Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 2 - Evidence
OTTAWA, Thursday, December 16, 1999
The Standing Senate Committee on Agriculture and Forestry met this day at 9:05 a.m. to examine the present state and the future of agriculture in Canada.
Senator Leonard J. Gustafson (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, this morning we will be hearing from the Canadian Dehydrators Association and the Canadian Fertilizer Institute.
Mr. Garry Benoit is the Executive Director of Canadian Dehydrators Association.
Welcome, Mr. Benoit. Please make your presentation.
Mr. Garry Benoit, Executive Director, Canadian Dehydrators Association: Good morning, senators. I would like to begin by thanking you for granting us this opportunity to outline our views on the current, very serious income crisis affecting our industry.
As many of you know, our association represents about 30 member processing plants in rural Canada. On a national basis, more than 85 per cent of our industry's production is exported.
In recent years, exports have been in the range of 700,000 tons of alfalfa pellets and cubes annually, with a value of more than $130 million a year in our peak years.
Our plants make major economic contributions to their local communities and regions. They create more than 1,000 jobs, with direct wages and spinoff benefits benefiting the local communities. In fact, the dehy plant is often the only industry in many of our rural communities. We have been held up by successive governments as the model of value-added industry on the prairies, producing the world's best quality alfalfa products in the most cost-efficient manner.
I am sorry to report that our economic success story is in jeopardy. Mr. Chairman, it is no exaggeration when I tell this committee that jobs in rural communities have already been lost and many others are on the line. I can tell you that most plants are operating at a loss and cannot afford to do so much longer. Major plants in Alberta, Saskatchewan and Ontario have already closed or have curtailed production.
The severe financial difficulties we face are a result primarily of lower international selling prices. Highly subsidized product from our foreign competitors wrecked the markets we worked long and hard to develop.
Our industry has also been hurt by the continued economic weakness of the Asian markets, a doubling of transportation costs, and disruptions in the transportation system, such as the recent work stoppages in the Port of Vancouver. The international price of our products today is now lower than the cost of production at Canadian operations.
Mr. Chairman, we agree that the long-term and ideal solution is to eliminate both export and domestic subsidies through the world trade negotiations. I attended the WTO meeting in Seattle, as did the Honourable Senator Gustafson and the Honourable Joyce Fairbairn. We have no doubt about the commitment of the Canadian government and its negotiating team to the goal of subsidy reductions. But we also have no doubt that those talks will be long and difficult and may not result in the subsidy reduction goals the government is hoping to achieve.
Alfalfa pellets are produced from combined farming and intermediate processing operations; hence, dehydrated alfalfa has never fit neatly into the farm income assistance programs. We have, however, after extensive negotiations and perseverance in the past, been included in some programs that have been of considerable assistance, such as the WGTA buy-out program. This was the only subsidy program that was of significant benefit to our industry, and it was removed. We did benefit from what was called the dehydrated alfalfa assistance program, which was intended to provide our industry with equivalent benefit to that that was being provided to others who had benefited from the WGTA. However, unlike others, much of the payment was returned to the government in the form of tax.
These funds were used by our operations, as intended, to foster industry adjustment. Our plants were modernized. We installed new equipment, such as better processing technologies, loading and weighing equipment, and so on.
Despite our strong efforts to be included in the AIDA program, a letter from Minister Vanclief has informed us "that AIDA should not be broadened to cover any value-added processing businesses". We are being pigeonholed as value-added processing, which we are, but we are also a farming operation in most cases. Therefore, we are falling between the cracks.
We were both concerned and disappointed that our industry was left out of AIDA. In an attempt to address these concerns, we met with Minister Vanclief's staff, departmental officials and key members of all political parties in early November. During these consultations, we were not able to iron out a solution to this problem; however, we were given some hope, with the suggestion that we do some further work on our industry's business plan and return to Ottawa for further discussions. We have been in town for those discussions this week. The rest of our delegation had to return to their operations, so I am here alone today. It is a huge concern of our industry that we get something fair for our membership through these discussions we are having in Ottawa.
Following the suggestions from the Department of Agriculture and members of Parliament during our meetings in Ottawa, our board of directors met. We went through an extensive process of fleshing out our business plan, working from 10 years out into the future, back to the current situation. Our members know that, given a level playing field or anywhere near a level playing field, our industry would be the most competitive in the world. In fact, we have suggested that our plants would survive if they were given support for even our two or three most critical years equal to about 20 per cent of the per tonne support of what our competitors are getting in Europe every year. That is how competitive we feel we can be if we are given half a chance here.
Nonetheless, Mr. Chairman, we are committed to looking for ways to become even more competitive, to further improve our competitiveness and to do the right things for the future. We have refined our business plan and strategy to include short-term, medium-term and long-term initiatives. We have provided copies of our business to for the committee.
When your government colleagues ask what can be done, we are prepared to answer. Mr. Chairman, the solution is three-fold. First, the long-term strategy must be resolution of subsidies and trade issues through the WTO. Second, our medium-term strategy has to and will include industry adjustment and adaptation measures. Third, an immediate cash injection to address financial losses in the short term is essential to the viability of this industry. An AIDA-type calculation shows a very severe drop in income, which would suggest payments, when we apply the AIDA calculation, of $9.7 million for 1998 and $22.7 million for 1999. AIDA is not thought of as being a rich program by many of those that are eligible for it. We urgently ask that you include a specific recommendation in your report for this level of assistance for the dehydrators across Canada. Details on the calculation that came to these figures are included in our business plan.
Mr. Chairman, competitor subsidy offset or adaption assistance is vital to the survival of our industry in the short term. If we wait until 2004 or beyond for WTO relief, there will not be enough of us left for it to make a difference. The dehydration industry is actively trying to correct the difficult financial crisis we now find ourselves in. Some plants have curtailed production. Members are exploring options for diversification and continually pursuing market development projects.
I recently returned from three weeks in Asia, where we have taken the bold step of committing to a market development coordinator for Japan. To help us further educate our customers in Japan, we are actively looking for Ph.D. level nutritional and feeding expertise there. We are not accepting that the Japan market is peaked out for us. We have gone into a slump. We have lost considerable market there because of the economic crisis, but we feel there is a great potential for the future. It requires a lot of expenditure on our part and a lot of hard work, and we are doing that.
We are also working very hard in Korea and China and in other new markets. We are out there and committed to doing the right things. The government must now do its part to allow this very deserving and globally competitive rural-based industry to survive the short-term income disaster caused by competitor subsidies and the Asian economic downturn.
If our industry is provided a fair level of support, in line with the grain farmers of this country, Canada will benefit from productivity gains we have made in recent years. We will retain and further develop our international markets. It will help us to retain jobs in rural areas of Saskatchewan, Alberta, Manitoba, Ontario and Quebec.
Approximately 55 per cent of Canada's dehydration industry is in the province of Alberta, often in areas such as the Peace River country, where they do not have a large livestock industry. We are taking alfalfa, which is very valuable in crop rotations. Alfalfa is a short-lived perennial that goes into the rotation in the land base. Usually the stands remain for about three to four years and then they are rotated back into wheat and other crops. If we do not have these facilities, it means that land has to go back to producing wheat and other crops that are in trouble. It will be detrimental to the land in the long term. Because alfalfa is a nitrogen-fixing crop, it is absolutely needed in the soils in some regions where our processing plants are located.
Our operations in most cases are doing all of the farming operation during the period that the land is in alfalfa. In fact, they have to feed the dehydrating and pelleting or cubing plant 24 hours a day from June until October. They have all the harvesting equipment. They have the trucks. They are bringing in the fresh-cut, green, chopped alfalfa material. When the weather cooperates, there are balers out there rolling up bales for winter processing of bales into what we call the sun-cured alfalfa pellets and cubes.
As you can see, we have many parallels to a grain-farming operation. The landowner is paid according to the tonnes of processed alfalfa pellets or cubes that come off his acre or his chunk of land. There is no room to pass back the severe drop in price because of the subsidy-created surpluses that have hit us.
We do have a variety of operations. There are some operations that are simply buying the round bales and further processing them into sun-cured alfalfa cubes and shipping them. Not all of our operations fit into the same, precise mold, but there are many parallels to the grain-farming operation.
For years, Mr. Chairman, both the federal and provincial government policies have promoted this type of value-added processing for agricultural commodities on the prairies. We were showcased as a model for the future as we developed markets in Japan and other countries. We are 85 per cent export dependent, but 70 per cent of our market is in Japan. We worked long and hard to develop those markets. It is a shame to have to vacate because of the short-term crisis we are experiencing.
The future success of our industry requires short-term government participation. Providing assistance would help the dehy industry bridge the gap in the short term and would allow it to survive and to contribute to Canada's rural economy in the medium and long term, as I mentioned.
We are asking for a parallel program and level of assistance to that available through AIDA for grain farmers and others most seriously hurt by the current farm-income crisis. We could use the audited production figures that were used for the DACHAP program, which, as I mentioned, was the program that was given to our industry when the WGTA was terminated. The government, along with ourselves, selected a representative year, and each of our operations in Western Canada, which is 95 per cent of the Canadian industry, has a precise share. We could use that same figure to distribute the desperately needed funds, which would be a parallel level of support to what the grain farmer is getting.
There is a mechanism there. Agricultural Minister Goodale recognized the uniqueness of our industry and the fact that we had these many parallels to farming operations, and that we were the only industry that had benefited from WGTA that was being left out of the equation. He came forward with this program then. We need a similar parallel companion program to AIDA right now to help us get over this short-term crisis.
Mr. Chairman, we are talking short term here. We know that our industry cannot be dependent on government for the long term. If we are given two to three years of support at the level the grain farmer will be getting through AIDA, that would take us through the crises. We are doing things to be on our own from then on. I cannot tell that you the whole grain mess is going to turn around. The subsidy-created surpluses are going to be a problem for some time to come. Any time you have the Americans pouring $22 billion into their farmers' pockets and even much richer programs in Europe we have problems. Our industry realizes that it has to adjust into new products, new markets, and help ourselves.
We are talking about short-term assistance that would take us through this crisis that we have been in for more than a year now. We are to a point where our companies are in desperate straits. The banks are watching very closely. In some cases, our companies are not able to retain the level of marketing staff that they have had. Farmers are questioning whether they are going to get paid. We are in a desperate state right now and we need this assistance very soon.
I would be pleased to answer any questions.
The Chairman: I will go to our deputy chair here. Senator Fairbairn, who is from Alberta, is much more familiar with this industry than most of us.
Senator Fairbairn: Thank you for coming here today. You were here this week taking your new business plan and strategy to various people in the government. Could you indicate to us what preliminary reaction you might have received so we would have an indication of what else we could do to help.
Early in your remarks, you mentioned that there were about 1,000 jobs involved in this industry with spin-offs into the community. In terms of the kind of secondary employment that this industry offers, have you ever been able to quantify that?
Mr. Benoit: Senator Fairbairn, we do not have a precise way of quantifying how many spin-off jobs there are. However, for example, in Falher they are a large operation, farming about 40,000 acres. One of the qualifications for the shareholders of that operation is that they have to be active farmers contributing part of their land base to the alfalfa dehydrating and pelleting plant. So there would be at least 50 farmer shareholders. These operations evolved because of the desperate straits the wheat farmers found themselves in; they were looking for diversification.
There are the immediate farmers, plus they probably draw alfalfa from another 100 to 150 farmers. The whole town is practically dependent on the industry. There are welders; there are truckers; there are service providers. It is definitely the major industry in town. They are not large towns. This is quite typical.
Whether it is five related jobs, in addition to the 1,000 direct jobs, or seven or two, it hard for us to quantify. It is the fabric of the community and the direct employment plus spin-off. Transportation is another important area.
Senator Fairbairn: In other words, this is an industry that has been created and has, in the past, prospered doing exactly what governments have told the farm community in Canada it has to do -- that is, diversify out of traditional crops, get into an efficient operation that is value-added, and out reach, if possible, into the export market.
You said in your brief that you were a model. That model has been proved over how many years?
Mr. Benoit: The industry has been mostly developed since the late 1960s, when grain was in the tank. Most of our operations started to come into existence at that time because of the desperation in the rural communities, looking for alternatives. The industry has grown and developed, perhaps doubled, in the last 10 or 12 years, but its beginnings were mainly back in the late 1960s, early 1970s, when grain prices were so desperate.
Senator Fairbairn: Have you had any preliminary response from the meetings that you have had this week?
Mr. Benoit: We met with a broad range of members of Parliament, senators, and department officials. I believe there is a good understanding of our industry and the role we play. I think we got a sympathetic ear, but it is clear that no decision has been made to look at our uniqueness and to start working towards a parallel program.
The official line is still that we do not fit into AIDA. There is a reluctance to open up AIDA to processors, and we are falling into that basket. We do not see that as being the answer. In fact, we think the answer is a parallel program just so we are not creating difficulties with the AIDA-type program.
We have had no promises. A number of people are committed to encouraging Minister Vanclief to take a look at us. We ask that we be able to sit down and work out something here that is fair for our industry. We are not insisting that we be let into AIDA. In fact, we think a parallel program is the way to go. But that will require some funding.
Senator St. Germain: You have answered one of my questions in your last response. You want a parallel program to AIDA, because under the AIDA program the danger is really that the plant would be subsidized, which is the equivalent to a grain elevator.
Canada's agriculture industry has been facing a huge subsidy scenario in a litany of ways. Is it really practical to believe that, with the modern plants you have today, industry adaptation can make a difference, or are we doomed as long as these huge subsidies from Europe and the United States stay in place? My understanding is that your plants are as modern as they can possibly be and that the efficiencies of scale cannot be improved that much.
Mr. Benoit: We have low-cost plants, even though we are world scale and large capacity. I took a study tour to Europe two years ago to look at the technologies that they are employing. We are doing it on a shoestring compared to the investment they have in their operations. We did learn some very useful things from that studied tour. For instance, there are some new products we can produce.
We followed up by hosting the Fifth International Green Crop Dryers' Conference in Canmore, Alberta. We brought speakers and technology from Europe and the United States to share ideas and technologies. There were 200 international dehydrators and industry people, giving our industry a chance to meet on our turf. We completed this project in October. Therefore, there are some new things out there we can do.
One example of something we learned was what is called the dehy bale. It involves taking fresh-cut alfalfa material and, rather than grinding it up and putting it into a pellet or a cube, leaving it as a long fibre product, where it comes fresh-cut, green, chopped, dehydrated and is pressed into a small block up to a 1,000 kilogram block. One of our operations, as a result, has picked up on that. It has cost them over $1 million to convert even a small portion of their capacity to doing this new product. That positions us in the long fibre market. In addition to all the nutritional value of alfalfa, we are able to come up with the long fibre dehydrated product. There is a large market development effort required to launch that product in Japan.
There are those kinds of things that we can do and we are doing. We are looking at leaf stem fractionation. We can get into the human health food tablets with a small proportion of production by separating the leaf from the stem, or we can get back into the poultry market with a 30 per cent protein leaf meal product, or maybe develop the natural coloration market Japan. We once had a large market in Japan into the poultry industry. We have lost that. We are looking for ways to get back into some of those types of markets.
The European subsidy program is unique. The reason they decided to build the dehydrating industry over there was because they got angry with the Americans for cutting them off soybeans a couple of times. I was at the Canadian Embassy in Washington, D.C. covering the agricultural slot when this first occurred. With price controls, things got out of whack and the Europeans were not able to get the regular supplies of soybean meal. They took a very conscious decision to build their own self-sufficiency by targeting industries such as alfalfa processing. They came up with subsidies to their processing plants that became very rich in the mid-1980s. The subsidy level -- and this is what the processor in Europe gets -- has ranged between a low of $114 a tonne to a high of $180 a tonne, paid to the processor every time they process.
In addition to that, the processor sells the product at the world market price. Their goal was to just meet their own self-sufficiency. The problem that hit us occurred when they overshot that target. Mad cow disease had hit, their consumption was off. Their industry was expanding on a very steep curve. All of a sudden, Europe had a surplus of dehydrated alfalfa pellets overhanging the world market greater than the total international trade in dehydrated alfalfa. They offered 5,000 tonnes back to our Quebec member, just a small shipment. It was large in that it is half of what the Quebec market uses. I remember the day that this operation called me to tell me that they were being offered this product from Europe at a substantial discount. This is a small processing plant in Quebec that also brings in additional needs from Western Canada to serve the Quebec market. They did not take the product. However, it went to the United States and depressed our markets in the Eastern U.S. Then the Japanese discovered that mountain of surplus and just used it to ratchet down our price. That is what we are facing.
The good news story here is that the Europeans have put a cap on the number of tonnes of dehydrated forage they will subsidize. They have reached that cap and they will not expand it. We are working with the Europeans to grow the pie bigger. We are sharing information on how we educate the users of these products and get more consumption going. Our answer is to eat our way out of the problem.
Senator Fitzpatrick: Your presentation was helpful because you incorporated into it a business plan. It helps us to appreciate the kind of consideration you have given as an industry to your problem.
My question is supplementary to Senator Fairbairn's. You indicated that the industry has been operating for some 30 years, but in the last several years the level of production has doubled. What has the growth curve been over the 30 years? How much has it increased in the last several years? It looks like you had a profitable margin from 1995 to 1997.
In terms of marketing, is your competition the United States? What share of the market have you had and what share of the market do you enjoy at the present time? I appreciate the problems that you have enunciated and I understand the subsidy problem, but how much of it is the fact that you got on to a good thing and others are getting into the same business and are strong competitors of the industry in Canada?
Mr. Benoit: When we got into the industry, the U.S. had 50 per cent of the Japanese market for alfalfa pellets. We have progressively knocked them out of that market. We have had over 95 per cent of the Japanese market for dehydrated alfalfa pellets in recent years. The U.S. has other crops. They can grow other things. We have just had to out-compete them and take the market, which we have done in Japan for the dehydrated alfalfa pellets.
With our other product, which is the alfalfa cube, the Americans are very tough competitors. We have gradually gained some market share, but we only have 25 per cent. The Americans have most of the rest into Japan. Because of our vast land base and the limited number of crops we can grow, we have the advantage; we also have natural gas for dehydrating. The U.S. has been our competitor. We have done well in taking some market share from them on the dehydrated alfalfa pellets. The U.S. has shifted their cubing and bales industry closer to the West Coast, where they have very good access to containers, irrigation. They are based on mainly a sun-cured product, where they can turn the water off and depend on the sunshine to do most of the dehydrating. Hence, that makes them a tough competitor in the cubes.
Spain came into the Common Market and thus started getting this subsidy. It had been a good market for Canada. They were producing 50,000 tonnes. Now Spain alone, because of the subsidy, produces more than triple all of Canada. They have expanded their market simply because of that subsidy. That is what we have been up against.
The good news is that the Europeans are mainly targeted at their own self-sufficiency.
Senator Fitzpatrick: What percentage of your sales would be sold into the Asian market and what percentage would be sold into the European market?
Mr. Benoit: Nearly 80 per cent of our exports go into the Asian market. We have been knocked almost completely out of the European market as well as the North African market, which we developed in Morocco. Strangely enough, however, we are getting small quantities into Portugal, Morocco and even Spain at the present time. But most of our market is Japan, Korea, Taiwan, then the U.S. We do get some into the U.S, and we are working on markets in Mexico. However, our largest market is Asia.
Senator Fitzpatrick: Can you give me some idea of what the subsidy quantum would be on a unit basis from U.S. production? In other words, what disadvantage are you being put at as a result of a U.S. subsidy on a unit basis? That is an oversimplification, but give us an idea of the kind of disadvantage you are at.
Mr. Benoit: The U.S. situation is quite different. The U.S. farmers are getting $22 billion. It is not a specific subsidy to alfalfa. It goes generally to the farmers. They are free to switch to alfalfa, and they receive a subsidy.
In the U.S., it used to be that the money was targeted at the program crops, wheat, corn, specific crops, whereas now that money just flows generally to the farmer. That is causing a switch back to alfalfa, which is giving us a little more competition.
The problem with the U.S. and the European subsidies is the creation of this depressed grain and protein meal market on a global basis. Because everything else is in the tank, we are pulled into the tank with it. It is a generalized thing with the U.S. rather than a specific subsidy to alfalfa.
Senator Oliver: Many of the questions I wanted to ask have been answered, and I thank you for that.
When you were giving a description of this product, you said that the farmer grows the alfalfa in the field, it is cut, it is taken into the plant, it is dehydrated and is made into cubes and pellets. Whatever the result of the cubes and the pellets is from that farm, that determines how much money the farmer gets for it.
If that is correct, how do you really measure productivity per acre? Is there no measure of how much your yield is per acre and if he is being paid by the end product? If the manufacturing was not all that efficient, then the farmer would suffer. If I am right, is that not one of the major problems you are facing, that the farmer should be paid for his yield and for his productivity and not for the end product? Do you understand my question?
Mr. Benoit: Yes, I think I do. The farmer contributes, say, 100 acres. All of the field operations are left to the processing plant, the harvesting, et cetera. As the material comes off the field, it is kept separate and the number of tonnes of processed product produced are measured. Typically, on dry land in extensive operations in the northern parts of Alberta and Saskatchewan, the average number of tonnes of processed product per acre is two. If a farmer has some very productive land, land that is producing three tonnes, he gets paid for three tonnes; if there is a drought and he gets a half a tonne, then the farmer shares in the hurt and he gets paid for half a tonne.
Senator Oliver: How does Canada's productivity compare to the productivity of farmers in both the United States and Europe? I am talking about yield per acre of the raw alfalfa before it goes to the plant?
Mr. Benoit: There is a tremendous difference even within Canada. In the irrigation area of southern Alberta, typically we would get four to five tonnes per acre. In the northern dry land areas, it is about two tonnes per acre. Typically, in Canada, we get two to three cuts. In California, where they might get eight or ten cuts, they are cutting alfalfa year round, they would get triple or certainly double the level of what we would get on irrigated land. The productivity is much higher per acre.
Surprisingly, we can still compete because our land costs are lower and the scale of our operations are large. We have to work against those odds.
The seasons in France and Spain are longer. They are getting four cuts rather than two to three. Hence, their per-acre production would be nearly double ours in many cases. There is a big variance. We have to contend with that and keep our costs in line.
Senator Rossiter: How does the quality of the product compare?
Mr. Benoit: One of our real strengths is the dehydrated alfalfa product. On the same day it is cut, the fresh-cut green material is being taken to the plant and dehydrated. There is really no opportunity for the sun or the rain to deteriorate the alfalfa to any extent before you capture the nutrients and the vitamins in that process dehydrated alfalfa pellets.
In terms of the cube, our product is actually discounted as compared to the sun-cured product of eastern Washington, Oregon or Utah, where they have desert-like situations with irrigation and sunshine. Our weather is not as friendly. We often have more weather damage because we are working from a sun-dried bale that is then reprocessed. Our dehydrated alfalfa pellets are as good as any in the world. The French can produce a similar level of quality, but on the cubes, the California-style weather is more friendly to producing a better quality product.
Senator Rossiter: What are the size of the cubes and the pellets?
Mr. Benoit: The pellets are just a bit bigger than a pencil and an inch long. They break up. The cubes are various sizes, but an inch and a quarter in diameter is the larger cube. There is one that is three-quarters of an inch. There is greater fibre length in a cube than there is in a pellet. That is advantageous for a dairy cow.
Senator Oliver: When you were giving your evidence, the most significant thing you said, in my opinion, is that your industry must adjust to new products and to new markets. You have answered that in part, at least, because you said in terms of new product you are looking at dehy bales, and you explained that. Then you said that you are trying to get back in poultry food and the human health food market.
Are there any other areas that you are looking at now? Before looking at subsidies, I am wondering whether you have canvassed all the possible markets for your products?
You did not say anything about new markets. Are you looking at South America; are you looking at Mexico; are you looking at other parts of Africa for your products? Most of your product -- 80 per cent -- goes to three countries, Japan, Taiwan and Korean. What about other countries and opening up other markets?
Mr. Benoit: In a typical year, we would export to maybe 15 or 20 countries. We have small markets in many countries. We are working very hard on the China market. There is a tariff problem there right now, but our government has done a good job in the bilateral negotiations to get at that tariff situation. We view China as a long-term market. I was there a month ago. We are getting some product into China, but it is a very low-priced, cost-competitive market. However, we think there is a long-term future there; it is worth the effort now.
We are scouring the globe at all times to find those new markets. We feel that, for the short to medium term, re-establishing the Japanese market is the best bang for our buck. There are some things we feel we can do there that will help us gain the most yards.
Our companies are working very actively in a number of other markets. Mexico has potential and we are getting some success there. We have looked at Central and South America. We are looking at our products going into fish foods. On our last trip to Japan, one of the focuses was the environment. Our products can be mixed with silage when they are making it, if it is too wet to absorb some of the juice; as well, the very nutritious alfalfa pellet or cube can be added to the silage pit. We are looking at those kinds of markets. We have brain-stormed as to what we can do.
The dollars are not there to move forward with some of the things that our guys should be pushing forward with and exploring further.
The Chairman: The AIDA program has not worked for the hurting farmers. You keep saying that you want a parallel program. Your graph shows a loss in the current year. However, you would gain some very significant payments if you were in the AIDA program, contrary to a farmer getting dried out and not having a high three-year average or getting hailed out and not having a high average and getting nothing. In the AIDA program, the wrong people are getting the money.
You come to the government asking for a parallel program. It would have to be quite different in formula to the AIDA program for the farmers. Being active in the farm community, you know that the people who are hurting the most are not getting the money. The Peace River district where you operate is one of those areas where they have had very, very poor crops. Seventy per cent of nothing is nothing. What do you mean by "parallel"?
Mr. Benoit: We have taken the AIDA program and done a very detailed calculation of how that would work if applied to our total industry. That calculation comes up with the $9.7 million in payments for 1998 and $22.7 million in 1999. We started with that calculation because that is the program that is out there. We feel that it would be fair for us, because of our many parallels to a farming operation, to get what the farm operations are getting. Things were going along okay until three things hit us all at once: The Asia crises, the European subsidy, and the transportation problems we went through. We have taken such a severe income hit that the AIDA calculation actually would work for us.
The Chairman: That is the basis of my question. The problem is that it is not working in the average farm situation where they have really been hurting. Their averages in the last three years have been so low that 70 per cent of that average gives them no return.
Mr. Benoit: We are suggesting that we go back to that base year that was selected as a representative year for our industry. The Peace River area has seen four years of disaster. There have been two years of drought and two years of a mudfest before that. A fair representative year was used for the WGTA buyout. The general AIDA calculation could be used to give each of our plants its fair percentage of whatever pot of money is made available. That would work for us.
Senator Spivak: How do the input costs for alfalfa compare to others in the cereal grains? Is there a lower input cost for growing the kinds of things you need to produce your pellets?
Mr. Benoit: There would generally be a lower input cost because, first of all, alfalfa is not fertilized. It is a nitrogen fixing crop and it adds nitrogen to the soil.
Second, alfalfa is a perennial. It is planted once every three or four years but it is harvested two to three times. It requires large, expensive equipment.
There are substantial costs in the harvesting and dehydrating.
Senator Spivak: Is this all for cattle or is it also for hogs?
Mr. Benoit: It promotes healthy digestion in sows. It is also used for poultry and is excellent for horses. Believe it or not, a quarter of the French production -- and France is typically the largest European producer -- goes to rabbits. It is almost a perfect feed for rabbits. It is used broadly, from camels to gerbils.
Senator Spivak: This could be a growth industry with lower input costs, more environmentally friendly and better feed than some of the other chopped up animal parts for live stock. Am I correct in assuming that?
Mr. Benoit: Alfalfa is the queen of forage. It is an excellent product.
Senator Sparrow: I would comment that the gophers love alfalfa, too.
Mr. Benoit: That does not help us much.
The Chairman: What is your cost per bale, and what can you sell it for? You said $180 a tonne in Europe. That is a pretty expensive bale of hay. What can you produce it at?
Mr. Benoit: Our landed price in Japan for dehydrated alfalfa was $180 U.S. a tonne, landed in Japan. It is now $120 because of the severe drop. That is for the dehydrated alfalfa pellet. The cube was more than that, and it has dropped a similar amount.
The Chairman: If you can produce five tonnes an acre, that is getting close to $1,000 an acre return for five tonnes?
Mr. Benoit: Yes.
The Chairman: That is better than wheat?
Mr. Benoit: Well, it is usually two tonnes per acre. There is also the transportation cost of getting it to Japan.
The Chairman: I want to thank you for a very detailed report.
Now I want to welcome the representatives of the Canadian Fertilizer Institute.
Mr. Roger Larson, President, Canadian Fertilizer Institute: CFI would like to thank you for the opportunity to appear before you this morning to talk to you about transportation.
I will outline briefly who the fertilizer industry is and who our members are; I will talk to you about shipper needs for competitiveness and touch on the current rail environment in Canada; I will address in detail CFI's recommendations for the Canada Transportation Act review and I will spend a couple of minutes talking about some marine issues that are of importance to our industry, including the importance of marine ports and, in particular, the Port of Vancouver. At the end, if we have time, we can talk for a few minutes about Canpotex.
The Canadian Fertilizer Industry is an important employer of primarily rural Canadians. We provide about 12,000 jobs. At least half of these involve very high technology, are highly paid and highly skilled jobs. The industry produces 24 million metric tonnes of fertilizer. Seventy-five per cent of what we produce is exported. The dollar value at point of export is about $3.2 billion. The retail value of fertilizers at the farm gate in Canada is another $2 billion in domestic agricultural sales and probably $0.5 billion in domestic industrial sales.
Elemental sulphur exports add another five to six million tonnes, with a value of $0.5 billion. Fertilizer is a very important export commodity and transport commodity for the Canadian rail industry. We represent about 15 per cent of total Canadian rail volume. To put that in context, grain is about 30 per cent. We are two of the major players in transportation. When we talk about transportation, generally, we are not talking about passengers; we are talking about bulk commodity industries, like ours, that are reliant on the rail industry for their existence and for their access to their markets.
In the handout, you will see a map outlining the distribution facilities and production facilities across Canada. Just to illustrate, we have two potash mines in New Brunswick. We have a nitrogen fertilizer plant in Southern Ontario and a small one in Eastern Ontario. We have a major nitrogen plant in Manitoba. We have six potash mines owned by PCS; IMC has three facilities; Agrium has a potash mine; Saskferco has a nitrogen fertilizer plant and then a couple of plants in Northern Saskatchewan. In Alberta, Agrium has four manufacturing plants. Canadian Fertilizer, which is owned by the co-ops, has two plants in Medicine Hat. Orica, Sherritt, Tiger, and SulferWorks have some sulphur production plants. This is where about 80 per cent of our production resides. We have an ammonia plant on the coast at Kitimat, and Cominco has an amonia sulphate production at Trail. Our ports: Kitimat obviously, Vancouver, Portland, Thunder Bay, Great Lakes, going south. This is an import terminal. These are import terminals and this is an export. We are pretty much interested in rail and marine transportation wherever it occurs in Canada.
I will now address shipper needs for competitiveness. The world market factors that we face as a commodity industry producing, say, urea are similar to the world market realities faced by our major customers, the Canadian farmers and the global farmers. Prices decline through time in a commodity market. Both have very similar price trends. We both face a tremendous need to be globally competitive. Both Canadian grain producers and the Canadian fertilizer industry are dependent on international trade for our marketing success. If you look at the structure of our industry, if you look at Canadian consumption, the size of our industry would be a fraction of what it is if we could not compete in export markets.
Rail is a very significant part of our costs in both of our industries. In fertilizer, it typically represents 25 to 40 per cent of the delivered value of the product. In that sense, rail can be the single largest cost factor in delivering our product to our customers, even exceeding the cost of mining or manufacturing the product. Because of this, if we are going to be internationally successful, globally competitive, we need to have the most efficient and cost-effective rail transportation system that our society can provide for us.
That is probably the same message that you would get from the Western Canadian Wheat Growers Association, or the prairie Pools, or the Wheat Board.
The Canada Transportation Act of 1996 tilted the legislative balance in favour of the railways by creating new barriers to competitive access relief. I am referring specifically to the substantial commercial harm clause, often referred to as section 27 or section 27(2).
The 2000 CTA review must start no later than July 1, 2000. I would note that there is no reason that it could not start earlier. Some of the review has already started through the various grain reviews following the Canadian Wheat Board complaint on the "winter from hell" -- if I am allowed to use that expression here. Justice Estey's review and Arthur Kroeger's implementation process have certainly, at least in a peripheral way, been dealing with some of our issues relating to the Canada Transportation Act.
CFI has developed some specific recommendations for the 2000 review. We would like to see the government improve and simplify competitive access by repealing the substantial commercial harm test and by replacing two of the provisions of competitive access. Those are CLRs, or competitive line rates, and another provision called extended interswitching. Our recommendation is that the government repeal those provisions and replace them with something we call a competitive access rate provision, CAR for short. We would like to suggest a limited form of running rights with a reverse onus test. Reverse onus means a reverse public interest test where the railway would need to show why the running rights should not be granted rather than what we currently have where the applicant has to show the public interest for granting the running right.
Finally, we have some recommendations on a final offer arbitration for a streamlined and flexible, nevertheless still single tier, process. We feel that this proposal on arbitration would address many of the concerns that were raised for a simplified and lower-cost arbitration system without bringing in potentially damaging barriers to this very important provision.
Improving and simplifying competitive access. I have talked about substantial commercial harm. I am sure many other people have talked to you about it before. Regulated interswitching is one provision of the act that we believe is just fine as it currently stands. We believe that it is effectively used to improve rail competition, in that if one railway is supplying a plant, the other railway that is within a 30-kilometre radius can access that traffic. In fact, what we are doing with CAR is extending the philosophy of a regulated interswitch to a larger radius in order to get the shipper to an interchange where there is more than one railway to provide service.
Having done that with a competitive access rate, we do not need the other two provisions. CAR is a less regulatory policy provision than CLRs, which require an application to the Canada Transportation Agency and a hearing. CAR does not require that, so it is a simpler provision to use. In fact, you use it the same as you would use a regulated interswitch today.
CAR enables a shipper to route its traffic to or from an interchange with a connecting railway up to half the total distance under a pre-determined, set-rate formula. The rates are not set. The formula is set in the same way that an interswitching formula is set today. Then the rates are determined using that formula.
Various measures can be used, such as the railway's average revenue per tonne kilometre or per tonne mile. They currently have this information available, right to the seven digit SIC code level. Hence, it is not something that would require any investment to obtain the data so that the rate could be calculated.
I will now give you a very quick illustration of the CAR concept and how it could work. If you look at this graph, you will see an illustration that we used when we appeared before Arthur Kroeger. You have two railways running from Saskatoon to Vancouver, both CN and CP. If you are in Northeastern Saskatchewan and you are on a CN line and you are more than 30 kilometres from Saskatoon, then currently you do not have access to competition in Saskatoon under a regulated interswitch. If you are within a 30-kilometre radius, you do have access to competition. This is what we are proposing: Say this is 100 kilometres. Your first 30 kilometres would be handled under a regulated interswitch and the remaining 70 kilometres would be handled under a revenue calculation, called a CAR rate, that would get you to Saskatoon, at which point the shipper can ask both CN and CP for their best quote to move the traffic to Vancouver, to Edmonton, to a seed plant north of Edmonton that perhaps could also be captive. Time does not permit me to get into it in fine detail, but that is basically how the concept works.
Limited running rights. We do have running rights today in the legislation. Section 138 provides running rights, but they are restricted to class 1 railways. There is limited competition on running rights between CN and CP. What we believe is needed is a limited form of running rights that expands the provision to all other railways, recognizing federal safety requirements and the reverse onus test that I mentioned. Why do we need a limited form of running rights? We need to encourage greater rail-to-rail competition to encourage the growth of short-line railways and to bring about lower rates, as in other deregulated sectors of our economy.
Final offer arbitration. This received some attention in working group 3, in which we and other shipper industries were not participants. We believe that the current final offer arbitration system in the act is not perfect. It does have a bias in favour of the railways, in the sense that they do get to look at the shipper's final offer before they have to table their final offer. We do think that there is some merit in taking a look at how arbitration works. However, we do believe that the provision, as it is currently worded, does in fact work, and we would be concerned that we must be extremely cautious when we start looking at arbitration that what we do does not damage this provision.
With "substantial commercial harm" being placed in front of the other competitive access provisions, realistically sometimes arbitration is all that is left for the shipper today. So it is very important that this provision not be damaged. We, along with a number of other shipper industries, have put together proposals for an arbitration model that could fix some of the problems and provide for a shorter and less costly timeframe for smaller and simpler arbitration questions, say, those under $750,000 but without nailing down a specific dollar amount. Whether it is $1 million or $200, we believe that a model can be developed that is flexible, yet does not create two tiers. We have very significant concerns with regards to the two-tier process that was put forward and the checklist or tests that were proposed to be put in front of the provision by working group 3.
I should like to move on to the marine issue for a moment. CFI is very interested in the Canada Marine Act. We believe that the move to Canada port authorities was an important and positive move forward in the marine sector. We have some concerns with pilotage, and we have had some significant concerns with marine services fees. We hope that the coast guard will continue working with industry to ensure that the programs that they wish to sell and to charge for and cost recover are those that are needed by the shippers.
Marine ports are important to the Canadian fertilizer industry. In total, we move about 8.5 million tonnes through marine ports. Much of that volume is by Canpotex, of course.
I should like to touch on the Vancouver Port labour disruption that took place a month ago. We lost sales. We had to divert cargoes to Portland when we could and cancel and rearrange sales when we could not. There was no way that our facility at Portland could accommodate all of our customer traffic. We simply do not have that kind of duplication and overlap. Further, the rail crews and all of the other infrastructure were not established to move a significant level of product to other ports.
We did what we could but it did jeopardize our industry's competitiveness. If we lose a sale, we lose it to the former Soviet Union, Germany, Israel, Jordan, and other producers around the world. It is impossible sometimes to get that customer back. Canada's reputation as an exporter is based on the fact that we produce very high quality product and that we are able to deliver on our commitments on time. That situation jeopardized our trading reputation.
We need a long-term solution. If we cannot find one, shippers are going to look more seriously at alternatives. A few years ago, our industry invested in Portland because of our concerns with the Port of Vancouver. Today we have customers who demand that we ship through Portland rather than through Vancouver. That needs to be addressed as a public policy issue in Canada; it is an important issue. We believe that we need to establish a long-term solution. Final offer selection-type arbitration has been proposed by a number of groups and we endorse that.
In the handout, there is an illustration of Canpotex. In the interest of time, Mr. Chairman, I will not go into any details on that right now.
The Chairman: My questions are not directly related to transportation, but, in the end, whether it is fertilizer that the farmer pays for, he ends up paying for the transportation of the fertilizer as well. A major problem now for our farmers is the cost of production, and fertilizer is one of the major input costs that we have in agriculture.
My son said, "Dad, if the price of grain goes up, the fertilizer companies will just raise the price of the fertilizer and we will not be any further ahead." Fertilizer prices have not gone down. I can guarantee that. What percentage of your fertilizer cost is freight? I can tell you what percentage the freight is for the farmer. If you ship to Vancouver, what percentage of the cost is it for the fertilizer company?
Mr. Larson: It is roughly 25 per cent to 40 per cent of the delivered value of the product, depending on where the customer is. Potash delivered to the southern United States would probably be at the high end at 40 per cent. Within the Prairies, probably the 25 per cent to 30 per cent figure would be more appropriate.
Senator, I will not argue with you. However, I will try to put forward some facts. The fact is that the cost of fertilizer has gone down.
The Chairman: Not at my farm.
Mr. Larson: Perhaps you are buying more of it, sir. Two days ago I delivered our brief on fertilizer costs to the Chairman of the House of Commons Standing Committee on Agriculture and Agri-Food. I do not have a copy in front of me, but I would be happy to share that with this committee. The fact is that the price of fertilizer in Western Canada today is 5 per cent less than it was in 1981. I showed you the graph on urea prices. If you look at the prices over time, you see that since 1965 there has been a dramatic decline. This is U.S. dollars, so you could add 50 per cent for Canadian dollars today. But the price in the mid-1960s was $225 to $275, about $250 a tonne. Today it is roughly U.S. $100 a tonne. That is a price index delivered FOB the U.S. gulf, but it is a fairly good indication of the world pricing levels from a manufacturing perspective.
Anecdotally, everything I have seen, including a brief that was submitted by our sister association, the Canadian Association of Agri-Retailers, to the House of Commons standing committee in Brandon a week ago, indicates that retail fertilizer prices have tracked that kind of direction.
In an economy where everything else in general price levels has increased substantially since 1981, the fact that the cost of a tonne of fertilizer is 5 per cent less indicates that we have made tremendous investments in production capacity in our industry. Production in Canada has gone from 2 million tonnes in the early 1980s to over 5 million tonnes of production capacity in nitrogen fertilizers today. We export 70 per cent of our nitrogen fertilizer production. That supplies valuable, high-paying industrial jobs. Given where those plants are located, your son could be working at one of them if he were not a farmer. That is a legitimate and valuable industry. We live with the same kinds of demand and supply constraints that our farm customers do. We are very sensitive to the farm income crisis. We are very concerned about the economic health of our farm customers, and we are certainly very interested in their long-term competitiveness and well-being. As an industry, we believe that the Canadian farmer has received substantial economic benefit from the fact that Western Canada is one of the major sources of supply of nitrogen fertilizer in the world.
The Chairman: You have to admit and have to know, if you have followed this closely, that our farmers are not getting their input costs back. It is simply not happening. For instance, this year saw the lowest income for farmers in Manitoba in this century. In Saskatchewan, farm income was the lowest since 1933. There are some extremely serious problems there.
I have many questions about the whole area of input costs, but I will not take up any more time other than to say what I have already said.
Truckload after truckload after truckload of fertilizer moves right past my door in Saskatchewan on its way down to the U.S. The Americans have a great advantage in getting Canadian fertilizers to help produce more grain and so on. Yet, I do not hear the fertilizer companies coming to the farmers' aid when the Americans say, "Keep your durum wheat at home". This works both ways.
I have another question about that issue. How much supply have we got and what is happening to it? There cannot be an endless supply of fertilizer at Esterhazy, Saskatchewan.
Mr. Larson: Senator, I will try to address those questions very briefly. First of all, those truckloads of fertilizer from Esterhazy are potash. We would be happy to sell some of it to you.
The Chairman: We cannot use it.
Mr. Larson: Actually, agronomically you can, and our agronomists could show you how you can improve your crop yield by using a little potash in the fertilizer blends, even in Saskatchewan. We have a problem convincing farmers and demonstrating the benefits of balanced fertilization.
Canada as a whole uses about half a million tonnes of potash. That mine in Esterhazy produces over 2 million tonnes per year just by itself. We supply 95 per cent of the U.S. consumption of potash. Again, talking about the importance of international trade to our industry, with regards to your point about durum, I personally would be inclined to agree with you.
The Chairman: Perhaps this is something you can consider when it comes to dealing with the Americans. We have difficulty reaching some agreements and we are shut down on some markets. Even their farmers will come forward, those that are broad-minded enough, and say, "Look, we get some great advantages by having fertilizer from Canada to improve our production."
Senator Sparrow: Where is your competition? Is it still Mexico and Carlsbad or are there any plants of any consequence any more?
Mr. Larson: How long is the potash going to last? There is over 1,000 years' worth of identified reserves in Saskatchewan. It is going to last a long, long time. That is an ancient seabed that was laid down in the pre-Cambrian period. It is a huge reserve.
The competition is the former Soviet Union. They have reserves that potentially could be as significant as ours, although we are the world's largest producer and supplier of potash. At one time they were, but we have supplanted them. Jordan, Israel, the Dead Sea area, and Germany to some extent are competition. Carlsbad is pretty much mined out. There is very little reserve there, less than a million tonnes of production. I do not think there is any potash production in Mexico.
Senator Sparrow: Who sets an international price on potash?
Mr. Larson: The market does, demand and supply.
Senator Sparrow: Influenced by whom?
Mr. Larson: Certainly Canada, as the largest supplier of potash in the world, would be a significant factor in that. On the demand side, China is potentially one of the largest consumers. They would have a lot of influence in terms of how much potash they buy. That is why China's admittance to the WTO is very important to us, and we have been pressing our needs for a more open market in China with the Canadian government and with our trade negotiators as we negotiate China's admittance to the WTO. From our perspective, it is absolutely critical that we have a fully open Chinese market and that they not be let in on the same basis or a similar basis as India.
India would be a huge consumer of potash. Certainly the United States is. We sell 5 million tonnes to the United States. It is a supply-demand balance. It is the same as any other commodity. A small change in supplier demand can have a significant impact on price because you just switch that little bit of a balance and markets respond.
Senator Fitzpatrick: I want to ask you about the Port of Vancouver. I am from British Columbia. As you said, we have just experienced difficulties at the port. What percentage of your total production flows through the Port of Vancouver? What happens in Portland? Do they have an arbitration process?
Mr. Paul Lansbergen, Communications and Member Services Officer, Canadian Fertilizer Institute: The Vancouver port has a capacity of about 4.5 million metric tonnes and we currently ship about 3.5 million tonnes. Every time there is a threat of a labour disruption or an actual labour disruption, the shipping companies, not just the fertilizer companies, start planning ahead. If there is a hint of a labour disruption, the fertilizer companies and shippers may start planning a month out to start diverting their shipments. For the fertilizer industry, Portland is the next option. Portland has a capacity of 4 million metric tonnes. We currently ship about 1.5 million tonnes. One problem, though, is that we have to get the fertilizer to Portland. We cannot suddenly make a decision one day and then start shipping more the next. It takes time to line up the rail service and everything else.
I really cannot say anything about the labour legislation that would govern the shipments to Portland.
Senator Fitzpatrick: What percentage of your total annual production is the 3.5 million tonnes that you ship through Vancouver? Is that 10 per cent or 20 per cent? How much do you depend on Vancouver for your supply?
Mr. Lansbergen: About 12 per cent. Our total production is 24 million metric tonnes a year. Most of the shipments through Vancouver would be potash.
Senator Fitzpatrick: What has your experience been with disruptions in Portland? Have they had as many disruptions as Vancouver or has it been calm in the labour market there?
Mr. Lansbergen: I would have to say it has been much calmer. That was probably one of the reasons that Portland was chosen for further investment. The industry just built storage facilities at Portland to handle more shipments. They are looking at long-term shipments through Portland just in case.
Senator Fitzpatrick: Do you not have higher rail costs to Portland, though, than to Vancouver?
Mr. Lansbergen: If you have a ship caught at the port, there are a number of increased costs while you wait for the labour disruption to end. It would be much easier, just in stress level alone, not to mention the relative costs, to go through Portland.
Senator Sparrow: Can you give me an example of how the final arbitration process would work between the railways and the industry?
Mr. Larson: I have a model I can run through, although I have never been personally involved in an arbitration. Everything I know about arbitration is from reports and people I have talked to.
We are suggesting that you could develop a model where you could have a simultaneous exchange of final offers between the two parties, the shipper and the railway. The railway has reasonably said that they need to know what they are responding to, and that has been the problem. In an arbitration, it is the shipper who initiates the action and, effectively, as the saying goes, pulls the trigger on the action by submitting for arbitration. Until they have written up an offer that fully defines exactly what their traffic is, how many tonnes and all the other parameters, including CAR supply, there is not exact clarity as to what the railway needs to respond to. That is why under the current legislation the railway has ten days to review the shipper's final offer before making its final offer back to the shipper, with a copy to the arbitrator.
The problem with that, of course, is that the railway people also see the shipper's rates ten days before they have to file their final offer. We are suggesting that perhaps you could build a model where everything is there except the rate. Then at the end of the ten-day period, both parties could show their rates at exactly the same time. That way you would achieve a level of balance.
Much has been said about the time and expense involved in an oral hearing. With the second tier of arbitration, you would not necessarily have an oral hearing. We are not convinced, looking from the outside, that it is a good idea not to have an oral hearing. That is the opportunity for shippers to go in front of an arbitrator in a judicial proceeding and plead their case for maltreatment. I am not sure that shippers would not want that opportunity.
That having been said, we feel that if both parties agree and the arbitrator concurs, an oral hearing could perhaps be dispensed with in simple questions, in which case the arbitration could be finished within maybe 30 days or less and the costs of that hearing could be avoided. On the other hand, we believe that it is important that the decision on whether or not an oral hearing should be conducted take place during the process, not prior to the process. That is why we are adamant that you need to keep a single-tier process in place and perhaps place these options within the decision making timeline, not before you have filed your case.
Senator Spivak: I was on the Transportation Committee when the review went through. We did try to make amendments on this side to get that captive shipper a better deal. However, we did not succeed.
What is your industry doing to make the farm crisis known, that is to say, to influence government to look at the farm crisis as an immediate and urgent priority? Is your industry doing anything?
Mr. Larson: We have had numerous conversations with the Minister of Agriculture and Agri-Food over the last year or so as we have seen the farm income crisis. This issue started developing a year ago or even more than a year ago. We had a sense that this was coming.
We have been working on a number of parallel tracks. We have come out with a discussion paper on climate change that suggests that one of the potential partial solutions to both the farm income crisis and climate change might be first of all to recognize that agricultural soils are a tremendous potential sink for carbon. That carbon is good for Canadian agriculture because it is soil organic matter. We know that there have been major efforts within the Soil Conservation Council of Canada, the Senate and the House of Commons to promote and improve soil conservation. We believe that by adopting better farm technologies, newer farm technologies, minimum tillage procedures, and adequate fertilization of crops, you can substantially increase and rebuild soil organic matter. This is not a forever thing, but if you are looking at the next 10 years to 20 years, we believe it is potentially a substantial part of Canada's obligations to Kyoto, perhaps in excess of 20 per cent. We have completed some research with the University of Saskatchewan that shows a very significant potential.
Farmers need assistance and incentives to adopt the farming practices that can possibly be the lowest-cost method of Canada dealing with greenhouse gases. We have put forward this discussion paper as a way that we can create a win/win.
Senator Spivak: I was not aware of your paper but I am aware of that particular proposition to help. Can you let us have some copies?
Mr. Larson: Absolutely.
Senator Spivak: That is a very worthwhile thing and I support it completely. We have an urgent, immediate crisis here, but somehow it is not being addressed. I cannot stress to you enough, and I am sure other members here agree with me, how important it is to get the magnitude of this crisis acknowledged and to get the right procedures in place. The farmers are hitting a brick wall. We really need all sectors of the farm community, the farm industry, the farm economics to help out.
Thank you very much. I look forward to that review with section 27(2), because we went through it once and hopefully this time we will get it right.
[Translation]
Senator Ferretti Barth: You have described all the problems you have in Western Canada. I would like to know the percentage of fertilizers used in Quebec. Isn't Quebec rather penalized regarding transport costs?
[English]
Mr. Larson: Actually, it is not disadvantaged in some ways, some would argue. It is advantaged because of its access to water.
The fertilizer consumption in Quebec is about half a million tonnes out of a total of about 5 million tonnes in Canada. A substantial portion of the fertilizer that is used in Quebec is imported through the Port of Montreal. We are a free trade industry. There is a free flow of products into and out of Canada. We have absolutely no tariff or border or technical protections whatsoever. If you can deliver urea into the Port of Montreal from the Arab Gulf cheaper than you can rail it from Western Canada, then it comes in by boat from the Arab Gulf. That is exactly what does happen.
We probably supply most of the potash needs for Quebec, keeping in mind that we have two mines in New Brunswick. We have substantial supply available. The phosphates for Quebec would come primarily from Florida. There would be some Saskatchewan potash and some New Brunswick potash in Quebec. About a million tonnes of finished fertilizers are imported into Canada. Of the 5 million tonnes we consume, about one million tonnes is imported. It is a balance.
[Translation]
Senator Ferretti Barth: With regard to transportation, you say that you would like more competition and that the best way to do that is to broaden access to the railways. Can you tell me how you are going to present those access programs to transportation companies?
[English]
Mr. Larson: I was remiss in not responding to you in French and I apologize for that. I grew up on a farm in Saskatchewan. Je m'excuse; je suis anglophone.
Our industry is not as hindered as some other industries are by lack of access. Something like eight of our potash mines in Saskatchewan have two railway tracks, one CN and one CP, into the mine site. About half of our nitrogen fertilizer production facilities have dual access, where both railways service the plant. In fact, to a significant extent, we have direct dual access. We do find that in those situations our members' experience would be that the railways do in fact compete for business.
Some of our plants have interswitching; that is, where they are within a 30-kilometre radial distance of the other railway, they are able to access the second railway with interswitching. Anecdotally, we find that the competitive elements are pretty much the same there as if there were actually two railway tracks directly into the plant or mine. However, beyond that 30-kilometre distance for regulated interswitching, there is no dual access.
We are trying to find a formula that reasonably compensates the railway for the service of delivering your goods to the interchange, because compensation is an important part of the formula, and yet at that point creates an environment where both railways are able to bid for your business, just as they could if you had both railway tracks right into your plant. Since in Canada we have two railways, not six or 10, the level of competition we are going to achieve is necessarily limited. We are seeking a public policy balance that would utilize the fact that we have two railways in Canada to the greatest extent that is reasonably possible and that is to find ways to give shippers access to both of those class 1 railways.
With respect to exporting to the United States, you might look at access to CSX or Burlington Northern, or something like that, but for many shippers in Canada those are secondary.
I should like to point out that we have been putting forward our proposal on CAR. We proposed it in our transportation forum last June, where we invited both railways, the federal and provincial governments and the grain industry participants. Most of the grain companies in Canada are members of the Canadian Fertilizer Institute, so we have a good working relationship with significant parts of the grain industry. We have repeatedly put it forward in direct meetings with the railways. We suggest that it is a reasonable and balanced proposal that could go forward to improve the existing legislation.
Given the animosity that was created in working group 3 with regards to some of the discussions on open access, we think that our proposal for a more limited form of limited running rights and CAR is perhaps a compromise that all parties could live with and that would in fact benefit the grain industry as much as it would other shipper industries. Grain is a very important part of the transportation industry. Our members who are grain companies have not had any concerns with our proposals. In fact, I believe yesterday a letter went to the minister, signed by six major industry associations, that proposed that our concept of CAR, competitive access rates, be put forward for serious consideration. It is gaining support as an option that bears some reason for further evaluation.
The Chairman: I should like to thank you for appearing today. It is obvious that we could spend much more time on different areas in regards to the fertilizer companies. Perhaps we will have you back to do that.
Mr. Lansbergen: We would certainly welcome an invitation to return.
The Chairman: We will now deal with the organization of the subcommittee on forestry. Senator Fitzpatrick and Senator St. Germain have done some ground work on this. Senator Fitzpatrick, perhaps you would like to speak to begin with.
Senator Fitzpatrick: We met with Mr. Armitage yesterday and also in June. We talked about the formation of the subcommittee to deal with the forestry industry and, in particular, focused on the softwood agreement that is due to expire 18 months from now, which is significant to all parts of Canada.
My understanding is that this would be a subcommittee of five. We have talked to senators who are prepared to serve on the committee. We would like to have it established now so that some preparation work can be done over the recess period. We would expect that we would have hearings of course in Ottawa, but also believe that it is important to visit the other regions of the country. Because this is a particular issue dealing with the United States and there is some real debate on the softwood lumber agreement in the United States, we may wish to visit Washington as well.
That generally covers our discussion. Senator St. Germain, would you like to add to that?
Senator St. Germain: Mr. Chairman and members of the committee, it is important that we get into this because we are seeing a change that some of us predicted in the past. The softwood lumber quota has really changed the market and we are losing some of our traditional market in the U.S. It is key that we start looking at how we can help and possibly make recommendations that would be useful by looking at the industry and maybe by working with the Americans.
Apparently Sweden and some of the countries that have never shipped into the United States are now able to ship into the United States competitively with lumber. We used to hold and control that market 100 per cent. It is important that we look at that. Senator Fitzpatrick and I have a personal interest, being from British Columbia. But it is important that we get onto this as quickly as possible and hopefully we will get the support of the rest of the senators.
Senator Fitzpatrick: There does not appear to be a consensus within the industry and within the different sectors as to whether or not managed trade or free trade is the preferred process. I anticipate that we will have strong arguments from witnesses advocating one or the other. It will be an interesting and perhaps difficult study for us.
The Chairman: Are we ready to move on this?
Senator Fitzpatrick: Yes. I move:
That a Subcommittee on Forestry be created and that it be authorized to study the present state and the future of the forestry industry in Canada;
That the Subcommittee be given the powers extended to the Standing Senate Committee on Agriculture by Rules 89 and 90 of the Rules of the Senate of Canada, with the exception of the power to report its findings to the Senate;
That the Subcommittee be comprised of five members, three of whom shall constitute a quorum;
That the initial membership of the Subcommittee on Forestry be as follows: the Honourable Senators Fairbairn, Fitzpatrick, Gill, St. Germain and Stratton; and
That substitutions in membership be communicated to the Clerk of the Subcommittee.
The Chairman: Are we all in favour of that motion?
Hon Senators: Agreed.
The Chairman: Carried.
Mr. Blair Armitage, Clerk of the Committee: If it is the wish of the committee, we can resolve into the subcommittee now to have the organization meeting, otherwise we can wait until February.
Senator St. Germain: We should do the organization now if it is not too time-consuming and if the other senators concur. Then we might be able to get some researchers in place and get the show on the road quicker than if we wait.
The committee adjourned.