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Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 12 - Evidence

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OTTAWA, Thursday, April 21, 2005

The Standing Senate Committee on Agriculture and Forestry met this day at 8:05 a.m. to study the present state and future of agriculture and forestry in Canada.

Senator Joyce Fairbairn (Chairman) in the chair.

[English]

The Chairman: Honourable senators, we are convened.

This committee is conducting a broad study on the present state and future of agriculture and forestry and Canada. Not surprisingly, one of the key issues that we have been hearing from groups all across the country has been the BSE crisis and the closed border issue with the United States, and how that has affected the lives of producers and industries across this country.

We are pleased to have members from the Canadian Co-operative Association with us. Please proceed.

Mr. Claude Gauthier, Director, Canadian Co-operative Association: Honourable senators, we are pleased to be here this morning in the context of your overall study on the future of agriculture in Canada.

The Canadian Co-operative Association is an umbrella organization that provides leadership to promote, develop and unite co-operatives and credit unions in Canada. Our members are some of the largest co-ops and federation of co- ops in this country. Honourable senators are familiar with Federated Co-operatives Limited and Co-op Atlantic, which serves hundreds of smaller retail co-ops, and GROWMARK where I work as a regional business manager. At GROWMARK, which is also a federation of co-operatives, we serve and support retail co-operatives in Ontario, and in the mid-western United States. Other members include Gay Lea Foods, a dairy processing business based in Ontario, and Scotsburn Dairy Group, which is a large dairy organization based in Atlantic Canada.

Co-ops are owned and controlled by the people they serve. While all co-ops value financial performance, the ultimate focus of co-operatives and credit unions is the social and economic empowerment of the people and the communities they serve.

Our organizations and our members are concerned about the sustainability of agriculture in rural communities. When farmers are hurting, so are the businesses in their communities, including co-ops and credit unions.

We have a long-standing interest in involvement in agriculture policy issues, and we have been participating in the farm income consultations with Parliamentary Secretary for Agriculture and Agri-Food, Mr. Wayne Easter.

As a major national organization, we are here to provide you with information that we hope will assist you in completing your report on domestic slaughter capacity.

The BSE crisis and the closing of the American border to Canadian beef have had repercussions beyond individual farmers and producers. We commended the federal government for their repositioning of the livestock industry strategy with its four-point plan to reopen the border, increase slaughter capacity, sustain the industry until capacity is increased, and also expand the export markets. However, we are concerned with the specific measures to facilitate increases in domestic slaughter facility and capacity. These measures do not adequately meet the needs of producer groups interested in forming co-operative slaughterhouses. This is the perspective we would like to bring to this discussion today: Slaughterhouse capacity through co-operative organizations.

I will be talking to you this morning about the benefits of agricultural co-operatives and the situation of co- operative slaughterhouse groups. Our written brief covers all of these topics.

For those of you not familiar with co-operatives, they are organizations owned by members who use their services. Co-operatives can provide virtually any product or service, either on a non-profit or for-profit basis. Co-operatives and credit unions differ from other businesses in three key ways. First, the primary purpose of co-operatives is to meet the common needs of their members, whereas the primary purpose of investor-owned businesses is to maximize profits for the shareholders. Co-operatives use the one member, one-vote system, not the one-vote-per-share system used by most businesses. Third, co-ops share profits among their member owners on the basis of how much they use the co-op, not how many shares they hold.

Farmers frequently turn to foreign co-ops to market their products, add value to their commodities, finance their businesses and supply farm inputs such as fertilizer, feed, seed and energy products.

Agricultural co-ops are a significant component of the Canadian co-operative movement. Agricultural co-ops also play an important role in the overall agricultural sector in Canada. Co-operatives market about 60 per cent of all milk products and one-half of all poultry and eggs produced in Canada. Some co-operatives have been involved in meat processing, but their involvement is mainly in pork and poultry. Only recently have co-ops turned to beef processing.

This committee has met with people from Atlantic Beef Products, whose parent companies are the Atlantic Beef Producers Co-operative and Co-op Atlantic. It is the first operational co-op beef slaughter facility in Canada. On February 15, their chairman appeared before you to report on their situation.

Co-ops are always evolving and a new form of co-operatives called “new generation co-operatives,” or “new gen co- ops,” has developed. They have similar features to traditional co-ops: democratic control based on one vote per member, distribution of earnings based on the use of service or sales to the co-op, and a board of directors elected by the membership. However, new generation co-ops have other features, such as being involved in processing commodities into higher value-added products, thereby providing a greater return to their producers. They usually have a tied contract setting out producer delivery rights and obligations. There membership is limited to those who purchase those delivery rights. Also, they have higher levels of equity investments by individual members.

We mention this because many of the co-operative slaughterhouse groups have been using the new generation co-op model in their studies. Appendices 1 and 4 of our brief will provide you more information on the new generation model.

While the co-operative structure provides a systematic way for producers to come together to pursue common interests, agricultural co-operatives have also been recognized by federal and provincial governments as effective tools for economic development, community building and business longevity.

There are many benefits for both producers and government. For the farmers and producers, co-ops provide a collective method to successfully compete in the business environment and improve their incomes. For governments, co-ops reduce the need for subsidies and farm aid, as farmers are able to get their incomes from the marketplace, or at least have access to a larger share of the income available from the marketplace.

They also assist in strengthening local communities and economies as most co-ops are community or regionally based. Co-ops are more likely to stay in the community as the owners are local residents. Appendix 2 lists additional advantages of agricultural co-operatives. We believe that these benefits provide a strong argument for the federal government to invest in the growth and expansion of agricultural co-ops.

In the last budget, the federal government recognized the contribution of agricultural co-ops. They noted that co- ops play an important role in regional development and rural economy; that they are an important part of Canada's agricultural sector, and that their presence supports and sustains family farms and small agricultural businesses throughout rural Canada.

Unfortunately, in spite of these advantages and acknowledgments of the multi-faceted benefits of co-operatives, there are limited resources to assist co-operatives in most parts of Canada. The Co-operative Development Initiative, which began in 2003 as a partnership between the Government of Canada and Canadian co-operatives, provides funding for co-op development. However, it is modestly funded and stretched to meet a broad range of needs.

Some federal agricultural programs include co-ops, and we will outline some recommendations to make them more accessible.

In several provinces, such as Quebec, Manitoba, Saskatchewan and Nova Scotia, there are specialized co-operative programs. Several provinces have contributed funding for the business planning of co-op slaughter facilities while fewer, and these are mainly in Manitoba and Prince Edward Island, have provided financing and funding for the construction of the new facilities.

There are a range of groups trying to start new co-op slaughterhouses in Canada at this time. We have identified seven that are under development, not including the Atlantic Beef Products Co-operative that met with this committee earlier this year. Most of the co-op slaughterhouses focus on over-30-month cattle and cull cattle, while some are planning to handle a range of ruminants such as bison, goats, elk and sheep. The BSE crisis has affected these co-ops as well, as seen in their reduced access to markets.

They are at different stages of planning and development and several of them at the critical financing stage. As you can see in Appendix 3, they are predominantly located in Western provinces.

Traditionally, co-operatives have started small and expanded on an incremental basis as the business has grown and finances became available. However, the agricultural industry is more sophisticated and consolidated today. Therefore, new agricultural co-operatives must start at a much larger scale to be competitive. For the meat processing industry, this means building facilities that could cost from $10 million to $40 million.

Overall, the issues and needs for developing co-operative slaughterhouses include, funding to undertake sophisticated business planning; information on available resources and government programs; the financial ability of producers to purchase member shares in new co-operatives; and, a big one, access to capital to finance start-up and construction.

Concerns raised by financial institutions and lenders about the risk and uncertainty of future border opening include meeting stringent new safety and environmental standards and the development of new markets that require additional testing of meat products. Naturally, these would vary from co-op to co-op.

Mr. Bill Dobson, our Vice-President, will carry on with our presentation.

Mr. Bill Dobson, Vice-President, Canadian Co-operative Association: Good morning, senators. Thank you very much for the invitation to be here.

I am a grain farmer at Paradise Valley, Alberta, which is just south of Lloydminster. My colleagues remind me quite often that I am a grain farmer and should not speak on behalf of the cattle industry.

I am the President of Wild Rose Agricultural Producers, a general farm organization in Alberta, and most of our members are cattle producers.

I have less experience and expertise on some things than others, and packing plants and the cattle industry are below what I hope to know about co-operatives. Our mission here today is to bring forward some information on co- operatives.

It has been very difficult to watch what has happened in the entire agricultural industry in Western Canada, especially in the cattle business, which has been a very stable part of our industry. Unfortunately, we have seen that stability destroyed. However, it has been encouraging to see the spirit of co-operation that has surfaced with regard to co-operative packing plants, since we have not really dealt that way in the past. Although many people in the cattle industry have dealt with co-operatives and credit unions, their segment of the industry has not historically been involved in co-operatives, so this provides us with some challenges.

I will outline what we think the federal government could do to help the situation. Co-operators and farmers are practical people. We have a roll-up-our-sleeves attitude. When we are presented with a challenge, as we are right now, we do not just sit around and complain about it; we try to think of ways to address the situation.

Producers see the need to get closer to the packing plant part of the industry. They have tried different methods to achieve that goal. You have probably seen the list published in the Western Producer of all the initiatives, which range in size and makeup.

We would like to bring forward some ideas on how this committee can help the co-operatives. We, of course, believe in the co-operative model. It puts producers on an equal footing in the business and has proven to be very successful in the past.

I have ten suggestions. I will follow along with the brief I have distributed to you and give each suggestion a bit of background.

First, we encourage the federal government to reallocate funds from the Livestock Repositioning Strategy to the Co- operative Development Initiative, CDI. This will allow for the provision of grants to help co-op slaughterhouse groups undertake business planning and obtain expert assistance. Minister Mitchell has indicated that there is an envelope of money but wants to ensure that it is deployed in the best fashion possible.

There is a need now for business planning. It is an area of business that most cattle producers are not totally familiar with, and there is probably only one chance in many of these cases, so accessing some funding for preparation of those business plans is very important. There is a need to hire experts to design their facilities and get the approvals for construction and conduct membership drives. There is a myriad of details to get underway.

An immediate reallocation of $500,000 from the Livestock Repositioning Strategy to the innovations and research component of the Co-operative Development Initiative would be helpful. This amount of money would fit in with what it would take to prepare adequate plans with the number of initiatives that are currently underway.

For your information, the Co-operative Development Initiative is a three-year program designed and initiated by the co-op sector. Its purpose is to strengthen co-ops in Canada. It is a national partnership between the Government of Canada and Canadian co-operatives. It offers technical advice and professional assistance to individuals, groups and communities interested in developing new co-operatives or strengthening existing co-ops. It also provides funding assistance to demonstrate an innovative co-operative concept or undertake research. The co-operative secretariat has the infrastructure to accept requests and provide funding. That is something that is set up and would not have to be redone.

Second, we encourage the federal government to reallocate funds from the Livestock Repositioning Strategy to provide additional funding for the advisory services component of the Co-operative Development Initiative. This would enable regional co-op groups to provide co-op-specific expertise.

We find through the co-operative sector that working with co-operative business structures is slightly different, and the best business people in the world are sometimes not familiar with the particular nuances that are in the co-op business. That would certainly help these slaughterhouse facilities to gain that expertise.

With an additional allocation of $160,000 to the advisory services component of the Co-operative Development Initiative, regional co-operative organizations could provide the needed expertise and information to emerging co-op slaughterhouses. That $160,000 seems like an odd number, but it is in relationship to the amount of funding that is already in place. This would be additional funding put in just for the co-op slaughterhouse initiatives.

There is a network of 19 anglophone and francophone advisory partners across Canada. The first recommendation is for the business side of the entities, and the second recommendation is for the actual co-operative side.

Third, we urge the federal government to provide investment in the form of direct grants to co-operative groups to fund safety and environmental aspects of their slaughter facilities. There are many costs involved in the starting up of a slaughterhouse. In existing slaughterhouses, there are strict rules on environmental and safety standards, which is good. When you are starting out, meeting these standards creates extra costs that are on top of everything else. It would be a help to have some assistance in making sure that new facilities are set up and are top rate. They have to do it anyway, but when you are beginning a business, that is when your costs are high.

Co-ops provide additional benefits to producers, government and communities, and it is reasonable to use some funds from the Livestock Repositioning Strategy to provide grants to these plants to meet their environmental and safety regulations. The funding of $1.27 million for a traceability system in the new Atlantic Beef Products plant came from the agricultural policy framework and ACOA.

Our fourth recommendation is that the federal government revise the Loan Loss Reserve Program to a loan guarantee program. I am not an expert, but it is obvious that the loan loss program has been a contentious issue since its announcement and there has not been a take-up. In many cases, it is inadequate to convince lenders that this is a good risk worth taking. Six months after its announcement, I do not believe any co-operative groups have actually accessed any of the loan loss reserve.

A loan guarantee, and I am sure it is not the first time you have heard this suggestion, would certainly be better for lending institutions, especially in a situation where it is local credit unions that are financing the small co-ops. It is even less attractive for them than larger financial institutions that may be financing several groups of packers.

Fifth, we encourage the federal government to work with the beef industry to explore ways to coordinate the development of new slaughter facilities and the marketing of beef. This would help increase the success and sustainability of new domestic slaughter initiatives.

It is difficult to take action on this recommendation. We have seen co-operatives have problems in Western Canada, and many times, it has been because of a lack of coordination. Right now, we know we have a problem. It seems like things get developed when you are backed into a corner and everyone is trying to do something for their own communities. They are trying their best, and there is a lot of capacity. It has lenders concerned.

I am not sure who takes the initiative or the lead, but the government could certainly do that, or suggest it, to bring people together, especially on the marketing side.

Many of these slaughterhouses are looking at 2,000 or 5,000 animals as week as their ambition. It is a big marketing job to try to sell that many animals. The coordination of some type of strategy and development for the entire packing industry is very important.

The large number of these groups also makes financing more difficult from not only a lender but from an investment standpoint. Many of the producers themselves are not that rich and they have one chance at this and want to have a measure of success, if possible.

The federal government is certainly in a good position to provide some leadership. I do not think it is a government role totally, but it can be done in conjunction with industry. I encourage you to pass that idea along to industry. There is a role to try and ensure that we develop the industry and not have a lot of failures, because it makes investment in our industry more difficult if they are not all going to be successful, or a large portion of them.

Our sixth recommendation is that the federal government develop a co-op investment plan that provides tax credit for individuals investing in agriculture co-ops, including slaughterhouses. The Canadian Co-operative Association and other co-op organizations have proposed an investment plan that would provide a tax credit to individuals purchasing membership or investor shares in agriculture co-ops. This would encourage producers to invest in their co-ops and also use their scarce cash resources to purchase membership shares. Shares are the way that new co-ops raise the initial capital they need before they seek financing. In new generation co-ops, the cost of the co-operative shares is considerable.

In some co-ops, there is also a provision for outside investors. This is particularly evident in some of the smaller local facilities. The community itself sees the benefit of the development of these packing facilities and is willing to invest. Tax incentives are a way to promote that investment, and that would certainly be a welcome recommendation.

Seventh, we urge Agriculture and Agri-Food Canada, in consultation with the co-operative sector, to review and revise its current programs.

Some of the programs in Agriculture and Agri-Food Canada do not work as well for co-operatives as they do for individuals, or two or three individuals. Quite often, co-operatives can have 400, 500, or 5,000 people involved. The programs need to have a co-op model in mind, a free enterprise system where a group of people get together. It is actually the entity that needs to be involved in the agriculture programs. We see that as a flaw that needs some attention.

Given the track record of co-operatives in the agriculture industry, it is unfortunate that there seems to be inadequate information and consideration of co-operative needs. With some concerted effort and partnership, we feel this situation would find a solution.

Eighth, we suggest that Agriculture and Agri-Foods Canada increase the promotion of their programs and services that are appropriate for agricultural co-operatives. There is a need for a campaign to promote federal government programs that are relevant for agriculture co-operatives. This could involve references to websites, conference displays, written materials and public advertising, all targeted at the public agriculture and co-op sector.

I just participated in Mr. Easter's discussions on Monday and co-operatives are coming to the forefront as part of agriculture more and more as people need to get closer to the marketplace. There is a need to try to harmonize federal government programs with co-operatives and to get them working more closely together.

Ninth, we recommend that the federal government consider providing 100 per cent testing of meat being exported to specific markets that demand it. That is worded rather carefully, because it is a contentious issue. I would not want to say that we are totally supportive of 100 per cent testing. That is something that the industry must be extremely comfortable with. That subject has been controversial and contentious. There needs to be discussion. There are markets that are demanding 100 per cent testing. The problem is that if it is scientifically based, are you setting out a precedent that that is what the entire industry must follow? That is the concern of many of the packers and those in the cattle industry, that we will be raising the bar to that is where they will be following along. If you are in a position where you have more product and you are seeking out markets, the customer is right. What those markets are demanding is what you must be prepared to give them. We encourage that approach where it needs to happen and to get the industry together to discuss that and to take a common stand and approach would be extremely important.

I know the Canadian Cattlemen's Association have suggested a pragmatic approach that provides for additional testing for meat destined for specific countries and markets that require 100 per cent testing. We recommended serious consideration of this approach in further consultation with key stakeholder groups including emerging co-operatives.

Our final recommendation concerning the human side of co-ops is that the federal government provide grants to train management, staff and boards of new co-op slaughterhouses. I am sure that honourable senators are quite familiar with the fact that existing slaughterhouses have a constant challenge with expertise and with labour in their plants. Bringing a bunch of new plants on side takes some training and knowledge. We know that for a co-operative it can be very successful, but we need leadership at the board level, on the co-op side, management and the employee level.

New co-op slaughterhouses will probably have to recruit senior management from other parts of the industry. They will require some training and additional skills in how to manage a co-operative and the packing plants themselves. Training front line workers is also a big need. With additional resources, the regional co-op organizations are capable of providing training for the boards and senior staff of new co-op slaughterhouses. Right now, much of the funding for those types of initiatives comes from the co-operative sector. There are limitations on that and many of these initiatives are for the public good, not just for the good of fellow co-operatives. We get less funding often and we see a role for the federal government to play.

We also recommend that Human Resources and Skill Development Canada provide funding for the training of production workers as required. Funding should also be available for recently opened plants, such as Atlantic Beef Products, who are facing some of those same challenges gearing up for production.

I will now turn the microphone over to Mr. Gauthier for some concluding remarks.

Mr. Gauthier: I hope you can see we have tried to cover all the issues that have been getting in the way of co- operatives attempting to create new slaughterhouse facilities and add capacity to the system in Canada. Our perspective is that co-operatives can play a significant role in providing a health balance of interests out there in the communities and in providing an option for Canadian producers to readily participate in.

The track record of co-operatives in Canada, as a balancing economic partner in the Canadian economy has been proven over the last century. We are saying today is also an opportunity to provide an option that is real and valid in terms of solving the issues around BSE and creating a more permanent, long-term strategy for the Canadian public.

We are open to questions and we are looking forward to a fruitful dialogue.

The Chairman: Thank you, you have given us a very broad overview of not just your concerns but also the opportunities that you see in a new world where we must respond quickly to forces beyond our control. As an eternal optimist, I am certain the border will open soon, but we cannot wait for that moment in order to keep our industry alive and well.

Senator Mercer: As I followed through your 10 recommendations, I was making notes. Next to each of your recommendations, I wrote two words, “good idea” for all of them. However, I will get to that in a moment.

With regard to co-op slaughterhouse groups, what would you consider the total capacity if you were to be successful?

If we build co-op slaughterhouses across the country, building on the Prince Edward Island model, where would you see the capacity going?

Mr. Dobson: You have asked a question that I do not have the answer to. The two large existing packers are getting up to 10,000 head per week. I do not have that number. In order to address capacity, you need to cover the backlog on an ongoing basis to fulfill the marketplace. I do not know the exact numbers, so we would have to get back to you.

Senator Mercer: If we are concerned only about the backlog, we may end up with excess of capacity.

Mr. Dobson: There is an excess of capacity. That is the big problem. That was my suggestion about the coordination efforts to try to come up with a marketing concept. Whatever the make up is there is only so much capacity. It would be nice to stand back and say, “Well, this is what we need to have over here to make this work in the long run.”

You are right that the border opening will not solve everything, but there is no doubt that it will disrupt these initiatives. If all the initiatives listed in the Western Producer article were to come to fruition, there is no doubt that there would be immediate overcapacity, and that certainly would be a challenge.

Senator Mercer: Government's function is to serve all aspects of the agriculture industry, not only co-op members. Farmers are an independent bunch and probably the best business people in the country. They can survive while losing money year after year, which is quite a feat. Your ten recommendations are good, but you are designing this for members of your organization. Not everyone is going to join.

What happens to the people who are not co-op members?

Mr. Gauthier: That is a very good question, but we have presented options to assist producers who are looking at the co-operative option in terms of dealing with their future.

We do not pretend that 100 per cent of the slaughterhouse capacity needs to move through co-operatives. A group of producers in Atlantic Canada discovered a few years ago, through their own discussions, that since no one else was willing to provide the capital, the right business solution was to do it themselves as a co-operative group.

We are facing a crisis and producers right across the country are asking for an alternative. They are not all clear and several groups have actively pursued creating co-operatives in order to control future slaughterhouse capacity as the solution.

Our recommendations aim to assist those who are willing to create a co-operative enterprise. This takes nothing away from the ability of private companies or multinationals to create additional capacity. We think that incorporating a group of co-operative-owned plants would provide a more permanent and balanced solution to the future and avoid what I think has partly caused this situation, that being the shift of capacity out of the control of Canadians.

Our producers are looking at the option. Not all these projects will come to fruition, but the ones that should and could deserve support from the government.

Senator Mercer: I found recommendation number 5 interesting,

That the Federal Government work with the beef industry to explore ways to coordinate the development of new slaughter facilities and the marketing of beef to increase the success and sustainability of new domestic slaughter initiatives.

That sounds a lot like a marketing board or supply management. In my time on this committee listening to beef farmers from Western Canada, even at the height of the crisis I do not think we heard anyone want to go so far as having control or coordination from elsewhere, whether it be from government or a marketing board. I am a little surprised to see this recommendation, because I have learned about the independence and strong will of beef farmers across this country.

Mr. Dobson: That is a good point. The challenge is to ensure that a marketing board does not have control of the cattle industry, and we know that. I had a chat with a gentleman from the Canadian Cattlemen's Association who told me that they recognize this problem. They are all starting from scratch in developing that huge industry. Although, we do not want controlled supply, there needs to be some coordination on marketing. Maybe there can be co-operation in different initiatives in addressing some of the larger markets. If you have a pool of beef coming out of five initiatives, whatever their structure, it may make marketing easier, rather than having those five compete against each other into these particular markets. As I mentioned earlier, some of these facilities are going to slaughter 5,000 head a week. That is a major marketing initiative.

Senator Mercer: I am not against the idea; I am just suggesting that we should not venture down this road unless we have good support from the industry, and I have not seen that from beef producers other than the co-operative movement.

Mr. Dobson: That is why it is a good idea to have those discussions with the industry itself, because you cannot force it on them. Yet, a group like the Canadian Cattlemen's Association is in a very difficult situation. They are funded by many large feeders that are dealing with existing packers. They cannot pick and choose and say, “This is not going to work. Go to 75 per cent or 80 per cent.” However, there needs to be some discussion. Otherwise, at the end of the day everyone will say, “It is unfortunate. We had too many of these start and only one-half of them have been successful, but let the chips fall where they may.”

The industry itself recognizes that this is a problem. I do not know how to solve the problem, but I believe that some type of coordination between government and industry would help in the solution.

Senator Oliver: Welcome, gentlemen. Thank you for your excellent presentation. What you have told us about co- ops is very important. I believe that co-ops play an extremely important role in the agricultural sector and your outline has helped our understanding of what they are doing right now.

Mr. Gauthier, I am particularly interested in what you said about new generation co-ops. On page 3 of your brief, you remarked on the new generation co-ops and said, “Co-ops have evolved to meet new needs and a changing marketplace.”

You went on to say:

However, new generation co-ops have other features such as; a commitment to process commodities into higher-value products, thereby providing a greater return to producers.

You may not know that this committee has done a major study on value-added products, trying to find a way to leave more money at the farm gate for farmers. I am fascinated to see that this is one function of the co-ops.

On the other hand, your ten recommendations deal with research, safety, testing, start-up costs, and so on, but there was really nothing there for brand Canada or marketing Canada, which is what I thought you were talking about when you mentioned higher value products that co-ops want to promote.

Why were there no specific recommendations dealing with something that both this committee and you think are so important?

Mr. Gauthier: Our overall recommendation is to encourage the government to provide assistance to those who are willing to create co-operatives, like the new gen co-ops that meet specific needs. When they identify an opportunity to add value through brand name or processing, they should be able to put the co-operative tool behind the organization and the enterprise.

There are some recent examples of new generation co-ops that are succeeding at adding value for their producers. In Ontario there is a group that is adding value through poultry processing. They started on a small scale, but they are achieving their goal of creating value through processing, identifying it, and tying it to their very small group of producers that have committed delivery rights to this plant.

Senator Oliver: Can you give me more details?

What are they actually doing to add value and how are they marketing?

Mr. Gauthier: They have instilled some processing within that plant. They have created a brand around their chicken and managed to filter into their chain and position their product on a high premium level with consumers. They are in the middle of that chain through their processing plant, and they have managed to keep some of that value and return it to their producers. That would escape the producers if a normally owned public or private plant did the processing.

Senator Oliver: It is generating higher margins and higher net profits.

Mr. Gauthier: Yes, because they have managed to brand their products. This is not an easy task.

In the U.S., there are many more examples of value-added and new generation co-ops. In Canada, unfortunately, we are just on the edge of creating those new enterprises. In the U.S., there have been significant strides over the last ten years of new generation co-ops around ethanol plants creating value out of the crops and providing those farmers access to the energy market through their own controlled plants.

Senator Oliver: Is value added something at the essence of where Canadian co-ops want to go?

Mr. Gauthier: That is the essence, whether you create value added through processing or value added through combined purchasing of inputs, which is also value added. Our GROWMARK group is attempting to pool the purchases of a large group and go to the market and suppliers. We are adding value by extracting the best possible costs for our producers.

In this case, we are talking about producers that are attempting to create slaughterhouses that they can hold the branding around and transfer some of that expressed value back to the producers.

It is not a guaranteed economic return, but it provides a better opportunity to tap in on that gap that they are not accessing to date.

Senator Oliver: Mr. Dobson, I would like to hear your views on the same subject.

Mr. Dobson: To a cattle producer, whether the animal is branded as special Canadian beef or whatever, it is tremendous value adding just to get into the packing business.

I just talked to a producer the other day who was selling cull cows for $300 apiece. Just to show you what value adding is, he was actually marketing from his farm. He was getting $1,400 to $1,500 out of an animal by selling burgers, steaks, and loins off these animals. There is $1,000 extra because of direct marketing.

The whole concept of a co-operative, producer-owned slaughter facility is that you have tremendous value added without doing anything else except the processing. That is a simplification because there are big costs to getting set up, but in the end, having the beef producers involved in the production of the meat will be a tremendous value added.

Senator Oliver: I am happy to you hear you say that.

Mr. Gauthier: The committee might want to refer back to Atlantic Beef Products, which has been operational for over a year. From my discussions with them, they have expressed the fact that the community and the consumer base has already recognized extra value from purchasing products that are coming from an Atlantic-produced beef, through their own plant.

There is an association in the marketplace that validates what they have attempted to do for their producers. There is a positive experience happening right here in Eastern Canada and we can learn from that experience. It is just the beginning, but from early indications and my discussions with people in the Atlantic provinces, it is providing a positive effect already. They are just starting to operate.

The Chairman: I can assure you Mr. Gauthier that Senator Callbeck keeps us up to date on the wonders of this particular operation in Prince Edward Island that is an example to all of Canada.

Senator Callbeck: I certainly agree with the comments that you have made about the co-operative venture. Atlantic Beef Products seems to be doing extremely well. We are delighted to have that organization in our province.

On page 12, you have compiled a list of co-operative slaughterhouse groups and I see that these groups are all in the planning process.

How many do we actually have up and running like Atlantic Beef Products?

Mr. Gauthier: That is the only one, and Atlantic Beef Products started before the BSE crisis. It is interesting that the Atlantic region of our country had an issue of slaughterhouse capacity. They depended on slaughterhouse facilities way beyond their normal geographic region, and those producers came to the solution to create their own because nobody else would do it for them. That is typically how co-ops are created. Nobody else wants to take care of our needs, so we do it ourselves.

These groups are all looking at an option that will or will not come to fruition, depending on the outcome of the business plan review and their assessments of the market and their ability to raise capital.

Senator Callbeck: As I say, we are proud to have the first one in Canada, and it has gotten off to a great start.

I wanted to ask about recommendation 6 on the tax credit for individuals investing in co-operatives. It seems to me Quebec has something like this, or maybe it is just that there is a tax credit for the employees and the members.

Mr. Gauthier: We are not from Quebec, but we are aware that through government policy and extra taxation tools are creating better opportunities for the capitalization of co-ops in Quebec. If we look at the record of co-op creation in Quebec, I think everybody would agree that the rate of creation and the sustainability of those co-ops are far superior to what we have experienced in the rest of the country. The Quebec government chose specific policies to support that as a social policy, and we believe that the federal government needs to think about the same thing.

If co-operatives have value to the Canadian community and are part of the solution, it justifies looking at taxation to determine if that is a venue to create a bigger appetite to collectively invest in those co-operatives.

Senator Callbeck: Is Quebec the only province to provide tax credits?

Mr. Dobson: There have been changes in the taxation act where you can take your money out of the agricultural co- op and reinvest it and not pay the tax on it. That was in the last budget, and that has been a change.

Senator Callbeck: I want to ask about loans in agriculture. You said that the purpose of the co-op is to meet the needs of its members.

Is it easier to get an agricultural loan from a credit union than from a bank and, if it is, what about the interest rates?

Mr. Dobson: It is only easier to get a loan if you are in a good financial situation. Lenders are lenders. The credit unions are supportive of the agricultural industry, but I would not say that it is easier to get a loan from them. There is financing throughout the entire financial sector into agriculture. It is dependant on the situation itself.

Mr. Gauthier: Credit unions are subject to their own capacity to finance large-scale projects too, and many credit unions are operating on much smaller scales than what we would see in the banking world. Sometimes their ability to take on the large projects is limited because of finance regulations that are appropriate in their world.

From my perspective and that of our producers, there seems to be a higher tendency for credit unions and caisse populaires in Ontario to finance producers that have a little bit of a stretched situation. We do have some retail co- operatives funded through credit unions, and they offer some competitive rates to the banking world. Their experience is positive, but the credit union movement has limitations in capacity too.

Mr. Dobson: That is so especially for the large projects. I would say quite a high ratio of individual farmers would be doing business with credit unions, but you are talking about agri-business, and I think that is well divided.

Senator Callbeck: Do you have any figures or statistics as to the percentage of loans that credit unions give to farmers or agriculture ventures?

Mr. Gauthier: I do not have that information to date. Our staff could provide you with that information.

Senator Callbeck: Is that percentage going up or down?

Mr. Dobson: The figure is going up as far as individual farmers for the one reason that many times credit unions, especially in the province I come from, are the only financial institutions left in town.

The credit union movement in Western Canada is growing at a significant rate. We are a key player in the agricultural industry.

Senator Gustafson: I have a couple of questions that arose out of the meeting that at least two members of this committee had with the Governor of the Bank of Canada. In talking about mergers and where the banks were going, it was clearly indicated by the governor that credit unions would pick up the slack in rural communities.

It appears to me that credit unions are not up to the challenge. Looking at the slaughter capacity, for instance, you recommend that government grants are part of the solution.

This committee has looked at many recommendations to start a plant somewhere in Canada. We have heard quite a good number of witnesses ask for funding of such plants.

How many plants does Canada need and where should they be located?

There has been quite a history in packing plants. Some, like Tyson and Cargill, have made great profits; they would not reveal their profits.

If there is that much money in the processing business, why can the credit unions not move in there and put it together? I am sure the government would throw in some grants. It is a difficult decision to make.

On the one hand, there are three major plants in the United States that are shut down because they do not have enough beef. We are faced with the question: What decision do we make in this regard?

When I was a young fellow, all of our beef went to Canada Packers, in Winnipeg. They are now out of business and everything moved to Edmonton. Yesterday, I spoke to a man from Saskatchewan who runs the largest Canadian feedlot operation. I asked him if we could build one plant to take up the slack in Canada, where should we build that plant. He surprised me when he replied, “Alberta.” I asked, “Why not Saskatchewan or Manitoba?” He said, “There are not enough cattle there.”

This committee faces the question of where we should build the processing plant. Quebec producers want a plant in Quebec. Ontario producers want a plant in Ontario. In my opinion, for what it is worth, Canada could probably have only one more good plant to bring stability to the industry.

The Chairman: We have had five presentations on this subject. We have heard from Gencor, in Ontario; Blue Mountain, in B.C.; Rancher's Choice, in Manitoba; the Atlantic Beef Products and the Quebec Beef Producers. Of those, Gencor, Blue Mountain and Atlantic Beef Products are up and running and the others are still coming along.

Senator Gustafson: Can these plants compete with the Cargills, Tysons, and so on? That has to be a question of consideration.

Mr. Gauthier: You are asking many valid questions. We are at a crossroads in this country. My observation is the same as your observation. This explains why all these producers are trying to find a solution because none is apparent and clear. There is a lack of a clear path in terms of what we will do as a country to protect the beef industry. We are dependent on exports; we all know that. We have limited slaughtering capacity within the country. We depend on large plants that are beyond our control.

We are at a crossroads in our economic life and need to do something more permanent within our own society. That is why producers are looking at a co-operative solution; they are desperate. They need attention and do not see the creation of that well-capitalized super plant. They are asking, “Who will do it if we do not?” That is why those people are looking at creating a co-operative to try to do something about the situation.

In the end, are we better off to have more in-house capacity and build the added value and market it to the world, or allow ourselves to rely on outside interests to earn, and reinvest the earned value added?

Our producers are at a crossroads. We are stuck.

I wish I could answer the question of where and what capacity we need to have. I know we do not now have enough capacity that is willing to buy and bid on the beef. The limited buyers have the cards on their side. How long will that last? The crisis started a few years ago, it is still not solved. The crisis was supposed to be temporary. After two years we are desperate.

Senator Gustafson: We know that the plant in Prince Edward Island will survive because of freight. That plant will survive. The plant in B.C. has a captive market of about 4 million people in the lower mainland, and they will survive.

If we have to build one more plant, where should we build it?

I would like you to look at this situation. In my opinion, we do not want to get into a pricing confrontation with the Americans. The cattle industry has a long history of being very successful in marketing cattle through the American system. I will give you an example.

In Estevan and Weyburn, we have had quite a few cattle operations, but nothing compared to Alberta. Those calves have historically been loaded on cattle trailers for southern feed lots. They never go near a slaughter plant in Canada. The same thing happens in Manitoba. Sometimes there is a fleet of up to seven trucks taking out a day's sale of young cattle. That will not change. If the border opens and there is a better price for those calves in Kansas than there is in Edmonton, they will go to Kansas. Farmers need every dollar and they will do their business where they can make a dollar.

Mr. Dobson: You have made some very good points. The credit unions hold a lot of the $47 billion of agriculture debt already and that is why they are not moving into the packing business too quickly.

This is another investment for farmers and it is another lending opportunity for credit unions. They like to be diversified as well. They would have to do this on a business basis. You cannot be a good Samaritan if you are in the lending business; you have to take a business approach.

This is a crucial time. Some of these initiatives are almost in place, but it takes a leap of faith to make it happen. I see the government making that leap of faith a little bit easier.

You said that one large packing plant would solve the problem. That will not happen. That is why I suggest getting people together to address some of the bigger markets. People need to have some ownership of those projects in order to make them work. I do not see one big project solving the problem, but several could work together to make some marketing happen.

You asked whether they will be able to compete if the border opens. There is a lot of emphasis on whether the border will open. The co-operative type of business opportunity is exactly the reason they could compete, because there will be commitment from producers. They will have ownership, so it is not just another place to haul their cattle. They are the owners of that facility, which is why I think the co-operative model is attractive.

Senator Gustafson: We know that the co-operative model works. The Saskatchewan Wheat Pool diversified into so many areas that they are in trouble. I do not know whether they were a member of the co-operators as a whole, but I think they were.

On the other hand, Federated Co-operatives Limited has done very well. I have sat on the boards of those co-ops, so I know. The Federated Co-ops have not diversified into so many areas, and have stayed very strong. In fact, the only reason the little co-operative at Macoun, Saskatchewan makes a profit because we get $150,000 a year back from the Federated Co-op, which is very strong, as you know.

Mr. Gauthier: There is another challenge to the economic picture because we are export dependent. The committee has to look at the effect of currency on the future. Many of our exports have been flowing well to the United States, but at a nice currency premium for American buyers.

Will the currency change over time? Who can predict if it will change?

If the dollar returns to par, what will that do to the north/south flow of cattle?

Will that change the need for positioning our own plants in our own country to market to the world?

I cannot answer those questions.

I think that the credit unions have invested to their maximum capacity. They are member-financed organizations, and they are maximizing the use of that capital and reinvesting it in their communities as best they can. Unfortunately, the rules of banking are the rules of banking, and they are subject to the limitation within the capital pool that they have created. I believe that credit unions and caisse populaires have done as much as they can to provide capital to their community projects.

[Translation]

Senator Gill: Congratulations on your presentation. My concerns relate to some of the questions already raised regarding competition. I imagine that in the early days, the co-operative movement in Quebec attracted small producers. I do not have the impression that large producers were drawn to this movement, which means that competition between the two sides grew. I also get the sense that it is impossible for cooperatives to generate immediate returns — today, we live in an era where businesses must turn a profit quickly. According to my sources, Quebec credit unions only started paying dividends recently, even though they have been in existence for many years.

Therefore, I have to assume that profit is not the sole motivation of cooperatives. In Quebec, aside from financial considerations, social and cultural concerns were also determining factors. I wonder if this is also true of cooperatives operating in the slaughter industry. Apart from financial considerations, there is a desire on their part to meet people's needs.

Mr. Gauthier: One of our recommendations calls for an infusion of additional funds to ensure that the co-operative aspect of these businesses is properly developed. We are very mindful of the fact that those who join a cooperative are not always cognizant of what the movement entails. Such aspects as mutual support and the development of a collective business plan are sometimes poorly understood because people are impatient.

Cooperatives are long-term projects. People who invest in co-operatives are more patient and set goals for the longer term. It is important to ensure that people who set up a cooperative are fully knowledgeable about this arrangement, not merely about the financial side of things, although that is important, but also about governance, membership and education issues and incorporating these into a business plan. For that very reason, the recommendations call for an infusion of funds. If these cooperatives want to survive, be competitive and persevere, funding must be a component of their business plans. Hence, our call for some financial assistance, or, at the very least, for the role co-operatives play to be recognized.

The co-operative experience in Quebec stands as a model for many Canadians, while the co-operative movement in Western Canada has also proved to be very positive. Co-operatives have also been established in the Atlantic region. Surprisingly, however, different government policies apply to these operations.

Senator Gill: I would imagine as well that since co-operatives initially attract small producers, you are likely to encounter opposition at the beginning from existing businesses. In this industry, as in others generally, a considerable amount of lobbying must take place. No doubt you are well aware of that fact.

Mr. Gauthier: Yes indeed.

Senator Gill: It is important to attempt to strike a balance for everyone's sake and to prevent some from receiving grants that others will not get, because that creates competition.

Mr. Gauthier: What we would like to see is a co-operative in a particular sector generating healthier competition within the industry. Not all beef producers have large operations, but there are some fairly large producers in the group that are studying the co-operative formula. They would like to see a healthier level of competition. That requires big players. I do not want to give them more credit than they deserve, but I think we need to define “small producer.” However, even medium-sized producers, that is those with 1,000 head of cattle, need different formulas to achieve the kind of economic balance that is non-existent today. That is why the co-operative solution is one of the options on the table.

[English]

Mr. Dobson: I do not want to leave the impression that co-operatives are only a social program. We have many extremely successful co-operatives in Canada. I sat for six years on the board of the UFA Co-op in Alberta, which has been around since 1909. It consistently has profits of $20 million to $30 million.

Someone once said that co-operatives are a different way of doing business; they have to think big but take small steps. As Mr. Gauthier mentioned, co-operatives are patient and in the end will be very successful. That is what we think will work for these initiatives.

Senator Peterson: I understand that you are asking for assistance to build economic model for a co-operative slaughter facility. The recommendations you have listed are tax credits, tax deferrals, loan guarantees, and so on.

Could you go to the Farm Credit Corporation or credit unions with your model and ask them for risk capital or venture capital equity?

Mr. Gauthier: We see the credit union system and the caisse populaire system as an integrated group in this overall strategy, but we do not limit that group. Capital is capital, and we need to get it from the best possible sources. I think the banking world is interested to the degree that they can manage their risk, just as the credit unions would want to manage their risk. The co-operative network of credit unions, caisse populaires and the Farm Credit Corporation are institutions that we should feel comfortable going to, but they should not be exclusive in terms of program support.

Mr. Dobson: You will notice that the suggestions are practical. We are not talking about huge amounts of money. These are ways of giving the co-operatives the tools to raise capital from themselves and their communities. We are not talking about millions and millions of dollars. These amounts could come from monies that have been allocated or from changes in tax strategies. They could come from banks or credit unions as well as from capitalization by investors and producers themselves.

Senator Peterson: Is our challenge to tell you which of these are available to you?

Mr. Dobson: They are considerations that you might consider with regard to making co-operative packing plants more viable. It will not take much to be able to take that leap of faith. Our suggestions are both plausible and possible.

Mr. Gauthier: We hope that in your final report, when you address all the issues around BSE and the future of agriculture, you will reflect positively that co-operatives can be a significant part of the solution. We are suggesting practical things that will allow groups of producers to create a co-operative option. We need to foster among producers an understanding of and business-like approach to co-operatives.

Our suggestions do not require large amounts of money. We propose additional funds for a platform that is already in place but needs a bit more funding to complete the cycle and allow people to come to their own conclusions. If people wish to pursue and implement it, they will do so in an informed way.

Senator Mitchell: I am interested in your recommendation about 100 per cent testing of exported meat. It seems to me that would solve many problems.

Why has the Alberta government been opposed to that testing?

Are you making any progress in changing their minds?

Who should fund such a program? Would you suggest that the federal government, the provincial government or the private sector should provide the financing?

Mr. Dobson: First, I am not sure that the Alberta government is against the testing. The testing of animals, especially less than 30 months of age, is not sufficiently accurate to make a real difference, so they do not think it is justified. Once testing begins, the expectation exists that the consumer wants everything to be tested.

Our testing technology takes quite a bit of time, which means that there must be a holding time for those animals, which is a significant cost for any slaughter facility. Technology is on our side on this and there will eventually be a test for live animals, while at present the experts perform the test on dead animals.

There is also pressure due to the integration of the North American market. In a normal marketplace, animals go back and forth between Canada and the U.S., and they are not fussy about that either. The former agriculture minister in Alberta said that if a meat packing plant wanted to hire a private lab to do the testing, that would be different from doing it in a government facility because the cost of the test would be quite a bit more due to the infrastructure required.

The farm organization of which I am the president is very cautious about this subject, because we believe that Alberta beef producers and the CCA are the leaders in speaking for the industry. We do not want to defy them by saying that we should test if the government says not to test, because we need to work together on this issue.

The industry associations appreciate that there will be markets that will demand testing and perhaps we need to look at doing that in certain markets without creating the expectation within the whole industry.

It is a delicate issue and that is why I would not say that we should test every animal. However, I think that we will move in that direction and technology will make that much easier in the future.

Senator Mitchell: This is a definite recommendation though, given that there is considerable ambivalence within the industry about doing the testing. I certainly accept and understand that ambivalence.

Are you suggesting that the federal government consider 100 per cent testing and that the federal government pay for it because the provincial governments will not, or would you suggest that it would be essential that there be co- operation between the federal and provincial governments in order to do the testing?

Are you coming to us because Alberta will not do the testing?

Mr. Dobson: The key word there is “consider.” To make it work and for everyone to be happy, the federal government, the provincial governments and industry have to be in agreement on the testing.

I believe this committee could recommend that discussions in that direction need to take place, and need to take place very quickly. Many of these initiatives will be meeting niche markets of some description. There will be a market that they are addressing that someone else is not or a reason why they sell beef that is a bit better, hormone-free or tested or so on.

I believe that all the players have to be on side concerning testing. Sure you can do it and just say, “Test them all,” but someone will not be happy down the way. We need to ensure that we are working together on this issue and that includes the entire industry and governments.

Senator Mitchell: Is this something you see the federal government brokering? I would take quite a bit of negotiation or mediation

Mr. Dobson: That is a very good role. You must appreciate that things roll along very well in an industry like the cattle industry until you have a few glitches. Then all of a sudden we are no longer one big happy family, and you have to bring the players together to have these discussions. To me, that is certainly a role that the federal government could play.

The Chairman: There is also the United States border issue.

Senator Mitchell: My next question does address the idea that it is not always the case of it being one big happy family. I am a real fan of co-operatives, but there are usually two sides to every story. There is a group that goes down that route, and it has supply management implications. Some like it and some resist it.

In Alberta specifically or maybe more generally in Canada, what is the other side saying to you?

I am not asking you to weaken your position, but I would like to know what the other side is saying and how you answer that question.

Mr. Dobson: I do not know whether there is really another side. There are producer-owned facilities, whatever the structure. I was at a meeting just the other day at Northlands and I thought one of the individuals said it very well. He said, “You know, in this cattle business, we have to start looking at this industry and doing things differently than we have over the last 65 years.”

We are talking about a co-operative structure because we happen to believe it works very well. You get equal buy-in from people, and it is a good working relationship and good business relationship that works, and it is proven to work. That is why we are promoting that structure. There are other initiatives that are still producer-owned. They use a different business structure. We just think that when you start a new business, we like to promote the co-operative model because it gets people on a good footing.

I do not think there is really another side. I have not heard any cattle producers in Alberta knocking down a co- operative model as a way of doing business. Everyone is talking about taking back or getting some control over the packing industry and having producers involved. They all recognize that having producers involved is the way to have commitment and buy-in. Everybody is getting the mindset that when the border opens, the problems are all over. We know that is not true.

The challenge is to build this industry and get more money back to the farm gate. Any part of agriculture faces that same dilemma. Let us take this as an opportunity to do get that money to the farm gate.

Senator Mitchell: Is it possible to say that co-ops would be less vulnerable to the opening of the border than owners of larger, single plants that are more corporately run because the co-op owners are their own market?

Mr. Dobson: Absolutely. That is the way it is. There is even concern that people can be bought. They need money, and when the plants get going and the border opens and you have American packers bidding on the beef, a few cents makes the difference. It is a low-margin game, and a little profit is all the profit there is sometimes. The co-operative model certainly does give that head start of having that commitment. That is how we feel.

The Chairman: Looking back into the not-too-distant past, we see that one of the most successful independent groups within this country has been the cattlemen. For years, they were very clear when government assistance programs were put together. They said, “Thank you, but we do not need those programs. We are just fine.” That has been the case for a very long time.

One of the interesting things that have happened over the last two dreadful years is that the aura of independence disappeared with BSE and the border closure. Instead of being an independent and self-motivating force, the doors have been opened, certainly here in Ottawa, for the cattle industry to come in and sit at the table and help with the solutions. Through a tragic situation, a different relationship has been formed. I am sure that we will readjust and that Canada will regain its markets and I hope that relationship continues to exist, because it is very important for government. It is also important, as I think we have come to understand, for the industry to have that kind of a relationship.

Mr. Dobson: That is certainly a very good point. When you think of the nature of the product itself, it is a very stable industry. You know how many cows you have, you know how many calves you are going to have, you know what your market is, and it adjusts very slowly. It is not like the grain business, where you throw some seed in the ground and are not sure if you are going to get 20 bushels per acre or 60 bushels per acre. You do not know what anybody else's crops will be like. You do not know what your market is or what your price will be. The cattle industry has been extremely stable. That is why it has been very healthy. It is easy to build up your herd as you build up your market. When you look at what has happened, one market all of sudden shattered. Because the cattle business was so stable, you could not just adjust the numbers overnight like you can in some other parts of the industry.

We have learned a lot. I am not going to stand here and say that cattlemen have always said we do not need any help but now we do. I think they are a very noble group of people. They are good business people. We have all learned from this, even in the co-operative system in that particular industry. It has not been a big part of it, but I see it happening, and there is that opportunity. These people are saying we can make this model work in our segment of the industry. It is very encouraging to me as a co-operator.

The Chairman: It is an industry that has been extremely effective and admired, if not envied, and all of us around this table hope that in a very short time, it will have the opportunity to come back. Still, I hope that linkage will remain, even with change.

Senator Mercer: To follow up on your comments, we have seen in our hearings an increased understanding that the Government of Canada is sympathetic to the people in the beef industry. Witnesses have come before this committee who would never have been here before the crisis in the industry.

The chair's earlier comments about the independence and the strength and the will of the people in the agriculture sector was really quite moving for all of us, particularly for some of the members of the committee who have a much stronger farm background than I do.

I am concerned with the cost of recommendation 9 and the 100 per cent testing. Who will pay for the testing? The worry I have is that the answer will be “the consumer.” I am concerned that the consumer will pay for the testing through direct costs at the grocery store or through his or her tax dollars.

We need to recognize that even Japan, who was insistent on 100 per cent testing, is now talking about moving away from that process, recognizing that our technology does not support it. Perhaps we should be talking about maximizing testing in the areas where testing is needed, particularly in animals over 30 months.

Is that a possible revision to recommendation 9?

Mr. Dobson: Just to answer your question about who should pay for the testing, to begin with, I think we have too many things that Canadian producers pay for that the consumers demand and are not willing to pay for themselves. If the consumers demand the testing, either they need to pay for it in the price of beef, or they need to pay for it, as the public needs to pay for it. The cost of the testing should not be the responsibility of the producer. We are producing safe beef. We produce safe food.

I am involved on farm food safety in grains and oilseeds and it is our view that if consumers demand it, then consumers should pay for it. If you were going in that direction, the government could certainly play a role.

Recommendation 9 states:

That the Federal Government consider providing 100 per cent testing of meat being exported to specific markets that demand it.

It does not say that we support 100 per cent testing of all beef. However, if that is what a market demands, and if it is a significant market, and they are adamant, then we need to look at a way to allow those folks to do that testing. The funding is certainly up for discussion. The provincial governments, federal government and the industry need to be very comfortable with that decision.

Mr. Gauthier: The marketplace always functions in a strange way. When there is a market that demands a specific attribute and that market is rather small and narrow, usually there is a premium that is paid for that extra step. When it becomes general, the premium disappears. We have experienced it in the GMO world with the oilseeds and the other crop products. As long as it is a small niche, the end user pays for the premium. As soon as it widens, the producer absorbs the premium.

My fear is that 100 per cent testing would fall on the producers. We all know that. In the end, the market would absorb the price of X, and whoever is in the chain in the cycle would end up offering less for the cattle because somebody has to pay for it along the way. Our observation is that it usually falls on the back of the producer. When there is a transportation difference or handicap, the producer absorbs the cost. That has been the experience in the Maritimes, and that is why they came up with their project to kill their animals locally and minimize that penalty.

The 100 per cent testing is only for those that absolutely require it. You would expect that a premium would absorb the costs.

Senator Mercer: We have recognized for a long time that food is the biggest bargain in Canada, and it is a bargain because we do not pay the primary producer well enough. The people in the middle, from the farm gate to my plate, are doing quite well, and my colleagues have heard me complain about the profits of the packers for some time. I will not dwell on that, except it leads to my last question.

I am quite concerned that we are getting close to the reopening of the border. When we were in Washington a few weeks ago, we thought we were extremely close to achieving that goal. A judge in Billings, Montana, as Senator Kelleher said, came up with a hometown decision, and so we are back to square one.

I am concerned about what happens when the border does open. Senator Gustafson has a theory, which I subscribe to as well, that there will be cattle moving north to feed on our very cheap grain, which is another issue. It is likely that since we have the cheap grain and the large feedlots the cattle will move north to feed.

I am concerned for the new slaughter capacity that we have developed and are developing. Will we be able to withstand the pressure from the major packers when suddenly we are back in business and they want to move back to what they consider normal? What will happen when the major packers reopen the three closed plants in order to process our cattle?

I am very concerned that the crisis will then be that we have developed capacity, but because of their muscle in the industry, and because they are such large packers and feedlot owners and own so many cattle that our people will be forced to go back to where they were before the closure. The U. S. beef industry is so big that it can dictate prices.

I am aware that all of the efforts that business, agricultural communities, the co-op movement and all the others involved in the process are at risk.

How do we help prevent what I foresee as the next crisis in the process?

Mr. Dobson: They will be competitive in two ways. We know the border will open sooner or later. The first to stay competitive is to see that they have adequate capitalization, by either producer capitalization or investor capitalization or a combination, so that the debt is not too high. We know that debt has to be paid off, and the more severe the debt, the more financial pressure, and the more financial pressure, the more difficult it will be to be competitive.

The second way is to have some type of strong marketing strategy for those groups of folks. I go back to the need to initiate discussions about some type of marketing alliance, but not a marketing board.

If you have 5,000 animals a week and another packer has 5,000 a week or whatever, there is no reason why some of that meat cannot go into those American markets when the border opens. You must have some size and some power to be able to do that. You are not able to do it killing 100 animals a day.

Capitalization and market power are what will make it viable. It is an opportunity. We face that in every aspect of society right now as large companies are putting pressure on small, producer-owned facilities. Can you live up to the task? If you have commitment, yes you can.

Senator Callbeck: In recommendation 7, you say that certain federal agriculture programs do not suit co-operatives as well as other types of businesses or individuals. You mentioned eligibility requirements in some of them and others that need added features.

Could you give a couple of examples, please?

Mr. Dobson: I do not have examples, but I certainly could get them for you. It is more of a mind set. It seems that programs are for individuals and not for co-operative entities.

Mr. Gauthier: A few examples have been highlighted recently. Co-ops make use of the Farm Improvement and Marketing Cooperatives Loans Act program, or FIMCLA, to finance producer input. Although the program seems pro-co-operative, there are constraints within that program that do not make it easy for co-operatives to apply for assistance. I cannot give you the details today, but that is our understanding.

Other programs do not make provisions in their applications for co-operatives to apply. Although it does not state that co-ops cannot apply, it makes it very difficult for co-ops and creates a whole series of questions. The people administering the programs have to answer those questions, which creates delays and confusion. The programs eventually work, but it is confusing for the community when programs seem to be individual specific but turn out to be available. There is a lot of wasted opportunity as a result. We could provide examples of examples that we have discovered over the years.

Mr. Dobson: Complications arise when the application requires a list of co-op members. If you have five or 10 members, that is not a big deal, but if you have 500 or 5,000 members, that is impossible. It must be recognized that the co-op is an entity that represents those members. The purpose of co-operatives is to do those things together. We will get some specific examples for you, but that is the concept.

Senator Gustafson: The mandate of this committee is to inquire into the present state and future of agriculture. I think we know it pretty well, but it is our obligation to find out more about it. In Saskatchewan, which has 40 per cent of the country's arable land, the grain industry is in big trouble, probably bigger trouble than the cattle industry.

I would like to hear your comments on that situation.

Mr. Dobson: That is a big question. There is no doubt that agriculture is having its share of trouble, especially this year. This is the worst situation we have been in since I have been farming, which is 32 years.

This is a difficult country to live in, especially on the Prairies. We are a long way from the ports. Many challenges have come together at the same time. The price of freight is very high, and BSE has compounded the problem. Commodity prices and input prices are another challenge. An underlying problem is agriculture debt. I believe it is $13 billion in Alberta alone, and close to $50 billion across the country. If interest rates go to 10 per cent, it will be extremely scary. At the current rates, we can barely get by.

We will have to work together to get through these hard times. We do not like coming to the government for help, but if we do not have some stability to get through these times, it will be very difficult to become healthy when things do turn around. It is not hopeless, but it is very challenging.

I mentioned the initiative in Calgary. I commend the government for looking at long-term strategies to make this work. As someone said, if you caught your girlfriend's hand in the door, it is a bad time to ask her to marry you and slip the ring on her finger. That is a good analogy.

You have to have a relatively healthy industry before you can talk about long-term strategies. We will get there, but we all need to work together.

Senator Gustafson: Senator Peterson tells me that people in his area are cash renting their land just to cover their taxes. The same is true in my area. That is serious.

Why would the financial institutions lend money to support this industry when they can invest in India and China and get returns on their money in the 10 per cent to 20 per cent range?

The only entity left to help is government.

Mr. Dobson: We have always enjoyed and appreciated public support in agriculture, but we can never take that for granted.

Mr. Gauthier: I can speak from the perspective of being part of the management of the supply chain to farmers, because I work with co-operatives in Ontario. It is clear that in the last two years there has been a significant shift in producer credit requests to the co-ops. As suppliers of products, we have to supply credit terms. A significant number of producers and farmers are asking us for longer-term credit because they cannot cash flow. They are asking to buy their seed, fertilizers and fuel on terms extended to January and February, whereas it used to be 30 days to 60 days. More and more producers have lost the support of their banking or other credit programs, and they are now trying to extend their terms with us.

In the last two years, we have seen significant bad debt write-offs in the accounts receivables of our co-ops. Many producers are getting out of business and losing their equity and their entire life savings; they are bankrupt. Those people cannot pay their accounts to their co-ops. The co-ops are not the only ones suffering from this situation, but I see it in our business cycle. To me, it is a clear symptom that cash has dried up. These people have exhausted their resources.

Those proud livestock producers, who have worked hard all their lives to earn a decent living and to earn their retirement, have lost everything. They are saying, “I can plant, but I cannot finance it. You have to stay with me until harvest or beyond.” We have to ask them to give security, and not just normal credit terms. They need to put their farms on the line. Not even the banks will provide them that credit.

They are in a dilemma, and there are a lot more of them than there used to be. That is a risk for us as a supplier.

Senator Gustafson: I can confirm Mr. Gauthier's statement. In the last three weeks, I attended three farm sales that were basically bankruptcy sales. They were either selling out to try to save a little bit for their retirement or they had no choice; they were forced by the financial institutions to sell out.

The situation varies across the country. In Saskatchewan and Manitoba, statistics show that land prices went up 0.8 per cent, whereas in Alberta they went up 5 per cent. The only people buying land in my area are oilmen. Farmers cannot buy land.

The Chairman: Before thanking our witnesses, I will add one more issue that is hovering over the heads of everyone in Western Canada who is farming grain or raising cattle, and that issue is water. Water is a very big issue in my corner of Alberta. The issue of water is looming as our glaciers melt. We do not get much rain in our area and the glaciers are very important to our land.

Agriculture is a testy business. We admire your spirit and enthusiasm. This has been a wonderful session today. Thank you very much. We will keep in touch.

The committee adjourned.

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