Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 8 - Evidence - Meeting of April 29, 2004
OTTAWA, Thursday, April 29, 2004
The Standing Senate Committee on Agriculture and Forestry met this day at 8:35 a.m. to examine the issues related to the development and marketing of value-added agricultural, agri-food and forest products, on the domestic and international markets.
Senator Donald H. Oliver (Chairman) in the Chair.
[English]
The Chairman: Today we are continuing the study of the Senate on value-added products. Over the last few weeks we have heard from a number of witnesses from various industries and farm activities dealing with value-added products and things that can make products Canadian and things that can help market Canadian products overseas.
Our last witness was Mr. Tony Stewart from British Columbia who told us of some of the value-added initiatives that he and others in British Columbia have undertaken.
Today, honourable senators, I am delighted to report that our first witnesses are from Agriculture and Agri-Food Canada. We have Mr. Gary Koestler, the Deputy Director of the Eastern Hemisphere Division of the International Trade Policy Directorate and Mr. Michael Presley, the Director General of the Food Value Chain Bureau, Food Safety and Quality, International Issues. We will hear from these witnesses for one hour and then we will go to Mr. Bill Ross, the president of the Canadian Vintners Association.
Mr. Koestler, we will hear from you first.
Mr. Gary B. Koestler, Deputy Director, Eastern Hemisphere Division, International Trade Policy Directorate, Agriculture and Agri-Food Canada: Honourable senators, it is a pleasure to be with you this morning as part of your study on the development and markets of value-added agriculture, agri-food and forest products. I will be speaking about a specific component of value-added agriculture, which is Canadian wine. That is my particular area of expertise.
I would like to begin with a brief overview of the role of the federal government in the development of the grape and wine sector in Canada and the factors related to the development of a world-class reputation for Canadian wine and the benefits to the industry, including those at the farm level.
In summary, the wine and grape industry is a sector of the Canadian agri-food industry. In the 1970s, the industry was characterized by growers producing low-quality, high-yielding grapes. There were a few large wineries that were highly dependent on preferential tax treatment to sell wine on the basis of price. Today, Canadian wineries are operating in one of the most competitive wine markets in the world, and Canada is recognized as a quality wine producing country with over 200 wineries. The strong linkage between quality of the wine and the quality of the grapes and the growing integration of grape growing and wine making has been a key element of this success.
Over the years, the federal government has supported numerous industry initiatives related to wine, such as new variety evaluation in Ontario, British Columbia, Quebec, and Nova Scotia. In addition, there has been ongoing support for domestic and export market development and the development of wine standards in Canada to improve the quality of Canadian wine and to meet the requirements of foreign markets. For example, the development of the Vintners Quality Alliance, VQA, wine standard and geographical indications for wine production in Ontario in the 1980s was initiated to meet European wine import requirements. Since then, VQA has been adopted in British Columbia and has evolved into a key element in the current success of the wine industry in Canada.
A major turning point for the Canadian wine sector came around 1989. The outcome of the Canada-U.S. Free Trade Agreement and a GATT panel ruling against provincial liquor board policies forced the phase-out of provincial taxation policies which, according to international trade rules, unfairly favoured Canadian wines over imported wine. The subsequent changes in provincial policies in this area would force the Canadian grape and wine industry to be more competitive with imported wines in the Canadian market.
In recognition of the need for the grape and wine industry to undertake a significant restructuring to survive in a more competitive environment, the federal government, in cooperation with the provincial governments of Ontario, British Columbia, Quebec, and Nova Scotia, implemented a multi-year wine and grape industry adjustment program. The focus of the program was the improvement of grape quality and wine-making practices. The main component was a grapevine pull-out program, which eliminated one-third of the lowest quality grapevines in Ontario and two-thirds in British Columbia.
In addition, government support was provided for grape and wine quality improvement as well as the domestic and export market development. Provincial governments also encouraged the development of the sector through changes to provincial laws including provisions to make it easier to establish small wineries and permitting on-site wine sales in complementary businesses such as restaurants.
The wine sector is also the key driver for agri-tourism in Ontario and British Columbia. Not only has there been considerable investment in small wineries and high quality vineyards, agri-tourism has allowed for the development of many other agricultural-based businesses, including food service and hospitality sector as well as specialty food producers and processors. An emerging wine sector in Nova Scotia and Quebec is following a similar pattern. As agri- tourism provides an opportunity for direct sales from producers to consumers, it allows producers operating on a smaller scale to be economically viable.
An important element in the success of Canadian wine sales in Canada was the development of a quality reputation for Canadian wine gained through market development efforts in Europe. Winning major international competitions and influencing internationally recognized wine writers served to help change the image of Canadian wine in Canada as well as other important markets such as Japan and Taiwan. This was achieved through a concerted effort of the Canadian industry with the support of the federal and provincial governments. Canadian icewine is now international recognized as one of the best and most valuable wines in the world and is a flagship for the full range of quality Canadian wine.
The federal government, cooperating with provinces and industry, has recently negotiated a bilateral wine and spirits trade agreement with the European Union. This is another element in the overall strategy for this sector to improve access to important niche markets in European Union countries for high quality Canadian wine and to support the image-building strategy for Canada.
The federal government has also ratified a multilateral trade agreement between new world wine producing countries on the mutual recognition of winemaking practices. This agreement recognizes the world-class level of Canada's wine sector and will improve access to other markets. The current negotiations under the world wine trade group are underway on a wine-labelling agreement, which will further facilitate trade in wine and help to protect the icewine name from imitation products in foreign markets.
Since the mid-1990s, the federal government has supported the development of national wine quality standards. One of the objectives is to harmonize VQA wine standards between Ontario and British Columbia and provide a framework for quality standards to be implemented in other provinces such as Nova Scotia and Quebec. This initiative will allow standards to be enforced on wines exported from Canada and also respond to a commitment by federal and provincial governments under the Agreement on Internal Trade to establish national wine standards to facilitate interprovincial trade in wine.
The evolution of the grape and wine sector in Canada serves as an example of the progress that can be achieved by a concerted effort by industry to improve quality and value of an agri-food product and the value of cooperation with governments at both the federal and provincial levels. Key elements of success in this sector are reflected in Canada's new agricultural policy framework.
My colleague, Mr. Presley, and I would be pleased to respond to any questions you may have.
The Chairman: Thank you for that interesting presentation. I would like to ask you a question that I have asked other witnesses who have come here.
A number of Canadians have told me that one of the things that is wrong with Canadian agricultural products is that there seem to be interprovincial barriers to our being able to access, receive and use products from other provinces of Canada. Specifically, I have heard people wonder why they cannot get cheese or maple syrup products from Quebec in Ontario. They wonder why they cannot get certain meat products or wine products from one province when they are made in another?
I am aware that there are certain interprovincial trade barriers. I know that the federal-provincial Agreement on Internal Trade, AIT, is said to have improved the movement of alcoholic beverages within Canada — that is, between provinces.
Has the trade in wine improved since the signing of this AIT? Are there circumstances in your view where it is easier for a foreign supplier — from Chile, France or Spain — to sell into a province than it is for a province to sell into another province? I would like to have your view on that. If there is a problem, I would like your recommendations for what our committee should be doing about it.
Mr. Koestler: The AIT includes a chapter on alcoholic beverages trade. In that chapter, there were some issues related to different types of alcohol — beer, spirits and wine. In the chapter related to wine, one of the aspects was establishing national standards to help facilitate trade. We have had good support from provincial governments on this initiative. That has gone a long way to opening the eyes of the different provincial agency in terms of the interest in trading interprovincially.
One aspect that one must consider in respect of interprovincial trade in alcoholic beverages is that under the Importation of Intoxicating Liquors Act, the provincial governments are the only body with the authority to import wine into the province. The province must take possession of any alcoholic beverages that are imported into the province. It is not traded like other products or goods. There is a very narrow channel for this trade to occur.
The Chairman: Is that true for all provinces of Canada?
Mr. Koestler: Yes, as I mentioned, under the federal Importation of Intoxicating Liquors Act, the authority for trade in alcoholic beverages has been delegated to provincial governments. This act goes back to the 1930s. That is one of the reasons that alcoholic beverage trade is really on a provincial basis.
That being said, our initiative on national wine standards has certainly opened many eyes. The high quality standard on VQA products has received recognition and those are the products that are trading freely between provinces. In particular, Alberta has been a major new market for VQA wines. Quebec is promoting VQA wines.
The same would apply with respect to imports. Imported wines would have to be bought by provincial governments. If a wine is sold in one province, it is no automatically sold in another province. It is up to the provincial authority in each province to actually purchase the imported wines. It is a fairly narrow opportunity of selling wines within a province, or any alcoholic beverages.
Mr. Michael Presley, Director General, Food Value Chain Bureau, Food Safety and Quality, International Issues, Agriculture and Agri-Food Canada: Mr. Koestler has described the wine circumstance nicely. I would say there is trend toward moving products nationally in Canada. In some respects, that is a function of commercial developments in the food industry more than perhaps policy or legislative efforts as retailers.
Food retailers have consolidated. There are more national buying desks within these large retail settings. Hence, you do not tend to have, for example, buyers within each province within a major grocery store. You would tend to have a couple of regional ones. In some instances for some categories, there is one buyer for the entire country, which means that suppliers try to supply the entire country. That has been the more prevalent trend.
The Chairman: Are there any health or phytosanitary rules in relation to the movement of cheese products, those that are pasteurized and those that are not. Are there still interprovincial barriers on those products?
Mr. Presley: I will have to come back to you on that subject. I do not know the specifics on the dairy category. I will have to respond to that later.
Senator Mercer: I am always interested in making sure that any government action has the effect that those of us who are affected want it to have at the end. I am interested in the discussion about the wine industry lobbying for the elimination of the excise duties at the lower levels of production of 100 per cent Canadian wines.
Specifically, I would like to know whether, if we were to do this, there is any way that we can ensure that the money that would be realized out of this for them would get to the wine producers, but would also reduce the price to the consumers? The two people who are vital to the success are the producers in continuing to produce quality wines, but also the consumers whom we need to consume more Canadian quality wines.
Mr. Presley: I think the honourable senator has just described the fundamental policy issue attached to that.
As you know, the excise tax policy is determined by the Department of Finance. There are always implications attached to tax policy that I underestimate from my perspective in Agriculture and Agri-food Canada. While I am very sympathetic to the interests of the wine industry and moving on this front, it is something that resides with the Department of Finance.
Your observation is significant. In other words, if there were savings available to the industry through tax reductions, how would those savings be invested in the industry? I know that Mr. Bill Ross will be following us and may want to comment on that. Would the savings accrue to the consumer? Would those investments be reinvested into the vineyards to produce still better grapes and to produce better quality products for the consumer? Would we see it invested in new, innovative products that are responsive to the consumer?
Those are some of the fundamental issues you would need to think through in that kind of a discussion. I am afraid I do not have anything more to offer than that. That is the crux of the policy discussion.
Senator Mercer: This will be the crux of many discussions around the table. However, I would challenge one thing — quality lies not only in the quality of the grapes. This is not just producing grapes and wine; it is producing an opportunity for tourism that goes along with it. There is a huge tourism industry around most of the wineries and one that can be expanded and has an effect beyond just the vineyard and the winery.
I am also interested in the marketing concept. We had a discussion the other evening about the joint marketing of wines and other Canadian agricultural products. We have a large surplus of beef in this country, but we also have other quality products that we should be trying to market along with our quality wine.
I am interested in whether you are familiar with the Taste of Nova Scotia Society, which is probably one of the best examples — if not the best example — of a unified marketing strategy for products from Nova Scotia. Do you think that model can be used as a template in other provinces, or perhaps could be used nationally to market wine with other agricultural products?
Mr. Presley: I am not intimately familiar with the Taste of Nova Scotia Society, but I know of the program. I have had a chance to talk to some of my provincial colleagues in Nova Scotia about it.
That program really does put the best foot forward for the Nova Scotian food industry. It is a program that is oriented toward discriminating toward the best products and promoting the best products. That is a key element for a marketing strategy focused on the domestic market.
As you may know, we have invested fairly heavily over the years in our export market promotion work. In working in an export market, you are dealing with consumers that, for the most part, do not know the Canadian food industry or food products. They may have a superficial understanding of Canada and a light understanding of our food products. When trying to market to those consumers, it takes a different strategy than one that focuses on the domestic market.
Over the past year, one of the things we learned from the beef file — certainly with BSE — has been that domestic confidence in the food product is extraordinarily important. What we found extraordinary about the beef file was that the Canadian consumer continued to hold Canadian beef in very high regard. Canadians increased their consumption significantly over the summer months following the May discovery of BSE — 60 and 70 per cent over those two months of July and August. That taught us that focusing on the domestic market and maintaining a sense of domestic pride in Canadian food products can serve our industry very well, particularly when we are dealing with some challenging export market effects as we felt with beef.
As I think about the domestic market and the focus that our department needs to put on with our provincial colleagues through programs such as Taste of Nova Scotia — and we have similar initiatives introduced in other provinces across the country — I like the approach we have taken with wine. We have developed, through such things as national wine standards, a national recognition of the premium categories so that Canadians become increasingly aware and see the best from the category.
We have created, within our department, some 10 value chain round tables, one of which is a horticultural round table where we are talking to the industry right from producer through to the retailer about strategies to both grow both the export and domestic markets. Part of the discussion focuses on how, as we appeal to the domestic consumer, we do it effectively so that we are just not competing with one category of food against another. It would be a tragedy if we introduced an initiative whereby we made inroads in terms of domestic consumption of beef but it came entirely at the cost of domestic consumption of Canadian pork.
We have to design our programs so that we think those implications through. A strategic approach that we need to take across all food categories is to first promote the premium categories and develop a sense of pride within the Canadian consumer of those products. We have discussed this with Canadian retailers. We have noted that in many instances Canadian consumers are not aware of the Canadian products on the shelves, so these kinds of initiatives could help.
The Chairman: Are you also dealing with the entire concept of value-added and of farmers adding value to the products they make as a way of increasing their marketing skills and increasing the market for their products?
Mr. Presley: Our premise, senator, is that too often in Canada — in horticulture in particular — we have supply chains but we do not have value chains. In other words, we have well-defined relationships between buyers and suppliers down to the primary commodities but we do not see a shared value premise throughout the whole chain.
Through these round tables, we are trying to create an environment and a setting where there can be candid discussion across the value chain. Bring together about 30 industry leaders from the primary level through to further processing, distribution and retail to look for win-win opportunities. We want to begin with some smaller pilots but where there could be an opportunity to define a premium category — a niche market— where that value proposition translates into realized earnings all the way through the value chain down to the producer.
We had our first meeting of the horticulture round table a couple of weeks ago. To start our first meetings of this round table we did a spot analysis and hired a consultant to help us. It was clear that we have a supply chain rather than a value chain and we need to adjust to that.
Senator Callbeck: I have a few questions about the VQA standards. It was mentioned this morning that they have been adapted in British Columbia.
What does that mean? Does that mean every winery is producing according to those standards?
Mr. Koestler: The Vintners Quality Alliance, VQA, is a certification mark used on wines that are made to a specified standard. Some wineries participate in the standards program in respect of the harvest of the grapes and the production of the wine. The wines then pass through a tasting panel to achieve a certain mark against the VQA standards. We label those wines VQA. Not all wineries participate in the VQA program.
Senator Callbeck: You also mentioned that there is work on harmonizing those standards between Ontario and British Columbia with the thought of going right across Canada. Are all provinces interested in these standards?
Mr. Koestler: Yes. We have had a process for several years but Ontario and British Columbia are the most keenly interested. However, producers and governments in Quebec and Nova Scotia are also now participating in this process and they are keen to follow a similar approach.
Although they have small industries, the idea is to identify the top quality product within that industry and market that. VQA has become the banner for quality wine in Canada. The intent is to establish that as a national standard and allow any province and producer group within that province that wants to set up a certification scheme to take advantage of that ``brand.''
Senator Callbeck: Is VQA marked on the label?
Mr. Koestler: Yes.
Senator Callbeck: I am from Prince Edward Island, where we have the small Rossignol Estate Winery. If Prince Edward Island were to accept the VQA standards, how costly would it be for Rossignol to accept and meet those standards?
Mr. Presley: The premise behind the quality standards is that there is a quality assurance attached to the product. We are developing a three-tiered standard. The effort has been underway since the 1980s when the industry tried to pull together wine growing regions across the country to develop national quality standards. Ontario demonstrated leadership but, as you discussed with Mr. Koestler, there have also been efforts between Ontario and British Columbia to develop the same standard across those two important wine-growing regions in Canada.
The Canadian General Standards Board was the vehicle used to develop these national standards. That process failed for a number of reasons but most importantly because the standard could not be enforced effectively. When you are trying to develop a reputation against a quality assurance standard, it is important when people make false claims based on that standard that you take action against those individuals. We needed to ensure that the standard was grounded in legislation. We are working through the Canadian Food Inspection Agency and the Canadian Agricultural Products Act, which provides for the basis for grade standards for everything from beef to pork to dairy and to juice standards. We have been using that act as the premise to enforce these quality standards, but that brings us to the issue of cost.
We have developed this standard on the notion that there would be three tiers. The top tier is the VQA, which is almost a brand that is well-known to wine consumers in Canada so it makes sense to build on that. It would be the premium category. To receive the endorsement and label a product as a VQA wine, the winery would need to have a taste panel. The winery would have to provide assurance that a chemical analysis had been done of that product, which requires a lab analysis. In addition, there is some requirement that the practices described and claimed to produce an icewine, or late harvest wine, are employed. Those are the elements in place. In most parts of the country — for example in Ontario and British Columbia — those capabilities have been established. They may have to be finessed a bit with the national standard, but they already exist.
We wanted to accommodate some of the new wine growing regions such as Prince Edward Island, Nova Scotia and some parts of Quebec, Some of those wine industries are growing and in Nova Scotia, the industry is quite well established. Other wineries may choose not to go the three tiers to the VQA level and to not have their product assessed by a taste panel. In such a case, we would have a second tier of standard called ``regional wines'' available, for which chemical analysis would be done to verify that the product meets those quality assurance requirements, although not to the top tier. The costs attached to that vary depending on how high the winery chooses to go in the standard.
The challenge in Atlantic Canada is that currently we do not have a quality assurance governance system in place. They have been established in Ontario and British Columbia but they do not exist in Nova Scotia, Prince Edward Island and the rest of Atlantic Canada. We are working closely with the industry and our research stations — for example the Kentville research station in the Annapolis Valley — to take advantage of the lab analysis capabilities to try to introduce a governance model for Atlantic Canada that would be cost effective for the industry.
Senator Callbeck: Do you have any idea what the costs would be for a small winery in the Maritimes if it chose to achieve the third tier in the standard?
Mr. Presley: I will give some illustrations of some of the costs. We did a study with the national wine standards committee that looked at establishing a quality assurance role in Nova Scotia. This likely could serve the Maritime Provinces. Our total cost for establishing that governance body was in the neighbourhood of $75,000 a year.
The question then is how those costs would be recovered from industry versus government providing those services. That was assuming we did not have infrastructure in place. We are looking hard at that cost to determine whether we can reduce those figures by taking advantage of the Kentville research station's facilities to be able to incrementally reduce those costs to offset the lab analysis requirements. That is the kind of one-time cost we have looked at in terms of setting up the facility.
Other costs associated with putting in place a wine standard are that when we regulate quality assurance wine standards through the Canadian Food Inspection Agency, the CFIA would require that all the establishments that are regulated for quality assurance also meet their food safety requirements. They would require those wineries to be registered food safety establishments.
Senator Hubley: I have another question on the smaller model from Prince Edward Island. If a winery does not grow all of its own grapes, are there regulations on how many they can import, or do they import? Is that something that happens often? I was thinking about traceability and the standards they have to use to grow the product. I do not know if it is a common practice for wineries to import a lot of grapes from other parts of the country or other parts of the world.
Mr. Koestler: The VQA standard requires that 100 per cent of the grapes be grown in Canada. In addition to VQA certified wines, other wines are made in Canada from a blend of imported and domestic products or just imported. There are no limits on the import of wine-making material. Wineries are free to import grapes or concentrate or juice to make wine, but it will never have a VQA label on it. The VQA standard is for 100 per cent Canadian-grown grapes, and a second-level standard was suggested for regional wine, which would also be 100 per cent Canadian-grown grapes. The top quality wines will be made from Canadian products.
Senator St. Germain: In regard to the VQA, is the Canadian Food Inspection Agency involved with the standards, is this done by the wineries themselves, or is it a joint effort?
Mr. Koestler: Currently, the VQA standard is enforced through government under provincial government regulations. In Ontario, VQA standards have been established and the enforcement of that has been delegated to an organization that enforces the standards on behalf of the provincial government. A similar situation exists in British Columbia, where the B.C. Wine Institute is enforcing the VQA standard.
In our model for when it becomes a national standard, the VQA will be a federal regulation and authority to enforce will be delegated to provincial governments — presumably the existing bodies that are already in place. We are not looking at creating new federal inspection services. It is a matter of recognizing what is going on already at the provincial level and delegating federal authority, in effect, to the provincial governments.
Senator St. Germain: In respect of the testing and the grading, does the federal government establish the tasting panels? From what I can understand, you do a scientific or chemical analysis of the wines, and then there is a tasting panel. Is this an arm's-length panel away from the wineries?
Mr. Presley: Maybe I can start in terms of whether it is a federally appointed panel, and then Mr. Koestler can describe the way that assessment is done.
Provincial wine authorities have established the tasting panels. In Ontario, for example, the VQA wine authority has established the panels; likewise in British Columbia.
Mr. Koestler was describing the role Canadian Food Inspection Agency would play in this. Many of our quality standards, whether for beef grading or something else, tend to designate third parties to do this for them. In the same way, the CFIA would designate these wine authorities to perform this function. The CFIA, before designating them, needs assurances that there is no conflict of interest, commercial or otherwise, and that they have the capabilities and that the training is in place and that the insurance and liability issues have been looked after. Those are some of the conditions that have been established.
Mr. Koestler: The taste panel in Ontario, for example, the VQAO, Vintners Quality Alliance of Ontario, is responsible for enforcing the VQA standard. They have a taste panel made up of mainly employees of the Liquor Control Board of Ontario — wine consultants who taste wine every day. These are professional wine tasters. These wines are tasted blind. There is no knowledge of which winery it comes from. They also have programs to educate the wine tasters as to the wine profile for Ontario wines.
There is a similar panel in British Columbia that operates out of the Summerland Research Station of Agriculture and Agri-Food Canada. That tasting panel comprises people who meet the qualifications for having a capability to taste and differentiate wine. These people come from the wine industry, the restaurant industry or the B.C. Liquor Distribution Branch, which is their equivalent liquor board. It is a variety of people, but the common denominator is that they must pass a test and be qualified as tasters.
Senator St. Germain: Is the market saturated? What is the projected growth in this industry? Have you any idea of the potential projected growth in the wine industry?
With respect to organic wines, I recently read an article on the Hearst Castle and the estate in California. One of the big issues is that they will sell off these estates for huge dollars for small acreages of so many hectares, and then they will possibly have vineyards on them.
The environmentalists are protesting this projected subdivision process because of concerns related to the herbicides and insecticides used in the production of grapes.
Can you elaborate on organic wines and the environmental impact on an area with huge production of grapes such as the Napa Valley in California and around Oliver, B.C.?
Mr. Presley: I will start with the question about market opportunities and how that appears to be growing. Mr. Koestler will respond to the question about organic practises and pesticides.
When we met with people from the Société des alcools du Québec, SAQ, to talk about national wine standards. We discussed their sense of what the opportunities are for the growth of the wine industry in Canada. To listen to the SAQ, you would understand that there has been some quite fantastic growth over the last 10 years, growth that we have not seen in any other food category. It has been quite extraordinary.
Mr. Koestler's comments are important to keep mind: We are facing a highly competitive domestic market. There are many imported products coming in. We will see a tremendous increase in acreage of top-quality grapes around the world from countries such as Chile, South Africa, et cetera. If you are a wine connoisseur in this country the years ahead look good because there will be a tremendous amount of top quality product available to consumers.
We will continue to see an increasing number of Canadians. This might be related to the aging of the Canadian population; you start seeing a decline in beer consumption and an increase in wine consumption as the average age increases. The wine industry has benefited from that.
The trick for us is to work carefully with government and with the Canadian industry to make sure that the market share that is derived from the Canadian industry is commensurate with that growth and that we do not see a declining percentage of that domestic market share as this tremendous competition comes in.
There is a great deal of optimism around the prospects for wine industry in the domestic market.
The Chairman: Is anyone making money? Senator St. Germain is a businessman and that is at the root of his question. Can you make a dollar in this business in Canada, as a farmer?
Mr. Presley: As a farmer, growing grapes? I should let Mr. Ross respond to that question when he comes because he can talk more about who is making money and who is not, in the wine industry.
Generally speaking, compared with other categories of horticulture, the investment in top-quality grape in the wine industry is translated into a value proposition throughout the whole chain that we do not see in other categories of horticulture to nearly the same degree, so I would say yes.
Mr. Koestler: To add to that question on the profitability, if you wanted to look at some things like land values in the Okanagan Valley and the Niagara Peninsula you would see that somebody must be making money because the price of land has gone up.
The Chairman: Yesterday we were told land runs at about $50,000 an acre.
Mr. Koestler: What else can you pay $50,000 an acre for in agriculture and grow a crop?
In respect of organic wine question, the Department of Agriculture and Agri-Food and the Canadian Food Inspection Agency are working on an organic standard for Canada. That will certainly set a regulatory framework to allow that to develop.
In British Columbia, there has been quite an interest in organic wines. Much of that has to do with climate. It is more feasible to move toward organic agriculture in a drier climate than in a more humid region such as in Ontario, Quebec and or Nova Scotia. It relates to disease pressure. There are agricultural aspects in terms of production of the grapes related to being able to go organic or not.
It is certainly a growing market. Growers are doing their best to take advantage of the increasing interest out there. With standards coming into place, it should be easier to take advantage of.
Senator Hubley: My question related to advertising. If you see a beer advertisement on television, you see wonderful parties and great activities.
When you see the wine advertising, it seems to be directed at a different age level. Do you have a comment on that?
Mr. Koestler: I cannot comment on the advertising strategies of different companies. Those are commercial advertisements.
Senator Hubley: Then I will go to my original question. The export of Canadian wines is small. It is approximately 1.3 per cent of domestic shipments. You have gone over several initiatives today: the work being done in respect of the standards of the VQA; the national wine standards; the promotion of the elite product; the ice wines and so forth. Are there other ways we can increase our Canadian wine consumption outside our borders?
With that, I would like to also mention that imports represent approximately 66 per cent of the domestic market. Where do you think, ideally, the balance should be? Do you think Canadian wines should be able to capture a larger part of that market?
Mr. Koestler: I do not know that measuring market share is the only way to measure the success of a sector. There have certainly been some changes in the Canadian wine industry and the shift that is taking place that may not show up in the statistics. Market share has to do with the value of the product.
As I had mentioned earlier on, Canada may have had a higher share of its domestic market but it was a very low- priced product. With the higher quality product coming into the marketplace under the VQA banner, the market share may be declining but the value of the product is going up. I would suggest that profitability is likely going up.
In respect of market share, it is a matter of moving the Canadian share of that market into the higher value wines where the industry is trending. We will never compete with the low-priced wines from large country suppliers and it is not a part of the market that will be in Canada's long-term interests. It will be more important to take a higher share of the higher-value products in the higher value markets to measure success of targets. If the industry was to set targets, the main focus would be on higher valued wines.
Senator Hubley: I think there is always that small cottage industry in small communities that is important to the economy of that particular region. What, as a government, could we do to assist these smaller wineries to come up to that VQA standard?
Mr. Presley: I want to emphasize the fact that these quality standards are voluntary standards, notwithstanding the fact that they would be captured in legislation so that if the terms associated with these standards are misused, we can take action. You can continue to be a winery and choose not to comply with these standards. The only restriction is, if you start using terms where there is a lot of investment made by the industry to develop prestige and reputation around ice wine, for example, that you do not use those phrases. It is a voluntary standard.
I spoke to your committee a few months ago about the work we have done with everything from cooperatives to some of the renewal programs we have set up to support training and skills development within the industry. I also mentioned other programming such as the Canadian Adaptation and Rural Development program of the past, which is now being continued in a new form. This program makes resources available to small value-added growers and firms to develop business plans and strategies. These are examples of overall federal and provincial efforts to support the industry and these programs will continue to be important to small wineries wanting to establish a foothold.
Senator Hubley: I have a problem. They are voluntary standards, but if the industry is promoting that VQA standard the smaller wineries will not be able to benefit from that because they cannot afford it. It would likely be a financial concern that would prevent them from trying to aspire to the VQA standard.
Mr. Presley: I have a contrary view. The more we can do to develop such things as national quality standards, a reputation for the premium category wines, will have a ripple effect through the other categories.
All of the Canadian producers benefit from that reputation. We have seen evidence of that with the experience in Ontario and British Columbia with VQA.
Senator Lawson: My experience with the wine industry goes back many years when the provincial government of the day in British Columbia under Premier Bennett decided that our laws in British Columbia were archaic. You are probably too young to remember. We had a ladies and escorts entrance to the beer parlour. A lady could not go to a beer parlour unless she had a male escort. In those days, you did not have a cocktail bar while you were waiting to go into the restaurant. That was the introduction of the plastic sandwiches because you had to eat something.
Premier Bennett decided that he would appoint a Royal Commission to review these archaic laws. He appointed a judge from the interior of British Columbia, a retired Catholic Archbishop and a tea-totalling Teamster — me. The Archbishop said, ``Edward, my son, you and I are to write the wine report and it must be authentic. I have had 10 years' at the Vatican, and I have some experience with wines. Here is my plan. We need to have dinner three or four times a week. I'll order the wine. You taste it. I'll drink it. Fair enough?'' It seemed fair to me.
During this two-year venture, I tasted a thousand different wines and found that I discovered a taste for German wines. I said, ``Your grace, you corrupted me.'' He replied, ``No, Edward, my son, I introduced you to one of the finer things in life.''
Senator St. Germain and I were there two or three years ago when Senator Fitzpatrick put a $5 million addition on his superb winery. You are right about quality wines. Cedar Creek Wineries, along with many others in B.C. have won so many medals, that they have been a huge success. I only have positive things to say about it.
I help out with a charity event organized by Peoples Drug Mart. It is a kind of fun event. Why do they go to Kelowna? There are good golf courses, but the real reason is that there are so many good wineries.
This is a credit to the flexibility of your regulations and so on. You talked about tourism and restaurants. Golf courses can compete with the finest hotels. Golf tournaments are combined with a wine tour. Food quality is in competition with all restaurants. This is a huge success from a combination of the flexibility of your rules, the attitude of the department, and the initiative and the innovative things that the wineries have done. It has been a huge success from where we were to where we are today. Whoever is responsible has my congratulations.
I think we need to continue what we are doing. We are now getting recognition everywhere with so many wineries in the interior winning gold medal awards in competition all across the world. We can be very proud of what we have accomplished.
The Chairman: Senator Lawson, thank you for those comments. That goes to the heart of what we are trying to do with the study on value-added. You spoke about the multi-functionality and the value-added component of something like a single grape. It is tremendous what it has done for Canada and for farmers.
Senator Tkachuk: Some 20 years ago, the wineries were saying that because of free trade they were not going to be able to succeed. They have succeeded quite well.
It bothers me that we would have free trade impediments in the provinces. You mentioned Alberta. Do all of the provinces have one buyer? Do they all buy through a central liquor board? Is that the way it all works? Which provinces are the worst for having impediments that restrict the free flow of wine products?
I notice that in my Province of Saskatchewan it is tough to get a good wine selection.
Mr. Koestler: The Province of Alberta has a unique liquor sales system. In that province, the retail sale of alcoholic beverages has been privatized. No longer do you have one single buyer; you have many buyers. Individual stores can buy wine.
It all must come through the province of Alberta. However, the Alberta government does not buy alcoholic beverages.
Senator Tkachuk: When you drive up by Banff-Canmore, there are a couple of fabulous wine stores. That person who owns those stores makes the buying decision, but then the purchase goes through the central agency. Is that how it would work?
Mr. Koestler: Exactly. That has been a good market opportunity for some of the smaller wineries, in particular. They can go to individual stores or restaurants and sell one case or five cases of wine. They can sell very small lots because they are dealing with individual stores and restaurants.
In other provinces, the agency delegated by the provincial government, such as the Liquor Control Board of Ontario, makes the purchase decisions.
Senator Tkachuk: They do not list everybody. They just list what they want to list or maybe those who are nice to their party. Is that correct?
Mr. Koestler: Their listing decisions are normally based on commercial considerations. It is a matter of having to sell the wine. These wine monopolies are in the business to sell wine. There is only so much room on the shelf. Not everyone gets on the shelf. There are different reasons for that. Fundamentally, they are operating on commercial bases.
Senator Tkachuk: Some wine stores are owned by wineries in Ontario. Correct? Do they sell only their wines or can they sell all VQA wines? Can they sell wines from anywhere in Canada out of that wine store?
Mr. Koestler: There are a limited number of private wine stores in Ontario that are owned by individual wineries. They can only sell wines that they produce within the province.
Senator Tkachuk: It is difficult for a small winery starting up in Ontario, British Columbia, P.E.I. or wherever. The owner must go to all of these provincial authorities to try to get his or her wine listed, is that right? Do they charge for shelf space like Safeway does? Can they buy shelf space so they can intrude on somebody else's market?
Mr. Koestler: Each liquor board operates with different practices. I do not know them all. However, normally a winery's first point of sale is at the winery itself. For smaller wineries, that is their main source of sales. You can only sell so much to people visiting the winery. Once you reach a certain level, you have to enter into distribution. When dealing with large buyers, there are volume considerations and being able to supply.
There are many different factors related to whether you get listed, and into how many provinces you can afford to list and the marketing dollars associated with that. Just to be listed in a store does not mean that the wine will sell. If you do not have a marketing program for that product, you will not stay there very long. There are many factors.
Senator Lawson: You are right in what you say about the farm gate sale. I believe there is a limit as to what the market can be when you sell to the liquor store, and you are allowed a higher markup at farm gate sales. That is very important to those wineries.
There is another thing that should not be overlooked. You made a casual mention about Alberta privatizing their liquor stores. The jury is still out on whether that was a good or bad idea. When they started out, they had 400 outlets and they had civil servants working in the liquor stores, getting wages and fringe benefits. When they finished, there were thousands of operators that are mom-and-pop operations or they are operating non-union with minimum wage.
I know the B.C. government decided that was a wonderful idea. They started with the program last year, got half- way through and stopped after they were able to put enough pressure on the unions to renegotiate some of their contracts, fringe benefits and so on. Part of that this trend that is out there about off-shoring and doing all these kind of things, you can break these contracts, so we will have the whole country on minimum wage and nobody left to pay the taxes.
Senator Tkachuk: These mom-and-pop operations are all in Alberta. There are many of them. Those people are making pretty darn good money in those places, where before they were prevented from competing in the marketplaces.
Senator Lawson: Some of them are. You should measure the bankruptcy rates.
Senator Tkachuk: It is up and down, that is fair enough. We have monopolies. We have a monopoly in Saskatchewan. That does not mean it is a better quality store. It is not.
The Chairman: Mr. Koestler, you have started a great debate here. Unfortunately, we are 15 minutes over your time. On behalf of the committee, thank you very much for this excellent advice and information you have given us. We will add it to others that we have gathered. It is deeply appreciated.
Honourable senators, I am delighted to welcome Mr. Bill Ross, who is the president of the Canadian Vintners Association, to join us
Mr. Bill Ross, President, Canadian Vintners Association: Honourable senators, on behalf of my board and our members, I would like to thank this committee for allowing the Canadian Vintners Association to make a presentation. We believe that your review of value-added issues as they affect the Canadian agri-food industry is timely and we are hopeful that, in the end, it will result in some excellent results.
The Canadian Vintners Association is a national association of grape-based wineries and their associations. We have direct or indirect members of about 100 wineries, representing about 90 per cent of Canadian wine production.
We are a highly value-added agriculture sector. We do not ask a lot of the federal government, but we do get good cooperation. I would say that Mr. Presley, Mr. Koestler and Ms. Gail Smith, who are all here from Agriculture and Agri-Food Canada, give us tremendous support. We have no complaints, only kudos, for their work on our behalf.
As you will see from my brief, I would ask your support that the federal government tax us less and that it modify some policies and procedures that may be outdated, and that would tend to negatively affect our value-added success.
The Canadian wine sector comprises more than 200 operating companies. Grape acreage has gone up to about 20,000 acres. That has virtually doubled in the last few years. We account for in the order of 10,000 direct and indirect jobs and perhaps $350 million in tourism revenues. We are reviewing that. We think it is higher.
At the retail level, Canadian wine sales are worth about $1.1 billion. Of that, about $125 million goes to the federal coffers in GST and excise taxes, and another $600 million or so goes into the provinces in liquor board markups and provincial taxation.
Exports, as we heard before, are not a large factor. The figure that I think one of the senators gave — at 1.3 per cent of domestic sales — is probably correct, but we export VQA wine. Our VQA wine production is about 10 per cent of shipments. It is more like 13 per cent of our VQA wine sales.
I would like to put a domestic policy framework in an international environment and then show you the uneven playing field that we feel that we are operating in, before giving some recommendations.
On the domestic scene, we feel we are the poster child — and I think Agriculture and Agri-Food Canada largely agrees that we are at least a poster child — for the agriculture policy framework. We are a high value-added industry. We produce a high value product. We start with a grape planted in the ground, nurture it, harvest it, and end up with a $20, $30 or $40 bottle of wine on the table.
All of our members are farmers. They plant grapes. We use advanced technology. We lever tremendous tourism and technology dollars. We produce a safe, environmentally friendly product. We essentially play to all of the tenets, if you will, of the agriculture policy framework. The one exception is that we are not large drawers of business risk management, which is a term used to pass dollars to the farmers from the government. The only direct compensation from the government has been in the context of normal crop insurance and related programs.
We have suffered, as you know, through fires in British Columbia. One of my directors lost his winery. We continue to suffer damages by the Asian ladybug, which has caused our industry in Ontario to destroy or downgrade in excess of 1 million litres of wine. The Asian lady beetle gets into the grape. The wine made from those grapes has a tainted taste, therefore it is necessary to destroy the wine. As the grapes were accepted for wine production, there was no crop insurance. Yet, the end product was useless. There is no compensation in any way. We are looking at that and working with the Agriculture Canada to get better research.
We have had two terrible winters. The Canadian wine crop in Ontario was down 50 per cent last year in production. If that happened in wheat or barley, it would be all over the front pages of the newspapers.
The Chairman: Why was production down?
Mr. Ross: It was the weather. We had a very cold January and February both in 2003 and this year. Last year there was frost in April of last year after bud break. The Niagara area has had two of the worst winters in about 15 years.
Internationally, we do not have significant import protection. The import protection is 3.74 cents a litre. Win suppliers to Canada, such as Chile or the U.S.A, do not pay that tariff. In total, there is about $6 million in import protection resulting from tariffs. We expect that that might be negotiated away during the Doha trade round.
I recently returned from Brussels. The European Union subsidizes its grape and wine industry in excess of Can. $3 billion annually. That is just the European Union out of Brussels. The individual countries and regional municipalities also provide extensive subsidies — some have said that those subsidies amount to double the $3 billion. We are dealing with very significant subsidies in Europe. In the U.S.A. and Australia, the subsidies are less but they are well-heeled, very aggressive exporters, as you have seen. You just have to go to the LCBO and look around. That is a difficult thing for us.
Furthermore, there is an excise tax break in many countries. In European countries, the excise break is an underpinning. In Canada, a tax of 51.2 cents per litre must be paid as soon as the wine is packaged and out of the excise warehouse. In countries such as Germany, Greece and Austria, there is no tax at all. We have a level playing field if we export to Germany, However, in those countries there is not an extraction of $50 million out of the industry before the wine is even sold. They have that advantage. In the U.S.A, there is a preference. That is, the U.S. producers do not pay excise at all. Whereas if we export to California, they pay excise. If they are competing against anyone their same size or even larger, they do not pay excise if they are from the U.S.A. In Australia, there is a rebate system state-wide and federally in which they get a rebate on excise for lower productions. It is a difficult environment.
Domestically, we are heavily taxed and not heavily protected or subsidized. Internationally, many of our larger competitors have an advantage either through policy or subsidized dollars. We feel that we are operating on an uneven playing field. This weekend, when you sit down to dinner with friends, look at your table and your menu. The only thing on that table — unless you are drinking coke and eating candies — that has GST is the wine. The only thing subject to excise is the wine. The butter, milk, ice cream, cheese, chicken, turkey and eggs all benefit supply management and significant tariffs as high as 350 per cent. We do not have that.
We are not asking for that. We are pointing out that there is a difference in policy whereby we as farmers are being treated differently from other farmers. The fish producers have benefited from significant adjustment programs. I know that the federal government just wrote a multi-million dollar cheque to the Wheat Board for a shortfall. I used to be the director general of grain marketing at Agriculture Canada. I know what happens on the Prairies.
I am not complaining about this. I am merely saying that on your dinner table the wine is the heavily taxed item — the ``net payer'' into the federal coffers. Many of the other items are ``net drawers'' from the tax. That is why we feel our playing field is not level.
We have some recommendations. The first you may have heard from Tony Stewart. We would like a reduction in the excise tax. It currently stands at 51.2 cents a litre. We would like that to be eliminated for production of 100 per cent Canadian wine. We are not talking about the blends. We would like it eliminated for up to 500,000 litres. It should be phased in so that it reaches 51.2 cents a litre by the time you hit 900,000 litres.
Those numbers are based on the U.S. model. We thought it would be safer given NAFTA and other agreements if we based it on a model that exists. Our position has been that that money would be retained in the industry. The board of directors of the Canadian Vintners Association has unanimously agreed that if we get a reduction, we would levy an amount on the producers so that we would have a pool of funds with which we could promote the industry. That pool would probably obviate the next request on domestic market support, for example, because we would have another source of funding.
There is also a question of whether this savings would flow to consumers. Our position is that because there are a lot of people who are anti-alcohol and anti-drink, and because of what we have seen in the tobacco industry, we will not use this to reduce the cost to consumers. We could achieve this as a subsidy, but it is not really a subsidy. We have tremendous cost pressures by the Europeans. There are better ways to use this money within the system. It would assist individual wineries that have cash flow problems. We would set up some levying for the excise.
As you know, senator, we received strong support from the House of Commons committee when we appeared there. Both the Liberal party and the Parti Québécois offered support. At that time, the Conservative Party told me of their support off the record.
The Chairman: Did they make a formal recommendation as a committee?
Mr. Ross: The political situation changed such that I had a letter from the then Chair saying that while they had gone through this process and heard from about 500 witnesses, they had backed down because of the change in government.
On the record, the representatives from the Liberal Party and the Parti Québécois are on the record as supporting our request. I understand that it was stood down when Mr. Martin made the changes.
In respect of domestic marketing support, there was a program — which ended, as luck would have it, just as I came on board with the wine industry. The $4.5-million Canadian Wine Market Development Program was set up to help the Canadian wine industry adjust to the FTA and the great pullout program.
The irony was that we pulled out — as you heard from officials earlier — one-third of the grapes in Ontario and two-thirds of the grapes in B.C It takes three to five years to reap the first crop after replanting. It would be a small harvest. In addition, we had little home-grown wine and we had a market development program with the funding to spend. Now, we have much more wine but we do not have the funding.
It would fit within the agriculture policy framework but Mr. Presley says that he can fine neither a good fit nor a bureaucratic will strong enough to go forward with renewing the program. We think it fits perfectly and that it does not have to be as large or as lengthy, but we would like a commitment from Agriculture and Agri-Food Canada to give us the opportunity to get a leg up on these tremendously highly subsidized European wines and aggressively promoted American, Australian, South American and South African wines.
For some reason, I was not looking when someone decided that I would chair the National Wine Standards meeting. It comprises a large group of industry stakeholders and we are making good progress, with tremendous support from Agriculture and Agri-Food Canada. As we go through this, the chance of our gaining national consensus is threatened by a number of things, including cost. There were questions earlier on the associated costs for the small winery. There are registration and on-going costs that are causing the small wineries to yell foul against and they would have difficulty with those.
We would ask this committee to consider supporting our request to Agriculture and Agri-Food Canada that within the agricultural policy framework, they find some funds that might be applied to at least either waiving or reimbursing the cost of CFIA registration and CFIA fee-for-service and user costs. The costs are about $2,000 per winery, with an additional $300-$1,000 per year, although CFIA is unclear on that. For 50 small wineries, it would be $100,000, which is not a great deal of money.
With respect to food and drug regulations, we have intransigence at Health Canada. It has approved some additives in 1995 but has yet to gazette them despite our pressures. The cost of adding new items to the food and drug regulations has become prohibitive. We have only one-third of our own market. If we could find a way to move Health Canada on some of these items, it would be helpful.
We have two issues in respect of packaging and labelling.
We met in Brussels last week to try to negotiate a worldwide wine trade group labelling agreement focusing on four main items — country of origin, name of product, net volume, and alcohol by volume. The CFIA is insisting that it must be on ``the'' principal display panel. Our negotiators from Foreign Affairs and from Agriculture and Agri-Food Canada, including Mr. Koestler, are trying to have it approved for ``a'' principal display panel so that the information could appear on the back panel.
The other issue relates to allergen labelling, which exists now. We do not have a problem that Health Canada will require us to add that all wines contain sulphites, and they mandated a minimum amount. However, in addition to that, they plan to impose allergen labelling on any wine containing egg, milk or fish products. We use, for example, albumen for fining and clarifying the wines. These are processing aids, which are all removed. The problem is that Health Canada will not define the zero and instead say, ``any detectable amount.'' Therefore, if the wine had one part per billion, you might have to declare that the wine contained fish products. Why buy an entrée of salmon when it already has the fish. It is misleading to the consumer and there is no science based on that. Health Canada also says that this information should be on the principal display panel.
We are seeking to maintain and enhance research funds and programs from Agriculture and Agri-Food Canada on such things as the Asian ladybug.
Interprovincial trade is of great interest to us. I have not mentioned it before because it currently falls under the provincial category.
Senator Mercer: We have enjoyed hearing from the industry and from government over the last couple of days in respect of the wine industry.
The best argument that you presented related to the example of what is on your Saturday evening dinner table. That resonates well with parliamentarians and all Canadians. If they look at their dinner table on Saturday evening, the only thing with GST on it is the wine. My advice is to stick with that sales pitch.
I am always concerned about people asking us to make changes to taxes or to remove taxes but I am supportive of removing the excise tax on 100 per cent Canadian wine. However, I am concerned that the money goes where I want it to go, which is first, to the wine producer and second, to the consumer. You have indicated that perhaps price would not decline and that the money would go almost exclusively to the producer. Is that a sure thing?
Mr. Ross: No, that is not a sure thing. As I indicated, we did that because some Canadians, who would not like to see alcohol reduced in price because it might increase the use thereof, are applying some pressures. When I heard those arguments, we decided not to reduce the price so the money would go back into the industry.
Senator Mercer: My other concern is that because alcohol is provincially regulated — in nine of 10 provinces it is sold under strict provincial regulations through agencies of the province — if we were to remove the excise tax and lower the cost, the provinces would quickly bump the price back up by increasing provincial taxes. I am concerned that the Canadian wine industry would not receive the benefit of the consumer buying more Canadian wine as a result of that price break, while the provinces would see consumers paying more taxes on the wine that they do buy.
Mr. Ross: That is possible. We heard that scenario one year ago when there was pressure on the federal government to reduce gas prices.
Senator Mercer: When you talked about marketing, I did not hear you talk about things like Tastes of Nova Scotia, for example, where all parts of the agriculture industry come together for marketing quality products in beef, vegetables, fruit, wine, and so forth. To me, that makes sense. You have a background in government and you spent a fair amount of time in international trade. What is the position of the association on things like that?
As a point of clarification, you did say there was $3 billion in subsidies by the EU, and then you said there was no excise tax on that. Is the lack of excise tax calculated into the $3 billion?
Mr. Ross: No.
Senator Mercer: Therefore, from our perspective, it is more than $3 billion; it is a $3 billion subsidy plus no tax.
Mr. Ross: Plus what the national countries and their regions contribute as well.
On Nova Scotia quality, next week will am going to a wine conference in Nova Scotia that includes discussions on wine quality. On the national wine standards committee, we have a representative of the Nova Scotia government, a representative of the wineries, and a representative of the Grape Growers of Nova Scotia. We have been working with the federal government, encouraging them to provide federal funds to Nova Scotia and the Maritimes to assist in bringing a quality standard somewhat like VQA. It is very important to us. The Wine Association of Nova Scotia is a member of our organization.
Senator St. Germain: You made a statement about being environmentally friendly and safe. Has there been any challenge in regards to the use of herbicides and pesticides in your industry?
Mr. Ross: There has been no challenge, but we are very much aware of the minimum and maximum levels in certain things. As a national association, we recently passed a motion that we would go into an environmental sustainability and production sustainability study. That study is underway with a consultant in Ontario. We are trying to bring in B.C. to look at just where we are environmentally and to determine if we can emulate some of the work being done in California, New Zealand and Australia on grape growth sustainability and sustainability the industry.
Senator St. Germain: Is your association supportive of the organic producers, or is this a side industry?
Mr. Ross: We are supportive, but it is a very small industry. I do not have a lot of members. As a president who reports to members and directors, it has not come onto my desk. Much of the aspect of organic wine is in the vineyard. You heard the comments today about the dryer climates being conducive. The wine-making process for making organic wines does not change that much.
Senator Callbeck: You mentioned you were going to a meeting next week in Nova Scotia, and that there will be people representing the wineries and the grape growers. Do many wineries buy their grapes from other growers, or do they grow their grapes themselves?
Mr. Ross: Both. Just to clarify, the meeting next week in Nova Scotia that I will be attending is actually a wine and grape conference.
We have close to 700 wine grape growers in Canada. There are only a couple of hundred wineries, so a good number of our members grow their own grapes and contract out to buy others. The Independent Grape Growers' Association in British Columbia contract to individual companies. I am sure that Quail's Gate and Cedar Creek contract and buy from private grape growers. You will also see it in some of the brands of wine the names of the grape growers that are being contracted by Vincor or Inniskillin. They take pride in that.
Senator Callbeck: Do many wineries import grapes from the United States?
Senator Rossiter: Because of the crop failure last year, we have done more importing than we would normally, just to stay in the business. However, yes, a number of them import juice or wine for blending, and that is that tier 3 category. They can only put on ``product of Canada'' if it is 75 per cent plus. The law in Ontario is that any wine bottled in Ontario must contain a minimum of 30 per cent Ontario grape. That law was changed last year for one year only to allow it do go down to 10 per cent because of the crop failure.
Senator Callbeck: Are small wineries more apt to import than the big ones?
Mr. Ross: No, small wineries are based on their winery and their grapes. Many of the smaller wineries evolve out of grape growers who decide to value-add, and that is how they go forward. I would say very few small wineries import grape. Their business is based on their own grapes or contracted grapes in the region.
Senator Hubley: You gave us many examples of other countries providing subsidies to their wine industry. We have looked at the agricultural sector here in Canada. It is something that different commodities have asked for, but we are always cautious that if we do that we will be challenged under the free trade agreements. Are these subsidies as direct? Is the $3 billion that the EU gives to the wine industry a direct subsidy, or is it under some other guise?
Mr. Ross: No, those 2 billion Euros are largely direct. They break it down. They will buy up bulk wine and subsidize the distillation of that wine for industrial alcohol. They are paying for improving the vines and putting in new vines. As I said, this does not count the subsidies being provided by regional municipalities.
Two years ago Air Canada told us that they served a certain Italian wine on their business class flights because the regional municipality associated with that Italian winery had paid the airline a $47,000 fee. If the winery does it, we do not mind it. However, this was the same as Nepean doing it.
We are not looking for subsidies. If you look at our request, much of it is some nudging of policies. Except for the reduction in excise tax, which would obviate the need for a Canadian wine market development program renewal. We are not asking for a lot, just a bit to help get us through national wine standards. They are not ongoing things. We are a significant net contributor to federal coffers. You have probably heard from a number that are net drawers from the federal coffers.
Senator Hubley: Yes, you gave us those examples.
What is the greatest vulnerability to your industry? There have been many situations over the past year. You mentioned the B.C. forest fires and the Asian ladybug.
Do you foresee any other catastrophes that could happen within what is becoming a very important industry, and what steps should be taken now to assist you? I am thinking of research dollars, by the way. I am wondering if you have any comment on that.
Mr. Ross: As I mentioned, ongoing research on the Asian ladybug or any crop problems we might have would be very useful. No one could have predicted the Asian ladybug. It chased aphids on soya. The soya crop was saved but the wine crop was ruined.
We touched earlier on interprovincial trade. I think the representatives from Agriculture and Agri-Food Canada were not totally correct. There is very little B.C. wine in Ontario and very little Ontario wine in B.C. That is a product of listing and purchasing policies of the two liquor boards. In Alberta, it is a mixed situation. Another interesting thing that may or may not happen to the industry is what happens in the provinces.
An issue is E-commerce — the whole world is going to buying on-line. If I buy an Ontario wine on-line today I am fine. However, if I was in Winnipeg and did it, I would run into the interprovincial trade-barrier problem. Anybody that is doing it on the purchase side and on the selling side is probably ultra vires of the regulations.
We have the whole issue of interprovincial trade, E-commerce, and listings in other provinces. Of course, the biggest threat is our weather. We have been lucky because we had tremendous increases in plantings in southern B.C, for example.
Another big pressure — and this is not up to the federal government — relates to the cost of land for wineries. There was an earlier comment that the industry is successful because of land values and land speculation. Where you may have gone from $10,000 an acre to $50,000 in Niagara, you will only get the $50,000 an acre if you sell the land for condominiums. We are trying to preserve the land as agricultural land so you cannot really sell it at that level if it is preserved for agriculture.
People say the Canadian wine industry is healthy because it has boutiques and restaurants and so forth. It has these things because you cannot make enough money growing, nurturing and harvesting your grapes and making a bottle of wine. You have to move on. Gary Pillitteri ran into problems when a lot of his wines were delisted. If your business plan says 60 per cent of your wines will go through the liquor board and suddenly they delist your wine and you cannot get a licence to sell them elsewhere, how do you sell them? You will see consolidation as the wineries have to consolidate. When you see the boutiques or the jazz festivals or the three-star restaurants added to wineries, equate it to the Prairies where the farmer might be working part-time on the weekend and his wife or her husband might be teaching school.
You cannot do it as a farmer. You have to add. When we add, it looks kind of nice — it is restaurants and boutiques.
Senator Lawson: You are right about the listing. That was a key problem in British Columbia. We brought in the people in who did the listing to ask what the basis of their decisions was and why they did not have more B.C. wines listed in the early stages. The representative admitted that it was his own bias — he said that everyone knows that B.C. wines are not good wines. They bring in German or French or maybe California but no B.C. wines. The life and death of the industry is in the hands of some civil servant who knew nothing about it. Now that has improved since then.
I agree with Senator Mercer about the issue for making Canadian wines and taking off the surtax. There are two areas, as a committee that we should be dealing with. You are right when say that regulations have not been formally amended for years and winemaking practices worldwide have far outpaced them. You say that as a result, Canada's food and drug regulations do not reflect modern winemaking technology.
The government said it will do something about regulations for that area and there are so many industries where we are dealing with archaic rules. It will not cost a lot to bring it up to date and keep pace with the industry because it is so far out front.
I also agree with your issues relating to allergens and so on. For heaven's sake, let us do it on the basis of common sense. Let us not be doing things to keep the industry competitive with the rest of the world and then implement silly rules here that negate all of that. There are two major areas where we can support you. I thank you for an excellent presentation.
Mr. Ross: We recently discussed the issue of allergen labelling at a meeting in Brussels. We are concerned that this issue is coming up more often throughout the world without any scientific basis. Delegates to this meeting represented about 90 per cent of wine production worldwide. None of them could cite one case of a person being adversely affected, allegedly from one of these allergens in wine — not one case in the world in history. Health Canada has confirmed that.
At least the Australians and the Europeans are undertaking some studies on this. We would hope that you would support our recommendation to Health Canada that before they implement any requirements for allergen labelling, that they look at some of these studies. Health Canada has not conducted any studies on this subject. They could at least require only a minimum amount — parts per million or whatever.
Another thing with respect to listings is very important. A general listing at the LCBO required 1,200 cases of that particular wine. That negated the participation of most of the Ontario wineries. The Wine Council of Ontario was able to negotiate an entry level. They have a small program, but it is an entry level which requires fewer cases.
If you do not get listed with the liquor board in Ontario you have two outlets — in B.C. you have three. In Ontario there is the winery outlet or you can sell direct-list to individual restaurants, which is costly because they might buy only one case and you have to courier it up. This province has tried to emulate what they have in B.C., which is VQA wine stores. There are about 19 of them in B.C., which are old wine licenses that can sell all VQA wines. As you heard earlier, our licenses here allow you to sell only your wine and only your wine produced in Ontario. Even a Vincor store cannot sell its B.C. products here. The Wine Council of Ontario made a case to the current Ontario government. Last week the government said that it would not permit that.
We are working in a highly taxed and regulated industry. It is a poster child that is kind of sexy. We are working with Foreign Affairs Canada and getting this wine into all our embassies. As you know, John Ralston Saul is a tremendous champion of Canadian wine and has done much to promote Canadian wine both in Canada and abroad.
There are some things that can be done — that would not require a lot of money — to improve our environment and help us succeed.
The Chairman: Mr. Ross, on behalf of the committee, I thank you for an excellent presentation. You have left us with some recommendations and as we hear further witnesses and start to look at recommendations in our final report we will keep some of your comments in mind.
Senator Mercer: I hope that the Steering Committee will consider inviting representatives from Taste of Nova Scotia to come and tell you about value-added products. That is one example. There may be others across the country of groups doing just what we have been talking about.
The Chairman: That is a good idea.
The committee adjourned.