Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 34 - Evidence
OTTAWA, Tuesday, April 27, 1999
The Standing Senate Committee on Agriculture and Forestry met this day at 9:10 a.m. to study the present state and the future of agriculture in Canada, consideration of the effect of international trade issues on farm income.
Senator Eugene Whelan (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Our witnesses are from the Canadian Wheat Board. Greg Arason is the new President and Chief Executive Officer of the Canadian Wheat Board. He is a native Manitoban, and was formerly with the Manitoba Pool. He has a long history of experience in the business world, and not just in wheat and grain. Gordon Miles is the Executive Vice-President, Corporate Affairs, of the Canadian Wheat Board. Mr. Arason, perhaps you could make a statement to begin.
Mr. Greg Arason, President and Chief Executive Officer, Canadian Wheat Board: I will make a few opening comments. We have provided you with a formal discussion paper outlining some of the issues around the upcoming Wto round as we see them.
I am pleased to be here. I had the opportunity to meet with the Agriculture Committee in the other place a few weeks ago, and I found that to be a very good experience. I am sure this one will be as well.
As the Canadian Wheat Board, we are very interested in the next round of the WTO, and we are also concerned by it. We believe that Canada, as a country, is very interested in the next round. If you look at the overall level of support in competing countries, particularly in the EU and the U.S., we believe that there is a lot of room for movement on their side. We also think that Canada has already made a significant contribution to open and fair trade. I think the record on that speaks for itself.
The Wheat Board representatives have had numerous discussions with Mike Gifford and the trade group, and as late as yesterday they met with a number of officials and the Minister of Agriculture, Mr. Vanclief, to talk about this and other issues.
The Wheat Board believes that the prices that we are currently seeing are depressed, in part because of the impact of trade distorting subsidies and programs available in the countries that we compete with. We would like to see some action on that.
On the other hand, we are very concerned that other governments are taking aim at the Canadian Wheat Board as a so-called state trading enterprise, and that we are identified as such. Our position is that the fact that we are a state trading enterprise should not be an issue. The issue should be how we behave, not what we are.
We are encouraged by the solidarity that we see developing in Canada around trade issues. The WTO preparation conference last week was strong evidence of that.
We are prepared to answer questions or get into details about a number of these issues, but we do believe that the next round is important if we are to see some significant movement from other parties on the issues affecting agriculture.
I am sure you are aware that the Wheat Board has a new governance structure. I came on board at the end of December, along with the ten elected directors and the four appointed directors. The Wheat Board is working very hard. We have had virtually one or two meetings every month since we came into office, and we are dealing with how we govern the CWB as well as the major issues that are facing us, including transportation, the WTO, et cetera. I would certainly be prepared to comment on how I see the Wheat Board functioning under this new structure.
Senator Taylor: I have read your report. I was glad that you said "reinforce state trading enterprises as legitimate commercial enterprises," because in your conclusion you watered it down a bit when you said that you "recommend that the government strongly defend Canada's right to structure its domestic industry in a manner that it decides." I thought that left the government too much room -- I thought you should have said "state enterprise," but you covered yourself in the conclusion.
When our committee was in Europe, one thing we heard very clearly was that Canada's greatest selling point was not only the high quality of our grains but also their dependability, which is a great compliment to the Wheat Board. A French senator told me that if we got rid of the Wheat Board it would be a triumph of philosophy over common sense. This was a guy who was very much against the Wheat Board, but he thought you did an excellent job.
My impression is that the government is trying to do things on the cheap with the Canadian Grain Commission. It is getting its budget cut and they are trying to restructure it. My impression is that both the Grain Commission and the Wheat Board are deeply committed to quality control. Is there a danger that the so-called savings that we are trying to get with the Grain Commission will cause us to lose our quality control?
Mr. Arason: I would agree that there are very strong linkages between the Wheat Board and the Grain Commission, and that we have a very strong working partnership. They are the watch dogs over the quality control system, and our ability to deliver quality and customer assurance around that is a very important selling factor for us.
We have reviewed the changes that the Canadian Grain Commission is contemplating. Our first and foremost concern is that outward quality is not adversely impacted in any way. We have discussed the revised inspection procedures with them. We insist that there be an onsite inspector in each of the terminals, with centralized inspection. We are prepared to let them work on that in order to streamline the system. We must qualify that, however, by insisting that the outward quality must not be impaired in any way, and that producers are not impacted by having their returns limited because of improper or inadequate inspection on the way in, which particularly relates to producer cars.
We do have some concerns about the overall level of funding, particularly in the research area. We think that that is very important to Canada as a whole, and that the grain research lab is an important part of that. We certainly feel that it is the government's responsibility to provide adequate funding, and I do share some concern about the level of funding and about the system's ability to adopt a user pay philosophy for the services of the Grain Commission. Ultimately, the farmers pay, and I think that in itself is a concern.
Senator Taylor: A supplementary question. If it is not broken, why fix it? It seems to me that the savings in the overall grain marketing are negligible.
Mr. Arason: That is a good question. In the great scheme of things, I understand that the deficit that the Grain Commission is incurring is partly related to the volume of grain going through the system. That volume is a factor of a number of different conditions, including not only the growing conditions, but also the mix of crops and the amount of crop that is being used within Canada, as opposed to going through the system and being exported.
Our view would be that if the government were to see fit to provide a higher level of funding, it would certainly have significant paybacks for agriculture and significant paybacks in terms of our ability to continue to provide a quality product. I would not discourage the government from addressing the deficit issue at the Grain Commission in a very proactive manner.
Senator Taylor: Genetic modification is seen in many other areas, such as canola. Do you see that as a problem in grains that you handle, such as wheat and barley? Is this a potential problem, and should the Grain Commission be watching it?
Mr. Arason: I believe it is a problem and a potential issue, not only for Canada but for all countries in terms of the acceptance of these products. Right now we do not have any kind of adequate testing system, other than a kind of kernel-by-kernel DNA analysis, which is very time consuming and costly. We need some kind of assurance that we will be able to identify these products.
The Wheat Board is talking to its customers ahead of time in order to identify the concerns that they have about these products so that we do not end up in a situation where we have a product that nobody wants to buy. We want to work with the industry on that issue.
Senator Spivak: Has there been a tremendous change in terms of the Wheat Board's personnel? Has the election produced people who are sympathetic to state trading enterprises, or is it the opposite?
Mr. Arason: There has not been a tremendous turnover. When the changeover took place, the three existing commissioners were given termination packages and the new board took over.
There has been no significant change in the senior staff. Mr. Miles, who is with me today, is an addition to our staff. There was a vacancy at the senior level, and we filled it. From a business point of view, I would say that the transition has been virtually seamless. Our customers have told us that they have not seen any impairment in the service or in our ability to deliver. Our sales program is going very well. I met with customers in many parts of the world over the first four months, and it has gone very well.
As far as the board itself is concerned, eight out of the ten directors that were elected ran on a platform of supporting the existing mandate of the Wheat Board, and they were elected on that platform. The member from Alberta ran on a very radical change to the Wheat Board platform, and the member from Saskatchewan ran on more of a dual market philosophy. That is the mix that we have around the board. But, as I said, eight out of the ten ran on the basis that the existing mandate of the Wheat Board would be maintained.
The appointed directors have fit in very well with the elected directors, and they have made a very valuable contribution to the overall operation of the board. I am very pleased with how the board has functioned.
Senator Spivak: I am glad to hear that.
We heard earlier about the absolutely drastic situation with regard to grains. We were shown the statistics for every category of cereals and grains in Saskatchewan with the break-even point and what it was selling for. It was sad.
Canada has done more to enhance its Boy Scout image in terms of reducing its subsidies to farmers, and there has been a tremendous shift into other things which also are not doing so well, except for the supply management area. We were presented with a very grim picture. Your figures here also show that there has been a tremendous drop in volume.
What do you think the future holds? Will there be a wholesale conversion of farmers' lands into big agri-business? Will the grain farmers be able to survive this year? Are we going to see a drastic drop in what is supposedly the best quality of wheat in the world because they cannot make a living on it? All of these things are really disconcerting. What can you tell us about the future prospects apart from the trade issue?
Mr. Arason: In the Prairies the grain economy has certainly suffered over the last couple of years, and cereal grains in particular have seen very depressed prices relative to what returns were a few years ago.
The other area that suffered in the West was the hog industry. I will not speak for the hog industry -- they will have to do that themselves. It is, however, one of the contributing factors.
If we look at the overall support levels in Canada, we do have a Boy Scout image and we have also behaved like Boy Scouts, because our numbers show that the producer-subsidy equivalent for wheat is in the range of 40 cents a bushel, whereas in the U.S. it is closer to $2 and in the EU it is $3. The playing field is very uneven in terms of support for our producers.
We do know that the government has an aid program on the go. I met with the Minister of Agriculture yesterday, and I learned that they are getting applications in under that program. It is fair to say, however, that that alone will not solve the income situation in the west.
We would like to be able to say that grain prices show some strength, and in a limited sense they do. When we consider what wheat prices will be down the road, we are a little more optimistic about next year, but we do not see any significant improvement. The American subsidization program on durum will have an impact on the market, increasing the supply of a product that is already oversupplied, and depressing the market even further.
It is a serious situation. The issue of whether we will see a wholesale abandonment of farms has been with us for a long time in this industry. There is ongoing consolidation and so-called corporate farming is becoming more prevalent. Farmers are survivors, however, and I still think that there will be a significant level of the family farm-type operations, although those farms may be somewhat bigger.
Farmers do need help to get through the current situation, but we always seem to find a way through such things eventually. I realize that the WTO is not a quick process, but we need some support in resolving situations such as these, which depress prices in Canada while they remain unaffected elsewhere.
Senator Spivak: It has been suggested that the Canadian Wheat Board is hampering the transition to some value-added kinds of activities. I wonder whether some of those practices are being looked at -- flour mills and so forth -- because of the method of buying and selling.
One of the avenues that might help farmers would be more grain-related value-added. Otherwise, we will be led into growing feed grains for pigs and cows, which is not a moneymaker. Surely that is not the overall picture that you would like to see on the prairies.
Mr. Arason: That is an interesting observation, and it is somewhat of a misconception in Canada. The biggest customer we have as a group is the domestic industry. We have a mandate to sell for domestic human consumption, and that includes wheat, malt, and barley. Our biggest customer in both cases is the local industry.
I have met with the Canadian National Millers Association and with the maltsters, and it is fair to say that the industry has done reasonably well working with the Wheat Board in the present environment. They would like to see subsidies removed in other parts of the world so that their products could move out of the country more freely as well, and that is an issue. I do not believe that the Canadian Wheat Board inhibits local value-added production.
We must ensure that we do not get into a situation where we subsidize one player over another in terms of providing different pricing. We have made a commitment to keep them competitive in a North American context, but to treat them all fairly. That is an important factor to keep in mind.
Senator Spivak: The point that we heard from Saskatchewan farmers is that the producers who are supplying these grains to the domestic market are not making money. At this point they are all losing money.
With regard to the aid program that has been designed, we heard that in some instances it cost more to get an accountant to figure out the program than the farmers will actually get from it. It is very difficult to apply for the program, and the aid itself is not adequate. That is what we heard, and I want to check these opinions against your viewpoint.
Mr. Arason: I cannot comment in a lot of detail on the aid program, except to say that I spoke with the Minister of Agriculture yesterday. It was his contention that the forms were not as difficult as accounting firms and others were making them out to be, and that perhaps some inappropriate fees were being charged. I do not have any direct knowledge of that.
In terms of farmers investing in their own further processing, we have met with a number of groups, including a group that wants to develop a pasta plant in the Manitoba and Saskatchewan area or, alternatively, in North Dakota. We are prepared to work with them, but we cannot be put in a position where we provide a different pricing structure to them and, in effect, subsidize their operation out of the pool accounts to the detriment of other producers. We also cannot put them in a situation where they are in a different competitive environment than the others in the domestic industry.
There are ways that we can help them -- for example, with some kind of special program to deal with the pricing into their plant, a program that will keep things on a level playing field and still allow them to go ahead. Those negotiations are continuing, and we are working with them. Our board is very interested in seeing how we can resolve the issues so that these kinds of projects can go ahead.
The Deputy Chairman: You made a comparison to your state enterprise. How do you compare with Archer Daniels Midland, Cargill or ConAgra? There are four big grain companies in the world, and then there is the Canadian Wheat Board. How do you compare with them?
Mr. Arason: Cargill obviously has worldwide sales many times greater than those of the Canadian Wheat Board, but I do not know their exact numbers.
ConAgra is a major Canadian Wheat Board customer in the U.S. in the milling end and in their malting business. We met with them a few weeks ago in their headquarters in Omaha, and I know that the total sales revenue for that company is in the range of US$23 billion to US$24 billion. To put that in context, the Wheat Board's sales range, depending on the volume and the price, anywhere from CAN$4 billion to CAN$6 billion.
We are a large player, but compared to companies like ConAgra, Cargill, and ADM, which are much more diversified and much more broadly based, we are not a large player. That is a good point. We should not be penalized for trying to create a critical mass here to market Canadian grain. We should be judged on the same basis as any other commercial enterprise, and if they put rules in place for us as the Canadian Wheat Board, similar rules should apply to large commercial organizations in terms of issues such as transparency and market power.
The Deputy Chairman: I agree with you. Somebody will be criticizing me for going back in history, but I dealt with three Secretaries of Agriculture in the United States of America during my career. All three of them said that the grain companies in the United States were so big that they could not do anything with them. I told them that there was a grain company in Canada called the Canadian Wheat Board, and that I did not have to do anything with them because they ran a good ship and they were looking after the producers.
I do not know if you were at the world trade meeting in Ottawa, but Secretary Glickman said we should get rid of the Wheat Board. Producers see the Wheat Board as some kind of an evil economic operation.
Mr. Arason: That is a prevalent misconception in the U.S., and Secretary Glickman's comments were certainly noted. I also noted Minister Goodale's comments the next day. His response to that was that the U.S., through its own offices, has investigated the Wheat Board and its practices six times, but it has never been able to prove any kind of wrongdoing or inappropriate commercial behaviour. Until they can do so, they should accept the fact that we are a legitimate form of business enterprise. It is the will of the Canadian government -- and I believe of the majority of western farmers -- to market in this manner. As long as we behave properly, that should be the test.
The Deputy Chairman: I want to talk about the Canadian Grain Commission. As you know, the Minister of Agriculture has authority for the Canadian Grain Commission, and another minister is in charge of the Wheat Board. I never agreed with that, by the way, but I went along with it.
We are very proud of the work being done by the Canadian Grain Commission. I do not think people know what the Canadian Grain Commission really does. We used to put on an International Bakery Conference. We knew the protein content of any grain in any part of Western Canada, and they could blend that grain together to get the flour that somebody wanted in Iraq or the Middle East or wherever we were shipping the grain.
I know we had -- I hope we still have -- one of the best grading systems in the world. I went to a terminal in Michigan that was run by the Michigan Farm Bureau. A man there was panning the grain just like you would pan gold. He was a blender actually. He was worth his weight in gold, because if he could get the right amount of junk in the grain he could take a number 2 and a number 4 and maybe make it into a number 3.
When I travelled abroad as Minister of Agriculture, I used to take a display case that demonstrated the grains we have. I showed it to countries like Morocco. They had four milling plants, and the head of the plant said, "If I could only have that kind of grain to make my flour." He showed me a sample of the grain. It was horrible stuff, but it was cheaper than Canadian grain.
Do you think that people really know what the Canadian Grain Commission does?
Mr. Arason: The Canadian Grain Commission and the Canadian International Grains Institute -- the Wheat Board is one of the sponsors of that organization -- are a tremendous resource for the Canadian industry. The Grains Institute continually brings in customers from around the world to help them to make better use of the products that we sell.
We have a distinct quality advantage in that our customers can use our grain to upgrade their end use products. I do not think it is widely known that, for instance, the Mexican market has emerged as a very strong market for high quality Canadian grain. Right now they are number five or number six on our importing country list. I have met with the millers in Mexico. We are taking grain right by the U.S. into Mexico. They are buying our wheat because of the quality and because they can blend it with other lower quality wheats to produce a much better product.
I feel that we need to maintain that competitive advantage through the Grain Commission and the Grains Institute. The Wheat Board has recently approved a further five-year commitment to the Grains Institute just because of that.
Senator Spivak: Do you ship by rail? How do you ship?
Mr. Arason: We have done some business into Mexico by rail. Virtually all the grain goes off the Prairies by rail to some export destination. Most of it ends up on the water at some point. Most of the grain will go into Mexico by boat, but I met with a miller in February who had just received a direct shipment of 20 cars that were loaded out of Saskatchewan and were at his mill within 20 days. That is possible, but it is not the usual form of movement.
The Deputy Chairman: We used to ship skim milk powder by freight car. I do not know if they still do that. From the time it was loaded in eastern Ontario and put on the main line, it was in Mexico City in 48 hours.
Senator Hays: I would like to ask to elaborate on how you think the Canadian negotiating position on agriculture should be pursued. Based on the experience of the Uruguay Round negotiations and four years of history now reflected in the completed negotiation, I think it is fair to say that this committee feels that if we had achieved what we thought we had achieved in 1994 this would not be a bad deal. As it turns out, however, with the benefit of hindsight, we really did not get very much on agriculture, particularly when we look at cereals and oil seeds. We increasingly hear, "Let us go back to the table and get what we thought we got in 1994."
Is there any merit in proceeding at least initially on a sectoral basis? I know that the ministerial at the end of the year deals with two sectors, agriculture and services. Do you think that our best interests are served by going sectorally for as long as we can, in that the Canadian response to the Uruguay Round was pretty close to what the parties wanted to achieve in 1994? The other parties, particularly Europe and the U.S., have done things that pretty much circumvent all of the major changes that we thought we had achieved by decoupling support.
Could we pursue that more effectively sectorally rather than comprehensively because of the dramatic difference between the Canadian position and two of our major competitors, namely the EU and the U.S.?
Mr. Arason: I heard a succinct observation last week at the WTO conference. One of the representatives in the open session stood up and said, "Before we accept a cheque in this next round, we should go back and see whether the cheque we got in the last round bounced." I think the cheque bounced. I do not think we got what we thought we would get. If you look at the record, that is born out by what is happening in the U.S., and in particular in the EU.
There is a danger that because they are such big players they control the agenda, so to speak, and the rest of us get caught in the crossfire. That is a major concern to us. If you look at the record, we have lived up to our commitments, whereas others have not.
On a sectoral basis, a number of us were concerned that, as Canadians, we would start playing off against each other in order to strengthen our own position going in. I saw something encouraging last week, though. I saw a Canadian position developing that respected the Wheat Board's role and respected the role of the marketing boards. The exporters, if you can call them that, were not targeting us in order to achieve benefits on their side. As I see it, we have a good chance of going in with a fairly strong and unified position.
I do have some concerns that, if we adopt a multi-sector approach, agriculture will somehow get traded off for something else that is totally unrelated to us. If we were to get into any negotiations on agriculture issues, I would hope that we would make changes that would be directly related to benefits that we would get in agriculture, not in some other sectors.
We have a good chance of developing a strong Canadian position. We have a good case to make. It is time that others lived up to their commitments, and before we start making any more concessions, we need to address that disparity.
Senator Hays: I am interpreting your responses as a qualified yes. Am I correct?
Mr. Arason: That is probably right.
Senator Hays: This is indirectly related to trade, in that the U.S. in particular has a strong negative view of state trading enterprises or STEs, a definition that the Wheat Board falls into. You have mentioned a number of times that you have gone through the process of U.S. scrutiny, and you are now undergoing scrutiny by our Auditor General. Will that help in this area?
As you know, scrutiny by the Auditor General arises in part because of an amendment that the Senate made to Bill C-4, which restructured the board in terms of its governance. It was thought that if the Auditor General could give the board close scrutiny, some of the problems that Canadians and Americans have would be resolved. I wonder if you could comment on that.
Mr. Arason: First of all, just on the overall issue of STEs, yes, the U.S. continues to target us in a very negative way. We should note that the U.S. has also identified the Commodity Credit Corporation as an STE under the WTO. We are not alone in this; there are a number of others.
Again, the bottom line is that we should not be judged on a philosophical basis about what we are or how we are structured. We should be judged on what we do and how we behave in the market.
As for the Auditor General, our Board of Directors dealt with that issue several weeks ago. A couple of weeks ago in a board meeting in Red Deer we announced that we had accepted the opportunity to have the Auditor General to come in and do an examination at the Canadian Wheat Board. That will probably take place early in the year 2000.
There are two audiences that will take some comfort from the fact that the Auditor General is coming in. Certainly there is a view within Canada that the Wheat Board has not been as open and as transparent as some producers would like it to be. We do, I should note, have Deloitte and Touche as our auditors. They perform a very detailed audit that is covered in our annual report every year, and that is consistent with any good business practice. There are no restrictions on that audit whatsoever.
The Auditor General's work will also address some of the issues that the Americans and others have raised about the secrecy, or so-called something to hide issues, around the Canadian Wheat Board. Our board thinks that scrutiny by the Auditor General is part of the CWB's responsibilities. It is something that we should do. It was provided for in the act, and we will cooperate with the Auditor General in developing the terms of reference for the audit and making sure that they have access to whatever information they require.
Senator Hays: As we go back to the WTO, who do we best ally ourselves with? We have the Cairns Group. We have special relationships all over the place that we could pursue. Towards the end of the Uruguay Round we were trying to ally ourselves, because of our position on supply management, with Japan and Korea. In the end we know what happened. There are a couple of examples.
The Canadian Wheat Board probably has the best intelligence system that I know of in terms of monitoring what is going on in the grain world -- who the players are. Do you have any sense of who we should be working with or trying to form a common front with in terms of Canada's best interests?
Mr. Arason: Although I am new to the CWB, I know that the Wheat Board has had a long-term positive relationship, for instance, with the Australian Wheat Board and the Australians. I understand that there will be a meeting of the Cairns group in late August in Argentina, and there will be some opportunities there to develop alliances. There is also some potential with New Zealand.
Obviously these boards are STEs that operate as import agencies in Japan and other areas. So, even though they are on the other side of the coin in terms of their role, perhaps there are some alliances that we can develop there.
The U.S. and the EU tend to be dominant, and it is imperative that other countries with concerns similar to ours band together, because we need some support to take on the big guys.
Senator Hays: Justice Estey's report suggested accepting some recommendations, particularly a lesser role -- or perhaps no role at all -- for the Wheat Board in scheduling grain movement. I wonder if you could comment on that in a trade context. I know that the Wheat Board has commented on this in the past, but perhaps things have changed since your last comment.
Mr. Arason: The latest information that I can give you is that a letter went out of our office yesterday indicating to a number of ministers that the Wheat Board was prepared to enter into a dialogue on how to move forward from the Estey report and deal with the issues that are on the table.
Two issues are of significant importance to the Canadian Wheat Board. First of all, from an operational sense, there is Estey's recommendation or suggestion that we be eliminated from any direct role in transportation between the farm and the export position. We believe that that would clearly hamper our ability to effectively market and plan our movements. We do not believe that that is consistent with supply chain management.
If you talk to any major organization, they feel that they have to have a direct involvement in the movement of their product from one end to the other. We believe that there are ways that we can work with the grain companies and the railways to make that system more accountable and more efficient, but we do not believe that the right solution would be to remove us from any direct role.
We believe that it would be difficult to administer Justice Estey's suggestion that we go to some kind of a tendering process. We also think that it would leave us with very little flexibility to move between ports and to adjust to customer requirements on a short-term basis. It would inhibit our ability to plan our movements so that we draw grain out of the areas where it is most efficient to draw it from, and it would make it difficult for us to look at the whole year rather than working on a week-by-week or month-by-month basis. We have put those views forward very clearly, and we will make them known in any further consultations.
The other issue deals with the rate level and the rate cap. There is very serious concern among the farmer members of our board and in the farm community in general that the level of rates could become a major issue because of the non-competitive environment that we might find ourselves in when it comes to the rail system in Western Canada.
We are asking for two things. First, that there be a re-costing and a review of the railway cost. We believe a lot of productivity has been captured by the railways over the last number of years, and that should be somehow removed from the cost basin and passed back to producers. Second, that until someone can prove to us that there will be an effective competitive environment, we should not be put in a position where rates are totally unregulated.
Senator Hays: I have a couple of questions on the movement of grain. It seems to me that that would be attractive to the pools, because they would assume that role and presumably have an opportunity to develop margins on that business.
However, Estey, as I understand it, has excluded the Wheat Board, or has suggested it be excluded from that role. What if the CWB were included as a contracting party for the movement of grain like anyone else? I do not know why that was not elaborated on in his report, but perhaps you could comment on it.
Mr. Arason: I do not mean this in a negative way, but one of the report's deficiencies was there was not a lot of detail. There were concepts, but the detail was lacking. Everyone has different views on how that kind of system might work.
He was proposing a tendering system whereby we would have to confirm a sale and then go back and contract for the supply of the grain from the country elevator forward to the port position. Given the time-frame that we have to develop our sales, that is not a very practical or workable solution. We have done some tendering, and we have had some success with it. I do not think the grain companies have all liked the results, because it has had the effect of lowering some of the charges that have been part of the tendering process. We are, however, reviewing that with the grain companies.
It is a tool that we can use, but we do feel we have to have direct access to car supply and be able to negotiate with the railways. That is another misconception in his report. He said that the Wheat Board does not negotiate rates, when in fact we do. We negotiate rates on a number of commercial movements with the railways. An organization of our size can have some clout, and we can save farmers money through that negotiating process. Our objective is to maximize returns to producers.
The grain companies obviously have assets that they want to pay for. They have invested a lot in the system. The railways want a return. But we believe that the farmers have to be treated fairly in this too, because they are the ones who are paying for all of these services.
Senator Hays: The cap involves something that would be very valuable in responding to the current crisis in the cereal sector, in terms of the commodity price and the dramatic and devastating effect that it is having on the use of our land base in the Prairies.
Capping rates would ultimately put us back into the Canadian Grains Transportation Act pre-quantification of the benefit and so on, which produced problems with the railroads in terms of their return for moving grain compared to other bulk commodities or other commodities. Over time, that became unworkable. We had to buy the grain cars. We had to do certain things in terms of subsidizing the railways in order to make up for their lower rate of return on moving grain.
When we talk about prolongation of the cap or building it in as a permanent structure, how would that play out in terms of the type of problem we experienced before?
Mr. Arason: The environment that you are referring to probably predates the Western Grain Transportation Act. When I was with the pool, I was part of the group that drafted that act. I have been directly involved in a number of costing reviews. Gordon, who is here with me, was the Deputy Administrator of the Grain Transportation Agency, and he was very involved in these issues as well.
It is fair to say that under the WGTA the railways did not suffer a revenue deficiency. They received their costs plus a contribution of 20 per cent of their variable cost to the overall revenues of the railway companies. They were adequately compensated. In fact, some people feel that it was more than adequate -- that the railways have done very well on grain.
They have invested in cars when required. We do have the government fleet that is available, and it is not in our interest to see cars invested unless they are required. They have invested in locomotives. They have invested in upgrading their lines, et cetera.
We should not be too concerned about the revenue adequacy that the railways have had. The fact that there is a cap does not necessarily mean that the railways are going to be in an environment where they do not recover their costs or where they will be unable to reinvest in the system. A cap provides some security to producers and grain shippers that the lack of a competitive environment will not put them at an undue disadvantage and allow the railways to charge whatever the traffic will bear.
The railways, to be fair, have their own legitimate business interest. I believe them when they say they will not put a customer out of business, but I also believe that they will take you close enough to the cliff to give you a good view of what it looks like below. We need to be sensitive to that.
Senator Stratton: As you know, in anticipation of the upcoming round of negotiations, this committee has travelled to Europe to look at the subsidies that take place there. I had the good fortune to travel rurally and meet with folks out there. It was impressed upon me that their attitude is completely different from the North American one. They firmly believe that agriculture is a way of life. They want to try to ensure that farmers stay on the land and, as such, subsidies are designed to allow that to happen. They also allow fairly small farms, for example, 40 hectares, which is really quite surprising. When you drive through the region and see these farms, while they are not wealthy, they are still fairly impressive.
The Europeans seem to be fairly adamant about trying to maintain that approach, because they see farming as a way of life and they want to maintain it. Then we have our attitude, which is that we want to protect our marketing boards and we want to protect our Wheat Board. The U.S. wants us to become more entrepreneurial free traders, yet they jump in whenever it is suitable for them and subsidize as well.
Why would the Europeans give up their approach in the face of our demands that they give up or decouple subsidies, and still allow us to keep our marketing boards and our Wheat Board? Particularly when the Americans are saying that no one, including Europeans and Canadians, has the right to do that kind of thing?
We are going into this next round and I cannot see the Europeans giving up on what they are doing, because it is pervasive. They may diminish it and find other ways of doing it. I cannot see the U.S. giving up, because a country is always going to protect a group or groups of its individuals or sectors. Are you optimistic about this being resolved in some fashion?
As a supplemental question, do you see the Wheat Board and the marketing boards surviving in the long-term in this round of negotiations? If they get into the hardball portion of it, which is where they created the blue box last time, we are not large players and they may say, "Okay, you are gone." How do you react and respond to that?
Mr. Arason: There is no doubt that there are a lot of factors that drive the support programs in Europe as opposed to in the U.S. or elsewhere. I read the report on the committee's visit to Europe, and I found it very comprehensive and very interesting. I have do doubt that it was a good learning experience, and from what I see it is a very comprehensive report.
As I understand the EU, there are two things that have driven their programs. In the early period, it was the issue of self-sufficiency -- Europe never wanted to be dependent on someone else for its food supply. They have long since passed the point of self-sufficiency. The other issue, particularly in countries like France, is a social issue of keeping people on the farms and in rural areas. Again, that is what is driving a number of their programs.
My concern is that those programs have gone far beyond the original objective of either self-sufficiency or keeping people on the farm. They have, in effect, created an environment where product is put onto the world market at a very subsidized or low price, which lowers the overall price for the rest of us, and we have to compete with that.
If it were strictly an issue of self-sufficiency and contained within the EU, it would not be such a problem. However, there are situations -- such as the current one with malt barley -- where restitution has virtually put us out of a number of markets because we cannot compete. A major concern of ours is that the programs have gone far beyond their social objectives.
As far as the Americans are concerned, one of the issues is that they just do not like the competition. We are a strong competitor. Their philosophical view is that we were successful because of what we are, not because of what we do. I think it is the other way around. We are successful because of what we do: we provide a quality product at a world competitive price and we are aggressive in the market. There are all kinds of examples that we can cite.
How do we reconcile the various positions? I do not know that I have an answer for that. One of the reasons we have the Wheat Board and the marketing boards is the absence of the kind of programs that they have in Europe. The Wheat Board and marketing boards are the farmers' way of providing a better level of return to themselves in the absence of the government doing that for them through other programs. Producers have the right to work together to improve their lot, and that should be respected.
Senator Stratton: Looking at the tug of war that is coming, you get the impression that Canada, as a bit player, is reasonably vulnerable in the whole scope of things. This is a pessimistic outlook, but after having gone through the last round, you have to be cautiously realistic. You have to be realistic when you look at our role and consider how significant a role Canada can play.
How vulnerable do you think we are with respect to the Wheat Board and the marketing boards? I know you would like to go sector by sector but, as I have said before, when it comes down to playing hardball to accomplish an agreement, are we not reasonably vulnerable as a country with respect to the Wheat Board?
Mr. Arason: I am optimistic that the Wheat Board is going to be around longer than I am. I do not know how long that will be. I believe in the organization. It has done a lot for farmers, and we should not get too pessimistic about strong negotiating positions going in. Obviously people are posturing and the Americans are doing that very vocally right now. It seems to go in four-year cycles in the U.S. too. We are coming up to that again.
Senator Stratton: Perhaps it goes in two-year cycles.
Mr. Arason: Perhaps, depending on which election schedule we are on.
In the great scheme of things, Canada, as a country, is not as large a player as the U.S. or the EU. However, as a significant exporter in its share of the world market, I hope Canada will have an impact, and that there will be some fairness and respect in the process. Posturing is one thing, but cutting a deal is another.
I take some comfort from what I hear from our trade people in terms of the position that we are going to take in. We have to put their feet to the fire and say "You are attacking the Canadian Wheat Board -- what about Cargill, what about ADM, what about ConAgra?" They are much bigger players, they have much more market impact, and they are much less transparent, by the way, than the Canadian Wheat Board.
Senator Stratton: It is not that I am disagreeing with your position, but realistically when you say you are cutting a deal, you want to protect Canada's position vis-à-vis the Wheat Board or the marketing boards. If that is your position, then what do you feel we should allow on the other side? If you are going to say, "We want this," then when you cut a deal you will say, "Okay, we will give you that."
The Europeans are subsidizing because they believe in that way of life and they want to maintain it. The U.S. does it in another way, whether it is Cargill or ConAgra or ADM. During election years, they still like to project the image that they are protecting the family farm. If we are all in virtually the same kind of ballpark, what should we allow the U.S. and Europe to have in order for us to maintain our position? It is that kind of game; you are cutting a deal.
Mr. Arason: I would hope that we do not give up something such as the Wheat Board to a philosophical argument that does not have any direct bearing on farm support, income, or subsidization. It is something they like to achieve for political reasons, I would say, rather than for hard economic reasons.
I hope that we go into the next round with a very strong position that we should only deal with things that have a direct impact in terms of subsidies, export programs, et cetera. I think a lot of other things have much more impact on the world trade picture than the STEs and the Wheat Board. I would hope that the round will focus on things that have a bottom line impact as opposed to things that are philosophical. I hope the Canadian position is strong in that regard.
Mr. Gordon Miles, Executive Vice-President, Corporate Affairs, Canadian Wheat Board: We also have to recognize that what we are hearing out of the U.S. can be driven by political reasons and by producers in the northern tier states. We do not often hear from the processors and end use customers. They also are making a case politically. They just do not do it in the same way -- that is, through the media.
ConAgra is one of the Canadian Wheat Board's biggest customers in the U.S, as is Cargill Milling. They are very satisfied with the quality and with the consistency of Canadian wheat. That product will continue to flow into the U.S. because that is what the processors require to create the end product that goes on to the shelves. We need to be careful to distinguish political posturing around the trade negotiations from what is taking place at the customer level.
Mr. Arason: As another example, I had many debates with American farmers about the impact of the Western Grain Transportation Act. They saw that as something that was a big target to get rid of because they thought it was providing a significant advantage to western Canadian farmers.
If the WGTA goes and farmers go to full rates, it will become much more attractive for Canadian farmers, particularly those in the eastern prairies, to export to the U.S. The trains and the trucks will turn south, because that is the best return market when you take all of the costs into account. In effect, that is what has happened. We got rid of the WGTA, and they thought that was a good thing. It has made the market more attractive for us and created a different problem.
Eliminating the Wheat Board will not change the consumptive demand in the U.S. We do practice some discipline in that market, and we try not to inflame the situation. But if all the farmers along the border suddenly turn their trucks south, we know what will happen, and it has happened.
We need to have direct dialogue with producer groups in the U.S. as well. I met with the state people in North Dakota a month or so ago. Some efforts are being made to try and develop a better understanding in the U.S. I do not know if we will ever convince everyone, but maybe we can help some of the farm groups develop a better understanding.
Senator Stratton: When I was in Sweden I ran across a parliamentarian from New Zealand who was a dairy former. He told me about a dairy farmer in Sweden who farmed at an elevation of 3,500 feet. His dairy herd was something like 13 cows, and he was successful. Why? Because the community in the area, believe it or not, paid him the equivalent of about $20,000 a year. In other words, they subsidized him because they wanted that farm to be maintained in that region. That is amazing.
If the Europeans were to do something like that, rather than subsidizing the price of grain or whatever, and if we were willing to give on that side in order to maintain our position on marketing boards and the Wheat Board, would that be acceptable?
Mr. Arason: The position we put forward in our brief is that domestic support programs should be fully decoupled, and there should be some cap on it. Any investment or incentives to invest ultimately can encourage uneconomic enterprises and result in sustained overproduction. We need to recognize that. On the other hand, however, how do you tell a local community they cannot kick in a few bucks to keep the dairy farm next door? I do not know. That is a tough one.
Senator Spivak: I want to get back to the whole problem of genetically modified products. In your brief, you state that biotechnology, trade issues and risk assessment must be dealt with on the basis of scientific fact. If you look at risk assessment carefully -- not risk management, but risk assessment -- that takes potential hazard into account, as does the precautionary principle. People who talk about sound science do not always use the term the same way.
Have we really looked at the question carefully, and not just in terms of a trade issue? I understand that some farmers are now looking carefully at some of the seed that has been genetically modified, and they are not finding that it produces as well. The yield is not there. Should we not be looking at all sides of this issue -- for trade reasons, for yield reasons, or for sound planting reasons -- and looking at the whole practice of genetically modified products in this country?
There are also genetically modified practices that are designed to protect the investment, such as the terminator gene. In the end, farmers are not going to stand for that. This issue is growing. It is not dying down.
Mr. Arason: I would agree that it is growing, and it is becoming more of a widespread concern on a daily basis. We had a lengthy discussion on this during our meeting yesterday with a number of officials from Agriculture Canada and some of the agencies that operate under it. There is some concern that we could reach a crisis on this very quickly unless we try to come to terms with it.
In spite of all the best efforts of science, if you look 20 years down the road, who could accurately or with any degree of assurance predict the long-term effects that might emerge from some of these new technologies?
Our position is that we want to be in step with our customers in terms of acceptance of the technology, and that is a moving target. Obviously the Europeans have the highest level of concern about this, but it is emerging in other markets as well. We continue to talk with our customers to make sure that we understand their position as this issue develops.
With regard to the quality end, it is our strong position that we should not abandon quality and viability in the interests of scientific progress. There has to be a benefit to the farmer in terms of a better product, a better yield, et cetera. There are some benefits in terms of reduced levels of pesticide use overall because of the selective nature of some of these varieties and the selective application of pesticides.
There is a positive side to it as well. The science has to be developed to the fullest possible extent so that we understand as much as we can about it. There is a lot of emotion around this issue, and I am concerned that it could ultimately be a trade distorting issue, because everyone will have their own definition of products that they do not want in their country. If we are not in tune with that, we will be in major difficulty.
Senator Spivak: Where is the work to evaluate this being done? Huge companies like DuPont and Pioneer Seed are merging and changing their focus from the chemical industry into the life sciences and the agri-food industries. They are not exactly doing that for their health. They are doing that for commercial reasons.
You have to be able to separate out things like the terminator gene and really good crop development. In this country, where is the major focus in terms of evaluating what sorts of biotechnology developments are actually beneficial and what sorts are simply for the protection of investment? I do not think that the latter is a legitimate use of technology in terms of no seed and so forth, and that is a huge issue all over the world.
Mr. Arason: There are two or three areas where there should be some checks and balances. First, the Canadian Grain Commission does have a Grain Standards Committee that reviews varieties for approval, and there is an approval process there in terms of licensed varieties.
Second, we have the Canadian Food Inspection Agency. It is a very significant organization in Canada, and it will ultimately have a role to play in this. I had a discussion with the head of that agency yesterday.
Senator Spivak: They look at the seed, they evaluate the seed?
Mr. Arason: Ultimately there is a link, but the links become very difficult. Does the chicken that is from a genetically modified plant food become a genetically modified meat product? There are all kinds of linkages that have to be explored, and it does ultimately end up in the food chain.
In this country, plant breeders' rights legislation has been in place for some time, but there was a major debate when it was introduced. The terminator gene is a broad question that probably goes beyond just a regulatory question. It is an economic, ecological, and sociological issue. It has a lot of ramifications.
No doubt technology companies have a lot invested in this and see a lot of return and future in it. Farmers have a legitimate concern about how they will, in effect, be captive to this technology at some point.
Senator Spivak: The concern is not so much the food products but the seeds; their productivity and what could happen on the fields. That is really the question I am asking. We have heard some stories. Apparently there are about 500 lawsuits all over North America. Monsanto is suing farmers for either accidental planting or for growing seeds that they are not entitled to grow based on their contracts. There are also different developments with the genetically modified plants moving onto other fields.
Where is this technology being evaluated in terms of its effect on the ground? Is it being done in the University of Alberta or the University of Manitoba? I understand about the food products, but I am talking about the crops and what is happening there.
Mr. Arason: Again, I would go back to the Grain Commission. I would hope that the Grain Commission, through the Grain Standards Committee and the licensing process, would not license varieties that do not show some benefit and that do not improve the productivity and the quality of the grain or the crops in the system.
I do not think there is a single home for this whole issue. It cuts across a number of agencies and departments. It goes beyond agriculture, I am sure, and there will be legal challenges. Companies will take steps to protect their investments. There are technology use agreements in place with the companies and farmers, and they are going to pursue that as well as royalty rights, et cetera. We have had hybrids in the system for a long time. They are not GMOs, but they have some of the same marketing characteristics.
We are all struggling with this. That was our discussion yesterday. It is something that we have to try to deal with before it is literally out of the box and we lose control of it.
The Deputy Chairman: Do you still distribute the display case that was put out by the Canadian Wheat Board?
Mr. Arason: We have versions of that around. Actually, I see them in offices in Beijing and Tokyo and Mexico. Everywhere I go I see those little displays. They are a great advertisement for our quality and our system.
The Deputy Chairman: This case has malting barley, feed barley, Canadian western feed wheat, Canadian prairie spring wheat, Canadian utility wheat, amber durum wheat, and soft winter spring wheat. The one thing that I do not see on there is oil seeds. When are you going to get control of oil seeds?
Mr. Arason: That is not currently in our mandate, and I do not see it coming in the near future. It is a question that continually arises in some form on the Prairies.Those display boxes will have to become bigger, because we are developing many more specialty wheats for particular end use characteristics. The number of qualities and classes of wheats is increasing, and a lot of development is going on in that area.
The Deputy Chairman: This is a wonderful selling tool, because they can see the kind of grain that they are going to get. Your opposition should do the same with the grain that they put on the market.
Several years ago I spoke to the Nebraska Wheat Growers Association. When the agent from Amsterdam who was buying their grain brought them a sample of the grain that he had received in Amsterdam, it was completely different from the grain that they had sold out of Nebraska. They then followed a whole boatload of grain from Nebraska to Holland to prove that they could grow the kind of grain that the millers wanted.
I have strong reservations about GMOs. I was appalled when I saw that Monsanto is giving $600,000 to Agriculture Canada at the research station in Winnipeg to develop a wheat that is Round Up resistant. Are you aware of that?
Mr. Arason: I did see the press announcements. There is obviously an economic benefit to it. I noticed that the premier of Manitoba was at the announcement, and it was quite a public event. We do have Round Up Ready canola, and that product is widespread in western Canada. In spite of the best efforts to segregate the product, I do not think you could guarantee a GMO-free canola out of Western Canada any longer. As I said, the issue is out of the box.
The Deputy Chairman: Some of the members of the committee -- including myself -- have received letters from out west saying that canola has become a weed because you cannot kill it. If the seed drops on the ground, it is very difficult to get rid of it.
Mr. Arason: That has been an issue not only with the GMO products. but also in the whole area of herbicide tolerance. I know the chemical companies have been advocating using different spectrum products in rotation so that you do not use the same type of product on your farm year after year and develop an in-house resistance to it. That issue is not restricted just to GMOs.
The Deputy Chairman: You can get rid of the ordinary canola by using a different herbicide, but anything that is Round Up Resistant is pretty well resistant to anything else.
Mr. Arason: It is a bigger problem, I agree.
The Deputy Chairman: A potato has been developed in England, and the Colorado beetle will not eat the vine because it affects him. Now they are finding that that potato that is GMO engineered may be withdrawn from the market because the testing that they should have done before on rats does not show a very good result.
You were at the WTO when a former Minister of Agriculture from Saskatchewan was promoting this genetic modification. He said it was the thing to be in. Are you aware that people who hold positions of authority are promoting this as a money-making venture?
Mr. Arason: There is obviously a high level of support in some areas for the technology because of issues around decreasing costs of production or improving productivity and efficiency, et cetera. There is a legitimate debate; some people have strong views on one side, and some on the other. There is also an economic issue here, as evidenced by the investments made by Monsanto and others in Western Canada.
In all of this, we have to try to strive for a balance so that it does not get out of control and we do not end up with a problem that we cannot deal with. Nobody that I know of has the answer, and there is no single body that could take control of this.
The Deputy Chairman: My own personal feeling is that it is already out of control when we hear Archer Daniels Midland announcing that the Europeans will accept corn or soybeans, et cetera, with only certain modifications under GMO. There is a test that takes about 11 minutes, and which will show whether or not it is modified grain.
The Canadian Grain Commission is one of the best organizations in the world to guarantee that we have a pure product that we can sell at a better price.
We spent millions of dollars to develop canola to become the safest oil from that seed that could be consumed. Over 50 per cent of the oil that we consume in Canada is canola oil. People are saying they do not want canola oil unless it is guaranteed to be GMO free and is not genetically modified. There are companies in Portugal and England that will not accept anything that is genetically manipulated.
We were the largest exporter of grain in the world before WTO. We always exported 75 per cent of the grain that we produced. Now it is being said that we should tag along with the United States and get rid of the Canadian flag. I cannot believe what I am hearing. Did you see the presentation they made to us?
Mr. Arason: If you are speaking of the Western Canadian Wheat Growers Association, historically the Wheat Board and the WCWG have not seen eye to eye on a number of issues. We agree on some things, but there have always been some philosophical differences, and they continue.
They have been quite vocal about perhaps moving closer to the American model than other producers in Western Canada would advocate. That debate continues in the region. It has been there for a long time, and I expect it will be there for a long time in the future.
The Deputy Chairman: When I was Chairman of the Agriculture Committee, we studied the Wheat Board's operations. I asked the head of the Wheat Board at that time what his concern was -- what he had to do with transportation. He said that the Wheat Board had no concern about transportation. I told him that I was astounded by what he said. Do you have strong feelings about the fact that the Estey report says that you should not have anything to do with transportation?
Mr. Arason: This is not a new position of the new governance structure of the Canadian Wheat Board. The previous commissioners and the previous staff of the Wheat Board had a similar view -- that is, that the Wheat Board, as a marketer, had to have some hands on levers, and that includes the levers of transportation. That is our position.
The Deputy Chairman: The appointed directors of the Wheat Board are: Betty-Ann Heggie, Senior Vice-President of the Potash Corporation of Saskatchewan; David A. Hilton, former senior Vice-President of International Banking, Bank of Nova Scotia; Ross L. Keith is a lawyer from Regina and has a farm; James M. Stanford, President and Chief Executive Officer of Petro Canada. Do you think you need one of these display cases for them?
Mr. Arason: Obviously the directors that were appointed came to the Wheat Board with varying degrees of familiarity with the Wheat Board and with western grain. Mr. Hilton actually grew up in Alberta, even though he worked for the federal government in trade and in finance for some time and then was with the Bank of Nova Scotia. Even though he is the only easterner on the board, he does have western roots.
The appointed directors have taken their new positions very seriously. They have made a significant effort to understand the board. We have gone through a major orientation effort with them. There is a great deal of respect around the table for the abilities that they bring with them, from a senior operating position such as Mr. Stanford or from Ms Heggie, whose background is in communications, and from Mr. Hilton in finance, and Mr. Keith in law. They make a very significant contribution to the board. We are a big corporation. We need that perspective around the table and it has been very helpful. The elected directors have really appreciated it.
We are all going through a learning process -- including me, and I have worked in this industry for more than 25 years. I am very familiar with the Wheat Board, but there are also many things that I have been working to understand.
Mr. Miles is new to the organization. There is a very good working atmosphere amongst our board members, and they are taking their responsibilities very seriously.
The Deputy Chairman: I am sure they will become some of your best supporters once they learn about the whole operation. Perhaps they will go so far as to get you those oil seeds so that you could market them in the efficient way that you market the other grains.
I want to thank you very much for appearing before the committee.
Mr. Arason: Senators, thank you for the opportunity. I hope you will have the opportunity to read our brief, but it has probably been more constructive to have a dialogue rather having me read a text to you.
If you have questions at any time, please feel free to contact us. We are accessible, and we do want to respond. I know the committee has a major interest in the Wheat Board and in trade issues, and we certainly want to work with you and keep the doors open whenever we can to provide information or receive comments from any members of the committee.
The committee adjourned.