Standing Senate Committee on Agriculture and Forestry

Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 28 - Evidence - Meeting of May 12, 2015

OTTAWA, Tuesday, May 12, 2015

The Standing Senate Committee on Agriculture and Forestry met this day at 5:19 p.m. to study international market access priorities for the Canadian Agricultural and Agri-Food sector.

Senator Claudette Tardif (Deputy Chair) in the chair.


The Deputy Chair: I welcome you to this meeting of the Standing Senate Committee on Agriculture and Forestry. I am Senator Claudette Tardif, from Alberta, deputy chair of the committee. I would like to start by asking the senators to introduce themselves, starting on my left.


Senator Moore: I'm Wilfred Moore, a senator from Nova Scotia.


Senator Maltais: Ghislain Maltais from Quebec.

Senator Dagenais: Jean-Guy Dagenais from Quebec.


Senator Ogilvie: Kelvin Ogilvie from Nova Scotia.

The Deputy Chair: For our first witnesses we welcome, from the Canadian Bankers Association, Alex Ciappara, Director, Economic Analysis, Canadian Bankers Association; Gwen Paddock, National Director, Agriculture and Resources Industries, Royal Bank of Canada; Peter Brown, Director, Agriculture, Scotiabank; Craig Bremner, Vice-president, Agriculture Services, TD Canada Trust; Darryl Worsley, National Director, Agriculture, CIBC; and Chris Costain, Vice-President, Commercial Agriculture, BMO Commercial Banking.

What an impressive group. Thank you for accepting our invitation to appear here this evening. I understand that Mr. Ciappara will be making the presentation. After your presentation, we will have questions from the senators. Please proceed.

Alex Ciappara, Director, Economic Analysis, Canadian Bankers Association: Thank you very much for the opportunity to be here today to provide the banking industry's input into the committee's study of international market access priorities for the Canadian agricultural and agri-food sector.

The Canadian Bankers Association represents 60 domestic banks, foreign bank subsidiaries and foreign bank branches operating in Canada and their 280,000 employees. With me today are representatives from Canada's five largest banks, who bring a variety of agricultural expertise with their own distinctive ties to the farming community.

I would like to briefly highlight the significant role and long history of the banking industry in Canadian agriculture.

Banks understand the importance of supporting the sector and work hard to establish and maintain strong business relationships with their clients throughout the agricultural value chain. Banks help farmers during every phase of their development, from young farmers at the beginning of their careers to farmers who wish to expand domestically and internationally, and those who are thinking about retirement and are in need of succession planning. This support extends beyond the farm gate to include other elements of the integrated agricultural value chain, such as food and beverage processors, input and service suppliers, and wholesalers.

At every stage, banks play an important role in assisting agricultural clients to adapt and change as markets grow, both in Canada and abroad.

The federal government has made international trade and investment a priority. Banks provide international trade-specific products and services as well as guidance and advice to agricultural clients so that they can take advantage of the opportunities that emerge in international markets. Banks offer customized global banking and cash management solutions, such as foreign currency accounts and exchange services. Banks also provide a host of exporting and importing products and services, including letters of credit, to minimize the risk of nonpayment and non-delivery of goods, which are some of the primary risks that the agricultural sector is exposed to when trading internationally.

Banks also have a strong working relationship with EDC, Export Development Canada, to leverage their products and services to help clients succeed internationally.

Of course, access to credit is an important element in supporting farmers. Banks compete with each other to provide almost $28 billion in financing to farms across Canada through operating, term and mortgage loans. This accounts for about 36 per cent of the total agricultural lending market. This is in addition to the everyday products and services that agricultural clients have come to expect from banks, such as deposit and operating accounts, insurance, investments and financial advice.

For farmers, banks also work with the government to provide programs such as the AgriInvest Account, the Canadian Agricultural Loans Act program and the Advance Payments Program, all government programs.

Our bankers understand that the agricultural sector, more than others in the economy, endures fluctuations in business conditions. The banking industry has a tremendous amount of experience helping clients through various challenges, from floods and droughts to BSE and avian influenza. When farmers experienced difficulties in moving grain through the transportation system last year, banks proactively reached out to producers to understand individual farmer needs and, when necessary, assisted farmers with financing solutions such as advice around increasing operating lines of credit and accessing the federal government's Advance Payments Program.

Banks work with farmers on a case-by-case basis, assessing individual needs such as their cash flow requirements and capacity, business prospects and expansion plans to develop appropriate next steps.

In closing, I want to emphasize the importance of the agricultural and agri-food sector to the banking industry and our commitment to continue to strengthen relationships with farmers and other agricultural value chain clients in order to help them take advantage of opportunities both domestically and abroad.

Thank you once again for your invitation to be here today. We would be pleased to answer your questions.

The Deputy Chair: We will begin the questions with Senator Maltais.


Senator Maltais: Your conclusion is a bit funny, because without agriculture, there would not be any sales. You would not eat, which explains your interest for agriculture. That is important.

Based on what you have said, there are two factors at work in the agricultural world. There is farming itself — modernization, equipment, expansion — made possible by farm credit loans. The other factor is encouraging international trade. That is what all the banks in democratic countries like Europe, Korea and the United States for example, are doing.

How will you work with the agricultural wholesalers and buyers to export products? Do Canadian banks have competitive rates, letters of credit and credit lines for exporters, compared to banks in Europe or the United States?


Mr. Ciappara: Thank you very much for that question. I will take it first and let my members jump in.

We are very competitive. As you know, during the financial crisis, Canadian banks came through with flying colours. Canadian banks are ranked number one in the world as the most sound banking system. That foundation enabled Canadian banks to perform not just through the financial crisis but after the financial crisis. It is that solid base that enabled them to help their clients through the financial crisis and afterwards.

Yes, I would say we are very competitive when it comes to comparisons with our international peers.

I will turn it over to my members to maybe elaborate on that answer.

Peter Brown, Director, Agriculture, Scotiabank, Canadian Bankers Association: It is a very competitive market out there, both here domestically and around the world. Scotiabank, as you know, is quite an international bank. We have operations in about 55 countries. We have a large international department and other departments that deal with letters of credit, foreign exchange, trade finance, all of the issues around that, and we are not by far the only provider of those in the marketplace. We have to be competitive to continue to exist and provide those services for our clients.


Senator Maltais: Since we are talking about it, Scotiabank is the only Canadian bank in Cuba, is that not right?


Mr. Brown: I don't think our presence in Cuba is one where we are providing a lot of services. We may have some connections there, but I am not sure that we have a lot of operations there; we do in a lot of the other Caribbean and Latin American countries.


Senator Maltais: You spoke of the financial crisis earlier. Are the banks today in a position to guarantee that, given another recession like the one in 2007-08, the Canadian government would not be compelled to do what the American government did through the Farm Act? I am sure you are aware of that American statute under which the government was forced to quickly intervene, because the great majority of small and medium-sized farms were headed straight for bankruptcy.


Mr. Ciappara: The Canadian banks did perform throughout the financial crisis. They were able to lend and support their clients throughout the crisis. We were able to do that because they are run well. We provide loans on a case-by-case basis. We look at every case individually and weigh the risks and the benefits when it comes to making those loans.

I think Canadian banks would be well placed to support the farms throughout another crisis because of the way they are run, particularly with the way they are supervised and regulated.


Senator Maltais: I have got one last question, Madam Deputy Chair. Given the free trade agreements that have been signed and are nearing implementation — not to mention the ones that are still being negotiated — Canadian businesses will increasingly be facing stiff foreign competition. Agriculture's valued-added products come from secondary, tertiary and even quaternary processing.

Will you support Canadian businesses that are diversifying by doing all that other processing? That is where you will find Canada's best paying jobs. Should you support entrepreneurs in the field, I think you would be doing a great service not only to farmers, but also to Canadians in general. Is that a path you might well take?


Mr. Ciappara: Not only would we support it, but we already do it. We already provide financing, business services and products not just to food producers but to processors as well. Yes, we fully support that.


Senator Maltais: Canada is under increasing pressure to produce more. We are 35 million people spread across a huge land, and there are countries out there that are starving. Canada is being pressured to make its farmland more productive and profitable. That means more products to process, and those processed products require capital.

I will be the first to agree should you tell me you will be supporting those businesses. You will play a major role, not so much now, but rather in the 10 to 15 years ahead.


Senator Moore: Thank you, witnesses, for being here.

Mr. Ciappara, at the bottom of the first page of your comments you say the banks compete with each other to provide almost $28 billion in financing to farms across Canada. Is that an annual sum?

Mr. Ciappara: No, that is outstanding.

Senator Moore: What is the history? Is that up or down?

Mr. Ciappara: It has been growing for quite some time, actually.

Senator Moore: Can you give us a few numbers and recent dates?

Mr. Ciappara: Over the last year, in 2013 to 2014, I believe it grew about 8 per cent or 9 per cent; this is the bank lending figure. The last I checked, over the last 20 years, it has gone up practically every year. It has climbed quite steadily. You must remember, too, that 36 per cent is split between the banks at this table as well as others.

Senator Moore: I was going to ask you about that, so thank you for answering that one.

What is the other 64 per cent? You say the $28 billion accounts for 36 per cent of the agricultural financing market, so what happens to the other 64? What is that made up of?

Mr. Ciappara: Yes, that is Farm Credit Canada; they have about a third of the market. Credit unions and caisses populaires are about 16 per cent of the market, and then finance companies and insurance companies and advance payments.

Senator Moore: Further to Senator Maltais' question — and we have had some evidence about the processing side of the agricultural industry and the importance of it — is there a number there that you can advise the committee that the banks finance in the course of a year in terms of the processing side of the industry?

Mr. Ciappara: I haven't seen any figures publicly in terms of the processing side of the industry. Some of that is captured in those numbers and some would be captured in other parts of the portfolio. No, I have not seen those numbers with respect to the processing side, but I can tell you that any processor that comes in with a good, solid business plan that is rigorous will be able to get financing. It is a very competitive industry right now.

Senator Moore: Thank you.


Senator Dagenais: I would like to thank the witnesses for being here. Mr. Worsley, I am happy to see you, because back in the day, I worked for the Canadian Imperial Bank of Commerce. I had taken a course to become branch manager. You see, banking leads to everything, even to the Senate. And that is it for my little commercial break. I spent a few years at the CIBC in Montreal. I was assigned to foreign currencies in the branch downtown. We were tasked with paying for the grain arriving by boat. This goes back awhile.

To encourage competition in the sector, farmers obviously need the support of our financial institutions. When you grant loans to exporters, among others, do you have particular criteria to respect? I would like to know more about the criteria you apply to Canadian exporters, among others. My question is for all of you.


Gwen Paddock, National Director, Agriculture and Resources Industries, Royal Bank of Canada, Canadian Bankers Association: In order to grant a loan to an exporter, we would have similar criteria to what we would have for any of our clients, and that is first and foremost a sound business plan, and then we look at the working capital they have, the leverage in the balance sheet and their ability to service debt. If you layer onto an exporter, then it's having confidence that when they're exporting to other countries, they understand the risks and have the appropriate risk mitigation factors in place.


Senator Dagenais: Do any of the other witnesses have something to add about the criteria?


Darryl Worsley, National Director, Agriculture, CIBC, Canadian Bankers Association: Senator, we also rely on partners like EDC. We look at the factors that Ms. Paddock just mentioned but also work with partners such as EDC to assist with managing some of the risks of going into international markets as well.

Senator Enverga: Thank you. Like the senator beside me, I used to work for the bank, for 30 years, the Bank of Montreal and CIBC. It's nice meeting bankers once in a while.

A while ago it was mentioned that you have been working with EDC, Export Development Canada, and somehow way back then there was some concern that EDC was duplicating the services of a bank. Can you comment on that? Is that duplication still happening now?

Mr. Ciappara: I can say that the CBA meets with EDC regularly, and I know our members work with EDC very regularly, and we don't hear any concerns about EDC duplicating what the banks are doing. In fact, they are very complementary in terms of the way they operate, the way they do their business. It's part of their mandate. It's written in their mandate that they are complementary to the banks. And I think on the ground, practically speaking, you are seeing that complementarity at work through financing, insurance programs and guarantee programs. There are a number of ways they provide complementarity to us.

I remember seeing a figure in one of EDC's annual reports that something like 93 or 94 per cent of their financing transactions are with a private sector financing company.

Ms. Paddock: To add on to what Mr. Ciappara has commented on, we see EDC very much as a partner. In recent months, they have actually reached out to us and asked how they can specifically help support agriculture exports, so I know it's very much on their radar as well.

Craig Bremner, Vice-President, Agriculture Services, TD Canada Trust, Canadian Bankers Association: From a TD Bank perspective, I would add that we see EDC as a valuable partner, certainly one that is instrumental in increasing exports from Canada. We particularly value their export insurance program, and as a bank, we intend to do more business with EDC to be able to support the export business of Canadian farmers.

Mr. Brown: I just wanted to add that at Scotiabank we have a group called our Global Transaction Banking group, and they have in fact set up what they're calling an EDC centre of excellence. It allows them to speak to our clients more about the products and services that EDC provides, so it really does indicate a partnership that we have with them.

Senator Enverga: That's great to hear. It looks like you are working well with EDC. However, are there any challenges? If you wanted to improve the relationship, what could you do so that we can enhance our agricultural exports? Are there any enhancements that you would recommend?

Mr. Brown: On the EDC front, I don't see any issues or problems. I think it's working very well, and they are a great partner.

I think that our clients wanting to do business internationally need other things. I've said this many times, practical and somewhat simple things, on-the-ground assistance, making the right contacts in the country they are trying to do business with, making sure they understand the regulatory environment they're getting into and having safe contacts there that they can trust. We have a number of examples where we've worked with our clients to help them get that. I'll just mention one.

We have, for instance, a client that's into greenhouse equipment. They've done very well in Canada, and they've sold into Mexico before but only sporadically. They came to us saying they wanted to set up a sales network there and hire a sales manager that could hire five or six others and put a network across, but they were having difficulty finding someone they could trust and someone who understands the different regulatory environments within the different states. We were able to help that client do that. These are very practical things.

Mr. Bremner: I would add that being an exporter, whether in agriculture or in any business, is difficult. You have to have very good contacts in those export markets to be able to find customers that value what you're selling.

We have just taken on a new customer that we are thrilled to be able to support. It's a unique business. They are importing organic feed crops from numerous countries, and they're actually bringing that to Canada, processing it in Canada and exporting it to the U.S. market. It's a fascinating little business we have taken on.


Senator Maltais: If it reassures you any, I never worked in the banking sector. I did however ensure many of your receivables. The premiums were paid on time, by the way; you were very good that way.

If there is a sector that is worse off than farming in Canada, it is what we call the soft sector, in other words, fishing. As you know, fishermen depend on the weather, the time of year, the Greenpeace folks — in short, a whole bunch of uncontrollable factors. And yet, it is an exceptional business. Think of the crab fishermen who sell 80 per cent of their catch to Japan for a premium price, or the lobster guys who sell to the States and Europe, also at a premium. That being said, it is an at-risk sector.

Do you apply the same criteria to a fisherman who buys a $250,000 or $300,000 boat and a young farmer who wants to buy a small, million-dollar farm?


Mr. Ciappara: Thank you very much for the question. I did not bring the fisheries bankers with me, but I can tell you that banks do lend to the fisheries industry. They provide financing to harvesters, processors and other businesses attached to the fisheries sector, for vessel and capital purchases, construction, refits, licences and quota acquisitions. Canadian banks do finance the fisheries sector.

Financing for the fisheries sector has been growing. It increased 11 per cent over the last five years. That's authorized loans, and the outstanding loans have increased by 21 per cent over the last five years. It's a growing area for the banking industry.

Frankly, banks making decisions on fisheries' loan proposals would be making very much the same decisions, going through very much the same decision process as they would with an agricultural producer. The business experience, how much business experience they have, equity, their cash flow, the nature of the clients — they would take all these variables into consideration to make that determination, but Canadian banks do lend to the fisheries sector.


Senator Maltais: I will give you a concrete example. South Korea has just opened its markets, worth some $10 million, to Canadian seal meat. Someone finally figured out that seal was delicious. This affects the Magdalen Islands, Newfoundland and Labrador, and northern Quebec. Seal is an inexhaustible resource. Seal populations are 25 times bigger than we need them to be, and they represent a threat to other species.

If, for example, other countries open their markets to seal, would you be ready to join the adventure of processing seal, which we have in abundance? Canada has just made available some $1.6 million to the seal hunters' association so that they can market the product across the globe. The Canadian government just made the announcement last Friday. Would this sector interest you, given the value added and the fact that processing is done right here in Canada? It's no Klondike, I agree, but it's a start. Would this type of business or new enterprise interest you?

Be careful what you answer, because I suggested that the hunters listen to our meeting.


Mr. Ciappara: I did quote the figure of $913 million in financing that has been authorized by the banks for the fisheries sector, and I'm positive that processing is somewhere included in there. They'll make a decision when a processor, like any other business, comes to a bank with a solid business proposal that takes into account all the variables that can affect its business. The bank will sit down and take a serious look at that business proposal and be in a position to finance it if that business plan is robust.


Senator Maltais: I'd like to finish by congratulating Canadian banks, because they helped the Canadian population weather the global crisis. We avoided the approach taken by the American and European systems. Canadians fared well, and banks were one of the reasons for that. It is normal that they make more money in the prosperous years. We do not see this reflected in our RRSPs, however.

I believe Canadian banks will have an even more important role to play, now that markets have gone global. I say global, not merely international. Trust me — people are knocking on Canada's doors. There is business to be done, money to be made. I hope you will be joining in. I'm convinced you will. You're in the business of doing business, not fishing for compliments, and I congratulate you for it.

Senator Dagenais: I'd like to get back to financing. You know that the Canadian government grants financial aid to farmers. Is that aid a form of competition for banks, or does it play more of a complementary role?


Mr. Ciappara: In terms of financial support, there are a number of ways that the government provides it to the farmers. We have the Canadian Agricultural Loans Act Program, which we see as complementing what the banks do. It's a loan guarantee program for young farmers. There is the Advance Payments Program, which is part of the package of programs that our members provide to farmers. There is also the AgriInvest Account program, which is delivered through banks. It's a matching government contribution program. A farmer would go into a bank, put their money into the account, and there would be a matching contribution from the bank. We see that as being very complementary.

There is a financial institution, Farm Credit Canada, which we don't see acting in a very complementary manner. It really depends on the program or the institution you're talking about.

Senator Enverga: I know there are a lot of great banks. The big banks are the best in the world so far.

Mr. Ciappara: We hope it continues that way.

Senator Enverga: However, there is global competition. How competitive are our banks as compared to other banks around the world, especially with servicing our agricultural exporters or servicing our free trade agreements? How competitive are we?

Mr. Ciappara: There are a number of metrics. One of the primary things you need to support exporters, agricultural or any other, is a banking system that can lend during good times and bad. You saw during the financial crisis that Canadian banks do not require one cent of capital injection from the government, whereas other banks in other countries required billions of dollars of capital injection.

The fact that we didn't need that government assistance of capital injection meant that banks were always able to lend to exporters and other businesses.

Regarding competition and bringing it back to the level of competition, you simply have to look at the world rankings and see where Canadian banks stand in terms of safeness and soundness of the banking system. That soundness means Canadian banks will be there through good times and bad.

Chris Costain, Vice-President, Commercial Agriculture, BMO Commercial Banking, Canadian Bankers Association: The Canadian banks are defending their market share and are standing up against competition from outside interests in this economy as well.

Ms. Paddock: Just a final comment on that. When we think about Canadian banks being competitive, when we think about competitive as to providing financial products and services to agriculture, what we do often in our institution is benchmark ourselves to some of the best-in-class world providers, or providers of banking to agriculture throughout the world. Quite often we find that we are on par as far as the menu of products and services we offer our clients goes, so I would say we're very competitive.

Mr. Bremner: You have to keep in mind that banks have an obligation and duty to protect their depositors' funds. As Alex mentioned, during the financial crisis we not only did that but we also were able to increase our lending capability through that and supported not only farmers but all Canadians.

Mr. Ciappara: To build on that point, we looked at lending to small and medium-sized enterprises, SMEs, not only in Canada but in the U.S. and the U.K. as well. In the U.S. and the U.K., two jurisdictions that suffered probably the most during the financial crisis, their lending to SMEs actually went down.

Lending to SMEs by Canadian banks increased during the financial crisis. That is an example of how a solid banking system is able to support the businesses and the economic activity of the country.

Senator Enverga: I know a lot of our witnesses from the agricultural industry have complained about the lack of workers. Some of them want temporary foreign workers.

How do the banks stand? Do you need temporary workers, or are you fine with all the staff that you have now?

Mr. Ciappara: In terms of our clients?

Senator Enverga: Labour. Are you well covered? Do you need workers, too, just like our agricultural counterparts, temporary foreign workers?

Mr. Ciappara: I think the labour market for workers is very competitive, frankly. We are always looking for highly skilled workers. We are competing not just amongst each other but against the high-tech companies, other manufacturers and knowledge-based industries. It is a competitive marketplace for employees and for workers.

Mr. Bremner: The University of Guelph did a study a few years ago where they said that for every graduating student in their agriculture program, there were three jobs. We all hire people from that university, and other players in the agricultural sector hire people from there. There is a real demand for those young people graduating from schools like the University of Guelph and McGill and other places like that. They get good jobs, and they join the banks and other agricultural-oriented companies.

Senator Tkachuk: You talked a little bit about Export Development Canada. Is Farm Credit Canada seen as a partner or as a competitor?

Mr. Ciappara: FCC is a unique institution in that, if you compare them to, say, EDC and BDC, there is no complementary mandate in their mandate. They are to compete. There are areas of the country where banks do work with FCC, but, in terms of the overall mandate, it is not a complementary mandate.

Senator Tkachuk: So they are seen as a competitor?

Mr. Ciappara: Yes.

Senator Tkachuk: Do they have the same regulatory framework? I kind of know the answer to the question, but I want you to talk about it. What are some of the issues that arise because of that?

Mr. Ciappara: They don't have the same regulatory framework. They do not have an OSFI overseeing them. The Office of the Superintendent of Financial Institutions, OSFI, did go in a couple of years ago to take a look at their books, but it is not as regular. It is not as frequent as the way OSFI comes in and looks at the books of the Canadian banks.

Senator Tkachuk: If it did not exist, do you think that the banks could step into their market, and do you think they should be exposed to the same regulatory framework?

The Deputy Chair: Could you perhaps clarify for our listeners what OSFI means?

Mr. Ciappara: Sorry. OSFI is the Office of the Superintendent of Financial Institutions.

Senator Tkachuk: If they did not exist, do you think the banks could take their market, fill the void, or, if they continue to exist, should they be under OFSI?

Mr. Ciappara: There is a role for FCC. I think there is debate as to what that role is.

When you compare FCC to BDC and EDC, there is no regular mandate review with FCC like you do with BDC and EDC. With BDC and EDC, there is a 10-year mandate review. You don't have that with FCC, so there isn't that opportunity to have those sorts of debates on the questions that you are asking, senator. There isn't that opportunity with FCC.

In terms of banks, banks are willing lenders. We are willing and able lenders, as I have mentioned before. We were able to lend throughout the financial crisis. That is the worst of the worst, and we were able to lend in good times as well. I am sure we would be able to provide more finance to the market if the opportunity was there, but, again, I think there is a wider question there. A mandate review, something like BDC and EDC have, would provide the opportunity to have that sort of discussion.


The Deputy Chair: Senator Maltais, do you have a quick question to ask about the farming sector?

Senator Maltais: Mr. Brown, you spoke of banks being involved in the reforestation of Mexico. In a past life, when I was in another parliament in Quebec City, we drafted a special bill. We debated the issue of reforesting the Toluca desert on the Pacific Coast.

We've ratified a few treaties with countries like South America, and we're currently negotiating others with other countries. Do you have ears to the ground and a sustained presence in these countries, given that we are both exporters and importers?


Mr. Brown: We are certainly open for business, and we are there. We are in many of the Latin American countries. In Mexico, we have a large presence, and, as it relates to agriculture, we have an agricultural director there, with a team that he works with. We are in many of the Central American countries. We have a focus on Mexico, Colombia, Chile and Peru, and we are one of the largest lenders in the Caribbean. In fact, in Jamaica, we are the oldest bank there. We have been there for over 100 years. We are very present. We have a fairly large agricultural book in certain countries in Latin America.

The Deputy Chair: If I may, I'd like to ask a quick question: A number of witnesses have underscored the importance of innovation and research projects in order to help them to create new products and differentiate themselves on the world market. Do you fund these types of technological-innovation projects, and could you perhaps give an example?

Mr. Ciappara: We provide support for them through banking services and banking products if they have a deposit or chequing accounts. We do provide that. It depends where they are in terms of the financing side. It depends where they are in their life cycle. If they are a mature company but looking to put in place an innovative practice or innovative technology, they probably have the cash flow that can support that sort of investment. It really depends on the nature of the innovation and where they are in the life cycle.

Mr. Costain: Farmers are very innovative people. Having had the pleasure of working with them for a number of years, we are challenged constantly by our clients requesting support for projects like that, and we are very pleased to provide financing for any innovations, be it feeding innovations for livestock or certainly processing innovations, particularly in the greenhouse sector, with exports, grading equipment and things like that.

The Deputy Chair: Seeing no further questions, on behalf of the committee, I wish to thank you most sincerely for having accepted our invitation to be here this evening. Thank you to the Canadian Bankers Association and all of its members.


Honourable senators, the committee will now reconvene to hear our next witness. We have the pleasure of having Mr. Bruce Muirhead, Associate Vice-President, External Research, from the University of Waterloo.

Mr. Muirhead, thank you for accepting our invitation to appear. I would now invite you to make your presentation. Senators will then ask you questions.


Bruce Muirhead, Associate Vice-President, External Research, University of Waterloo: Thank you very much for inviting me this evening to have a conversation with you about international market access priorities for Canadian agriculture and agri-food. I note in your order of reference that you are tasked with examining four issues. I will address my brief remarks to the final two of these and less so to the first two, although I will address elements of them as well. I am happy to answer any questions that may be raised on your study focus.

As you may know, and I assume this is why I was invited to appear, I research and write on supply management, mostly dairy and eggs, in a context of competing international systems comparing ours to those found in Australia, the U.K., New Zealand and the U.S. Based on my extensive study of these countries' agricultural regimes in supply-managed sectors, the Canadian way, it seems to me, is the best in all of those sectors. I am trained as a historian, so, unusual in an analysis of Canadian agriculture, my work provides historical context to the growing debate about the sustainability and resilience that is epitomized by supply management. Most of the Canadian literature has been the work of social scientists, often writing to sway opinion, to offer policy options or to critique current events.

Egg and dairy supply management in 2014 is as rational and as necessary as when it was implemented in the early 1970s. Indeed, the case is more solid presently, given the global volatility in agricultural prices and the difficulties farmers outside the supply-managed sectors face in ensuring the sustainability of their operations, despite the best intentions of all the witnesses you had in the previous session. A significant volume of the literature addresses the issue of power asymmetries between the producer and others in the supply chain.

The Deputy Chair: Could I ask you to slow down a bit for our translators.

Mr. Muirhead: I am sorry. Usually I speak in 50-minute sound bites for classes; so I'm trying to cram 50 minutes into 5 minutes. It's hard.

They include processors, supermarkets and myriad people in the middle, symbolized by the people who were here just before me. Supply management effectively deals with the issue of power asymmetries. Farmers talk a lot about this — how they cannot deal with supermarkets or processors one on one.

Simultaneously, global population is increasing, making the safe and secure production of food a pressing necessity for Canadians, the great majority of whom live in urban areas. Egg and dairy supply management, as well as that of the other supply-managed sectors, ensures stable production at reasonable prices to consumers.

As noted, I compare the Canadian industry to its international peers and its impact, potential and actual, in international trade negotiations. Increasingly, Canada is negotiating international agreements where supply management is perceived to be a hindrance to a successful conclusion. To date, Ottawa has successfully resisted those who have demanded its fundamental change in favour of something that reflects so-called free market characteristics. I would say there is no such thing as a free market in agriculture; but that is a whole other conversation, perhaps.

It is important that our government continue to do so. My work speaks to this as well as how completing systems are supported by governments around the world. Every single dairy sector and most egg sectors are supported in some fashion by the public sector, except Australia, which has difficulties unique to Australia, despite a pervasive rhetoric in all international trade negotiations that would suggest otherwise. The genius of the Canadian system lies in part in the fact that its farmers are not subsidized by government, while still providing an essential agricultural commodity at a reasonable price for consumers.

These issues are becoming more important as questions of the benefits of free trade in agriculture are being increasingly replaced by new concerns emerging from recent increases in food prices and food scarcity and as agricultural issues become more pressing in the face of climate change. We see that in the Doha Round, which began in 2001 and probably will never end.

Implicit in my work is the question of the ongoing validity of the international political consensus around the neo-liberalization of agriculture. While the WTO and the OECD assume certain things about desirable future trajectories for global agriculture, both have traditionally weighed in vociferously against supply management. First and foremost is the claim that supply management creates rigidities and works against — in their words — the reasonable allocation of resources as defined by them. Both present any decrease in a country's domestic agricultural support, which should lead to greater dependence on market signals alone — which no country does but that is what they say — as a clear improvement in the sector's economic management.

That is a completely incorrect assumption. The critical interrogation of resilience of industry structures in both historic and current moments of crisis will help to inform the current debate about neo-liberalism and productivism in agriculture as well as the obvious merits of supply management.

In conclusion, our Canadian system hits all the proper markers — food security, food sovereignty, traceability and proper pricing for consumers, with the result of smaller farms with less adverse environmental impact as well. Some elements of the U.S. dairy system are now talking about supply management, although I don't think the U.S. Congress will go for it. Certainly, dairy farmers are interested, in particular now given the huge oversupply of dairy around the world. It would be a shame for us to lose it or to compromise its operation in such a context.

Thank you for inviting me. I look forward to your questions about international trade or agriculture and all the great things that supply management has done, if you agree.

The Deputy Chair: Thank you very much, Mr. Muirhead.


Senator Dagenais will ask the first question.

Senator Dagenais: Thank you, Mr. Muirhead, for your presentation. I want to talk about the trade deal with the European Union. You know that the agreement has been a source of great concern for milk processors, cheese producers among others.

Some Quebec producers that I have met are very nervous. Around 16,000 tonnes of cheese will make its way to Canada. That is an extra 32 per cent of cheese the market has to accommodate. What, in your view, will be the impact of this increase on the Canadian market and on the people who are part of the dairy products supply chain?


Mr. Muirhead: I was a little bit perplexed with the reaction of the Dairy Farmers of Canada, in particular, to the results of the CETA, the Canada-European Union Comprehensive Economic and Trade Agreement, in large part because it seemed like the government was working toward minimizing impact on supply management but having to give up something.

In terms of the additional — it is fine cheese I guess, and then another 2,000 tonnes of some other kinds of cheese that is coming in under the CETA as well. The market is growing. The fine cheese market in Canada is growing dramatically. You have to give something in return for access to the European market. We get beef access. In that context, maybe there is a bit of trade-off, as you know, for beef or cheese. I don't think it will have much long-term impact on Canadian cheese.

One of the criticisms that farmers have — and I have heard this a number of times — is that they have created the market for fine cheese in Canada. We have lots of artisanal cheese makers now, who make really great cheese. For example, I have seen the TV ad about Oka cheese from Quebec, which is a great commercial. That is the kind of thing that I think that farmers feel almost betrayed about: that they create the market and the government trades away some access to people. I can't see that it's going to have a long-term adverse impact. Also, in that context, you have to give up something in order to get something in return. I thought it was a pretty decent deal that they got.


Senator Dagenais: You spoke of supply management, and how fiercely its advocates, among them the Union des producteurs agricoles du Québec, defend it. I would also like to broach the subject of the Trans-Pacific Partnership currently being negotiated. Canada certainly wishes to be a part of it, and if I have understood correctly, we will have to show some flexibility on supply management and display some openness to do so. What do you think?


Mr. Muirhead: I still believe that the TPP, the Trans-Pacific Partnership, won't happen and that the Obama administration won't get trade promotion authority at the end of the day in order to move ahead with it. Without trade promotion authority on the American side, the agreement is dead no matter how much effort has gone into negotiating it. That's my personal take on it. Of course, everything could change tomorrow, and I could be completely wrong in my analysis of that.

Looking at the numbers, and I have read a lot of stuff about who supports it and who does not and for what reasons, I think that it won't happen. But, should it happen, then it is not so much the Japanese but the Americans who are certainly keen about getting rid of supply management. In fact the National Milk Producers Federation in the U.S. is hugely critical and extremely aggressive in its tactics with regard to Canadian milk. If we get rid of supply management in that context and cave in to American demands on this, then we are almost signing the death warrant of dairy farmers and the dairy industry in Canada.

They are cranking up and increasing milk production in the U.S. at a huge rate, right across the board now. In fact, they talk a lot now about export markets. They've cut into Australian dairy exports, for example. They have an organization called Cooperatives Working Together, which is a private sector organization and therefore outside the orbit of the World Trade Organization and its rules and regulations. They heavily subsidize the exports of dairy products to, for example, South Korea, where they have a free trade agreement and we have signed one as well.

The Americans are intent upon increasing milk production and getting rid of the surplus through exports. We all know that when the Americans decide that they are going to do something, they really do it.

It seems to me, based on the history of this and also past practice, that we will not have access. It will be the softwood lumber business all over again, where we have our system here and they have their system there, and as I heard Robert Reich say, where does the biggest gorilla in the room sit? Anywhere it wants. The Americans set the rules for this. They will demand access to our market for their dairy products in the same way that they will subsidize them through Cooperatives Working Together or through other mechanisms that they have.

The producers' Margin Program that they run in the United States is heavily subsidized. The state pays 62 per cent of the insurance premiums that every farmer now takes out, in case the price of milk drops and the price of feed increases. That is a public sector program that farmers access. They pay a slight premium, but I would hope they would.

It would be a disaster if supply management — eggs and dairy — 40 or 50 per cent of milk is consumed locally as well. If that happened, we would be flooded with American milk and eggs, and I doubt there would be much we could do about it. I think it would spell the end of the Canadian dairy industry and the Canadian egg industry in a significant way. It would be awful.

Senator Enverga: A while ago you mentioned Australia and New Zealand. Basically, they regulate their supply management productions. The regulation requires a transition period to enable producers to adopt a free market. What do you think of the Australian and New Zealand models with respect to regulating supply management? What are the effects? How do they manage to do it?

Mr. Muirhead: Neither of them has managed it at all. The Australian one is in a bad way; Australia's egg and dairy industry is in horrible shape. The Australian industry in both eggs and dairy is undergoing significant downward revisions now. Farmers are going out of business at a very quick rate. Part of it is drought in south Queensland and northern New South Wales. Western Australia had the hottest summer ever recorded. We had the coldest winter in Waterloo, but they had the hottest summer in Western Australia. I don't know what any of that means.

Australian agriculture is in absolute crisis in those sectors like eggs and dairy. Also, Australian eggs are more expensive than Canadian eggs. Cadged eggs are about a third again as expensive as we would expect to pay in supermarkets here. I think Australia is in complete denial about what they intend to do. They have reduced, by billions of litres, the amount of milk they produce. I have a research trip planned to Australia where I am going to the Dairy Farmers of Australia, and I've have made arrangements to talk to them about this. They used to produce 11 billion litres of milk, and now they produce 8.5 billion to 9 billion litres of milk. The volumes are reducing, largely because they can't compete and they have completely deregulated. No farmer is able to make money in a completely deregulated market. There's that old expression: You can make a small fortune in agriculture if you begin with a large one. I think that the Australians are experiencing that now.

As far as New Zealand goes, I have rarely come across a more hypocritical country when it comes to dairy and their obsession with deregulation and getting government off the backs of producers. I hear Tim Groser and John Key talk all the time about this aspect. New Zealand did deregulate, that is true — at least they withdrew public support for the dairy sector. It is a single-desk supplier. Fonterra is their major milk producer. It is a single-desk supplier. It now controls, as they say, only 87 per cent of New Zealand production; it used to control about 95 per cent, but there are other players that are entering the market now.

As a result of the huge role that they play, they set the international price for dairy. It seems to me that they are the beneficiaries of their not really deregulated but single-desk supplier mechanism where they are allowed to basically prosper at the expense of other countries.

Fonterra is great. If I was a New Zealand farmer, I would say, "Yes, this is what we have to do," but it then relies on government giving them sort of a single-desk supplier. The dairy export board was amalgamated into the two cooperatives it established that made up Fonterra in 2001 and was a single-desk supplier. It had sole authority to export dairy from New Zealand in the pre-2001 period. Pre-deregulation was established in 1961, and it operated on the same principles as our Canadian Wheat Board did, the Australian Wheat Board as well, which was a single-desk that basically set the price and became a major player.

They didn't deregulate. The industries in New Zealand that did really deregulate, like wool and sheep meat, have gone into the tank. They are very poor now. Everybody is switching to dairy in New Zealand, even in environmentally suspect areas, because milk prices have traditionally been quite — well, not this year or last year, but milk price haves been very high, and the dividend payments that people have got through Fonterra, which is a massive co-op as well, have been very high.

The other thing about Fonterra that I should mention is that you can't produce for Fonterra unless you own shares in Fonterra. Shares now cost approximately $5.25 a share. Farmers would have 1 million shares in Fonterra.

I spoke with New Zealanders about this. I can't see how their system is different from our supply managed system. If you want to belong to Fonterra or want to belong to the system, you have to pay. You have to buy a share, and you can only produce for Fonterra up to the amount of shares you have in the co-op.

It's like comparing eggs to eggs or cheese to cheese. It's the same kind of thing that Fonterra operates in. They have shares; we have quota. They pay about the same amount per farm for shares that we would pay for quota.

Senator Oh: Mr. Muirhead, you are on top of the supply management production.

Mr. Muirhead: Fingers crossed.

Senator Oh: In how many countries is the government subsidizing dairy products? This is a huge market. Even in Asia, they are far behind in agriculture products. In how many countries is the government subsidizing exports or, as you say, dumping? How many governments are doing that?

Mr. Muirhead: I couldn't say about governments generally. It has changed a bit in the last couple of months, but in the European Union, for example, they are still allowed to provide US$10 billion or US$9.6 billion worth of export subsidies every year. They call them export credits, even though they subsidize the export of dairy products around the world.

Internally, as I'm sure everybody knows, the Common Agricultural Policy has been one of the most — if you are a large farmer, it has been one of the most wonderful programs ever to have been implemented. It began in 1962, and at one point, the Common Agricultural Policy took about half of the EU's entire budget, about $50 billion annually. It's less now, and dairy is certainly less subsidized now than in the past. I can't give you a number, but certainly the EU is very conscious of maintaining dairy production and dairy exports from the European Union.

They got rid of the quota system as of April 1 this year, and a number of countries have said they will double production over the next five to seven years. For example, Germany wants to, and the Germans are huge dairy producers. A couple of years ago, they produced about 30 million tonnes of dairy, which was far more than they could use in Germany. They had to find some home for it.

The Irish, who have a tiny market, have said they want to double production in a couple of years. Now that they have gotten rid of quotas in the European Union, many countries will be back within a year or maybe two. They will reimpose the quota system, because they will not be able to deal with the milk that will be produced. Even now, countries are producing more dairy than they did as of March 31.

That leads to the other issue, which I know you didn't ask about but sort of follows on from that, and that is that if you don't have quotas, how will you control production? This is what the Americans are now worried about.

Last year, Fonterra was paying $8.40 per kilogram of milk solids. This year they are paying $4.70 because nobody is buying. There is a huge oversupply, and the price of dairy has gone down.

This is a big problem for those countries and those producers.

Senator Moore: You mentioned that you are going to New Zealand and Australia.

Mr. Muirhead: Yes, both New Zealand and Australia.

Senator Moore: I take it you have been there in the past.

Mr. Muirhead: Yes.

Senator Moore: When you go there, what do they ask you about the Canadian system? Are they critical, abrasive or complimentary? Our dairy producers are surviving through our supply management system, so what do they say to you about that?

Mr. Muirhead: That's a very difficult question to answer, because in places like Australia, they have drunk the Kool-Aid about deregulation and neo-liberalization, sort of liberalized the sector, and "we can benefit." They still hold out hope that they will eventually make money.

They are critical of the Canadian system in that they think it's hidebound, inefficient, unproductive and highly regulated. Everybody confuses that it's regulated by government. Government does not play a role other than creating the legislative framework for the supply management to happen, but they think because it's controlled by government, it is inefficient and not particularly good.

In New Zealand, they think we are missing out on huge export opportunities. That defeats me, because I think if we get into the export market, our cows are among the most productive in the world. They produce 14,000 kilograms of milk solids a year. In New Zealand, they produce 3,500 kilograms of milk solids. Our cows are about three times as productive as their cows.

I think if you want us to get into the market, it is a finite market, and we are going to impact your markets, maybe we ship to China. They have a free trade agreement with China that they signed in 2008. Maybe we ship to China or South Korea or Indonesia or Malaysia. I don't quite understand their approach to this, because we would be a huge competitor of theirs, as the Americans are.

Senator Moore: Exactly.

Mr. Muirhead: You didn't ask about the U.S., but the American dairy farmers that I have spoken with have said that they think our system is great. And they wonder —

Senator Tkachuk: It's a monopoly.

Mr. Muirhead: Yes.

Senator Tkachuk: How do we facilitate trade in the supply management market? We have our supply management system. I agree with you that most agriculture products, if you scratch them, there is a government dollar there somewhere, but at the same time, ours is right up front. We have a kind of monopoly in the country.

How do we facilitate trade? I would like to buy French cheese. We make some of the best cheese in the world. We should be able to sell it somewhere else besides here. We need a solution to that within the systems we all have.

Mr. Muirhead: That is the $60,000 question, or whatever the current equivalent is, maybe $6 trillion question.

I would say you either have supply management or you do not. It's like being partially pregnant. You can't sort of do away with elements of supply management and have the system persist. It seems to me that it's an all-or-nothing proposition; you keep it or you don't keep it.

In terms of facilitating trade, once CETA gets through, we will be importing more French cheese than we have in the past. I think there is maybe some intent to negotiate further market share for other countries if the TPP ever comes to pass. I don't know what's going to happen with that.

The supply-managed sectors are such tiny — in a sense, insignificant — sectors of the Canadian economy. Dairy and eggs are like 0.0001 per cent of our GDP — or even with the processing side.

They are tiny sectors. If we have this system that works well for us, does it become a crisis for the Americans such that if we don't get rid of supply management, our whole chance of signing onto the TPP — if it does go through — is compromised? I don't understand that at all. The U.S. has global aspirations. It's a huge deal for them. Why they're interested in whether they can ship a million tonnes more milk to Canada is beyond me.

To facilitate trade, a greater percentage of our dairy market is open compared to their dairy market. About 5 to 6 per cent of our market is open, and about 3 per cent of their dairy market is open.

Facilitating trade is a critical thing, I agree, and Canada has to trade in order to be prosperous, but I would say that with the supply-managed sectors, you either have supply management or you don't. You can't whittle away at it until it becomes nothing. As I say, it's an all-or-nothing proposition.

I realize that's a completely inadequate answer to your question, but it's a fundamental one. Either we take a stand on that or we don't.

Then you have issues about manufacturers. Bombardier wants access to the American market, or Malaysia or Vietnam. I understand there are tradeoffs that every government has to make, but if we don't have supply management, then we would need some other program in place that would not be as well placed or to our advantage as supply management is now.

Senator Tkachuk: You talked about the Australian and the New Zealand systems and the problems they are having. But to me, it's always about supply and demand. Do they have a supply problem? Are they short of milk in Australia or New Zealand? Do they not have butter, or can they just buy it somewhere?

Despite all the problems, can consumers buy products?

Mr. Muirhead: Yes.

Senator Tkachuk: So what is the problem?

Mr. Muirhead: Farmers are the problem in Australia, not so much in New Zealand. If you want all parts of the supply chain to prosper, you have to help farmers. We have seen in the pre-supply-managed era that processors, in particular supermarkets, would take advantage of producers to the producers' disadvantage. You need some sort of intermediary organization between the farmer and the processor in order to level the playing field.

So, yes, you can.

I talked to the head of the Australian Egg Corporation Limited, and he told me that Coles and Woolworths control 80 per cent of the supermarket market in Australia. They have what are called "reverse options" with egg producers where they actually get everybody together on a certain day to bid for the supermarkets — what price their producers will sell their eggs for to Coles and Woolworths for the coming year. He said they'll have everybody at a computer terminal. They might have 100 or 300 farmers bidding at the same time, so everybody can see what everybody else is bidding.

He said they also have Coles and Woolworths people interspersed at the computers among the farmers, also bidding down the price of eggs. So egg farmers in Australia do not make a lot of money. In fact, there is a court case going on there now — and I don't know how it will turn out — about eggs being destroyed because there was an oversupply and the price paid was far too low for farmers to make a go of it.

It's that kind of thing that happens. Also in Australia, Coles and Woolworths have prided themselves on a dollar-a-litre milk, which has driven dairy farmers out of business. So it's really good for the consumer, but it's not good at all for the farmer.

In Canada, everybody along the chain is looked at and, I think, given equal weight; the producer isn't disadvantaged in terms of the relationship with the consumer.

Senator Tkachuk: They obviously have a competition problem at the retail level. If there are only two companies that supply 80 per cent of the market, they have a monopoly buying from people who are not part of that monopoly. I suppose you would need to have that.

If we had an answer to that facilitating trade question, we'd both be rich. Nobody seems to have that answer.

How do we facilitate competition and build efficiencies into what I think of as a monopoly system we have here? I have family in the United States. I go down there and buy milk, butter and yogurt. There is a huge variety of everything in the stores, and there are many different stores. It tastes the same. It tastes great, and it is a lot cheaper than it is here.

So how do we build efficiencies into that place that is a monopoly, because that's what they are?

Mr. Muirhead: In the case of the U.S., I'm sure you know they subsidize the system — both producers and also the processor side — quite extensively. The USDA puts out numbers as to what it takes to produce a gallon of milk in the U.S. It is very similar to what it takes us to produce the equivalent amount in Canada.

The fact that they subsidize production — the latest farm bill that was passed in February 2014 — the stats that have come about that — the numbers are that it will provide $1 trillion worth of subsidies to agricultural producers over the next 10 years, which is about $100 billion a year. I'm not saying all of it goes to dairy or eggs, because it doesn't, but a good chunk of it does.

They haven't done away with lots of the issues that have been raised in previous farm bills. They've gotten rid of milk marketing orders and that kind of thing. But the dairy and egg industries are both still very singularly well placed in Congress — particularly the dairy industry — in terms of getting subsidies whenever anything happens.

I saw a good cartoon in The New York Times where they have the round bales of hay. They were all baled in dollars. It suggests how the U.S. deals with agricultural production.

I don't think you were talking about the U.S., but it seems to me that an American government or producer has never met a subsidy they didn't like.

Senator Tkachuk: I'm sure of that.

Mr. Muirhead: So that's partially the reason why.

I don't think it's necessarily economies of scale; I actually think our producers are very efficient. Our cows produce almost exactly the same amount in terms of kilograms of milk solid that American cows produce. And our Canadian cow genetics are exported around the world, because they are world leaders in that area. As far as I know, American cow genetics are not.

Also, Americans use growth hormone for 20 per cent of cows they milk. One of the reasons I read about the American population drinking less milk now than they have in the past is because they are worried about growth hormone in milk. It's only 20 per cent, so 80 per cent is growth-hormone-free, but I think the public mixes up a couple of those concepts, too.

Senator Tkachuk: It's a marketing opportunity for non-growth hormone.

Mr. Muirhead: That's true. Monsanto might not like it, but. . . .

Senator Beyak: Thank you, Mr. Muirhead. This has been very enlightening for me.

You mentioned earlier that the reaction of the Dairy Farmers of Canada surprised you somewhat. It surprised me, as well. Could you elaborate on that?

Mr. Muirhead: Is it a total of 30 million more tonnes over time — I cannot remember the precise number, but it was something like that — of cheese being imported into Canada. I actually thought that when CETA was being negotiated, the government was very reluctant to give up supply management and reluctant to give any access to the Canadian market at all. But they have to give something.

It is a relatively small percentage of a growing market. The European tonnage is finite, so as the market grows, our cheese producers can produce more, and the Europeans are stuck at whatever it is — 30,000 or 18,000 tonnes of fine cheese, whatever it was.

I was, as I say, surprised at that, and I don't know, but I would guess that the government was probably surprised by the reaction, too. I would have thought that the government would say, "We've done a really good thing here; we've kept them to 18,000 or 20,000 more tonnes. That's really good," and it didn't work out that way. I don't know how that percolates through the Dairy Farmers of Canada. Maybe they are so concerned about any tiny little wedge being put in the supply managed system that they are on edge about anything.

It's not only dairy and eggs we are dealing with in these trade negotiations but a whole series of other things. It would be a tragedy if we lost supply management through inadvertence or international trade. I could be provocative and say that we are drinking American growth hormone milk — I'm sure we wouldn't be — but, anyway, it's that kind of thing.


Senator Dagenais: We talk a lot about supply management. Before I ask you my last question, I would like to share with you a comment made to me by the president of Rôtisseries Saint-Hubert. That is a restaurant chain that uses a lot of chicken, because that is what it sells. He calls supply management a cartel, because it is impossible to negotiate the price of poultry. That is his view.

I would like to come back to the Canada-European Union Comprehensive Economic Trade Agreement, and those 16,000 tonnes of cheese, because a good many farmers, in an area I know well, are worried. They told me they expect the government to offer them compensation. I replied that to receive compensation, they have to submit proof of harm. I asked them if they had a way to put a number to the damages, and they answered no. So I told them that they will have to wait before making any such demands.

In your view, if there were to be compensation, what would be the amount? For the time being, we do not know what the damages will be.


Mr. Muirhead: I could say I have not the faintest idea about what the damage might be. Again, we will have to wait in the fullness of time to see if there is an adverse impact on cheese production in Canada. I travelled to the Saguenay region a couple of years ago and camped for a few weeks, and I have to say the cheese there is phenomenal. I can't imagine that those processors will suffer adverse effects because we import Roquefort cheese or something like that. There is this idea that we should buy Quebec or Ontario cheese, and our cheeses are, as you said, world beaters in many of the categories in which they compete. Who knows, maybe when French cheese begins coming in, it will popularize the notion of eating Canadian cheese. I don't think there would be a lot of disadvantage suffered by the producers in Quebec.

As far as the cartel goes, there are four companies in the U.S. that operate chicken. There are Tyson, Hormel and two others, and they run something like an indentured servitude operation; it is medieval. The producers take on long-term debt, and the processors, the four big companies, reap the advantages. They take on short-term contracts with those producers. It's almost, as I say, like an indentured servant kind of relationship where the producer must sell to one of the big companies or basically they go out of business. It's a huge amount of debt incurred in setting up that sort of operation.

Doug Constance at Sam Houston State University in the U.S. has written a lot about this, and it really is kind of a medieval relationship. This is the necessity. This is why I think supply management is so good, because between the chicken producers here, the processors and the consumers, an intermediate organization works to level the playing field a bit. But I probably couldn't come up with a different word for Saint-Hubert and its chickens.

Senator Enverga: Once again, with regard to supply management, it's all about supply and demand. Sometimes supply goes up or the demand goes down and vice versa. How does the agriculture industry adapt to this? Don't you need something more like price management rather than supply management? Is it going to be trade management, something like that, or do they need more government control? How would you differentiate? They have the three pillars: production management, import control and pricing policy. Which one has more importance in regard to pricing and the industry as a whole?

Mr. Muirhead: I think matching domestic demand with domestic supply is almost like a fine-tuned science. Supply management was introduced officially in 1971, but it was in Ontario before then. Over the last 44 years or so, it is pretty much of a science, and while they do have some issues with respect to oversupply sometimes, I think that generally speaking it's a pretty finely tuned system, and the production side reflects domestic demand, so there is not anything out of whack with the system.

Also, they now pool milk. The P5 — Ontario, Quebec and the three Maritime provinces — pool supply, so there is some sharing of milk now across provincial borders to even out the peaks and troughs of supply. I think they have worked it out pretty well.

In terms of price, I don't know why lots of people have an issue with supply management because the consumer pays the cost of production, unlike the U.S., where the consumer might not pay the cost of production. It's one of those systems where it is whatever is negotiated. Maybe supermarkets use it as loss leaders. But the producer is getting the cost of producing that litre of milk, which I think is a good system, and somebody is going to be paying the freight for eggs and dairy. Somebody is paying the freight for that, and it's not subsidized.

I read a cabinet conclusion from the Diefenbaker government in 1960, where they were on the hook to subsidize through legislation the dairy industry in Canada to the tune of $60 million. The finance minister at the time is in cabinet conclusions. They are talking in cabinet, and he's saying: "I don't know where we're going to come up with the $60 million. We don't have $60 million to support the dairy industry in Canada." That began the whole process.

In 1963, under the Ontario Conservative government at the time of John Robarts, we get the 1963 advisory commission on dairy, and then we get the 1965 Milk Act. It all flows from the same place, which is that we cannot, as a small country, afford to subsidize dairy production the same way they do in the U.S. or the European Union after 1962. So we will have the consumer pay the full cost of production, and stores can do whatever they want with it as loss leaders or discount it somehow.

If you don't drink milk you don't pay — that's true — but everybody eats cheese, of course.

Senator Enverga: Why can't we just price it for consumers who can afford it, and maybe keep the extra ones somewhere and give it to the poor countries? Would it be possible? It's more like pricing management and supply management at the same time. I'm so outraged whenever I see producers dumping produce in the sewers because they thought the price was too low. Is it possible to do that? Is there a hybrid supply or pricing management we can adapt?

Mr. Muirhead: In Canada, our producers can't destroy milk. Generally speaking, they don't do it because they do get the cost of production, whereas with respect to the European Union, you can see photos online of dairy producers spraying policemen with milk with hoses. They have riot police in Brussels to fend off dairy producers. I think it is a weird idea or image, dairy producers fighting riot police because prices are low, but they do that in the European Union. They have not done it in the U.S. because of the subsidy programs, but in the European Union that does happen.

In Canada, we don't want their kind of system. I think we price milk fairly now, and it's based on the cost of milk production on the average farm in Canada. It's not the lowest cost production and it's not the highest cost production, but the average.

Actually, Canadian consumers benefit from the system, it seems to me. In New Zealand, milk is about a third more expensive for consumers than it is now. Even though milk prices have dropped dramatically over the last year in the world — so in New Zealand, you would think consumers would get a break — last October, milk prices in New Zealand rose by 6 per cent, at the same time that prices are going through the floor.

Dairy farmer suicides in New Zealand are up. There were four in December, and there have been sixteen over the last six months. That kind of thing, debt in the New Zealand dairy sector, is huge. It is a horrible situation, because they have expanded too much, too quickly, too far, and the prices collapsed. It's like a commodity, so you go up and down. It is oil, iron ore, uranium; you name it. Milk is the same, and it is the producer that ultimately pays the cost in that kind of situation. Whereas in Canada we don't have the wild swings, but the price that is published is fair, I think, for most people, and it is affordable by most people in the country, it seems to me.

The Deputy Chair: On behalf of the committee, I want to thank you for sharing your extensive knowledge with us. We can see why you are the holder of the Chair in Public Policy at the University of Waterloo.

Mr. Muirhead: Thank you very much. It is a great pleasure. This is my first time at a setting like this, and I feel privileged to be here to speak with you and have a conversation. I have made a couple of mental notes about things which I can incorporate.

The Deputy Chair: If there is any further information you would like to send to the committee, you could do so and send it to our clerk.

Mr. Muirhead: Sure, I will do that.

The Deputy Chair: That is most appreciated. Thank you so much.

Mr. Muirhead: Thank you very much for inviting me.

(The committee adjourned.)