Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 1 - Evidence of December 9, 1999
OTTAWA, Thursday, December 9, 1999
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.
Senator Leonard J. Gustafson (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we have the privilege of having before us today representatives from the Alberta Soft Wheat Producers Commission. I will ask them to introduce themselves and explain the role they play in their organization.
Please proceed.
Mr. Peter Pepneck, President, Alberta Soft Wheat Producers Commission: I wish to thank you for allowing us this time and letting us share with you our concerns and recommendations relative to the reform of the grain handling transportation system. We will also touch a bit on the issue of having a stable safety net for Western Canada.
Being a little nervous, if I refer to something in the document and forget to tell you exactly where to find it, please just remind me and I will try to keep you informed. As I go through the document briefly, I will try to go through it in the order you have it before you.
As primary producers of soft wheat, or any agriculture product, we operate under the same economic rules as other small businesses. You are aware of that. There is, however, one major difference between producers and most other industries, and that is that the majority of the world market that we sell into or compete with is heavily subsidized and bears no relation to the cost of production. The returns that we, as producers, are receiving for growing grain here and the returns that they receive for growing grain in Europe and in the United States bear little relationship to the selling price of grain in the world market.
Unlike other businesses, we just cannot pass our costs on to consumers. Consumers are demanding more regulation in the area of food safety, herbicide and pesticide testing, genetically modified organisms, and so on. We, as consumers, have the same concerns. However, under a user-pay system, that adds more costs to the primary producer, who does not have the ability to pass those costs on. Basically, the same thing is happening in grain handling and with the transportation system, with the one additional complication that the producers are dealing with a monopoly or duopoly in grain transportation in Western Canada.
Being from Southern Alberta, we are actually dealing with a monopoly. There is only one rail line in Southern Alberta, and that is the CP. The net effect of the elimination of the Crows Nest Pass Agreement and the Western Grain Transportation Act is increased revenue for the railways. That is good for them, but as a result there are increased costs to the producers. Transportation and handling have become the major input cost to producers. Transportation is very important to us because it is our major input cost.
That brings us to the present situation. A huge rationalization is happening in the rail and grain handling system in Western Canada. Branch lines and elevators are closing all across the prairies. High-throughput terminals, usually of cement construction, are being built on main rail lines. We support the rationalization of the system. We recognize the potential savings for the railways and the grain companies, but there should also be savings for us as farmers. We know our costs will increase owing to rationalization. We need additional equipment. We need enough grain bins on the farm to store all our grain. The cost of custom hauling is huge. As producers we fear we will not recapture those additional costs. We worry that we will not participate in the future cost savings because of the monopoly power of the railways.
Remember that producers are the largest stakeholders if value of assets is counted. The railways say they need huge returns on their assets. Producers hold a much higher total value of assets and yet the returns are not there for us. We wish to participate as equal partners. We are not asking the railways to subsidize our operations, but we wish to participate as equal partners in future savings.
I will not detail the history of our participation with Mr. Kroeger report and the Estey report. Let me just say that we participated in each of these processes. We shared in the Kroeger report findings, but we must point out some of the shortcomings. We emphasize the seriousness of the income shortfall of grain producers in Western Canada. There are two sides to that problem: lower income and higher costs of production.
The huge increase in transportation costs is one cause of that problem and we feel it should be addressed first. The single most important principle to uphold, if the grain handling and transportation system is to be changed in Western Canada, is to create and allow real competition in rail transportation. Specifically, we feel there must be more than two rail carriers competing to transport a farmer's grain at every point in the grain system. That is what the Estey report said and that is basically what we expected to see in Kroeger's report.
In Southern Alberta, we only need to look across the border to Montana to assess how a deregulated captive market is charged by a monopoly railway. From our talks with the transportation committee we got the sense that the railways have already been lobbying there to try to point the finger away from rail costs and toward other things. We must look at the whole picture, including lower terminal costs and lower handling costs in the United States. An American farmer pays less for grain transportation and handling than a Canadian farmer. As a general picture right across the United States that is true. If we look only at the Montana experience, there is a captive market and rail charges are basically higher than anywhere else in the world.
Burlington Northern is a well-run railway with low costs but very high charges. They charge $54 per tonne just across the border compared to $37 for total freight handling in some parts of Southern Alberta. We fear that a completely deregulated system will cause even higher costs to farmers.
The Chairman: Do those figures include elevating charges or just the freight charges?
Mr. Lyne Jacobson, Marketing Chair, Alberta Soft Wheat Producers Commission: Everything is included. My grain cheque shows total deductions, including elevation, cleaning and terminal charges, of about $37 per tonne.
Mr. Pepneck: Right across the border, the American farmers are paying $54 per tonne just for freight charges. Their handling charges are slightly cheaper than ours. There are reasons for that, too. For example, the American government is building their cement structures. Canadian farmers must pay from their own pockets for those facilities.
As far as we are aware, the only source for definite competition would be a common-access rail bed. We understand there could be some problems with safety issues, but competitive line rates and enhanced inter-switching rules alone will not ensure competition between railways. Having two companies providing a service has never been deemed to be adequate competition, especially when they are geographically separated by the vast areas of Western Canada. We are a long way from the next supplier.
The railway argues that they provide incentive rates of $5 per tonne for 100-car spots, $3 for 50-car spots and $1 for 25-car spots. They say those charges can be recaptured. In some ways, they are just posturing. There is almost no availability of 100-car spots and, until now, those special rates applied only if the cars were loaded within 8 hours. In Alberta, no facility can load 100 cars in 8 hours. The rate was on the books, but no facility could physically achieve the time limit. Recently, that limit was changed, but we would point out their miscommunication.
At page 4 of our brief, we discuss the railways' defence against common-access rail beds. They argue, and rightfully so, that such access will infringe on private property rights. They fear forced open access and the inability to recover costs of maintenance. Yet when we examine the CRTC ruling on communications, we see that competition results in net savings to the consumer. If the government will not allow real competition in rail transportation, such as that upheld in the CRTC ruling and in pipelines, which also share a common carrier, then producers would be better off under a regulated, distance-related freight rate.
In summary, the producers and the grain industry are together in calling for real and effective competition.
The issue of freight rates is also directly related to competition. If sufficient competition exists, a rate or revenue cap should only be required for a short transition period. From then on, competition should limit freight rates. I am sure you have heard different suggestions on how to set the revenue cap.
Mr. Kroeger requested a costing review from the transportation agency. That review clearly showed that the revenue cap of $31.50 per tonne proposed by the railways should be lower than the actual 1998 average rate. Mr. Kroeger recommended a revenue cap of $27.77. Perhaps we do not want to focus too tightly on the numbers, but Mr. Kroeger used the 1998 numbers and failed to take into account the productivity gains made in 1998-99 and in 1999-2000.
We know that any new rate coming into effect will not take place before the year 2000. We believe that if you factor in the 3 to 4 per cent between Mr. Kroeger's equation and the rate, we come very close to the keystone KAP WRAP SARM recommendation, as they call it, or the Saskatchewan and Alberta rural municipalities' recommendation, of $25.79 per tonne. We can tell you why we think these numbers sound reasonable, but we cannot generate the numbers for you as such. That is Option C in Mr. Kroeger's report.
The keystone and SARM proposal deemed that there should be a productivity formula built in for the first five years that should also lower the freight rate. We agree with that concept. We see the major efficiency gains taking place right now. The cement structures are being built. This grain system will be rationalized within the next few years. The branch lines will be shut down. The elevators will be shut down. Major savings will take place in the next few years. If you do not need to run on the branch lines, you do not need to maintain branch lines and you do not need to run on all these points. Major savings are taking place right now.
We do feel that perhaps we should only use three years instead of five years. If competition is to work as suggested, then we should see this freight rate coming down by itself without being legislated. We are willing to say that for the first three years, as an interim, we can allow that, and we will see how it works out. We do believe it is essential, though, to have a costing review in 2005 to evaluate how these measures are working. If competition is actually working, then we can make some adjustments. If competition is not working and producers are not benefiting from changes, then we need to look at the system further.
I do not think we want to spend too much time on the commercial environment. The Canadian Wheat Board is a contentious issue on the prairies, to say the least, among the producer-industry groups. Mr. Kroeger recommends moving the Canadian Wheat Board to a more commercial environment, to what is called "the spirit of Estey". He has not brought agreement between industry players. Perhaps a method to resolve this impasse would be to have a clear directive from the government telling all grain companies and the Canadian Wheat Board to sit down and develop a common maximum position after considering each other's concerns. I do not know if you can sit them down in a room and force them to do it, but we would encourage that kind of dialogue so that a system can be developed that would work.
Again, we would make some recommendations, and we propose the following changes. It should be stressed unequivocally that these recommendations are only made under the condition of adequate and real railway competition.
Tendering is one of the really contentious things. We see tendering as a tool which the Canadian Wheat Board could use in the right context to lower producers' costs. We would recommend, if possible, that 25 per cent of all Canadian Wheat Board shipments be under the tender system. An evaluation of the tender process could then be completed at the Canadian Wheat Board's year-end. We could assess whether producers actually benefited from this process. If it is determined that tendering is a cost benefit, then the process should be encouraged and expanded. If it is not a benefit, then make changes so that it is a benefit.
As to contracts, the Alberta Soft Wheat Producers Commission sees a benefit to producers of a contract system that clearly sets out the participants' responsibilities.
Dealing with logistics, at least during this transition time, we think the Canadian Wheat Board must retain some control or have some input into the transportation of grain in order to ensure that it meets its contract and sales requirements. We believe performance contracts are the means for the Canadian Wheat Board to be able to fulfil its commitments, but they still need the right to access on the prairies.
As to whether the Canadian Wheat Board should receive grain at port in-store, producers receive blending revenues of between $20 and $30 million under the scenario that the Canadian Wheat Board be allowed to put these directly into pool accounts. We would recommend a change such that the Canadian Grain Commission regulations on blending be changed to allow blending out of grade, resulting in perhaps even the generation of more blending revenue. Blending is an expertise type of thing. If we allowed the Canadian Wheat Board to blend out of grade, it would essentially be doing what the terminal operators want to do now when they put the Canadian Wheat Board at spout. They see some extra revenue coming in there.
Mr. Jacobson: To explain the blending, at port or at the terminal position, the top qualities of wheat can only be blended within grade. No. 1 can only be blended with No. 1. You cannot take a No. 2 grade wheat and blend it into a No. 1 and keep your No. 1 status. In most years that probably works out when you have an equal split of crops, but when you have a crop where 90 per cent or 85 per cent of it comes in as a No. 1, Hard Red Spring, for example, then you should be able to blend to a No. 1 and keep the No. 1 status. At the terminal, we feel they should be allowed to take a No. 2 and blend it into a No. 1, and we feel we can recapture some more value for farmers by doing that.
Mr. Pepneck: I will touch on safety nets because they are related. There is no way we can separate safety nets and transportation input costs from our net returns. Transportation is the main input cost that we have. When you examine income, you must look at the returns that we get from the marketplace and at our costs; the problem is the squeeze between them. Our costs are going up; our returns are going down. They have passed each other. It is easy to understand. When we talk about a safety net, we are talking about the situation in the grain industry in Western Canada being very grave. A survey has been released that indicates that up to 40 per cent of those polled were thinking of leaving our industry in the next year, and we are very concerned about that.
As a Saskatchewan farmer put it, $3 per bushel looked pretty good in 1929, but it does not look good today. Prices paid today are not much different from prices in 1929, but our costs are enormous. Transportation is one of those costs.
We believe that Canada must take measures to ensure that world grain prices return to a market-driven price, not a government-intervention price. We believe the long-term solution to this situation should come through strict controls on domestic support programs through world trade talks, but those fell apart. Nonetheless, we believe Canada must make a commitment to the world and to its grain producers that it will not stand idly by while low-cost producers in Canada are driven out of business by high-cost subsidized producers in the United States and Europe.
We need some form of long-term revenue support. We suggested one, and we have a copy of that under NISA in our appendix. I do not think we will go through that right now. Suffice it to say that we have done a great deal of thinking about this. We need some kind of program specifically addressed to falling grain prices. Grain prices are ratcheting down slowly. The intentions are good under the AIDA program, but it just is not working. An illustration would be that under the AIDA program you receive 70 per cent of one-half of the amount of the world price. If the world price is $4, we receive 70 per cent of that as a guarantee. The three-year-old world price is $2.80 a bushel. In the meantime, our European competitors are receiving a $4 subsidy plus the world price. They are looking at $8, and we are looking at a $2.80 guarantee. It is just impossible to continue functioning that way.
In conclusion, we believe the income shortfall of grain producers in Western Canada is very real and very serious. There must be programs in place that respond in the short term and the long term. We believe the recommendations for transportation review would lower our input costs and therefore affect our net returns at really no cost to the government or the taxpayer. By allowing real competition in rail transportation, producers in Western Canada, even according to the CTA study, should save between $150 million and $240 million annually.
A long-term, stable safety net program must also be considered, and we have put some ideas forward on that.
Mr. Chairman, we are now open for questions and discussion.
The Chairman: Thank you for that report. When the Crow rate was discontinued, what did you, as soft wheat growers, pay for transportation? What was the difference for you in Alberta? For example, if you farmed 1,000 acres at Yorkton, Saskatchewan, the cost of losing the Crow rate was about $20,000. What did you lose in Alberta?
Mr. Andy Kovacs, Executive Director, Alberta Soft Wheat Producers Commission: Since the Crow rate was eliminated, the freight rate has virtually doubled to the producer. We are paying about $27 a metric tonne now and we were paying in the neighbourhood of $13 per metric tonne. That cost has virtually doubled. On an acre of irrigated soft wheat, which is 2 tonnes per acre, that means our input costs have increased $27 an acre with the elimination of the Crow rate.
Senator St. Germain: Our witnesses this morning are deeply concerned about the possible lack of results coming out of Seattle.
Gentlemen, thank you for coming here this morning to make a presentation to us. If I heard correctly, you said that the AIDA program is good but is not working. Can you explain why it is not working?
Mr. Pepneck: The AIDA program will work very well if you have a sudden drop, because 70 per cent of the market price might be sufficient. When grain prices ratchet down over a number of areas, the price drops so slowly that it can fall 30 per cent every year and you will still receive nothing from AIDA. That is what happened. We are not experiencing a sudden drop in grain prices, we are seeing a gradual decrease in grain prices. In the grain industry, if you experience a natural disaster along with a drop in price, then the AIDA program may apply. However, it is not sufficient when you receive nothing, because a natural disaster means almost nothing. However, if it is strictly a market price problem, where the prices have been gradually decreasing, AIDA not will not cover that.
Mr. Kovacs: To clarify that, if the three-year average is being used and that average has been a declining amount, that number becomes smaller and it then becomes 70 per cent of that smaller number. You are talking about the AIDA program being effective. However, either it will not generate a payment or, if it does, it will be a very small one. That is the problem with the AIDA program; it is based on that short, three-year income average.
The Chairman: Most of your production is irrigation, is it?
Mr. Jacobson: Yes.
The Chairman: You do not have a situation where you have a drought?
Mr. Pepneck: We never have a drought as such. Our production is fairly constant. I should also point out that in irrigation, few of us are single-entity farmers. Soft wheat is a rotational crop, so we grow a variety of other crops. My other crops support my soft wheat crop so that I can sell it at a reduced price into the world market. Other people who do this in Saskatchewan, however, do not have that available. They must use off-farm income to subsidize their grain production. That is the seriousness of this situation.
The Chairman: I asked you that question because, under the AIDA program, if you had a drought year where you had no crop and your average was extremely low, you could not apply for AIDA. It is the same situation if your crops were damaged by hail. The people who are hurting the most never receive anything because the program works backwards. However, you would not have that problem where you have your own water supply.
Senator Spivak: Would you not say that the AIDA program is based on the wrong premise? It is based on whether or not there is a sudden crisis, but the point is that a crisis has been occurring for quite a number of years. It is really an income support program that is necessary, not an AIDA program. Am I not correct in that suggestion? Shouldn't the program be reoriented to what the real needs are instead of having an inadequate program like this one?
Mr. Pepneck: You totally understand the problem with AIDA. That is the exact problem. It is not targeted for a problem that involves a continual decline or one that arises over some period of time.
Mr. Jacobson: You are correct on that end of it. Producers would very much like an income support program -- that is, if you could ever do that. One example of a program that is in existence right now is Ontario's market revenue program. It is not GATT green, though; you must realize that. The Canadian government is saying, "GATT green" to us. If you are to go on an income support program that is not related to cost of production or crops, then you are GATT green. However, if you start relating back into crops, then you get into the red and amber programs.
Senator Spivak: Are all farmers agreed that they would prefer to have a totally rewritten program rather than trying to adjust to something that does not fit into the situation? Would the farm organizations prefer a different program, a new program that would retain the funding that is available at present, rather than the AIDA program, which is not effective?
Mr. Jacobson: I do not know if we are qualified to speak for all the other farm organizations, but we can speak for our own. The AIDA program does not work for us. In Alberta, we have a FIDA a program. It is an onerous process to apply for it, though. You must go back three or four years and figure out what you kept on the farm, what you did not have on the farm, what you sold and what you did not sell. To put it on an accrual system for accounting four years back costs us a lot of money and a lot of time to try to figure it out, and we are not very accurate. We would prefer something that would come off our income tax as income. It supports the same value type of thing in the end and gives you the same information.
Senator St. Germain: Regarding your soft wheat production, you were saying that you also have other crops. Have you reduced the production of soft wheat, or is it necessary that you grow it for crop recycling, and so on? What percentage of the soft wheat production in the country is in your area and to what markets does it go?
Mr. Pepneck: The price for soft wheat is dropping so quickly that our organization is under threat of not being here next year. That is a bad thing to say, when you are the president of an organization. However, that is how strongly it is dropping. As far as wheat itself is concerned, I skipped over the beginning of the brief, where we explain our industry. Soft wheat is a pastry flour that is grown in Alberta by our organization. About 95 per cent of Canada's total soft spring wheat production is grown in Alberta by our organization. We have gone from 250,000 acres a few years ago to 50,000 acres at this time. That was strictly an economic decision on our part. That is why we say that our own organization is threatened, when we see the drop that has happened historically.
This product is used for pastry flour. Half of it is consumed domestically by mills that make cakes, cookies and breakfast cereals. The mills are asking where they will get this flour if we cannot supply it; can they get it from the U.S.? I do not believe we will get the wheat from the United States. Rather, we will see finished products coming into Canada. Our own value-added industry and the jobs that go with it will be eliminated.
Ontario's usual crop is a soft winter wheat that is used for the same purpose, but, of course, transportation costs from Eastern Canada to Western Canada will prevent most Ontario wheat from going to Western Canada. Our production of soft wheat only shifts toward Eastern Canada, including Ontario, in response to disease problems, and those problems tend to occur regularly, perhaps two years out of every ten.
The Chairman: What price do you get for your wheat today?
Mr. Everett Tannis, Treasurer, Alberta Soft Wheat Producers Commission: The final price for last year was $113 per metric tonne.
I would like to comment on the AIDA program. A farmer must fall below the 70 per cent cut-off in order to qualify. That qualification will only be triggered after bankruptcy. It is like hooking up to life support a body that has been dead for two days. What is the point? We need a new percentage for cut-off or a new program.
Mr. Kovacs: Mr. Jacobson spoke on price and the reason for the rapid decline of the soft wheat industry in Western Canada. Alberta produces 95 to 99 per cent of the soft wheat produced in Western Canada. It is the main production base. Aside from a small amount in Manitoba and Saskatchewan, the rest are winter white wheats that are produced in Ontario.
Fifty thousand metric tonnes of our production is used in domestic, value-added consumption. As an example, Sunland Foods has a large cookie plant in Edmonton providing between 600 and 800 jobs. They supply all regions of Western Canada and supply the Pacific Northwest, or PNW. If wheat production falls to the point where we cannot supply the domestic market, that industry will virtually disappear. They could not bring up soft white for the PNW against the higher price.
The reason that the price of soft white spring wheat has been declining so rapidly is that white wheats are the most heavily subsidized and the most widely grown wheat in the world. We do produce a good product, but the world prices on soft whites are the lowest ever. As we say in our presentation, prices are at 1930 levels. In Appendix C of our brief we talk about costs of production. You can see that the gross return, which is shown at (A) on that table, minus the total production cost, which is shown at (E), shows a loss of more than $50 per acre.
Those figures were obtained from Alberta Agriculture. The production in this example is tremendous, at 83.99 bushels per acre, so the management is terrifically good, being higher than average, and yet the losses are still more than $50 per acre.
Senator Fitzpatrick: I want to follow up on the questions regarding reduced production. In Canada we are attempting to increase value-added production for domestic and export markets. You seem to say that agriculture output has been reduced from 250,000 tonnes to 50,000 tonnes, and that will impact our value-added processing operations.
Mr. Kovacs: Absolutely, there is an impact. There are four major value-added processors in Western Canada that use the flour from mills. Rogers Foods in Armstrong, B.C., is a company wholly owned by Nisshin Flour Milling out of Tokyo, Japan. They use our wheat for tempura batter which is exported to Japan. That business could be lost.
We could also lose a large portion of the milling slice for the only Canadian-owned mill in Western Canada, Ellison Milling Company in Lethbridge, Alberta. They supply a soup-extender market in Aylmer, Ontario, for Campbell's Soup. No other wheat grown in Canada is of the soup-extender quality that we produce in Western Canada.
Senator Fitzpatrick: Can you estimate the number of jobs that would be lost in the value-added industry? Some jobs in the growing industry may be absorbed by switching to other crops, but how many job losses do you foresee there?
Mr. Kovacs: The plant in Edmonton, when running at full scale, supplies about 850 jobs. The plant in Armstrong, B.C., supplies between 150 and 175 jobs. The Robin Hood Multifoods flour mill in Saskatoon, at last count, employed about 275 people. Ellison Milling in Lethbridge employs about 180 people. Those are not large numbers. Some production jobs also exist at the primary level.
We have a basic premise that the growing industry generates $70 million at the primary level when production is at average levels. I cannot estimate the value-added production on 50,000 tonnes of domestic consumption, but it would be a very large number. There are far-reaching spin-off effects on freight, packaging, distribution, et cetera.
[Translation]
Senator Ferretti Barth: I am intrigued by your presentation in which you describe a number of problems. Not so long ago, the government offered you the services of Mr. Estey and Mr. Kroeger who are experts in this field. Why are you dissatisfied with their recommendations?
[English]
Mr. Pepneck: Mr. Kroeger is the other gentleman to whom you are referring. We participated in Mr. Estey's and Mr. Kroeger's process and we were looking forward to Mr. Kroeger's report. We were concerned when Mr. Kroeger wrote to Mr. Collenette about the legislation that was to follow. He said that the railways could make efforts at efficiency gains, but, regarding competition, he said, "We will study it further."
Back on the farm, the words "we will study it further" mean that it will never happen. That is our first and primary concern. From our viewpoint, all the concerns of the railways were addressed. There was a revenue cap put in place for a five-year period, as was recommended. In an effort to rationalize the system, they were allowed to shut down branch lines that were a part of our heritage. The closures of those branch lines, if allowed to continue, will affect us personally.
We support the rationalization, but I am actually saying that I will lose my current elevator and branch line and Mr. Jacobson will lose his; Mr. Tannis has already lost his in the last two years. We are not talking about something distant, we are talking about ourselves. We know that this involves extra costs. For example, we will be required to pick up an extra $4 or $5 per tonne. We just have to do a further study of the competition in the railways.
[Translation]
Senator Ferretti Barth: Are you and these two gentlemen still communicating? Have you abandoned the idea of seeking their input, preferring instead to try and resolve the problem on your own?
Transportation is a major problem for you and now you are requesting a level playing field for everyone. You say you want to meet with members of the Wheat Board and other grain producers to discuss your mutual problems. Have you in fact asked to meet with Wheat Board officials or has your request to meet with them to examine problems and find a mutually acceptable solution been turned down? Everyone needs to work together to find a solution that will allow you to keep working.
In discussing transportation in your report, why do you say that a single carrier for grain is not enough and that other resources need to be found? Why have you not made this request earlier?
[English]
Mr. Pepneck: I will answer the first question. Judge Willard Estey was commissioned by the government to complete a study of our transportation and handling system. We participated in the process, but it came to a halt after Judge Estey completed and submitted his report to the Minister of Transport. Mr. Arthur Kroeger was a bureaucrat appointed to implement the Estey Report in the spirit of Estey. We asked that we be included on the committee, although we were a small organization. We were not granted that request, but we did participate in each one of his plenary sessions. Mr. Kroeger was given a timeframe for the completion of his report and was to submit it to Mr. Collenette by the fall of 1999. That was done, and thus we refer to the letter he gave to Mr. Collenette. We do not object to dealing with the ongoing process, but these had a timetable set by the government. Mr. Kroeger complied with a September 1999 deadline and submitted his report to Mr. Collenette. At that time, the process ended and it is to that point that we are directing our comments.
Our transportation system has evolved. Originally, there was a legislated freight rate, not a freight revenue cap system. Originally, the Crow rate benefit was set at $13 per tonne, and that was supposed to be ad infinitum. The farmers were happy with that, but the railways were not. That was the freight rate many years ago and people understood it well. However, we cannot go back. The process changed and the government then picked up a certain percentage in order to guarantee farmers' incomes. Although we paid the freight, this system nevertheless cost the government. Not wanting to continue with this expense, the government developed a buyout plan that would pay approximately half the freight price for one year only, following which the farmers would be on their own. However, the freight rate was still regulated by the government, and that was based strictly on distance.
As an example, Senator Gustafson's Saskatchewan freight rate is higher than mine, as he is further from the West Coast than I am. Previously, under the Crow rate, the freight actually went to the East, as the market was in Thunder Bay, thus providing a lower rate for Senator Gustafson.
We are existing now under a regulated freight rate that is set by the government, and that rate can go up to a maximum amount. The railways are allowed to drop their rate below this freight rate, but they do not. I am not arguing with the railways; that is the system we are now using; but the government is suggesting that this will end. Following the Kroeger Report, the government has stated that the system will open up. Everyone will be able to determine their charges, and there will be no guarantees for the farmers. That was the basis of the Kroeger process.
The Chairman: It is important to point out that the railroads received large concessions in mineral rights, and so on. For example, for every second section of land, they received the mineral rights. My perception is that officials from the railroads will not tell you that, but that was put off into a different company. So their situation has changed, and it is a complex situation that we are looking at. It is not that the railroads were moving grain for the same price that they moved it years ago under that set of rules.
Another issue is that, in Saskatchewan for instance, the wheat pool alone is removing 235 elevators. They bulldozed an elevator at Macoun last week and my grandson said, "Grandpa, why did you let them do that?"
This becomes a serious emotional issue, but it is also the reality as the government and the grain transportation people attempt to change the system. A massive change has already taken place as far as Saskatchewan is concerned. Those elevators are going down one by one and there will be 235 fewer within a year or so. That is a major change for the Prairies.
Mr. Kovacs: You wished to know why we are asking for this concession or this consideration by the Government of Canada and particularly by this committee today. You must understand that the Kroeger process was based on consensus, and consensus is a difficult scenario. If you have ever been in a room with more than 10 or 12 people, you probably have found that consensus escaped before you arrived. There were majority positions that emerged from the three working committees. Those majority positions came together and were almost at the point where the railways, the grain companies and the Wheat Board could agree on some new methodology that would facilitate the process. However, because there were perhaps three additional people in the room, the railways, and possibly one farm group that objects to almost everything that the Wheat Board says, said no. Thus, there was no consensus on the major issues and that was reflected in the Kroeger report. Yet there were majority positions on all of them and they were in the working group.
The process had a reasonable timeframe and the report has been tabled. We must respond now because the report does not take into consideration the one overriding fact that we have in our presentation today, and that is "real competition". As has been suggested, the Kroeger report indicates that there will be "other competition" or "some competition," or "they will study it further." We are not satisfied with that. Without real competition, these other changes that are necessary for the whole system to function honestly, for return benefits to the producers and for lower costs, will not occur.
We believe that those are important considerations. We have tried to be as proactive as we could from our small organization's point of view. Although we had minimal funds, we attended each of the three plenary sessions, and we made a bilateral presentation to Mr. Kroeger at the onset of the process, but we have had very little impact. We are here today because we are fighting for survival.
Senator Gill: Are there alternatives other than railroad transport?
Mr. Jacobson: In our area, you must look at railroad transportation because of the distances involved. We do not have a barge system. There is not a river big enough in Southern Alberta to float a boat, let alone a barge. We are limited to the railroads as our major carrier.
The railways would say that trucks are a viable alternative to allow you to go to another railroad company or another railroad line. The distances involved in Southern Alberta and the great majority of the rest of Western Canada do not allow a truck to be economical. Trucks are limited economically, if they only have a one-way haul. They can extend that range, if they have what we call a back-haul. When you start moving grain out of a grain terminal, you are talking about some grain terminals holding 50,000 or 66,000 tonnes at one time. You have to load a train of grain. You multiply 90 tonnes by 100 cars, and that is the tonnage that you have to put on a train. Well, you cannot move that volume of grain and guarantee a back-haul to another line. It is just physically impossible. Therefore, our feeling is that trucks are not a viable alternative.
If you go out to the coast and start taking a 100-car train, it takes four Super Vs to fill a grain car. Every one of those Super Vs must go through Vancouver. If you have ever been to Vancouver to the grain terminal, you know you cannot get trucks in there. It is physically impossible. You cannot tie up the traffic. You would tie up all the traffic through the mountains, let alone Vancouver.
You can compare us to the States as well. In the United States, Burlington Northern is an efficient railroad. It returns a large profit to its shareholders, and the place from which it returns a large portion of its profit is Montana, where it is a monopoly railroad and is unregulated. Basically, when they get down into competition in Minnesota, where there is barge traffic, their rate is similar to our rate in Southern Alberta. You can see the difference. When competition drives the price, the price comes down. Where there is no competition, the price goes up. We feel we would be in a very similar situation on that end of it.
Senator Robichaud: You say that the closure of local elevators is an emotional thing. I can compare that to wharves in my part of the country. The fishermen are used to having their little wharves, and if you ask them to go somewhere else, then they are ready to go to war over it. Still, there has been some rationalization happening. You say that, to a degree, you are also aware that this must happen.
Then you talk about the facilities. Did you say that in the States the government pays for the entire cost of those handling facilities, while in Canada you, the producers, pay for them?
Mr. Pepneck: Historically, the United States has paid storage for their grain handling facilities. In the United States they do not have country elevators. They have had large terminals all over the United States for years already. Ten 10 years ago, the government was paying storage to the farmer. This is one of their programs. Basically, the storage over the years paid for the grain handling facilities. They do not need to build. In the prairies right now, we are having a rationalization to the big, cement, throughput elevators. It all comes down to the bottom line. It all gets directly passed on to the producer. We will end up paying for it. We know that. It is not a direct payment. They paid storage for years, which has paid for those bins in the United States. You will not find a little country elevator in the United States, and you have not found one for years.
Mr. Jacobson: I have been down in Colorado and the whole system there is comprised of large, inland terminals. The terminals in that state were built with government money as government storage at no cost to the producers at that point in time. They have an advantage in that area.
Mr. Kovacs: We are sort of skirting around your question. To answer you completely, there have been efficiencies. Those efficiencies accrued to the railways and perhaps in some way to the grain companies at the expense of the farmer. The farmer has had to haul further because his facilities closed. My friend Mr. Tannis hauls 50 miles to get his grain to elevators now. That is a cost to him of $4 or $5. He has to pay that. The saving to the railways has been tremendous in that they need fewer trains and crews. They collect up to 50 or 100 cars at one time. They do not need the infrastructure in place to move the grain, because those efficiencies have accrued. However, the benefits of the efficiencies have not been passed on to the producers. The producers have had to pay, and that has increased their cost.
Senator Robichaud: Are you saying, then, that none of those efficiencies have been passed on to the producers?
Mr. Jacobson: No, there have efficiencies passed off. At the present time, it has been coming out of the incentive rates that grain companies are passing back. If they have a 50-car spot, they will pass you back $3 a tonne as an incentive. The incentives are not coming out of the elevator system at this point in time. They just are not economically there at this rate. I know that our own co-op has had to raise its handling rate twice in the last year to keep even.
You have a system at this point in time of small country elevators and large terminals. Make no bones about it: The system is consolidated at this point in time. The large cement structures are already built. You will not see very many more big elevator terminals built in the West. We are now in the next step, which is consolidating that system and shutting down the little elevators. That will happen over the next three years.
The only incentive at this point in time comes out of the freight rate or subsidy. If we get a 100-car spot, although we do not have one in Southern Alberta right now, then we would get possibly $5 back. However, one of our biggest fears on that cost saving back to the producers is that, once the system is consolidated and you do not have a competitive freight rate where you can actually negotiate with the railway, then what incentive does the railway have to pass incentives back to us? They have captured the market.
Once you have a terminal and an investment from the grain companies of $10, $12, $14, $15 or $20 million, they just cannot pick that terminal up and go to the next line. They are a captive shipper, so they must operate under what the railways want. If they do not feel like they have to pass anything back to us as producers or even to the grain company, our feeling is they will not.
Senator Robichaud: One way of addressing that would be to allow others to use facilities such as the railways.
Mr. Jacobson: Yes. We feel you need competition on the railway. We see too many ways that the railway can get around competition between two players. They might deny it, but they do meet on the golf course and talk about these things. There can be the type of thing where they say, "You set a tariff here, and we will not."
That sort of thing does happen in business, and we know that. If there are only two competitors, the danger increases. We need the actual threat that someone else can come in and access that rail bed at a competitive cost. That would hold the rates down. Otherwise, if you do not do that, then we need regulation around it, and the government does not like regulation and most of the people do not like regulation. However, for protection for producers, you need it if you do not have competition.
Mr. Kovacs: The fact remains that the threat of competition is not enough to make the railways honest or to return those incentives to producers. It has to be more than a threat. It has to be real competition. It has to be visible, and it has to be first.
Senator Robichaud: Who would be the real competition in this case? Who would be the threat?
Mr. Jacobson: There is a shortline running in Manitoba, and up to Churchill and Hudson Bay. There are also some shortline rail lines in Ontario. Those may be run by Amtrak. Another alternative could be Burlington Northern out of the United States. If they really wanted to be a threat, they could be, but I do not think they want to prove that open access can work, because that would affect their system down there. We have to take that into consideration.
Mr. Kovacs: I am going to flatter Mr. Jacobson by saying that the competition might even be a grain company that buys a locomotive and some hopper cars and moves that grain itself. In any case, competition has to be open and accessible.
Senator Fairbairn: Senators have to realize that we did at one point have great railway traffic through Southern Alberta; both railways came through. The Crow rate was named after the mountain pass through which that traffic flowed in Southwestern Alberta. It was like a bargain with farmers. However, the bargain has ended for a number of reasons, including world trade reasons, and a gap has been left. Now the farmers are under the gun trying to fill that gap, which, in their view, obviously, is a big inequity against them.
I think you are quite right that you will not get competition from CN or CP in those parts of Canada that do not have it now. Where will the other competition come from, then? As one railway has pulled out of passenger service in Southwestern Canada, private-sector rail competition has come through and is doing quite nicely, certainly between Alberta and British Columbia. To what extent is it realistic to think of an Amtrak breaking in to a competitive situation if it were available in the southern part of the Prairies? That would involve not only Alberta and Montana, but also Manitoba and the Dakotas. Is there anything realistically domestic that people who share your point of view could suggest?
Mr. Tannis: I should like to share with you some of the thoughts that we have on paper, which go with the graphs that were produced by Whiteside & Associates from Billings, Montana. That document suggests that deregulation of U.S. railroads in 1980 produced winners and losers. The winners are those with competition, while the losers are the ever-increasing numbers of captive shippers who have been forced to pay for the lower rates. The lesson, in our view, is that in monopoly and duopoly situations, there must be strong regulatory protection for the captive shippers. Before deregulation of U.S. railroads in 1980, there were 42 Class I railroads. The problem was that there were two competing goals, but the regulators viewed them as only one goal. The theory was that rail-to-rail competition could be substituted for regulation, but the result was that from a total of 42 Class I railroads, they are down to four major railroads today.
Captive rates will rise until either the next more expensive transportation alternative is reached or the rail customers go out of business. The lesson here is that farm producers will suffer the most from duopoly and monopoly pricing because they cannot pass the transportation cost on to anyone else.
The document to which I have been referring was a presentation prepared by Americans, for Americans, in the United States. They want to compare their system to ours. They argue that their results show that regulations must be kept in place because railroads will not do it. The only competition they see there is when the rates go up to the next mode of transportation. It would almost triple our present rates if we had to go to trucking rates to bring grain to the coast. Therefore, we must keep regulations in place.
The last page of the document prepared by Whiteside & Associates lists a number of recommendations. First, they say we have to maintain strong regulatory protection for Canadian captive shippers. Captive shippers can count on only one mode of transportation to be the most efficient. Second, we must develop the competition base between this nation's railroads by enhancing competitive access. Third, we must maintain a strong CWB involvement in transportation functions to ensure accountability and sharing of productivity with farm producers. Fourth, they say we must keep a strong shortline focus. We, of course, have done away with the shortline focus. Finally, we must ensure that a rate review is done to provide current data for future rates.
That is what our neighbours to the south are saying. Do we want to undergo the same experience and find out that we have the same results in 10 years?
Senator Spivak: Could we get a copy of that document?
Mr. Tannis: We will make you a copy after this meeting.
Senator Fairbairn: You said earlier in your presentation that you had been talking with people in the Department of Transport. I should like you to expand a bit on your concern, which is centred around the fact that they were discussing comparative savings with you that were based on a general view of the transportation situation in the United States. It included everything, but if you move into an area like the West, those comparative savings disappear or are severely reduced because the situation is quite different than it would appear if viewed as a national transportation issue. I should like clarification on that to see whether I am on the right track.
Mr. Pepneck: The railways are allowed to lobby, and they keep trying to divert the attention away from themselves. The transportation department told us we could have more savings in the handling end or the terminal end. They specifically pointed out that the terminals are being run less efficiently in Canada than in the United States.
When you start generalizing things and using statistics to do it, you see that the overall freight and handling in the United States is cheaper than our regulated system is right now. There is no doubt about that. They have barges, and they transport a great amount of their wheat other than by train.
However, when we are talking about railways, we want to compare our system to places in the United States where the railways are actually doing the hauling, especially where they are doing the hauling under a captive market -- Montana, North Dakota and even Idaho, which is closer to port. We are saying that you should not get diverted into generalizing and looking at the entire grain transportation system in the U.S., because then you would come to the conclusion that they are cheaper than we are with regulated rates.
The problem is that we will never have their freight system. We must go with our own, and our own is very close to where they have a captive market. There, their prices are almost double ours even under a regulated rate. Our railways are making huge profits. They are buying Westin hotels from petty cash. We cannot point out the numbers but the fact is that we know where the savings are going to come from in the next five years. We would hate to see the focus being diverted to the terminals. Let us concentrate on the railways because we believe the greatest cost savings must be found there.
Senator Fairbairn: You say you have gone from 250,000 acres to 50,000 acres. Over what period of time did that happen?
Mr. Kovacs: That occurred over five years. We have downsized to 20 per cent in five years.
Senator Fairbairn: How many farmers are involved?
Mr. Kovacs: Initially, we had 2,200 producers. We claim in our brief to represent those people because they remain on our database and our mailing list and we represent their interests, but present producers number between 600 and 700, or perhaps even fewer by now.
Senator Fairbairn: That is not just our industry.
Mr. Tannis: We have been in Ottawa for the past three days and we have visited several government departments. We found the Department of Transportation to be most railroad-friendly. We came to Ottawa because this is Canada, where the Mounties always get their man and the railways always get their way. That is why we came, to ask you for help.
The Chairman: This probably would not work for Alberta, but there is much talk in Saskatchewan that if freight rates go too high, the only option will be to ship grain down the Mississippi. You alluded that, because of the waterway, costs are cheaper for the Americans. They use the army and they do many other things to move grain directly south, down the Mississippi. The Canadian railroads feared that southern option for a long time.
Mr. Jacobson: You are right. The railroads do fear traffic going south and hitting barge traffic. The canal system in the U.S. is a publicly supported program. The U.S. corps of engineers maintains it. Perhaps you could talk to the government to see if we could slip under the U.S. barge traffic subsidy. They may not accept that since they threatened to blow us up with nuclear missiles over grain trade.
Our cost to access that system would be higher than the cost to the American farmers. It is an option to explore if freight rates keep going up. Another option is to quit growing grain.
The Chairman: Grain production in the hard-wheat area controlled by the Wheat Board has dropped from 18 million tonnes to 10 million tonnes. When we put those figures together, we wonder whether we will have any wheat industry at all if the pattern continues.
[Translation]
Senator Gill: Several years ago, I was fortunate to study international trade. I would appreciate an update on the situation, because the information I have is most likely no longer accurate. We studied the history of the wheat industry from an international perspective. We also discussed the transportation monopoly.
I suspected that there was also an international monopoly in place. The marketing of wheat was controlled by a small number of people. Has the situation changed any? Producing nations must be seriously affected by this monopoly, which is not a bad thing as such, provided you are the one who enjoys the monopoly. When the shoe is on the other foot, however, the situation can be quite bleak. So, I had the impression that there was a monopoly of sorts. Has the situation evolved?
[English]
Mr. Jacobson: The Canadian Wheat Board is viewed as a farmers' monopoly. That is one trading agency for Canada. The U.S., though, has gone from 43 exporters to 10 surviving exporters. Their system is being consolidated under the multinationals. I do not have the European figures but I expect the same trend is continuing there. Eventually, the multinationals will control the grain trade. They are integrated into the whole process from production right into the consumer's house. They engage in inter-company trade at the multinational level, selling back and forth to themselves until the product gets to the consumer's shelf. The product never leaves their system and their profits are maximized.
We are at a disadvantage without that integration in our system. The Wheat Board does not have the facilities, nor do the farmers, to reach the store shelves. We have tried to add value to a certain extent but we are fighting a losing battle. It requires a lot of money. Product acceptance by consumers can take five, six, seven years, which creates prohibitive pricing for farmer organizations and prevents them from accessing the market. It can be done and we are trying, but I doubt if we can compete on a large scale.
Senator Spivak: I have been here through two changes in transportation policy. I am not sure that we have found the transportation policy that works for Canada.
We were told that shortlines would be the salvation for freight movement. I know trucking is not a good alternative. The government is being asked for billion-dollar subsidies to maintain roads, such as those in Manitoba, which were never meant for such heavy truck traffic. The Crow rate was reduced to lower subsidies but then huge subsidies are requested for highways. It does not make sense.
Have the railroads been abandoning the shortlines without selling them off?
Mr. Pepneck: We are not really talking about the shortlines. Shortlines connect to the main line in some cases, but there are none in Southern Alberta. We are discussing main-line traffic where there is no alternative. Trucks can always compete with shortlines. That is how shortlines will set their prices. We want to discuss getting the wheat to port and there is absolutely no alternative to rail.
Mr. Tannis: There is one shortline somewhere in Alberta that is running light rail traffic. That means each car has a weight limit so it cannot be filled completely. After the shortline, who will pull these under-weight cars to the coast? That is a phoney excuse from the railroads to say that shortlines are a viable alternative.
Mr. Jacobson: As another consideration, if elevator companies are building high-throughput terminals on main lines and they own facilities on the branch lines, they really have no incentive to keep small facilities open. They cannot afford both systems. We have chosen, as farmers, to go to a high-throughput system. If there is no grain to be hauled on a shortline, no one will buy it. A grain company has no incentive to keep a shortline open.
Senator Spivak: Farmers in Manitoba are having to truck distances that are three times what they used to be. I do not understand why you cannot have shortline railways doing it. I just do not get it. It is uneconomic. It is inefficient. It will require huge subsidies. Why is no one looking at that?
Mr. Pepneck: If we go to a shortline, then other people share the cost. As long as we put the grain on the main line, the farmers have all the costs to go from the farm to the main lines. What incentive is there for anyone else even to bother with a shortline? We have accepted that that is the rationalization of our system, so we have to live with it.
Senator Spivak: We are talking about a policy that benefits producers. The shareholders are not the only ones with interests at stake here. The railways are interested in their shareholders, and they are cutting costs. However, the industry is going down the tubes because we have not adjusted the right policies for that industry. I just do not get it.
Mr. Pepneck: It is also the public interest at stake, because the taxpayers pay for roads.
Senator Spivak: The taxpayers are getting dinged anyway for subsidies.
The Chairman: I believe this is covered in the brief, but I should like a short word on the crisis situation.
Mr. Pepneck: In a word, the income shortfall of grain producers in Western Canada is real and serious.
Mr. Tannis: Sometimes it does not look too bad, and other times it looks really bad. It is not all that simple. Last month, we went to a safety net coalition meeting in the province of Alberta. Sometimes I find the Alberta government not that easy to deal with because they balance the books and pass the cost on to me so it looks good to the rest of the world. We are short of funds and do not get enough for our product. That is why we talk about the railroad. That is an input cost. We have to keep input costs low, because when people hear that we got $1 more for our wheat, they are pulling on the other pocket to get that $1 back out, so then we are still short. That is a real concern. When you show numbers and figures and you see that this is paid up and that is the need but the need only goes to an average of 70 per cent, that does not give the real picture. The numbers do not lie, but they do not tell the complete truth. You see the NISA accounts, and some of it is taken out. There seems to be a large amount of money in the NISA accounts, but that mostly represents people who are not in need. They are either close to retirement or are selling their farms or have something there so they do not need to take it out. But when you wake up at two o'clock in the morning and do not know how you are going to feed your family next month, that is how it is.
Mr. Kovacs: Do not be fooled, senators. The need is real. The crisis is upon us, and we must react. We do not have very much time to do this. We must do something before spring seeding, before April or May, or else we will start the process of losing an entire generation of young farmers. They will not be able to survive.
Do not be fooled by the railways that come and tell you, "Oh, well, we are about to lose these jobs, and we will not make as much money, and efficiencies will go." When the railways, particularly CP, start talking about losing or eliminating jobs, they are doing it because their efficiencies have increased and they can still maintain or increase their profit margins. Focus on the input costs that we showed you here today. Transportation is one of them. All these costs affect the producer. They are real. There is a crisis situation. Existing programs, such as AIDA and NISA, are not adequate enough and they will not address the issue. There must be more than that, and there must be more proactive consultation to make something happen in a short time.
The Chairman: I thank you for a very complete report this morning. We appreciate your attending. We will certainly take your report into the consideration of our committee.
The committee adjourned.