Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 11 - Evidence - Meeting of May 1, 2008
OTTAWA, Thursday, May 1, 2008
The Standing Senate Committee on Agriculture and Forestry met this day at 9:09 a.m. to study the present state and future of agriculture and forestry in Canada.
Senator Leonard J. Gustafson (Deputy Chair) in the chair.
The Deputy Chair: Good morning, honourable senators, witnesses and all of you who are watching the Standing Senate Committee on Agriculture and Forestry. Today, the committee continues looking at the issue of farm input prices in Canada.
Canada's 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 an average of 7.6 per cent and 13.9 per cent annually between the years 2002 and 2006. Although grain prices have risen in recent years, higher input prices have had a direct impact on farmers' profitability. In addition to the reasons behind these high input prices, the committee is paying particular attention to the Canadian input prices relative to the prevailing prices in the United States.
Joining us this morning, from the Canadian Association of Agri-Retailers, is David MacKay, Executive Director. I understand that you have a statement this morning, after which we will entertain questions from the senators.
Welcome, Senator Mahovlich. I think he was grieving over the hockey game and got held up a bit. We are glad to have him here this morning. He is from Ontario. We also have Senator Peterson from Saskatchewan; Senator Callbeck from Prince Edward Island; and Senator Mercer, the silent member of the committee, from Nova Scotia. Welcome this morning, all.
David MacKay, Executive Director, Canadian Association of Agri-Retailers: Good morning, senators and Mr. Chair. Thank you for the invitation to be here today. I apologize in advance, because I would have liked to have had some of my agri-retail colleagues with me. However, as you can appreciate, this is the time of year where they are literally in the fields with their growers. They could not be here but probably knew you would understand that it is a very good use of their time as well.
The Canadian Association of Agri-Retailers and its 1,000 members across the country service the nation's producers and are the front line of a fertilizer and chemical trade worth over $3 billion. Our members work closely with grain and oilseed growers to maximize the return on their crop input investments.
Often underrated as a facilitator in the value chain, agri-retailers do not set the price of inputs or trigger market volatility but they do have a price stabilizing effect that benefits producers. Constantly buying bulk quantities through volume discount contracts, dealers are able to lock in best pricing for their customers. As a result of these pre-season agreements and forward purchasing, growers rarely have to pay the open market price. These agreements also guarantee the supply and just-in-time delivery to prevent growers from having to store inputs. In other words, dealer contracts serve as a hedge against market volatility and the value-added services that they bundle into the contracts help to offset the sting of higher prices.
Contrary to some opinions, crop input dealers do not benefit from high market prices of inputs. They too incur the high cost of the goods sold and typically work off of set margins that do not change, regardless of the price of the product. If anything, retailers often find their margins pinched because they wish to placate disgruntled customers and reward loyalty or because volatility often puts the cost of replacement product up higher than the original selling price, and prices change weekly. You could say that retailers are literally caught in the middle and, as such, feel the squeeze from both sides.
Despite being disadvantaged by record high fertilizer costs as much as growers, retailers do not perceive the market to be the result of any untoward business practices but rather, a culmination of several economic factors. These economic factors include unprecedented worldwide demand in fertilizer, a shift in the North American crop allocation due to biofuel initiatives, lag time to increased manufacturing capacity and an open global market.
The very same commodity-related supply and demand dynamics that are driving record grain prices are also driving fertilizer markets. It would seem somewhat exploitive to cry foul on one aspect of the commodity equation while embracing the other. Growers will have an opportunity, hopefully, to offset their input costs with strong returns from the sale of future outputs this year and in future years. Of course, we are all praying for a bumper crop this year.
Retailers, on the other hand, do not see this market as an opportunity to widen margins, but instead, are hoping for a greater volume of crop input orders from growers that want to invest to maximize their yields. Two unexpected obstacles including a tight supply line and lost sales to global fertilizer suppliers are challenging those hopes.
CAAR believes that the supply shortfall will eventually be addressed as greater manufacturing capacity comes online. In the short term, growers may benefit from potential adjustments to the cash advance program or other credit initiatives that facilitate pre-purchasing of inputs on a contract basis with retailers. That will help guarantee supply, lock in best pricing and avoid exposure to the open market volatility.
Crop input dealers across Canada are ever mindful of providing cost effective products and services for farmers because they sustain our livelihood. Retailers, too, feel the economic pinch of the volatile fertilizer market and the soaring fuel costs, transportation costs and equipment costs, all of which tie up a great deal of operating capital for retailers. Yet, we are still finding innovative ways to buffer customers from unprecedented high crop input prices by securing supplies and leveraging advance purchase opportunities. The presence of the retail sector is price stabilizing. The last thing we would want to see is to have our customers run into the hands of foreign suppliers.
Unfortunately, agri-retailers are increasingly being required to invest tremendous resources into fertilizer and agri- chemical security. New regulations and industry codes are being established on a product-by-product basis which is an inefficient approach that will culminate in redundant costs and a potentially significant withdrawal of dealer services to farmers. Examples include the new restricted components regulations for ammonium nitrate, as well as the pending Ammonia Code of Practice for anhydrous ammonia. Despite supporting the principles of all these regulations, retailers will not be capable of incurring the entire cost of the site security upgrades and training required now and in the future. Furthermore, the introduction of multiple product codes and regulations creates unpredictable cost schedules, which prevent retailers from being able to develop reliable budget forecasts. That further affects our ability to extend credit and service to our customers.
CAAR is calling for the development of a comprehensive crop input security protocol that would capture all crop inputs, including fertilizers and pesticides into a single integrated security plan that would be infinitely more cost effective to implement and budget for. CAAR is asking the Government of Canada to assist the retail sector with this project and, of course, in the interest of public safety. A proactive approach that does it right the first time can prevent the potential misuse of inputs that are essential to crop input production and the Canadian economy. A crop input security contribution program or tax credit would go a long way to help retailers safeguard fertilizer and pesticides from the threat of terrorist or criminal misuse.
Agri-retailers in the United States are on the verge of realizing an agri-business security tax credit as part of a tax title attached to a massive $280 billion U.S. Farm Bill now undergoing conference consideration in Congress. My understanding is that they are deciding on it this week and, eventually, the President will have it on his desk to sign. It includes a provision for agri-retailers for an enhanced 30 per cent tax credit on eligibility security expenses, up to $100,000 per facility, for a maximum of $2 million for multiple facilities. This is above and beyond the standard tax credit on the remaining balance for security costs. In essence, the U.S. government is virtually splitting the cost of the security measures with American agri-businesses.
Needless to say, if the U.S. security tax credit becomes law, then the Canadian agricultural sector will, once again, face a competitive disadvantage on world markets because it is forced to absorb 100 per cent of the security costs.
The culmination of inordinately costly regulatory compliance and an inequitable economic playing field leaves Canadian retailers with only two possible scenarios. We will be forced to pass on most, if not all of the expenses to farmers at a time when input costs are already unbearably high or we will have no choice but to discontinue the products and services that we offer our customers. Either outcome will only serve to alienate our customers further and drive more trade outside of our borders.
Few Canadian agri-businesses will be able to endure the spiralling costs of a product-by-product barrage of security regulations in the coming years. The retail sector is a critical component of the agricultural value chain. Without its services, farmers would face extraordinary logistical challenges.
As such and on behalf of the 1,000 agri-businesses across Canada, CAAR respectfully requests that you consider supporting our recommendation to establish a crop input security tax credit or contribution program similar to the U.S. that will address significant security concerns while preserving vital economic trade within Canada.
Senator Mercer: Good morning Mr. MacKay and we thank you for being here. We appreciate your time. You have raised many problems and hopefully, we can find some solutions.
You did say that supply shortfall would eventually be addressed as greater manufacturing capacity comes online. Where is this capacity? Who owns it? Is it Canadian driven?
Mr. MacKay: From my understanding, it is Canadian driven. I understand that three or four of our largest Canadian manufacturers that have mines in Canada will be ramping up production. That includes Agrium Inc., Saskferco, Mosaic Co. and PotashCorp in Saskatchewan, which mines more than potash. I understand that they have the potential to add on as high as 15 million metric tonnes a year in increased potash production. Therefore, it is a significant opportunity in the next five years to have incredible capacities.
Senator Mercer: That is the good news.
Mr. MacKay: Yes, that is the good news.
Senator Mercer: You indicate prices change weekly.
Mr. MacKay: At a retail level, they change weekly.
Senator Mercer: Can you give us a little backroom view of what is happening here that is causing the prices to fluctuate that quickly.
Mr. MacKay: Gone are the days when could you just pre-order all your inventory from one manufacturer and be fine. Due to supplies being so limited right now, often we cannot even order when we wish to order. We have to be very vigilant, almost on a daily basis, and watch it like a stock market ticker to find out when product is available, first — and that sometimes is not a guarantee — but, when we do see product available, at what price and what volumes we would need to lock in certain pricing.
Instead of just placing orders, we are now negotiating. We have become savvy buyers to pull from multiple sources. You cannot just bring your fertilizer in from one manufacturer or distributor any longer; you must look at multiple sources. You become very astute at looking at pricing and buying opportunities to inventory enough products, or get products in just in time, so the grower will have it available.
It is very tricky, but we are becoming good at it. It is requiring that we work with our farmers for advance purchase opportunities to lock in contracts where they provide us with their forecasting for their requirements so we know exactly how much we can obtain.
Carrying inventory is not a worry any more; no one has to carry inventory because it is all gone the moment you get it. However, access to supply is the problem, as you appreciate. It changes the price such that, if we were to purchase one day at a certain price and sell it, we may very well be repurchasing at a loss if we are not careful, if we kept the prices the same. We have to change our prices to the growers to ensure our margin is not pinched, if not a complete loss, on the sale of the fertilizer.
Senator Mercer: Canadians invented just-in-time delivery in the automobile industry. Now it is down to food production.
You said the magic words, for the chair anyway, when you talked about the U.S. Farm Bill. I know how the chair and I both agree that Canada needs an American-style farm bill.
I am interested in the crop input security tax credit that you propose. Without complicating it too much for me and for the people watching, how would this work? Also, how much do you see this costing the government?
Mr. MacKay: That is a great question. We have been on the Hill quite a bit providing estimates and discussing that point. In a nutshell, you can appreciate and those of you who are first-hand in the agricultural business know that there are multiple inputs. This is just an example of one input — anhydrous ammonia — where regulations are required.
This one is the actual code and this one is the quick reference guide. This is the quick reference guide. You can well imagine what we are facing. This is one product. We have up to 100 products that we have to carry. Actually, it is more if you include the pesticides and the crop protection products. It is inefficient because it is code by code by code. Every time another code comes up, we have to change our infrastructure in our retail sites to upgrade physically for physical infrastructure for security. It is the most inefficient system possible. I would rather build it once and be done.
It includes things like perimeter fencing, lighting of certain areas, it might include cameras, motion detection systems, alarm systems, locking, bars on windows, appropriate signage and training. We estimate those costs and I can tell you they have gone from being estimates to actuals now because we are implementing them. We estimate that on any given site with an average of one to three acres, we are looking at a $50,000 investment to upgrade just to this code for security such as fencing, lighting, locking, et cetera. If you multiply that by the potential of 1,000 retailers or more, you are looking at some significant numbers.
We propose the following two methods that the government might use to assist the agriculture retail sector with costs. The first is a contribution program and the second is a tax credit system. At this point, we do not necessarily feel one has to be the advantage over the other. We would like to leave that up to the government.
The contribution program, however, has a precedent in Canada. The Marine Security Contribution Program provides 75 per cent reimbursement for all eligible expenses for the exact same infrastructure at Canadian port facilities. Now they would be at Canadian agriculture retail sectors. That program is in place through Transport Canada shared with Public Safety Canada. It is a 75-25 split. If we were to take that equation and apply it to the Canadian agricultural retail sector, the worst-case scenario is a $50 million commitment from the federal government.
Senator Mercer: These regulations are not necessarily coming from Agriculture and Agri-Food Canada. Are they coming from Public Safety Canada?
Mr. MacKay: In this case, this one is an industry-driven and sponsored code. However, I want to point out two things: As an agriculture retailer, you do not decipher or differentiate whether it is government or industry. Why? One, you know it will become a regulation at some point and, two, the consequences are just as dire; should we not comply with this code, we will not be shipped product. That is as bad, if not worse, than receiving a fine from the government. I would rather deal with a government inspector than to not have product show up on my doorstep.
The Deputy Chair: You said you were in the field with the farmers. Are you finding that farmers are saying, ``Because the prices are so high on fertilizer, we will just put in a minimal amount to try to get by?''
Mr. MacKay: Not at all. Our growers that are long-term customers of our members are realizing this is the year to make the investment. They know that the return that they will derive from the fertilizer this year as a result of the high grain prices is their greatest hope to realize their best returns. It makes good agronomic sense to do so and it makes good economic sense to do so. We are making sure that optimum levels of fertilizer are being applied. I do not know about the actual application rates but, if I were betting, I would say you will see more tonnes of fertilizer laid this year than you have any other year. The corn crop, especially, is taking up quite a bit in the U.S. However, we are certainly applying more fertilizer this year than last year.
The Deputy Chair: Are the cash advance programs adequate for input costs?
Mr. MacKay: This is the heart of the matter. It comes down to the risk the farmers have to face to be able to finance this year's inputs. If we get a great crop year and no drought or flood, they will realize great returns and have a lot more cash in their pockets. However, they face incredible risks going into this year because of the high input costs.
Getting cash in their hands sooner is certainly advantageous to help them bridge the gap. We do that ourselves.
It is not well known that the Canadian Association of Agri-Retailers finance their customers. We do that quite a bit. The problem is we are not getting access to capital anymore because access to credit is shrinking for us. We have to carry more dollars in inventories. We have the same inventories but need more dollars now because of higher cost. We have less access to capital. Now we cannot extend it to our farmers because it is taken up by security costs, fuel, transportation costs and equipment.
The Deputy Chair: This committee will have bankers here next Tuesday. I understand nine of them are coming. Maybe you should attend.
Mr. MacKay: Can I bring the stick?
Senator Peterson: Thank you for your presentation. We have heard about the tremendous increase in prices, 96 per cent to 100 per cent. How much of that is structural, something that will never change, and how much of it is supposedly just demand? In other words, you have the opportunity to boost your prices because everyone wants it.
Mr. MacKay: Although I am not a market analyst, I will give you my opinion. I would say the vast majority of it is a result of the market supply and demand. It is a commodity. We knew two or three years ago what the basement prices were. The costs must have been in there. In some cases, the product has more than doubled. I would be talking out of school if I told you that I did not think it was anything other than the supply and demand market trends.
Senator Peterson: You talked also about just-in-time delivery and I presume that is mostly for the producers but also for the retailers. Is there not some structure you could set up with forward contracting where you could match contracts to try to do this because a producer wants just-in-time delivery as well? However, if he does that, he is subject to the highest prices because of the timing. Is there some way of working to match those two?
Mr. MacKay: Yes, that is actively occurring already in agri-retail sites and with farmers. We are ensuring we work with our growers in advance of a season to understand the forecast for their demand to ensure we lock in not only the availability of the product but the price. That practice occurs 90 per cent of the time. It is not something a farmer traditionally would have done. Market stability was there. They could buy at any given time and generally not have a problem with supply or the price. That is different now, however; today's environment is different. It is absolutely critical that forecasting occurs pre-season and that they lock in pricing and availability. None of my members currently are reporting shortages.
Senator Peterson: What are the producers required to do? If I was a producer buying in the spring, what do I have to put up to secure that price?
Mr. MacKay: That comes down to individual negotiations with the retailers, depending on how good your credit is, whether the credit is provided by the retailer itself, whether you want terms, whether you are paying cash. It depends on so many variables based on the actual retailer themselves. I do not know if I could comment.
Senator Peterson: With retailers themselves, if you were to forward, how much bench strength do you need to do that?
Mr. MacKay: That is the problem. Now that we are paying more for the fertilizer as well, we are having trouble securing all the products we need, which is why we need to go to multiple suppliers to get a little from here, a little from there and come together with enough inventory so we can guarantee the complete demand for the farmer. As I understand from my members, no farmer has been short-shipped any product.
Senator Peterson: On this security of product, your books indicate this is a growing issue, but you also indicate that these regulations do not cover the end user. You have farmers now, like our good senator the deputy chairman, farming large acres. If they bought that product and put it on their premises, they would be larger than some retailers.
What are we getting at here? What are we trying to achieve? Is this Oklahoma all over again?
Mr. MacKay: To be frank, yes. Ammonium nitrate is a highly explosive precursor when mixed with diesel oil. It was what brought down the Murrah building in Oklahoma. It was used in the first attempt at the World Trade Center. It was involved in the London bus explosions. It is the product of choice for terrorism, hacks and criminals. It needs to be secured. It is the reason why it is no longer used in Western Canada other than by growers bringing it in through the Port of Churchill.
I am concerned about the security threat of any unsupervised or unsecure ammonium nitrate no matter where it is, on my retail facilities or on a farm. If we can obtain the appropriate security protocols and implement the right upgrades, perhaps those products can be secured at retail sites and farmers will not have to worry about that.
Senator Peterson: That would be a bigger concern than just the producers or your group carrying that total load. It is beyond that, I would think. Is this not a national issue and what you are getting at?
Mr. MacKay: Right, this is a matter of public safety and I am sure the government puts many resources into securing this product. We are simply shining a light on the fact that we believe there are some vulnerabilities in the system right now. We would like assistance from the government because we understand that public safety is a major concern. We will share in a portion of the costs. It is good due diligence and stewardship for our products. We would like the government's help to ensure these products are secure and that there is no access for people who would use them for sinister processes.
Senator Callbeck: Thank you, Mr. MacKay, for appearing this morning. The main question I want to ask is with respect to potash. Before I ask that, I want to ask about a couple of sentences in your brief. You said:
Contrary to some opinions, crop input dealers do not benefit from high market prices of inputs. They too incur the high cost of the goods sold and typically work off of set margins that do not change, regardless of the price of the product.
I thought those margins would change depending on supply and demand.
Mr. MacKay: Not really. We need to keep our margin, and it tends to be a gross margin. Percentages would be nice, but they would be too hard to calculate all the time. We are trying not to gouge our customers at a time when we know it has been unbearable for them. The trick is to keep the margin and it has been challenging. If you open up the books up of retailers, I do not think you would see wild swings in margins. We attempt to keep a constant margin.
Senator Callbeck: In other words, if the supply goes down, that margin does not go up?
Mr. MacKay: Not necessarily. It is up to every individual retailer to price their product. I do not want to speak on behalf of all of them in regards to price setting. Generally speaking, those margins stay intact.
Senator Callbeck: You have done a study on this, have you?
Mr. MacKay: Right now, the information is anecdotal. If I were to suggest it is in a study, I would not be able to produce a document that gives you actual margins because it is fairly private information for the retailers. I do admit it is anecdotal.
Senator Callbeck: I want to ask you about potash to try to understand what is going on here. Canada is a big producer and we export roughly 95 per cent. In a press release, you acknowledge that supply of potash fertilizer has become tight in Canada. When you look at the chart from the Department of Agriculture and Agri-Food Canada, it shows a comparison between Manitoba and Minnesota, and it is higher in Canada by 3.8 per cent. The second chart shows Ontario and Michigan where potash is higher than Ontario by 20.7 per cent. Can you explain those percentages?
Mr. MacKay: I have been asking myself the same questions. Obviously, we are on the receiving end of some of those prices as well. Intuitively, it does not seem right that the product comes from a mine in Canada and goes to the U.S. at a lower price. I can only surmise that it is a result of purchase agreements, bulk quantities and very large quantities going to the U.S. In Canada, there are perhaps smaller quantities and so the smaller volumes.
I do not wish to speak for the fertilizer industry. These are questions my members have as well. Generally, we think this year there has been equilibrium brought in terms of pricing more so than last year between Canada and the U.S.
I purchased a Ford vehicle that came out of Brampton, Ontario, and paid $10,000 to $15,000 more than I could have had I bought it in the U.S. I chose to support my fellow Canadian. I, too, have those same questions.
Senator Callbeck: Regarding the methodology used in these charts, do you agree with them? You do not dispute these increases?
Mr. MacKay: Not at all. I am not sure what you have in front of you. I do not see what you have there.
Senator Callbeck: I am reading from Farm Income, Financial Conditions and Government Assistance, Data Book, September 2007. One chart compares Ontario and Michigan, and the other compares Manitoba and Minnesota.
Mr. MacKay: As long as the sample sizes are large enough and they are taken over a long period of time, there is no reason to doubt the statistics. However, anytime you do not take into account those study dynamics, you are likely to get flawed data.
Senator Callbeck: Has anyone looked into why there is such a difference? Who might be looking into it?
Mr. MacKay: The industry itself is trying to justify that. You also have retail pricing that is sporadic in different areas. Retailers can set whatever prices they like.
It is my understanding that there has been some ``dumping'' — I used that term at the Standing Committee on Agriculture and Agri-Food meeting, and I am not sure it is the right term — of anhydrous ammonia in North Dakota. It is an open market for fertilizer, and many farmers in that area were getting out of anhydrous ammonia because of the new, tight security measures. Product was being made available, and one of the best outlets or channels was to offer it to Canadians doing cross-border runs, mostly farmers with nurse tanks to acquire anhydrous ammonia.
One example might be very local markets of supply and demand. Other than that, I do not know if I could satisfy your questions as to who is looking into it — obviously, the Government of Canada, provincial governments, and I know that Keystone Agricultural Producers are doing cross-border studies. Although that sounds helpful and I applaud them for doing it, I noticed that their study makeup and dynamics were flawed because they did it over a short window of time and took a small sample size. Anyone in the study business knows that is a bit of a no-no.
The Deputy Chair: Would this not come back to volumes?
Mr. MacKay: As I mentioned earlier, a greater volume moves into the U.S. than into Canada. I would have to see the math. It is one possibility.
The Deputy Chair: Farmers use a lot of potash in the corn industry, as I understand it. We do not use too much in Saskatchewan.
Mr. MacKay: I am sure there is quite a bit of it used for corn. Corn is a thirsty crop for fertilizer and anhydrous ammonia and other good quality products. Any of the nitrogen-based fertilizers will be used for corn as well.
Senator Mahovlich: I have a misunderstanding. For years, our chair complained that there was not a demand for grain, wheat and corn. Suddenly, we have a great demand. We have potash; we have good fertilizers and a great supply. I picked up the paper this morning — our dollar is higher than it has been since I can recall — yet we are in trouble. We are heading for a crisis. Am I reading it right?
Mr. MacKay: It sounds like you are talking about some large macroeconomic terms there. When you say ``crisis,'' do you mean in the agriculture sector?
Senator Mahovlich: I mean in the economy.
Mr. MacKay: I am more bullish.
Senator Mahovlich: The farmers should be okay.
Mr. MacKay: If we get a good crop in the bin, this should be a great year for farmers. They are carrying a big load right now. I see Senator Gustafson wince a little. It is not in the bin, yet. They are carrying a lot of the risk right now. Once it is in the bin, and I know Senator Gustafson knows the famous line — the best cure for high prices is high prices.
It is a market system. Eventually, we may see both grain and fertilizer prices come down substantially, but they usually come in fairly lockstep. They are tied to the same market dynamic.
I am more bullish. The Canadian economy certainly has stronger aspects to it that will be more buoyant than the U.S. economy. I do not want to tie ourselves like an anchor to the U.S. I think we have more independent economic reasons to be optimistic in Canada.
Senator Mahovlich: Would a farmer like to see our dollar down a bit?
Mr. MacKay: Certainly, the farmers in the livestock business would say so. Whenever you are exporting, it is tough when you lose your buying power and your costs go up, no question.
Being an open market, sometimes it can also work in your favour to have stronger purchasing power with that dollar in the U.S. I know farmers do have access to cross-border fertilizer as well as to crop protection products in that regard. It can swing both ways.
Senator Mahovlich: Is fertilizer regulated as much as wheat and barley as far as bugs in the system?
Mr. MacKay: That is a general question. I am downward from the manufacturer, so I am more downstream on the supply chain. If you were to ask the fertilizer manufacturers themselves in terms of procurement, processing, shipping and manufacturing, they would offer you a different story. Fertilizer for us is highly regulated in transportation. That is how we receive it. I can tell you most of the reason for this book is due to Transport Canada regulations, CSA standards, boilermaker standards for provincial regulations provincially, WHMIS legislation and emergency response planning. You would not believe the stuff we have to go through just to get it to the actual site.
Senator Mahovlich: Is it easier to get ammonium nitrate here in Canada than in the United States, the U.K. or Europe?
Mr. MacKay: I do not know that it is necessarily easier. It is easy to obtain ammonium nitrate. You can purchase it from worldwide suppliers. A recent shipment came from Russia through the Port of Churchill and North American farmers purchased that shipment. There are regulations in place as a result of the restricted components regulations that are tighter in terms of its security and transportation. That is good news. However, Canada no longer manufactures ammonium nitrate. Growers in Western Canada, for the most part, have not used ammonium nitrate in probably over a decade. My members do not store or handle it.
A unique situation occurred last October, however. There was ammonium nitrate brought into the Port of Churchill. I have a picture of it here somewhere. It was 18,500 kilograms of bags, 9,000 metric tonnes. It only took one and a half tonnes to bring down the building in Oklahoma. I understand it was brought in securely, which was fine. It came in before the regulations, but it was stored on a farm. I have a concern about that. If we will be tightly regulated at the agri-retail site but not actually store the product, and product such as ammonium nitrate will be brought in by foreign suppliers and not through us and then be stored on a farm where there is no regulation applied to it, it seems the regulation is in the wrong place. However, I am not advocating that we regulate the growers. That will not work. It is not practical. I am advocating that we find a system where I can have the appropriate infrastructure in place so we can store product like that for our growers securely and not be vulnerable for security.
Senator Mercer: You had 9,000 tonnes of ammonium nitrate coming to the Port of Churchill in October. I sit on the Standing Senate Committee on Transport and Communications, so I have a good deal of interest in port security.
You expressed some concern about that in your brief, but your concern was not at the port itself, where you think that as it arrived from Russia in Churchill, it was secure at the dock.
Mr. MacKay: Although I was not there, I have faith that appropriate steps were taken. Undoubtedly, however, if you applied the current Restricted Components Regulations to the way it was handled, stored and shipped, I would not be surprised if they did not meet those standards. They are quite rigorous.
Senator Mercer: Where was it destined? If Senator Gustafson, who is a competent farmer, does not use it in his farm, along with many other Canadians, where was this ammonium nitrate going?
Mr. MacKay: It came from Murmansk, Russia, directly from a Russian fertilizer company. It was shipped by rail down to either Thompson or The Pas. At that point, it was trucked out to the buyer. My understanding was that it took five days to deliver but eventually the product was delivered to growers on their farms.
Senator Mercer: In Canada or in the U.S.?
Mr. MacKay: In Canada; mostly the Prairies.
Senator Mercer: Are American farmers still using ammonium nitrate?
Mr. MacKay: Yes.
Senator Mercer: I want to bring this together. We talked about which department would impose the regulations. We discussed both Public Safety Canada and Agriculture and Agri-Food Canada. Let us switch the debate to south of the 49th parallel for a moment. It amazes me that the Department of Homeland Security does not have regulations in the U.S. Am I wrong?
Mr. MacKay: No senator, you are not wrong. The end user is not regulated in the U.S., either. The Department of Homeland Security works with retail sites, distributers, wholesalers and manufacturers. It is my understanding that the regulation does not apply to end users. The only aspect of the regulation for ammonium nitrates that applies to the users — and this applies in Canada as well — is that they cannot resell the product.
Senator Mercer: The farmers cannot resell the ammonium nitrate.
Mr. MacKay: That is correct.
Senator Mercer: I am not a farmer. We talked about the farmers doing okay this year — at least we hope they do. If farmers do okay, one person in the chain who will probably not do okay is me, the consumer. If farmers do not do okay, the government will get involved and the same end consumers will get it in the end, anyway.
How much ammonium nitrate would a farmer have on his or her farm?
Mr. MacKay: It could vary anywhere from a couple of tonnes to as much as 20 tonnes or more.
Senator Mercer: How many tonnes did it take to bring down the building in Oklahoma?
Mr. MacKay: It was 1.5 tonnes.
Senator Mercer: All of the farms have enough ammonium nitrate to cause that type of damage.
Mr. MacKay: Yes senator, the farmers have the potential to do that type of damage, although I am not here to accuse the farmers of anything. I am just concerned.
Senator Mercer: No, I am going to the security aspect of it. Farmers are too busy to worry about this, but it is a public safety issue. If someone comes along and steals the ammonium nitrate off the farm, then it becomes a real problem.
Mr. MacKay: There is no question about that. Agri-retail sites are better able to secure the product.
There has been debate on this subject. I have had this discussion with the farmers in North America and it gets heated about what is more vulnerable, ammonium nitrate at an agri-retail site or on a farm. In the middle of the night in some rural part of Saskatchewan, what will offer more issue for the security of Canadians? I do not know how to answer that question. I can tell you that there is no ammonium nitrate at agri-retail sites in Western Canada. It does not exist.
There is no question that if all of sudden a large supply of ammonium nitrate is stored at a farm in Western Canada, I will be very concerned. However, regulating the grower is not the answer. I suggest the solution is to ensure that we have the appropriate infrastructure to store that product.
We also lose the business. When we see our farmers go to worldwide suppliers, we are losing that business. They are telling us that they no longer want to shop from us. That is a problem.
Senator Mercer: Senator Callbeck asked a question about the price of potash and the difference between the price of potash in Canada and in the U.S. The potash probably all originates in Canada.
You rightfully said that we do not want to ask companies about their margins. However, publicly traded companies must produce annual reports that show their profit and loss statements. Has anyone done an analysis from that point of view? Are Canadian-based companies more profitable — that is, maybe charging too much — than companies in other jurisdictions, mainly our neighbours to the South?
Mr. MacKay: You are referring to the manufacturers themselves. They are publicly traded. There is no question that their finances are available to their shareholders and the public. I am not sure if something has been looked into, but you will not find anything other than the fact that profits are soaring now. Agrium has posted a number of press releases recently, as has PotashCorp. Although you see record profits, it is my opinion that these companies should be congratulated for the investments they are making, the jobs they are creating and the economic stimulus they are providing. They are returning many of those financial resources into new infrastructure and new capacities for fertilizers.
Senator Mercer: I am not suggesting that profit is a bad thing; I think it is a very good thing. I worry about the consumer and the other people in the chain, namely the farmers, being taken advantage of. You talked about your Ford vehicle. You paid $15,000 more than you could have paid for it south of the border. That is what occurs when you have a Canadian and American dollar at par.
Senator Peterson: I would like to get a better understanding of the cost and impact of the site security and safety regulations. Your report indicates that there is disconnect between the government and industry already. They say they have consulted widely and that the whole thing is cost neutral. At the most, it would be $120,000 for the entire sector. Your people are saying that is wrong, that it would be $50,000 per site. Obviously, there is a break down here. Something must be done or this will run away with itself and we will be stuck with it.
What can we do to help the industry to try to steer along a path where there is dialogue and these diversions can be identified and discussed before being in solid print?
Mr. MacKay: I could not agree more with you. I have spent 18 months on the Hill trying to begin that dialogue, exchange that communication, shine some light on it, and give a warning about what we are facing. It has been 18 months of total frustration. At this point, when it comes to members of Parliament and the government, I am being shut out. I am not getting anywhere. Meetings are being cancelled; I cannot seem to have meetings established. The Minister of Public Safety points me to the Minister of Agriculture and Agri-Food Canada, the Minister of Agriculture points me to Natural Resources Canada. Natural Resources Canada points me back to Agriculture and Agri-Food Canada and a high-ranking official within agriculture points me back to Public Safety Canada. It is a runaround like I have never seen before.
Senator Peterson: That is not good. To crystallize this, what route do we take? Should we consider a private member's bill to get it on the table?
Mr. MacKay: Yesterday, I proposed a private member's bill, via email, to the Chair of Liberal Party's Rural Caucus, Mr. Larry Bagnell. I would be happy to share that communication with the committee. I proposed the party consider an agri- chemical or crop input security tax credit similar to what the U.S. is about to implement, a contribution program that already has precedent with this government.
The Minister of Finance has informed me that it is not something they would like to entertain. We are prepared to look at the tax credit system so it is parallel to the U.S. There is no question in my mind that if I cannot gain traction with the government, that a private member's bill would be appropriate.
Senator Callbeck: The costs of pesticides have not increased like the costs fertilizers.
Mr. MacKay: Not as much.
Senator Callbeck: I understood there was quite a gap in the percentages.
Mr. MacKay: Yes.
Senator Callbeck: Is the energy cost less of a factor in pesticides than in fertilizer?
Mr. MacKay: To my understanding, yes. The feedstocks into many of the fertilizers, nitrogen based, are natural gas, and of course, there is the processing of it to actually create it. My understanding is that the energy costs are a relatively small factor in the final price of both products.
Senator Callbeck: I thought it was high in fertilizer.
Mr. MacKay: It is high when the price is low, but now that the prices are double, it is not a significant factor. It gets back to the earlier comment. What is the reason for the big change in the prices? I believe it is mostly the supply and demand market dynamics at play.
The Deputy Chair: We are told that the average cost of food for Canadians is about 9 per cent or 10 per cent. What numbers do you have on that?
Mr. MacKay: We would agree with those numbers. The average Canadians' disposable income applied to feeding themselves is in that range.
The Deputy Chair: Do you see a significant price increase in the current year?
Mr. MacKay: Yes. Anyone who has gone to a grocery store recently have seen that that prices are up substantially, certainly for the cereal-based products and anything to do with livestock. You expect that. We have a worldwide food crisis right now in the ability to supply developing countries with their food. The food banks are in trouble having reduced many of their stocks by one-half or one-quarter. There is no question that we will see higher prices at the supermarket. Unfortunately, it is a natural consequence of the market.
The Deputy Chair: I would like to hear your conclusions on the global economy and what you are seeing out there in relation to Canada.
Mr. MacKay: As an agri-retailer mostly focused in Canada, we do not often think in global terms. We know the entire Canadian sector of agriculture has to compete globally. When any one particular portion of that sector has hardship or breaks down, the entire value chain becomes uncompetitive. Although we can quibble at times with the domestic issues that we face, we often lose sight of the challenges we face globally. I often say that the monster at the gate is not ourselves but our global competition. While we fight for the scraps here, we are shooting ourselves in the foot in not working together to ensure we can compete globally. I can guarantee you that if agri-retailers have to incur costs of security; they will pass those costs on to growers. That aspect of competition will be that we will not be able to compete with the American system.
The people in the fertilizer industry, I am sure, have their own views of how they compete internationally. They export the majority of their products. In Canada, we are, for the most part, trying to keep the farmers happy right now, and that is challenging at best.
The Deputy Chair: We export about 75 per cent of the grain we grow. Is that the number you have?
Mr. MacKay: I do not know about the grain. The fertilizer is around the 75 per cent or 80 per cent range, but I am not sure about the grain.
Senator Mahovlich: On the same topic of the average cost of living, many of our pensions are pegged at 2.5 per cent. This coming year, what do you think that the cost of living will be?
Mr. MacKay: You guys have graduated me to a whole new level of economic status. Not being an analyst in cost of living, I can only suggest this number. Our cost of living for the short-term will certainly be impacted, but food prices might go up another 5 per cent. The prices will not go up 50 per cent. That is still a hardship, but it is an economic commodity cycle for the most part. It is not necessarily permanent. We can sometimes get unnerved by the snapshot we see, but over a longer period of time we will hopefully see prosperity for farmers in the coming years as they get higher returns. The markets will adapt, and products and fertilizers will come online. Prices will stabilize, potentially level off or even drop. We will find some equilibrium with this new dynamic at play. It is a cycle. Things will perhaps return to where they were. At some point, we might actually be talking about a crash of grain and fertilizer prices, perhaps the next time I appear before you.
Senator Peterson: Would you think that over the past years consumers have possibly paid a disproportionately lower price than maybe they should have, and now that there is a chance for producers to get a fair price for their product with the higher prices in the stores, that it will that get down to the farm gate?
Mr. MacKay: Yes, I do believe that Canadians are now realizing that what sometimes is at their expense is to the benefit of others, and they realize how closely tied the supermarket price is to the market conditions out there faced by farmers, manufacturers and retailers. It is a bit of an education for the Canadian consumer.
There is no question they have had a pretty good and easy run of it for a number of years. I think we have some of the lowest per capita food costs for household income in the world. We are very fortunate in Canada, in my opinion. I think now Canadians are realizing that they will have to shoulder some of the cost burden, but there is a win in that the agricultural sector will see returns it has never seen before.
I am sure you have investigated farm income for a number of years being deplorably low, and government subsidies are costing taxpayers a great deal of money. The taxpayer shells out via subsidy, and maybe now we can do it directly to the farmers so that they are rewarded and we can lower the subsidies. Perhaps that is one way of reaching equilibrium.
The Deputy Chair: If a loaf of bread is worth a $1.50, how much does the farmer get out of that for his or her wheat?
Mr. MacKay: Again, that is not an area where I necessarily could venture to say. If we were to slice up a loaf, what is the farmer's take on that? I do not think I could tell you that.
The Deputy Chair: We have heard between 6 cents and 10 cents. It is not significant.
Mr. MacKay: It has been a long time coming, but farmers will get the rewards that they should be getting.
Senator Mercer: I think Mr. MacKay has prompted a lot of debate. I am afraid I do not share his same optimism that Canadians understand that they are getting a good deal when they go to the grocery store. I do not think Canadians understand that.
This fall, when the prices go up, and they will go up, we will start paying for domestic products as opposed to imported products as they are now. I do not share that optimism. We will have a hue and cry from the consumers about the price of food. I also do not believe that the money will go to the farmers, as we have been saying here for quite a while that it should.
I do believe that we should ask our researchers, chair, to look at the publicly traded companies. Let us look at some publicly traded companies in this industry and analyze the profit margins over a number of years, just to look at the theory that we have heard this morning that profits are up. Perhaps we should compare it with similar companies — with our major competitors in the United States — to see if our profit margins are out of line. I am not against profits; I simply want to ensure that Canadians are not being gouged because someone sees an opportunity.
The price of oil will not go down, certainly not quickly. Some predictions indicate it will go up. This problem will continue for a number of years.
The Deputy Chair: Do you have any numbers on the processers? It seems to me that the processors seem to make more money out of the food industry than anyone else.
Mr. MacKay: No, I do not have any numbers, unfortunately. That would be a great opportunity for this committee to investigate.
The Deputy Chair: Are there any further, urgent questions?
Senator Mercer: We have raised more questions than we have been able to answer, but that is good.
Mr. MacKay: It means I have done my job.
The Deputy Chair: With that, I want to thank you, Mr. MacKay, for a very interesting morning. Thank you, senators.
The committee adjourned.