Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 22 - Evidence - November 4 meeting
OTTAWA, Tuesday, November 4, 2003
The Standing Senate Committee on Agriculture and Forestry met this day at 5:36 p.m. to examine the issues related to the development and domestic and international marketing of value-added agricultural, agri-food and forest products.
Senator Donald H. Oliver (Chairman) in the Chair.
[Translation]
The Chairman: Honourable senators, I welcome you as well as our observers. I would also like to welcome Canadians who are listening to us on CPAC and the Internet.
[English]
Over the last few weeks, we have listened to various witnesses who explained to us the issues surrounding value- added products. This evening, honourable senators, we have invited the President of the Canada Beef Export Federation, Mr. Ted Haney, to provide us with an overview of the issues his industry is facing in relation to value- added products with the objective of improving opportunities for farmers.
I invite Mr. Haney to make his presentation. Following your presentation, honourable senators will have a number of questions to put to you.
Mr. Ted Haney, President, Canada Beef Export Federation: Thank you for the opportunity to present to you here this evening.
The Canadian beef industry has been in the business of adding value in Canada for over 400 years. The first cattle arrived from Europe in the early 1500s. They were, at that time, designed to provide meat for settlers, which was the beginning of Canada's settled history.
In more recent years, our production in the Western Prairies as well as in Ontario has increased through opportunities, first, in Canadian urban centres, and, second, to markets outside our boundaries.
Our most recent history from an export federation perspective began in 1990, when the Canadian industry began a significant increase in cattle production, combined with beef processing, well increasing our supplies of products beyond Canada's own needs. This is truly value adding at the very far edge, because all of the value that we put into product leaves Canada and becomes income to our nation and provides opportunities for growth throughout our economy.
In 1990, our industry exported 85,000 metric tons of beef to the United States; and 7,000 metric tons to Asia and Mexico. Our industry knew we had a dependence problem on the United States. Over 95 per cent of our exports were destined for the United States, and that market was becoming increasingly protectionist. We had defended ourselves from various countervail challenges. We had the constant spectre of anti-dumping charges against us. We had the possibility of other trade restrictions in the form, in early years, of border frictions; later on, it came to be country of origin labelling. The federation was founded in order to increase value-added exports and to diversify away from or to lower our dependence on the United States.
Coming forward to 2002, the 12 years that this organization has been in existence, our exports to the world increased to 520,000 metric tons or $2.2 billion. Our exports to the United States made up 373,000 metric tons or $1.7 billion. Our exports to those markets of interest to the Canada Beef Export Federation had grown at an astonishing rate, reaching $470 million and 126,000 metric tons in 12 years.
That progression has been valuable to our industry. It allowed for the investment in two world-class beef processing facilities in Western Canada and significant investments to increase the scale and capacity in existing beef processing establishments in Central Canada. These investments have been well in excess of Can. $500 million. Those investments and the resulting jobs have been, again, a value to Canada's economy.
Today, our industry employs well over 100,000 people directly in the jobs of cattle production, beef processing, and the direct service-related industries. About 60 per cent and up to 70 per cent of our production is exported. Further growth for our industry is predicated upon improved access and increasing consumption of beef outside Canada. In Canada, we are a mature industry. Beef consumption increases some, it decreases some, but it remains basically stable. Our expansion and our prosperity come through increasing sales to Asia and Mexico.
Looking forward to the year 2010, we believe that we will be able to increase our exports to Asia and Mexico from the current $470 million to $1.1 billion. That will provide more than 100 per cent of our growth because, during that period of time, we expect exports to the United States to begin to fall as we redirect, for profitable reasons, Canadian beef products to markets further away.
Our primary needs as we move ahead are related both to domestic policy and international policy. For domestic policy, the Canadian beef cattle production and beef processing industry requires an investment friendly environment where corporate taxation is competitive with our other regions where this worldwide investment can flow, whether it is to the United States, Australia or New Zealand.
We need labour mobility as we have enjoyed labour mobility, and we continue to need it to have new production employees move to towns, such as Brooks, Alberta, High River, Alberta or Guelph, Ontario, to seek employment. In many cases, jobs in our industry provide the first significant employment for new immigrants to Canada, a true value to people arriving in our country and a necessary requirement for these plants to run at ever-increasing rates.
Internationally, we require improved market access and we require more stability in the rules that guide our trade. For example, we have to thank the United States for providing partial access to our products in the midst of our BSE crisis, but we also note with some degree of concern that even the United States has not granted wide enough access to our products to eliminate or to bring to an end the crisis in our industry.
Based on trade concerns, the U.S. began to import boneless beef and liver from animals under 30 months of age. Then they shared our opinion that Canada's BSE is minimal thereby indicating that all non-specified risk material beef products from all ages of cattle, as well as live cattle born after the ruminant feed ban for feeding purposes, processing purposes and breeding purposes, should be allowed for trade. We are frustrated that the implementation of worldwide scientific-based guidelines are not being followed, even by our best trading partner.
More generally, we face barriers in the form of high tariffs. In Japan we have a 38.5 per cent tariff. Our industry's belief is that, if that tariff were eliminated, and that is a partial goal within the current round of the WTO, an additional 550,000 metric tons of beef would be imported by that nation. Canada, capturing 10 per cent of that increased level of exports, would ship an additional 55,000 metric tons or $150 million to Japan. Instead, in the current environment, Japan has triggered a safeguard that has increased our tariff from 38.5 per cent to 50 per cent. They did that as a protection system as the market recovered to normal import levels after their BSE crisis in 2001. Just that small tariff increase, from 38.5 per cent to 50 per cent, has led to an approximately 20 per cent drop in beef imports by Japan, beginning immediately after the increase in tariff.
That demonstrates that high tariffs are a barrier to trade. Increasing tariffs lead to reduced trade, and we believe it also confirms that decreased tariffs will lead to higher levels of trade and prosperity for our industry.
Similarly, in Korea we face a 40 per cent tariff in that market. Through elimination of that tariff we believe that Korea would increase its imports by 200,000 metric tons.
Our share of that, again 10 per cent, approximately 20,000 metric tons, would provide our industry with $60 million in new exports. Just those two countries alone would give us over U.S. $200 million in new sales and, again, would provide our industry with additional ability to grow and to produce higher levels of revenue from each animal, always through the competitive process, that wealth being transferred back to the cow-calf sector.
An example of a market that demonstrates efficient trade through a lack of market protection is Mexico. In 1995, when Mexico, Canada and the United States implemented the North American Free Trade Agreement, our exports to that country were small: 3,000 metric tons or $4 million, which is a minimal amount. It makes little contribution to the health of our industry. Based on the tariff-free access that NAFTA gave to us, allowing our products to enter that market on a cost-competitive basis, combined with the openness of their economy, leading to increased investment and improving incomes and life styles in Mexico, our share of that market increased from an approximate 5 per cent level to over 20 per cent. Our sales in 2002 were 76,000 metric tons — $283 million worth of beef. That was only possible through the elimination of tariffs within the North American Free Trade Agreement.
Therefore, our primary long-term impediments to continued growth in value-added beef production lies in the world of international trade rules; in the short term, resumption of access through our BSE crisis; in the medium to long term, the elimination of trade distorting tariffs, while always ensuring that the rules of trade are guided by an objective third party so that we do not have to take major trading partners head on to try to maintain our trade.
The Chairman: Thank you very much, Mr. Haney. I will ask the deputy chair, Senator Wiebe, to take over the conduct of the meeting now.
Senator Jack Wiebe (Deputy Chairman) in the Chair
The Deputy Chairman: The reason they make me take the chair is so that I will not ask so many questions.
I know that we may never get back to the trade situation we had before BSE. However, I do believe that we have a chance of getting back. We will be operating under new rules and guidelines.
My first question relates to one of our concerns as a committee and why we are studying this issue. How do we go about processing more of the raw product that we grow here in Canada? Why are we exporting so much of the live product, especially to the U.S, to have it fattened and processed there? The U.S. is then has the advantage of providing more jobs, and it benefits from the sale of grain used to feed the animals.
Mr. Haney: We have a history that has attracted investment in our industry. It is a good lesson about where we need to go to attract future investment for our value-added processing.
Canada, until the mid-1980s, was a net importer of processed beef products and an exporter of live cattle and grain products. As the existing corporate base in Canada, which included many smaller scale, non-world-class efficient beef processing plants, began to engage in world trade, Canada's production advantages began to allow us to increase exports. Therefore, in 1990, again, our worldwide exports had increased to 94,000 metric tons or $260 million. That triggered an investment by Cargill Foods in a world-class plant in High River, Alberta, again, about a $250 million investment, to build a processing plant that will handle about a million cattle a year. That investment allowed those cattle to stay in Canada and produced about 350,000 metric tons of processed beef products that were, by and large, in excess of our own domestic demand. Through improvements in market access, that product was starting to flow into the United States, into Mexico a bit, but new processing volumes were flowing primarily into Asia.
In the next five years, our exports increased to 221,000 metric tons, or $660 million. We had proven ourselves to be efficient in marketing Canadian beef in internationally competitive markets. That attracted a new investment by what is now Tyson, or IBP at the time, in Brooks, Alberta, to acquire and vastly expand Lakeside Packers, involving another investment of between $200 and $250 million in that facility.
Our exports then increased from 221,000 metric tons to 520,000 metric tons. The extra 300,000 metric tons that that establishment was processing went directly into exports.
We believe that our existing processing base will take us on up to our 2010 goal of around $1.1 billion. At that point in time, we think there will be room in Canada for another — in today's dollars — $200- to $250-million investment for another world scale packing plant in Canada. Whether that is foreign investment or Canadian investment, we do not know at this time. That will keep back in Canada the million cattle that we export today to the United States, turning them into another 300,000 metric tons of beef products that will be exported to the United States, Mexico and primarily Asia.
The process that has led to past investments and that will lead to new investments in our industry is improving access to markets, exercising that access, showing that there is profitable return on investment in value-added processing facilities to turn live cattle, in our case, into processed beef products. That process will continue and will lead to additional investment in our industry. I hope I have answered your question.
The Deputy Chairman: You have. As I recall, Western Canada would export our live animals south and there was not much east-west trade; and the east would import the processed product from the U.S. Is that still happening to a large extent?
Mr. Haney: It is. The volume and nature of the trade has changed dramatically in the last seven years.
The population-rich regions of Canada, Ontario and Quebec, do import beef products from the United States, in particular, for food service to augment supplies available within the provinces. Major volumes of processed beef products leave Western Canada, primarily headed to the western seaboard, and within that, to a large degree, to California and those major population regions.
Live cattle also move in large numbers of 800,000 to 900,000, in a usual year — last year, because of drought, it was about 1.5 million animals — to the central United States, into the corn belt, where they are fed. Some cattle move from the dairy states in the U.S. Midwest up to Ontario, but in relatively small numbers, to augment cattle supplies in that region.
The nature of trade has changed. In 2002, Canada enjoyed a $3.5-billion trade surplus in beef and live cattle with the United States. While there is some north-south trade, it is mostly south-north trade.
The Deputy Chairman: When the Crow Rate was abolished, we hoped that would encourage the processing of more product in Western Canada. At a recent round table held here, the consensus was that, in terms of encouraging process, that net benefit is still yet to be seen.
It is very difficult, it appears, to attract a meat processor into my province of Saskatchewan. Is that because of the freight rates to our larger population centres to market the finished product?
Mr. Haney: The effective Crow Rate has helped to stimulate the intermediate value-adding in our industry, although it is the production of intermediate products, which would be fed cattle. Instead of exporting calves and backgrounded feeders, there is a much higher level of grain feeding. That is value-added in itself. Exporting a calf versus exporting a fed animal ready for processing, represents a great deal of value to our industry.
The elimination of the Crow Rate and the resulting more competitive feed grain prices in Western Canada has helped to stimulate the cattle feeding sector.
I think also that the availability of the increased number of fed cattle in Canadian feed lots and the resulting competitiveness of fed cattle available in Western Canada helped to attract the investment of IBP-Tyson in the Lakeside plant. There has been great speculation that a most likely location for that next world-class processing facility would be Saskatchewan-Manitoba. The presence of that new plant will stimulate even more feed lots within a 200-mile radius around that packing plant and will see a great economic expansion, wherever it is located.
We have freight advantages to California, to those large western U.S. populations, as compared to the Midwest U.S. packing plants, which is why the trade has gone that way. We have freight advantages to Asia from the U.S. Midwest packing plants, which is why we have dramatically increased exports there.
We do not have a freight advantage, but we are not suffering a significant disadvantage, either, in servicing our Ontario markets. While the cost of transportation is an issue, a case can be made that there has been a stimulus of significant value-added, first, in the cattle production and, partially, attracted investment for beef processing due to the change of competitiveness in western grain prices with the elimination of the Crow Rate.
Senator Chalifoux: I will date myself right now. Through the Second World War, we had Burns' packing plant, Union packing plant and Ketchum Brothers in Calgary. I worked for Union through the summer — on the killing floor, as a matter of fact. Through the war years, we shipped between five and six freight carloads of pork a day to England and Europe. It was a very viable business opportunity for everybody.
Being Canadian, I would like to know why we have to go to the United States to process our beef? You talked about Cargill and others who are all United States companies. Why are we not promoting Canadian entrepreneurs?
We have a small meat processing plant in Calahoo, just west of where I live, in north-central Alberta. It is HACCP regulated. Yet they are having a difficult time working with and catering to the oil and gas industry in the North. They cannot seem to get any assistance from anybody on this issue. Emile Berube is the owner-operator. The plant is located in a small village, and it is the main employer there. The company employs between 60 and 80 people from that village.
Another issue we have is provincial tariffs. The company wants to do business in the Northwest Territories but it cannot because of the provincial tariffs there. Provincial tariffs are also a concern.
The territories, with its diamonds, its pipelines and everything else, is an excellent market for Canadian processors to access. I would like to know what your organization has done, or is doing, or will they be doing anything? I am a strong Canadian entrepreneur and I do not like Cargill and all these world-class huge corporations coming into our country and forcing our smaller industries out.
Mr. Haney: Our industry is pleased to be able to promote Canadian beef in many new and emerging markets. It is allowing certain companies to expand and remain in the industry, where otherwise, through purely domestic competitive forces, they would have to leave.
I have neglected to mention our support of XL Foods, which is a Canadian family-owned business, based out of Edmonton; Nielson Brothers, with operations in Calgary and in Moose Jaw; St. Helen's Meat Packers, owned by the Bielak family and located in Toronto; Northwest Foods, again, a family-owned operation, operating out of the old Alsask plant in Edmonton; Better Beef Limited, owned primarily by one family, but by a closely held shareholder group as well, in Brooks; and Centennial Foods with whom we work — again, two families own that company with operations in Calgary and Saskatoon.
All of these companies are seeking and finding, with our assistance, opportunities in markets outside of Canada, which is our primary focus. Many of these are entrepreneurial in nature. We also worked closely with companies such as Wagyu Canada, a producer-based company, taking Wagyu-cross cattle, producing them to international standards, custom processing them in companies such as XL Foods and Northwest Foods, and then exporting those products to Japanese retailers directly — linking a family-based retailer in Japan, with Wagyu Canada, a family-based and producer-based company out of Camrose, Alberta. These are some examples that also are valued by our industry, and supported by our organization.
There are issues with respect to inspection standards and interprovincial trade of beef in Canada. While that is not the focus of the Canada Beef Export Federation, I think there is a gaining consensus within our industry, and outside our industry, that inspection standards do need to converge. This would most likely mean increasing provincial standards to meet federal inspection standards, to allow any company processing beef in Canada to trade within the province, in other provinces, and outside of Canada. That effort, in part, is to address human health considerations, as well as to meet minimum expectations within general society for safe food.
We are working in favour of smaller companies and entrepreneurial companies, which make up about one-third of the total processing value in our industry. The very large companies comprise two-thirds of the processing. As Canadians, we always balance off the need and wish to attract foreign investment, and the wish to have that same capital or equity generated within Canada. We are hoping, in time, to find that balance.
The key will be, how can we attract that venture capital, that entrepreneurial capital, that investment capital, when we are ready, in about 7 to 10 years, to invest another $250 million and construct the next world-class processing plant in Canada?
Senator Chalifoux: How is your organization finding the provincial tariffs? Are they a detriment to the export of Canadian processed meat right across Canada and the territories?
Mr. Haney: Unfortunately, I am not aware of interprovincial tariffs. However, any interprovincial restrictions do not affect our companies — otherwise federal government inspected establishments — it does not affect their ability to move product across any other province in order to export. Therefore, it does not interfere with the process of international export. It only really starts to interfere when product is needed to stop in a neighbouring province to be consumed there.
Senator Chalifoux: Also, I would like your opinion on the HASAP regulations. That is creating a lot of problems because it is costing so much money for the smaller organizations, the smaller businesses to get into it. I know it was going to cost Calahoo Meats almost a million dollars to come up to those regulations. What is your opinion on that?
Mr. Haney: My opinion is that expectations of Canadian consumers and consumers around the world have continued to increase with respect to food safety. HASAP is a system that dramatically increases the probability that food is processed in a safe and wholesome fashion. I think that provincial inspection without HASAP is valid for self- consumption — you send an animal to an abattoir and take it back for home consumption — but is increasingly becoming less acceptable for commercial sale of products.
Our industry understands, that the implementation cost is dramatic. However, I think the consumer expectations have driven us in this direction. The existence of HASAP, and in some cases, some very expensive interventions that our industry has put into place, has actually formed the base of our lightning speed recovery — although today we do not see it — in the current BSE crisis. Without those very credible systems of intervention, we would have no hope of re-establishing our international trade.
I understand it is a barrier to entry, which speaks to your first concern. Capital cost is a barrier to entry of small- scale entrepreneurs. We need to work very hard to support those further processors, which are smaller-scale plants producing very high value products, through specific niche opportunities, first in Canada, and leveraging that success to take them internationally — as we have done with Centennial Foods and other specialty players. That is a route to attract the entrepreneur and smaller scale plant and keep them operating in Canada.
Senator Hubley: In your brief under the heading ``The Tactics,'' it says:
The Canadian Beef Export Federation believes that local representation is the key to export success. Our six international offices not only deliver our promotional programs, but also serve as a focal point for exporters and clients. These offices provide competitive intelligence and offer hands-on trade facilitation to all interested members.
Whereabouts are your international offices?
Mr. Haney: In 1990, the first physical location of the Canada Beef Export Federation was Tokyo, Japan. It was opened approximately three months before our own Calgary head office was opened. That really defined our philosophy of direct market involvement.
In 1995, we opened offices in Seoul, Korea, and in Hong Kong. In 1996, we opened offices in Taipei, Taiwan, and in Shanghai, China. In 1997, we opened up our last office in Monterrey, Mexico.
The difference between operating a local representative office and attempting to promote your products from a Canadian base is the difference between talking about success and facilitating that success. Our exports, during the 12 years of enjoying international representation to Asia and Mexico, increased from $7 million to $470 million. Local representation was truly the key to that success.
Senator Hubley: The theme that we are working on is ``value-added.'' It was interesting that you have different definitions of value-added. I am not a cattle person, but even the feeding regime that you use for these animals is in itself a value-added aspect. I had not thought of that. It is very interesting.
Can you promote market trials or identify niche markets within those areas? I just wanted you to tell us the good news that there could be this kind of program in place for the Canadian beef industry.
Mr. Haney: I would like to focus on Monterrey, Mexico in response to your question. In 1996, the base year before opening our office in 1997, we saw 3,000 metric tons of sales — $5 million — to Mexico. That is important but not dramatic from an industry perspective.
Those sales were primarily through intermediate brokers who would buy beef in Canada and then sell it in Mexico, with neither the buyer nor the seller ever meeting or knowing each other. The seller from Canada never knew the end- use of the product.
Our product mix was 80 per cent offal — primarily outside skirts, the muscular pillar of the diaphragm, lips, number two tongues, beef feet, and tripes, which are stomach products. They were all sold at absolute commodity bases. The Canadian industry had no idea whether we had competitive advantage within our specifications and they did not even know what the Mexican specifications were.
The Canadian industry believed that Mexico only wanted to buy lips and tongues and tripes. The Mexican buyers believed that Canada only had lips and tongues and tripes for sale. These products are in excess demand in Mexico and people in the industry would say that even a monkey could sell them. Having them is, by right, the ability to sell them.
We established our office in Monterrey, Mexico. The first thing we did was to bring a group of 10 influential buyers to Canada. We have VIP beef awareness missions and we bring key, hand-picked buyers to Canada. We expose them to our production and inspection systems; to our processors — they meet nine on average as they tour the country — and to our government regulators to learn about our health and safety environment. The buyers were astonished that we have a full range of products available to them, that there was an interest in Canada to sell those products to them and that the products were competitively priced.
The Canadians who received this first group of buyers developed an entirely new perspective on what corporate Mexico was all about — it had money. They believed in using intermediaries because it was too risky to do business directly in Mexico. It was thought that if you sold product in Mexico, there would be no payment, your product would end up in purgatory somewhere, and you would be beaten out of the market.
However, the Mexican buyers had money and their product requirements were far beyond those few easy-to-sell products. In fact, now, our product mix is 80 per cent beef cuts and only 20 per cent offal products. The beef cuts come from the chuck and hip — the exact cuts that are not easy to sell in the Canadian retail sector. The knowledge given to Canadians about the needs of the Mexican market and given to Mexicans about the available Canadian products led to intensive direct engagement. Now, virtually all trade is done directly between Canadian exporters and Mexican importers.
Three of our companies actually have representative offices in Mexico. Two of them are multinational corporations from the United States, Tyson and Cargo. XL Foods Limited of Calgary also has a representative office in Monterrey that is developing specific company sales. Those offices have identified traditional products and cuts in the Mexican market that were new and unique to Canada. One example was a nine-piece, bone-in chuck. It is the shoulder part of an animal carcass in Canada. It is a two-piece chuck that is cut laterally into two parts, deboned and placed on the retail meat case as chuck steaks, cross-rib steaks or blade steaks or roasts. They are not the most saleable or the most appealing products in our meat cases.
However, in Mexico it is 90 per cent bone-in that is cut into nine separate pieces. That is huge value-added because you pay for the knifing and for the additional packaging, thereby adding great value to that chuck. It is cut to Mexican specifications and sent down for a price premium that delivers more value back to the animal in Canada.
We stopped selling tongues to Mexico, by and large, because when we became skilled in Japan where we were receiving up to $7 per pound, which is $14 per animal, for tongues. Mexico, a brand new market, was identified by our offices and brought back to Canada for tongue tips. In the processing of the tongue for Japan, the tips of the tongues were being sold to Mexico, as it happened to be a traditional product.
These are two examples of unique opportunities identified through local representation that were brought back to Canada. As a result, our industry was able to derive more value out of cattle after meeting that local need. Otherwise, we would have had no idea that it existed.
Senator Fairbairn: Looking through your brief is like a trip down memory lane. You have done marvellously well with the federation.
Could you comment on what is happening in respect of BSE? Are we quivering on the edge of control over the situation? You have been closely involved and we would appreciate your overview of the situation and the effect that it has now on the cattle export industry.
We would also like to know what we should look for in immediate future reactions, for instance, the sense of security, or lack thereof, in this current situation of companies that have invested heavily in Canada. It would be helpful for us to know your perspective on this.
Mr. Haney: I was asked to estimate the direct damage to our industry — not the collateral damage — five and a half months into our BSE crisis.
Our estimates today are that we have lost $1.65 billion in export sales in the last five and a half months because of suspension of trade as a result of BSE. It would have been $5.75 billion, except that in the last six weeks we traded approximately $100 million in beef to the United States and Mexico when those markets began to re-establish access for our products. Already $100 million in beef products has been exported to the United States, first, because they were the first to re-establish trade, and then Mexico.
We tried to forecast where we will be by the end of 2003. In 2002, our exports to Asia and Mexico were 126,000 metric tons. In the first five months of this year, prior to BSE, we exported 51,000 metric tons, primarily to Mexico but also to Asia with some additional sales in the greater China market. We think we will sell an additional 21,000 metric tons to Asia and Mexico after BSE for a total of metric 72,000 tons. That is a 50,000-ton drop from 2002. In the United States, our sales in 2002 were 373,000 metric tons. We shipped 142,000 metric tons in the first five months of this year pre-BSE, and we believe we will ship approximately 90,000 metric tons into the United States, post-BSE to the end of this year, for a total of 232,000 metric tons.
We will have about the same, or about 20,000-ton sales to the entire rest of the world. We had 7,000 metric tons in sales to the rest of the world in the first five months. We think there might be possibly 1,000 metric tons to all those other markets around the world — not Asia or Mexico or the United States — through the end of the year, for a total of 8,000 metric tons.
Our export picture will look surprisingly better than what we thought for processed beef. Of 520,000 metric tons in exports in 2002, we think we will still export 310,000 to 315,000 metric tons in 2003, because as access is opened up to the United States and Mexico, we will overtrade in those markets. We will take a much higher share of those markets than we have had this the past, because we do not have access to the major profitable markets in Asia.
Macao has granted us access. That is a front door to China. We should be able to trade on that access when the paperwork is exchanged between our governments in the next week or so. That should bring into place another 3,000 or 4,000 metric tons in trade to China via Macao, and provide Hong Kong with a great motivation to re-establish its trade with Canada, because Hong Kong is traditionally the front door to China. They do not want to see Macao take over their entrepot business.
With Hong Kong and Macao open, we know that the other Chinese market of Taiwan will have great motivation to join back in the trade of Canadian beef, using the re-establishment of trade in Hong Kong and Macao as part of the justification for rejoining. That will probably open up another 5,000 metric tons of trade early next year in that market. That will bring China back into our market environment. Whether or not they grant us direct access, it will come through Hong Kong and it will come through Macao.
Japan and Korea are our two major remaining challenges, and they are different. We have a tendency to put those two difficult markets together: Korea and Japan, obstinate and intransigent. However, they are very different. Korea has suspended re-establishment of trade negotiations with Canada until all of the beef that is detained in their warehouses has been either destroyed or exported back to Canada. We believe that Korean authorities also want to ensure that Korean importers have received compensation for the financial losses that they have incurred because of our BSE problem.
We encourage the Government of Canada to take a strong position and to provide compensation to our international clients who have, by no fault of their own, suffered quite significant financial losses. Thus far, the Canadian government has not stepped forward with that very important program.
In some cases, Canadian companies have provided private compensation to clients; however, many of the smaller companies have not been in a position to be able to cough up the million dollars to compensate their Korean clients. The larger ones have, but the smaller ones find difficulty. We believe when that issue is finally dealt with, over the next month or six weeks, that Korea will re-engage in negotiations with Canada. It will lead to a re-establishment of trade with Korea. The new OIE guidelines, which will be released in draft form sometime this month, will be very helpful to Korea in looking at a new set of rules that will indicate a broad base of trade with Canada and our minimal risk for BSE status. We think the combination of those two should bring Korea back into our trade fold in the first quarter, if not the first half, of 2004.
Japan has political problems internally with regard to BSE. Quite frankly, they handled their first BSE outbreak very poorly. There has been questionable handling of several of the other cases in Japan since then. They have been sensitized and believe it is possible to bring down a government over a major crisis related to BSE and they do not want reintroduction of Canadian beef to be that crisis.
We know Japanese consumers are unafraid of Canadian beef and are by and large unaware of BSE. Two weeks ago, we completed a major Canadian beef promotion with Costco in Japan. We gathered together inventories held by importers and distributors through several different distribution channels to make a commercial inventory. We then marketed it and promoted it through Costco. Japanese consumers responded very positively to it. We sold seven metric tons in three outlets in two days, at prices that were not discounted in any way.
What does Japan need to re-establish trade? It needs to get through its national election, which will give it political confidence to make what they believe to be a possible risk-laden decision on re-establishment of trade in Canadian beef.
We believe that the new guidelines, which will be issued in draft form this month by the OIE will provide a new set of considerations that might help Japan find the side door to making a new set of decisions to re-establish trade with Canada. Right now, they are backed into a corner. Under the existing rules, they have not been willing to follow through; however, a new set of rules allow for new interpretations and might allow for another set of decisions.
We also believe that, when Korea makes the decision to trade with Canadian beef, that will signal Japan standing alone in Asia.
The United States and Mexico, both expanding dramatically the range of products that they are purchasing from Canada, will again isolate Japan as a country not willing to trade, where very soon the vast majority of the world's importing nations have resumed trade with Canadian beef. We believe the combination of those motivations will bring Japan back to Canada sometime in 2004. Which quarter, we do not know; however, in 2004 we think they will come back in.
Our friends south of the border have been no stronger than in the meat processing companies that have together invested half a billion dollars in processing facilities in Canada. Tyson and Cargill have advocated steadfastly for the resumption of trade in Canadian beef and cattle to go to their American beef processing facilities. They have used all their political connections. They have used their influence within the American Meat Institute, so that that organization, as an industry sector, lobbies on our behalf in the United States. The Canadian Cattlemen's Association have used their peer relationship with the National Cattlemen's Beef Association to advocate for a resumption of trade.
We have had absolute confirmation from the U.S. government that this solidified position of positive advocacy for our industry has fed the pace of re-establishment of trade, to the point where even senior USDA administrators are somewhat shocked by their own haste in how fast they have re-established things like new access for selected beef products today, and initiated a rule-making process, which in 90 or 120 days may well bring back the majority of the products we produce in Canada.
What are they looking like? There is hope that the crisis will end. There is frustration that it is not going fast enough, but they believe their investments in Canada, and the Canadian companies who have invested in the industry believe, that they will exercise their full ability to export through the year 2004.
We have feedback from our industry that the goal for 2005 of exporting 214,000 metric tons or $800 million of beef to Asia and Mexico is valid and intact, and that our goal of exporting $1.1 billion of beef products to Asia and Mexico in 2010 is also valid and intact. We have not stopped the process of growth and prosperity through exports. We have just had a very uncomfortable holiday.
That is really how it is being looked at at this time.
Senator Fairbairn: Thank you very much for that. I think it is important that we hear that, and also I have to say the way are you handling it — not only for your own clients and your own part of the industry — but for all the others who are struggling, is a class act. The almost emotional instinct at this time is to be very down and apprehensive and I think you are doing a very good job.
With regard to this coalition of organizations in the United States, I understand that there is a call-back period since Secretary of Agriculture Vennemen announced that they are ready to accept some live cattle after a 60-day period.
Will your associates be engaged in this talk-back to the United States on the validity of their decision?
Mr. Haney: The National Cattlemen's Beef Association played a vital role in getting our trade status to the federal registry and comment period. They have expressed their commitment to provide positive comment and to attempt to decrease the negative comment that may come into the process through moral suasion. It is understood that the comments that are put into the federal registry for the re-establishment of Canadian beef will be a permanent record, and should the United States ever suffer a single case of BSE, those same comments would be used by international trading partners, either for or against the U.S. industry.
The National Cattlemen's Beef Association and the American Meat Institute are committed to providing positive comment and remind other industry players to be very careful about negative or inflammatory comment because everything said there can be used against the United States or for the United States should they ever face the same problem.
As well, our client bases in Mexico and Asia have been extremely supportive and continue, where they can, to positively influence their governments. We believe that they have made a positive contribution toward the movement to re-establish trade in Hong Kong and in Taiwan in particular. The local industries have worked for us and on our behalf. They have created an environment in which regulators in those markets are working from a position of confidence that when they make the decision to re-establish trade, it will be met with positive comment within the industry and a resumption of trade, so it is not a useless revision of regulation, and that the Taiwanese and Hong Kong industry will confidently market Canadian beef, demonstrate their confidence in our products and transmit that confidence to consumers.
An important aspect of our strategy is enlisting the support of the local industries in the United States, Mexico and throughout Asia to work on our behalf during this delicate time of re-establishing trade.
Senator Fairbairn: Given what you have just said, are all these messages of what you are doing with the partners in the United States being passed on to our cattle producers here in Canada? One cannot describe how difficult a time this is for them, including emotionally. Do they know what you have been saying to us here tonight?
Mr. Haney: Canada's provincial cattle producer organizations have taken a leading role in reaching out to the grassroots to let them know the real story. Where challenges are remaining, many of our industry representatives have joined regional and local town meetings to talk about this. They have done a good job of communicating the opportunities as well as the remaining concerns, bringing forward the perception of opportunity that is here now and opportunity that is coming in this process of re-establishing trade. In part, it has ensured that useless destruction of cattle in an inappropriate way has not happened. The frustration levels were higher two or three months ago than they are today because of the re-establishment of the trade we have now and the knowledge of more access coming and the communication of a certain degree of optimism that we will get through this, even though now, on-farm, there is real concern and a real problem.
The industry has a wonderful optimistic streak. A major calf sale in central British Columbia saw 500-pound calves attract prices of $1.50 per pound. That is a vote of confidence that those animals will eventually be profitably sold to Canadian processors or Canadian feedlots, or to American processors or American feedlots. If there were not optimism that there would be a profitable sale at the end of their productive lives, there is no way that a purchase price of $1.50 would be justified.
We have challenges on the cull cow program and we are looking to address that as well. That is a source of concern right now. However, we are starting to see a small degree of recovery in our industry. For that, I am personally very thankful, and communication has been key to that.
Senator Fairbairn: Thank you for what you are doing. I know that with your efforts and the efforts of the Canadian Food Inspection Agency there has been a tremendous effort to share that knowledge and that has had an impact on producers who are now suffering. Keep up the good work.
The Deputy Chairman: A year from now, in the fall of 2004, country-of-origin labelling for beef products may be different. The U.S. government has a plan that has been lobbied against quite strongly by the U.S. packing industry. Our cattle associations have been lobbying and working hard against it.
What is your association doing to help mitigate the process in the event that labelling should be required?
Mr. Haney: A great deal of our industry's strategic positioning prior to May 20 was focused on mitigating the possible damages from a mandatory country-of-origin labelling regulation in the United States. My, how long ago that seems.
Our estimate is that of the 373,000 metric tons of beef products traded into the United States, we have approximately 100,000 metric tons of sales at risk. That is approximately half of the products that we sell to U.S. retail. All of the sales to U.S. food service are exempt from country-of-origin labelling. Half of the products we sell to U.S. retail is trimmings that go to ground beef production. We believe that U.S. consumers will not react negatively to a pre- packaged fresh or frozen chub of ground beef that is full of branded store markings with only one spot saying the country-of-origin.
Country-of-origin may stimulate a further processing sector in Canada. That is taking trimmings and coarse ground into fine grind ground beef and final consumer packaging in Canada to be sold under the retailer's brand of packaging with product of Canada printed on the bag. However, in the meat case, it would look no different from that same retailers brand of ground beef supplied by Americans. On the ground beef side, we believe that no great displacement will take place. It could actually stimulate further processing in Canada.
However, we believe that the main muscle cuts are at risk for continuing to sell those to U.S. retail. We supply about 3 per cent of U.S. retail sales. Additional costs associated with retailers of segregating includes the possibility of facing severe fines of $10,000 per incident if they make a mistake or wilfully mislabel the product in the meat case. We know that many retailers will the simply stop buying Canadian beef. The at-risk volume is 100,000 metric tons.
It is interesting to note that the federation believes that between now and 2005 — the time at which the true effect of country-of-origin will come into place — our exports to Asia and Mexico will increase by 90,000 metric tons. The efforts and resources put into place to achieve that goal are in large part a core response to country-of-origin labelling in the United States.
Particularly in regard to products from the chuck and cuts from the hip, we really do sell in volume to the United States and divert those products profitably into Asia and Mexico. We need to resolve our access problems out of BSE quickly in order to get that additional product profitably diverted into Asia and Mexico so we do not meet the full impact of country-of-origin labelling in the United States.
The National Cattlemen's Beef Association, the U.S. cattle producers main spokes body, speaks vigorously against mandatory country-of-origin labelling.
Senator Fairbairn: What about the assistance of Japan with the Americans to have a system where they can guarantee that no Canadian beef is being sent?
Mr. Haney: Japan is a very complicated and troubled market for us. We are currently in a situation where until live cattle go into the United States, the U.S. put into place, at Japan's request, a beef export verification program that simply states that all beef going to Japan from the United States was derived from cattle slaughtered in the United States. As long as we do not send live cattle to the States, that system works. Japan is being quite strident in their direction to the United States. They want the beef export verification program expanded to ensure that American beef exports in no way are related to Canadian cattle that are in that country.
We know that at a very fundamental and scientific basis it makes no sense because of the hundreds of thousands of cattle that we have exported to the United States into their breeding herd. We have exported millions of cattle to the United States over the last several decades that have gone in an unknown fashion throughout their entire herd. Canadian cattle and their descendants are fully integrated into the U.S. system.
We believe that the U.S. is now prepared to take a hard line on Japan's further requests to expand the beef export verification program. They will answer back, on science, that they are not willing to have Japan dictate U.S. trade policy. The United States, are not willing to have Japan tie the hands of U.S. industry to protect from perceived risks that are not justified through a scientific risk assessment.
We think that we will have more of an ally in the United States in dealing with Japan — not necessarily because it is in our interests, but because it is in America's interests to have efficient ability to direct beef products processed in Canada or in the United States regardless of the origin of the live cattle.
We think that there will be the potential for conflict and, we hope, conflict resolution between the United States and Japan as the United States moves toward importation of live cattle. It is a difficult situation, but the U.S. does not want to be dictated to by anyone, not even by Japan, in this particular case.
The Deputy Chairman: I am going to as you to make a prediction. How much success do you think that the American Cattlemen's Association and American processors will have in lobbying the federal U.S. government to not proceed with the country-of-origin labelling?
Mr. Haney: I feel a lot more confident that the rule-making process for live cattle will go through quickly. There will be debate around that, but everyone has done a lot good work to try to ensure that goes through.
There is as lot of quiet effort to interrupt the country-of-origin labelling regulation. The USDA has done its part by estimating at least $3.9 billion in implementation costs — that is enough to raise the hair on the back of U.S. government.
They have done their part. They have not facilitated easy adoption. The analysis that they did showed little to no benefit to the U.S. cattle producer or consumer. The cattle producers themselves, the National Cattlemen's Beef Association, have confirmed that there is no benefit. In fact, they have shown that there is a cost through improved competitiveness of the U.S. poultry sector, which is not covered by country-of-origin labelling.
Putting that all together, if I were to bet on it, I would predict that there is a 70 per cent chance that there will not be mandatory country-of-origin regulation in the States. There is a 70 per cent chance that there will be a labelling initiative, but it will be voluntary. We have no problem with that.
Senator Gustafson: I have one matter that bothers me a bit. Why are these cattle prices staying where they are?
In Assiniboia yesterday, a 1,000 bred heifers brought $1.70. The calves brought $1.20 and fat cattle brought about $1.00. They are so high because people are speculating because the grain market is so cheap. A bushel of barley is 65 cents and feed wheat is $1.00. Someone will make a killing if that opens up. There is no question about it.
They are buying these cattle with the idea that when it opens, they will make a big profit. They were paying $3.50 a bushel for barley two years ago. The feeders will make a killing on these cattle if the market opens up. That is why they are buying them and that is why they are risking it.
That is good. However, do not forget the poor grain farmer out there who is trying to sell grain at $2.50 a bushel for number one hard wheat and cannot make a go of it. The cattlemen will come out of this better than the grain producer will. Especially when, as was announced today, the freight rates in large parts of Europe have gone three times what it was. That is impacting the grain market.
The cattle market has a bright future. You have done an excellent job. There is no question in my mind on that. However, it is important to let the powers that be know that farmers should be buying barley instead of trying to grow it, at 65 cents a bushel. You just cannot win with those prices. It has really been positive for the market that this hits at the same time. Three years ago, feedlot people were losing $200 a head feeding cattle because grain prices were reasonably high. Their margin will be high here.
The Americans were going to try some kind of a formula in moving these cattle when they do move them. Am I reading that right? It looks like they will open the border by January 1, 2004. However, they will have some kind of a method of moving these cattle. Have you any information on that?
Mr. Haney: The comment period will be over by January 4. They will have to review comments and go through a revision process. They will resubmit the regulation to OMB and other departments, such as FDA. Then there will then be an implementation period. While we would hope that in January the market would open, realistically it might be towards the end of the first quarter, if there are not hugely divisive comments in registry.
The rules could change as a result of comment. I believe that they will remain substantially as they are. The rules today indicate that in respect of sales of cattle direct to packing plants, those cattle have to move in sealed liners. All that means is that CFIA would be involved in the pre-inspection of those cattle certifying that the animals are under 30 months of age; a CFIA seal would be put on that liner; and the U.S. DAFSIS would then unseal that liner at the establishment where they are destined. That will ensure that all incoming cattle are then reconciled against final destination and, as a safety mechanism, ensure the cattle are not accidentally or purposeless diverted into breeding herds or other places. They are not requiring cattle to be tattooed for that direct shipment; nor do they require that those animals be inspected in the mandatory inspection at the border crossing.
The rules indicate that animals still under the age of 30 months destined for shipment to feedlots in the United States and then onto packing plants would have to first, have a tattoo in one ear — a permanent form of identification — and second, that the CFIA would have to certify the health status of these animals. They would not have to travel in a sealed container and they would then go to any one of what would presumably be many registered feedlots in a terminal feedlot program. Those animals would then be presented for slaughter prior to the age of 30 months.
The USDA has said that as long as they do a health certification on them — and, that is normal for exports of live cattle into the breeding and feeding markets anyway — the trucks do not have to be sealed. With the permanent ID, if those animals would be diverted out of a U.S. feedlot or, somehow, become past age of 30 months, and if they would ever be presented at a U.S. beef-processing establishment for slaughter and were over 30 months of age, they would simply be rejected.
They are putting together a set of control programs that should be quite efficient to implement. However, there is nothing in there today that says there will be any quotas or time restrictions or volume restrictions. The only restriction is on how animals will be documented and how they would have the import and processing controls.
Senator Gustafson: I recall hearing the announcement and I thought at that time that the Americans left it open so that if they were getting a terrible reaction from, say, Japan or other countries around the world, they had a way out.
You said that we exported 232,000 metric tons of processed beef this year, did you?
Mr. Haney: We expect to have total exports in 2003 of 232,000 metric tons, 142,000 of which was before BSE; and we believe that 92,000 metric tons will be exported from the resumption of trade in September through the end of the year.
Senator Gustafson: Will this set a direction that may, in time, mean that more beef will go down across the line on packaged beef as opposed to live beef? The whole movement was 373,000 metric tons. Was that live beef and processed beef?
Mr. Haney: No, the 373,000 metric tons was just processed product in 2002. There is about another 400,000-ton equivalent of live cattle that went down in addition to that.
Senator Gustafson: Amazingly, that opened up pretty quickly, when you think of the whole process. The processing plants did a good job of preparing that beef as well and getting it to move fast.
Mr. Haney: It is true that the amazing speed of re-engagement in trade will only become apparent to our industry when we look back upon this time. There is still too much frustration and too much economic harm in the industry to see it today. I suffer from that myself.
The frustration of re-engagement of markets in Asia is front and centre, but I need that and our industry needs that frustration to continue to drive toward the ultimate solution in full access to all major markets. However, when I think ahead two or three years, I know that when we look back together, we will look back with pride on our actions. We will also look back with gratitude for the actions of our major trade partners and how fast we were able to re-engage in trade. We will look back on pride with the inspection system and the regulators who supported that system. We will look back with pride on how the OIE, the International Association of Animal Health, worked to facilitate an expectation that the world would re-engage in trade with Canada, because if it does not, the OIE's system does not work. The OIE's regulations only work if there is a quick resumption of trade in safe beef products, which is what we have to sell.
Senator Gustafson: The farmers I am talking to all the time are very pleased at the way it has been handled. I have not heard many negative positions at all.
Finally, have you monitored the price of cattle in the U.S.? Can you tell me what a 600-pound calf would bring in the U.S. market? I hear that it is at an all-time high but I have not checked out the numbers.
Mr. Haney: I have not checked out the calf or feeder prices, but I know that the U.S. has gone over $1 a pound in U.S. money. It is for fed cattle, it so has been an extraordinary time.
The U.S, to its credit in the rule-making process, have said that saying that re-establishment of trade in Canadian beef, if the entire rule goes through, will lead to a 4- to 6-cent per pound drop in consumer beef prices in the United States. Canadian displacement of U.S. exports in other markets will decrease U.S. prices in the United States by another 5 to 6 cents a pound. They are acknowledging that they will take a turn down in their consumer beef prices in fed cattle prices, in feeder prices and possibly in calf prices, which, by a national regulators' perspective, is not all bad. The prices were getting almost unsustainably high in the United States.
The Deputy Chairman: On behalf of the committee, let me take this opportunity to thank you very much for your very positive presentation tonight, and also for your tremendously enthusiastic response to the questions we asked. We appreciate that very much.
Before we write our report, we may want to call you back again. I hope you will not mind if we do so, to seek your expertise. Thank you, again, for coming here tonight.
Mr. Haney: Could I indulge the panel for a moment? There is something that I neglected to read in, and this is the core of our strategy in moving ahead to the remainder of re-establishing trade.
There are eight specific actions that we need to address. I have talked in general terms, but I feel compelled to share this with you. I apologize if it is inappropriate.
The Deputy Chairman: Not, at all.
Mr. Haney: The first major action point that we believe is needed is to seek a comfort letter from the United States Department of Agriculture to SAGARPA, Mexico's regulatory body, allowing for Mexico to import all non-specified risk material beef products from under-30-month and over-30-month cattle and to import live breeding cattle. This comfort letter would give Mexico a free hand to establish trade in a broad range of Canadian beef, serving as a new template for other cooperative market regulators. Instead, what we have faced is an aggressive you USDA that has subdued Mexico and finally led to the position where Mexico will only initiate trade in products that the United States has already approved. Twice, Mexico has moved ahead of the United States: First, with their intention of re- establishing trade before the United States in July; second, when they established trade together with their announcements on August 8, Mexico went ahead and included four additional products that the U.S. had not approved. In both cases, the USDA communicated officially to Mexican authorities, suggesting to them that moving faster or farther than the United States could jeopardize Mexico's animal health status for BSE, which is scientifically unfounded, and could therefore put at risk Mexico's ability to export their one million live cattle per year to the United States.
This use of force by the United States has been noted. It is not appreciated and it is not helpful. We seek the Government of Canada's efforts to have the Government of the United States of America desist in that and to have them provide a letter of comfort to Mexico so that Mexico can act on scientific grounds to re-establish trade.
The second point is to develop a federal-provincial government-supported ``change of animal health status'' insurance rider for future non-U.S.A. beef exports. This insurance program, similar in nature to crop insurance, would provide the necessary confidence for international clients to commit fully to Canadian beef without fear of facing unfunded product detention in the event of another future BSE case in Canada.
The third point is to develop a federal-provincial compensation program immediately to purchase and dispose of all remaining detained beef products in South Korea and Japan. Compensation should also be provided to international clients who have disposed of detained beef prior to the effective date of this program. The only exception to this program would be for insured losses where insurance coverage was available and can be documented.
The fourth point is to re-issue Canadian government letters to all foreign regulators in key markets asking for immediate resumption in trade for all non-specified risk material beef products from under and over 30-month animals. This letter should also introduce specific rationale, based on minimal risk status for BSE, for allowing resumption in trade of live breeding cattle — at least those born after our ruminant feed ban. Where possible, rationale should also be directly linked to the new draft OIE guidelines and Canada's ``Minimal Risk'' paper. New letters of instructions to Canadian posts should then be issued to encourage pursuit of a broad range of market openings.
The fifth point is that while Canada has implemented an SRM policy on July 24, 2003, only the minimum requirements of individual importing nations should be certified — that is, the exclusion of specific SRM products as required by that importing nation. The voluntary inclusion of references to Canada's SRM policy as a basis for export certification may preclude exporting all products put into storage prior to the implementation of our SRM policy, which is several million dollars of products, in Canadian freezers to date.
The sixth point is significantly higher industry participation levels in all market access and trade negotiations affecting the trade in live cattle and bovine products. Industry expertise and complementary resources will help to counter foreign government arguments against re-establishment of trade — for example, claims of consumer fear of Canadian beef — and provide implementation perspective on how new potential bilateral trade protocols will affect our actual ability to exercise trade. This is about redefining the public-private relationship and the process of market access and trade negotiation.
The seventh point, is confirmation of Canada's own enhanced feed and surveillance policies and programs as they relate to BSE. This should at least require that all farms be licensed to purchase feed containing ruminant and meat and bone meal, which would be helpful in ensuring the multi-species farms at one location or with shared feed systems would not receive those licences if the removal of SRMs from ruminant meat and bone meal cannot be achieved in current environment. Increased surveillance should be consistent with the new OIE guidelines, most likely requiring a sensitivity level of detecting incident levels at one in a million with a confidence interval of 95 per cent.
Finally, regarding the eighth point, we require a further enhancement of cooperation and coordination between government organizations, within government organizations, and between government and industry, in Canada, as we complete our efforts individually and collectively to recover from the current BSE crisis we are in.
We believe that these eight points are key to establishing full access for Canadian beef in key markets outside the United States.
Senator Fairbairn: Have you given those to the Department of Agriculture?
Mr. Haney: On several occasions in various different ways, as many ways as we can fit it into the process.
The Deputy Chairman: This is another way, and it is well done.
Again, thank you so much. We will certainly say once again we appreciated your enthusiasm and your presentation tonight.
Mr. Haney: It was my pleasure. Thank you very much.
The Deputy Chairman: I now have my hammer, so I am able to declare the meeting adjourned.
The committee adjourned.