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THE STANDING SENATE COMMITTEE ON AGRICULTURE AND FORESTRY

EVIDENCE

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OTTAWA, Thursday, June 7, 2018

The Standing Senate Committee on Agriculture and Forestry met this day at 8 a.m. to continue its study on how the value-added food sector can be more competitive in global markets.

Senator Ghislain Maltais (Deputy Chair) in the chair.

[Translation]

The Deputy Chair: Welcome to the Standing Senate Committee on Agriculture and Forestry. Good morning, everyone.

This morning, we have the privilege of having Gary Stordy, Director of Government and Corporate Affairs at the Canadian Pork Council, as well as Martin Lavoie, President and CEO of Canada Pork International. Welcome to you both.

Before getting started, let me introduce myself, Ghislain Maltais, Deputy Chair of the committee. I will be chairing the meeting today. I will now ask the senators to introduce themselves.

[English]

Senator Mercer: Senator Terry Mercer from Nova Scotia.

Senator R. Black: Senator Rob Black from Ontario.

Senator Marwah: Sabi Marwah, Ontario.

Senator Oh: Victor Oh, Ontario.

Senator Doyle: Norman Doyle, Newfoundland and Labrador.

[Translation]

Senator Dagenais: Jean-Guy Dagenais from Quebec.

The Deputy Chair: Here are a few recommendations before we start. We scheduled one hour for our meeting, so, the shorter your presentations, the more questions the senators will be able to ask you. I would ask the senators to be disciplined and to ask brief questions, and the witnesses to give brief answers if possible, so that we can have at least two rounds of questions.

The floor is yours, Mr. Stordy.

[English]

Gary Stordy, Director, Government and Corporate Affairs, Canadian Pork Council: Good morning. I’d like to thank you for the opportunity to appear before the committee today to provide the perspective of the Canadian pork producers across Canada. Rick Bergman, our Producer Chair from Manitoba, sends his regrets. He wanted to be here, but family matters kept him at home.

The meat industry is, by far, the largest component of this country’s food processing sector.

Our producers raise animals from coast to coast, with the largest pork production and processing facilities clustered in Quebec, Ontario and Manitoba. Direct farm-gate sales of Canadian pork in 2016 totalled $4.1 billion and created over 31,000 farm jobs across Canada.

The pork industry is a major contributor to Canada’s GDP. Food processing creates more jobs than any other segment of the Canadian manufacturing sector. Providing employment for 65,000 workers, meatpacking and processing plants are often either the primary or major employer in towns and cities located across Canada.

Mr. Chair, members of the committee are no doubt aware that export markets are absolutely critical to the current and future prosperity of the Canadian livestock and meat sector. Meat processors and exporters must identify foreign markets for more than 70 per cent of what our producers produce here in Canada. That 70 per cent is both for the meat, which Martin Lavoie certainly has responsibility for, moving Canadian pork overseas, but that also includes live animals that are shipped into the United States.

Therefore, it should not be surprising that pork producers have been ardent and steadfast supporters of all initiatives that contribute to opening new markets and expanding access to existing markets.

The Canadian Pork Council and producers welcomed the news that the CPTPP legislation will be presented to the House of Commons before it rises for the summer. Because of improved access to key markets like Japan, the Canadian pork producers can keep doing what they do best, knowing that their livelihood, and that of thousands of other Canadians in rural and urban communities who work in the pork industry, is supported by the latest agreement.

Producers take pride in providing consumers with a healthy, safe and affordable food supply. Producers demonstrate this commitment by voluntarily participating in the Canadian Pork Excellence platform. This platform, developed by producers for producers to use on their farms, adds value to Canadian pork and allows the industry to be more competitive in global markets.

The food safety component of CPE, called PigSAFE, is based on the HACCP management system and provides global customers the assurance that Canadian pork is of the highest quality and a safe product. It provides assurance that the on-farm food-safety-related issues are addressed. It provides the foundation for the implementation of the Canadian Ractopamine-Free Pork Certification Program, which enables product to be exported to China, a market of well over $600 million last year.

The pork industry’s food safety program has a long history, and the first version of the program rolled out over 20 years ago and helped the industry secure existing customers and develop new ones, such as the $1 billion Japanese market, where food-safety assurance is critical for access.

The animal component of CPE, PigCARE, reflects the introduction of the 2014 code of practice for how pigs should be handled and raised on farms. The code of practice is credible and broadly recognized by government and industry stakeholders as being reflective of the common industry standards. It is our engagement, as an industry, to reflect the animal care practices outlined in the code. By us adhering to this code, public trust and consumer confidence are elevated.

Traceability, the last component of the CPE, PigTRACE, enables the traceability of live animals as an added value to customers. PigTRACE will enable our industry to better manage a potential disease outbreak. Improved response time reduces the economic impact on the industry and avoids costly market disruptions. By quickly containing problems in this way, the pork industry has a better chance of returning to business in a shorter period of time than it would normally without a traceability system.

PigTRACE, operating in conjunction with a strong on-farm biosecurity protocol, gives the Canadian pork industry a competitive edge by offering buyers and importing countries improved production security that is resilient to market disruptions resulting from disease or food-safety problems. This improved security offers pork buyers peace of mind in knowing that they are sourcing pork from one of the most secure supply chains in the world. Canada is one of only a few countries to initiate a national swine traceability system. By being one of the first countries to initiate a program, Canada is securing our position as a global leader.

I would like to take a moment to touch base on innovation. We are pleased that the Canadian government has focused on this area. Thanks to the AgriScience Program, hog producers will be able to contribute to their long-term partnership with Agriculture and Agri-Food Canada in utilizing research to address the fundamental changes in our industry.

Our research efforts are quarterbacked by Swine Innovation Porc. They operate from an office in Quebec City and facilitate research in the Canadian swine sector. Their main objective is to enhance the profitability and environmental sustainability of the Canadian pork industry by supporting the development of the most innovative technologies that will benefit the entire pork value chain.

While the pork sector has benefited greatly from the science cluster, we are limited in resources that we can bring to the table. In 2016, the CPC completed the public process to establish a promotion and research agency. Creating this agency would provide producers with a new source of industry funds that could be used to expand our innovation program. This agency is absolutely critical to our future improvements. We look forward to the Canadian government completing the review of our application and taking the measures necessary to establish this agency.

Before I wrap up, Mr. Chair, hog producers and processors benefit from being competitive with global competitors and having improved market access. However, we can’t forget the impact this has on Canadians. Studies regularly show that the top concerns of Canadian consumers are the rising cost of food and keeping healthy food affordable. A globally competitive Canadian pork industry will ensure that Canadians have access to locally produced, high-quality, competitively priced pork and pork products. However, we can’t meet this expectation if we are locked into the domestic market, and we look forward to future trade agreements being completed.

I’d like to thank the committee for the invitation to appear before you today and for your attention. I’d be pleased to answer any questions.

[Translation]

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

The floor is yours, Mr. Lavoie.

[English]

Martin Lavoie, President and CEO, Canada Pork International: On behalf of Canada Pork International and our members, I want to thank you for the opportunity to be here today and to talk about the expansion of processed product and value-added product in the pork-export business.

Canada Pork International was established in 1991. We are the export development agency of the Canadian pork industry, so we are now managing the promotion of the domestic market and international market. We are a joint venture of the Canadian Pork Council, representing the hog farmers — Gary represents this organization — and the Canadian Meat Council representing the pork packers and traders in Canada.

The Canadian pork industry exports over $4 billion every year in export to over 100 different countries. To give you a representation of the volume we’re doing, this is 50,000 sea containers every year that we are exporting. Pork is the largest meat industry in Canada, and we’re generating a lot of economic activities.

What I decided to do for this presentation is to actually just take the three main topics that you had in the invitation and just talk about them.

First, the competitive advantage of value-added in the Canadian pork industry. I think it’s important to understand what value-added is in the Canadian pork industry.

We have value-added products, taking ham, making cooked ham, bacon, sausages, cold cuts and processed product. This is one way to do it. In exports, right now, this only represents, out of $4 billion, $320 million. A big share of that is actually not even processed products; it’s some ways to ship raw material to Japan. That accounts for large volumes. Canada is a bit underdeveloped as far as exports of processed products.

The biggest item for Canadian pork exports in value-added is chilled pork. Chilled pork means cuts, loins, tenderloins and bellies. With the process and dedication of our exporter, we’re able to manage to have a 60-day shelf life. This is why we have chilled pork exports to Japan, and we’re very successful. Canada has half of the fresh import market share in Japan, and this is the bulk of the value-added in the Canadian pork industry.

I’d like to talk about value-added in the sense of adding value to the carcass. To me, if we’re having access and we’re working to have the best access and the best market opportunity on every single piece or cut of pork, this is really adding value to the industry. For example, if we’re able to ship the heads to China at $1.50 a kilo and our second-best option is 75 cents in the other market, this creates as much value as doing fancy products. This is another area that is interesting to understand where we’re adding value as an organization and as an industry.

There’s also an opportunity to work on value-added at the farm level. If you’re having specific breeds, some Berkshire pork, some specific Japanese genetics, you will add value to the product. It is the same thing for the feeding. If you have an ABF program or organic product, this is a different way to add value, and not just at the plant or marketing level.

Canada has a lot of competitive advantages when it comes to value-added product. We’re certainly known for quality. Our exporters are dedicated. You can’t achieve 60 days of shelf life on product if you haven’t worked every single aspect of the value chain. If you miss just one, the product will not be suitable at the end. We have the flexibility. We have smaller plants that can adjust to embrace the value-added approach. We have brand reputation. We have excellent credibility of our inspection services with CFIA. Like I said, we have smaller plants and flexibility.

Basically, for the chilled pork, we have key advantages, which is again the quality of the product and the know-how. There’s not a lot of countries, aside from the U.S., who can manage to have the chilled pork exports. This is 30 years of experience of continuous improvement. I’ve been in the industry for 20 years, and I’ve seen the number of days of shelf life going up because guys keep on pushing themselves. We work as an organization through benchmarking to make sure that they always increase the level of quality.

Our geographical situation helps a lot. Right now, for the Japanese market, we’re protected from European exports. They can’t get there in time and have enough shelf life left. For the key export markets for chilled, like Japan, Korea and China, which is opening soon — I think this has just opened as a follow-up of the Prime Minister’s mission last fall — these are also great opportunities coming ahead of us.

On processed products, hams and sausage, Canada right now is lagging behind. We’re the leader in fresh, chilled meat. Our main competitors are Europe and the U.S.. The U.S. has a dynamic volume with some brands, Johnsonville, that you will find in pretty much every country in the world. Europe has the ability, with their regional specialties, like the Serrano ham, the Italian product, to be able to sell internationally on some specific niche market high-value products. That’s also part of hundreds of years of doing a product a certain way, and there’s international recognition for that.

Point two is the capacity to generate value-added product in order to meet global consumer demand while remaining competitive in Canada. Canada has all it takes to increase or further develop our value-added. As I mentioned, we’re already leaders in chilled pork, and we think with CPTPP, with the opportunities in China, we have tremendous opportunity to grow that. Our industry has not grown that much in recent years in volume, but we’ve grown our business in value. We’re able to transform frozen meat into chilled meat and add value this way. There’s further growth to be done. Quite frankly, the Canadian pork industry is exporting 70 per cent of its production, so exports, value-added, is actually the only way to remain competitive. If we lose that, we will become extremely uncompetitive. In our case, I think it really helps to become competitive. We’re facing competition from the U.S. in our domestic market, and also products from Europe. This is the way to remain competitive and make sure our companies are successful and profitable.

Also, to promote that, Canada Pork International, 2016, based on the programs that Gary mentioned, the Canadian Pork Excellence program, PigTRACE,PigCARE, we’ve built the Verified Canadian Pork brand. We are branding Canada internationally. If you look at the success we had in Japan recently, one of the aspects now is the Japanese consumers are recognizing the quality of Canadian pork and they’re able to see it and identify it. It really creates a buzz and some buying intentions — actually, clearly purchases — as we’ve tripled our chilled pork exports in Japan in the last five years, and this is really supporting this. We are in the process of building a brand that is adding value to the product and for our members. This is a very important component of what we’re doing.

Finally, if the support should be provided in the technology, marketing, environmental certification and intellectual property. I’m going to talk about what I think are the four more critical points.

First and always, it’s market access. We’re seeing it. You have the NAFTA situation right now, but the opportunity that was created with CPTPP for chilled and processed pork. For the first time in 20 years, I’m hearing the Japanese saying they’d like to import bacon from Canada. From this success, we have small processors now selling sausage in Japan with the Verified Canadian Pork brand. We’re all building things. The fact that on processed product the tariff will go straight to zero is extremely positive and promising for our industry, and Japan is already a billion-dollar market.

We have the possibility to add to that, eventually through working on China. There are other markets that are very important, and some specific trade agreements that I think it would be great to work on, like Caricom, for example, that could provide a lot of opportunities for processed products in hotels in this part of the world.

The other aspect that is important is the notion that if you want to add value, it takes manpower and technology. There’s truly a shortage of manpower for our plants. Whether it’s in processed products or simply adding value, if you don’t have the labour, you will send the cuts bone-in, so you’re not adding value in Canada because of a shortage in manpower. This is extremely important. We need to have our plants to keep the value here in Canada, sell the product as processed as possible, not necessarily just in value-added, but the more you debone and skin the product, the more value you add in Canada and the more jobs you have in Canada instead of other countries. Obviously, it goes in parallel, but we’ll need support for technology in plants and in research to support this.

Especially when you talk about a value-added product like chilled pork, the stability for our infrastructure and the labour contract is extremely important. We don’t have frozen product that can sit in a warehouse for months. When we’re working with fresh product going to Asia, it’s really important to have stability in infrastructure, at ports coast to coast and at our rail facilities as well. There are several issues there.

I would add that it’s important to get support from the government for market promotion. Right now we have the objective of growing our agriculture exports up to $75 billion. What we’re seeing now is overcommitment in the GF3 in agri-marketing, so our promotion budget is actually being cut so far by $1 million. We’re working on areas there, but I think it doesn’t go together, where we want to go as a country, adding value to more agri-food exports. I think support to export promotion will be extremely important. As Gary pointed out, I think the creation of the check-off on imported products from the U.S. will be critically important to support our industry.

In conclusion, I think there’s tremendous opportunity to concentrate our effort on value-added pork from Canada, but the support through market access, trade promotion, manpower and technology is going to be critical to meet the demand of the world market. The world market, despite any opinion or anything we hear about meat consumption, is definitely growing. There’s growing opportunity, and I think we have to be in a good position to take advantage of those opportunities.

[Translation]

The Deputy Chair: Thank you very much for your excellent presentation, Mr. Lavoie.

[English]

Senator Mercer: Thank you for being here.

Mr. Stordy, you mentioned a code of practice. I assume the code of practice is happening on the farm. How does that interpret into the marketplace? Do you talk about the code of practice when you’re marketing your pork? How do you do that? If I were a customer, what would the message be from you about the code of practice before I buy pork from you?

Mr. Stordy: Certainly the code of practice outlines the way animals should be handled on a farm. It’s actually an extensive document that our industry, our organization, then takes and pulls out basically the most important areas and then implements that into our PigCARE program. It’s taking that, and then what we do with that PigCARE program, it's essentially the expectation that producers are doing this. It is validated or somebody goes on the farm to ensure they’re following essentially these processes or steps in how to treat animals, and they have the protocols. That’s one part of it. That’s on the farm.

The next step is that we can stand up and say, “This is how we treat our animals.” This is an effort to assure the customer, whether it’s on the processing side or even just for the consumer who buys the pork every day, this outlines the expectation on how animals should be treated in the care of producers. This is something that is validated and then verified. If there is a situation where maybe something happens or a protocol, this is the corrective action to ensure that that situation is fixed, the producer is informed about what should be happening and then it doesn’t happen again.

Mr. Lavoie: I might add to Gary’s response to say that on the marketing side, this is a solid base of our platform for export promotion. A consumer from Japan sees the Verified Canadian Pork branding. For example, on meat shelves, you have sleeves where you have information or a poster, POP material. We’ll have our seven brand promises, including environment, no hormones, CP, and PigCARE is one of the components of the brand promises. So a Japanese consumer may ask, “What am I buying when I buy Canadian pork?” This is one of the seven, so we’re really taking that and incorporating it.

We’re told, especially by Japanese buyers, that customers are interested in that, and this is something else that the Americans are not promoting, and it definitely puts us at an advantage. As far as perception, there's a clear perception that Canadian pork is better in quality and image-wise, and that really contributes to that.

Senator Mercer: You mentioned that research is one of the major functions, of course, of the whole industry to increase profit. What visions have your research brought to the barn or to the market?

Mr. Stordy: Linking some of it with your question before, there is how animals are raised. That is an area where consumer preference is indicating that they’d like to have animals not raised in sow stalls, a certain component. Over the past three years, we have a producer base that has used this specific system for several years and believes in it. We needed to find out what the alternatives are, how to go about raising animals in alternative systems, researching what alternative systems are and, frankly, actually reinventing new systems so that producers who move forward, whether it’s building a new barn or wanting to invest in this particular system for raising animals, have the most accurate information. They have test pilots on what could be done, whether it’s in existing facilities or new facilities. The benefit of that is that was producer-led research, where they paid part of their levy for every animal marketed and reinvested in themselves to adapt and investigate market demands, look into considerations on how other options can be done, and really do it in an efficient and competitive manner. All of that would not have been possible without, essentially, producers’ support and interest in research and then, from there, moving forward.

Senator Doyle: Thank you for your presentations.

You gave the impression that our pork products are not making big inroads into the European market. Is that because of a need for better marketing on your part or on the government’s part? Should government be doing a little bit more to try to get you into these markets today?

Mr. Lavoie: You’re asking about Europe specifically?

Senator Doyle: Yes.

Mr. Lavoie: I think sometimes there are market cycles in Europe. Obviously in the world, and gratefully, we don’t eat the same parts of the pig. The Asian market likes specific cuts that we don’t in Canada. We import bellies and ribs from Europe. Our main target for exports is hams. It would have been a great market opportunity for the last 15 years, but with the market situation right now, it’s not that appealing to export hams to Europe versus China, or Mexico, or other markets.

If we look at the opportunity for Europe, it’s probably not going to be in processed and value-added products. Europe is one country that is well developed in that they like to have local products. I think the opportunity for Canada is to export specific cuts at a higher value than any other markets, and that will be part of the processed products made in Europe. There will be opportunities. If you look at the volume that we have, it’s still fairly small compared to the size of the market, but we have not fully taken advantage of it. It is mostly a market situation. Right now, in the case of Europe, I don’t think promotion would help. It would help in other markets, but that’s not the situation for Europe right now.

Senator Doyle: We hear that CETA could very well improve the value of Canadian pork. Is that a fact? Would you get more for your pork products as a result of CETA?

Mr. Lavoie: I definitely think in the long term this is something that is positive. Since its implementation, there hasn’t been a whole lot of business that could be done. However, if you look at it realistically, the opportunity with reduced tariffs is 60,000 tonnes. We’re exporting almost 1.3 million tonnes. You have to put that in perspective. It has increased, but it’s not as much of a game changer as Japan or China could be, for example.

Mr. Stordy: Our industry is still a strong supporter of CETA. There were a few hiccups along the way related to understanding the market conditions and how to access the market. That is slowly being worked out. Martin is correct that right now, the market conditions are not favourable for us to be shipping or filling the quota. That could easily change. If something happens in another key market, Martin and some of the traders will be looking for the best opportunities and where they can get the best value or price for that particular product. That’s where the EU market may come into play. Today, it’s an opportunity market that’s there. We’re shipping not a lot but some, but that could change a year or two years down the road, and then we will be thankful to have CETA in place.

Senator Oh: Thank you for your presentations.

I want to touch a bit on the export markets to Asia. I understand that your pork sector has been getting meat over to the Asia market. For Canadian pork in 2017, your website says that China, Japan, Philippines, Taiwan and South Korea are among the top 10 export destinations. Can you give us an update? I think there is a pilot project going on to China. If you can export $1 billion worth of value to Japan, China has a huge middle class that depends on good quality, safe products from Canada.

Mr. Lavoie: In 2016, we exported $600 million to China, which is already very significant.

Gary said that sometimes there is a flow of products when markets close. We lost the Russian market, which was an important market for us. After some readjustments, I think China is now the market that is pulling our market.

If you look at graduation of our exports to China, it started with the by-products, that is, the feet, the offal, the heads. This is always the base in China. It has been like that since the beginning. What we’ve added to get to $600 million is some cuts for processing. That is a lot of bone-in-hams that are getting deboned and processed in China. This is a higher value item, and we now have the volumes and the value up.

I think the next opportunity with the pilot project is to reach out to the high-end supermarkets in China. The capacity to pay in those markets is just as good as in Japan, if not higher. There is a tremendous opportunity to position Canadian pork as the reference and to bring the experience we have in Japan to make sure that we are further developing this opportunity.

The great thing about China is that it’s not exactly the same cuts as in Japan. That allows us to add value to the carcass while having cuts that were not put as chilled products. By adding this fresh value, you’re adding more than a dollar a kilo to frozen versus chilled to those market opportunities.

You don’t need a lot of marketing support to sell frozen trimmings or fat in a box that you send to South Africa or anywhere. We need the support. That’s why the agri-funding component is very important. You need to reach out to educate consumers in China that the buyers have material when you’re getting into the value-added market, as we are doing in China.

There are several opportunities in Asia. I mentioned the great success in Japan, namely, over $1 billion Canadian dollars of export in the last two years. China is there. I think there’s great opportunity to get back into Korea. Canada was the leading exporter of pork to Korea seven years ago, before all the other countries started to have an edge on us on FTAs. Now we’re catching up. This is a market where we’ll need further support. Singapore is a small market but a wealthy place where we could develop some value-added products. Even in markets like the Philippines, there is an opportunity for some frozen but branded opportunities.

We just did our strategic plan. Clearly, we are looking at Asia. When I was talking about growth and meat consumption, there are tonnes of growth left to be happening in Asia, and it is the main target. There are other areas, but this is where I think most of the demand will come for pork from Canada.

Senator Oh: This committee has travelled to China, in Shanghai, to the biggest Shanghai food show there. Beef producers were having a big promotion.

Mr. Lavoie: Yes, but less volume. More promotion for smaller volume. Was that this year?

Senator Oh: No, two and a half years ago.

Do you have a pork processing plan in China for value-added?

Mr. Lavoie: We are also part of the trade shows in China, the last two. There were 20 companies from Canada travelling and in our booth.

We also have an office in Shanghai to support sales. We’re not there to sell the product for our members but to have marketing support and organizing in-store demos for them promoting Canadian pork.

The needs for promotion are evolving with time. Now China is there because of the chilled opportunity. We’re very grateful for that. There are still some things to fix. It’s not perfect, but it’s definitely an opportunity that we embrace. I think it has a lot of potential.

Right now, the chilled business to Japan is about $800 million, and $45 to $50 million to Korea. That should grow, but China is going to definitely land somewhere between Japan and Korea in the short term. The potential for growth, then, is limitless.

Senator Oh: What about the TPP? How will it affect your export market to the region as a whole?

Mr. Stordy: It’s going to make a substantial difference. It mainly secures a key market that we already have, Japan. It places us at a greater competitive advantage versus some countries that are not included. It also allows us to compete against other countries that have access to Japan. Japan is a billion-dollar market for us. It’s been an important market, but they import from other countries, the United States and the EU. The EU has just finished and signed, and it’s been implemented. The EU-Japan FTA is in place, so we’re competing against some of those favourable marketing conditions for the EU industry.

For us, as Martin has indicated, we will have a reduction of the tariff. We will have a reduction in some other aspects that will improve the potential market access for some of the processed and further processed products. That’s incredibly important.

In addition, you’re looking at an interesting fit. Japan has been an anchor market for us. We’re doing well in China, but with the CPTPP, Vietnam will be an important emerging market for our industry. That’s certainly positive.

Senator Marwah: Thank you for your presentations.

I want to elaborate on market access. I understand the free trade agreements are positive for you, and that’s wonderful. Have you experienced non-tariff barriers in the markets where you are? Some of the other industries that have been here have mentioned that coming up as an issue. While they reduce one side, they increase the other side to prohibit market access. Are you experiencing that with your products in the countries where we have a trade agreement?

Mr. Stordy: Absolutely. It is a growing concern for industry. A number of countries, from our point of view, are implementing some of these non-tariff barriers. Whether it’s dealing with on-farm production diseases or whether it’s delaying inspection of our facilities, taking a long time for them to certify our plants, these are all, in our belief, barriers to accessing that market and that have sometimes happened after an FTA has been signed or during. It is a problem to expanding market access or improving sales, diversifying to some of these countries.

We do understand, first of all, that we have some very hard-working civil servants, whether in CFIA or Ag Canada. There is no doubt that in many cases they are stretched with the demands that industry is placing on them. For us, we do see the need, whether it’s more focus on some of the key priorities or more support, or whether it’s at the in-country level to deal with other federal governments, because it’s only the federal government that can talk to another federal government, from our point of view, and deal with some of these issues.

Increased participation in some of the national global bodies, whether it’s OIE or WTO, an increased presence there would certainly be of benefit.

And all this is time, money and resources and the people, and making sure that the people who are there have the history and know-how to be engaged in the discussion. Those three are some areas that we believe could be focused upon to help address some of these non-tariff barriers and understand where it’s coming from.

The best example for us would be with the CETA agreement. We are very strong supporters of the CETA agreement. As we started understanding and investigating how to access that market, regardless of the price, there’s a requirement to import into the EU called the Health Check. There was a tremendous amount of back and forth trying to understand how to resolve this Health Check matter and understand what the EU expected moving forward. CFIA was, essentially, the lead agency responsible for understanding this and came up their understanding of how this Health Check requirement could be implemented. Unfortunately, it wasn’t workable. The situation was eventually resolved, but it took someone in a regional office to come up with a concept to move it through.

I’m going into that long story because this was something that we were irritated and agitated with for over two or three years, and it was resolved just by some dedication and, frankly, by chance further down rather than the national view.

Mr. Lavoie: Some countries are clearly using that as a way to control their market. There is the official part, but there are different ways, just by delisting a plant or few plants. I’ve seen more of that the more we’re dealing with Eastern European countries. There was a lot of that in the past, where it’s really controlling the flow of the market.

What is important, on top of what Gary was saying, is to be able to communicate well with the industry and just understand what it is. Sometimes there’s distraction on the technical side, but if you really understand that this is political, it’s a market and linked to pressures from local producers that you’re seeing this kind of action, it helps the government to have a better response and sometimes not go out of our way on the technical side to resolve something that is not technical. I think that’s a great component, really understanding the market dynamics.

I see some improvement with a lot of players. Some are just not playing that game and never do. For some other countries, then, it’s going to be a long battle to change those added, especially when there is some government orientation on food imports.

Senator Marwah: From a regulation perspective, I understand that regulation, on the one hand, allows you to enhance your reputation for food quality and safety and gives you your brand, but on the other hand, do regulations prevent you from acting swiftly or dealing competitively? Is domestic regulation a problem? Has it kept pace with technology and where the world is going?

Mr. Stordy: There is always room for improvement with technology. E-certification is one area, and the federal government is responding to adapt to some of the new technologies, but sometimes it’s not always fast enough.

Senator R. Black: Thank you for your presentations. I can tell you are both passionate about the industry and what you do and excited about the present and the future.

Gary, with respect to the platform, the Canadian Pork Council, is it a mandatory participation by producers?

Mr. Stordy: It is voluntary.

Senator R. Black: What’s the percentage of take-up?

Mr. Stordy: For all producers shipping to federally inspected plants, they would all be on the program. We have a number of smaller or medium-sized producers that have more local production, direct sales, who may choose not to be on the program. But for all those shipping into federally inspected plants, which are for export, they would be on the program because of the ractopamine-free protocol that is included.

Senator R. Black: Do you have to be in it all the way? You listed three modules.

Mr. Stordy: Yes.

Mr. Lavoie: Virtually everyone.

Senator R. Black: If markets open up and exports increase, do we have the capacity to produce and process however further down the road? By the way, thanks for your explanation of value-added and the differences. I appreciated that.

Mr. Lavoie: You’re welcome. I think we do, and there are major investments that are being done in plants, some enlargements. There are some coming.

One of the biggest challenges now is to make sure that the hog production is going to follow demand. We’re definitely getting the signals that there is high demand in Asia. We are in a spectacular spot to take advantage of those opportunities with the reputation of Canadian pork. For several reasons, the appetite to invest and grow, we need to get those market signals back. We need to have conditions that allow a producer to invest. The access to capital for expansion at farms is a key factor that is not as easy to do in Canada versus the U.S. This is why you see a lot of growth in U.S. production and not in Canada.

The part of having more hogs, and there are environmental concerns and city permits, there are all kinds of concerns, but this is a challenge that we are working on now.

Mr. Stordy: We are dealing with our industry. It is going through a changeover. With next-generation producers coming in, we want to support that as much as possible and make sure that pork producers have positive views, that they see an opportunity, frankly, to have a return on their investment. No one wants to make the investment, build a barn and not necessarily have a long-term future. We’re pleased to see the processing industry making investments into their facilities and free trade deals to have an opportunity for those markets.

We are dealing with labour issues, which will be ongoing. We are dealing with the capacity to find investment to build new barns. There is some changeover where old existing facilities are being essentially replaced. We need, frankly, more barns to come into place.

A big part of it is, in the United States, for those producers that are involved in field crops or even corn production, they want hog production on their land because they want the nutrient-rich manure. Rather than purchasing chemical fertilizer, they use the manure from the barn, and the pigs are a by-production of their field crops. We want more of that type of view to take place. Frankly, I’m looking out West and a number of the field crops that they’re involved in.

Senator R. Black: Thank you, Mr. Stordy.

[Translation]

Senator Dagenais: I have two questions. My first question is on NAFTA. The talks are not going so well, and I do not believe that the problems will be solved in 2018. We are talking more and more about a bilateral NAFTA, that is, between Canada and the United States, or between Canada and Mexico. In your opinion, what would be the impact of this on the pork industry?

Mr. Lavoie: The impact on trade with the United States is limited. There are no tariffs. Our tariffs are at zero, and it is the same in the United States. That is our current situation. At the moment, our biggest question mark if there is no NAFTA, given all the trade disputes and the absence of an organized structure, is the dynamic between the United States and Mexico. We currently have an idea of a scenario without NAFTA, solely with regard to countervailing duties imposed on aluminum and steel. If they were imposed, tariffs to Mexico would go up to 20 per cent. Therefore, there are a great deal of products that are exported from the United States to Mexico tariff-free that would then be tariffed at 20 per cent, which really changes the market dynamic.

However, both industries are too interconnected for these products to go elsewhere. Mexican importers want fresh, never-frozen products. That would create an indirect, additional opportunity for Canada. However, I believe that the trade is deeply rooted, and would continue, even with a 20 per cent tariff, to absorb. So, according to the market dynamics, if the demand is weak, the American processors will absorb it. If not, the Mexican importers will, and the prices in Mexico will go up, due to the surcharge. Personally, I do not see trade coming to an end in the pork industry.

Senator Dagenais: We are talking about the infamous carbon tax. We know that some provinces are imposing it, including Quebec, and we also know that Saskatchewan does not want to impose it. Last Tuesday, in his appearance before the Standing Senate Committee on National Finance, Minister Morneau said that there will be a federal model for all the provinces, including those that do not apply the tax. However, elections are currently being held in Ontario. If, for any reason whatsoever, a Conservative government were elected, we know that it wants to abolish the carbon tax. What impact would that have on your production? Would certain producers not be tempted to move their facilities to provinces that do not apply this tax? It is one thing to say that it has an effect on climate change, but a tax is a tax, and taxes can influence prices. I do not know if this tax would affect pork prices. What do you have to say about the carbon tax? Do you think certain industries will choose to relocate?

[English]

Mr. Stordy: We’re concerned about where NAFTA is going. NAFTA is an important trade deal that developed our integrated industry. When I say “integrated,” we really are connected with the United States at the hip. In pork sales alone, there is $1 billion going both ways. We sell about $1 billion of Canadian pork into the U.S., and the U.S. sells about $1 billion of U.S. pork into Canada. That’s just on the pork sales.

If NAFTA talks get delayed, fall apart, it creates uncertainty in that integrated market. While pork will most likely continue to move within the North American industry, the consequences of this will be on producers and the producer price they receive. The market price gets jittery when uncertainty falls into place or there is a disruption or perceived disruption in the flow chain, and that trickles down into the price that producers receive, and unfortunately that usually means a drop.

We have been following and been involved in NAFTA as much as we can. We are working with U.S. counterparts and Mexican industry to see what opportunities exist to modernize NAFTA, because the original NAFTA deal did a great service to our industry and how CFIA as well as the U.S. counterpart cooperated and worked together. That has been overlooked over the years. That cooperation allowed the North American industry to become better at what they do and access global markets.

We’re really concerned about where this is going. We’re watching it. I don’t think anyone is going to be a winner if this continues to escalate and we end up with retaliatory tariffs.

[Translation]

Senator Maltais: Good morning, gentlemen. Who would not find your presence here today interesting? You represent a very important market for Canadians.

In the last few years, Canadian wine producers have gotten a second wind. For example, Quebec producers have been fighting for many years to be able to sell their wines in the Société des alcools du Québec (SAQ) outlets. According to statistics published last week by the SAQ, the bestselling wines are from Quebec and Canada, which is leading to a sharp decrease in French and Chilean wine imports. Furthermore, Quebec-made spirits — specifically gin and vodka — we do not make any rye or bourbon — have overtaken imports from other countries, particularly Finland and the Scandinavian countries.

However, interprovincial delivery is a major factor in Quebec. We would really like to be able to choose wines from British Columbia and the Niagara region, but that is still a problem. Quebec City and Vancouver are far apart, but Quebec and the Niagara peninsula are not. In the short or medium term, could we see wine move freely?

[English]

Mr. Stordy: I would suggest that producers probably won't move from one province to another because of the carbon tax. I think the real factor is how each province or each provincial government, to be more specific, implements a tax and how it is applied to producers. Province A may decide to provide a full return of any funds collected from that producer on the carbon tax, while Province B may decide to invest in something else rather than making that return to the producer. What it would do is create basically not an unfair situation but a competitive disadvantage for Producer A in one province versus Producer B. Chances are, if Producer A is in an uncompetitive situation, they will just end up shutting down rather than moving, because barns are not inexpensive to build. With some of the technology and requirements and the fact that they may be moving their family, they may look for other options. I know for our producers right now, they’re really trying to understand what the potential impact is — frankly, the cost — and how it’s going to be applied. In many cases, they don’t have those answers yet.

Senator Diane F. Griffin (Chair) in the chair.

The Chair: Thank you. I’d like to take this opportunity to thank the witnesses. Obviously, we could have gone on for quite some time, but you’ve given us a lot of good input and that’s greatly appreciated.

We now have our guests for the second panel. Dan Paszkowski is with the Canadian Vintners Association, President and Chief Executive Officer; and from Spirits Canada, we have Jan Westcott, President and CEO, and CJ Hélie, Executive Vice President. We’ll hear from the vintners first.

Dan Paszkowski, President and CEO, Canadian Vintners Association: Thank you and good morning.

As the national voice of the Canadian wine industry, our members represent 90 per cent of all Canadian wine production. From growing grapes and wine production to packaging, distribution, marketing, retail sales, consumption and container disposal, wine is amongst the highest value-added agri-food products in the world.

Our members are farmers operating within a vertically integrated business model. Our economic impact extends well beyond direct sales and employment, with strong linkages to tourism, retail sales, bars and restaurants.

Today we have more than 700 grape wineries located in six provinces across Canada, with 31,000 acres of vineyards supporting 1,800 grape growers. Unlike many other sectors of the economy, once our vines are planted, it is impossible to move our agri-food operation to another jurisdiction.

The Canadian wine industry produces high-quality, award-winning wines and contributes more than $9 billion to the national economy, supporting over 37,000 jobs and attracting almost 4 million tourist visitors to wine country each year.

Canada is now the second-fastest-growing wine market in the world, with wine consumption growing three times faster than the global average, making competition for shelf space fierce. Over the past decade, wine sales in Canada have grown by 116 million litres, but imports have captured 68 per cent of this growth.

Canada is the sixth-largest wine importer in the world, and per capita wine sales in Canada have increased by 27 per cent over the past decade. This is an encouraging trend, with experts stating that the Canadian wine market is poised to grow by almost 16 per cent by 2021, creating an additional 90 million litre sales opportunity.

The strong social and economic importance of farming activities within the rural economy increases the significance of value-added agricultural initiatives, such as wine production, because the benefits spill over beyond the farm gate.

Value-added wine production is a means to increase employment, revitalize and diversify rural communities, increase farmers’ financial stability, promote a culture of research and innovation, increase quality and brand recognition for regional products while developing niche markets, and promote collective solutions and partnerships along the agri-food value chain.

Today, the Canadian wine industry is known to produce high-quality products and provide benefits to Canada’s economy and cultural life.

A recent Gandalf survey found that three quarters of Canadians are wine drinkers and most purchase Canadian wine some of the time. But more importantly, 81 per cent believe that the Canadian wine industry contributes to the economic vitality of agriculture in rural areas, 78 per cent believe the Canadian wine industry contributes to Canada’s tourism industry, and 74 per cent believe that Canadian wines can compete internationally.

Our challenge is not food safety or quality standards. It is linked to the simple fact that imports represent 67 per cent of all wine sold in Canada, compared to an 8 per cent wine sales market share for our premium VQA wines. It is impossible to increase our focus on expanding our global reach when the world’s largest exporters want greater access to our domestic market.

The first step to success is to ensure that we have free trade within Canada. To have wine delivered from a domestic winery is a fact of life in major wine-producing countries, but, in Canada, this would be illegal in seven of ten provinces, although nine out of ten Canadians state that they would like provincial laws changed to be able to order wine from an out-of-province winery and have it delivered to their home.

Six years after the unanimous passage of Bill C-311 in both the House of Commons and the Senate, the ratification of the Canadian Free Trade Agreement in 2017 and a Supreme Court decision a few months ago, interprovincial winery-to-consumer delivery remains illegal for 80 per cent of the Canadian population.

Under the auspices of the Canadian Free Trade Agreement, we now await the recommendations of the federal-provincial-territorial Alcoholic Beverages Working Group. The CBA has provided a legislative proposal that meets all internal and international obligations and remains hopeful that the Alcoholic Beverages Working Group will support the implementation of a provincially legislated interprovincial winery-to-consumer delivery system when they report to their respective internal trade ministers by July 1, 2018.

The country as a whole benefits if unnecessary barriers to internal trade are minimized and if producers have fair access throughout the domestic market that responds to consumer demand. This helps them to scale up in order to compete abroad.

Second, the Canadian wine industry has always been a supporter of free and fair trade, but the reality is that VQA wines have captured only 17 per cent of wine sales growth over the past decade compared to 68 per cent for imports.

Canada has signed free-trade agreements with many of the largest wine-producing countries in the world. Today, under CETA, NAFTA and CPTPP, 91 per cent of wine imports to Canada will enter tariff free. Trade within these FTAs and with other countries has benefited our import competition by $2.2 billion in annual import sales compared to $12.4 million in exports from Canada. This is not fair trade and impacts Canada’s ability to foster value-added investment and grow market share at home.

Further, our value-added import competition provides significant support to their wine and grape industries. For example, in 2017, EU wine and grape support amounted to CDN $1.83 billion, which included $357 million in annual grants to cover 40 per cent of processing and wine infrastructure investments, while the Australian government provided their wine industry with $50 million in export and domestic wine support aimed at increasing Australian wine sales. In a similar fashion, the Chilean government is investing $84 million to develop and expand its wine tourism trade.

Third, legislating the annual indexation of the excise duty on wine to the Consumer Price Index in Budget 2017 has impacted the competitiveness of Canadian wineries. This annual taxation has taken place at the same time as the United States provided $222 million in annual excise reductions on all U.S. wine sales, and Australia has implemented an annual $275 million excise rebate for its wine producers. The excise escalator threatens the growth of our wine sales market share in Canada and our ability to create new export opportunities.

In conclusion, Canada’s value-added wine industry has the potential to double its size over the next decade and grow our economic impact to $18 billion. This growth potential is dependent upon more aggressive federal action to support the removal of internal barriers to trade, free and fair trade agreements and program support and tax policies that drive economic growth. In partnership with government, we can create well-paying jobs, boost productivity and competitiveness and build long-term growth for the Canadian wine industry, with positive returns to the federal government.

Thank you.

The Chair: Thank you very much.

Jan Westcott, President and Chief Executive Officer, Spirits Canada: I’m Jan Westcott, President and CEO of Spirits Canada. My colleague, CJ Hélie, is Executive Vice President of the Association. Later on, when you have really hard questions, please address them to CJ.

Thank you. We’re pleased to be here today to share our views, experiences and recommendations on how to enhance the competitiveness of our value-added food sector in global markets.

Spirits Canada is the sole national organization representing the interests of Canadian spirits manufacturers, marketers, consumers and exporters. Our member companies account for over 85 per cent of domestic spirits production and over 90 per cent of Spirits Canada international exports.

Built on the foundation of our signature product of Canadian whisky and Canadian rye whisky, the Canadian spirits industry is perhaps the highest value-added category within the entire processed agri-food sector.

As this is the Senate’s foremost authority on the agriculture sector, I wish to remind senators that Canadian whisky is produced from grain grown virtually 100 per cent by Canadian farmers. In fact, we’re very proud of the fact that in every province in which we produce spirits in Canada, the sole source of our grains are Canadian farmers, whether it’s Ontario, Manitoba, Quebec or Alberta. I want to underline that because we are uniquely Canadian in that sense.

With a wholesale value in excess of $650 million, spirits annually represent more than two thirds the value of all Canadian beverage alcohol exports, far surpassing the combined value of beer, cider and wine. But all is not well, and, thanks largely to self-inflicted wounds, Canadian spirits manufacturers are falling behind our major international competitors in the Scotch, American and Irish whisky sectors. The industry’s year-to-date international shipments in the first quarter are down an alarming 6.9 per cent from last year, despite near-record consumer interest in the industry’s forte, rye whisky. This dip is a continuation of a longer-term trend in which the value of American whisky exports surpassed those of Canadian whisky in 2000 and those of Irish whisky surpassed ours in 2010.

I’d like to talk about root causes for a minute or two. Last year, the House of Commons rejected the advice of the Senate to withdraw from the budget implementation legislation a proposed annual escalator clause amendment to the Excise Act, 2001, that would implement automatic annual increases to beverage alcohol excise duties on April 1 of each and every year thereafter. The Senate’s entirely reasonable recommendation that Parliament should have an opportunity to review and assess any future potential tax increases on spirits and other beverages, based on the circumstances at the time, was ignored.

And what are those circumstances today? On January 1, 2018, the U.S. administration cut excise duties on American beverage alcohol products, including spirits. Adopting a stepped-fee approach to spirits excise duties, a recommendation that was rejected by our own Department of Finance, the U.S. has reduced the excise burden on a typical bottle of spirits by 10 cents a bottle. I know that sounds like a small amount, and I’m going to come back and talk about that.

Here in Canada, Finance has imposed an increase of 12 cents over the last two years, with an additional 8 cents estimated for April 1, 2019, for a cumulative 20 cents a bottle. So the gap between American and Canadian excise duty rates has grown by 30 cents a bottle over a very short period.

This characterization, however, only tells half the story, given subsequent taxes that are imposed in Canada. Both larger in magnitude than in the United States and more likely to be ad valorem, or based on the price of the product, the actual effect is exponentially higher when it comes to the impact on final prices facing consumers.

By April 2019, the impact of the difference in excise duties between the rate in Canada and the U.S, compounded by subsequent federal and sub-national, provincial or state municipal taxes, will be $5 per bottle. The actions taken by the Government of Canada will have driven by differences between our prices and U.S. prices by an additional $5. Everyone knows that, when you go to the United States, you can buy a bottle of Crown Royal for a lot less than you can buy it in Canada. That gap just got widened by $5.

Put another way, in 2015, the impact of Canada’s higher excise duty rates at retail was an unsustainable 70 per cent versus the U.S., and, by April 2019, this additional burden will have grown to a staggering 90 per cent.

Simply put, without significant tax relief for Canadian spirits manufacturers — and I would say our colleagues in the beer and wine industry; we’re all struggling with this — ours may be the last generation to enjoy the significant benefits of a local domestic manufacturing industry for spirits.

What we’re seeing in the United States today is very similar to our experiences in Korea when the U.S. concluded their free trade agreement with that country in advance of Canada’s own FTA with Korea. Importers and distributors in Korea shifted their focus and attention in brand portfolios to products with lower taxes and higher potential profit margins, and, in the 12 months following the U.S. signing their deal, the value of our exports to Korea declined by over 50 per cent. The same dynamic is occurring in all of the important U.S. market states as distributors focus on products with greater margins.

On its face, the U.S. excise duty tax reduction that took place on January 1 should flow equally to imports selling in the United States, but the U.S. rules related to sharing the rate reduction within a controlled group — so you’re a company, you control a whole series of brands — means that many Canadian exporters will not share the same level of benefit as American-based manufacturers. The result is a shift in industry investment throughout the supply chain — brand owners, distributors and retailers — away from Canadian whisky to American whisky.

The biggest challenge for the Canadian industry over the past decade has been to attract its fair share of the global investment to the Canadian whisky franchise. Investment in globally competitive production facilities, laying down distillate that over the years matures into whisky, investment in new brands and opening new markets. The low margins available in Canada and a hostile policy environment that sees locally made spirits disadvantaged versus foreign products in terms of retail access has made Canada a very low priority investment market.

The circumstances became considerably more hostile with the annual indexing of already excessively high federal duties on spirits, compounding the uncertainty regarding NAFTA negotiations, the imminent threat of retaliatory tariffs between the United States and Canada.

No country in the world so disadvantages its own principal export good in its home market. Canada could learn from, to take one example, the government of Mexico’s ongoing support of its national drink — tequila.

We are not seeking the same level of active support as is provided to Mexican tequila or American bourbon. We are simply asking the government to stop actively harming Canadian whisky producers.

The U.S. market dynamic is so important. My comments have largely focused on this emerging crisis situation. I will leave comments related to the other costs, such as interprovincial barriers and other elements, to another day or to questions that senators have.

Thank you very much. I appreciate your attention.

[Translation]

Senator Maltais: You are absolutely right. It is inconceivable, in the age of free trade agreements, that we have tariff barriers within our own country that prevent goods from moving freely.

We are also seeing a phenomenon. Young people today start drinking wine at a much earlier age than people of our generation. It is not uncommon to see young adults drink a couple of bottles of wine on Friday nights, whereas ten years ago, they would instead buy a case of beer. These days, they are drinking a lot more wine, and this consumption continues to grow.

Canadian wine is better than some of the plonk we import from countries I will not name out of respect for them. We import wine in containers, and the SAQ bottles them. They are not even good enough to cook with, whereas Canadian wines are better, no matter where they come from.

You mentioned small producers. I live across from the Île d’Orléans, where there are many excellent wine producers. However, these producers are not allowed to sell their wines at the SAQ. People have to go to the producers to buy the wines. Yet, these are superior-quality, even award-winning, wines. Government officials control this monopoly. They pretend to know Quebecers’ tastes, and that is the problem. They know their own tastes.

[English]

Mr. Paszkowski: I would like to believe the answer is yes. As I mentioned in my presentation, we are awaiting a federal-provincial-territorial report that will be provided to internal trade ministers by July 1 of this year. We remain extremely hopeful that that report will include a recommendation to ministers to establish a legislated winery-to-consumer delivery system in Canada. Three provinces currently allow it to happen: British Columbia, Manitoba and Nova Scotia. The other seven do not. We view this as a really big opportunity.

You’re absolutely correct in terms of we get a lot of Quebec tourists that visit Niagara, for example, but you can’t have the wine brought back home. If you do try a wonderful bottle of Gamay Noir in Niagara and you get home and tell your friends about it, it is illegal to have that wine shipped back to your home. You can’t contact the winery and have it shipped back for you. That is a significant problem.

Our ability to build our consumer base in Canada is the pathway toward developing a lucrative export market. If you look at Argentina, it owns 99 per cent of its market. Ninety-nine per cent of Argentinians drink Argentinian wine. In Canada, we have a 30 per cent market share, but our premier wines have an 8 per cent market share.

You did mention Quebec in your opening statements. VQA, our premier wines we produce in Canada, have one quarter of 1 per cent market share in the Quebec SAQ. For the largest wine-consuming province in the country, that is unfortunate. But if we had interprovincial trade, consumers with an interest in a wine would have the ability to try Ontario, Nova Scotia, Quebec and British Columbia wines. If they do have an interest in wine, the SAQ will start to list them more and more, as you have identified. For the largest wine-consuming province in the country to have the lowest percentage market share of Canadian wines is a disappointment.

CJ Hélie, Executive Vice President, Spirits Canada: We are only available to be sold through the SAQ in Quebec. That’s our sole sales channel. We have a great relationship with the SAQ, but we question their definition. You mention the produits du Québec stats in your question. They define the produits du Québec by the size of the producer licence in Quebec. They exclude from those products all the products made from Quebec-grown grains in the large distilleries. All the Smirnoff vodka sold in Canada is made in Valleyfield, Quebec, but the SAQ does not consider that a produits du Québec, while a small distiller who imports grain-neutral spirit from Ontario and bottles it in Quebec is a produits du Québec. Have you found that Canadians are drinking fewer spirits?

The Chair: Just a quick answer, please. The question was long, so the answer needs to be short.

Mr. Hélie: We saw a dramatic decline in spirits’ share of beverage alcohol consumption in Quebec in the late 1970s through the 1980s, when bottled-in-Quebec wines and beers were expanded to chain grocery stores. More generally, across Canada over the last decade, we have remained roughly consistent in our market share of beverage alcohol. Wine has increased, beer has decreased, and spirits have been relatively stable for the last decade.

Senator Oh: Thank you for your presentations. They were wonderful.

I came from the Niagara region in Ontario. How is our icewine doing? I know that everywhere I travel, they talk about Canadian icewine. It seems to be our top brand in the world.

Mr. Paszkowski: Icewine is doing very well. We’re not a big exporter of wine in general, but our export history started with icewine, and it still has a very attractive market, particularly in Asia. Our icewine sales continue to grow.

The challenge we have with any luxury product such as icewine is counterfeit. That is a challenge that we’re facing in many different countries — water mixed with sugar, for example, that is sold in a bottle to be considered icewine. That is a threat to our industry because we don’t know what’s in that bottle, using that brand of icewine. There is a safety risk to consumers as well.

Senator Oh: In terms of Canadian export subsidies, your report says that every year the EU gets from the government $357 million; Australia, $50 million; and Chile, $84 million. How much help do you get from our government for the export sector?

Mr. Paszkowski: The CDN $1.8 billion that I mentioned is the total amount that the European government provides its wine and grape industry on an annual basis, the other example which is one portion of that.

In terms of our support from the federal government to promote domestic and export markets, it’s $550,000 per year, and we match that for a total of roughly $1.1 million. So there’s a considerable disadvantage to those major countries that are selling wine in Canada that are spending millions of dollars to capture more and more market share. As my statistics have shown, they have captured 68 per cent of total wine sales growth over the past 10 years.

Senator Oh: So the government is not really helping much export-wise.

Mr. Paszkowski: Not in comparison to our competition.

Senator Marwah: Thank you both for your presentations.

I will address this to Mr. Paszkowski. I should tell you at the outset that I’m a great fan of your wine industry. I think it has done a fantastic job in increasing quality and profile, and I think it’s quite underappreciated.

The comment that jumped out in your presentation was that ever since we signed the free trade agreements, we have had an increase of $2.2 billion in annual imports and only $12 million in exports. Why is that? That’s a huge imbalance.

Mr. Paszkowski: We’re not a large producer in the scheme of things in the world, so that’s obviously one factor.

An example would be the United States, and I’ll give some statistics there. We’ve had a free trade agreement with the U.S. for 30 years now: first the Canada-U.S. Free Trade Agreement, followed by NAFTA. U.S. wines into Canada have increased from $19 million to $500 million in sales, so a 13 per cent annual average growth every year for the past 30 years. Our sales to the United States have increased from $8.2 million in 1987 to $8.8 million in 2017.

The ability to access some of these markets is extremely challenging. With the United States, we have to go through a three-tier system. First we have to get an importer, which takes a 30 per cent market share; then we have to go through a distributor, which takes more; and then we have to get into retail, and they take even more. There is no money left at the end to be able to sell into that system, whereas in Canada we have a liquor board system. So a U.S. or EU producer goes to the LCBO or the SAQ, and they basically make their sale for the whole year. It’s a different system, and it’s challenging for us to enter into the United States.

Senator Marwah: Just a follow-up question, if I may, chair, that applies to both industries: I keep hearing that distribution is a problem, given the fact that distribution is controlled by some very large players. So distribution might mean getting it from the producer to the shelf — is that correct? Is it an issue?

Mr. Westcott: Are you speaking of Canada?

Senator Marwah: Yes.

Mr. Westcott: No, that’s not correct.

For example — and I’ll use Ontario just because we’re in Ontario — in Ontario the LCBO consolidates all shipments. We don’t actually ship from our plants. We have the largest distillery in North America in Windsor.

Senator Marwah: Sorry; I didn’t mean within Canada. I mean outside Canada. Let’s say you want to ship product from here to California. Besides the three-tier system, I understand that’s distribution; getting it to a shelf in California is a problem.

Mr. Paszkowski: For us, that is definitely a challenge. If you look 10 years ago, there were 7,000 wine distributors in the United States. Today there are many more brands, many more different types of wines that are being sold. There are 700 distributors in the United States. You have gone from 7,000 to 700. So to get a distributor to actually be able to sell your wine is a challenge for us at the get-go because there are not that many, but there are more brands for them to sell. They focus on the larger brands, not on the smaller ones, such as Canadians would produce.

Mr. Westcott: That’s a market consolidation that took place in the distribution sector in the United States. It’s no different than grocery stores. The same has happened in the grocery industry. You’re seeing it in big box. As industries have moved to create efficiencies, consolidation takes place. Yes, it can be difficult to get in, but there are lots of examples of success, smaller countries that have penetrated that.

In the last 20 years in Canada, we’ve created a new whisky called Forty Creek. It is very successful and comes from the peninsula. John Hall is the guy that started that. By dint of effort, as a small producer, he made tremendous inroads into United States. I won’t say it’s easy and I won’t say it’s inexpensive, but it certainly can be done if you have the right product, the commitment and the passion. We used to look at him and say, “My God, it’s amazing what he accomplished in the United States.”

You’re right; it is not easy. But it's not impossible either. It’s a different market, but it’s an open system. It’s based on the quality of the product, the demand you create amongst consumers and your ability to invest against that ultimate consumer. It’s a different market than Canada and a different market structure than exists in Europe and many parts of the world, but it is an open system.

Senator R. Black: Mr. Paszkowski, we heard on the news last night that a number of vines in Nova Scotia have been frozen. You mentioned that the Canadian wine market is poised to grow by almost 16 per cent by 2021. The market is there, absolutely; it appears to be. Is there the production capacity in Canada, based on last night’s news and things like that that happen every year?

Mr. Paszkowski: I was in Nova Scotia two days ago, so just after the frost. We are farmers, so we are at the whim of the weather, and who would anticipate frost in June? However, the vines in Nova Scotia were impacted. We still think there is an opportunity, after they assess, for a second growth of the buds, to still come out with a vintage, although possibly smaller than it would have been otherwise.

That is a challenge for us in Canada — not only weather, but we are restricted by land, areas in Canada where we can grow grapes. With warming of the climate, you could expand that out a little bit. We can never supply the entire Canadian marketplace, but we believe we can grow from 30 per cent market share back to roughly 50 per cent market share, which is what we had when we signed the Canada Free Trade Agreement in 1987. There is growth potential for our industry, but we will never be able to own our entire market.

Mr. Westcott: I’ll comment on that as well. It illustrates how closely we’re tied to the farm community. We talk about the farmers as our partners; we’re attached at the hip. We produce one of our major Canadian whiskies in Manitoba. We’re proud of the fact that all the Crown Royal in the world is made in Gimli, Manitoba, and it’s made exclusively from corn, wheat and rye grown in Manitoba. For a number of years, parts of Manitoba were under water. It was only this deep, but it made sourcing grain in that province extremely difficult. I think in 2014 we managed to get back to securing 100 per cent of our grain back in Manitoba. This illustrates the exigencies of businesses that are so reliant on agriculture communities. We all go through these kinds of things. They add cost to the business and challenge the viability of businesses. We struggle to explain to people how closely related all of us are: the vintners, the brewers, and ourselves, to the farm community, and you get those kinds of issues.

Senator R. Black: Thank you. Mr. Westcott your presentation was concise and in-depth, so I'm challenged to come up with a question. You talk about members accounting for 85 per cent of domestic spirit production and 90 of Canadian spirits. What’s the 15 and 10? Who are they? Are they very small?

Mr. Westcott: One or two I would say medium sized. For example, a company in Alberta called Highwood. A great company that has been around for a number of years and makes terrific whisky. They are not members. They were members but ran into difficulties with excise over the years. The company changed hands and stopped being members. They haven’t come back. We treat them as members. They’re good guys. They make good products. I don’t need their $25,000 as membership fees. They are contributing to the industry.

We’re seeing the growth of small producers, just as I saw when I was in the wine and the beer business. We’re seeing some good people come up. The market will determine which survive and which don’t. When I was in the beer business, we saw all kinds of small brewers come up and go down. If you have a good product, a good business plan, you know what you’re doing, you’re committed, you will survive. Similarly in the wine business. Some small distillers in Canada are merging — for example, Still Waters out of Vaughan, north of Toronto, a couple of guys in the west. They’re bringing innovation to the business.

But keep in mind, 75 per cent of what we make in Canada leaves Canada. The issues that I deal with are making sure that our products have fair access in all the markets we sell in. If you’re a small producer making 15 or 25,000 cases, you are years away from going into those markets. I can only think of two of those new distillers who are selling outside of Canada. Still Waters would be one and there is a small one in Alberta. There are thimblefuls of products going out. They will get there, but it’s too early. That’s where the 15 per cent comes from.

[Translation]

Senator Dagenais: You talked about free trade between the provinces, and the problem with wine. Perhaps, in a future project, the government should focus on this issue, which would probably be more interesting than the legalization of cannabis.

I would like to return to the infamous excise tax. Mr. Westcott, could you compare different consumers in different points of sale? Where does the money from the sale of a bottle of whiskey from the United States go, when compared to a bottle distilled in Canada? I regularly go to the United States, and I find it odd that you can buy a good bottle of whiskey for $18, whereas, curiously, the same bottle is sold for $37 in Canada. Where does this money go?

[English]

Mr. Westcott: The money goes to three places. Money goes to the federal government by way of excise tax. Excise is a production tax. As soon as a liquid comes off the still, it’s liable for excise duty. The federal government also collects revenue from the industry vis-à-vis the GST, so the final tax on our products is the GST, a sales tax. So the federal government is at the top and at the very bottom. The GST is calculated on the costs of the products, all of the services, and all of the taxes that came before it.

The provinces take a big chunk through the markups they apply by the liquor boards. The only people we can sell our products to all across Canada are the provincial and territorial liquor boards. We can’t sell it to anybody else. They apply markups ranging from 140 per cent in one province to 205 per cent in another. They can be very significant.

It’s important to point out that while the provinces are seen to take a lot of money, in most cases the provinces are also providing a service to the business by being the distributor, the wholesaler and the retailer of the product. The markups that the SAQ, LCBO, and the Alberta Liquor and Gaming Commission charge are to cover the cost of their activities in distributing and selling the product.

If you look at the sale price of our products — the retail price the consumer pays — approximately 80 per cent goes to government and 20 per cent goes to industry. That’s the point we try to make. That gross margin to the industry is dramatically lower than the gross margin available to people that make bourbon in the United States, scotch whisky in Scotland, Irish whisky in Ireland, and even now Japanese whisky. From an investment basis, the world looks at Canada and says, why would we invest in the Canadian spirits or whisky business when we could take that dollar and put it anywhere else and make more money. You say to somebody that the tax in Canada is going to go up like this forever and ever, and we need your investment in the Canadian whisky business. They look at you and say, I don’t think so. That’s how it works.

[Translation]

Senator Dagenais: You must admit that there is quite a difference. We are talking about practically double the price.

[English]

Mr. Hélie: That same bottle, you are paying less in the U.S. and, as a supplier, they’re getting twice as much as in Canada.

Mr. Westcott: I’ll give an example. We did an analysis of all the border states around Ontario. Crown Royal sells for about $6. When Diageo sells a bottle of Crown Royal to the LCBO or the SAQ, they get about $6. I think it is $6.05. In every one of the border states — Pennsylvania, New York, Michigan, Vermont — they get at least twice as much money when they sell that bottle of Crown Royal, so the incentive to sell it in Canada is pretty tough. And that bottle, as you pointed out, sells for less money than it sells in Canada. The tax rates in Canada are a big disincentive to bring investment here.

Mr. Paszkowski: The implications of that for our industry in Canada are significant. The excise rate in the United States is half of what it is in Canada. The excise escalator will increase our tax every single year. In January of this year, the U.S. government put in place a rebate system on a tax that’s already half of what we pay. For the smallest producer in the United States, a 90 per cent reduction in that excise rate is what they’re paying. On top of that, they have direct consumer delivery where they get full margin on those sales. Since 2005, these small wineries in the United States have been growing, making more money and investing back in their business. Now they have a significant reduction in excise duty and are looking for a place to export because they have grown to the point where they can export. One of the most attractive markets in the world is Canada. They are exporting now to Canada, taking more market share away from us as we have become less profitable and can’t invest back in our business because the excise rate continues to increase. As Jan mentioned, the excise rate happens at the front of the pricing chain. The markup is on top of the excise. The GST and the PST is on top of the excise. By the time it gets down to the consumer, it increases the price of a bottle of wine significantly and makes our product less competitive against the import.

Senator Ataullahjan: Thank you for your testimony this morning. Some of my questions have been answered.

Mr. Westcott, you speak of self-inflicted wounds and a hostile policy environment. Is anyone listening? What would you like to see changed?

Mr. Westcott: I think the automatic annual increase in taxation that has no relationship to what’s going on in the country, the world and the business, has to be eliminated. Keep in mind that we had this policy for six years during the 1980s. It went from 1981 to 1986. We closed 12 distilleries in that period. It basically hollowed out all of the mid-sized distilleries across the country. We closed distilleries in British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia and New Brunswick — 12 distilleries.

I had a meeting with a small distiller in the summer shortly after Mr. Morneau announced the escalator that came in in the budget, and they were putting together their five-year pro forma as to how they were going to grow their business. He happened to have an investor when I was sitting with him, and he said that just based on inflation of about 1 and a half per cent, it took all of the profit they were projecting for that small business over the next five years. You have the investor sitting there saying, “Well, why would I put my money into this?”

The automatic nature of that is pernicious. It is literally going to kill the business. They set that rate that will take place on April 1, whatever inflation was, September 30, 12 months; so we’re probably going to be around 2 per cent of inflation. By April 2019, the differential between excise in the United States and excise in Canada, we're going to be 90 per cent higher than the United States, with no end in sight. Seriously, how do you run a business that way?

We’re a global industry. The same companies that own and make Crown Royal in Canada own Johnnie Walker Scotch, Bulleit Bourbon, own Irish whiskies and own Japanese whiskies. Our guys go to those cap-ex meetings and put their hands up and say, “We would like to have some money to really promote the Canadian whisky,” and people look at them and say, “I would love to do it, but if I put my money . . . .” And they have a fiduciary responsibility to invest that money where they will make the most return.

Is it because we can’t produce good whisky? Let me think. A year ago, one of the foremost experts in the world, Jim Murray, picked Crown Royal Northern Harvest Rye as the world’s top whisky. There’s a huge passion for rye whisky right now, our forté. We’re winning awards all over the place.

We can produce it, and we know customers want it, but we just can’t get the investment to drive the business. We export close to $800 million of spirits out of Canada, the bulk being whisky. There is a huge appetite for our products, but if you can’t attract the investment, you can’t get there. Canada has a great track record of signing good trade deals that give us access, but you have to go to those markets, teach people about your product, make them aware and get them to try it. You have to have the money in your jeans to do that, and we don’t have that money.

Senator Ataullahjan: There’s a lesson in your speech: One should listen to stuff that comes out of the Senate. Sober second thought is a really good thought; so thank you for that.

The Chair: Especially when it comes to ad valorem taxes. I remember voting on that last year.

[Translation]

Senator Gagné: I would like to follow up on Mr. Westcott’s comments, but, the wine market is still an attractive, growing market. Do you have a hard time attracting investors?

[English]

Mr. Paszkowski: There is a love affair with wine, as you mentioned, so the investment that we get for the small wineries is largely from someone who has done well in business and this is a retirement project for them. For the larger wineries, I’d have to argue the same as Jan: Yes, it’s becoming increasingly difficult because the margins are getting lower.

If you’re facing tax increases every year without a vote from Parliament, that’s problematic to investors. If you’re producing some of the best wines in the world but in small volumes, your ability to sell that to a consumer in another province is extremely important.

Youth, as was mentioned earlier, is extremely important in terms of the future of wine consumers, yet a winery can’t fully use social media to sell their product except within the confines of their province. How do you maximize the digital economy?

The government wants us to export, yet Europe owns 50 per cent of our market. All wines represent 70 per cent of our market. If we can’t find investors to invest in our business, it’s going to be difficult for us to grow in the export market and to maintain our business within Canada because more and more importers are coming here with a very significant amount of contribution from their governments and very low taxation in their jurisdictions.

As I mentioned, in Europe, any time you want to make an investment in your winery, the government will give you 40 cents on every dollar invested. You can put the best technology in the world in place to sell your wine in Canada. We can’t do that.

[Translation]

Senator Gagné: I have another question with regard to competitiveness that is somewhat in the same vein. To be competitive, we need value-added companies and value-added production. Is it challenging for your companies, and are there adjustments needed in your production so that you can be even more competitive on the market?

[English]

Mr. Hélie: I could add to this on behalf of Canadian distillers. In addition to making the best products in the world, we are globally renowned for cost engineering. Because of the high tax load in Canada for many decades, we have been leaders in taking costs out of the business; so plants in Europe and the Americas have taken our best ideas to make plants the most efficient they possibly can. We were cut to the bone years ago, so these latest rounds of taxes are going well beyond harm to that. That’s where we are in terms of the competitive nature of our facilities.

The Chair: I have one question: The survey showed that three quarters of Canadians are wine drinkers. I’m assuming these are adult Canadians.

Mr. Paszkowski: Absolutely.

The Chair: I wanted to make that absolutely clear.

I would like to thank our panel. It has been very interesting. We greatly appreciate this.

I’m going to close the meeting to the public, and we’ll have a five-minute in camera session.

(The committee continued in camera.)