Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 9 - Evidence - Meeting of April 8, 2008
OTTAWA, Tuesday, April 8, 2008
The Standing Senate Committee on Agriculture and Forestry met this day at 7:07 p.m. to study the present state and future of agriculture and forestry in Canada.
Senator Joyce Fairbairn (Chair) in the chair.
[English]
The Chair: Good evening, and welcome to the Committee on Agriculture and Forestry. Today the committee begins looking into the issue of farm input prices in Canada. Canadian farmers have been facing significant input price increases in recent years. For example, Statistics Canada's Farm Input Price Index shows that fertilizer and fuel prices have increased, on average, by 7.6 per cent and 13.9 per cent annually between 2002 and 2006.
Although grain prices have been on the rise since last year, higher input prices have had a direct impact on the profitability of farmers. In addition to the reasons behind these higher input prices, the committee will be paying particular attention to input prices in Canada relative to those prevailing in the United States.
With us tonight, from the Canadian Fertilizer Institute, are Roger Larson, President; and Clyde Graham, Vice- President. Also joining us tonight, from CropLife Canada, are Lorne Hepworth, President; and Peter MacLeod, Vice- President.
We are glad to have you here. This is a tough issue and it is important for us to hear from you.
We have two hours tonight with our witnesses to cover a very wide range of issues. I encourage you to keep your questions short in order to give our witnesses an opportunity to respond fully and for everyone to have a good chance to participate in our discussions.
Welcome, gentlemen.
Roger Larson, President, Canadian Fertilizer Institute: I would like to thank the members of the Standing Senate Committee on Agriculture and Forestry for their invitation to talk about the situation in the fertilizer industry and our relationship to agriculture.
We are a not-for-profit industry association. We represent the nitrogen, phosphate, potash and sulphur fertilizer manufacturers in Canada. With facilities located across rural Canada, our members produce over 25 million metric tonnes of fertilizer materials annually and we export about 20 million of these 25 million tonnes of fertilizers. We are a major export industry in Canada and we export to 70 countries around the world. Our mission is to be the unified voice of the Canadian fertilizer industry by promoting the responsible, sustainable and safe production, distribution and use of fertilizers in Canada.
Today I am here to discuss the global supply and demand of fertilizers and its impact on Canadian agricultural producers and how, in partnership, we can realize the full potential of both the Canadian fertilizer industry and Canadian farmers.
Fertilizer is a globally traded group of commodity products. Production locations are based on the proximity to raw materials, to major water and ocean and, in North America, rail transportation links and to major food producing regions in the world.
Fertilizer is the most important crop input. Canadian farmers spend about $2.7 billion per year on fertilizer, based on 2006 statistics. Today, global economic growth in developing countries is driving increased global demand for grains. It is not rising world population so much as it is the rising expectation for a better diet from a new and expanding global middle class. It takes three pounds of grain to produce a pound of chicken, five for pork and eight for beef.
Alternative uses for grains such as biofuels have been given a lot of attention recently, but the real driver in the market is demand for better food diets around the world. That, in turn, is increasing demand for fertilizer to produce that grain. The result is the competition among farmers globally for the current supplies of fertilizer.
Fertilizer is a commodity that is produced, shipped and used around the world. There are well over 250 companies internationally that produce fertilizer products. Canada's border is open to fertilizer imports. In fact the majority of fertilizers consumed in Eastern Canada is imported. There are no tariffs, duties or trade barriers on fertilizers. When we asked one of our members what was required to import urea fertilizer from the United States into Canada, the reply was very simple: A customs broker and a truck.
Many of our 41 member companies are engaged in importing fertilizer materials into Canada. Within Canada there are a dozen companies that make various kinds of nitrogen fertilizers. Three major firms, mostly in Saskatchewan, produce potash. We are importers of about half our phosphate fertilizer requirements in Canada.
Fertilizer prices paid by Canadian farmers continue to rise; however, commodity prices for wheat, barley, corn, canola and soybeans are also at record highs. Who would ever have thought of wheat at $20 a bushel?
As I hear more and more concerns about the fertilizer prices paid by farmers, I note the price that they are receiving for their grain. How many bushels of wheat does it take to pay for a fertilizer bill today versus in 2002? It is all about economics and farm economics are much better today than they were in 2002. A CFI member calculated the return on fertilizer investment for canola today. It is over 158 per cent, far higher than it has been for many years.
Farmers are using nutrient management plans to be more efficient and to use fertilizers more efficiently. In our discussions with farmers we stress using the right fertilizer product at the right rate, the right time and the right place.
These are cornerstone messages that our industry has been giving to the public and to the farm community and it seems to be resonating. As an industry, we are rising to the occasion to explain fertilizer as a strategic commodity for our grower customers.
Since the beginning of 2008, we have been meeting with producer groups concerned about fertilizer supply and prices. Farmers want to know why fertilizer is the most expensive on record and whether there will be enough this spring. One thing that has made farmers angry is reports that fertilizer prices are higher in Western Canada than in neighbouring U.S. states. Those reports are often based on anecdotal evidence or small samples taken just before spring seeding, when supply-demand conditions can be very chaotic.
On any given day there will be differences in the prices or quotes by various agri-retailers within Canada or on either side of the border. Government studies have shown that, over time, prices are equivalent. In fact, Agriculture and Agri- Food Canada reported in March 2007 that there had been no significant difference in Canada-U.S. fertilizer prices in more than a decade. I would like to quote from that report.
The fertilizer market is global in nature and the North American fertilizer market is completely open and integrated. As a result, Canadian fertilizer prices are linked to the U.S. market. Statistical analysis has confirmed that average fertilizer prices in Canada and the U.S. border area were not statistically different for urea mono- ammonium phosphate and muriate of potash over the 1993-2006 period.
Farmers around the world want more fertilizer. The increase in international demand for fertilizers has been a factor in the rising cost of fertilizers. Global nitrogen demand has increased 14 per cent, phosphate by 13 per cent, and potash by 10 per cent from fiscal year 2001 to 2006. There are three major drivers in the surge in world fertilizer demand.
First, India, China and Brazil are leading as the largest contributors to the growth in global nutrient demand; 90 per cent of the growth in global fertilizer demand is from developing countries. For example, the Brazilian agriculture ministry shows that their demand for fertilizer is projected to grow by 25 per cent, to 30.6 million tonnes of fertilizer, by 2016. For comparison, Canada's entire consumption of fertilizers is about 5 million tonnes per year.
Second, world cereal production and consumption are on the rise, as I mentioned earlier, resulting in a tight food supply and strong agricultural commodity prices and increasing crop acreage in the European Union and in the United States.
Third, other factors such as corn-based ethanol production in the U.S.
I would like to note that while international demand for fertilizers has increased, the three to five years that it takes to increase fertilizer supply has further contributed to the upward pressure on price. The International Fertilizer Industry Association forecasts significant increases in global manufacturing capacities to meet this growing demand, urea at 22 per cent, phosphates 8 per cent and potash 16 per cent, from now until 2011. Our member companies are making significant capital investments around the world and in Canada to increase fertilizer supplies.
I would like to take a moment and ask my colleague, Clyde Graham, to talk about the value of fertilizers for Canadian farmers.
Clyde Graham, Vice-President, Canadian Fertilizer Institute: During these changing economic circumstances, farmers should work closely with their agri-retailers well in advance of seeding to get the best value for their fertilizer dollar. Agri-retailers are the best source of information on the fertilizer market but they need good, timely information from their customers so that they can plan their supplies.
As an industry, we have always prided ourselves in being a strategic commodity, one necessary to sustain life and responsible for over 40 per cent of the world's food supply.
I want to highlight our industry's effort here. Fertilizer best management practices help to improve the environment and maximize economic returns. With the cost of fertilizer high, it is more important than ever for farmers to use fertilizer efficiently. CFI has developed the ``Right Product @ Right Rate, Right Time, Right PlaceTM'' system for best management practices that not only protects the environment but also helps farmers get the most from every fertilizer dollar.
What can governments do in this current situation? There are some things the government should consider to help farmers in purchasing fertilizer. Experience shows that waiting until the last minute to buy fertilizer puts supplies at risk and can lead to increased costs. Do farmers have the information they need to make informed decisions about the market? Does the federal spring cash advance program allow farmers to arrange for their fertilizer when their suppliers can make the best plans for their overall product and service needs? Do the lending programs offered by Farm Credit Canada provide farmers with the flexibility they need to take advantage of opportunities to buy fertilizer well in advance of spring seeding? These are all questions that this committee should consider.
In addition, the Canadian Association of Agri-Retailers, which represents not only the large retailing companies but also a large number of independents throughout Canada, has been asking the federal government to provide 75 per cent funding for the capital cost of new safety and security measures for fertilizer outlets across Canada. Is the government prepared to assist in this security challenge?
Thank you for this opportunity as you consult Canada's agricultural industries about input costs. We would be more than pleased to answer any questions you have.
Lorne Hepworth, President, CropLife Canada: Thank you for the invitation to appear tonight. In the package we provided for you, there is a copy of our brief as well as our latest annual report. I will pick out some of the brief's highlights and walk you through it.
Joining me tonight, is Mr. Peter MacLeod, Vice President of our Chemistry Division.
CropLife Canada is the trade association representing the developers, manufacturers and distributors of plant science technologies for use in agriculture, urban and public health settings. Plant science encompasses pesticides as well as plant biotechnology, or GMO crops as they are commonly known.
To position the Canadian market in a global context, from a pesticide standpoint, although we are a large agricultural nation, in terms of pesticide sales we represent about 3 per cent to 3.5 per cent of global sales. While we are big in Canada, relatively speaking, we are small at the 3 per cent and 4 per cent level globally.
On the plant biotech, the GMO crop side, we have a much larger presence. Seeded acreages to GMO crops in Canada position us at about fourth in the world. From a sales standpoint on the chemistry side, we run about $1.3 billion at the manufacturing gate level. That gives you some sense of who we are and the size of our industry.
What do we stand for as an industry? What do we believe in? What have our members subscribed to in terms of those basic tenets, if you like? Safety and innovation. From a safety standpoint, it almost goes without saying that although there is tremendous benefit from our technologies, at the same time we must ensure we represent no risk to human health or to the environment.
Our companies employ people in this country and the world over. They are no different than any of us sitting around the table. We all have families. I would like to think we are all environmentalists. Our member companies have no interest in putting products in the marketplace that would pose any risk to human health or the environment.
We stand for a science-based regulatory system to assure the public about the safety of these products. It is not that they have to take our word for it. Government regulatory systems assure the public that these products, once registered, can be safely used.
Further on the safety front, we stand for an informed public so they understand and are informed about our products and about the rigorous and robust regulatory system that the Government of Canada subscribes to.
In terms of innovation, technologies can enhance the quality of life because of the benefits they can bring. We stand for continuous research of new technologies. It may interest you to know that our member companies reinvest about 10 per cent of their gross sales back into research and development. That positions them in the top four or five business sectors globally in terms of their reinvestment into R&D. For a typical company, that works out to something in the order of $800 million a year or $2 million a day for most of these large companies being reinvested back into research and development.
Like my colleague here, we stand for the proper and safe use of these products. In pesticides, that means if you cannot prevent the problem first and foremost, which is what most farmers want to do and, for that matter, home owners, then we subscribe to integrated pest management, which is picking the right tool and using it in the right way in the right place at the right time. That is how one ensures capturing the benefit without risk to the public or to the environment.
Finally, innovation is all about realizing a competitive advantage for our farmers. Our companies essentially subscribe to a global vision for the future of agriculture. Many of you have heard talk about the future of the bio- economy. What we see there on a go-forward basis is something in the order of a $500 billion opportunity globally. That is a very large number.
The trick for Canada is how to ensure we attract our fair share of that investment here to the benefit of Canadian farmers and Canadian society? What we are talking about in this global bio-economy is to continue to grow crops as a source of food and feed, but also to grow crops as a source of biofuel for bio-industrial products, for bio-plastics, for bio-materials and for bio-pharmaceuticals. All of these are part of the new agriculture. It is not just about food and feed anymore.
Returning to the emphasis that we place on safety and proper stewardship of our products and our member companies' work in that regard. It may interest you to know that while I am a lobbyist, about 60 per cent of all of the funds that our member companies advance are not for lobbying and not for communications but for an array of stewardship programs where we take a lifecycle holistic approach to managing the products through their entire lifecycle. The Canadian industry is a world leader in this regard. I will give you a couple of examples.
Once a farmer has used a pesticide on the farm, he has an empty container. Disposing of that empty container is much different than disposing an empty Coke can. The farmers either pressure rinse them or triple rinse them, and then they are picked up by our industry associations through our contractors and recycled back into useful end products like highway guardrails or drainage tile for farm use.
We are not at 100 per cent. We are at about 73 per cent return rate, but we are one of the world leaders in that regard. Similarly, we have picked up the old unwanted pesticide that might be on the farm. For example, a farmer might ask, ``We had a grasshopper outbreak in 1960, and I have a half jug of pesticide sitting in the back shed. What do I do with it?'' We pick it up and safely destroy it through high temperature incineration.
Over the last few years, working in conjunction with the governments across the country, we have picked up about 1.2 million kilograms and safely destroyed those products. We run some similar programs on the plant biotech side. Canada is an acknowledged leader in these environmental lifecycle stewardship programs.
In terms of innovations, farmers in Canada and around the world are voting with their seeders when it comes to the GMO plant biotech seeds. In the 10-year history now, slightly over 10 years, this has been maybe the most dramatic uptake of a new technology ever in agriculture. Globally, after 10 years, there are now something in the order of 250 million acres across the globe planted to GMO crops in 22 countries. As I said, Canada is fourth. With respect to the crops here, there are high penetration rates of 80 and 90 per cent of herbicide tolerant canola, which makes it easier for the farmer to control weeds. It lends itself to conservation tillage practices and no tillage.
I still remember my days as a youth in Southern Saskatchewan, seeding at this time of year. As some senators know, you get these terrible dust storms. Now with these modern pesticides and GMO technologies, I can walk across my land and feel the tilth, the improved organic content of that land because of these technologies.
The same is true for the use of herbicide tolerant genes in soybeans and insect-resistant corn where they can preclude a farmer having to use a pesticide because you build the insect resistance right into the corn plant.
A couple of future endeavours that our companies are working on relative to GMO technologies that I think are interesting, are working on drought resistant and heat stress and heat tolerant crops for the future to deal with those droughts that can be so devastating in much of Western Canada. I farm in the middle of the Palliser Triangle where there is certainly drought tolerance needed. Many will remember a few years back the frost that hit early in August and frost tolerance is another area these companies are working on. This is as well as increasing yields and genetic manipulation to have crops that are more amenable to biofuel considerations. Those are some of the future research technologies that are in the pipeline.
On the chemistry side, unknown to most people, the industry today is much different than what Rachel Carson wrote about some 40 or 50 years ago. These technologies today are highly sophisticated. The barriers to getting a product approved on the marketplace, and rightly so, are so high now from a health and environmental standpoint that where 20 years ago, you maybe would scan 20,000 molecules to get a winner, one that was healthy and safe and would work, today, you will easily scan 120,000 to 140,000 molecules to find one.
It should be no surprise that getting an active ingredient commercialized globally runs about $200 million, to meet these new and, I would argue, proper, demands for safety. For the most part now, the products that are put on the marketplace are ``reduced-risk'' products. Over the last 10 or 12 years, something in the order of 37 new active ingredients have been introduced that would qualify for that reduced-risk chemistry designation.
I want to turn now to the issue of fair prices, and the discipline mechanism that exists in legislation in Canada to make sure that our farmers have a fair price discipline mechanism.
Some of you may know that farmers have had access to an Own Use Import pesticide program since 1993. In 2005, farmers, industry and government regulators began discussions on revisions to that program to make improvements related to concerns raised by many groups.
June 2007 saw the launch of the new Grower Own Use Import program, or GROU, a revision to the old OUI, or Own Use Import program.
To give a little history, the Own Use Import program was first conceived as a price discipline mechanism at a time when record low farm income was the norm, and farmers were understandably seeking the lowest input costs possible.
Many pricing studies have gone on and continue to go on, and typically, they show that on any given day some products are cheaper in Canada and some products are cheaper in the U.S.
From the start of the Own Use Import in 1993 to 2004, only one product was approved through the old OUI.
In 2005, the PMRA, Health Canada's Pest Management Regulatory Agency, allowed intermediaries or agents to act on behalf of farmers on the basis of chemical equivalency of the product to one registered in Canada. In 2005, permits allowed imports of over 5.7 million litres of unregistered pesticide and the farmers' Own Use Import program was now very much on a commercial scale.
In 2005, questions arose regarding the impact of a large scale Own Use Import program on new product innovation and safety issues related to product equivalency and stewardship.
With the program's growth, a number of stakeholders raised concerns. These included farm groups, manufacturers, dealers, environmental NGOs, provincial governments and grain merchants. As a result, the PMRA convened a task force in November 2005 to address these concerns.
The task force quickly realized that the issues facing farmers went well beyond the price discipline mechanism. They included access to the latest technology at the same time as their U.S. competitors, the role of regulatory harmonization in achieving that goal, and how to fill the technology gap with a greater number of minor use products such as the U.S. farmer typically had access to. It needed to address environmental stewardship and the management of things like empty containers. It needed to address intellectual property protection and how it supports innovation and new technology developments so that we continue to have a system that is attractive to the newer, better, safer products. Finally, it needed to address the issue of improved access to generic products.
CropLife Canada supported the task force consensus because it took the larger perspective of the long-term needs of both the farmers and the industry.
All members of the Own Use Import task force signed on to the report, including the Canadian Federation of Agriculture, the Grain Growers of Canada and other farm groups, the Farmers of North America as well as industry and government representatives.
That makes it a very powerful document of consensus delivering recommendations on the following: First, initiation of a pilot GROU program, a new price discipline mechanism, where growers identify potential candidate products for import. Access to the old Own Use Import program was continued during this pilot period. It provided for stewardship programs, including management of empty containers. It provided for the PMRA moving forward with an improved and modernized generic product registration system, and it provided for price monitoring by Agriculture Canada.
Where are we today with this new GROU program? The only product that was approved under the old Own Use Import now been registered in Canada and is a candidate for the GROU program. We have some 11 products already approved under the GROU program and another half dozen under consideration. Where we had one in 12 or 13 years under the old Own Use Import program, we now have 11 under the new program.
We have improvements to and a modernized generic product registration system. We have CropLife Canada members embracing North American registrations for many new product registrations. We have a minor use pesticide program that is bringing in more minor use products. We have our industry's commitment to provide the necessary data, both detailed and expensive, for the PMRA to assess GROU applications and collect containers from farmers. We even support the extension of the current Own Use Import product until GROU was up and running.
It is, by any measure, a tremendous success in providing growers access to the products they need, expanding the potential importation of products and maintaining the health, safety and environmental protections that Canadians expect.
Let me revisit in a little more detail the progress that has been made on minor use. ``Minor use'' is the typical terminology, but as we have gotten more and more specialized and niche crops, some of the needs are so small but the crops have such a high value, that micro-use crops have evolved out there.
The big five crops — wheat, barley, canola and those that would be commonly familiar to farmers — are of such a size that it is relatively easy for companies to justify making the expenditure to get those registrations in Canada.
If you look at some of the newer crops, and not that new by many measures today, such as lentils, pulses, peas, canary seed, sunflowers and even herbs and spices, some of those have very small micro uses. In fact, we had a study done for Agriculture Canada a few years back that showed if you had the entire market to yourself for a particular product — I think it was for blueberries — your total sales, not the profits, would have been $25,000, yet to get the product registered was somewhere in the order of $350,000. Even if our companies wanted to be magnanimous, it is tough to convince your board of directors that you are going to have a return of 212 years to get that product registered. Those are the micro-uses. For some farmers, they are important.
That is why the Government of Canada, in collaboration with the industry, put together this minor use program four or five years ago at the Pest Management Centre. We have had some tremendous successes. There is much more to be done yet, but since its inception four or five years ago now, there have been 382 minor crop uses approved.
Similarly, in the NAFTA harmonization, from the standpoint of getting recognition from across the border, we have made some significant headway.
Given the global market for food crops, common regulatory approaches with our NAFTA trading partners make sense. Many regulatory differences exist between Canada and the U.S., which are impacting the agriculture industry's access to new technologies. As Canadians, we cannot afford to have regulatory policy create a lag behind our major trading partners in innovation and technology adoption.
There has been much progress in evolving both the regulations and policies for pesticides; however, there are significant opportunities to improve innovation in agriculture through strategic changes to regulatory practices and by making a firm commitment to immediate implementation.
The PMRA has made significant progress in moving forward — I would want to make sure I acknowledge that — on harmonized data requirements and regulatory procedures, but there is much work yet to be done. The intent of international harmonization is to eliminate trade barriers, increase efficiencies and reduce costs for regulators and registrants. The harmonization of pesticide regulation is occurring under the North American Free Trade Agreement Technical Working Group on Pesticides and within the framework of the OECD Pesticide Forum.
Through the NAFTA forum, industry and governments have made great strides by working together to address this industry. The goal for the industry is one safety package, one data evaluation, and one synchronous registration on both sides of the border. This will allow a reduced time requirement for registration and do away with unnecessary duplicate evaluations for the same product.
I am happy to report to you that something in the order of 50 per cent of the new active ingredient registrations are now either joint reviews with the U.S. or global cooperations with the EU or OECD countries, so we are making headway.
Harmonized regulatory approaches and procedures between countries will serve to safeguard the health and safety of Canadians, ensure a healthy environment and create the climate for our economy to become more innovative and competitive. Further alignment of our regulatory system should be a priority as our safe, abundant food supply and farmer access to new and innovative products depend on it.
In summary, our industry has delivered on its commitment to farmers to expand products available for importation, to improve and speed up the generic registration system, and to offer more and more products in tandem with the U.S. This commitment is strong and is founded on the basis of a predictable regulatory regime that not only protects the health and safety of Canadians but also rewards innovation.
The Chair: Thank you. It was terrific hearing from you this evening. I know that my colleagues will want to ask questions.
Senator Gustafson: Welcome. Your visit is very timely. Farmers are looking forward to a very unusual spring, as you know and as you have said, but there are some very serious concerns.
First, the cattle industry is in big trouble. Feed costs are out of hand. Many farmers are reducing their herds and not getting much return. At the same time, grain prices are very high, and these cattle need to be fed.
I wish I had an answer for this. Perhaps you have.
Mr. Larson: Senator, I do not have an answer, because I am not a livestock industry analyst. However, I can say that, although the cattle cycle is longer term, it is similar to the situation in hogs. A speaker at one of our North American industry meetings in early February said that mature hogs to market in the U.S. had hit record levels in late January and early February. He put up a couple of charts that showed that hog livestock numbers and breeding population will go down. There will be a surplus of pork on the market, the price of pork will decline, and the surplus will be taken up. With the reduced herds, there will be a reduced ability to supply the market, and hog prices will skyrocket. He said that everyone in the hog industry is plotting when to start rebuilding their herds to take advantage of skyrocketing hog prices.
I know that the cattle cycle is much longer, and I also know that the cattle industry has been devastated by multiple challenges, including an export ban to the United States and BSE. That industry has particular challenges.
I also suspect that with high grain prices globally every other livestock cattle industry in the world is facing the same challenges, and that market will respond as part of their cycle.
Senator Gustafson: What percentage of the cattle industry and the hog industry will go out of the business and not come back in? Our chairman just said that some Hutterite colonies have gone out of hog production, and they represent big numbers.
The next problem is that grain prices are high and input costs are going to be very high. The farmer who will be hurt the most is one who had a drought last year and has no grain in his bin or has not been able to market. He will have the highest input costs he has ever had, and he will have nothing to pay with. There will be winners and losers here. Someone who had a 40-bushel crop when grain was at $12 or $13 will be all right. If he has no grain to sell, he is in big trouble, unless governments make provision for farmers like him. There are areas, especially in Saskatchewan and Alberta, that had significant drought. How do you suggest that should be dealt with?
Mr. Larson: Mr. Graham talked about the need to look at Farm Credit Corporation loans available for farmers who are caught in situations like that, and perhaps also the timing of cash advance programs. Those are important factors.
I'm not an agricultural banker, but slide 5 in the brief we submitted to you deals with returns to farmers from October 2007 to January 25, 2008, which is only a matter of a few months. It shows what happened with a 50-bushel wheat crop or a 40-bushel canola crop in Norquay, Saskatchewan. Farmers saw a dramatic improvement in returns per acre. I would hope that a good farmer, who is able to produce good returns and has a proven business experience, would be able to finance.
I know that farmers in the Prairies have had a couple of years of drought. Last year, even more so, they did not have a lot of cash to finance their inputs. Last year they did have a crop in most places, and they should be in a better situation.
The farmers who are most hurt by the current input cost situation are not those in Canada, North America or the European Union; they are the farmers in impoverished parts of the world where a landholding might be one third of a hectare. They are not producing food to make money on the markets; they are producing food to feed their families. Their input costs have gone up by the same percentage, but their revenue has gone up by zero.
As a society we need to look at the warnings of the U.S., the FAO and the food aid programs about the need to ensure that those farmers are able to afford their inputs.
Senator Mercer: You indicated that we export 20 million tonnes of fertilizer to 70 countries, which allows me to blend the mandate of two committee on which I sit, the Agriculture Committee and the Transport Committee. How do you ship that fertilizer and through which ports?
Mr. Larson: About 80 per cent of our product has to be shipped by rail. It is the only viable way in Canada of moving our goods long distances. We use the port in Vancouver. We have a port in Washington that also exports potash on the West Coast. We use St. John, New Brunswick. We have a potash mine in New Brunswick. A lot of people think we are just a Saskatchewan-based industry.
Senator Mercer: I know where Sussex is.
Mr. Larson: We move about 2 million tonnes of potash through that port as well.
Senator Mercer: You ship it as bulk; you are not putting it in containers?
Mr. Larson: This is bulk product. Half of our product ships to the U.S, so it goes through Portal, Saskatchewan, and the Alberta ports.
Senator Mercer: The 80 per cent by rail is going to the U.S. market?
Mr. Larson: Half to the U.S. and half offshore.
Senator Mercer: So it goes by rail to where? Is it being shipped to Vancouver?
Mr. Larson: No, to farmers in the U.S.
Senator Mercer: You did indicate that India, China and Brazil, in particular, were your target markets. I just wanted to draw to your attention that Halifax is closer to India and China through Suez than Vancouver is. There is a lot of capacity to ship it through Halifax, either in bulk or containers, whichever you prefer.
Is there a way we can increase our capacity? You talked about exporting 20 million tonnes of fertilizer a year. Is there any way to increase our capacity? Can we take more potash out of the ground in Saskatchewan and New Brunswick or is it economically not viable?
Mr. Larson: Our Saskatchewan potash mines have announced major production increases and mine expansions, in the last year. One of our member companies just announced a $3.5 billion expansion yesterday in Saskatchewan, and we need dramatically improved rail infrastructure to move these goods to port. We use the same railway tracks as the grain export industry, and both industries need a major investment in improved rail facilities and improved port facilities.
Senator Mercer: I think, chair, that when the Transport Committee files their report, one of the recommendations will be on rail. I ask members of this committee to remember that when we are voting on it. What is good for exporting other products is good for agriculture.
On page 3 of your presentation, you raised three questions. Do farmers have the information they need to make informed decisions about the market? That is a good question.
The other two questions I found more interesting. Does the federal Spring Credit Advance Program allow farmers to arrange for their fertilizer when they and their suppliers can make the best plans for their overall product and service needs?
The third question is: Do the leading programs offered by Farm Credit Canada provide farmers with the flexibility they need to take advantage of the opportunities to provide fertilizer well in advance of spring? You have asked the questions, but you did not give us the answers.
Mr. Graham: We posed those as questions because, when it comes to farm finances, that is a relationship between the farm groups and the government on those issues. In some of our discussions with the farm groups, there are concerns that those programs may not have been designed to deal with the situation where you have both high grain prices and high fertilizer prices at the same time. Certainly, over the years, the need for farmers to anticipate their fertilizer and other input demands at a longer term has increased.
You have to keep in mind that the supply line for fertilizer is a very long and complex one. It is actually kind of a minor miracle that every spring, farmers are able to get delivery of fertilizer product throughout Saskatchewan, Alberta, Manitoba and Ontario, all the rural areas. That has to move largely by rail, it has to be positioned, and then it has to be put in position for delivery in the spring, because the gap between the winter season, when many rural roads are not very effective, and spring seeding is a very narrow window, and we have to move millions of tonnes of product in order to do that.
In terms of Eastern Canada, because of the production being mostly in the west, that product is imported by sea. It often has to come in in the fall, be positioned, and then it has to be brought in to places where farmers can get at it. Again, the supply lines are very long.
Places like Quebec and Atlantic Canada may be depending on bringing in urea from Russia, for example. It is an extremely long supply chain, and it is important for their agri-retailers to have advance knowledge to be able to purchase that product, make the plans long-term, finance it, and bring it into a position where farmers can have it in the spring so they can get their crops in. The more information the industry has, and the earlier, the better. Of course, farmers need to be able to know if they can finance it, and that is where programs like the Spring Credit Advance Program come in.
Senator Mercer: I understand some of that urea from Russia comes in through the Port of Halifax.
Mr. Graham: That is right. Eastern Canada tends to import its product by boat because the distance by rail is expensive. It is always cheaper to move bulk commodities by boat.
Senator Mercer: If I can switch to our other panellists for a moment. You talked about the safety issue. One of the points you made was an informed public. I am curious as to how you inform the public. How am I informed?
Mr. Hepworth: The industry can do a certain amount to inform the public about the safety of the products. Products have had 10 years of testing, roughly 160 tests, and then after all that testing is done, that test data is submitted to the regulatory agency; they do not have to take our word for it. Then, typically, they take another year or two to evaluate it and then approve the registration for it.
We have an obligation to advise the public that these registered products, used according to label directions, can be safely used so that you can capture the benefit, whether it is eliminating pests that might attack the crops, dealing with weeds and fungi that might attack golf courses or your home lawn or your trees in your back yard, as well as the public health uses, whether it is for swimming pools or rodent control or whatever. We have a job there.
However, as you probably appreciate, there is a lot of angst — and we understand that — in the public about the safety of pesticides. Typically, the further away you are from the farm, the higher the angst is. We find that most of the public do not know that Health Canada regulates them and requires all this testing, and that these new products are a lot different than what we had 50 and 60 years ago.
We recognize we have a role here. Our board typically meets with Health Canada every fall. We did this last fall. We met with the Executive Director of Health Canada's Pest Management Regulatory Agency and the Assistant Deputy Minister of Health. Our single recommendation to them was not that they need to have a more efficient regulatory system, or make it more effective or do speedier registration reviews or anything else. Our single recommendation to them was that they need to do a better job of communicating to the public about the rigorous regulatory system we have in Canada. Not to be a shill for the industry at all, not to defend an individual product, but to defend their regulatory system. If you do not, the public loses trust and confidence in it and the consumer loses trust and confidence, and you keep ratcheting up the safeguards, which are terribly expensive. If they are science-based, nobody has difficulty with that, but you put in jeopardy the entire system. Yes, we have a job in informing the public, but I would submit that the regulators do as well.
Senator Mercer: My final question follows up on what you just said. You talked about innovation and you talked about reinvesting 10 per cent into R&D, which I think is great. Where is this R&D done? Is it done in Canada? If it is done in Canada, whereabouts in the country is it done?
Mr. Hepworth: There is some done in Canada.
Senator Mercer: What is the percentage?
Mr. Hepworth: My colleague may want to speak on this, but just as we are 3 to 4 per cent of global sales, we are in that same ballpark in terms of the amount of R&D that is done here.
Much of the basic active ingredient research might not be done here. It might be done in research campuses in the U.S. or in Europe. Certainly, you have to do research for individual formulations given the environment here, and so on. That would take place in Canada. The same would be true with the GMO seeds.
Peter MacLeod, Vice-President, CropLife Canada: One of the things we see a lot of investment in in Canada are the crops that Canada plays a major role in producing, such as canola. Canada has become a global research and development centre because we dominate in that crop. We are exporting our technology to Europe and other parts of the world where they are using that crop. Australia is another one. Typically, for the crops where we are a dominant player, such as chick peas, lentils and mustard, we have centres of excellence here in Canada.
Senator Mercer: Where are these?
Mr. MacLeod: In Saskatchewan, there is a major research and development centre. In Alberta as well there is another one for one of our member companies. Those are the two centres.
Senator Mercer: Is there nothing through the agriculture schools in Eastern Canada, either in Montreal, Charlottetown or Truro?
Mr. MacLeod: At Macdonald College or through the Nova Scotia Agriculture College, some basic research goes on mainly after the product is in the pre-development stage and they are trying to optimize it for Canadian climatic situations. Again, those are crops where Canada is not a major player. It is what I would call an optimization of getting the exact details for the products in those areas, both in McGill and Truro.
Senator Callbeck: Mr. Graham, the last section in your brief talks about what government can do. I know that Senator Mercer has asked you about some of the things you suggest. I want to ask you about the other two.
First, you asked the question: Do farmers have the information they need to make informed decisions about the market? Are you suggesting here that government has a role to play there that they are not playing? What is the answer to the question?
Mr. Graham: Currently Agriculture Canada sponsors two major programs where they monitor fertilizer and diesel fuel prices across the board. That was the reference Mr. Larson made. These are quite extensive programs. They look primarily at the Manitoba and North Dakota area and also in Ontario and Kent County. There are intensive monitoring programs throughout the year. I have had some provincial officials ask if the department could increase the frequency of that. That is a question that the government could look at, namely, whether they are sufficient. We think it probably is. We are waiting for the next report to come out on that.
Certainly, there are many sources of information that are available but are not publicized. Mr. Larson has a copy of Green Markets, which is a U.S.-based research organization that tracks the fertilizer market. They are independent of industry and they regularly, on a weekly basis, publish figures on fertilizer prices.
Are those available to farmers? We have looked at doing a spring outlook conference for our industry and also for farmers, to provide more early information about the coming year's fertilizer market.
Like any consumer, a farmer needs to be informed as best he can. Is there a role for government to do that? I think we asked that question.
Senator Callbeck: You have not got an answer as to whether there is a role for government here?
Mr. Graham: The government is already playing a role.
Senator Callbeck: Do you feel they should be doing more?
Mr. Graham: That is the question that you would want to ask farmer groups; namely, do they think they have the information they need already?
Senator Callbeck: You talk about the Canadian Association of Agri-Retailers, who have been asking for 75 per cent of capital cost in new safety and security measures for fertilizer outlets. What exactly are you talking about there? How expensive is it?
Mr. Graham: We have an industry-sponsored stewardship program for the safe storage and handling of anhydrous ammonia, which is one of the major nitrogen products. It is a dangerous good that requires particular handling, but it is a very cost-effective good for farmers. We have developed a program that sets a code of practice for how retailers are supposed to handle the product. It is a very rigorous program. We have set up the program so that there is lots of flexibility to allow equivalent measures. We are talking about such things as adequate fencing, security cameras, proper locks, things like that which are basic measures. However, some of the independent retailers in rural areas serving smaller markets may be challenged in meeting some of these measures.
The federal government did provide assistance to Canada's ports to upgrade their security on a national security basis. That is the formula that the agri-retailers used as a base.
In addition to anhydrous ammonia, in Eastern Canada, in particular, there is also use of ammonium nitrate, which has some security concerns for illegal use. Again, those facilities have a code of practice that is based more on knowing the customer and record-keeping to discourage illegal use. There are some costs there, as well as security measures.
Agri-retailers are the people who are out in the country. They are important employers in small towns and rural communities throughout all of Canada. They are critical sources of not only product for farmers but also agronomic advice. Many of the provinces have got out of the extension business and we think it is a reasonable request by the agri- retailers to get support in upgrading their facilities to help ensure public safety.
Senator Callbeck: I have a chart here on the Canadian fertilizer information system. I want to ask a question about the Atlantic Canada column, because that is where I am from. According to this paper, between the years 2005 and 2006, nitrogen went down 17 per cent and phosphate went up 45 per cent. Why would that be?
Mr. Larson: We will have to find the chart first.
Mr. Graham: We could get back to you on that. It is a small market. Those are industry-based statistics. In a smaller market, your ability to get accurate information may be not as good. I would have to review those numbers. Did you say phosphorous was the decline?
Senator Callbeck: No, phosphate went up 45 per cent.
Mr. Larson: We would have to check with the industry to get the answer to that.
Senator Callbeck: I have a question on the price of pesticides. It says that the price increases in 2007 lagged behind that of other inputs such as fertilizer and energy. Why is that?
Mr. Hepworth: Our industry is married to the fortune of farmers. If you look at pesticide sales data, and I think the most recent is in our annual report, for about five years — we do not have our 2007 data in yet; it is being collected from our members — for the five years to and through 2006, which were some of the worst farm income years in history for Canadian farmers, our industry sales were flat in the marketplace, almost constantly at $1.3 billion. It was the harsh reality of what the marketplace was. Farmers were being very careful on what pesticides they were using and needing. In some instances, I think there is evidence to suggest that where they can make use of a lower cost pesticide, they would use it as you might expect.
Senator Callbeck: Is there a lot more competition in the pesticide business?
Mr. Hepworth: Basically, there are seven big global manufacturers and some domestic companies. Therefore, there is very rigorous competition amongst them.
As I said in my remarks and in the brief, with regard to the issue of pesticide prices on this side of the border versus that side of the border, farmers are uniquely positioned here in Canada relative to many places in the world, because of the mechanism they can use. So even though the product has to go through testing and regulation, et cetera in Canada, and our regulations are typically more onerous than in many placed. However, if the identical product is available in the U.S. for a cheaper price, there is a mechanism they can put in place to bring that product into the marketplace. As the legislation says, that serves as a price discipline mechanism.
Senator Mahovlich: Potash is mentioned in your brief. When I hear potash, I think of the West in Canada. How do we compare and are we the number one supplier of potash in the world?
Mr. Larson: Yes, we are. We have the world's largest reserves and we have the largest market share. Canada supplies about 40 per cent of the world's supply of potash. Russia and Belarus are our two closest competitors.
Senator Mahovlich: I see. So we have enough potash mines?
Mr. Larson: There are enough to last about 1,000 years. The challenge is to ensure that the mine does not flood in which case you would have a total capital write-off of a couple billion dollars. The quality of reserves is also the best in the world.
Senator Mahovlich: You mentioned all these pesticides and fertilizer. Do we have any serious damage done to our well water in the West?
Mr. Hepworth: Mr. MacLeod can comment in more detail. However, part of the testing required to get a pesticide registered and approved by Health Canada includes extensive environmental tests relative to earth, air and water, including impacts on what they call indicator species. They have a couple different species of fish and water fleas on which you would do testing.
Senator Mahovlich: What about geese?
Mr. MacLeod: Mallard ducks and geese are two of the species that are looked at to see if there is any impact from any pesticide or residues. They are extensively tested. That is what my colleague Mr. Hepworth was talking about with the $150 million that is needed for the studies of these products. There is extensive examination to look for these types of problems.
Senator Mahovlich: You mentioned drought in the West. Have we ever considered building reservoirs when we get into a problem? In Ethiopia, there is always a drought problem and they are building huge reservoirs.
Mr. Hepworth: As one of your Senate colleagues may well know, one of the great projects that I would submit is bringing a lot of benefit to the agricultural community, those ranchers and farmers who need water control, as well as tourism and sport fishing is the Rafferty Dam in his riding in Saskatchewan.
Senator Gustafson: It has been 10 years now.
Mr. Hepworth: It was a big issue, but in drought-parched southern Saskatchewan where I am also from, it is the sentinel project. That is just an example. There is also the Diefenbaker Dam and the Churchill River system is important as well.
Mr. Larson: There is also a water diversion project on the Bow River in southern Alberta. That entire agricultural area around Lethbridge would be a devastated drought zone if it was not for irrigation. We are nowhere near using reserve water to the extent that they are in the U.S. There is probably a lot of potential.
Senator Mahovlich: Is there still more potential?
Mr. Hepworth: You have put your finger on one of the big issues of the future, namely, water — water quality, water quantity and infrastructure. As I mentioned, some of our member companies are working on drought tolerance for crops. It is a big project for them, not only for Canada but across the world, for example, in Sub-Saharan Africa.
Senator Mahovlich: I think we will have to help the United States too with what happened there last summer in California and Georgia. They had big problems down there. We will have to look at that.
The Chair: I should put in a pitch on that issue. That is a huge issue in the area from which I come, Lethbridge. The University of Lethbridge is now viewed as one of the top centres for water science issues. People have come from around the world to teach and work on water science at the university.
One of the things that make me anxious is looking at the beautiful line of mountains that are visible from the city. At the end of that particular part of the range are the glaciers that fill the rivers with run off each year for our irrigation systems. Without those, we would be a semi-arid desert. We are told now that these glaciers are melting quickly and two of them will be gone in my lifetime.
This is an extraordinary issue. In some cases, all the science in the world may not be able to go into full battle with the environment. When you hear that there are parts of Western Canada where the farmers are very anxious, that would be one of them. We toured that area and those towns that we visited are all served with irrigation. However, a drought is a drought and there have been times when even that has not been able to help.
Senator Gustafson: I think Mr. Hepworth probably has some ideas on designated acres. It seems that you now have companies wanting specified acres of canola. Many farmers are moving to wheat because of the high return. Canada is expected to have a supply for the markets to which they have sold over the years. It appears to me this may be quite a challenge. That is the down side.
The plus side, I think, is that agriculture in Canada will come into its own. For years, we in the agriculture industry have been taken for granted. Food was not really given any consideration since it cost us only 9 per cent of our income. Now, however, people are concerned about it.
We are at the point where our farmers are extended as far as they can go. A new combine with two headers that we would have bought a year ago for $250,000 is now $400,000. We know what the fuel prices have done. They have doubled. It is no different in your industry. Fertilizer has followed, and so has the chemical industry.
I would like to hear your concerns, and extend that into the global economy. Some are saying they cannot compete with Brazil. Is that right? What is your observation?
Mr. Hepworth: I will weigh into this. If I knew anything for sure about the future, including what I was going to seed next month or farmers were going to seed, I would be rich and retired.
I agree with you. Most agriculture commentators today would agree that agriculture is in a different place. There is something fundamentally different about this cycle. Our industry would subscribe to that. You commented about farm decisions and what they will do and the difference this year. A year or two ago, nothing pencilled out. This year, practically everything pencils out. The issue for Canada is how we ensure that we maintain these markets given all the pressures out there to produce crops for fuels, industrial product uses and all these opportunities that are out there.
I would use an example that I think has a lot of merit and has a logical approach to it. Mr. MacLeod mentioned that, in Canada, the canola industry is one in which we are the global leaders. The canola industry is in a good position from two standpoints. One is that canola is the best heart-healthy oil. They have developed tremendous markets around the world for that, including in the U.S. most recently in terms of their market position there. At the same time, there is this value and drive to have canola as biodiesel. It has been very prevalent in Europe, for example, and in Canada. They want to capture both markets. They wisely have set themselves a plan out to 2015, sort of one third, one third, one third. How will we get to these 15 million tonnes when they typically produce seven, eight or nine million tonnes by that time so we can ensure our Japanese consumer and others are happy with our healthy oil profile and at the same time meet this biodiesel market? They have said they will not sacrifice either. It is not an either/or situation.
They will increase their production to this level one third through more acres, one third through higher yield per acre and one third through higher oil yield per pound of seed. Today, for example, if you crush the canola, about 40 per cent of it is oil. They want to get up to 50 or 52 per cent — not overnight, but over a few years. There is some research in China that is as high as 52 per cent. How will they extend and grow it in a broader geographic area? That is where our member companies come in with drought tolerance and heat stress tolerance and nitrogen fixating capabilities. Our members come in on some of these yield opportunities. It will require lots of commitment to R&D and a very nimble regulatory system in some instances. There is then the specialty canola where farmers contract acreage, and there the issue is ensuring you pay the appropriate premium to attract those farmers to grow those acreages.
The final point I would make here when talking about this thing globally is that we subscribe to this fact — and not just in this last year or two — about this bio-economy, this $500 billion opportunity. I would hope that policy makers such as yourself and we in industry and our farm stakeholders and the entire value chain do not lose this opportunity of the next four or five years, or however long it is, and ensure that we look at putting in place whatever it takes to capture this new economy, this transformed agriculture. So that when we go through this commodity cycle we are not sitting here four or five years from now saying, ``We should have figured something out because now wheat is down to $2 a bushel.''
We need to look at how do we capture these new opportunities for crops for fuel and pharmaceuticals and bio- industrials and bio-plastics and all these other opportunities. We may well not be as competitive in some parts of this country as we might like to be. Producing wheat, for example, where I come from, compared to Eastern Europe or some other places like that. We need to use this opportunity. I do not even know what it is, the new infrastructure. Some of it is training, trace back and ISO-certified farms. I do not know what all of it is, but we need to put our collective heads together and come to it.
Agriculture and Agri-Food Canada has put together with the provinces a document with the province called ``Growing Forward.'' What they outlined there is similar to a vision document we produced a few years ago where we talked about this $500 billion bio-economy. We need to ensure that we grasp this opportunity of the transformed economy of agriculture.
As our board chair said at our last annual meeting, we almost have a moral responsibility to make sure we develop these technologies safely, because every day the paper is full of stories on the price of rice and what it is doing. My colleague mentioned the impact on these developing economies. We spend 10 per cent of our income on food, and they are spending 30 or 35 per cent, and it goes up. That is a big number. That is our obligation and almost our moral responsibility to human kind.
Senator Gustafson: Our farmers just last week got a letter from the Canadian Wheat Board stating that they will ship a lot more grain through Thunder Bay. Thunder Bay had not hauled a lot of grain. Five years ago, they were arguing whether they should pull the rails up. Today, that whole thing has turned around just because there is great opportunity in the world. There are a number of areas in the same situation.
The Chair: Thank you also on behalf of all of us. We have been watching this issue from the side a bit as we have been going ahead on our rural poverty study. It is very important that you are here tonight because this is a huge issue in Canada with different kinds of flags going up here and there. Underneath everything you said tonight is that we have to keep an eye on this particular issue because it is a foundation issue for the future.
We wish you all the best. Obviously you are working hard at it. I am sure that you will be in this room again at some point to keep us posted. We wish you the very best of luck. Any time something comes up that you think we should know, you know where we are.
Mr. Hepworth: Thank you.
The Chair: Thank you very much, and thank you, colleagues.
The committee adjourned.