Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 26 - Evidence - Meeting of November 22, 2012
OTTAWA, Thursday, November 22, 2012
The Standing Senate Committee on Agriculture and Forestry met this day at 8:04 a.m. to examine the subject matter of those elements contained in Division 19 of Part 4 of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I wish to call the meeting to order.
[English]
Honourable senators, I welcome you and the witnesses this morning to this meeting of the Standing Senate Committee on Agriculture and Forestry.
My name is Percy Mockler, a senator from New Brunswick, chair of the committee, and I would like to ask all honourable senators to introduce themselves.
Senator Merchant: Good morning. It is nice to see you here. I am Pana Merchant, and I am from Regina.
Senator Mahovlich: Frank Mahovlich, Ontario.
Senator Callbeck: Catherine Callbeck, Prince Edward Island.
Senator Plett: I am Don Plett and I am from Manitoba.
Senator Buth: JoAnne Buth, Manitoba.
Senator Eaton: Nicky Eaton, Toronto.
[Translation]
Senator Maltais: Hello. Ghislain Maltais, Quebec.
Senator Rivard: Michel Rivard, Les Laurentides, Quebec.
[English]
Honourable senators and witnesses, thank you for accepting our invitation and for sharing your comments, vision and experience with us.
Today the committee will continue its studying relating to the subject matter of Division 19 of Part 4 of Bill C-45, which contains amendments to the Canada Grain Act.
Honourable senators, today we have a panel of three witnesses. I would like to introduce them officially. We have Mr. Wade Sobkowich, who is the Executive Director of the Western Grain Elevator Association.
[Translation]
Richard Wansbutter, Chairman, Western Grain Elevator Association Management Committee.
[English]
We also have Mr. Richard Phillips, Executive Director of the Grain Growers of Canada.
Thank you for appearing before the Standing Senate Committee on Agriculture and Forestry. I invite the witnesses to make their presentations, followed by questions from the honourable senators.
I have been informed by the clerk, Mr. Pittman, that the first presenter will be Mr. Sobkowich. Please make your presentation.
Wade Sobkowich, Executive Director, Western Grain Elevator Association: Thank you very much chair and members for inviting the Western Grain Elevator Association to speak on Bill C-45, Division 19 amendments to the Canada Grain Act.
Collectively, the Western Grain Elevator Association members handle in excess of 90 per cent of Western Canada's bulk grain exports. Our members and the farmers and customers we serve have a vital interest in ensuring the role of the industry's primary regulator is well-thought-out and well-defined.
The amendments in Bill C-45 allow the Canadian Grain Commission the flexibility to look for most the cost- effective ways to have elevator licensees post security. It also removes the mandatory nature of inward weighing and inspection, while keeping it in place as an option in situations where it is required for business transactions. These are necessary amendments.
However, we need to look at the CGC and the Canada Grain Act much more deeply. We must start with taking a step back and considering whether or not the remaining CGC services are actually required and competitively priced. I will use outward inspection as an example because going forward it will be one of the CGC's main revenue streams with this change in the removal of inward weighing and inspection.
Costs for outward inspection, through the recent CGC consultation document on changes to user fees, will go up from 51 cents per tonne to $1.60 per tonne. This means the cost of a single certificate final for a 50,000 tonne vessel will increase from $25,500 to $80,000. The annual cost to an export terminal handling about 5 million tonnes of grain per year would be $8 million. To put this into perspective, the same terminal would have a 115-person labour force to clean grain, manage inventory, ship grain and deal with maintenance and repairs, and the union labour cost would be approximately $9 million per year. If you add in costs of management and benefits, CPP, EI, vacation pay and that sort of thing, we are looking at about $14 million a year to run that terminal. When you compare that $14 million to run an entire terminal and all the functions that go along with it to the $8 million it will cost them to have the CGC analyze a sample and provide a final documentation, there is no doubt that the CGC costs for their services are not going to be competitively priced.
WGEA is of the view that having the CGC provide outward inspection should be optional. It should be available for customers who require it, but other third parties could provide the same service as well.
Certain buyers accept third-party inspection, regardless of the CGC certificate, resulting in a duplication of costs because we are required to get the CGC certificate as well. Qualified third parties can provide an export certificate at considerably less expense of approximately 35 or 40 cents per tonne. Assuming more than 30 million metric tonnes of grains and oilseeds are exported from Canada, requiring the industry to use the CGC for these certificates will add more than $36 million of costs to the grain handling system per year.
The root of the issue is that the CGC performs some functions for the good of Canada. I know you heard this from some of the other witnesses the day before yesterday. The CGC is being required to include these cost calculations for other functions in its calculations on user fees.
There is an inherent conflict of interest when a regulatory agency operates on a complete cost recovery basis. Rather than being primarily motivated to undertake activities that are in the best interest of the Canadian grain industry, the primary interest becomes one of seeking to create and apply regulations, policies and procedures in a way that generates revenue for the agency.
As a regulated service provider, the CGC should not be burdened with trying to find ways to extract enough revenue to cover its operating costs. The CGC should be focusing on providing the right services that are most appropriate in a rapidly changing industry, which may or may not be the optimal path for the procurement of funds. Functions such as maintaining a grain quality assurance system, grain safety activities, traceability, monitoring and research, and maintaining of a statutory grade system, are for the good of Canada. Other regulatory agencies, such as those that deal with border services, policing, vehicle weight restrictions, et cetera, are deemed to be for the good of Canada and paid for by the taxpayers of Canada. The CGC user fees consultation process revealed that costs are projected to increase from $38 million to $54 million per year starting August 1, 2013, even with the removal of inward weighing and inspection. The costs of the CGC to a producer with a 5,000-acre farm handling harvesting about one tonne per acre is nearly $8,000 and will rise to $12,000 when and if these user fees come into effect.
It is worth noting that the United States, one of Canada's major competitors, funds their inspection agency at a level of 37 per cent. Also, in international trade negotiations, funding to regulatory agencies does not come into play in a substantive way. If the government is making decisions about where funding can be allocated for the direct benefit of producers, then good of Canada functions within the CGC is a logical choice.
The User Fees Act defines "user fee" as follows, and I will paraphrase but I have it quoted in the document I provided. "User fee" means a fee for a product or for a service that is provided only by a regulating authority and which results in a direct benefit or advantage to the person paying the fee. The user fees apply only in situations where there is a direct benefit to the person paying the fee. To state it another way, the CGC would not be legally authorized to charge for services for which there is no direct benefit to the person paying the fee. In our view, that extends to components of costs as well. We would say that only direct components of services should be included in those cost calculations. Accordingly, we question whether the User Fees Act actually allows for full cost recovery of all CGC functions.
With respect to other proposed amendments, we have repeatedly asked the government to modernize the entire Canada Grain Act prior to increasing user fees. Some of the more significant amendments that should be made are in the areas of mandate, governance, grades and standards, optional CGC for certificates final, requirement for variety declarations, and penalties for making false declarations. There is value in the Canadian Grain Commission and the industry requires it for certain functions, but at some point, the costs outweigh the benefits. Many in the industry are questioning that right now.
The WGEA encourages the government to revisit its position that the CGC must generate revenue for its entire operations, including all functions, and included in service fees. Otherwise, it will subject the industry to unwarranted costs of a magnitude unfair to Canadian farmers.
The Chair: Thank you, Mr. Sobkowich. We will hear from Mr. Phillips now.
Richard Phillips, Executive Director, Grain Growers of Canada: I would like to draw people's attention to the railway map I provided. I want to be clear that you understand when we say "we are removing inward inspection," what we are talking about and why it is no longer necessary today. One railway line on the map says "1972." Going back 40 years to a farm north of Regina, Saskatchewan, there was a rail line where you would see up to 10 grain companies on that line. The train would come down with 100 cars and drop off 10 cars at each elevator. Each elevator would ship maybe some barley, wheat, canola, peas and lentils — a whole variety of crops. The train would come back, pick up all those cars and take the train-load of 100 cars out to port positions at Vancouver and Thunder Bay. It would cost too much money to break the train apart and give everyone their cars so everyone got 100 cars at one terminal and the next train would go to the other terminal. People's grain from all these different companies was going to one another's company terminal. Companies do not trust each other much so it was important to have the inspection there. The neutral inspector from the Canadian Grain Commission would identify a number 2 wheat or a number 1 canola, et cetera; and that was the basis of settlement between the companies shipping and the companies receiving. Today on that same rain line, there might be one elevator shipping all 100 cars. Let us say they are shipping 100 cars of canola. They are shipping it to their own terminal, most often so there is no need to pay all the inspection fees when it is an internal company transfer of grain. When we say "inward inspection," that is exactly what is no longer necessary today because our system has changed so much. That is what the map is for today.
We are pleased to see the proposed changes to end the inward inspection. We are also pleased to see some of the proposed changes in the bonding and security. We think there are better mechanisms than the bonding systems we have had for many years. A couple of pieces are missing there from this bill. We hope that another bill will come later.
First is the licensing of value-added facilities. If I as a farmer deliver my grain to one of these gentlemen's grain elevators and we disagree — he says it is a number 2 wheat and I say it is number 1 wheat, I can take a sample of that grain, ship it to the Grain Commission, where they will grade it; and that is what we will live with. If I take my load of grain to a flour mill or a canola processing plant, I do not have access to the same grade and dockage if we disagree. A lot of producers would be pleased to see the power to have that grade and dockage from the CGC extended to more places than just the licensed grain elevators.
Second is the governance piece. One way or another in the new world, the producers will pay for this. The grain companies will have to pay the fees, but when the grain companies work out how much they pay me for my grain, the calculation will include the cost for all these fees. It will come out of the producer's pocket one way or another. It is critical that the governance of this organization be much more accountable to both the industry and the grain farmers. We need to know going forward. Believe it or not, sometimes bureaucracies get their fingers into more and more things the longer they are there — the bureaucratic creep. We want to be sure that there are one or two people on the board of directors of the new organization that we can go to as farmers and ask why they are increasing our fees yet again; otherwise it will happen every year. That is just the way bureaucracy is sometimes. We want someone who is accountable back to the farmers and charge up there and who can explain that the increase in these fees is justified. That is fine if they are justified.
Third, we want to see some flexibility on the outward inspections. A strike by the Canadian Grain Commission shuts down the port and we cannot load boats. We need to have some flexibility in a just-in-time system so that if a flour mill in Japan needs 50 tonnes of wheat on a certain date, there is no delay. We cannot have delays. When we have delays, whether because of strikes or rail issues, countries look at other countries to buy their wheat because they simply cannot have the flour mill go empty. That hurts Canada's reputation and the ability of these guys to make future sales. Those are the kinds of issues that we think need to be included in the next round of proposed legislation.
The Chair: Thank you, Mr. Phillips.
Senator Plett: Thank you, gentlemen, for appearing once again before this committee.
My first question will be for the Western Grain Elevator Association. My concern has always been for the farmer. Are the farmers happy? In this case, we also need to concern ourselves with the grain companies. Currently, if farmers have grade or dockage disputes with elevator companies, both sides are subject to re-inspection using the Canadian Grain Commission's chief grain inspector. That remains in these proposed changes. We have heard that farmers like this service, but do the grain companies also like these changes? Please, both of you jump in here if you would.
Richard Wansbutter, Chairman, Western Grain Elevator Association Management Committee, Western Grain Elevator Association: With the proposed changes introduced, the farmer still will have the ability to go to the chief inspector to arbitrate a dispute in and around grade and dockage. We are comfortable with the changes. I think it still protects the farmer.
I would like to put this into context. We always need these provisions for farmers to appeal, so we certainly support that.
As a company, Viterra handles about 14 million tonnes of grain each year. I checked with our inspection people. I said, "I am curious; how many disputes do we get in a year?" I was surprised. It is about a dozen across our system. Where I am going with that is that we do have qualified inspectors, our own inspectors, at each and every elevator, but there should be that avenue for appeal and I think the changes accommodate and protect the producer.
Mr. Phillips: I fully concur. That is actually staying there. Even if it is only, say, 25 to 50 people across Western Canada who ever use it, it is an important service to be there. We would like to see that expanded to flour mills, malting plants and canola crushing plants as well. If the grain leaves your farm right now and goes to Viterra and we disagree on dockage, we take the sample, send it in and it gets checked. If I send it to the canola crushing plant and they say "You are a lower grade right now," there is no recourse now and of course it is already unloaded and gone. We would like to see it expanded to more the value-added facilities as well.
Senator Plett: The Canadian Grain Commission charges grain companies user fees for all the services that they provide. However, it is widely known that grain companies — obviously, they are in the business of making money — pass these costs on to farmers. What percentage is transferred to farmers and what percentage do the grain companies pay?
Mr. Sobkowich: When you have fixed costs across the industry, you do not tend to compete on fixed costs. You compete on other factors in the basis. There are transportation costs, which are fixed and they are the same for everyone. We cannot control those. There are CGC costs. They are fixed; they are the same for everyone. We cannot control those. Those are definitely factors that get included in the basis. Then companies compete on the rest of it and try to gain efficiencies in their own operations by streamlining things, whatever they need to do to try to make themselves more competitive. They tend to compete on those other components of the basis, whereas CGC and transportation costs are fixed. It is all put in the bucket.
Whether you talk about what percentage the companies pay and what percentage the farmers pay, it is all part of the same calculation, and it is a constant and standard piece that goes into the calculation. I would say that in this case CGC costs are passed through the grain companies to the farmer or to the end-use customer, to the extent we can extract that value from the international marketplace.
Senator Plett: You lost me there somewhere. From what I understood, the farmers are paying everything.
Mr. Sobkowich: I think that is what I said.
Senator Plett: I understood that correctly.
Mr. Phillips: It all flows downhill that way.
Senator Plett: The farmers love the fact that they are paying the entire cost. No, they do not.
Mr. Phillips: In fairness, it is the same for all the companies. It is not like Viterra is trying to pass all the costs to the farmer and another company is not. It is fairly level. At the end of the day, they do work hard because they want to buy our grain each year. There is quite a bit of competition out there. They work hard to buy the grain. I give credit to all the grain companies.
Senator Plett: Of course, we will be hearing from a few farmers later on this morning and we will ask them how happy they are.
Mr. Phillips, I was going to ask you what specific future policy changes you want and you have already addressed that in your comments. Do you think that what we are doing right now is a good first step in moving towards the policy changes that you would like to see?
Mr. Phillips: It is a good first step. We would like to see the second step come pretty quickly, though, because these fees are going up big time. They will save $1.51 a tonne for the outward. If Viterra is loading a 1,000-tonne boat, that is $150,000 in fees on every boatload going out. It is a lot of money.
They talked about going through what the Grain Commission is involved in, what they have got their fingers into over the years. Which of these services add value to farmers? If they add value, we will pay for them, but our sense is that there is a lot of stuff going in there that we do not know if they add value or not. You get regulatory creep; you get your fingers into things and it is hard to get them out over the years. The world has changed a lot since the end of the Wheat Board. We need to go back and look at what exactly is adding value and we will pay for those. Everything else should be optional.
Mr. Wansbutter: If I could add one point, we certainly support the need for outward weighing and inspection. The point we are making is that when you have a regulatory body where there is no check on what their costs are or a valuation of those costs, we have trouble with that. In Mr. Sobkowich's example, our fees will go to $1.50 a tonne, but if I had the option of using a third-party provider, for example, SGS or Intertek, and we have used them in the past so we know what their fees are roughly, they are in the range of 40 cents a tonne, it allows us the option to be as cost- efficient as possible.
To your question, you are right; those costs are passed down to the producer. I would rather pass down 40 cents than $1.50.
Senator Merchant: My first question is by way of information because people have been asking me this: Why are transfer elevators being combined into a single class of terminal elevators? Many people say that they talk to each other and they do not understand why that is happening.
Mr. Sobkowich: In the past there were some differences between the way a transfer elevator and a terminal elevator handled grain in the industry. In Mr. Phillips's example, there were multiple railcars from multiple sources, all ending up at the terminal and the terminal needed to manage that. They still have to manage that today, but it is more homogeneous from fewer sources today. The transfer elevator simply took the product, moved it through its facility and put it on a boat. It did what the title said, which was transfer.
There has been a narrowing in the definition of what a terminal does versus what a transfer does. Also, the transfer elevators on the St. Lawrence accept grain through some direct rail programs that bypass Thunder Bay and go directly to their facilities, in which case they do operate very much like a terminal elevator in Thunder Bay. I think the thinking behind it at the Canadian Grain Commission was that they are so close in definition operationally that we may as well streamline this and put them into one class of elevator, which is terminals.
Senator Merchant: Another thing that I have been told is important — as a matter of fact, they say it is very important — is the official weighing and inspection. Weighing, they say, is far broader than just simply weighing the grain. They check the car for leaks. They check to see that the car is identified properly, that each compartment is full. They verify the identity of the grain. The physical equipment is checked and the records are kept. This serves as an important function when there is a discrepancy of the loaded and unloaded weight and is used to settle disputes.
For weighing and inspection, it appears that now the producer is supposed to hire a company to come and observe the grain unload, sample the car and inspect the grain. If anyone has watched the cars unloaded, they would know the cars are not unloaded in any order. For instance, if I ship three cars, they could be unloaded at different times, different days, and I would not know when they are going to unload to be able to hire someone. They say this kind of inspection only works on paper. Can you elaborate?
Mr. Wansbutter: I will try to answer some of the questions and have Mr. Sobkowich and Mr. Phillips come in.
To the first part of the statement, we, our company employees, are the ones who inspect the cars. You do not see any CGC staff down the track. It is our responsibility to inspect the cars when we are loading them to ensure they are in proper and good condition and that there is no leakage. It is our staff at the receiving pit at the export terminal that will bring the cars in. They will open the gates. They will make sure that there are no issues with the cars. There is no CGC staff performing that function.
The second point about inward weighing and inspection, as Mr. Sobkowich mentioned a couple times, is that the vast majority, in our case probably 95 per cent of the grain that we are unloading, is from our own origination points. Viterra is shipping from its primary elevator system to its own export terminal. We have already settled with the farmer back in the country. We own that grain; we have purchased it; we are now moving it forward to a sale, either our sale or for the Canadian Wheat Board, and there is simply is no need for that inward weighing inspection by the CGC.
The other point is that we are regulated closely by Weights and Measures Inspection Services to ensure that our scale systems both in the primary and at the export terminal are tested and verified and accurate. That service the commission is providing, from our view, is redundant and not necessary.
Mr. Phillips: I agree with what he said.
Mr. Sobkowich: I would add one more thing to that. By way of an example, it is the same thing as going to fill up your tank at the gas station. You do not have someone there to make sure that the volume and the weights are correct. They are correct because they are certified by Measurement Canada. That is the same situation we are moving to here.
Mr. Phillips: It sounds like the person who wrote that may have been talking about producer cars where they are shipping producer cars. Many of the producer cars come in blocks. They are on the short lines. There are some in Saskatchewan, as you know. They will ship a block of cars. Usually they will have negotiated where those will go. They will negotiate with mission terminals, for example in Thunder Bay, and they will either have mission terminal staff do the inspection or they can hire SGS or someone else to do the inspection and grading. However, as Mr. Wansbutter said, they are not doing the work that this person thought they were doing on the ground there, so I would not share the concern.
Senator Merchant: I have one more question that I would like to put to you about eliminating weigh-overs. Weigh- overs are a check to see that companies do not take too much dockage. Farmers used to call this "tookage" instead of dockage — this is new language to me — and by eliminating this "tookage" it will take on a whole new meaning. It says: Trust me, competition does not keep them honest. Maybe you can tell me what that is about.
Mr. Phillips: As a farmer, I would say that is completely false. Most farmers have a pretty good idea what the dockage is in their grain samples. If I go to Viterra and I do not think I am getting a good deal on dockage, I go down the road to Pioneer or a whole bunch of other companies, or we take a sample at the driveway and send it to the Grain Commission and they grade it for us. If the companies have bought my grain, it is no longer my grain. It is up to them if they want to do some blending and make some money on that. A lot of times if I have a number 2 wheat and Viterra wants my grain, they will give me number 1 because they know they can blend it off a little bit. We find as farmers there is a lot of competition out there, and if I do not like the grade on the driveway when I go to sell it, I send it to the Grain Commission and get it graded. What they do after that, if they make money on that, is their business, and it is their risk if they lose money, too.
I do not think that statement is fair anymore. However, that is good coffee shop talk.
The Chair: I guess it is pertinent that when they want to send information to senators they can. Thank you for the information, Mr. Phillips.
Senator Eaton: I would like to follow up on Senator Plett's questioning. Are you saying, and I think this will be more and more important as we ship more grain, hopefully, in the free trade agreements with India and perhaps China, Korea, Japan that the whole outward weighing should be opened up? Should it be completely market driven and anyone has a choice whether they go to CGC or the other? Should it be completely market driven?
Mr. Sobkowich: I will start with this. We think it should be market driven. The whole objective is to supply the customer with what they want. If the customer is interested in using a third-party inspection company that is internationally recognized, why would we not allow them that option? In fact, today we do allow them that option.
Senator Eaton: Everyone does not have to pass through CGC?
Mr. Sobkowich: No, we have to pass through the CGC. At the same time, though, we get a company like SGS to do the inspection as well. The customer is interested in the SGS certificate, so we give them that one.
Senator Eaton: Would it be viable to not be required to go through CGC? In other words, is it viable to completely leave it up to the customer?
Mr. Sobkowich: It would be viable for a couple of reasons. First, it is viable today. By inserting an option in that case, we would not be forced to pay for a CGC certificate that goes in the garbage.
The second reason is we are still talking about adhering to the Canadian Grain Commission statutory grading system in a lot of cases. While you may have a third party inspect that grain, they are inspecting it to the statutory grading system, and that must meet that statutory grading system. There may be other specifications that the customer requires that a third party would also analyze and put on there but retain it for those customers who would like to have it.
We need to have our focus on the customer and allow the flexibility to continue to give them a certificate file from the CGC for those who want it but allow for flexibility to other service providers for those willing to accept that.
Senator Eaton: If the market, so-called, was opened up and it was not obligatory to go through the CGC, would that be a good way of cleaning up — I do not know if that is the right word — or making the CGC look at their own costs carefully and making the system leaner?
Mr. Sobkowich: It is and it ties into that good of Canada stuff because that could not happen from a CGC sustainability of operations. They have reorganized their finances to draw the revenue from that certificate file. That, perhaps, is one of the reasons why it is being kept as mandatory. If we were to be able to introduce the good of Canada component and only charge for direct costs related to those services, then I think it could happen.
Senator Eaton: All right. Say in a good world we open it up and you do not have to go through the CGC; the customer can choose who does the outward weighing and grading and certificate. Is there another role then for the CGC?
Mr. Sobkowich: Yes. If customers are not use choosing the CGC to do that, the CGC still maintains the statutory grading system.
Senator Eaton: They still set the standards?
Mr. Sobkowich: That is correct. That is what I call the statutory grading system. They still set the standards, so you still meet those benchmarks. They change as time goes on and the marketplaces change and react to that, but they still maintain the statutory grading system.
Mr. Phillips: May I speak as a producer?
Senator Eaton: Yes.
Mr. Phillips: The grain growers have 14 different commodity associations within the Grain Growers of Canada, and so we asked our members what they thought about mandatory versus optional. The United States is our largest single customer, and the Grain Commission does not inspect any of the grain going to the United States. They only inspect grain and these valuable certificates are only on boats leaving from port position.
Senator Eaton: Why?
Mr. Phillips: It is all negotiated commercially. The grain companies deal directly with the American buyers, and it is all sorted out with no grain commission.
Mr. Wansbutter: That was part of the negotiations originally with NAFTA, and because we have so much cross- border trade both ways, those inspection services were deemed not required and there are contractual arrangements.
Senator Eaton: If we opened it up and it was optional as to who ended up grading and giving the certificates, would that hurt the Canada brand abroad in any way or would it help it?
Mr. Sobkowich: I will give you my views on that.
I think that, again, we are maintaining the statutory grading system. Any certificate you get from the CGC or a third party, presumably it is to that. This is the number 1 Canadian Western Red Spring, the falling number is this, and the protein is this. Customers have certain other specifications that they require information on, outside of the statutory grading system.
I do not see any reason why we would not be able to make that change and still be able to deliver what the customer has requested. I see no reason why that could not happen. In doing that, we would maintain our reputation as a reliable supplier of accurate, consistent quality to those customers.
Senator Callbeck: Mr. Phillips, you have a chart here. In 1972 you say there used to be ten elevators and now there is one. Roughly, what is the distance?
Mr. Phillips: It varies across the Prairies. In southern Saskatchewan they may be further apart. My farm is at Tisdale, Saskatchewan, and we have five of these big elevators within 30 or 40 miles. However, we have several different train lines, so they are spaced around on that. In some cases it may be 100 miles and in others, 50 miles. It could be a little bit more or less. In some cases there might have been two or three of these in the same town, not just 10 separate towns.
Senator Callbeck: You said if there is a dispute with the quality, if the grain is delivered to a terminal, the Grain Commission will deal with it. However, if it goes to a flour mill, there is nowhere for that dispute to get resolved.
Mr. Phillips: That is correct.
Senator Callbeck: What is the reaction to the Grain Commission on this?
Mr. Phillips: From a producer's perspective, we want to see that change. If we talk about flour mills, there are fewer of them so you haul further. Once it leaves your yard on the truck and is gone, it is usually commercially trucked. I am not there to negotiate when it unloads; I have to take whatever it is. Most producers would be happy to see an extension of the services. I do not know whether the flour millers and canola crushers would be happy. Perhaps these gentlemen can comment on that. I think you have investments in some of those?
Mr. Wansbutter: I am always hesitant to speak on behalf of someone else, but I understand that the Canadian Oilseed Producers Association, COPA, has looked at this, and I do not think they would have any objection to it.
Mr. Phillips: It is fairly competitive and there are many oilseed crushing plants in Saskatchewan, as Senator Merchant would know. If you give me a hard time, I will not sell my grain there in the future. It regulates itself through competition. In the handful of times when we strongly disagree, we would like the right to have the Grain Commission inspect.
Senator Callbeck: Have you talked to the Grain Commission about this?
Mr. Phillips: I do not want to speak on their behalf, but I presume they would be comfortable doing those inspections.
Senator Callbeck: What about cost of the credit insurance where you have to put up a bond to the insurance company? We had a witness the other day who said the cost of credit insurance is one tenth the cost of the bond. Do you agree, roughly, with that? Is this a major expenditure?
Mr. Sobkowich: I will start by giving you an idea of what the costs of security are today and then maybe we can get into what will happen in the future where there are still a lot of unknowns.
Today the industry posts about $600 million in security. That is it not the cost of providing security; that is what they post in security. The cost of security is about $9 million a year for the industry in total. That is $1.4 million for the Canadian Grain Commission; $1 million for grain buyer administration; and $6.6 million for companies to post security. That is the cost of them posting the $600 million. Those are the costs today.
My limited understanding of an insurance-based system — and if that is what we are moving to — would be that it would reduce the costs significantly, but the devil is in the details. We do not know what those details are yet. We just know this bill gives the CGC the right to move away from the embedded security within the Canada Grain Act and design something different that they are comfortable with. It depends on how that rolls out going forward. We assume they will consult with the industry and farmers about how that will look in the future. I cannot sit here and tell you it will be 10 per cent, 5 per cent, 20 per cent or what it will be. I am pretty sure it will be less, but I do not know the percentage. Perhaps Mr. Wansbutter or Mr. Phillips will have an idea.
Mr. Wansbutter: The point is that the commission has stated that the administration of their security system is not the most cost-effective or the most efficient. When you have to post a bond, you are tying up $600 million of capital that could be deployed elsewhere. With insurances you pay a premium; you do not have that money set aside. That should reduce the cost of the system and make more capital available for companies to invest elsewhere.
Mr. Phillips: One other small piece is that in some cases when they are reporting the financial situation every 30 days, we have had companies go under. Even though they posted the bond, their debts increased so much since the last bond posting that we only get 50 or 70 on cents on the dollar. For some producers, the insurance is more likely to pay out what you buy your insurance for.
Senator Callbeck: What is the makeup of the Canadian Grain Commission? Who sits on that commission?
Mr. Sobkowich: The Grain Commission as an organization?
Senator Callbeck: Yes.
Mr. Sobkowich: It is a regulatory agency. There are three commissioners that are appointed by the Minister of Agriculture and they run the commission. Then there are various departments within the commission itself that look after industry services, research and a host of other functions.
Industry people and producers do not sit on the Grain Commission. However, within the Canada Grain Act there is a requirement for the Canadian Grain Commission to set up the Western Standards Committee and the Eastern Standards Committee. That brings in participants from the different sectors of the industry, farm organizations, exporters, grain handlers, et cetera, to provide advice on how they might tweak the values and levels within the statutory grading system and look at other research, other ways to ensure we provide a consistent, quality product. For example, right now we measure, in a simplistic explanation, gluten strength based on a sprout. You can look at the kernel and see how much it spouted. That is an indicator. That group would look at research into whether we look at falling number to determine if that is a better way to measure gluten strength and if that can be introduced into the grading system. There is that interface with the industry through the Canadian Grain Commission, but the commission itself consists of commission employees.
Senator Callbeck: Mr. Phillips you talked about farmers having more input and you were talking about fees at the time. What did you mean?
Mr. Phillips: As I said, a lot of the costs will come back down to us. There is a lot of discussion about changing the governance structure. Right now, there are three commissioners appointed. The Grain Commission is asking if we should have one or two commissioners. We suggested that maybe they should consider a board of directors, appointed by the minister, that would have two or three farmers and maybe some grain industry people as well. There needs to be someone at the top, whether one, two or three people, that we can go to ask why the fees are going up 4 per cent next year. I need to have someone I can trust to say to me, "Richard, we are getting into some international settings and doing some other work. We need this money and it is good for farmers. It is important for international standards." Make the case, and we will be okay. Our fear is that we will end up with a system where there is no one in charge that we can trust who will be accountable directly back to the farmers. We are looking for that line of accountability.
Senator Buth: Both organizations have commented that they support the proposed changes in the bill. Thank you for your suggestions for additional changes going forward. We are all looking at ensuring that the system is as lean as possible to reduce costs throughout the system, especially to farmers.
You use a term that I think not everyone is familiar with that I would like you to describe: "basis." Can you talk a bit about basis and how it is set? Can you tell me if the basis has changed over the years? What are the trends in terms of basis?
Mr. Sobkowich: The basis is the components of costs factored into a bid when a company is trying to be competitive and attract the farmer's grain to his elevator. Companies will use whatever tools they can to try to attract that farmer's grain. Calculations that go into that basis cost include the fixed costs of CGC fees and transportation, the company's costs and whatever element of margin on top of that the company chooses to include. There are probably more elements that I am missing. Those pieces go into a company's decision as to what they will try to offer to attract the farmer's grain.
Mr. Wansbutter: To your question about the trend on basis, as Mr. Sobkowich indicated, the basis we reflect back to the producer will vary depending on the conditions. When there is a high demand, for example for canola, we as companies are out there trying to secure that canola from the producer. You will see the basis tightening up or narrowing because in trying to secure that grain we are being more competitive and offer a better price to the producer. At other times, you will see the opposite happen and the basis will actually expand for various reasons, such as we are not in the marketplace, do not need that supply or a reflection of other costs.
Senator Buth: It is a combination of fixed costs within the system.
Mr. Wansbutter: And risk.
Senator Buth: In addition, you use that to send a signal to the farmer that you either want grain or do not want grain.
Mr. Wansbutter: Yes. It is an indication of what the marketplace wants or does not want.
Senator Buth: Mr. Phillips?
Mr. Phillips: Most farmers will watch the basis quite closely. When basis gets widened maybe and the price will drop down to us is at harvest time. Everyone is trying to deliver all their wheat at the same time and no boats are coming for a week to Vancouver and companies do not need wheat in their elevators because it will block them up and they need boats for canola. They will then bid more aggressively for canola and the price becomes better to the farmer because they need canola to get to the boats on time. That is how it works. Farmers watch that. The market will signal. If it looks like it wants more wheat than canola, then if I am to haul grain, I will go down and negotiate for what I see that they want. I can tell what that margin is.
Senator Buth: Has it changed much over the years?
Mr. Wansbutter: The basis fluctuates considerably.
Senator Buth: Are there trends?
Mr. Phillips: The market is every bit as competitive for my grain today if not more competitive than it was in the past. Part of it is that farmers are prepared to move grain farther and look abroad for markets, unlike when they used to haul to the local elevator three miles down the road.
Mr. Wansbutter: From the beginning of this crop year, the basis for the vast majority of our crops has a narrowed. It has been very competitive. Whether that is a trend into the future, I will not predict.
Senator Buth: You said that some buyers want certificates from third-party suppliers for outward inspections. SGS is one such inspection company that can provide those services. How common is that? Do you see that moving forward there will be more demand from customers to use another service?
Mr. Wansbutter: I would have to say that it is not common. We have had the Canadian Grain Commission for so many years and most of our customers are used to that. As the system evolves, why they are requesting SGS or Intertek is not because the Grain Commission is doing a poor job — far from it; it is because some of our customers are asking for a lot more quantitative analysis that the CGC does not do or necessarily provide on a certificate final. Some of our customers are saying that it is fine to have the grade and the protein, but they need a lot more information. We alluded to that. For example, if we are shipping on a wheat sale, I need to know the falling number, the ash content and the moisture absorption. Third party providers will do that for you and give you the full analytical slate required to assess what we are selling or are prepared to offer.
Senator Buth: Why is there a difference in cost?
Mr. Sobkowich: The difference in cost comes to this good-of-Canada piece. The CGC is being compelled to take all of those costs for the grain research laboratory, maintaining a statutory grading system, head office costs, et cetera. Given that they are on a full cost recovery basis, they need to factor those in when establishing the fees. In the main revenue stream, there are licensing fees and fees for outward inspection, and because they do it that way, their costs are going to be very high. Other companies do not have a grain research lab and are not compelled to monitor the system and do all of these other good-of-Canada functions; so their costs can be much lower.
Senator Mahovlich: Mr. Phillips, you mentioned strikes. Are you suggesting that the government legislates no strikes for, say, elevator operators or train operators?
Mr. Phillips: I would say no to that. We are saying that when we use strikes, the minister has the flexibility to say that while there is a labour dispute, we could have SGS issue the certificates. At least the grain could move while they continue to negotiate the labour side. We need to have some mechanism so that we do not disrupt the flow of grain; but I am not advocating for mandatory back-to-work.
Senator Mahovlich: Have a strike but keep playing hockey.
Mr. Phillips: You could bring in replacement players.
Senator Mahovlich: That is why they have strikes. Everyone gets hurt in a strike.
Mr. Sobkowich: Mr. Phillips is right. Allow us to bring in replacement players in those situations where the CGC goes on strike. It is one more reason to allow optional inspection. We see it now in Thunder Bay on inwards, where the Canadian Grain Commission does not have the resources to inspect all unloads. We have had to come up with a temporary fix to deal with that problem. It required CGC to provide exemptions to companies to allow them to grade their own grain instead of the CGC doing it. We are worried because if that scenario happened on the outward side, they could stop commerce. We could have vessels sitting there, and we cannot load them because the CGC is on strike and unable to inspect. In those cases, and for other reasons, we would like the ability to use other parties.
The Chair: To the witnesses, thank you very much for appearing this morning and sharing your comments with us.
Honourable senators, we will now hear our second panel, which is composed of Mr. Kevin Hursh, Executive Director of the Inland Terminal Association of Canada; and also, as two individuals, Mr. John De Pape and Mr. Jeff Nielsen.
Our first presenter will be Mr. Hursh, to be followed by Mr. De Pape and Mr. Nielsen.
We ask you to make your presentations and we will move then to questions.
Kevin Hursh, Executive Director, Inland Terminal Association of Canada: My name is Kevin Hursh. I am Executive Director of the Inland Terminal Association of Canada, or ITAC for short.
I will give a bit of a background on ITAC, as you might not be aware of the structure exactly. The Western Grain Elevator Association that presented previously represents the large companies that serve the grain industry in Western Canada. The Inland Terminal Association of Canada is a group of 10 terminals that are at least 50 per cent farmer- owned.
There used to be a time when the majority of the grain handling system in Western Canada was farmer cooperatives. Those days are long since over, but there is a group of ten terminals — seven in Saskatchewan and three in Alberta — that are majority farmer-owned. Some have partners that are the major grain companies; some are entirely farmer- owned.
Running through them quickly, in Alberta there is Providence Grain Solutions, with its office in Fort Saskatchewan; Westlock Terminals, the town of Westlock, north of Edmonton; and Lethbridge Inland Terminal.
In Saskatchewan, the largest, and large by any standards, is Weyburn Inland Terminal; North West Terminal at Unity; Prairie West Terminal, Plenty, Dodsland area of west-central Saskatchewan; Great Sandhills Terminal at Leader, Saskatchewan; South West Terminal near Gull Lake; Gardner Dam Terminal near Strongfield, near Lake Diefenbaker; and CMI Terminal in the Naicam-Spalding area.
Four of those inland terminals plus a couple of other players own Alliance Grain Terminal on the West Coast, so they do have some attachment to export. That is Great Sandhills Terminal, Weyburn Inland Terminal, North West Terminal and Prairie West Terminal who own Alliance Grain in conjunction with Parrish and Heimbecker and Paterson Grain, which are two of the privately owned grain companies in Western Canada.
With that background on ITAC, we will go on to comment on what we are here for, which is changes to the Canada Grains Act. What you will hear from ITAC mirrors what you will have heard from many of the other industry players. It is the general belief that it is a good move to remove mandatory inward inspection and weighing; that when that service is needed, it is still there, but making it mandatory was putting an unneeded cost on the system. It is great to see them take that out and a $20 million savings with that and some other things that are not on the backs of producers. If it is not needed, it should not be there.
There has long been discussion about changes in the producer payment protection. Producers want protection. They want to know that they will get paid when they deliver to a company. However, the bonding that has been the procedure up until now has had a number of shortfalls and the hope is that an insurance-based system can indeed be less costly and an improvement. However, the details of that are yet to come. It is the belief of most people that because of insurance functions where you can pool the risk of a number of companies, probably there will be less expense and less administration and it will be a good thing, but it will be pending the details.
Like the other groups, ITAC believes that the modernization efforts do not go far enough with the Canadian Grain Commission, and particularly, as was discussed in the previous panel, the role of mandatory outward inspection and weighing, and why not the option of a private inspection company that is accredited by the Canadian Grain Commission. As noted, there are many cases where the buyer, the overseas customer, may want a private grade. The Canadian Grain Commission is duty bound to provide its own grade at its own cost on top of the private grade and that is just wasteful in the system.
As also mentioned, there is not enough in this current system that looks at the public good of what the Canadian Grain Commission offers. We would argue that the Grain Research Lab, policy development and food safety are all elements of the public good. Since that is not being paid for by the government, it goes on to the Canadian Grain Commission who in turn must collect that in user fees. Although not part of this bill, the whole user fee consultation is ongoing concurrently, and user fees are set to rise dramatically to the entire industry starting August 1. If more things were deemed to be a public good, if things like outward weighing and inspection were not mandatory anymore, that would reduce the cost to the entire system.
Currently, it is my understanding there are only about $5.45 million of Canadian Grain Commission activities that are deemed to be of the public good. Many analysts looking at that say it should be much higher than that and then take that off of farmers and off the entire industry.
In conclusion, I think most people watching this procedure realize that there is little chance this bill will be altered in any substantial way. It will probably go through much as we see it. At least, that is my view as an outside observer. However, I think there is a great need to reopen the bill and complete the modernization process at the earliest possible option. The worry is that it has been opened up as part of this bill, a few changes will go through and everyone in the world gets busy and it sits for years and years with some obvious flaws that need to be addressed. The hope is, even though it is not likely to be fixed in this bill, it soon can be reopened and some of these other areas addressed.
The Chair: Thank you, Mr. Hursh.
Now we will hear Mr. De Pape.
John De Pape, as an individual: Mr. Chair, members of the Senate, good morning and thank you for the opportunity to appear before you today to address the issues around the changes to the Canada Grain Act as they relate to the Canadian Grain Commission.
Let me start by saying that I am not affiliated with any specific stakeholders in the grain industry. As an independent market and risk management specialist, I work with both farmers and agri-business and have provided analysis and input to industry on various grain marketing topics, specifically as they relate to risk management, competition and market efficiency.
My opening comments are aimed at two issues, although I am happy to address others later: the importance of market information and the equitable application of Canadian Grain Commission user fees.
Undoubtedly the biggest single event in the grain industry in the last few decades is the end of the single desk of the Wheat Board, not only because of what it means to farmers' abilities to freely market their wheat but because of the impact the Wheat Board had on the structure and makeup of the industry. Specifically, the current complement of grain handling firms in Western Canada and their relative sizes is a product of the Wheat Board era.
Trying to compete with the major firms that control over 80 to 90 per cent of our export capacity, many small firms, such as ITAC members, relied heavily on the Wheat Board as a business partner that providing financing, marketing and even countervailing power, keeping them in the game among the giants, but now that has all changed with the changes to the Wheat Board.
I do not think it was anyone's idea to replace the Wheat Board monopoly with an oligopoly of a few dominant private firms. We need to provide a level playing field to the extent that we can so that the competition can flourish, providing farmers with choices among grain buyers and to keep costs down.
Information plays a critical role in ensuring that level playing field within Canada and ensuring our global competitiveness, and the Grain Commission plays an important role in providing critical information, specifically grain handling statistics, used by just about everyone in the grain business: farmers; grain handlers; railroads; market analysts like myself, both private and government; futures traders, brokers; even the federally appointed grain monitor, Quorum Corporation. This information is available free of charge yet contributes to the overall cost of the Grain Commission. It is my sincere hope that the Grain Commission does not consider the provision of this critical information as excess baggage that cannot fund itself. In my view, this information should be considered as a public good and provided for accordingly. I mention this because a number of years ago they did look at stopping the provision of this data altogether because it was such a cost burden.
In fact, the Grain Commission's role in market information could be expanded. For example, I believe that Canada needs to adopt a strategy of publishing a weekly report summarizing all export sales commitments as they are made, as they do in other countries, most notably the U.S. This is vital information that would benefit the whole industry, particularly the smaller players.
Now some comments about user fees. When costs are added to the value chain, farmers pay for it. We heard the discussion earlier today that costs are passed on whenever possible. However, in this case, it is not quite that simple.
Let me go through some math. Considering we export over 60 per cent of our total grain production in Western Canada, the net price at the farm gate from those offshore markets plays a substantial role in determining the local market price for each crop, the whole crop. If the offshore price, net to the farmer, is pushed lower due to higher costs, such as these user fees, the price the local buyer will pay will also be lower. Arguably, the value of the whole crop is pressured down due to the cost increases to servicing that offshore market.
Using the Grain Commission's own estimates, if $54.3 million — that is the total user fee they are talking about — is added to the cost of handling 23.3 million tonnes of exports, again their number, the farm gate price of export grains would be pressured lower by about $2.33 a tonne. For ease of reference, we will call it $2 a tonne. This will lead the domestic buyers to lower their price as well, meaning the price of the whole Western Canadian crop of, say, 45 million tonnes will feel the impact. This indicates a reduction in farm revenues of about $105 million. That $54.3 million would go to pay the user fees and just over $50 million would be considered a transfer of wealth from farmers to domestic crushers, domestic millers, even U.S. traders, and so on. $54.3 million in user fees will end up costing farmers almost double that.
We can argue the actual numbers, but what is indisputable, I think, is the direction and breadth of the impact. It is very much like the Crow rate. When we got rid of the Crow rate, we increased freight rates and the whole value of the crop dropped.
Assuming this transfer of wealth is not part of the plan, other options need to be considered. If it is felt that the services provided by the Grain Commission are mandatory, seen as a required component of the "Canadian brand," then it follows the whole agriculture economy benefits and therefore should be considered a public good paid for by the taxpayer, much like the Canadian Food Inspection Agency.
If it is felt that the industry should pay for this service, which means that farmers will pay for it ultimately, I think the most equitable approach is to charge all farmers on a per tonne basis, perhaps through a check-off arrangement as opposed to just at the export. Deducting, say, $1.20 per tonne on all deliveries of all major crops would come close to generating the revenues. I am not advocating this. I am just throwing out options. If you did it this way, the net cost to farmers would be roughly half of what the effect would be otherwise. If the services are considered to be optional, then those that benefit from the service could pay for it directly as required without having a material impact on the market prices generally, therefore avoiding excess cost transferred to the farmers.
I appreciate the opportunity to share these thoughts and am happy to answer any other questions.
The Chair: Thank you very much, Mr. De Pape.
Now we will ask Mr. Nielsen to make his presentation, followed by questions.
Jeff Nielsen, as an individual: Thank you, senators, for asking me to speak on my thoughts as a grain and oilseed producer on the proposed changes to the Canadian Grain Commission.
As a producer, I work as hard as I can within the means of Mother Nature to produce the best and safest crop. The CGC over the past 100 years has proven to our customers worldwide that Canada has and will continue to have some of the best grains, pulses and oilseeds around. Yet, as with farming, changes happen, and it is time to bring the CGC up to date with what farmers want, our grain elevator terminal system wants and ultimately what our customers who are buying our grains want.
On August 1 of this year, wheat and barley producers in Western Canada finally got the freedom to market those crops just like any other wheat and barley producer in the rest of Canada. That in itself was a giant leap forward. The modernization of the CGC is much needed as well.
I have some thoughts on changing the inward weighing inspections. Currently, there are several third-party service providers available that have the ability to take on these inspections if needed. Being that we live in a competitive market, I feel our grain companies are best suited to choose whomever they want for these inspections if needed. This in itself will save producers and the industry money.
As many have mentioned, and what does concern me as a producer, is the potential for fee increases on outward inspections. With the move to total cost recovery, these fees will no doubt rise substantially. I am very concerned that these costs will not be absorbed by the buyer or shipper and that they will therefore be put back on producers. A strong argument could be made that it is for the good of Canada that the government plays a role in keeping these costs to a minimum.
I will speak now to producer security. As a producer, a guarantee for what I sell to a grain company, broker, malting facility, feedlot or whoever is a must. Current bonding requirements of the CGC do not meet the needs of industry or my farm business. Over the years, we have heard of examples of a grain company or broker that has gone into receivership without a sufficient bond to cover producer sales. This resulted in producers getting pennies on the dollar they were owed.
Credit insurance is an option available and one that is accepted by the CGC. Atradius currently offers this credit insurance. Having heard presentations from this company, I understand that this cost to grain buyers is minimal. Perhaps other third parties will come forward and offer competitive programs of credit insurance. This then goes to protecting producers, reducing costs and freeing up credit and capital for the buyers.
Another possibility is a cash commodity clearing house. Such a model was developed by the Western Barley Growers Association back in 2008. It is called AgClearing. This option was well vetted by industry and producers, and could still be a viable option today.
I believe one of the current gems of the CGC is its Grain Research Lab. As we move to streamline the operations of the CGC, it is important to note that the Government of Canada, on behalf of all Canadians, must continue to increase funding to the Grain Research Lab. This public good gesture goes to benefit all Canadians. The work it provides, for example, is yearly crop monitoring; new varieties and usages; and attributes for milling, oilseed qualities and malt barley aspects. It goes further on the technical side by working on variety, identification, mycotoxins, trace elements and grain biology.
As a producer, this work has an extremely high value, one that goes right back to every Canadian. It is the work done at the CGC grain labs that all Canadians reap the benefits in ensuring the quality of our grains is safe and sound. This must continue to ensure our customers a continued supply of some of the best — if not the best — grains in the world.
I would like to make a quick comment on governance. Like many others, I have the opinion that we need to see the changes to the CGC governance. I realize they are not in the changes proposed in front of us today, but I do wish to raise my concern. My suggestion is moving the CGC to a corporate board structure of governance. Along with farmer representation, this would provide the checks and balances to ensure a more efficient CGC that farmers and industry want.
I thank you for your time today and look forward to your questions.
The Chair: Thank you very much, Mr. Nielsen.
Honourable senators, I would like to remind the committee that I will be asking for an in camera meeting at 9:50 so that we can adopt the report to be tabled in the Senate this afternoon.
Senator Plett: Thank you, gentlemen, for being here. A few of you have been here before and we appreciate you coming back again.
Mr. Nielsen, I promised Mr. Sobkowich and this committee that I would ask you a question when you got here, so you probably know what it is; you have addressed it at least in part. How happy are the farmers about having to pay the entire user fee?
Mr. Nielsen: I was impressed with some of the figures presented this morning on how it would increase. That is substantial to the 5,000-acre farm. Our bottom line as producers is something we are very conscious of. This year, with better grain prices, naturally our suppliers want to bump their prices up. We are always fighting that double-edged sword of getting better grain prices but paying more for our supply. It is a very conscious thought of ours.
Senator Plett: We have heard from previous witnesses — indeed, the panel before you and others — that they are happy with the changes that are being made but concerned that maybe they do not go far enough. Mr. Hursh, you were quite clear on that.
This government has been very clear in wanting to transform the grain industry. That was borne out in the Marketing Freedom Act that we presented a bit ago, and you were certainly supportive of that. There is apparently a grain symposium going on in Ottawa this week with the theme of "dawn of a new era." I think that is a great theme.
Having said that, I think we have shown that we want to move things forward. We made the first step with the marketing freedom. We are making the second step with this.
Mr. Hursh, you are rightfully concerned that government does not always move as fast, and maybe we have done something now and that will not happen.
I would like for you to all share your comments on whether there has not been a clear indication that we want to move forward. I am certainly not committing our government to anything; trust me on that. However, we are moving forward. Our minister has made it clear that he wants to transform the grain industry. It has not been done in a hundred years or whatever.
Would you agree, first, that what we are doing now could not have been done without the Wheat Board Act — without the end of the single-desk marketing — and that there is a very good chance that we will continue to transform the act as we move along?
Mr. Hursh: I am not sure this is hand-in-glove with changes to Canadian Wheat Board marketing. I think many of the changes to the Canadian Grain Commission could have been made under the current Wheat Board system.
That said, the transition to an open market system has worked better than anyone could have anticipated. Grain movement has been good. It is helped by the fact that grain prices are at near-historical highs. The future of a voluntary Canadian Wheat Board is something we can discuss — whether it has a future and whether it will have difficulties.
We are disappointed that the changes to the Canadian Grain Commission do not go the full distance to modernization, as described.
The other piece in the puzzle is grain transportation. I am sure that will probably come before this Standing Senate Committee on Agriculture and Forestry as well. Not only grain shippers but shippers across this country are awaiting legislative changes so there can be the opportunity for service level agreements and a levelling of the playing field with the major railways. The hope was that legislation might be introduced this fall. Maybe it will have to wait until next spring. That is a critical piece in the entire modernization of the grain industry. All three are important.
Mr. De Pape: I mentioned in my earlier comments my thoughts on the Wheat Board and the end of the single desk. I compare it to pulling a tree out, roots and all; it is that large a change. The government did the heavy lifting and they pulled the tree out by the roots. However, we have left a hole. If we want to level the playing field, we need some landscaping.
The government should not get too concerned with deregulation. Regulations are like cholesterol; there are good and bad regulations. If you want to look at a deregulated market as your icon of performance, I would say let us look at something different. Look at the futures market, which is one of the most highly-regulated markets in place. It has very strict rules, is tightly regulated and is very efficient. We should not be afraid of regulations.
I have mentioned to the minister that the industry is asking for structure. That is all. When I mentioned the mandatory export sales reporting, we have not had that in a very long time. It came out of the "Great Grain Robbery" of 1972. The Russians came in and bought everything available in the U.S. and it created a bit of chaos in the market. Since then, when you make a sale, you have to report it; it is made public. It is just good information. That is a regulation. It would have to be mandatory. I think it would be good structure.
Let us talk about the Grain Commission issues about outward inspection. To make it optional would be very consistent with making the Wheat Board optional. I am big on competition and the effects of competition.
Let me give you an example. Let us take the $1.60 the Grain Commission is talking about to load a vessel. A typical rate would be 2,000 tonnes an hour. At $1.60, that is $3,200 an hour. For an eight-hour shift, that is close to $30,000 for two men, generating $30,000 a day. There are other costs because the competition can do it cheaper. When you look at it, you ask what we are paying for. If you look at the Grain Commission submissions, they are paying for other things like the grain research lab. If they are paying for something that they are not getting direct benefit for, someone else is. It sounds like the public good to me. If we really want to move the industry forward and we want efficiencies, it should be made optional and have the competition drive those costs out.
Senator Plett: Mr. Nielsen, do you any comment?
Mr. Nielsen: I agree with both Mr. De Pape and Mr. Hursh, and we must proceed on some of the more significant changes going forward.
As far as the changes with the Wheat Board, those were long overdue. We have had this issue on changes to the Grain Commission before the Senate and the house in the past. It is finally getting to the point where we are getting something done now. It may not be as far as we want, but it is getting done. It has been presented in two bills in the past and several reports have been commissioned on changes to the Grain Commission over the past five to seven years; it is time that we get this step done.
Senator Plett: Mr. De Pape, my wife and my doctor thank you for reminding me about my cholesterol level.
I have one final question and then I will wait for the second round. We have heard much about the bonding, the insurance and the savings and so on. I would like to have a comment from a farmer's perspective.
In a default, how often did a farmer get a 100 per cent payout with the bonding system aside from the cost of it, which I think has been explained? Insurance will always be cheaper. I am a business person. I have had to supply bonding over the years and it is a costly thing.
Mr. Nielsen: I would say rarely. Mr. Phillips made the comment this morning that the bonds are usually in place at the wrong time of the month of when that company sent in what it had on stocks. When the company went into default position, it probably had more stocks on it and less cash in the bank. That is where you never saw 100 per cent payback, and 10 cents on the dollar back to the producer. I deal with private grain brokers as I am a feed grain producer and I am conscious of watching what I do.
Recently in Lethbridge we had a small grain broker that went into receivership and there are still producers to be paid out on that issue. It is a high concern. Without an insurance base where I know I could get a strong 95 per cent if not higher, I would be quite happy.
Mr. De Pape: The issue about the bonding is a bit of an anachronism. It does not cover all the risks out there. The Grain Commission bond covers transactions between grain dealers and farmers. It is only on transactions that have been executed. A lot of grain, though, is sold on what is called a forward contract.
For instance, say Mr. Hursh sells his wheat at $9 a bushel, which is a good price, but it is for delivery in March. At some point before March that company goes broke, he no longer has a contract, and now the price is $7 or $8. Has he lost any money? You might say it is just a paper loss, but it is a true loss. He may have made other decisions based on that. The bond does not cover that nor does it cover transactions between companies. There are more of those company-to-company transactions going on. If one company goes under, the other one suffers and the farmers eventually suffer as well. It should be revisited. Insurance goes part way and the clearing house concept that Mr. Nielsen mentioned would go to manage most of this.
Senator Plett: That is very important. That has not been mentioned before. Thank you very much.
Senator Callbeck: Mr. Nielsen, you talk about the potential for increased fees for outward inspections. You feel that if this happens the people who will be affected are the producers, not the shipper or buyers. Can you comment on why you think it is the producers that will suffer the bottom line?
Mr. Nielsen: I think it is just the way our system has been over the last 100 years. To our customers, through the CGC, we have always provided these inspection services. As a producer, I have never seen the true value back from the buyers to me for those services. Perhaps there is leverage we can use to the CGC, being that it is high reputation and just in select markets that are available to pay for that. I would like to see cost recovery from the buyer side. If they want specifications that I know I can produce — and that the CGC will ensure they get — my personal belief is that they should pay for it. However, in the current way it is set up it will be pushed back to us all as producers.
Senator Callbeck: Any other comments on that?
Mr. De Pape: I was surprised this morning that the Western Grain Elevator Association did not answer the similar question this way. Many of their members have said weighing inspection is a line item on the cash ticket; the cash ticket or the cheque. They will itemize those costs that they can identify clearly like that and put it right on the cash ticket as a deduction. Absolutely, farmers will pay for it.
Mr. Hursh: I would agree. The international market tends to be highly competitive. The price is set and all the costs are deducted back down and taken off to the producers. Even if the producer was not seeing it deducted from the cheque, the producer would ultimately be paying the vast majority, if not all of it.
Senator Callbeck: You said the work done by the CGC is really for the common good and you feel that the government should be funding that part of the work. Would you agree that it is around 20 to 25 per cent, the total budget?
Mr. Hursh: I have seen come calculations done that would suggest that would be a more reasonable mix, yes; $5 million up to $15 or $20 million as public good. I have seen that suggestion, if you take things like food safety and grain research as public good.
Mr. Nielsen: My information shows currently there is an evergreen fund for $5.4 million that goes to CGC. I think it should be increased. It benefits all Canadians by the fact that it is our name going out there on those grains and it is our reputation.
Senator Callbeck: We have heard this from other witnesses.
Senator Eaton: To follow up on Senator Callbeck's questions and the way the Wheat Board was de-monopolized, could you do the same thing to the CGC? If you were going to do future legislation, could you divide it in two? In other words you have the part of the CGC which is the public good — which would be part of the ministry and paid for by the Government of Canada — and things like outward certification, things they did on the ground that could be opened up to market forces. Would that be a way of doing it that would make it fairer for the farmers?
Mr. De Pape: Yes.
Mr. Nielsen: I think that is a good idea that needs to be looked into, yes.
Senator Eaton: Thank you.
Senator Buth: Most of my questions have been answered, but Mr. De Pape, I am interested in your presentation where you walk through what the costs would be to the industry overall. Can you walk through that process of thinking again and explain what you believe would happen if the costs are added to the export side of the business?
Mr. De Pape: Sure. Perhaps an analogy would help. A number of years ago we looked at the Crow rate. The Crow freight rate was a statutory rate that was $8 a tonne pretty well from anywhere in Western Canada to Vancouver. It was not sustainable, so it was changed. We now have commercial rates which are more like $45.
At the time, the big argument was that if you increase those freight rates from $8 to $40, then that would lower the price of grain, and not just grain going in those rail cars for export but all grain. The reason for that is a thing called arbitrage. If your export price is $9 a bushel, that is what you are getting. The local buyer who is processing right there will not pay any more than $9 a bushel. If your price goes down to $8 a bushel, his bid will also go down to $8 a bushel. The tide floats all boats the same.
When I looked at this, I just looked at the raw numbers of $54 million over 23 million tonnes. It is not just over 23 million tonnes. Really, it is over 45 million, because we export about half. It is really about double. Farmers who are selling to Cargill and are not selling into that export market at all will feel the effect. Their prices will be lower because markets work and incentives work. The local buyer will not pay more simply because he can. He will pay what is competitive. Basically, it is a competitive thing.
Senator Buth: Thank you. That is very helpful.
Senator Plett: Mr. Hursh, or any one of you, I would like you to talk a bit about either the efficiencies or the inefficiencies of the mandatory inward inspection. There have been some comments made about people doing voluntary inspections. Do you see that producers would use voluntary inward inspection in the future?
Mr. Hursh: I cannot really see a use for it. I am not proficient on how producer cars function in this environment where inspection takes place there, because in those cases producers would own the grain until it reaches export position, I presume.
In the case of how producers are affected, after they have dropped it off in the elevator, whether it is a Viterra or a Richardson or Weyburn Inland Terminal or North West Terminal, they no longer own it. They have negotiated the grade and dockage, and they are paid and the terminal that bought it owns it. If that terminal is North West Terminal, and let us say in this case they are not sending it to their own grain export terminal, maybe there is a reason they would want to pay for inward inspection when it gets there; but, if it is Richardson or North West Terminal sending to Alliance Grain and they own a piece of that grain terminal, why do you need to inspect what you have already sent? It is a system designed for a different time and a different system, and that cost is still a drag.
Senator Plett: Mr. De Pape, do you have any comments?
Mr. De Pape: He covered them.
Senator Plett: Thank you very much.
The Chair: With that, witnesses, thank you for sharing your comments and experience with us. This has certainly been informative.
Honourable senators, I will now ask to take a short break so that we can move in camera.
(The committee continued in camera.)