Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 12 - Evidence - Meeting of May 8, 2008
OTTAWA, Thursday, May 8, 2008
The Standing Senate Committee on Agriculture and Forestry met this day at 8:05 a.m. to study the present state and future of agriculture and forestry in Canada.
Senator Joyce Fairbairn (Chair) in the chair.
[English]
The Chair: Good morning honourable senators and witnesses. Welcome to this meeting of the Standing Senate Committee on Agriculture and Forestry. Today the Senate committee continues looking into the issue of farm input prices in Canada. Canadian farmers have faced significant increases in input prices in recent years, which have had a direct impact on farmers' profitability despite higher grain prices. Growing demand from developing Asian countries and biofuel production appear to be the main driving factors pushing the demands for grain.
Joining us this morning to help provide the committee with a global perspective of the evolution of world supply and demand for agricultural commodities and inputs are: Guy Debailleul, Professor, Laval University; Sylvain Charlebois, Associate Professor, Faculty of Business Administration, University of Regina; and a former professor, Al Loyns, President, Prairie Horizons Ltd.
We have a group interested in hearing what you have to say and then we will ask questions. We have two hours and will start immediately.
[Translation]
Guy Debailleul, Professor, Laval University, as an individual: Thank you, Madam Chair. You should have received a document entitled ``La flambée des prix agricoles mondiaux 2007-2008,'' a reproduction of a Power Point document. First, I will illustrate some aspects of how agricultural prices have been rising in the last year, and then I will discuss certain factors that seem to me to have made a significant contribution to international price increases.
In fact, we can say that there has been a generalized increase in agricultural raw materials in the last 18 months, and particularly the last year. You have an illustration on the first slide, at page 2. If we take the period from January 2007 to April 2008, we observed a 99 per cent increase in the price of American grain, a 51 per cent increase for corn, a 159 per cent increase for rice, a 75 per cent increase for soy, an 83 per cent increase for soy meal, a 67 per cent for powdered whole milk and a 106 per cent for butter. I will mention, just after the question period, that some of these products follow what may be specific patterns, and react to what may be relatively price increase factors, particularly when we look at milk or rice.
On the other hand, we see that at the same time, other agricultural products have experienced much more moderate price increases. Frozen beef, only 13 per cent — I say ``only'' in comparison with other products. For pork, we have even seen a decrease, which is apparently temporary. Poultry prices have risen by 8 per cent, Brazilian poultry by 36 per cent, and cotton by 16 per cent, coffee by 26 per cent and cocoa by 16 per cent.
There are patterns that involve two different kinds of price increases. The products experiencing sharp increases are grains and oils.
We will see how the mechanisms of the increases for grains and oils are related.
On the other hand, for milk, it should be noted that there may be a connection because milk is both a source of protein and a source of fat.
The phenomenon is the result of what may be a more European dynamic. Increases in relative prices, support prices in the common agricultural policy, in recent years, seem to have hurt the price of milk. Accordingly, some producers have abandoned milk production, and this has resulted in a reduction in the supply of milk in the European Union, to the point that businesses in the processing industry have had to offer better price incentives to producers to reverse the trend. The pattern is therefore unique to the situation.
That increase, which applies to a number of agricultural materials, has also combined with the increase in the price of energy. It is driven in part by rising production costs.
The relationship between rising agricultural prices and rising energy prices is not a new factor in our history. We saw the same type of situation in the early 1970s, in 1972, 1973 and 1974. At the time, rising agricultural prices were driven by massive purchases by the former Soviet Union. Several poor harvests had led to a deficit in grain products. The USSR then turned to the world markets to purchase large quantities, and this caused an increase in agricultural prices. On that occasion, the United States felt it necessary to place an embargo on its own soy exports in order to maintain domestic prices at a level that was acceptable to users. I think it is important to remember this. Recently, we have seen a number of countries adopting the same policy.
Now, let us put these increases in perspective. If we look at the illustration on page 5 of the document, we see that the increases we are witnessing are not, at present, larger than exactly what we saw at the time of the crisis in the early 1970s. In real terms, the price of corn is still below the peak it reached in 1973-1974. We will see later whether we should expect subsequent developments to be the same.
If we refer now to the illustration on page 6 of the document, note that apart from the event in the early 1970s, this increase in agricultural prices, and subsequently in food prices, is a departure from a long trend, over several decades, that has seen a regular and constant decline in food prices. If you compare agricultural raw materials, food products, you see that, in fact, from 1980 to two or three years ago, we had in fact witnessed a declining trend in food prices.
A host of factors have contributed to this significant rise in the prices of agricultural materials, in particular in the last 18 months. As economists, we might want to distinguish between causes that act on demand, on the one hand, and those that act on supply, on the other. The causes associated with demand include increased biofuels production. Because this is an additional demand factor, it affects the markets. Rising food consumption of products is associated with continuing demographic growth, rising standards of living and changes in dietary habits. There has been much comment on those factors in the media. They are long-term factors, that is, they are not likely to reverse in the years to come.
Over a shorter period, in terms of demand, we have seen financial speculation that has gradually become relatively enormous. With that has come speculation by businesspeople, properly speaking — obviously I am distinguishing between speculation by businesspeople and speculation by financial funds.
Now let us talk about causes that are regarded as associated with supply. We have seen declining production. We can associate that with natural disasters. Examples are the major droughts that have affected wheat supply in Australia. On the other hand, there are the heavy rainfalls and climate disturbances that have affected rice production. And then, in terms of trends, apart from those random events, we also see a decline in productivity increases — these facts will be illustrated a little later with a graph. The competition that some countries in the South are facing in relation to imports can have distorting effects on trade associated with certain agricultural policies applied in the countries in the North. All of these factors have brought about what I would call a crisis for subsistence farmers, in that they are having trouble finding a process for developing, modernizing and increasing their productivity.
Causes associated with supply are also illustrated by rising gas prices, which have an impact on production costs. Energy is an important factor when it comes to both transportation and agricultural production. There is also fertilizer production, because the manufacture of certain fertilizers, like nitrogen, is fairly energy intensive.
In the short time, we see consequences associated with restrictions that some countries have placed on their own exports, to try to maintain domestic prices at a level regarded as reasonable.
Let us come back to a few of these points. We referred to rising consumption, in some countries, as a disruptive factor, or a factor likely to bring about agricultural price increases. The finger has been pointed at two countries: China and India. China currently consumes one fifth of the wheat, corn, rice and soy produced in the world.
In 2003, meat production rose to 36 kilos per capita. That figure more than doubled in the space of 15 or 20 years. Although we see a very large disparity between urban and rural populations, in terms of animal calorie intake, the average person in China currently consumes 609 animal kilocalories. That figure includes all animal products, including fish. For the period from 2003 to 2005, people in the United States and Canada consumed 1,063 kilocalories. To put things in perspective, they consume 1,100 in Germany and 1,250 in France.
Average consumption of animal kilocalories in China is half what it is in the countries in the North.
Another important factor in food equilibrium is the consumption of vegetable oil. The Chinese consumes about 19 kilos of vegetable oil, as compared to 50 kilos for the average American or European. At the same time, we have to note that the agricultural balance of trade is always in surplus and that China is actually still a net exporter of grains. On the other hand, it imports very large quantities of oilseed products. I would note in passing, because it is a factor in the discussion, that given the circumstances, China has thought it wise to reduce its bioethanol production targets by 60 per cent from the five billion litres planned for 2010; the target has been reduced to two billion.
So even if, as a long-term trend, China becomes a major factor in the global food equilibrium, its current dietary habits are not directly responsible for the recent increase. On the other hand, we might be concerned about the weight it will carry in years to come and the challenge that being able to maintain agricultural development that corresponds to its needs represents for it.
In fact, this same problem is going to become even more acute for India, which is also a net exporter of agricultural products at present. As you know, India placed restrictions on grain exports in 2007. India, like China, is a very big importer of oilseed products and at the same time a very big exporter of oilseed meal. It is a net exporter of meat and dairy products, and as might be imagined this is also associated with the fact that average per capita consumption of meat in India is very moderate and is probably going to rise less quickly than consumption in China, for cultural reasons.
India is the fourth larges producer of bioethanol in the world, but in the context there have been statements by Indian leaders that suggest they are going to be revisiting some of those biofuels production policies. Unlike China, I would say, there is more concern, in future, about China's ability to develop its agriculture quickly to meet its growing needs, given that agriculture was not a priority sector in recent years, from the standpoint of economic development.
I would now like to discuss a few points about biofuels, that have been called an important factor in rising prices. Ethanol production objectives in the United States did come at a point when a decline in production was being observed. One effect of declining in production, coupled with an increase in energy use, was a reduction in inventory. You know that low inventory is a factor that has a major effect on some aspects of speculation. Rising corn prices, spurred by the use of biofuels, has undeniably had a contagious effect worldwide on the price of corn, because the United States is a price-setter in this regard; as a result, there are is the possibility of major substitutions among grains, or an effect on other grains.
The same dynamic is seen in the European Union, except that there are two different dynamics operating there: corn-based ethanol production, but also sugar beet ethanol production, in Europe; and also biodiesel manufacturing, because diesel is an important factor in automobile fuel in Europe and biodiesel is part of the oilseed problem.
We should mention Brazil, because it is the world's second largest bioethanol producer. As you know, ethanol is produced from sugar cane and there has been no significant increase in the price of sugar, worldwide, associated with potential growth in ethanol production.
I referred to the new and relatively significant and recent role played by financial speculation. This point even seems to have surprised the Commodity Futures Trading Commission, which recently observed that these speculative funds controlled about a fifth of corn, wheat and cattle futures in the United States, and specifically, on the Chicago market, 47 per cent of hog futures, 40 per cent of wheat futures, 36 per cent of cattle futures and 21 per cent of corn futures. This is a relatively new phenomenon, and its possible consequences on international price stability or instability in the longer term will have to be examined — we do not have the distance needed at present. We might well fear that their role will be associated with much greater price volatility.
I would note in passing that it must not be concluded that these speculative funds are creating the increase, in the sense that they get involved only if they anticipate an increase; on the other hand, they can exacerbate or precipitate movements and thus increase volatility overall. However, they are not going to create an increase in a situation where the other factors are more likely to lead to a decrease, naturally.
A few more points; at page 10, you have a slowdown in productivity increases. What you see on that graph are increases over forty years, showing annual production increases, for three major crops. This is at the international scale, and so it does not distinguish between developed and developing countries. You can see that, as a trend, you have a decline in those increases. We might wonder what the reasons for that trend are. Here again, we can refer to the recent world development report, which devoted its 2008 report to agriculture and which notes underinvestment in the agricultural sector.
Talking about supply still, obviously we see, at page 11, differences in productivity increases between what are called developed countries and developing countries. You see grain production, that is average grain production, all grains taken together. Those differences are fairly significant, and that is particularly the case when we look at growth in productivity on the African continent; that is the curve that is the lowest on the productivity scale, and productivity there has virtually stagnated. Special efforts are going to be needed in that regard.
I also cited some other factors that are unfavourable for supply, and in particular for increasing supply in developing countries. They include trade mechanisms, in the sense that there may be distortions associated with direct or indirect subsidy policies in the Northern countries.
Supply weakness can also be explained, as I have recently noted, by weak support for agriculture in some of those developing countries. We may have an opportunity to come back to this. Those are a few comments that I wanted to bring to your attention to start this sitting.
[English]
The Chair: Thank you. Who would like to follow?
Sylvain Charlebois, Associate Professor, Faculty of Business Administration, University of Regina, as an individual: Good morning. Of course my own province, Saskatchewan, has gained from what is happening right now on world markets. We grow a lot of grains, we have an abundance of oil and we have uranium. We are endowed by a significant number of commodities. We are gaining, but I feel that Canada should be concerned about what is happening around the world.
As a prelude to this morning's discussion, I prepared a short text for time's sake to ensure I stick to my 10 minutes.
I will talk about the world food crisis, the Doha Development Round negotiations and Canadian policies in agriculture.
The current food crisis that affects millions of people around the globe calls for a renewed interest in ensuring that the Doha Round has a successful outcome. Addressing the twelfth United Nations Conference on Trade and Development in Ghana on April 20, Ban Ki-moon, the UN Secretary General, commented:
Clearly, we need a successful conclusion to the Doha Round. At a minimum, that would mean opening new and significant markets for agricultural and non-agricultural exports and services from low-income developing countries. It is time for wealthier nations to rethink old-fashioned programmes of agricultural subsidies. Economists agree that they inhibit trade and disproportionately penalize poorer nations, contributing to the current emergency. If we cannot scrap these relics today, in an era of high prices, then when can we?
We need to help the poorest of countries take advantage of these new opportunities by channelling aid and development assistance toward projects that boost local industry and production capacity, from roads to schools to health systems. Aid-for-Trade initiatives can be a powerful multiplier.
The Doha Development Round started at Doha, Qatar, in November, 2001 and is still ongoing. Its primary objective is to lower global trade barriers and facilitate free trade among countries of varying prosperity.
Agriculture has taken centre stage in Doha, as it did in the Uruguay Round, which ended in 1994. At the same time, the Uruguay Round brought about the most significant reform of the world's trading system since the General Agreement on Tariffs and Trade, GATT, was created at the end of the Second World War.
The Marrakesh agreement that concluded the Uruguay Round included commitments to re-open negotiations on agriculture and services at the turn of the century. These negotiations began in early 2000 and were incorporated into the Doha Development Round agenda in late 2001.
Many global trade negotiations flirted with collapse before succeeding at the last possible moment. The Kennedy Round, Tokyo Round and Uruguay Round are all good examples. However, virtually all observers concur that the current Doha Round of multilateral trade negotiations through the WTO is faltering badly.
We observe significant political pressures in France and Canada, in particular, to exclude agriculture markets from the Doha negotiations in favour of a separate deal that could be controlled more easily by interested parties in developed countries.
Many countries have already announced new protectionist measures to face the current food crisis. France has called for stronger support of the common agricultural policy within the European Union to protect its farmers from more intense international competition that a successful Doha Round will necessarily impose. Without agriculture, there is no Doha.
It may sound counter-intuitive, but the challenge of the current food crisis invites all nations to agree collectively to policies that promote trade.
The current food crisis, affecting more directly the relatively poor countries, has many roots and underlying factors. The most significant factor is the increasing world demand for food products, particularly the increasing demand for meat expressed by emerging countries — with India and China in the first row — and the bad weather conditions experienced in important producing countries.
The second factor is the increase in the price of oil and fertilizers, as alluded to by Mr. Debailleul, the development of biofuel production from corn as well as panic buying, hoarding and speculation, et cetera.
The protectionist policies of developed countries and the disordered trade rules these policies lead to in agriculture are the fundamental factors that prevent the adjustments in world-wide food production and distribution to increased demand from emerging countries and supply-disrupting bad weather.
Freer trade conditions would allow more flexibility and innovation in adaptation, as in any other sector or industry. Today, there is no sign of insufficient food capacity. However, there are many signs of ill-conceived public policies that tamper with incentives and equilibrium mechanisms and thereby prevent the existing world-wide food production capacity to be put to efficient use.
In conclusion, Canada can expand, innovate and prosper in the agri-business sector. Hiding behind protectionist tariffs and staking one's future on a mature domestic market is a recipe for disaster.
Demand for agricultural products is growing rapidly in many parts of the world and Canada should capitalize on those opportunities. The developing food crisis creates an opportunity for Canada to demonstrate its willingness to eliminate trade-distorting mechanisms and Canada would gain significantly in doing so. Concrete commitments to freer and fairer trade will provide a more efficient and competitive agricultural industry for the betterment of all.
The necessary policy compact includes a unilateral cut in tariffs; the abolishment of the Canadian Wheat Board monopoly on barley and wheat; and a commitment to multilateral trade liberation, as the Doha Round remains the best option for mid-sized market-oriented countries such as Canada.
Canada is losing farms despite our highly protectionist measures. A price-fixing mentality has been dominant for years, and it is time for Canadian agri-businesses to develop actively value-added products.
Supply management, even if supported by all political parties in Canada, hurts global trade as well as efficiency. Canada inevitably will be forced to adapt when the Doha Round leads to a conclusion in favour of free trade, as recent drafts of a potential agreement point in such a direction.
When that happens, Canada will need to abolish its price support systems. We better become ready now; change will come whether Canada likes it or not. As a major agricultural exporter, Canada has a lot at stake with its grain, oilseeds, meat industries and other non-agricultural industries as well.
The time to move is now.
Al Loyns, President, Prairie Horizons Ltd., as an individual: Good morning and thank you for the opportunity to be here. The subject is important and I am happy to share my views on the ongoing process with senators and the committee.
My presentation is considerably less global in scope than either of the two witnesses that are here with me today. Mine tends to be more ``feet on the ground.'' I intended it that way because, as a retired professor, that is where I come from these days; I try to keep my feet somewhat more on the ground. It also means that I am less analytic and more introspective, probably, but that is the nature of this presentation.
I will touch quickly on rising prices versus inflation, what is going on in the energy sector, and compare and contrast the energy sector to what is going on in agriculture and food. I will give you two particular cases that are introspective — they are both situations I am involved with personally in one way or another — to show you what has been happening on the ground in prairie agriculture. Then finally, I will raise two basic questions that I think are relevant to the reporting that you will do ultimately, coming out of this committee.
The first question is whether these recent price and cost increases that we have experienced are the new economy. Is this where we will be? Is that the baseline to move forward? If so, how do we respond to the increases; and if not, how do we cope with what may be happening?
I was criticized by one reviewer who looked at my notes and said that this discussion of prices and inflation is too academic, but I think it is important to point out that price rise is not necessarily inflation. I made that proposition to the Prices and Incomes Commission when I worked for them in 1970, I think it was, and probably had as much difficulty convincing them as I would have convincing you today that the proposition makes sense. However, the Prices and Incomes Commission finally adopted the notion that inflation is something different than price rise only, and we see that difference reflected in the way statistics are reported these days.
Inflation is a process of price change; it is not simply price change. It is general and persistent. It is cumulative, which means it feeds upon itself, and it has broad economic impacts. I would say we are already there with energy.
That situation is contrasted with the one we are addressing here today, input price and cost increases in agriculture. Price increase may be simply in a sector, and at the present time, in agriculture, it is basically in the grains and oilseeds subsectors of agriculture. Importantly, simple price increase in a sector may be self-correcting. That is not an adequate treatment of the subject, but it is all I can spend time on here this morning.
Are input price increases equal to cost increases? Not necessarily. Importantly, rising costs may not hurt either at the individual producer level, or for the industry or sector by itself. We have an important example that I will demonstrate in a moment.
The key word, though, is ``may;'' ``may'' not hurt. Usually, cost rises do hurt, but importantly, input prices are only part of the costs. Axiomatically, for a profitable operation or industry, input costs are, by definition, and in accounting, less than the revenue.
Hurt is influenced importantly by what happens on the revenue side. That is my entire point. This situation, then, means that we must look at rates of price increases on inputs and products to determine whether there is hurt and whether we have a serious problem.
Here are some important facts. The one-year Canadian price performance, both in overall consumer price increase and in terms of food-price increase, is far better in Canada than in the United States. There is a simple answer to why that is the case. It is the relative change in exchange rates between Canada and the United States. In this whole discussion, we cannot ignore the impact of exchange rates. They are extremely important to what goes on in the industry.
Second, the price increases have had materially different effects across agriculture sectors and across food sectors. We can demonstrate that point easily, and I will later. We also have data from the consumer price index, CPI, to indicate that.
Grains are different than livestock in terms of what is happening. Energy prices are huge over the past year and pervasive. Importantly, the risks in agriculture with what has happened in the past year have increased dramatically in this relatively short time period, less than one year when it comes right down to it.
Finally, as I have already said, exchange rates have a pervasive impact that we need to look at.
In regard to energy versus agriculture and food, there is no question that all energy prices are rising. I could not have said that two months ago, because natural gas prices were stable. Natural gas prices, in the space of two to three months, have gone from the $6 to $7 per unit level to $11 according to The Globe and Mail yesterday on the futures market.
Energy has become a larger component of inputs, especially for crops. That increase is because of equipment power; diesel fuel, mostly natural gas; all transportation; fertilizers; pesticides, which are petroleum based; and any heating that goes on in the agriculture sector, which is considerable.
By my definition of inflation, energy is already there. We are in the early stages of inflation in the Canadian economy because of rising energy prices.
Finally, it is important to note that it could be worse. If the Canadian dollar had stayed at 85 cents, all these impacts would have been larger than they have been.
In agriculture and food, the situation is different. Grain prices and revenue should offset input cost increases in 2008 and I believe into 2009. That is a demonstration that increases in costs, as large as they have been, may not hurt. We will probably agree that 2008 and 2009 look fairly good for agriculture in a net situation, but we will leave that to debate later if we need to debate it.
Grain-related food products are rising and they will continue to rise. The exchange rate effect for grain has been a net negative, mainly because of the revenue impact, 100 per cent revenue versus some proportion of costs. Livestock is taking the hit. Livestock is hit both ways. Product prices are down and input prices are up because grain is the largest input.
The exchange rate has been negative, and we are into herd liquidation, on hogs for sure and potentially on cattle. The impact of that liquidation, as it works its way through the system, will be some drop in meat prices originally but then rises in meat prices after the adjustments have taken place.
All this has created the possibility and the threat of trade disputes with the United States. There is country-of-origin labelling, COOL, hanging out there, which could make all this situation worse, depending on what the Americans decide to do with it.
Here are two snapshots of what is happening in prairie agriculture. First, my operation is a small Red River grain operation, not representative but, I think, indicative. I am not producing anything on that land this year — the land is being sold as we speak — but I have prepared the data as if I were producing.
Land rentals in the Red River Valley — and I think this situation is probably typical in Manitoba, if not the prairies — have gone from about $45 an acre to about $60 an acre. That is at least a 35-per-cent increase. Seed wheat, two and a half bushels per acre, has gone from at least $6 to $9 or $10. That is a 35 per cent increase. Nitrogen fertilizer has gone from about 45 cents to about 70 cents. That is about a 55 per cent increase. Commercial application has gone from $5 to $7 an acre. That is a 40-per-cent increase. Commercial trucking has gone up. Those numbers are mine, but I think the number is representative. Fuel has gone from 70 cents to about $1.15 a litre today.
The full cost before labour and management on a grain operation in the Red River Valley was in the order of $180 an acre. Today it is $240. That is about a 30 per cent increase. Expected revenue, however, has gone from $210 to as high as $350, maybe $400 an acre, if the crop is good. Expected revenue has gone up at least 50 per cent. The gross margin has gone from $20 to $30 an acre up to $200 an acre. That is a major increase, and that again demonstrates the nature of these cost inputs working through but not hurting because the revenue has gone up enough to compensate.
Hogs are a totally different picture. Feed prices are up 50 per cent. Feed costs have gone from 45 to about 55 per cent of total costs. Hog prices were down 38 per cent at the peak. They are down now about 20 per cent, but even at those rates, I do not think any hog operations anywhere in Canada, and certainly not in the Prairies, can say they are making money on feeding hogs. Hog sales are 100 per cent of revenue in the hog business.
In the kind of operations we have in Manitoba, weanling pig prices are usually contracted. They are formula prices and are down about 25 per cent at this time.
The key impact of all these factors is that profitability has gone from a reasonable plus to a negative in less than a year. We were making about $5 to $8 per hog. The operation I am in can make good money at an $8 margin per hog. The situation has gone from a small positive to a large negative. For many operations, that swing is $50 and some hog operations claim to be losing $50 per hog these days.
The feeding and herd numbers are starting to adjust. Pork prices are low and do not begin to cover costs of production. That is not COOL. That means this picture does not even include the potential impact of COOL coming into operation.
Where will prices go from here? I do not know, but I will make these comments. The agricultural cost base has increased. Energy costs are likely to continue to rise, but more slowly. Any energy-based input prices will increase and we notice that natural gas is increasing right now. That is a bad sign for nitrogen fertilizer prices. The livestock sector has to shrink.
Grain prices depend on a number of factors. The situation varies with the grain; corn versus wheat versus oil crops. They are in different situations today. Corn is heavily dependent on U.S. policy and other countries' policy toward ethanol production. In Canada, we must be cognizant of what is happening with the exchange rate.
Biofuels have been discussed here. I would be less certain discussing the impact of biofuels on corn. There are people on both sides of the equation. There is no question biofuel uses a lot of corn these days and wheat in Canada.
The price issues will determine whether we accept, what we accept and the variety of biotechnology applications. People are looking for substitutes outside the grain sector for biofuel production these days. Substitutes probably will take genetic modification processes to digest and to remove the carbohydrates and sugar from things like grass, straw, hulls and other cellulose-based by-products in other industries.
We cannot forget about Mother Nature globally and we cannot forget about governments and policies, for example, price controls, border control, et cetera.
Different people are on different sides of the equation right now about whether wheat prices have already turned around. I can show you a piece from a newsletter coming out of Winnipeg indicating that wheat prices are on the way down while corn and oilseeds are not necessarily. I can show you another one that forecasts wheat prices returning to where they were last December in 10 to 15 years. There are differing views on the subject.
The last two points are other issues that we need to examine. I raise this in the context of things I hope your staff and your committee will look at.
You have heard many times — but it is true — that there is a serious and increasing lack of agriculture and food research done in this country. There are serious competition issues and concentration of markets in the input and service market areas of fertilizer; pesticides; machinery, especially at the regional or local level; grain handling and transportation; and livestock slaughter and processing.
None of these situations is easy to crack, but we are not paying any attention to them from a policy standpoint. They influence the price behaviour and cost structure that farmers face. I would love to talk about these points in the question period.
There has been a disappearance of price discovery mechanisms. That probably does not sound important. However, if an agricultural producer has no idea what their wheat or flax is worth, they cannot use the Chicago Board of Trade or other futures trading mechanisms to hedge their production. They have extra risks and uncertainty built into businesses that should not be there from a public policy standpoint that impact their ability to produce properly.
I emphasize that there are risks in this industry now that did not exist as little as a year ago. There is a risk of an exchange rate plunge. The key word is plunge. If the Canadian exchange rate goes back down to 90 cents or 85 cents in a systematic and organized time frame, it would be net positive for the grain sector. It would likely be net positive for the livestock sector as well.
However, if it falls as fast as it rose, it will cause a lot more problems to the sector than it did as it was rising. What can government do about that from a public policy standpoint? I do not know, but from the standpoint of understanding where the risks are in the industry, that is one of them.
There is a material risk, in my view, of further U.S. trade actions. COOL is one of those actions. We do not know where these will go, but as sure as God made little green apples, it does rain in Indianapolis, and we will see the Americans challenge livestock crossing into the United States. We could see challenges on wheat again because the Americans do these things.
In regard to changes in policies on biofuels, for example, what would happen if the U.S. pulled the subsidy they give to the processing of corn into ethanol? Some people think it would drive corn prices down rapidly. I am not on that side, but we do not know the answer. Therefore, it is a risk.
Widespread border and price controls could also be disastrous to the industry. Do we need another commission? That seems to be one thing a lot of Canadians consider when they see issues like this one. My answer would be that I do not think so, but we need to establish a targeted policy agenda backed by serious research. That research issue goes back to what I said earlier.
My last point is that competition policy in this country is ineffective. We need structural initiatives. Many problems I alluded to are based in structure; that is, market concentration and power issues in the input and product sectors. We need to have mechanisms to deal with structure.
The competition policy that exists in the country at present time is not sufficient. The Honourable Wayne Easter pointed out competition problems in his report to the House of Commons a year and a half ago. I do not generally agree with many things that Mr. Easter says about agricultural policy, but I agree with most of his comments on identifying the problems in competition policy and structure of the industry.
We should look at the European Union and Australia where competition policy is much more important. I think they have more accomplishments than Canada.
Finally, the competition people probably need more resources to do their job.
I will be happy to address this issue or anything else in your questions.
The Chair: Thank you. Listening to the three of you was a real eye opener.
Senator Mahovlich: Talking about competition, are American farmers more protected than Canadian farmers from global competition?
Mr. Loyns: The issue of competition I raise is different than the issue of protection farmers may receive. However, let me try and comment briefly on both.
There is no question that the measures of public support to American producers are far greater than they are in Canada. American producers have much more extensive agricultural programs that give them protection under the Farm Bill. American producers also have greater border protection but it varies across sectors. It is difficult to give a specific answer without spending much more time on it.
The competition that I am talking about is active rivalry between firms that operate in the input sector, for example, fertilizer or machinery. Typically there is more competition in the U.S. because they are a much more compact nation serving more people out of any geographic area. One problem with competition in Canada is decidedly the great distances that we have to deal with in moving product and in establishing institutions to deal with commercial markets.
In general terms, although my colleagues might disagree, in that sense of competition, American producers are blessed with more competition in many of these markets than Canadian producers. I will speak to grain handling and the transportation sector. We have two railroads that move about 95 per cent of the grain for export. It must go long distances. The two railways in terms of transportation do not really compete when it comes right down to it. They have nice, cushy local areas along tracks that have been there for centuries, so they do not have to compete. Some of that competition is regulated but most of it is not regulated.
For the same population in the United States, railway tracks run south, west and east, for the most part, and there is the heavily subsidized Mississippi River system that moves a great deal of their grain. That one example indicates that Americans have a better competitive situation than we have in Canada.
Senator Mahovlich: Would the Port of Churchill be of any help in this area? I heard that a ship from Russia came there.
Mr. Loyns: That question is an interesting one and I am glad you asked it. There is a lack of competition in the fertilizer industry. I have a photocopy of an article prepared by a fertilizer industry representative in Western Canada that speaks to fertilizer pricing. I do not think he intended to tell it this way, but to an economist, it says that they have market power. They price their fertilizer wherever it is sold between Kansas and the American border and Edmonton and Winnipeg as if that fertilizer came out of New Orleans. However, most of the nitrogen fertilizer used in North America comes from Edmonton. Therefore, Edmonton should have the lowest price, by economic and competition theories. Somewhere between here and Kansas, Minneapolis or wherever, the two sources of supply should meet and those prices should be the highest. There would be a kind of boundary there where the fertilizer suppliers met.
What does fertilizer have to do with the Port of Churchill? The fertilizer system has a base-point price out of New Orleans. If we were to bring in most of the fertilizer through Churchill, we could change that base-point system and we would have a price point in Churchill, call it Southern Manitoba, that would then be the lowest. It would force the people who up the price and sell out of Edmonton to drop their price to compete with Churchill. I believe that was tried with one shipment, and it worked. There was no doubt that there was a small price impact in Southern Manitoba for a period of time.
However, the real issue is how to pull that off. What does public policy have to do with it? I am not smart enough to answer that, certainly not here today, but you have identified a significant issue, Senator Mahovlich.
Mr. Charlebois: I will add to Mr. Loyns' comment on competitiveness with the Americans. Whether we agree with it, the Farm Bill provides any vision to American agriculture. Unfortunately, I believe Canada does not have a vision for agriculture. We do many things for different reasons and at times, policies conflict.
A recent example is the cull program in the hog industry. We provide $50 million to the hog industry to manage our supply, which means culling the hogs. Of course, we are culling because most hog farmers cannot pay for feed because of the significant increase in input costs. On the other hand, some policies in the provinces support the building of ethanol plants at the same time, which has an impact on the price of corn. Many things happen in Canada that do not help. We throw our money here and there on various programs with no real vision for the future.
Another point Mr. Loyns mentioned is about competitiveness and global supply, which is probably one of the most significant challenges for Western Canada. The current gateway and corridor initiative that was brought forward by the government is our best hope for increasing Canadian competitiveness. We do not have population density in Canada. We need to provide logistical effectiveness to our agricultural industry. If we do not, we will not be able to compete.
This week, the Conference Board of Canada came out with a study showing evidence that we are trailing in global supply chains. We cannot take advantage of what is happening in the Asian Pacific markets because we are incapable of doing so and we must go through the United States. In the United States, the way in which they have developed gateways and corridors is highly efficient compared to what we are doing. We need to invest more in infrastructure so that we can leverage our agricultural competitiveness.
Senator Mahovlich: It sounds like we are not orchestrated properly.
Mr. Charlebois: Not necessarily; Mr. Loyns is from Manitoba and I am from Saskatchewan, and there seems to be competition between the provinces as to which will become the hub — the next Kansas City or Chicago — in Canada for grains and transportation. As well, we have Winnipeg, Regina, Calgary, Saskatoon, Edmonton and so on. Corridors are being developed to reach Prince Rupert or Vancouver but many municipal, regional and provincial governments are competing to attract attention. There are no orchestrated manoeuvres, as you stated, senator.
[Translation]
Mr. Debailleul: As you can see, we are three economists, and that means that we represent at least three different opinions, if not more, but at the same time we can agree on certain points. Mr. Loyns pointed to the lack of competition in the agricultural input sector and said it may be even more obvious in Canada than in the United States. In the United States, as we know, farmers are also complaining about the lack of competition, particularly in certain sectors, including fertilizers. For fertilizers, we need only note that shares in Potash Corp. tripled in value in less than a year and John Deer's profits have risen by about 60 per cent. This gives us an idea of the dynamic in terms of the impact of price increase on certain suppliers, when they are in a monopoly or quasi-monopoly position. I wanted to point out that this is also a major concern for American farmers, to the point that study groups have been held on the subject.
It is particularly worth noting that when we talk about agriculture, we tend to say that the lack of competition in the agricultural sector is associated with the distorting effects of agricultural policies. In the inputs sector, it is spontaneous market mechanisms that have led to this degree of concentration. I wanted to point out that aspect.
[English]
Senator Mahovlich: I have heard things will get worse in the United States before they get better. Therefore if the American dollar falls and weakens itself again, what effect will that have on us?
Mr. Loyns: The two dollars moving in opposite directions have had some of the impacts I indicated. If the American dollar continues to fall, it will put more pressure on us from their exporting. It will, in some cases, raise some of our prices.
There are two aspects of your question: The U.S. dollar falling relative to European currency, for example — that is, the rest of the world — or relative to Canada. There will be different impacts.
The impacts I referred to with respect to livestock and the grain sectors being net negative is in regards to the relationship between U.S. and Canada. Most livestock and grain sales are denominated in U.S. dollars. Let me talk about those sectors only.
If the U.S. dollar were to fall more, I think it would be more of the same. That fall implies that the Canadian dollar will rise and, as I have indicated, the livestock and grain sectors are hurt by that.
Senator Mahovlich: Given the fall of the American dollar, I do not think the Canadian dollar rose as far as the Euro was concerned. Due to the American dollar falling so low against the euro, it looked like our dollar was rising. However, when I went to Europe to spend money, our rising dollar did not provide any advantage.
Mr. Loyns: I think that is correct. I am not posted on those numbers, particularly. However, you raise a relevant point. Since most livestock and grain prices that we deal with are denominated in U.S. dollars and most livestock goes to the United States, the livestock sector has been damaged more.
Of course, if those dollars were still cheap on Canadian grain sales to other countries, that probably helped us some. However, I still contend that the net impact of where we are is negative, and a further drop in the U.S. dollar would probably be further negative. That said, my more academic colleagues here may disagree.
The Chair: I remind myself, our colleagues, and witnesses — especially Mr. Charlebois — that, back in 2006, this committee undertook a small but pointed study on the situation in the farm industry at that point. We brought forward a report called Agriculture and Agri-Food Policy in Canada: Putting Farmers First! In that report, we had only one recommendation: a farm bill. We hoped a farm bill would move the issue along more quickly, perhaps.
I do not say that the government is not thinking of a farm bill, but other things always seem to roll over it. However, in the community, it was a much appreciated effort.
Senator Oliver: Thank you, Madam Chair. First, I thank the three presenters. All three of you presented excellent reports on a timely, difficult and important issue for Canadians, Canadian farmers and Canadian consumers.
The approaches were different but all of you pointed to things that are important. I want to put questions to you all, but the one that intrigues me most relates to the talk by Mr. Charlebois about WTO, the Doha Round and freer trade and trade-distorting mechanisms.
I agree with many of your premises but I do not agree with your conclusions. However, as I understand what you said, we need to find ways to eliminate a lot of these trade-distorting mechanisms. If we had freer trade, we would not be talking about food shortages and so on because Canada has a tremendous capacity and Canada could take advantage of freer trade if it could trade more of its goods more freely.
You then looked at one of our trade-distorting mechanisms, which is the supply management. You said that we need to take a close, careful look at this mechanism. Ultimately, the Doha Round will say, You must eliminate this mechanism, Canada, and there cannot be any more of these mechanisms. You also mentioned barley and wheat, and abolishing those monopolies. The current government is working on doing that.
I will return to supply management. If we look at the U.S. farm bills in the last few years and the magnitude of those farm bills and, then, we look at some of the trade-distorting subsidies from the European community, what we do in Canada with our tiny supply management scheme is so small in the scheme of thing that it would be the last thing to move.
If we removed supply management today, and the Europeans and Americans kept their subsidies at the current rates, we would have no trade because we could not compete. We could not sell even one kernel of grain.
What is your timing for what you would like to see in terms of this freer trade?
Mr. Charlebois: You ask a multifaceted question. I will address it as succinctly as possible. Regarding the WTO, first, let me first say that I think Canada is not necessarily trade oriented. Rather, it is a trade-reliant country.
Senator Oliver: We export a lot of our agricultural products.
Mr. Charlebois: Certainly, but I think a lot of that export is based on being so close to the Americans; we trade a lot with the Americans and are highly reliant upon the American market. Whenever the currency goes up or down, it affects us all.
That in itself is a massive problem. That is why we need to trade more with other nations. I am sure my colleagues here would agree. We need to be less reliant on the United States and develop more markets. That point returns to my earlier point about global supply trains.
Senator Oliver: That is why our trade minister has entered into a multiplicity of bilateral trade agreements. That is the direction the government is headed.
Mr. Charlebois: Yes, many nations are developing these agreements as well, specifically the Americans. Over the last couple of years, the Americans have signed over 14 or 15 different bilateral agreements. We are jumping on the same bandwagon ourselves. Only last month, I think we signed a bilateral agreement with Peru. That agreement is a positive indicator.
However, we need to be careful with our trading strategy. That is why we need to put a lot of energy on multilateral negotiations. First, many analysts say that negotiations at the Doha Round are not doing well.
I disagree. I think they are doing well; they are simply going through a regular course of events. Negotiations started in 2001. We are in 2008 now. It has been seven years. I expect the Doha Round to last, at least, double the time of the Uruguay Round, which lasted 7 years. Therefore, we are looking 14 or 15 years down the road.
Senator Oliver: As you said earlier, the Doha Round is agriculture and unless the Americans and Europeans move on their trade-distorting subsidies, there can be no progress in Doha.
Mr. Charlebois: They have started to move slightly. India and China are showing signs that they want to move as well, which are certainly good and welcome signs.
However, I feel that Canadian negotiators are highly competent and respected in Geneva. The problem is that they are dealing with an impossible political agenda. They are looking at trade but, at the same time, they are looking at protecting the virtues of supply management, which is a highly protectionist measure.
Senator Oliver: I want your view on supply management.
Mr. Charlebois: We need to reform it. Many countries in the past have reformed it such as England and Australia.
For example, the dairy industry has 80 per cent supply management. Therefore, whenever we talk about supply management, we talk about dairy. The dairy industry in these countries has flourished. The industry has developed new technologies and new markets. It is highly integrated and the industry has developed new markets to bring more wealth into the country.
We are focusing mainly on managing supply, and farmers are doing well as a result. I was raised in Farnham, Quebec, which is the dairy land of Quebec. I worked for farmers and God bless their souls, they are great people, but they will hate me for saying this: Supply management must change.
Consumption of milk has gone down. Twenty years ago, the typical Canadian drank about 100 litres of milk or so per year. Now it has decreased to 85 litres of milk per year and slowly decreases every year.
We are focusing mainly on managing supply and not on creating demand. That is the fundamental point in my argument on supply management. We can look at domestic and international demand. However, we need to develop the product and the markets, first and foremost.
As a result of supply management, Canadian consumers indirectly subsidize our dairy farmers. Although the prices in the U.S. have gone up by 38 per cent to 40 per cent for a gallon of milk in the last six months, the price is still below the price we pay now in Canada.
In most provinces, we pay more for milk, eggs and poultry products. All three commodities are under supply management. In the end, Canadian domestic consumers pay indirectly for our supply management scheme.
[Translation]
Mr. Debailleul: Sylvain and I have slightly different perceptions when it comes to the merits of the supply management system. I agree with him on certain points, and I would say that we have problems with how the supply management system currently operates, in that it generates profits that are crystallized in the quota prices, and that is problematic. We are trying to find things that can be done. Will abandoning the supply management system open the door to greater prosperity in the dairy sector? I am not entirely convinced that it will. On the question of growth in production, Sylvain referred to Australia, where no increase in dairy product consumption has been observed. In the medium term, rather, we observed a decline in dairy product consumption. The reason that production has grown in Australia is access to external markets. One of the problems associated with supply management is that milk is regarded as a raw material. That does not leave enough room for trying to find other ways of marketing it, of adding more value to it, either on the farm or in processing methods.
I had the chance to visit Wisconsin last fall. Wisconsin was once the leading milk-producing state in the United States and its ambition is to return to that position. When I went to Wisconsin, that was the first thing I was told, in the government department and the professional organizations: we cannot achieve new prosperity unless we abandon the idea that milk is a raw material and put our efforts essentially into marketing it, adding value to it by all kinds of processing methods. Today, Wisconsin is proud of how it has 800 specialty cheeses, in other words, twice as many as in Quebec.
Senator Oliver, I would like to come back to the question of international trade negotiations. There again, I disagree slightly with Sylvain. I do not think it is a strategic issue when it comes to the food crisis. I am trying to do a bit of advocacy for the agricultural sectors in the developing countries. I know that if I were to speak to grain producers in western Canada, I would not necessarily be popular if I explained that one of the priorities, if we are to avoid the spectre of the food crisis, is to develop agriculture in the South, particularly subsistence agriculture, because as Canadians, we seem to have the impression that it is our mission to provide a certain number of those countries with the grains they may not have.
At the same time, we look at the distress, the panic even, on the part of the big international organizations and even some of the leaders of countries in the North, when the food riots erupted. In fact, I would mention in passing that we paid a lot of attention to that phenomenon because it was essentially a rather spectacular urban phenomenon; there were demonstrations, windows were broken, and so on, when the fact is that we have been living for years with 850 million people not getting enough to eat. The fact is that those 850 million people essentially live in rural areas and are often farmers. But they are silent.
We realized that the food riots were directly associated with political instability and that this was what was worrying leaders in this world. If we are to avoid the spectre of these food crises we have to rebuild the agricultural sectors in the South. In this regard, I have another slight disagreement with Sylvain; I do not think that concluding the Doha round is a prerequisite. We have to give the South the resources for rebuilding their agricultural sectors. Those resources are the same ones same way that the North mobilized 50 years ago to modernize its own agriculture: interventionist agricultural policies, and although it may not be politically correct to say so, relative protection of their markets.
Mr. Charlebois: I would like to add something to what Mr. Debailleul just said. Supply management is going to continue to be, first and foremost, a tool for the poor countries. Supply management was a tool that made it possible for our regions in Canada to prosper, to become wealthier. In the 1960s, if we recall, for 40 years up until today, that is exactly what made it possible for the regions to become wealthier. Now, I sincerely believe that the Canadian system is obsolete. We quite simply have to reform it.
Mr. Debailleul cited the fact that domestic consumption in Australia has declined. That is true. On the other hand, they are now making gin out of milk in Australia, did you know that? We talk about innovation, about technology. We are doing it here in Canada with milk products, but not enough, in my opinion. We have to do more of it.
[English]
Senator Eyton: My first question will pick up on the last point made by Mr. Loyns, and I must say, I am a firm believer in lots of competition. My other questions will be much more generally related to global supply and demand as opposed to local or Canadian concerns.
Mr. Loyns, I was curious when you talked about the need for an effective competition policy and said that we should look at the EU and the Australian models. I know a little about both models but I was surprised by the reference. Can you elaborate on that recommendation?
Mr. Loyns: I am probably not as versed in either as I should be to give a detailed answer but I know that in Australian agricultural policy, the competition people have been front and centre in terms of analyses and advice to the government and in terms of the framework of many institutions. The one I know best is the revisions in the Australian Wheat Board. The revisions in the Australian Wheat Board, to my understanding, began with their competition policy people about 15 to 20 years ago. The revisions progressed toward deregulation and the ultimate evolution of the Australian Wheat Board. Such a process in Canada has been held up for a variety of reasons but also held back because that particular vision of the world of economic organization has not been conducted in Canada in that way. We have not dealt with the issues of competition around the Canadian Wheat Board. The Canadian Wheat Board causes uncompetitive situations.
Senator Eyton: I was not referring to the process or how they arrived there so much but rather to the end result. Why is the competition policy in Australia better than the equivalent here in Canada?
Mr. Loyns: The competition policy in Australia has higher priority. I am not sure how I can answer your question otherwise. I studied marketing boards in England a decade ago, and when the U.K. moved into the EU, they had difficulties with their marketing board becoming more involved in the EU because the approach in the EU was to apply competition policy performance measures. In particular, the Milk Marketing Board, which was the most restrictive in the U.K., did not fit the European model.
It is my understanding that the U.K. ultimately modified their model more in the European direction, which is a cooperative model, as I understand it with vertical linkages that are more in tune with open trade, free trade and a more competitive organization of industries in these countries.
I urge the committee to look in detail at both the European and Australian models. I do not have enough knowledge to answer your question fully but I would like to see the committee do a bit of that work. The Honourable Wayne Easter reached exactly the same conclusions in his presentation before the Standing House of Commons Committee 18 months or so ago. It is an aspect of the industry that needs more study.
Senator Eyton: Essentially, we have our issues in Canada and we try to deal with them as best we can. We all fit within a global context one way or another. We might defer things for a year, five years or even ten years but it comes down to a matter of global supply and global demand.
In that context, Professor Debailleul's comments and other comments along the way suggest that international markets, speculators, hedge funds, the New York Commodities Exchange, COMEX, Chicago Mercantile Exchange, et cetera, amounted to threats and were not a positive influence on overall price setting. There has been some reference to the possibility of more severe price adjustments up and down. I would have thought it was the reverse and, for example, that COMEX plays a positive role in anticipating and smoothing out fluctuations in commodity prices, in particular the ones we talked about today. Why are negative aspersions cast on world markets, including trading exchanges like COMEX?
[Translation]
Mr. Debailleul: If I gave the impression that the speculative movements we have seen in recent months have a positive effect on smoothing out fluctuations, I did not make myself clear. I wanted to distinguish between two things; if there are a certain number of players on the commodity markets purchasing options, purchasing futures, the reason is that they are anticipating that the prices of those raw materials are going to change, in one direction or the other, and so all they are doing is anticipating it. That does not create the movement, but it accelerates it. By accelerating it, it exacerbates it, it increases volatility. From that standpoint, I think it does not play a positive role.
At the same time, you could ask me whether that means it has to be regulated. I think we have to ask ourselves the question today, because it is a relatively recent phenomenon. As you know, futures and options are bought and sold on the markets in the major agricultural products, and they essentially reflect the fact that farmers or businesspeople were trying to cover themselves against fluctuations that might interfere in their own production decisions. In that sense, it plays a very useful role. On the other hand, when speculative funds get involved they distort their own functioning, and that concerns me if we see this trend confirmed. A number of speculative funds have in fact been created. In recent months, and even recent weeks, ``agricultural fund'' divisions have been created, and it has been said that this was the last frontier where big money transactions could be conducted. This is somewhat worrisome to me, if it were to be confirmed in the long term.
As to how to control it, I admit that I cannot tell you, whether it can be done or it should be done. But it may be worrisome. Regardless of what we might argue about the wisdom and benefits of freer trade in agricultural products, most economists nevertheless agree that freer trade would be associated with greater price volatility. But the possibility of speculative funds getting involved is going to increase price volatility even more and that is something that concerns me.
[English]
Senator Eyton: We probably disagree, at least in part. That kind of price-fixing mechanism — international trade without restriction — is significantly better than some regulator trying to establish the price, taking into account all the complexities of price-setting worldwide.
I will move on to the second question of a more specific nature relating to the question of available world resources and their utilization. For example, we tend to think in static terms about arable land and what can be produced in respect of specific crops.
I have some knowledge of Brazil. There was a brief reference to Brazil in the presentations this morning about sugar cane production. As I understand it, Brazil possesses something in the order of 25 per cent of the world's arable land, much of which is not under cultivation. It is an important factor in that, of all the grains we are talking about today, Brazil would represent, in the world export markets, something like 40 per cent plus.
Globally, I want to look at what our inventory of world resources are and how they can best be applied.
Starting with the world resources, could Brazil — and I suspect other undeveloped countries have huge potential as well — be a significant source of the grains we are speaking of that would help relieve what appear to be shortages today?
There were differing opinions about how long those shortages will persist, but it seems to me there is significant potential for new resources or production of more grains than we have today. The contribution is significant.
Second, from a global point of view, someone who was clever could say, here are all the resources and, if they were concerned about ethanol production, as an example, they would be able to measure what grain or product is best suited to ethanol production. My reading tells me that sugar cane is a significantly better source as a base for ethanol production and corn is less efficient, both in terms of money cost and in terms of environmental costs.
First, your comments did not address the potential for world resources and increasing those resources and, second, you did not talk at all about perhaps some direction of grain production, assuming we want part of it going into ethanol. What are the best sources for ethanol and how do we use the best sources?
Those are my two questions.
The Chair: Please respond quickly, as two other colleagues would like to get a word in before we finish.
[Translation]
Mr. Debailleul: In terms of resources, I agree with you completely, that, for example, countries like Brazil have not yet achieved their full production potential. Those countries are starting to become major players on the international agricultural products markets.
We also have to mention other countries, like the ones in the Eastern Bloc, for example Ukraine and Poland and even Romania. Those countries have very significant agricultural potential and have certainly not yet relaunched, and reinvested in, their agricultural sectors. But we can expect that they will be doing that in the years to come.
In the medium and long term, I do not, at the moment, see any sources of major concerns about food disequilibrium at the international level, given that there is a way of responding to it. That solution should become plain in the next four or five years. Everything will depend on whether international prices continue to provide sufficient incentive.
On the second point, regarding ethanol, we have to acknowledge that the decisions that have been made in the last few years have caused disequilibrium in the grain market. We are now encouraging the development of other ethanol supply chains that perform entirely differently. You are right to point out that producing ethanol from sugar cane is far more efficient in numerous respects, including environmentally.
A lot of hope is being built on celluloid ethanol production, but we do not yet have a production technique that would be commercially viable. We will undoubtedly have to wait another three or four or five years, and that will be the challenge.
As agricultural economists, we have to be careful not to engage in price projections going beyond the two- or three- year horizon. In Washington, they projected grain prices over 10 years. They predicted a price increase in the medium term, over five or six years. Well, those increases have come about, and even been exceeded, in the space of a year.
[English]
Mr. Charlebois: I want to address your first question, Senator Eyton, about Brazil and emerging markets. The G20 plays a significant role in what happens around the world in terms of world supply in agricultural commodities.
Climate is one thing that does not help us. We are a northern country, and I think the best potential for Canadian agriculture to strive for over the long term is to look at specific niche markets. For example, I will not name the company but a specific company in Western Canada is involved in swine genetics, and the company is looking at developing the Chinese market in swine genetics. China is the largest market for pork in the world. That is one way for Canada to take advantage of what is going on in China, as an example.
However, climate plays against us. That is why Brazil, India and other countries have a competitive advantage and more potential over the long term than Canada does.
Mr. Loyns: I have three quick points. On ethanol, I firmly believe that grain should not be used in ethanol and will not be over the long term. Grain was a short-term solution. We will see biotech and other processes bring other things like cellulose into the ethanol market. That will free up substantial grain.
Regarding your second point of looking at potential resources, I am traditional. Perhaps it is because I am old and I have been around before. The issue of new resources is important, but the issue of not-well-used or unused present resources we know needs to be dealt with. I think of Africa, in spades. Agricultural production in Africa is potentially enormous but is not being achieved. There are many reasons for that.
However, my third point is: One reason that we, as Canadians, are not doing what we can from the feeding-the- world standpoint is that the priorities of the Canadian International Development Agency, CIDA, have moved away from feeding the world to other politically correct subject matters.
I was around CIDA in the early 1980s. The organization was working on big infrastructure projects like irrigation and power in those days, plus agriculture. I was around CIDA in the late 1980s, and they were still working on agriculture and food.
Agriculture and food serves basic needs of people. We ought not to move away from those priorities in our international development programs. I think you people could say something on that subject.
[Translation]
Mr. Debailleul: To illustrate what Mr. Loyns said, I would like to suggest this. About 15 years ago, agriculture represented about 16 per cent of public development assistance. Today, we are talking about 4 per cent.
[English]
The Chair: Thank you. This discussion is interesting. We are not over it yet, but these things need to be said and we are glad you are here to say them.
Senator Peterson: Thank you, Madam Chair, and thank you, gentlemen, for your presentations.
Mr. Charlebois, you touched on trade distortions and issues that Canada must address. It seems to me that Canada has won most of the WTO challenges, if not all of them. The culprits seem to be the United States and the European market.
You also indicated that the elimination of the Canadian Wheat Board would help producers. Can you expand on how that would help?
Mr. Charlebois: Senator, I was not talking about abolishing the Canadian Wheat Board. I referred to the abolishment of its monopoly on barley and wheat. I wish to make that distinction.
Can you repeat the first question to ensure I understand?
Senator Peterson: You were talking about trade distortions, how Canada was part of those distortions and how the country must remove itself from these issues. We have won most of the challenges we have brought before the WTO. The United States and Europe have been the culprits on subsidies, particularly in grain. Are we a cause of the distortions or are we only drawn in by other countries?
Mr. Charlebois: You are talking about the cases related to grain and the CWB. We have won all cases with regard to the North American Free Trade Agreement, NAFTA, as well. Our track record in that regard is stellar.
However, it does not mean that a call for change is not warranted. We need to be more aggressive in how we market our barley and wheat around the world.
I think the existence of the Canadian Wheat Board has become a strategic roadblock in allowing a specific industry to expand and to innovate. Mr. Loyns talked about lentils. Lentils were under the CWB monopoly in Western Canada about 15 years ago. Now, processing plants have been built in Western Canada and the industry is thriving as a result.
In looking at barley or wheat, all we see are farmers relying on the CWB to do a good job of selling and moving the commodity itself. If we want to create wealth in regions, biofuel has done that. Ethanol is not all bad; it has brought wealth in the region.
If we eliminate the monopoly on barley and wheat, it is likely to provide more wealth to rural areas than ever before. The Canadian Wheat Board has become a roadblock to vertically integrate even further.
Senator Peterson: You commented that supply management was only for poor countries. I do not know in what context you meant that.
Does the United States and how they manipulate softwood lumber fall into that same category?
Mr. Charlebois: I am a food distribution specialist. I am familiar with softwood lumber, but I cannot comment on that industry. We do not eat wood, so it is not my forte.
Senator Peterson: Mr. Loyns, the agriculture sector is experiencing rising input costs and rising revenue as well now. One risk producers face is crop failure. They have no control over that risk. Crop insurance now does not address that risk. If there was a crop failure with these high input costs, it would be disastrous for producers. Is crop insurance something we should look at immediately?
Mr. Loyns: My comments about the rosy picture for 2008-09 assumed at least an average crop. If crops are better, the picture is even rosier. However, you are perfectly correct and I should have stated this fact explicitly, but I understand the point. Any kind of crop failure at the present time, crop insurance notwithstanding, likely would be a disaster for most producers.
Farmers are capitalizing rapidly right now. They cannot buy new equipment. I am told by dealers that there are no new combines available in Canada or the United States unless they order them from the factory and they are delivered in the fall of 2009. That is how tight a lot of these big ticket items are.
I indicated that the cost base of agriculture has increased. A crop failure would only augment the problems associated with that increase.
Whether crop insurance is adequate, off the top of my head, I would say it is not enough to save a lot of producers from going under if they have a crop failure. Crop insurance covers only a certain percentage of costs. The pricing on the product side lags behind reality. I expect crop insurance is at least a year behind in terms of adequate protection, if crop insurance is ever adequate protection. Some people believe it is; some people believe it is not.
Senator Peterson: We talked about ethanol and how it was developed. In Saskatchewan, where I am from, it was driven primarily by low prices, lots of grants and lots of tax exemptions.
Forget about the food-over-fuel argument. As public policy, is ethanol something we should pursue or did we get ahead of ourselves in a knee jerk solution to a problem? Should we have relied more on research to use cellulose, switch grass and other things?
Even then, it is debatable whether ethanol uses more energy to create energy.
Mr. Loyns: I am not an expert in ethanol, but the questions you raise are valid. My observation is that we are short on research on this subject. We jumped politically, in many cases, following the U.S. model. Perhaps we should not have.
I do not worry particularly about food versus energy in the ethanol or biodiesel argument. Wherever we can turn agricultural products into other final products, I am in favour of promoting it.
However, the basic economics are not there for ethanol. We should not support long-term projects with public money that could collapse in three to five years. I expect to see a lot of softening in the argument for moving corn and wheat into ethanol products within that timeframe. I think technology will catch up and we will use different sources for ethanol.
That is the risk, as far as I am concerned.
[Translation]
Mr. Debailleul: I would say the same thing as Mr. Loyns, that if we look at things in terms of one country, we might think that it was policies that seemed entirely justified, in a context where corn prices were relatively low and people thought that the reason prices were low was that there were not enough markets for the production, so it was creating a new market.
The problem is when several countries simultaneously apply the same strategy, with relatively comparable resources but with possibly very different incentives from one country to another. We know what the financial incentive level there is in the United States. As well, I think it is a technology that shows that it is possible to build a plant in a relatively short time and get it up and running. It was impressive to see how in a few years, in the United States, they went from a few production units to over 180 now in operation. There are still at least 80 to 100 waiting to be completed. It was the speed of the industry response to the level of subsidy that create the problems we are facing now. Two years ago, the OECD was already urging its member countries to be somewhat cautious about adopting this kind of strategy, in terms of the possible repercussions on all markets for all agricultural products.
[English]
Mr. Charlebois: I am neither an ethanol nor an energy expert but, going back to Mr. Loyns' point, we are conducting good research in Canada at the University of Saskatchewan, the University of Alberta and the University of Manitoba. However, I am not sure if we are researching the right areas. Most research at these universities or at other centres across Canada, is on microlevel issues. We are learning how to grow things faster and better but we are not looking at the macro picture to give consideration to other elements and variables.
Ethanol is a great example. We have come forward with different policies that support the building of certain ethanol plants. As a result, it has affected markets in a way that many people did not anticipate. There are good elements about ethanol, even though we hear many adverse comments about it. We cannot overdo it. I agree with Mr. Loyns that we need to build a solid business case for ethanol for the long term so that the industry is self-sustainable.
Senator Hubley: This morning has been a terrifically interesting one. My question is on research, which Mr. Charlebois raised. Mr. Loyns, research also came up several times in your presentation. One heading was about the serious lack of agriculture and food research and another was about establishing a targeted policy agenda backed by serious research. Can you elaborate on that? Should we shift our focus in research projects to address the quickly changing times?
Mr. Loyns: Categorically, yes, is my short answer. My real answer is a little longer, understandably. In agricultural and food research in Canada, we have moved away from traditional research to new priorities, such as value-added, the environment, nutraceuticals and functional foods, et cetera. Neutraceuticals and functional foods would represent small numbers you could not even post today and into the near-term future. Yet, we have cut out agronomic research. Basically, agronomic research is no longer taking place at least on the Prairies. We have starved and cut out the public breeding and public research programs across agriculture. Do not get me going on this subject because I was the President of the Prairie Oat Growers Association for two years, during which time we pushed Agriculture and Agri- Food Canada for more oat research. We have one and a half breeders on the Prairies in oats. The crop produces $300 million to $400 million in exchange every year shipping oats to the United States. We could not shake loose on those things. We no longer know what the marketing margins look like. I bet that my colleagues do not even teach that term at university these days. At the same time, the public wants to know, when wheat is worth only 8 cents or 10 cents of a loaf of bread, and the price of bread suddenly goes up 50 cents a loaf, why that is the case. We cannot answer that question without the analysis to know what the price transmission process is in that industry. It is the same in the hog industry and in the pork industry. Am I right that pork prices will drop in retail stores as herd liquidation continues? In terms of economics, the price should drop. I have been a professional shopper throughout my professional career and wherever I travel, I go into food stores to check the prices. However, will pork prices drop? That question is one of knowing something about the competition in the market, about how food retailers behave and about the price transmission process that occurs in these sectors.
I am biased on these matters partly because I worked for Beryl Plumptre for three years on the Food Prices Review Board. We analyzed these things from a public standpoint, and created a literature that never existed in Canada before but it is gone again because nobody is performing that work today. The ability for professional colleagues in academia to access money to perform this work is gone. The people at Agriculture and Agri-Food Canada who might fund this kind of work are not interested in talking about these issues. They have different priorities that are much more politically attuned and not about market structure conduct and performance of the agriculture and food markets. That research is where I would place my priorities, and that is what I meant by the statement in my overhead. I apologize for taking so long with my response.
[Translation]
Mr. Debailleul: I think that agronomic research, research in all areas that are related to agriculture and agri-food, is a crucial issue. I cited it in relation to developing countries, but it is also true for the developed countries, and for Canada.
A report released recently talked about the work done by a team of researchers. Three years ago, the World Bank, the FAO, the United Nations Development Program and a number of other organizations had pooled some of their money and invited a panel of researchers to report on agronomic research worldwide in the last 50 years, and identify the challenges to be met in the next 50 years.
That group of researchers was put together in much the same way as the group that researched climate change — and in fact the secretary of the IPCC climate change research group was the secretary for this research panel, which was divided into five teams. Each team covered one part of the world. I happen to have had the privilege of participating in that effort, and for reasons that were not explained to me, Canada did not decide to ask a lot of researchers to participate in that effort. It was validated three weeks ago in Johannesburg by an intergovernmental panel. I could provide you with the Internet sites on which the initial portions of the report will be available.
What was found, for all regions, including the region I worked on, North America and Europe, was, first, that agronomic research efforts have to be stepped up; there are issues that are decisive enough for this, and public agronomic research has to e encouraged. There is one crucial issue in going back to putting effort into disciplines that have gradually been abandoned. Mr. Loyns referred to it: genetic improvement, including by traditional methods, not just through biotechnology. Everything relating to diversifying systems for production. The research panel was relatively sensitive to the fact that on a 20- or 30- or 40-year horizon, climate change will be an essential variable in policy relating to agricultural production systems and that if we do not work now to promote more diversified systems that will be able to adapt more easily to the changes that are coming, we will be at somewhat of a loss. Obviously, the countries in the South will be at a loss, but we will be too.
Obviously, the countries in the South will be at a loss, but we will be in the North too. So agronomic research has once again become a crucial issue.
[English]
Mr. Charlebois: For the record, Mr. Loyns, we teach market margins at the University of Regina. We have not forgotten about that topic.
I will respond to your question, Senator Hubley. Returning to my point earlier, I do not think we are researching the right things. I was involved with the Richardson Centre for Functional Foods and Nutraceuticals at the University of Manitoba. I was part of a panel to look at the nutritional virtues of barley. With what is happening right now with the debate on barley, we are looking at new markets and we perceive that commodity differently. Therefore, we are looking at what we can do with barley. For human consumption, other than beer, there is no potential to do more with it. They are questioning what to do with it.
I was surrounded by food scientists that had access to a lot of research money and grants. I wish I had that kind of money but I do not. However, they conducted great work. I think they contributed a lot to science.
They wanted to help agriculture but they did not ask the fundamental question: Is there a market for whatever product they were developing? They did not even ask that question. I asked the question and they looked like deer caught in headlights. They were not prepared.
It happens often in Canada. It is a philosophical question about growing things, about looking at supply and about price taking but not considering the market elements of providing a specific product to whatever market that is.
That, in itself, is dysfunctional in Canada. I am sorry to be critical but there is a complete disconnect between what research is transpiring and what markets need right now.
The other element is that, as a young scholar, I am involved with the grant game. To obtain grants now researchers must fill gaps that are narrowly defined by certain people that intuitively think certain things are important for agriculture. However, if researchers come forward with novel, unique ideas to contribute to agriculture in Canada, I can testify that it is difficult to obtain grant money.
Mr. Loyns: I totally agree with those comments. I want to point out that the situation Mr. Charlebois describes can be played over and over in various areas in agricultural and food research. Top-down vision is lacking as well as playing out a vision according to where priorities really ought to be. Priorities are ``nouveau'' these days. We need balance between the traditional, the basic and the ``nouveau.''
The Chair: Thank you, colleagues, and most particularly, our witnesses. This meeting has been an extremely activist event today. I assure you this is the first time we have had this kind of a discussion with three such first-class people who are clearly involved in this subject. It is helpful to us. We will put your views in our report when we write it, which should be relatively soon.
Thank you for coming, and, colleagues, good job.
The committee adjourned.