocks; there is no question about that. The EU realizes that 2001 is not too far away and they will want to liquidate some of those stocks. Right now, for example, on barley, the export subsidy is 100 per cent of the value. World barley is trading at just over $70 U.S. per tonne and their export subsidy is just over $70 U.S. per tonne. The EU is afraid that they will come into the next round of world trade negotiations with big stocks and everyone will decide that export subsidies must be limited further. That puts them in a bad position relative to their overall stock situation.
I should mention one clarification that is not on this graph. This graph refers to EU "wheat" export subsidy carry-forward potential only. There is a similar situation for coarse grains which include barley and corn, of course.
When they get to 2000-01, the exports can still be subsidized at 14.5 million tonnes of wheat per year. EU exports of wheat are somewhere in the neighbourhood of 16 million or 17 million tonnes per year. Some three-quarters or more of their overall exports will still be eligible for export subsidies even after 2000-01. It will impact their overall ability to affect expenditures on export subsidies.
Senator Taylor: Australia is putting in less per hectare or per bushel. You mentioned that they could face the same problems. That was not the question. The question is: How are Australian farmers surviving if they face the same problems? Do they have much cheaper land and input costs?
Mr. Geddes: In the Australian grain-growing regions, some farmers are surviving by increasing their farm size to 20,000 hectares and 30,000 hectares. They are not surviving on the family-farm concept. They are maximizing their efficiencies.
Also, through research, they are beginning to grow a higher-quality, higher-value commodity, such as durum wheat which they have never exported traditionally. This year, they had the potential to be a major exporter of durum until weather took that away.
That again compounds Canada's problems because that is precisely what Western Canadian farmers have been doing to try to deal with the problem -- go to higher-value, higher-quality crops. That is the only option left to us. It is a good option if the price complex is not destroyed by others.
Senator Taylor: Saskatchewan will be down to a population of 10,000 if the farms get that big.
Mr. Hehn: I want to correct a statement you made. You said they are pouring less into supporting grain in Australia. That is not quite factual.
The producer subsidy equivalent chart shows we are very close. We are both so low that it is not a big factor in terms of competition; however, we are close. We are at $24 per hectare. Australia is at $17 and New Zealand is at $11, compared with the U.S. at $111. Today, it would be much higher if we included the $7 billion.
Senator Taylor: I was thinking about percentage-wise.
Mr. Hehn: They produce 22 million tonnes of wheat now. They are as big a player in the market as are we.
Mr. Sawatzky: Most of the grain production areas in Australia are located close to the coast. The average distance to port is quite a bit less in Australia than it is in Canada. They do have an advantage there in terms of the average transportation cost being lower for an Australian farmer than for a Canadian farmer.
Mr. Hehn: Mr. Sawatzky makes an important point. An Australian farmer's percentage of the export price is quite a bit larger than the percentage of a Saskatchewan or a Manitoba farmer. They do have that advantage.
The Chairman: In the border dispute, was the South Dakota governor defeated or did he win? I did not hear.
Mr. Hehn: It does not matter. We probably will not hear from them until the next election.
The Chairman: Is the border dispute over, then?
Mr. Hehn: The border dispute will never be over in terms of truck movement. Canadian farmers would get upset with a lot of American trucks on their elevator driveway. Similarly, American farmers get very upset when they see Canadian licence plates on their driveways.
We move very little grain into the U.S. by truck. Virtually all of it is moved by train. It now moves directly in 25-, 50- and 100-car trains. We are mindful of that.
As long as there is no huge differential in terms of border price, that problem should eventually rectify itself.
The Chairman: They did block the rails once, did they not?
Mr. Hehn: Yes, but that train had no grain on it.
The Chairman: On November 20, the boards of directors from the various regions will be elected and the minister will appoint five people. Do you expect much change in the Canadian Wheat Board as a result?
Mr. Hehn: In the long term, it will bring the Canadian farmer and the consumer in some 70 countries across the world closer together. We have had a major challenge. I have been at the board eight years. We have improved somewhat.
We have had a major challenge in communicating to the farmer that the Wheat Board was his marketing instrument and that he should take ownership of it. This new approach will allow the farmer to take ownership of his marketing agency and feel that, in fact, he has ownership of it. That is important. We are still viewed in many quarters as a government agency that takes its marching orders from Ottawa. However, we work at arm's length from Ottawa.
We try to work with the objective of maximizing the return to the farmer on every sale we make. We are not working for Ottawa; we are working for farmers, who pay all our expenses.
However, this particular change in governance will give the farmers ownership. It will allow them to be more directly involved in the business itself. In the long term, that will make the board a stronger organization. What happens in the short term, I do not know. We will have to see how it all sorts out.
Senator Whelan: I am alarmed, Mr. Hehn, about the subsidies. All of these high paid people from the WTO, the OECD and within our own country are going around talking about these subsidies and how they are disappearing.
You have given us figures today that show subsidies are actually increasing. Production is increasing with no concern about supply. Is the European Community so wrong in supporting their farmers to this high degree?
Mr. Hehn: They are totally wrong in terms of encouraging their farmers to produce more than the marketplace can absorb, with the exception of what they produce for their own consumers.
I qualified my remarks earlier saying every country has a right to produce for their consumers. They do not have the right to create an unlevel playing field for any overproduction they may have. The European Union may not be oversupporting their farmers, but their policies have put the European farmer in a position where all of that opportunity was capitalized in the business. Thus, it is reflected in land prices, quotas and many other things.
The farmer is not benefiting from that right now. He has to pay more for land and for quota. They have to deal with that ultimately. Now is the time for Canada to put it on the agenda and say, "We do not quarrel with you having the objective of producing for your consumer. We do not want to get into that argument, but you will have to do something about managing supply over and above that particular level of production."
Senator Whelan: Your presentation has been very important to help clear up the misunderstanding about this new globalization. Many Canadians are under the impression that these subsidies have stopped. However, the evidence you have presented to us here today shows us that is not the case.
Mr. Hehn: We will be appearing in front of the Commons committee sometime in the third or fourth week of November. We will be presenting much the same package as we presented to you, with updates on the figures. We will give much the same kind of information to the Commons committee so that as the Government of Canada deals with this issue both Houses of Parliament will be fully informed as to the downstream consequences.
The Chairman: This has been an excellent and enlightening presentation. Thank you.
The committee adjourned.