Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 6 - Evidence, February 19, 2003 - Morning
CALGARY, Wednesday, February 19, 2003
The Standing Senate Committee on Foreign Affairs met this day at 10:04 a.m. to examine and report on the Canada-United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators and guests, I am privileged to chair the Standing Senate Committee on Foreign Affairs.
On behalf of the committee, let me welcome you and say how delighted we are to be here in Calgary and to have the opportunity to hear your views on some of the international trade challenges that confront us today.
Our mandate is to examine and report on the Canada-United States trade agreement of 1988, the North American Free Trade Agreement of 1992, secure access for Canadian goods and services to the United States and Mexico, and the development of effective dispute settlement mechanisms.
We are expected to present our final report no later than December of this year, though we certainly hope to do that well before December.
We find ourselves in very difficult circumstances as they relate to our trade relations with the United States. Here is the reality of the situation from a national perspective: 86 per cent of our international trade moves in a southerly direction. Trade with the United States represents about 35 per cent of our gross domestic product.
The Alberta figures are equally dramatic. 89 per cent of international trade is with the United States. While it is true that fossil fuels account for 72 per cent of that, let us not forget the rapid growth in other products: beef, telecommunications equipment, organic chemicals, and furniture.
Like Canada as a whole, you have basically one customer: the United States. That customer is holding us hostage. Look at what has happened with softwood lumber. Punishing tariffs have crippled a once vibrant industry.
The American Farm Lobby now has grain in its sites, so Alberta grain farmers are at risk. While it is true that Alberta has a pretty good ``oil and gas hand,'' the United States holds most of the aces.
We can try to get the Free Trade Agreement and the NAFTA reopened. We can try to get a more equitable dispute resolution mechanism. We are going to the WTO.
Should we not be looking at other markets and broadening our customer base so that we at least have some leverage? The bottom line is, we are here to listen and to learn.
The other members of the committee are Senator Austin, from British Columbia; Senator Di Nino, from Ontario; Senator Setlakwe, from Quebec; and Senator De Bané, from Quebec. I am from Ontario.
We have just come from very interesting hearings in Vancouver which have, I think, focused our minds on this problem.
We have with us this morning Mr. Douglas McBain from the Western Barley Growers Association; Mr. Dennis Laycraft, from the Canadian Cattlemen's Association; and Mr. David Usherwood, from the Calgary Chamber of Commerce.
I will ask each of you to make a reasonably brief presentation.
Mr. McBain, please proceed.
Mr. Douglas McBain, President, Western Barley Growers Association: Mr. Chairman, it is a privilege to be here today to express our views of the export trade with the United States. I represent the Western Barley Growers Association. I am the newly elected president as of last week.
The Western Barley Growers is a voluntary, membership-driven organization representing barley producers from Western Canada. Our mission is to support a vibrant and self-sustaining industry.
One of our goals is to achieve an open North American market for agricultural products, especially barley. We support the free trade agreement, but we need to have assurances that we have reciprocating rules with the trade agreement, so that rules on one side are equal as import or export restrictions on both sides and the same criteria for grade and quality apply on both sides.
Our biggest problem with barley exports is our domestic policy with regard to the Canadian Wheat Board and the limited access we have to an American market as individual producers. However, while I will not go into detail on domestic policy, I would be pleased to answer any questions.
In respect of their role in exporting and the producer's role, there is a disconnect between what we can do as a producer to export and the impacts of American and Mexico trade restrictions on us. Right now, they are limited to what the board does. If the board decides they are not going to export to those countries, then there is no impact. The point is that, as producers, we want access to the market and domestic policy is our biggest trade restriction.
We have concerns in the cattle industry about the country-of-origin labelling that the Americans temporarily or voluntarily have in place at the moment. As the cattle industry in Western Canada is our largest barley market, we are concerned about its health and ability to be profitable when their largest customer is the United States and they are facing import restrictions. Therefore, any cost that is loaded on to cattle producers will be downloaded on eventually to the grain producers.
We also have concerns about the check-offs being disguised as a tariff on either side of the border. We have a check- off applied for product going into the States. We do not have reciprocating check-offs or costs coming back in.
The last point is in regard to genetically modified organisms, GMOs. The Barley Growers have always spoken in favour of GMO research and supported the introduction of GMO products provided the research is science-based and proven to be safe.
Mr. Dennis Laycraft, Executive Vice-President, Canadian Cattlemen's Association: Thank you, Mr. Chairman and honourable senators, for the opportunity to present our views on this absolutely critical issue to our industry.
We have submitted our brief, which includes background on anti-dumping rules. I will not go through those in detail, but I will highlight a few points that are very important to the discussions.
Our industry has been one of those that has benefited tremendously from the Canada-U.S. trade agreement. The agreement led to a significant investment in Canada's beef industry. We saw two of the largest and newest packing plants in the world built in Western Canada. Today, we see an extensive expansion of the largest packing plant in Ontario, which is, in part, a result of our access in the North American market, which has really become an integrated market. Cattle flow north, cattle flow south to wherever the markets are highest and most efficient, and beef travels extensively through North America.
Mexico is now our second-larges export market with remarkable growth in the past five years. That has to do with the provisions in NAFTA. We, along with the United States, have tariff-free access to Mexico, whereas the rest of the world pays 20 per cent and 25 per cent duties. As well, there are some duties on U.S. beef because of anti-dumping rules in Mexico that arose out of a dispute in 1998 between the two countries.
We export about one out of every two calves that are born today, in one form or another, to the United States. You can take one out of ten that we export to the rest of the world and that is growing.
We do have a new global marketing strategy in place where our longer-term objective is to try to bring that into a more even balance, and our objective is to get a 50/50 relationship.
Mexico and Asia are going to be really the key engines of growth. I mention that because, as we enter into international trade negotiations, the ability to address the tariffs that we face and extensive tariffs that we face in snapback provisions in Japan, in Korea, and in Taiwan, will be critical to our ability to diversify.
We have had our share of difficulties in our relationship with the U.S. We currently face a threat because of the country-of-origin labelling requirements, which could be a very significant impediment to our trade. On balance, we have worked well with our American counterparts. It is when congress starts to get involved that things start to go out of control.
Our counterparts south of the border did not support mandatory country-of-origin labelling when it was being debated in the congress. However, it was pushed through. Some of the proponents pushed it, in part, because of the frustration and animosity they have experienced in relation to access into our country. There are animal health requirements on feeder cattle that both our American counterparts and we agree should be changed, but the length of time it takes to change those leads to greater frustration.
In respect of these issues, the Americans hold the aces because we have about a six to one positive trade balance in beef and cattle. One does not mind if they are holding the aces if it means that we have a $2.6 billion trade balance in 2001. We expect that is going to be over $3 billion when the 2002 numbers are out.
We believe the best way to deal with the issues that are out there is to be proactive around them. We did have a very good record of understanding in 1998 on addressing agricultural issues. It is important that we get to the root of some of the basic concerns they have. We do have concerns with some of their requirements as well, but over time, we found we can work well with our counterparts south of the border. We need to address their concerns and make some changes to the way we do things if we expect them to make changes to the way they do things.
In respect of anti-dumping rules, we were caught in an anti-dumping case that cost us close to $90 million over a 16- week period. We only won because we were able to successfully argue our exports were not causing injury to the U.S.
Current anti-dumping rules, be they Canadian rules or U.S. rules, work by including a provision that if you are selling your product below your cost of production, technically any product you sell in that form is considered a ``dumped'' product. They will investigate a narrow, 12-month period for an investigation. If it can be proved that not only are you not covering your production costs, but you are also not making a return on investment, technically you are found to be dumping. In agriculture, invariably, if you are operating in a free marketplace, it is a natural function of supply and demand that occasionally you are going to be not covering all of your costs of production.
Any wheat, barley, pork, beef could be found guilty of dumping during a normal part of their business cycle. I have been told that this could be the case for dairy this year. This is the first time I have heard of that.
Those rules need to be changed to recognize that there is a business cycle involved. Anti-dumping rules should deal with predatory pricing. That was essentially the reason they were put in place. It is virtually impossible to have any artificial dumped product in a free market environment. It makes no sense to have those rules.
These issues have to be addressed at the multi-lateral level, However, they do affect how our trade goes on with our American counterparts because both CUSTA and NAFTA essentially left the key dispute rules — with the exception of NAFTA panels — to the WTO for definitions of subsidies and subsidy rules.
Because of our dependence on the U.S., we essentially operate as an industry that is careful of any dollars that flow into our industry, so we do not put ourselves at risk of a countervailing duty. That is one of the consequences that you face when you are successful as an exporter. We are comfortable in that.
I have not said much about Mexico because generally we have good trade relations there. The more we nurture that, the better.
In respect of the U.S., however, we like the idea of having quick response teams to address problems while they are small. We tend to get into what I call a ``four-year pattern.'' Disputes tend to surface as you get into the summer months in the midterm election cycle. We are working well with them on keeping diseases out of North America as a trilateral group.
We have a unique opportunity to work with the United States as we deal with their concerns around bioterrorism and the issue of homeland security. The more we can do to work together to improve the trade relationship between Canada and the U.S., the better service we will be doing for our industry.
I would be happy to answer any questions.
Mr. David Usherwood, as an individual: Mr. Chairman, I would like to correct the record. I am a principal owner of a consulting firm called ``U 2 Enterprises.'' I am associated with the Calgary Chamber of Commerce, but I am not here in any official capacity speaking, either directly or indirectly, on behalf of the chamber of commerce. I am actively involved and I do chair the subcommittee on agriculture and food.
The Chairman: Thank you very much. We will certainly correct that.
Mr. Usherwood: The Chamber of Commerce is aware of my appearance here, but has not endorsed my brief, due to some logistics and things like that. I am here as Dave Usherwood.
I would like to review, for the record, the history of the Canadian Wheat Board as I understand it, or as my research revealed.
The Wheat Board came about in 1919 through an act of Parliament, and it was certainly appreciated by the farmers and by society in general. We were living in rather unsophisticated times in the Prairies in 1919. We had just come through the First World War. The enterprise was certainly appreciated and needed.
In 1943, in the Second World War, another act of Parliament gave the Canadian Wheat Board exclusive sales and marketing rights to wheat and barley crops growing in Western Canada. This was basically a War Measures Act and, based on law, would have been upheld in courts as a reasonable undertaking considering the circumstances of the day. Price and supply control worked well for the benefit of all.
In 1967, the Canadian Wheat Board was granted exclusive marketing and sales rights to western Canadian barley and wheat crops, which has continue to this day. It has never been revised or challenged under the charter of the Canadian Wheat Board.
In 1998, current federal government undertook to expand the administration of the board from three government- appointed commissioners to a fifteen-member board. Five of those members would be government appointees; 10 would be elected by farmers. However, my understanding is that there are no members of the Canadian Wheat Board. One can be an associate of the Canadian Wheat Board and therefore entitled to vote on the selection of directors if you sell your product through the Canadian Wheat Board. To date, the chairman of the Canadian Wheat Board has always been selected by the directors from one of the five government appointees. I think those stats are important.
That is a brief background on how the Wheat Board has evolved. Its quasi-democratic appearance, having five government appointees, would lead the normal layperson — and certainly a foreigner — to conclude that it was not a democratically elected board that is free from interference from the prime minister and from the responsible cabinet minister.
The Canadian Wheat Board acquired over time a perpetual, non-competitive agreement or a restrictive covenant on all western Canadian farmers producing wheat and barley. Earlier in the brief, we did establish that the non- competitive restrictive covenant is not a covenant between equals.
The Canadian Wheat Board has significant business momentum and will easily survive — and most likely prosper from — the abolishment of this contentious monopoly from its charter of incorporation.
The Canadian Wheat Board is not a small organization. It is dominant in the marketplace, selling our great products of wheat and barley to niche markets. However there are certain markets to which the Wheat Board will not go. Kenya is an example of a market the Wheat Board will not develop because they are looking just for wheat of any quality. We sell quality-graded wheat and barley. We should be proud of that and the Wheat Board should be proud of that. It is not an insignificant speck on the wall in the trade of these commodities.
Although people fear change, a change in the Canadian Wheat Board's charter to abolish their monopoly trading practices could be beneficial to all, including the farmers and to Canadians in general.
I submit in this brief that the issue of the Canadian Wheat Board versus the Canadian farmer is serious. That farmers ``being at least a party of one'' have suffered irreparable harm and will continue to suffer irreparable harm if the perpetual monopoly of the Canadian Wheat Board is not set aside. In consideration of the total situation and the long-term interests of both the parties and the interest of the entire country, the decision should favour setting aside this restrictive covenant. Failure to act will most likely lead to protracted trade disputes with our trading partners. That is evident right now.
While Canada may or may not win these trade battles, irreparable harm will be done to the farming gradient sector of the agriculture business of Canada, thereby we will have lost the war.
The right course — and I emphasize ``right course'' — of action is for Parliament and this committee to act and make things right. However, it appears that the federal government is hesitant to take any initiative to resolve this matter. Therefore, it would be logical that an appeal be initiated to request the courts to set aside the restrictive covenant of the Canadian Wheat Board by issuing an interlocutory injunction pending legislation or by instructing the government to make changes to the Canadian Wheat Board's charter, or both, thereby resolving this issue in the interest of Canada.
I believe if an appeal were launched to the Supreme Court, the Supreme Court would probably uphold the monopolistic restrictive trade covenant of the Canadian Wheat Board — not because it was the correct thing and not that it could not be appealed in law, but because of the supremacy of Parliament. That does not make it right.
I am asking this committee to consider seriously recommending that the government make things right and abolish this monopolistic, restrictive trade covenant of the Canadian Wheat Board for the benefit of all. I can see irreparable harm being done to the agriculture industry and to farmers and growers of Canadian wheat and barley.
Last fall, the Standing Committee of the House of Commons recommended the abolition of this monopolistic restrictive trade covenant of the Canadian Wheat Board. One committee of our Parliamentary system has done this and I would suggest perhaps a re-examination of the House of Commons recommendation on this issue be considered.
My last point is in regard to something that came across my desk just this week. This is in the bulletin published by the Canadian Wheat Board and it should give raise concerns for this committee, for Canadians and for the Wheat Board. The chairman of the World Trade Organization, agriculture negotiations, released a draft paper February 12, setting out the main elements for the WTO's deal on agricultural trade.
Several key elements of the draft are disappointing, so the Wheat Board says, especially with regard to state trading enterprises, STEs, such as the Canadian Wheat Board. In regard to export competition and domestic support, the draft imposes drastic, unfounded restrictions on the operation of exporting STEs, while importing STEs are barely affected.
The concluding comment is the Canadian Wheat Board will work closely with the Government of Canada to push for a better outcome. This should be a warning to this committee and to Canadians and to farmers that we could very well suffer irreparable harm. I would refer you to the software lumber dispute, which is really causing harm in B.C., and in Alberta, too.
So there are precedents out there, and I am fearful of the outcome if we persist with our blinders on to the reality of the situation.
I am advised that the potato growers have a restrictive trade on their seed potatoes to the country of Mexico. That could be another trade dispute.
I know that this committee recognizes that we are a nation of traders. However, we must be aware of these things and the special interest groups that exist and other trading jurisdictions.
Senator Austin: Let me join with the Chair of this committee in thanking the three of you for being here and discussing these issues with us. Our particular focus is on our trade relationship in North America, with the United States and with Mexico, and the issues that arise in that relationship. Of course, FTA/NAFTA are principal parts of the architecture of our trade relationship there.
I would like to start with the so-called Farm Bill in the United States and ask the three of you to give us, in more detail, what negative effects, if any that you see. How should Canada be dealing with the Farm Bill?
Second, do you have problems moving your commodities across the border into the United States? Some industries have substantial problems in getting through the border in a timely and efficient way. How critical are border issues to you?
Finally, how do the questions relating to agricultural trade in the Doha Round impact on your interests?
Those are broad questions because I would like not to lead you in the answers.
All my political life — which is quite long — the Wheat Board issue has been alive and well as an issue. My understanding was that the members of the board, the people who owned the books and therefore can vote, have voted in support of the status quo, substantially in support of the status quo, so you might comment on that.
Might I start with you, Mr. Laycraft? Just go across in the cattle industry.
Mr. Laycraft: Our principal concern with the Farm Bill is the miscellaneous provisions that deal with country-of- origin labelling. There are a number of conservation measures in it that have been changed, but we do not view them as creating any significant concern.
As I detailed in our brief, the imposition of the country-of-origin labelling requirements — the way they have been defined — will clearly impede trade. The largest retailers down there have told us that, with the record keeping requirements that are estimated to be in excess of $2 billion annually, the easiest way to avoid a lot of those costs is to single-source product. When over 90 per cent of the product consumed in the U.S. is from the U.S., and you are a chain as large as Wal-Mart, which is now the second-largest retailer, the only country that can satisfy their actual requirements, if they are going to single-source products, is the United States. I such cases, one does not even have a chance to get to the counter for consumers to decide if they like your product. That is a principal issue we have.
We recognize the problems that the bill creates in terms of the entrenched subsidies to the grain sector, and I am going to suggest, I will let Mr. McBain talk more on that.
Senator Austin: In respect of country-of-origin labelling, as far as you are aware, is there no consumer preference? Canadian beef has a good image, or do we believe that essentially the consumer prefers American products because they are American?
Mr. Laycraft: Because of the way our market has become increasingly integrated, our two largest packers in Canada are U.S. owned. They have facilities in the U.S., and they chose to integrate their distribution system. That makes sense form a business perspective. If it makes sense to fill an order with Canadian product, they just simply sell it as Cargill product, or XL Corporation as they call it south of the border; what was IBP and now would be called Tyson product, they just sell it as Tyson product. Most consumers down there were just aware they were buying either Cargill or Tyson product. We have very similar meat inspection sanitary, federal sanitary requirements — remarkably similar to the way the GAO described it. That is how that has developed.
We have not seen a lot of companies go down there and create specific programs to sell Canadian product; rather, they sell brand of products that are more either the retailer's brand or the packer's brand. There is not a lot of awareness of Canadian product down there.
The U.S. market it is not a market per se, it is a whole range of markets. There are 53 million Hispanics, who have a very different attitude about the products they buy than the Caucasian population. There are close to 10 million people of Korean descent down there.
We are looking at each of those markets individually and try and see if we can establish a stronger identity for our product. However, until now, we have been working to expand into other markets where this forces us to defend our position in the U.S.
Our view is that if common sense prevails and they step back from country-of-origin labelling, it still makes more sense to diversify to other markets instead of spending the few resources we do have in the U.S.
Senator Austin: What do you say about the legal advice you had on whether the country-of-origin labelling is a WTO cause. The same issue affects the whole producer world. Could we request a series of appeals to the WTO on the basis that is essentially a qualitative tariff?
Have you had advice on that subject?
Mr. Laycraft: We have had extensive consultations with officials at the department of foreign affairs and with the trade and agriculture people at Agriculture and Agri-food Canada.
I cannot say enough good things about our embassy in Washington. They really work hard on our behalf and do a great job.
They released guidelines last October with a 180-day comment period. The principal issue with NAFTA is that the cost of the measure itself becomes an impediment to trade. Until you have the final guidelines, you have lots of estimates of cost, but once the final guidelines are in, our sense is that there is a very strong NAFTA case.
With respect to the WTO, again, we are waiting for final guidelines. We get into issues such as the chapter changes and significant transformation, national treatment issues, and in a number of cases, we believe there are potential grounds. The advice we are getting is it would probably be prudent, when all of this is done, is to select one avenue or another.
Currently, I think that if the guidelines do not change significantly, the NAFTA route would offer us a great opportunity. The problem with these processes is they are very long. It could easily go a year or two after the measure has come into effect.
If there were some way of dealing with this quickly before a measure came into effect, then they would be great options. However, we are also working with a growing groundswell south of the border that is trying to prevent it from coming in because of the question about consumer preference. Our American counterparts, the NCBA, believe if there is a consumer preference out there, it will be met by companies that want to offer that choice instead of imposing it on every consumer.
The other remarkable thing south of the border is they have imposed this on red meat but not on poultry, so we are going to add $2-billion cost to the red meat industry in North America and further put it at a competitive disadvantage to the poultry industry.
With respect to problems crossing the border, the odd thing tends to come up. For example, Canada, the United States and Mexico went down to look at Uruguay to determine their foot and mouth disease-free status. Canada returned and approved Uruguay's shipments ahead of the U.S. and Mexico and ahead of other countries. Remember, we are exporting to the U.S. Suddenly we were being questions about how, with our system, could we prove that we are keeping the Uruguay product separated from Canadian product until it is approved for export to the U.S. As we went down and did it together, there is no rational reason for not timing that decision with the U.S. and avoiding the problem down there.
One of the challenges is that the Canadian Food Inspection Agency has really shifted its focus. Originally, when they were formed, we were told, their principal mandate was to take a more business-like approach to providing services to our industry, and that was part of the rationale for cost recovery.
More recently, they have taken a more detached approach whereby their principal mandate is to protect the safety of our food supply. We certainly do not argue with that mandate, but in doing that, they have said they have removed the trade advocacy mandate. This is the agency that negotiates the market access agreements in terms of veterinary requirements and meat inspection requirements. If they are the people that determine our access to markets, and they do not have a trade advocacy role, we are very concerned about what resources will be made available to ensure we do not have problems crossing the border.
I do want to commend the federal government. There has been a lot of work very quickly around some of the sensitive issues that, in the post-9/11 environment, could have made access more difficult. The urgency that was placed in ensuring that did not happen is really appreciated.
Our product is exempted from the bioterrorism, so that is not presenting a direct problem to us. We are on a different list, however our analysis tells us that it is certainly going to be a big problem for seafood.
With respect to the Doha Round, as I mentioned earlier, our ability to diversify depends on access and fair access to other markets. We are seeing growth in the quality of the protein supply as economies improve, and that is what has really fueled the growth in Korea, and earlier fueled the growth in Japan, which continues to grow. We expect will fuel some growth into China.
As tariffs come down into those markets, we expect to not only benefit from increased consumption, but we are also taking on larger shares in those markets as we market our product better. Reducing tariffs is very important, as are better and improved disciplines on subsidies.
The U.S. is not doing anything illegal under the WTO with its current Farm Bill. There were initial comments that they were exceeding, but they are not exceeding their current obligations there.
We need to reduce trade-distorting subsidies. Like Australia and New Zealand, we have a relatively small population with a large export of agriculture products. Our taxpayer base is much small than that of the U.S. or the European Union and therefore we cannot maintain the level of subsidies that they do. Therefore, the more disciplines we put on those countries, the better off our agriculture sector is and the better off the Canadian economy is.
Senator Austin: Mr. Laycraft, do you believe that the essential point of the U.S. Farm Bill policy is, as they have said publicly, to force the European Community and Japan to reduce their subsidies? It is a subsidy war race and we should be supporting the U.S. Is the question in terms of that initiative?
Mr. Laycraft: We should be doing whatever we can to bring subsidies down in other countries.
I have watched the machinery of the U.S. congress work on issues like country-of-origin labelling. There are a lot of political reasons why things happen there, rather than just pure motives related to trade negotiations — especially during an election year.
I hope that one of the outcomes of the U.S. Farm Bill is that it gives them more room to negotiate and to seek deeper cuts.
We are hopeful because of other factors. Look at the extension of the EU. As they start to bring in more of the eastern European countries, their ability to basically cover them with a common agriculture program without any significant increase in income should put pressures on the European Union — although some will fight it tooth and nail — to see the levels of support reduced.
Mr. McBain: In regard to the Farm Bill, domestic subsidies, of course, create an unequal ability for us to compete in their market. The problem that we recognize, and that producers in the United States have already recognized, is that the result of the Farm Bill is immediately capitalized into their cost of production, so they are now becoming the highest cost producers in the world. It becomes self-sustaining. If they do not keep getting it, they cannot compete. Our argument is we want to become the lowest cost producers.
We do that by reducing government cost, reducing our environmental costs, transportation costs — keeping those as low as possible to compete in an export market. Our biggest competition is not going to be the U.S. producer. It is the South American producer and the eastern European producer that can produce the same product and deliver it into our domestic market cheaper than we can. This is what the Farm Bill will cost American producers over the long- term.
If they do not keep increasing that amount, they are going to be out of the export production market.
Senator Austin: Are you saying the Farm Bill will introduce inefficiencies in productive capacity?
Mr. McBain: It already has.
Senator Austin: That will become structural in their system. It already has.
Mr. Usherwood: With regard to the Farm Bill, my conclusion is that the U.S. has an awful lot of money to throw at their agriculture industry. We are not in a position to compete on a dollar-for-dollar basis.
There are a lot of strong, powerful special interest groups in the United States. We do not have the political will in Canada. The agricultural sector is very small. It is a very significant part, but a very small part of our perceived GDP.
The best thing we can do is go to the high ground. It is always best in the political arena if you can stay to the high ground, be above board, and be above suspicion.
The perception is that the Canadian Wheat Board is a monopoly. It is a monopoly, but it is not necessary that it is monopoly.
We have to make sure that our product crossing the border — whether it is grain or spuds — is not contaminated. We must be truly diligent regarding the quality of our product.
The Canadian Wheat Board does a good job on that, but we have got this little speck on it that is causing a lot of unnecessary attention. I believe that you have the authority, or the province has the authority to change it.
Senator Austin: Let me make the observation that Canadian agriculture is the least subsidized agriculture of the U.S. and European and Japanese market. We already have the cleanest hands in the export system, but that does not solve all our problems.
Mr. McBain: In the next Doha Round and the WTO, the Wheat Board has been targeted. One of the reasons they are targeted is because of government support that they are perceived to receive.
The other issue is that technically the board does not buy grain. The board is a seller of grain. The board sells the grain through agents, but the price is determined by the selling price backing off their cost and backing off the transportation. The farmer's price is determined by the selling price, minus costs. In all other marketing jurisdictions, grain companies have to buy the product first to acquire the source, and then they have to sell it into the same market as the board.
This is where their complaint is based: They cannot compete against a state-guaranteed marketing agency because of the way their costs are determined. It is not a market-driven system.
The other problem is that the board has accumulated a huge credit sales account from 25-year grain sales, which they continue to carry as an asset. The net interest earnings that they gain from those credit sales, which are 100 per cent guaranteed by the government, are now significant interest incomes in each pooling account.
The grossest example is in the feed barley pool account this year. The board has only 2,500 tonnes of feed barley committed to the pool account. Their net interest earnings on that account will be $8 million this year. According to the act, all interest earnings are to be returned to the pool account, which they accumulate each year. That would make the expected price return for the feed barley pool account $4,000 a tonne. Obviously, this is not what barley producers are going to be paid.
An exclusion in the act allows the board to put any amount of money they see fit into another fund. I cannot remember the name of that fund. They can put as much of the interest income into the pool account as they deem fair. The rest is put into a reserve account within each pool account, which continues to accumulate. This is the problem.
Senator Setlakwe: I have three short questions, one to each of you.
Mr. McBain, you mentioned that domestic policy is our biggest trade restriction. Would you please express a bit more on that?
Mr. Laycraft, are we selling any cattle to Europe? Is there any possibility that we might be doing that, if not? Why are we not if we are not?
Mr. Usherwood, what is the percentage of farmers who are willing to act independently of the Wheat Board?
Mr. McBain: Domestic policy, specifically, is a Canadian Wheat Board policy. It affects eastern farmers and western farmers differently. The perception is that the pooling system in the designated area is the board's mandate to use in exports. In effect, it is the licensing policy that restricts our export opportunity.
The licensing policy is covered under Section 4 of the Canadian Wheat Board Act. Specifically Section 46(d). This gives the Wheat Board its licensing authority across Canada. The rule is the same across Canada for licensing, but it is applied differently in the east than it is in the designated area.
The Chairman: When you say, ``licensing,'' do you mean the licence to grow wheat, a licence for production?
Mr. McBain: No.
The Chairman: Would you just tell me what kind of licence this is?
Mr. McBain: This is an export licence. An export licence is required for any wheat or wheat product or barley or barley product containing 25 per cent or more of each product exported from Canada. If it is flour, pasta noodles, raw wheat, raw barley, feed barley, malt barley, and so on, it all requires a licence.
The licensing requirement is applied differently in the east as the west. Here there is no legal requirement to be in the pooling system. The board does not control all grain. It only controls grain offered to it in the pooling system. They tell us that they will not give us a licence in the designated area unless we sell the barley to the board and buy it back. However, there is no requirement to do that in law.
Mr. Laycraft: We do not sell any cattle to Europe currently on the basis of geographic risk ratings related to bovine spongiform encephalopathy, BSE. We are currently, along with the U.S., in a risk 2 category, which is ``not likely'' to have it.
We believe we should have been in a risk 1 category, and we are working with our government to get into risk 1 because we are confident we do not have it. Because of that, they do not allow any live cattle exports. That trade was essentially disappearing anyway.
Typically, most genetic product now is either sold in semen or embryos. There were some problems in selling that, but I think they are being resolved.
For beef, they are one of the most tightly restricted markets in the world. We call it ``Fortress Europe.'' There is virtually no hope of selling beef to Europe. We have completely given up on that market.
Senator Setlakwe: We are selling beef to Asia.
Mr. Laycraft: Yes, we are. Just to put it in perspective, the EU offers to Canada and the United States an 11,000 tonne quota with a 20 per cent duty in quota and prohibitive duties above that.
We are selling 450,000 tonnes to the U.S., so it is equivalent about 5,000 tonnes per country. As well, they have an illegal ban on our exports because we have licensed for use in Canada growth promotants, as they do in the U.S. If it is not that, they come up with some other reason why we cannot sell beef to them.
Mr. Usherwood: In light of the recent court challenges and the imprisonment of farmers, the number of farmers who would opt out of the Canadian Wheat Board would be relatively small — perhaps in the hundreds. A percentage of the export would be smaller.
If it can be found or proven that it would be more beneficial for farmers to opt out of the Canadian Wheat Board and to realize more money in their pockets, then the Wheat Board has got a challenge. However, that is business and that is competition.
My view is that the Wheat Board should not be fearful of disappearing. I think they have the momentum, and they have the will to persist. We need to have the reality of freedom of choice.
Senator Setlakwe: Do you think that farmers would be better served exporting individually than they are now by the Wheat Board?
Mr. Usherwood: I think it is a moot point. It is perception. If people perceive that they would be better served and they want that right, then that is going to get the media's attention, it is going to the U.S.'s attention, and it is going to create a lot more static than I think is justified for such an issue.
The Chairman: I suppose you are saying that if there was a small competition to the Wheat Board, things would be less controversial.
I have to admit that I have wondered the same thing. If you would be as able to export grain individually as well as through a selling organization — which is what the Wheat Board is — just how long would you be successful if the market declined? It would be okay when the market was high, but difficult when the market was low.
As I understand your answer, you are saying that the Wheat Board should continue, but there should be some competition with it.
Mr. Usherwood: That is correct, Mr. Chairman. I think you have read what I have said correctly.
Senator Di Nino: Mr. McBain, you are part of the Wheat Board, I gather. Do you agree with Mr. Usherwood's position?
Mr. McBain: Absolutely. The issue of having an open market and including the Wheat Board in it has been the position of the barley growers.
The issue of exporting always seems to dominate the conversation, but a more important issue is the domestic sale of our product. The domestic market has not expanded. We would rather see the value-added opportunities increase here and export a processed product rather than a raw product. With regard to the issue of an open market, the export opportunities would be overshadowed by the opportunities of a domestic value-added industry here.
This goes back to the Farm Bill question. The basis of the Farm Bill is to buy the product in the United States and create a world market that has to compete with that low price. Therefore, you force the value-added industry into the United States, and they are the dominant market supplier now for that value-added product. It forces out value-added process in all other countries where they are competing for the raw material.
The important part of an open market is the opportunities it would create here. This is where various chambers of commerce — the Regina Chamber of Commerce included — has seen that value-added opportunity is the real benefit domestically.
Senator Di Nino: I have two questions to all and any who would like to respond. We have heard testimony that the trade with the U.S. principally, and to some extent with Mexico, is both sectoral and regional.
One of the criticisms of trying to deal with the irritants created with the U.S. is that we do not have a united front. We do not have a pan-Canadian position. Particularly since the FTA came into being, the U.S. has many times been able to — at least partially over the last 200 years — divide and concur.
Do any of you have any comments?
Mr. Laycraft: There is a certain irony relating to which side of the glass you are looking through. Most of the people we talked to in the U.S. feel that we have done far better in the trading relationship than they have. I think that is the general sentiment down there.
From our sectoral perspective, on balance we have had a very good relationship down there. There tends to be a lot more tension related to regulatory issues. The Wheat Board is a chronic irritant south of the border. It is not just lately with the Dakotas.
It is ironic when you look at feed grains, the highest feed grain prices now in North America are in the Lethbridge area because of the concentration of cattle feeding in Western Canada. That is why there is so little barley in the export pool. Sure, our barley production was down, but virtually all of it has gone into livestock feeding. The actual relevance to the Wheat Board is very small now in terms of the feed grain market because of the growth in the value-added industries in Western Canada.
It is a good idea for us to work with certain groups on a common position. However, there are some groups from which we want to keep a distance because of the issues they create. For example, the supply manage industries operate on a fundamentally different premise of restricting access into their markets. Groups such as ours operate on a free- market basis; we have different allies, and different dynamics south of the border. We are never going to be able to walk on a common ground when one group is trying to increase access and trade and the other group is trying to defend an orderly marketing system.
To be honest, the further you get from Canada, the easier it is to find people with whom we can talk rationally. We have people who count cattle-liners as their measure of trade in Montana and the Dakotas.
My message would be that the most important thing is that we need to work on and improve communications with our counterparts.
Mr. Usherwood: The U.S. has an advantage over us with their larger population and gross domestic product. They have a built-in market. We have to be proactive. We have to stay to a high ground, and we have to remove those perceptions or those misperceptions as to how we conduct business. Canada is a nation of traders. Anything we can do to maintain or increase our value is beneficial.
We have a domestic irritant. Currently it is economically viable to ship durum wheat to Taiwan where they make pasta and send it back to us. They can make money at that. The irritant is that the Canadian Wheat Board has a sales commission that it cannot be sold to a pasta plant in Canada. Therefore, we are not doing anything to add value to our durum wheat. I think this should be an irritant to Canadians because we are really a hauler of wheat and we are not getting any residual benefit to the economy.
Mr. McBain: The barley growers have joined with other commodity producers in Canada to form the Grain Growers of Canada. We meet regularly and have an executive director in Ottawa so we have a common front for lobbying government in domestic and trade issues.
Senator Di Nino: You have not joined with other sectors? With the automotive industry, softwood lumber, the potato growers, tomato growers, et cetera?
Mr. McBain: We meet regularly with the Cattle Feeders Association and we are putting together common fronts for trade issues relating to both cattle and grain imports and exports.
Senator Di Nino: We have had at least two very credible witnesses talk about the issue through the lens of September 11 in a rather disturbing manner in the dire predictions on the problems that that is going to create.
Senator Austin asked if these groups are concerned in regard to the conditions that are being set with the issues of perimeter, secure border and so forth. I do not know if we got a full answer on that. Will these conditions be a major problem for Canada in keeping its trade relations with the U.S. in particular?
Mr. Laycraft: We have been following those very closely. We see two significant strings: the Bioterrorism Bill and homeland security.
For some products, bioterrorism, should legitimately a cause for concern. They have excluded products such as red meats and from that, so we have not had an initial concern. However, these are areas in which we need to work closely with our American counterparts.
The homeland security contains all of the right language. We should be able to work out something that is good for Canada, in my opinion. However, it also has some risks to go the other way. I think it warrants constant vigilance and a real effort to work with them.
We believe we can work to streamline procedures at the border. A lot of the suggestions related to pre-notification, we do anyway. There are random inspections, so send notification when shipments are sent there. They let us know which ones have been directed to the inspection point. Our sector has become used to many of these procedures.
However, I do believe that if any two countries should be able to work out a good compatible system, Canada and the U.S. can. We have the largest two-way trade in merchandise that I am aware of in the world. We are also countries that are very similar in a lot of respects. We share many of the same concerns.
Mr. Usherwood: Yes, we should be very much concerned about the fallout from 9/11.
I compliment the Canadian department of agriculture for being proactive on this. We have food safety people. Some of my associates are food safety specialists, and we are vulnerable. Potato crops or grain crops can be easily contaminated. It would not be very expensive.
The department of agriculture is on top of this, but we have to be proactive. We have to ensure that there is no perception that our guard is down or that we are not doing the right thing. Yes, we should be concerned and we are vulnerable. However, I think we are taking the reasonable steps.
Mr. McBain: Any restriction to the U.S. market could be devastating to the agriculture industry in general in Canada. The worst-case scenario would be if the border were closed completely. We would be wiped out the next day. We are heavily reliant on the export and import of products from the United States, and we rely on that market to support our industry.
The Chairman: I might just remind our witnesses that we know that, in order to conduct our massive trade with the U.S., the requirement is that one truck cross the frontier every two and a half seconds. If that were stretched to five seconds or more, there would be enormous implications for Canada. This is one of our major concerns.
Senator De Bané: Mr. Laycraft, what is our share of the beef market in the United States?
Mr. Laycraft: Last year when we ran that calculation, we had 3 per cent of the beef market. We also export live cattle. We had what works out to 4 per cent of the U.S. live cattle slaughter; therefore, in total we have roughly 7 per cent of the U.S. market.
Senator De Bané: Are there other countries that also supply the American domestic market?
Mr. Laycraft: Mexico's sends in around 3 per cent of their live cattle supply in the way of feeder cattle. Australia and New Zealand are the only two other large exporters of beef to the United States. In all, there are four countries that are the main suppliers to the U.S.
Senator De Bané: What market share do Australia and New Zealand have combined?
Mr. Laycraft: Combined, they are probably going to be somewhere in the 6 per cent to 7 per cent.
Senator De Bané: When you look at the different protectionist measures that the United States has taken since 1980 — whether countervailing or anti-dumping — have any of these abated against your group since the free trade?
Mr. Laycraft: It is interesting to look at the graph. The seventies were a very difficult period. There was the Nixon price freeze, which led to a whole bunch of different measures on both sides. In the 1980a, a number of 332-type studies investigated the nature of trade. It was not until 1998 that we actually found ourselves in a formal dispute.
It is clear we got rid of a number of tariffs because of the Canada-U.S. Trade Agreement. We certainly improved our ability to move meat products across with the random inspections instead of every product being inspected. Our feeling is that CUSTA, in particular, was a landmark agreement that has made a tremendous difference for our industry. The areas for dispute tend to be rules that are based out of the WTO instead of NAFTA or CUSTA.
There is some unfinished work relating to CUSTA and NAFTA. We established committees to look at further harmonization around the approval of certain products, more harmonization around inspection requirements. It is really in regard to the unfinished work there are areas that occasionally raise problems.
Senator De Bané: According to your brief, there were five attempts in the last 20 years to impose countervailing or anti-dumping measures. No?
Mr. Laycraft: The 332 is a study versus an investigation. It can be a precursor to a trade dispute. They may use the data to launch the dispute. However, when we met with our American counterparts, they recommended taking that route because there were tensions. When the market goes down, concern goes up. It is a fairly simple relationship.
They said if we get more facts out in the country, it would help reduce some of the concern. You take a gamble with that, but we have found the US International Trade Commission has been very fair in their examination in the United States. In many cases, it actually dissipated before it became a dispute.
Another group with some very clever lawyers got involved in 1998 — the Ranchers-Cattlemen Action Legal Fund, R-CALF. They are a group that usually represent interests down there that want to get the anti-dumping duties in place. They found a way to get standing, so it was kind of a new element came into the actual investigations in 1998. Our American counterparts were not in favour of that investigation.
Senator De Bané: You have 3 per cent of the beef market, and still there were several attempts. Imagine the problem of our softwood lumber. They have about 33 per cent of the market share there and they do not even know who those companies belonging to the coalition against them are. My understanding is that they are driven by pure, crass, domestic politics.
With respect, I do not agree fully with your argument about the definition when anti-dumping arises. You seem to say that in a free market, as long as you are in a free market, by definition, there can be no dumping. I am not sure that analysis is valid in economics.
My next comments are directed to Mr. McBain and Mr. Usherwood. First, neither of you have made any reference to the fact that the majority of the members of the Wheat Board are farmers. Second, they have voted and the overwhelming majority of them have been in favour of that system.
I have a comment that you might not find relevant to our discussion. I was Minister of Fisheries. Fish is another commodity. Why are the prices depressed there? It is because the sellers are different small fish plants and fisherman. They cannot compete with the buyers who are in Boston and elsewhere that supply the whole American market. When an individual or a group of them arrive, they do not have the clout of the Wheat Board.
The Wheat Board can go to a country and state that it is representing all the farmers in Canada. It can guarantee quality and delivery. Do you think your members can compete with that in a business sense? We are about a commodity and the whole thing is a question of the relationship between the seller and the buyer. For example, our largest and most important wheat buyer is the Government of Algeria. Do you think that government, which buys for hundreds of millions of dollars a year, would feel more comfortable dealing with individual small groups of sellers from our country? Or would they prefer to deal with the Canadian government?
My fundamental question is why do you not accept the opinion of the overwhelming majority of grain farmers from our three Western provinces?
Mr. McBain: In our last election, which presented five of the ten districts in Western Canada, 17 per cent of eligible producers voted in favour of an open market; 23 per cent voted to support the Canadian Wheat Board the way it is. Forty per cent of eligible producers voted. The question is where were the other 60 per cent? Both sides claim their support one way or another.
The Chairman: What did they vote for, the other 60 per cent?
Mr. McBain: They did not vote.
The Chairman: Then they voted for the status quo.
Mr. McBain: Not necessarily. Many farmers are completely disengaged from the Canadian Wheat Board, so although they are eligible to vote, they have no interest in the board. They farmed around it. We call it ``voting with your seed drill.'' They have produced entire new industries in Western Canada that are non-board crops. The pulse industry is the best example. Because of the Wheat Board policy, farmers have been directed into a more economical and profitable industry where one never existed before.
Anyway, the numbers get distorted on both sides.
At any rate, the numbers get distorted on both sides. There are a thousand votes differential among three of the four areas, between the board and the non-board candidate winning. There were 80 some thousand possible votes; a thousand votes determined the outcome of three of four directives.
In respect of delivering grain to another country, it comes down to individual producers. I do not buy that scenario. I do participate in international markets in other industries and it is not difficult. There are only five major grain companies in the world. All of these are located in Canada and the Canadian Wheat Board does not handle grain. They do not deliver grain. They do not grade grain. They do not guarantee the supply. The Wheat Board is just an accounting system. They hire agents. They do some marketing themselves. Otherwise, they have exclusive agents in other foreign countries that deal with the buyers in that country.
We have other agencies such as the Canadian International Grain Institute, CIGI, that do market development in other countries. If the board was a voluntary organization and I did not have to deliver to them, the point would go to the grain companies where they are already in those markets. They are already the ones that organize the delivery to port. They have the port facilities. They organize the ship, the freight and the delivery to each market that they already have.
The board will tender contracts to the grain companies either as delivery to a country or as delivery to spout. Either the board arranges the freight for delivery at spout, or the country that buys the product arranges for their own transportation.
It is not really an issue of individual producers having to compete with each other for an international market; it is an issue where, the individual producers have never been in that position and will not be in a voluntary marketing situation.
Mr. Usherwood: Neither Mr. McBain nor myself is advocating the abolishment of the Canadian Wheat Board. We are concerned that our trading partners perceive it as a monopoly.
Mr. McBain's figures are similar to mine. We have barley or wheat farmers who feed their product to their cattle. They do not have to deal with the Wheat Board. That is Mr. McBain's point, that they have created a sub-industry. However, if you have durum wheat and you want to make it into pasta, you another company to do that. That is where the Wheat Board is creating some problem domestically.
Furthermore, the Wheat Board does not need to have five government-appointed directors. The concern is that one of those five appointed directors is always the chair. By my parliamentary recollection, the chair always has two votes on a tied vote. Therefore, a majority to pass anything would require nine of those ten elected directors to gang up hypothetically on the five appointees. That is perceived as undemocratic and has created some problems.
The two issues relate to perception of how the Wheat Board is structured. The Canadian Wheat Board will actually prosper with that freedom removed because the farmer will decide they can make more money by dealing with the Wheat Board. That is probably the case. However, the perception is that they can make more money by not dealing with the Wheat Board. As Canadians, we need to endorse competition in our society.
The Chairman: As I understand it, in the cattle business, your approach to problems of dependency on the U.S. market is that you are diversifying and trying to get — I think you said this earlier — 50 per cent of your exports to other countries. Is that right?
Mr. Laycraft: Our 2010 strategy is to get to a 50/50 relation. A big part of the difference is moving out of the commodity business. We are not going to compete against the low-cost South American product. It is on the basis of high-quality products, on the basis of the safety that we have in our Canadian food inspection system and our production systems here, and our ability to access, on reasonable terms, markets like Asia and Mexico.
We will be changing the way in which we do business, but we feel confident that we can realize that strategy.
The Chairman: I was a member of this committee when we dealt with the original Free Trade Agreement. I recall how the Canada-U.S. trade in cattle operated at the time. In the West, we exported cattle to the western United States and in Eastern Canada, we imported cattle from the contiguous part of the U.S. We did not have a big problem with cattle moving back and forth.
As I have understood it this morning, you have managed to resolve your trade disputes. The difference has been the removal of tariffs, which has caused you to integrate more.
Could you describe briefly, what has happened since that ``even-Steven'' situation in 1998?
Mr. Laycraft: That agreement also created more investor confidence. That was a big factor. We saw investment in the packing industry and modernization. We now have three of the most modern plants in the world — two in Alberta and one in Guelph, Ontario. There was an expansion in the packing industry.
We also saw a dramatic expansion in the feeding industry. In the past, we would have sent a lot of feeder cattle to eastern Canada and to the United States for export. Ontario would have either imported feeder cattle from Western Canada or from the U.S. We are finishing more cattle in Canada and reaping all of those benefits to the grain sector.
The Chairman: Which has, I suppose, changed the dynamics of the grain sector to quite an extent.
Mr. Laycraft: It has made an enormous difference, if you take a look at our exports of feed grain, for instance. We always believed that with the removal of duties, Western Canada, in particular, would demonstrate more efficiency and increase its share of the North American production. That has happened.
During this period of time, it was not just a re-distribution. The western Canadian beef industry and the Canadian beef industry increased in size. Last year when the census came out, we had the largest beef cattle herd ever reported in Canada. That was a reflection that we were able to export. While our domestic consumption has gone down per capita, it has held about even because of the increase in population. The entire growth that we have realized in our industry is because of trade. We have done very well in the U.S. market and it has given us now the competitive ability to do well in other markets.
The Chairman: On the larger agricultural issue, it is interesting how complex the issue is. Not so long ago, I listened to Mr. Stuart Harbinson, who is the chairman of the agricultural committee of the Doha. They picked him because he is from Hong Kong, where they do not have any agricultural production. One of the few agreements they have had so far was on the choice of chairman, so we know this is a very complicated issue that is not going to resolve quickly.
We know that Mr. Fischer of the European Union is also not going to make any pronouncements before the Doha procedure takes away. He is not going to give any of his cards away at this point.
I want to thank our witnesses on behalf of the committee. This is a very troubling issue.
The committee adjourned.