Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 9 - Evidence - Meeting of October 24, 2006
OTTAWA, Tuesday, October 24, 2006
The Standing Senate Committee on Agriculture and Forestry met this day at 7:10 p.m. to examine and report on rural poverty in Canada; and the present state and future of agriculture and forestry in Canada.
Senator Joyce Fairbairn (Chairman) in the chair.
[English]
The Chairman: Good evening, honourable senators and witnesses, and all of those watching our Standing Senate Committee on Agriculture and Forestry.
Last May, this committee was authorized to examine and report on rural poverty in Canada, an issue that was raised in the Senate and aimed at this committee by our colleague Senator Segal. For too long, the plight of the rural poor has been ignored by policy-makers and politicians. Until the end of the year, the committee will therefore hear from a variety of different witnesses who will give an overview of poverty in Canada's rural areas. This work will then serve as a basis for the committee's plan to travel to rural communities across this country next year.
Today, we are very pleased to have with us James Sentance, Associate Professor of Economics at the University of Prince Edward Island. His research interests include labour economics, regional economics, and rural and urban issues. He is a collaborator on a major collaborative research initiatives grant from the Social Sciences and Humanities Research Council of Canada for research on ``Municipal-Federal Government Relations and Provincial Mediation: A Comparison Across Policy Fields, Municipalities, Provinces and Federations.''
We have one hour tonight to discuss this important issue with Professor Sentance. I would invite my colleagues to keep their questions as brief as possible in order to allow our witness to respond fully and so that everyone here is able to contribute to the discussions this evening.
We are very pleased to have you, sir, and the floor is yours.
Jim Sentance, Associate Professor, Department of Economics, University of Prince Edward Island, as an individual: I thank the committee for this opportunity, which I hope will be of some interest to you. I was given a set of questions to help guide me in making a presentation. I will begin by quickly responding to some of those, to give you a sense of where I am on these issues, and then we can go from there. I have rearranged them into four sets of questions.
The first concerns the boundaries of the study that you are looking at. A few questions went to who are we looking at, who are the rural poor, what we mean by rural, farm, small towns, et cetera. In that regard, my feelings with respect to the idea of farmers and poverty, which is a question that comes from some of the comments in there, I have some difficulty identifying farmers with poverty. It may be a question of semantics. Maybe I am splitting hairs, but as challenged as our farmers are, and as problematic as their income flows may be at the moment, I am not sure that what we are looking at there is what I would call poverty. Most of our farmers in Canada operate what I would consider small- to medium-sized businesses. The problems faced by farmers are essentially business-type problems, not the type that leads to poverty in the sense that you usually think of poverty. While agriculture is clearly related to what is happening in rural areas, I am not sure farmers themselves are really who you are looking at in terms of the impoverished, if you are looking at poverty in the classic sense. Of course, you can redefine ``poverty'' as you like it, if you want. Having said that, what we are left with in rural areas are people that clearly are impoverished.
As to the issue of rural and small towns, I do not see a lot of difference between those in rural areas who I would consider impoverished and those in small towns who I would consider impoverished. I do not see any reason not to include small towns in your study, if you are looking at rural areas.
Frankly, in many parts of the country, certainly in Prince Edward Island, I do not know how one can extract rural areas out of the small towns or extract the small towns out of the rural areas, because they are so integrated. You cannot go more than 10 miles anywhere on Prince Edward Island without running into a small town. There are no rural areas that do not include small towns. That is true for a fair part of the country. You get large stretches of rural territory without small towns, but I think small towns are integrated into rural areas, and their problems are, to a great extent, the problems of those rural areas. I think you should include those.
The second set of questions relates to where the poverty in rural areas comes from, the role of agriculture in all of that and what other factors might be involved. Certainly agriculture is part of the problem. It goes beyond the current problems that agriculture faces. Rural poverty in Canada has developed over decades, not over years, and it is part of a process.
I think you can go beyond agriculture to talk about the whole primary sector, forestry, mining, et cetera, as well. The part of the country that was settled and developed to exploit our natural resources, the land and the forests and our mineral wealth and so on, hit a high point a while back, and that part of our economy has been receding in importance, certainly relatively, and in many areas absolutely. My feeling about rural poverty to a great extent is that it is what happens when that process goes on long enough. People, towns and areas basically get left behind. The tide goes out. Some people go with it, and some people are left. The ones that are left do not have as much to do, do not have as much of a basis for a market economy as they used to, and they struggle. Agriculture is clearly part of that.
It is not simply a matter of incomes having fallen. There are structural changes as well. As we have moved to larger farms, obviously you cannot support as many people. Technology has replaced agricultural labour in some cases. Towns have been somewhat deflated by changes in the way the agri-food industry operates on the Prairies, as we have moved from smaller elevators in little towns across the Prairies to bigger super-elevators in fewer locations. That is a problem for the towns that have lost their elevators. That is a loss of money and employment and so on.
Part of the problem is the same thing you find with poverty anywhere in the country, problems with individuals' education, training, skill sets and so on that make them less employable and therefore less able to earn income in the marketplace. To some extent, that is exacerbated in a rural area. As opportunities leave, the lack of mobility of some of the people that are left in rural areas is a part of the whole problem there.
There were some questions on measuring poverty — which is problem in rural areas. How do you measure poverty? I tend to prefer absolute measures rather than relative measures. Something like a low-income cut-off would perhaps be a starting point, but there are some difficulties with that. That kind of a measure looks at income, prices, proportions of income being spent on various things, but it relates very much to what is happening in the marketplace.
There is some recognition in one of the questions that I was given that there is more to standard of living than simply what is going on in the marketplace. There was a reference to access to public services. Clearly, there are fewer public services available in rural areas — which implies, even if it may be similar on a market income measured basis, that something is lacking in a rural area that should be noted.
It goes beyond that. There are some difficulties with the use of most of our standard measures of poverty in rural areas, because the standard of living that people are able to achieve in those areas quite often goes beyond what they are earning in the marketplace or what market prices happen to be.
Someone in a rural area will quite often have a lot more time available, for example, to do things on their own, particularly if they are employed in seasonal industries. That time has value and can contribute to their standard of living.
There was a very good argument along those lines made a decade or so ago in a royal commission in Newfoundland. I have forgotten the title, but it is usually referred to as the House commission — Doug House was the author. It makes the point that people on unemployment in Newfoundland have a substantially higher standard of living than one would expect. Because they are not fishing all time, they have time to put towards making things for themselves. For example, their housing is far above the level one would expect relative to their income from the marketplace.
The opportunities for those kinds of non-market inputs into one's standard of living are greater in rural areas. Opportunities for non-market income, income in kind, food from the ground and so on, are greater there. There are many complications in that, and I am not sure any one measure will adequately capture what is going on in rural areas. There are many difficulties in comparing that to what is happening in urban areas.
What to do about poverty in rural areas? To some extent, it depends on how much one wants to put into it. There are some obvious things that would help. To the extent that the difficulties that agriculture faces are part of the problem, clearly fixing those problems would be of some use. That would certainly put more income into rural areas and aid in that way.
On a more personal level, you probably want to look at the individuals that are impoverished in rural areas, and the obvious things to look at are levels of education, training, skill sets and so on. I am not sure how much you can do along those lines. I think a lot of the people that we are looking at are people who have already gone through the education system, so to some extent the problem was created in the past. I am not sure how much those people can be fixed up now.
The answer that many economists would give, that maybe we should move all these people to urban areas where they can get jobs, is a particularly stupid answer. Unless you do a significant amount of re-education and retraining of many of the individuals that we are looking at, there would not be opportunities for them in those urban areas.
If we are looking at mobility, many people have moved out of Canada's rural areas and gone to where there are opportunities, typically in our bigger cities. The ones left behind have stayed behind for very good reasons. They would probably not find opportunities that would make them any better off in those urban areas than they are in the rural areas.
Policy addressed to rural poverty may have to look at ways in which you can make the life of these people better where they are, as they are, for as long as they are there. My big concern with that kind of thing is the trade-off in helping people in rural areas. There are not many other ways you can assist them. How far you go that way, and whether you actually encourage people to stay there and be poor when they have the opportunity to go elsewhere — these things have to be considered.
Added to the mix is the fact that it plays back on itself. You start taking people out of rural areas and that may improve life for those people, but it can also hurt the people left behind. That is part of the problem of rural areas. People leave for opportunities elsewhere. Migration is a selective process: It takes the brightest, the best, the youngest and most marketable. As they leave, they take spending, purchasing power and flow of money out of those areas and make conditions worse for the people who are still there.
I will leave it at that and respond to questions.
Senator Segal: Professor, thank you very much for coming from Prince Edward Island and helping us with your perspectives. I wanted to make sure I understood the distinction you were making between agricultural poverty and rural poverty.
If we have census-tracked data that says that 40 per cent of people living in a particular set of townships are living below the low-income cut-off and you and I were flying over in a small plane, if I understand you correctly it would be your ab initio position that the people on the farms are likely not part of that 40 per cent — that it would be the other people in the region, but not the people on the farms.
Mr. Sentance: They may very well be part of that 40 per cent, but I am not sure that I would categorize that low- income status as poverty in the classical sense.
Senator Segal: Let me test that further with you, if I may. If we went to Jane and Finch, downtown Toronto, there are a lot of people living below the low-income cut-off.
They may be doing various things to sort out deficiencies — eating at their in-laws, borrowing cash from relatives — so that they are not in the impoverished process, although their low-income cut-off number is real. Are you suggesting that we should not be counting farmers among the impoverished because they are living on their own land and may be able to grow some of their own food, even though their annual income numbers would suggest that they are? Is there some magic about living on a farm that gets in the way of having no money?
Mr. Sentance: No, it is more in the nature of owning and running a business. Part of that is the existence, on most farms, of significant amounts of wealth or assets and elements like that.
For example, there could be a business owner in the city, with a building and a business running, whose current net income could be below the poverty level. However, I am not sure I would categorize that business owner as being impoverished or in poverty. I think of it more as a business income flow problem rather than classic poverty.
Senator Segal: If we assume, for purposes of this discussion, that people who live on a family farm are dependent upon income from that business to meet their basic requirements — mortgage payments, food, heat, transportation and clothing — and if their core income has collapsed well beneath the low-income numbers, it strikes me that we end up with the classic debate, which bankers love, between solvency and liquidity.
Your argument is that they are solvent; they have a farm, machinery, a barn and livestock. The bank's argument is that that is interesting, but there is not enough income to make the payments so we will seize it all. There is a liquidity problem.
They might not view a large corporation with real estate, with a similar liquidity problem, as worth seizing. They would put it into the special workout branch within the bank, but they may not do that for a farmer. In terms of your assessment of this, I am trying to determine why a farmer has some sort of built-in protection when their income collapses because he or she is a farmer and they have a business, which other Canadians, if I understand you, might not have in a similar circumstance.
Mr. Sentance: I am not so sure I would consider other Canadians in similar circumstances as all that different. Again, it may be a matter of semantics; maybe I am splitting hairs too finely.
Senator Segal: We are interested in working to a dynamic definition that we can do something about, so your advice is very helpful and I appreciate it.
With respect to the outside incidence that we see — increase in the food banks, increase in crystal meth utilization in many parts of Canada, increase in farm bankruptcies — these do not connect directly with the low-income cut-off, but they do speak to an incidence of economic difficulty, which we are seeing right across the country.
I would be interested in your advice on how we take your concern that we do not overstate the problem, compare it to the numbers with respect to those other difficulties and try to merge it in some way that gives us an understanding that is both pragmatic and realistic.
Mr. Sentance: I do not necessarily think of myself as wanting to minimize the difficulties that farmers face. My point is more that the source of their difficulties is different from the source of the difficulties of other rural, small town poor.
The things that happen to people, such as having to go to food banks, may be very similar. I am not denying that. However, I am saying that it is a problem of a different nature.
If you are looking for explanations and solutions, if you are looking for policy initiatives, I think you will be looking in different directions to try to solve the income difficulties of farmers and the poverty problem of the non-farmer, rural poor. That is where I was coming from.
Senator Callbeck: Since you live in Prince Edward Island, as I do, I have a couple of questions I would like to ask you about the province.
According to Statistics Canada in 1996, 29 per cent of Islanders were in primary industries like farming and fishing. Now, five years later, in the statistics for 2001, that figure is down to 14 per cent, which is a tremendous drop. What do you see for the future? Do you see this trend continuing?
Mr. Sentance: I think it is a continuing trend. It is one that is coming a little bit later in Prince Edward Island than it has in a good part of the rest of the country. It has been going on for decades now.
As I said in my opening remarks, it is part of what is happening in rural areas and part of what is creating, over time, a bit of a rural poverty problem. Basically, opportunities are moving elsewhere. Canada has a lot of opportunities opening up for people but most of them at the moment are in urban areas. Our rural areas are in relative — if not, in a lot of cases, absolute — decline. It is a difficult task to try to stand in the way of that or reverse it. That is an interesting question for your committee: How far do you want to go in that direction?
As far as the market and the economics of it go, the process is pretty irresistible. You can hold it off for a while and prop rural areas up to some extent. However, if you are getting into that area, you must ask: What are you willing to put into that in terms of resources? What is the rest of the country willing to put into propping up rural areas and providing opportunity?
Senator Callbeck: In terms of propping them up, how would you do that?
Mr. Sentance: It is not an easy thing. To do it, you must provide some kind of opportunity for people. You can prop individuals up through welfare-type systems — guaranteed annual incomes or something like that — and make people comfortable. In terms of providing people with opportunities in rural areas, you have to find an opportunity that will work.
In Prince Edward Island, we have done a bit of a job of — I hate to use that term ``propping up'' — keeping people in our rural areas to an extent that otherwise would not have been possible by expanding the tourism industry over the last several decades.
That has not come naturally, though. To do that, we have had to have a fair bit of development money to build attractions, motels and so on. The changes in the employment insurance system, moving to seasonal employment benefits and regionally differentiated qualifying periods and so on have allowed people to sustain themselves in occupations in tourism, where they only work part of the year, in a way that would not otherwise have been possible. There had to be resources put into that. You can do that kind of thing here and there, but the question is to what extent we are willing to divert resources to that kind of opportunity.
Senator Callbeck: You mentioned that one of the greatest issues is education. In Prince Edward Island, our percentage of high school graduates is 71 per cent compared with the national average of 77 per cent. However, I understand that in the rural parts it is much lower.
Mr. Sentance: It is significantly below that.
Senator Callbeck: Do you have any ideas on how we can get more rural people to graduate from high school?
Mr. Sentance: This is part of the conundrum. In supporting rural areas, you quite often end up promoting industries and occupations where education is not as necessary.
In Prince Edward Island, we have rural industries. Agriculture is reasonably successful. There is the fishery, and many people who are dropping out of high school do so because they have opportunities that do not require higher education. If you promote those kinds of opportunities too much, you create the situation where people are lured away from education. It is difficult to balance.
Senator Downe: I should like to thank the witness for his presentation.
You talked a lot about the market. Have you done any studies on the impact of the agricultural subsidies that our competitors have, such as the U.S. and the European Union, particularly France? It seems to me that, unless we increase our subsidies, the continuation that Senator Callbeck talked about and the reduction in primary-industry employment is bound to continue. Either we institute heavy subsidies for our farmers like our competitors are doing or we will have a rural decline.
Mr. Sentance: That is currently one of the biggest problems in the agricultural sector. I have not done any research or studies of my own on that, but I do keep abreast of what is happening. I am not an expert on agriculture, but the first issue there to which I would point is the problem with international subsidies.
If we cannot get others to reduce their subsidies and correct the market in that way, as we have been trying to do through the World Trade Organization, albeit not very successfully thus far, one of our few alternatives is to subsidize our farmers to a great extent. Again, it is a question of where you get the money and how much you are willing to put into that. There is a problem there.
There are other challenges as well, such as higher energy prices. Farming is a relatively energy-intensive operation, and that must be hurting at the moment. There are developments elsewhere in the agricultural industry. I would have some questions about the degree of market power that elements downstream from agriculture have, that is, the retail processing end of things. It does not look to me like a really competitive market in many cases. One must wonder to what extent profit margins are being squeezed for farmers in those areas.
There are many issues that our farmers face at the moment.
Senator Downe: I share your concern about the secondary issues, but it seems to me that there has been a policy decision made by other countries to have a viable and prosperous rural agricultural community that younger people can aspire to live in. We have not done that, and the decline we are experiencing is a reflection of that policy. I share your view about our work with the World Trade Organization, but, as you said, the results are not what we wanted. In the absence of a WTO ruling in our favour, we will continue this decline.
Senator Peterson: Thank you for your presentation. I am from Saskatchewan, so my comments will be focused on that area.
I see two levels of rural poverty in Saskatchewan — farmers, and towns and villages. The towns and villages have relied in the past on farmers for their livelihoods, but with the farms getting bigger that is harder to do. Some small towns have hurt themselves — because the people go to major cities to buy their groceries and clothes and then are upset when the local grocery store does not have any fresh cream for them when company comes.
In order to solve this problem, an area needs a focal point such as a natural tourist facility or a major industry from which they can work. Some would have to be cut loose because they cannot be sustained. They are small, the tax base is dwindling, people are leaving, the infrastructure is crumbling and there is not enough money in the treasury to keep them all going.
Do you see that as something that could be focused upon?
Mr. Sentance: You mentioned infrastructure, which is certainly part of the cause of decline of small towns and rural areas. As the population dwindles, you get down to the point at which governments are not willing to support infrastructure. You need infrastructure in place in order for opportunities to take place. Rural Canada's small towns will not get anywhere with no facilities or businesses. People will not relocate there without them.
As you said, it is difficult to do that everywhere. There are just too many small towns.
It may be a matter of governments being a bit more involved in deciding where that infrastructure will be located. They may have to do some picking and choosing as to what towns will get this or that. It is better to go through a process of trying to ensure that you have enough facilities of various kinds to make things workable and to keep people's quality of life acceptable within a larger rural area rather than try to fight a battle against losing this here or that there, and so on. If all the small towns were competing with each other, one may lose it all. It should be decided that, in this rural area, we will have a hospital here, a sports rink there and something else located over there.
Senator Peterson: The other problem I see is that poverty is not as visible in the rural areas either. You do not see food banks in small towns. They do not need much of a hand up. They need a little help to keep them going.
Mr. Sentance: Yes.
Senator Mahovlich: Thank you, Mr. Sentance, for attending here. I am from a small mining town in northern Ontario. There was always the worry of what would happen when there was no more gold. Elliot Lake, which was a uranium town, has reinvented itself as a retirement community. Do you know if the government had anything to do with that, or was it a private-sector initiative?
Mr. Sentance: I cannot remember. I think the municipal government there may have had something to do with promoting that. That is an interesting example. That is one of the kinds of things that you might actually be able to do in small towns, in particular, in the way of providing facilities.
One of the opportunities that small towns have over the next few decades will be providing habitation for seniors — given the big demographic bulge coming up. If you wanted suggestions as to the things that you could put into rural areas that would be relatively suitable and you will need anyways, that is it. It is not a matter of stealing money from some other purpose that you would otherwise use to prop up a rural area. This is money that we will either have to spend collectively or through the marketplace anyway. Small towns are perfect places for seniors, in many cases. Many of those people who will be our seniors originally came from small towns.
Senator Mahovlich: On the East Coast, which has rural problems, are many people selling their properties? I have heard that many Europeans are purchasing properties in Nova Scotia, for example.
Mr. Sentance: There is a fair bit of that.
Senator Mahovlich: Is a lot of that going on?
Mr. Sentance: Yes. It would be worth taking a look at how the makeup of the population in rural areas is changing. In preparing for today, I did a bit of research, and one of the things I found was that the rate of depopulation of rural areas is not as great as you might otherwise think. In relative terms, clearly, they are falling behind the rest of the country. However, there is a reasonably large number of people who are moving from the cities to the rural areas. Part of that may be people moving out of big cities into what are technically ``rural areas'' on the fringes. They are just looking for somewhere to build a development, a subdivision or something.
In Prince Edward Island, I do not know that there is a large number of Europeans buying up lots yet, but there are a lot of large luxury homes that are going up out in picturesque points in the countryside. To the extent it takes place that is helpful for rural areas. It takes away a bit from their original character, but those people do potentially inject some money into the local economy, possibly provide jobs that are more suitable for the kind of people that we are looking at.
Senator Meighen: On the Fisheries Committee, we used to talk about bottom fishing. That is what I am doing.
My colleagues have asked you all the important questions. However, professor, have you come across any other country where a strategy has been adopted with particular success that might, perhaps, be brought to Canada? Is Canada unique in facing this problem? Surely, the Irish faced it, maybe even a century ago. I have a report here about a program in rural Armenia that is setting about to develop the obvious things, such as drinking water and paved roads — all the infrastructure that you mention. Maybe infrastructure is the key to it. Technology allows us to do work in places that in yesteryear we could not. Infrastructure would allow people to travel, perhaps, and have other amenities. By ``travel,'' I mean go into the cities and come back out. Our infrastructure in Canada in that respect is not the greatest. Our roads seem to be deteriorating and our train intraprovince is not the greatest.
Could you speculate along with me as to where the road might lie that would lead to some sort of stabilization if not solution to the problem we are looking at?
Mr. Sentance: I cannot say that I have really noticed or done much looking around in terms of examples from other countries. It is interesting that you mention Ireland, as that is the first country that popped into my head. Maybe there is something worth taking a look at there.
Certainly, the problem of rural decline in countries where urban areas are expanding is, I would say, not unique to Canada. The extent to which Canada was into primary-sector activities is unusually high compared with most other developed countries. This may be a bigger problem here than in most other developed countries. However, there are certainly elements of that problem everywhere.
I was over in Britain this summer. As I travelled through England, it became quite clear to me that the same kind of thing is probably happening there. There is a fairly significant rural decline there. Everybody is moving to the big cities. There, however, they have pretty good infrastructure, in terms of public transportation, trains and so on. I am not sure that that has really helped the rural areas, by keeping people there, to any greater extent than here. It may have facilitated London's urban sprawl, however, so that you can settle a little further out, but it becomes urbanized rather than remaining rural in that sense.
Senator Meighen: Where do you see the hope for rural areas? If Senator Mahovlich's gold mine has come to the end of its life, then that is that. If the cod fish will not return in the numbers they used to, that is that.
Mr. Sentance: Frankly, I do not hold out a lot of hope that anything will happen in the resource primary sector that will miraculously arrest the decline and reverse things at any point in time. I think it is just the way things go. If nothing else, the markets are a problem, but the kind of technology that you use in these areas tends to be less and less labour intensive. Even for a given amount of gold in a mine, you need fewer miners now than you used to. Our farms are using fewer labourers and people are bigger than they used to be. Distribution systems are more centralized and require fewer people in rural areas.
I do not hold a lot of hope that traditional economic bases of rural areas will somehow miraculously turn around and fix all the problems. A turnaround in agriculture would be positive if we could somehow affect that, but that is difficult to do. Fixing international problems so they do not mess up our markets or finding the money to subsidize our farmers to the extent they do, both of those things are difficult and hard to achieve. Even then, they would only go partway towards fixing the problems of rural Canada and, in particular, the rural poor.
I hate to say it, because I do not like the idea, but you must move people out and fix up their lives somewhere else. Many economists suggest that. I am not sure we could make those people any better off in the big cities in any event.
Senator Meighen: Do you classify Fort McMurray as a big city?
Mr. Sentance: There are some exceptions. The oil patch is an obvious one.
You will have to look at other ways in which you can get people and activity coming out of the cities and into rural areas. It will be new stuff. The retirement facility is one possibility as well as decentralized production of services.
At some point, people will get sick of living in the cities and will want to move out to the countryside. There is some potential of that happening, although again you must provide people with what they have come to view as the necessities of life or they will not like it when they get there.
The Chairman: We appreciate you appearing before us, Professor Sentance. We are in the early days of this study, and we have a long way to go. You certainly told it the way it is, and that is exactly what we want to hear.
We will certainly be re-reading what you have suggested here tonight, and if we need to get in touch with you further, we will. As you know, you have some fans here in the room from Prince Edward Island, and I know they are very pleased to see you here. Professor Sentance, we wish you a fine journey home. Thank you very much.
Our next witnesses are not strangers to us, particularly myself, coming from southwestern Alberta. Joining us now are Ms. Sandra Marsden, President of the Canadian Sugar Institute, and Mr. Daniel Lafrance, Vice-President and Chief Financial Officer of Rogers Sugar Canada, the company that owns the Taber plant.
Please proceed, Mr. Marsden.
Sandra Marsden, President, Canadian Sugar Institute: Thank you for inviting us to speak with you this evening.
I should like to tell you a little bit about the Canadian sugar industry, as an understanding of the industry in Canada is important to understand the implications of this particular issue on the industry as a whole, as well as Rogers Sugar specifically. Mr. Lafrance will address the Rogers-specific issues after I make my remarks.
I have a set of slides, which, if you follow those, I think would make the presentation flow a little easier. I will start with the one in colour.
The Canadian Sugar Institute has been incorporated since 1966, and we represent Canadian manufacturers of refined sugar. Today, that includes Rogers Sugar in the West, which has a cane-refining operation in Vancouver as well as a Taber sugar beet processing plant. Redpath Sugars, now called Tate & Lyle Canada, is located on the waterfront in Toronto, and there is Atlantic Sugar in Montreal.
The second slide represents a little bit about the history of our industry. The industry has been in Canada since the mid-1800s, before Confederation. The existing companies in Canada have roots dating back that long. We are a long- standing industry that has made an important contribution to the Canadian economy, both nationally and regionally.
Today, the industry produces over 1.3 million tonnes of sugar, which may seem like a lot; however, per capita consumption is not increasing in Canada, so the industry depends on population growth for any growth in the industry.
We produce sugar from imported raw cane sugar, largely from developing countries, increasingly from Central and South America, but also from Australia. The remainder is sugar beet production and processing in Alberta.
The industry has rationalized dramatically over the years. Prior to 1980, there were ten cane and beet processing facilities in Canada. By the year 2000, there were six. Since the year 2000, there have been four. The most recent plant closures were a sugar beet processing operation in Manitoba — Mr. Lafrance will talk a little bit more about that later — and a cane refining operation in Saint John, New Brunswick.
The industry really has responded to competitive pressures, both with respect to import competition and the lack of export markets. The result is that we are a highly competitive industry. Prices are very low in Canada relative to other markets. You can see from the graph that in fact the prices track world prices, which are much lower than prices in the United States, Europe and most other developed countries.
As the third slide indicates, we have rationalized. We do have roots in Canada that go a long way back. The fundamental basis for Canada's industry has not changed; it is an industry founded on the principles of free trade. We are essentially an open economy, which means we track world prices, and sugar beet producers must also follow as their returns are directly related to the world market. The industry does not receive subsidies or does not have import quotas and high levels of tariff protection.
The tariff in Canada is about 5 per cent of current world prices, so it is very low. You can see from the chart, according to this study for the World Bank, that Canada has the lowest tariff in the world.
Slide four: In understanding the industry, it is important to see it in the context of both the suppliers to the industry as well as the customers. Over 85 per cent of Canadian sugar is now sold for further processing, so sugar in Canada is a vital input to the food-processing sector. It has, in fact, driven a lot of investment in food processing. Any impacts on our industry, whether in cane refining operations or sugar beet processing and production, will have implications for customers, both Canadian consumers in terms of the supply of a wide variety of products, as well as industrial users of sugar.
Major sugar users in Canada account for 25 per cent of Canadian food manufacturing, and that is 80,000 jobs. Sales in 2004 were at $16 billion and exports at $5 billion. It is a very big industry in Canada. Investment has grown dramatically over the last 10 years and sugar has provided a very important competitive input to that sector.
Slide five: Just a little bit about trade agreements, because it provides a context for why the United States tends to get very preoccupied about sugar and any increases in exports of products that may look like sugar or that may have high levels of sugar content.
In Canada, we are very dependent on the domestic market, very dependent on sales to Canadian food processors and consumers because there are very few opportunities to export. In fact, with all of the recent trade agreements, Canadian sugar producers have actually lost access rather than gained. It is not that those agreements are not generally trade liberalizing; it is just that sugar has been isolated as a sensitive commodity.
Obviously, the United States would be the most logical export market, as it is for our other agri-food products, yet, in fact, in Canada we can only export 10,000 tonnes of refined beet sugar to the United States, a 10-million-tonne market. So it is extremely small. The U.S. faces no such restrictions into Canada.
In 1995, with the Uruguay Round agreement, the United States took the opportunity to do something called ``dirty tariffication,'' where they used their tariff schedule to modify their quotas. This resulted in a significant impact on Canadian sugar exports. You can see from the chart that 30,000-tonne decline had a direct impact on Rogers Sugar.
Before I talk about sugar beet thick juice, what are we looking for?
Before we faced some of these new threats, we were working closely with other agri-food commodities in Canada towards a successful WTO trade agreement. Unfortunately, that process has stalled, not that we are not still strong advocates of the process; we are, because we see it as the only real fundamental opportunity to change protection of sugar policies around the world. We continue to advocate with our alliances. We are members of a global sugar alliance, largely developing countries that are members of the Cairns Group that are seeking liberalization of sugar markets, as well as the Canadian Agri-Food Trade Alliance, similarly looking at an export market outcome improvement.
Slide eight: I will talk about thick juice. As Senator Fairbairn mentioned, in September the U.S. issued two notices. One, on September 11, was a notice of a petition from the domestic industry in the United States to reclassify sugar beet thick juice, a product of the sugar beet processing industry, as sugar. That is a petition, not a rule as yet, but nonetheless indicative of the interest that the United States Department of Agriculture has in responding to U.S. domestic sugar concerns. That would be the more direct restriction of trade. On September 8, just prior to that, they issued a notice that proposed some changes to their domestic quota program, which would indirectly have the same effect. Both of these notices are in response to U.S. domestic pressures to curtail imports of a product that actually has .3 per cent share of the U.S. sugar supply, almost negligible.
Since 2002, the United States Department of Agriculture has been monitoring imports, trade in sugar syrups, sugar- containing products and watching for what they might call circumvention. There is no real firm definition of circumvention, but if the USDA deems that there might be circumvention they can make recommendations for legislative changes.
This product is not circumventing anything. It is a legitimate product and is distinct from products that are covered by quotas. It has been entering the United States freely for the past four years, but trade increased slightly up to a maximum of 36,000 tonnes in 2004-05.
Obviously, we are urging the government to respond very aggressively to these proposals; one is a notice of petition, the other is a proposed rule-making. It is not a rule yet, but we believe there is an opportunity to have an influence early in the process. This is a small volume to the United States, but a very big volume, very important volume to Roger's Sugar and to Taber sugar beet producers and the processing facility.
While I am here with the committee, I should like to take the opportunity to tell you about another significant threat to the industry — that is, the regional trade negotiations that are advancing before the WTO has a chance to impact agricultural regimes around the world.
Our industry is in somewhat of a unique position because our market is open. More and more, we face import competition, import threats, because other markets are closed. We face very active competition with South and Central American producers of refined sugar increasingly because the United States market is effectively static.
The U.S. did enter into recent trade agreement called the CAFTA-DR, but that access increase for those for Central American countries was a modest 1 per cent. It brings the share of the U.S. market, for those countries, up to about 2 per cent. Our market is 100 per cent open for raw sugar imports used in refining and 100 per cent open for fine sugar imports with that modest 5 per cent duty.
Unfortunately, or fortunately, Canada is engaging in regional negotiations and, obviously, trade negotiations may be helpful in liberalizing trade in certain sectors. They do not generally address agriculture on a broad sense and most of those agreements leave sugar off the table because it is a sensitive product.
The problem for us is with the removal of the small 5 per cent tariff. We are vulnerable to increased import competition, and we have nowhere else to go. As long as the United States market has its fixed 10,000-tonne quota, we are constrained to our domestic market. I think Mr. Lafrance can tell you a little bit more specifically about how that can impact margins in his business.
Daniel Lafrance, Vice-President and Chief Financial Officer, Rogers Sugar Canada: Thank you for this opportunity to discuss import and trade for Rogers Sugar and Lantic Sugar, which are related companies owned by Rogers Sugar Income Fund, and we manage both companies. The map of Canada before you is in two colours, to indicate the two markets in Canada, comprised of 1.3 million tonnes. The Western Canada market, about 275,000 tonnes, accounts for 20 per cent of the total Canadian market, and the Eastern market, which includes Central Canada and the Maritime provinces, accounts for 80 per cent. We operate two plants in Western Canada where the market is small. We have a cane plant in Vancouver and a sugar beet plant in Taber, Alberta.
As you will see in one of my slides, our capacity at Vancouver and Taber is similar — about 66 per cent, or two thirds. To operate large plants at 66 per cent would not be viable over the long term. There is no doubt about that. We have looked at everything to improve our capacity utilization, and it is difficult. This market has been fairly stable over the last number of years. In Western Canada, there are no large industrial users of the product like there are in Eastern Canada. For example, in the East, we have companies like Kraft, Hershey's and Nestlé, which are not in Western Canada. It is important for Rogers Sugar to retain these markets for the survival of our two plants.
What have we done in the area of plant investment? In order to be cost-competitive, we have to invest large sums of money in the plants. In 1998-99, we invested more than $58 million in the plant at Taber, to double its slicing capacity. Sugar beets need to be sliced as quickly as possible when they arrive at the plant, where work continues 24/7. We began a campaign on September 16 this year and we will work continuously until all the beets are sliced. This year, we have a bumper crop — everything is working in our favour. We will likely complete the job mid-February 2007.
We store our thick juice in large tanks and then we process it as we need it. We also have a market, which we discovered a few years ago, to sell thick sugar beet juice.
As an aside, in 2000, we invested $120 million for a major expansion to the plant in Montreal.
Regularly, we make large capital investments in our plants. Over the last five years, we invested $35 million in our plants; we invest $20 million annually in maintenance. The business requires large capital investments.
Ms. Marsden spoke to plant closures. I will speak to the closure in Winnipeg in January 1997 and why that happened. Winnipeg was a small beet plant that produced about 50,000-60,000 tonnes of sugar per year. Most of that, about 40,000 tonnes, was sold to U.S. markets. In 1995, the United States placed quotas of 10,000 tonnes on sugar coming from Canada, and we did not have a Canadian market to absorb the 30,000 tonnes that no longer went to the U.S. We had no choice but to close the plant in January 1997, although we tried to find a new market for those excess tonnes. We had approximately 250 growers at the time, and we were putting back into the community between $15 million and $20 million per year for the sugar beets. Many growers asked us if they could ship their beets to Taber, but distance is a problem for sugar beets. Hauling sugar beets is expensive so the sugar beets must be grown close to the plant, in this case in Taber. It was impossible for the Winnipeg plant. The Winnipeg farmers have an investment of about $200,000 in sugar beet equipment, but after the closure, the equipment was almost worthless. That is important for those farmers because the equipment is dedicated to sugar beets. The plant in Saint John was shut down due to the small market and the high freight rates. Those were the main reasons for closure.
One of my procurement responsibilities is to negotiate contracts with the sugar beet growers. We have an agreement with the Alberta sugar beet growers, who represent approximately 250 growers in Taber and environs. The formula since 2000 has been for a fixed price. Prior to 2000, we had a shared-revenue system. For sales of sugar beet from Taber, a formula was used to calculate the share to the growers. We do not have a chart here today but, in the late 1990s, the world price of raw sugar declined to about 4 cents per pound. Sharing revenues of 4 cents per pound does not go very far. The growers and we were not making much money, and so the growers were unable to expand their acreage and, in some years, actually had to reduce their acreage. We were also hit with drought in 2000 and in 2001. We had to do something to protect the relationship with the growers, which had been in place for 80 years.
It was important for us to negotiate an agreement with the growers so that they could go to their banks for loans. They had to be able to tell their banks how much money they would get from their sugar that year. We took the risk. Rogers Sugar Income Fund decided to set a fixed price for the growers. That agreed upon price has been fairly stable since it was negotiated in 2000. We have paid about the same amount of money to the growers year after year for the sugar derived from the sugar beets. That important step meant that we took all the risks of the sugar movement and the margin we were receiving on sugar. Our sugar margin began to decrease in 2004, but I will explain that later. Although this return to the growers was important, they always want more money; no doubt about. However, we cannot pay more for their sugar at this time because there are no new markets for sugar.
I will speak to sugar beet thick juice. Our fiscal year-end is September 30. In our first fiscal year, we sold 19,000 tonnes, and 20 per cent of Taber's volume was sold as thick juice. Why did we look at selling thick juice? In 2001, Costa Rica was given duty-free access to Canada to begin January 2003. They came to Vancouver first with their offers to sell sugar. They did not sell a lot — 6,000 tonnes — but they made offers to sell 150,000 tonnes of sugar, so our margin went down and we had to match the market. We had seen earlier that our plant capacity was only 66 per cent, but we knew we could not lose volume. Therefore, we were looking at alternatives, and sugar beet thick juice came up as an alternative.
We found someone to transport the thick juice to the U.S. and process it there. The margins on it are not great, but they cover costs and give capacity to Canadian growers. Thus, the plant operates four months during the slicing campaign instead of only three months. That is important for us, because it allows us to amortize our fixed costs on a larger volume.
In 2005, 30 per cent of our total volume was in thick juice. In 2006, it went down to 20,000 tonnes for one good reason — hurricane Katrina hit the U.S. They were short of sugar so they opened up quotas at four different times — one of them, Canada-specific of 25,000 tonnes, which could only be supplied by Taber. Rather than sell the thick juice, we processed it into granulated sugar and sold it at a much higher margin than the thick juice. That was one exception.
Currently, we have no contract for thick juice because our customers are unsure whether they are allowed to import thick juice. We like to know one year in advance where our supply comes from, and it is the same for our customers. There is so much uncertainty about it that our customer is unwilling to sign a contract with us.
Taber's revenue was 16 per cent to 30 per cent of our total revenues in 2006. I talked about our gross margin rate earlier. My chart shows the gross margin in 2003, before the venue of Costa Rica, and again in 2004. What happened to our gross margin rate? There was a huge decline. With a lower gross margin rate, we need as much volume as possible to compensate and make enough profit to sustain our two plants.
In conclusion, we talked about a raw cane sugar supply and how important it is. I talked about Costa Rica and the damage they did with a little bit of sugar sold into Canada. Guatemala is a larger producer. We buy a lot of raw sugar from Guatemala. Our supplies of Rogers Sugar Vancouver sugar plant is about 60 per cent Guatemalan raw sugar. In total, we buy about 120,000 metric tonnes, much more than a 10,000-tonne quota could get. There is no duty on this volume. We have increased from zero in 2000 to about 120,000 tonnes this year. We are doing more and more business with Central America. That is what they want.
Again, Guatemala is a West Coast port and it will enter Vancouver first and will impact the small volume we have in Western Canada. We need to protect as much as possible to ensure we have the opportunity to sell thick juice in the future and retain that $31 tariff that is important for us for any other imports.
The Chairman: For some of us, this is a new business, but this is not by any means the first time that this issue over sugar beets has been raised over the years in Ottawa. Last week, we heard from Bruce Webster, the general manager at the Taber plant. We also heard from the president of the Canadian Agriculture Association, Mr. Friesen, and two of our people from the Department of Trade. We are also in discussion around this table about the possibility of ourselves, as a committee, sending an appropriate document of concern into this process in the United States. We will be having more discussions about this and, indeed, help from our trade department as well as our embassy in Washington. This is being taken quite seriously here and certainly out in Western Canada, where this is a significant issue. We are very pleased you have come here to share more of the background and the details with us.
Senator Callbeck: Thank you for your presentation.
Have there been attempts before to restrict the export of this beet thick juice?
Mr. Lafrance: No. Basically speaking, we started selling beet thick juice in 2004. There have been a lot of rumours that the beet growers in the U.S. wanted to prevent this from happening. It was allowed, as Ms. Marsden said, under the rulings to export beet thick juice. There is not a high profitability here for us or for the importer, but at least there is something for both of us. That is why we have small opportunities of doing that.
Senator Callbeck: If this does happen — and, ones hopes, it will not — what are the options, then? What is the future of the Taber plant?
Mr. Lafrance: The options are very slim, to be honest with you. When we look at our plants in Western Canada, they would be operating at about 55 per cent capacity. At 55 per cent capacity, you can almost say that we need one single plant, and we can do something in order to supply all of Western Canada and even maybe ship a bit from our eastern plants.
The problem is that we have no other avenues. This year was an opportunity that will not come back again in the U.S. They opened up this quota, but we will not see that again unless there is another catastrophe like there was in 2005. There are not many options. We are looking at alternatives.
What can we do with Taber? We looked at chicory, as an example, in order to keep the plant running. We are also talking about organic sugar, but it is a small market. It is 5,000 or 6,000 tonnes, which is not a whole lot, but it is 5,000 or 6,000 tonnes. We applied to do a study on ethanol, as another example. I think that is a long shot. We do not have many opportunities in the sugar market for Taber.
Senator Segal: It is my recollection that in the 1988 free trade negotiations, at the very last minute, in fact, our American friends brought the sugar beet issue to the table, which was the way in which we were allowed to bring the beer industry to the table. We wanted to protect our beer industry. The Americans had been unreceptive to that, but when they showed up with their concerns about sugar beets, that was the opening for our negotiators at the time to put both in in a way that was protective of our beer industry, which is a highly paid, high industrial wage employer here in Canada with a large use of Canadian agricultural products.
So I am clear, is that where the restriction on your exports, at least in its most recent creation, in fact came from?
Ms. Marsden: In 1988, actually basically the first day of the free trade agreement in 1989, it was not beet sugar in particular. In 1987, there was a ruling that prevented further exports. We used to export refined cane sugar. There was a unilateral customs ruling — and this is not that different in a sense — that changed the classification so that only domestic beet sugar from Canada would qualify for access to the United States. That was in 1987 and was basically rolled into the free trade agreement.
In 1988, there was a sugar dextrose product sold in the U.S., principally at retail. That was reclassified and, as of January 1, 1989, could no longer be exported. It is not dissimilar. There were different mechanisms, but the same effect. There are many, many situations. In 1995, with the introduction of the Uruguay round, the U.S. reclassified crystal drink mixes, products like Tang, into quota. That was 54,000 tonnes of exports that had to fit into a quota that fills every year. Effectively, it stopped that trade.
There is a long history of these actions. It is more difficult now that there is a World Trade Organization agreement. The U.S. is trying to get away with it, if you will, using some of their domestic legislation. They really have no right to do that. When you create a tariff classification, you bind that in a trade agreement. Industries are free to develop whatever products they choose that might not be covered under quota classifications. That is what beet thick juice is. It is actually a natural part of the process. With the lost opportunity in some other sectors, such as liquid sugar, which is less competitive, with high fructose corn syrup and higher energy costs, then industries look to other ways to maximize utilization of plants and make revenues.
Senator Segal: If I understood your presentation correctly, we are not talking about our exports having added up to a very large percentage of the total U.S. percentages. Why are they doing this? Just to be nasty?
Ms. Marsden: Because one pound is too much. They have a very aggressive sugar lobby in the United States. A lot of money is paid into both parties, and they leave no stone unturned.
Senator Segal: Having said that, surely it is similar to other efficient exports from Canada. There would be food processing and other manufacturing industries that benefit from having greater access to a larger supply and a better price. Have they not done any lobbying on behalf of exports into the United States so they will have a better range of input cost management choices?
Ms. Marsden: Yes. They do lobby, but they are not a sufficient counterweight to the domestic producing lobby.
Senator Segal: I noticed in your presentation you make the case that the Government of Canada should defend. What instruments would you suggest the Government of Canada use in the defence of our existing export capacity and even the previous level that has now been constrained?
Ms. Marsden: In terms of the current issue, it is early in the process. The government has formal options, which is making a submission with all of the legal argumentation and preparing for the next step, which is the international trade challenge. Obviously, we hope this will go before that because the damage may be done before the international courts can rule. That is logical. There are other consultation mechanisms and so on.
In terms of getting it back, unfortunately we are talking about a long-term process in terms of the World Trade Organization. The stalling of that does not bode well for the U.S. farm bill, and we expect there will be minor changes. We are treading water and trying to hang on to what we have to sustain an industry.
Senator Segal: I suspect the U.S. producers are alleging injury here?
Ms. Marsden: I do not think they have gone that far.
Senator Segal: Not yet.
Ms. Marsden: They are calling it ``circumvention'' — because that is a nasty word and it suits the arguments.
Senator Segal: Mr. Lafrance, what is your employee base that is tied directly to the export flow?
Mr. Lafrance: It is difficult to say there are certain employees tied to it, but the Taber plant has 80 full-time employees, and they also have about 250 seasonal employees. Losing 40,000 tonnes out of 110,000 tonnes produced at Taber, you may look at a total number of employees there, because we operate a plant of 75,000 tonnes.
Senator Segal: Viability is no longer necessarily sustainable.
Mr. Lafrance: Viability is in question because, as I said before, we would have two plants operating at 50 per cent. Vancouver is always a swing-capacity plant. Because we deal with sugar beets, some years we have better crops than other years. The Vancouver plant makes up for the difference. Basically speaking, the more Taber will produce, Vancouver will produce less, but at the end of the day you are looking at a total market of 275,000 tonnes and how to produce that more efficiently.
Senator Segal: If the sugar beet farmers are not selling to you, they are selling to no one?
Mr. Lafrance: There are no other sugar beet plants, and after they close down they are almost impossible to restart.
The Chairman: As you heard earlier, we have launched ourselves on what will take us into the next year as we work our way through rural poverty in Canada. Just for the interest of the members of the committee, the sugar beet industry, as it remains in Alberta, went through a brutal period in the mid-1980s, when, for reasons that have never been entirely clear, the sugar beet industry was shut down completely. That has caused me some thought as we embark on this new program that we are working on. At that time, that meant that there were many farmers who were instantly out of work. Their whole way of living disappeared, having been grounded in that part of Alberta since the early part of the last century.
We watched a very noble effort on the part of these farmers coming off the fields and ending up here in Ottawa, virtually begging at the House of Commons front door to have their industry brought back. When we think of the various aspects of rural poverty, it also had a profound effect on the small communities in that area. Taber was not the only one. Storekeepers were not selling their goods and people were leaving the land, et cetera.
It is a nightmare, colleagues, to find what was perking along quite nicely with a lot of work from many people, that this just came down recently, I gather, in a very short period of time. We appreciate you coming here and explaining it to us, because anything that has to do with trade challenges is very difficult.
We will continue to follow this and seek suggestion from you as it goes along. As the government gives us a lead on the way and degree in which it will respond to this, we will make up our minds. The time is reasonably short, but there is certainly time for a vigorous response. We will keep an eye on that and try to educate ourselves further.
Are there any other questions, colleagues?
Senator Mahovlich: You mentioned an international ruling. Do the Americans respect those? If there is a ruling, is it positive for us?
Ms. Marsden: I do not know if I would want to speak for the Americans on that question. Sometimes. They should. It is in their interests to respect it because if they do not, then other countries will feel free to do similar things on other products.
The Chairman: That ends the evening of hearings. We want to thank our guests and wish you all the very best in what I know will be difficult days ahead. This committee will be keeping a sharp eye on it.
I would ask our colleagues around the table if they could stay for a few minutes as we finish our hearing here tonight.
The committee continued in camera.