Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 8 - Evidence - Meeting of October 19, 2006

OTTAWA, Thursday, October 19, 2006

The Standing Senate Committee on Agriculture and Forestry met this day at 8 a.m. to study the present state and future of agriculture and forestry in Canada.

Senator Joyce Fairbairn (Chairman) in the chair.


The Chairman: Honourable senators and all of you who are watching these proceedings on television, we are convened here this morning to discuss the worrying developments occurring in the United States that may have profound effects on Canada's sugar beet industry.

On September 8, 2006, the United States Department of Agriculture issued a notice of proposed changes to import rules regarding sugar beet thick juice that, if implemented, may eliminate Canada's ability to export this product south of the border.

These proposed changes, which could be implemented after a 90-day comment period, would have a devastating effect on Canada's only sugar beet processing plant, located in Taber, which is in southwestern Alberta, as well as to the sugar beet farmers themselves who rely on a continued operation.

I wish to thank our two witnesses this morning who have made themselves available — on very short notice — to the committee to discuss the background and the implications of these new developments. One of our guests today was set to celebrate the harvest in Taber last weekend, but it was not quite the celebration we had anticipated.

With us this morning are Bruce Webster, the General Manager of the Alberta Sugar Beet Growers, and Bob Friesen, President of the Canadian Federation of Agriculture.

Bruce Webster, General Manager, Alberta Sugar Beet Growers: First, let me thank this committee for allowing us to appear. I was in Ottawa at Canadian Federation of Agriculture meetings that were scheduled about a year ago, and this issue has snowballed recently. There have been a number of events where this issue has taken on a very high profile.

The issue is an important one for us. Sugar beet thick juice is one of the natural intermediate products of turning the sugar beet root into sugar. In our trade relations in the WTO implementation, the United States put in place a tariff- escalation scheme respecting sugar beet and sugar. We have a very small, 10,300-tonne, raw value sugar quota that we can fill at zero duty, and everything else is subject to a 16-cent duty. With international sugar prices now at about 11 cents U.S. a pound, that works out to about a 150 per cent tariff on any over-quota shipments, so no over-quota shipments occur.

To try to attract value-added imports to the United States, when the WTO schedules were implemented with Canada, the United States said that Canada could send any amount of sugar beet root or thick juice for processing into sugar, and both of those types of shipments have taken place. Sugar beet root is sent from southern Ontario into the state of Michigan, the value-added is captured there, and through our processor, Rogers Sugar, we developed a market in the U.S. for the thick juice. It is an important market for us.

The sales vary from year to year. Since March, the customer who buys the thick juice has not purchased any, but sugar prices have changed since spring, so it is an option that we need to have available. We have sent the equivalent of 35,000 tonnes of refined sugar as thick juice into the United States which would be about one third of our crop in the year in question.

The disappearance of that market, given to us knowingly and freely by the United States WTO implementation, would have a damaging effect in Western Canada. Our processor operates two plants. In meetings with government officials here in Ottawa this week, the witnesses who will appear from Rogers Sugar next week have said that a continued degradation of the markets of sugar made in Western Canada would result in having them to consider closing one of the two facilities in Western Canada.

We have been around for 82 years. During that time, we have operated off a maximum 5 per cent tariff on refined sugar; there is no tariff on raw sugar coming into Canada. We are there competing at the world market levels. The sugar beet farmers in southern Alberta, with the 1995 crop, voted unanimously to stop receiving commodity-specific support. We have operated for 11 crops now without price support. We know we can exist in the world market. We have gone through the price cycle in the last 50 years. In the last decade, we had five tough back to back years and we never once asked the government for help. We solved that problem with our processor, Rogers Sugar.

We know we are competitive on a worldwide basis. We can compete from anywhere and we have been doing that for generations. We look at this question as one that is very important in the WTO.

One of the main sticking points at the WTO is agriculture, and one of the controversial topics is sensitive products. Sugar will be on the sensitive product list and the special product list for a lot of countries. If major players in the world scene want to change the rules, and the offers that they have made and people have acted on for a decade, that will be a very bad signal to send to all the developing countries especially.

It is in our self-interest to maintain the market that was freely given to us. Even if we sent all the production from Taber, which this year will be about 110,000 tonnes, into the United States, the U.S. has a 10 million-short tonne market. We would never send all of our production to the U.S., because in the markets we serve — Edmonton, Calgary, Saskatoon — the population is growing quickly and our local customers want to buy sugar. We will never send all our thick juice to the United States.

In order to run the facilities at in Vancouver and Taber at decent capacity, we need that thick juice market, and we would ask the Government of Canada to respond to this proposal in the federal register in the U.S. that no new rules are needed. There is a rule now — the WTO schedules. For the sake of having an international trading system that is rules-based, that is where Canada has to stand.

We had meetings with Minister Emerson this week; our meetings with the Government of Canada have been very good. We were down in Washington, D.C., in June, where the agriculture and fisheries staff at the embassy were very supportive.

This is an important issue and we are glad to be able to talk about it here today.

Bob Friesen, President, Canadian Federation of Agriculture: I want to talk about some of the things that Mr. Webster has just talked about, but I will segue into a few other areas as well, after which I will be able to answer your questions.

Mr. Webster's comments emphasize the need for strong trade agreements — the importance of trade agreements for Canadian agriculture, the importance of fair and equitable rules and the importance of compliance with those rules once negotiated. We have recently focused a fair bit on the importance of bilateral trade agreements as well.

We still export over 60 per cent of our agricultural productions, so we need market access in other countries. We need to ensure that other countries do not take away preferential market access that we have maintained over the years. We also must ensure that we gain new preferential market access in some of these countries. As senators are well aware, the Doha Round is in suspension, which emphasizes even more the need for bilateral trade agreements.

Canadian farmers are getting tired of the fact that, although the U.S. always wants to negotiate trade agreements, when push comes to shove and Canadian farmers out-compete American farmers in their own market, they have all kinds of innovative ways to impede market access. Of course, we rely on the U.S. market because it is an important one for us. Canadian agriculture and Canadian farmers benefited from the Canada-United States Free Trade Agreement, CUSTA, and the Free Trade Agreement, FTA. It is extremely important, as Mr. Webster has said, that the U.S. sticks to agreements and does not impede market access whenever they feel like doing so.

I do not have to tell senators the importance of ensuring that our farmers are not hit by trade action by doing what they want to do with thick sugar beet juice. This is important to our farmers, given that they are just coming out of their worst three years for net income in their history and competing against U.S. farmers who are coming out of their best three years in their history. That illustrates clearly the strategy that the U.S. has decided to adopt in their agricultural industry. We have looked at strategy options over the last several years, especially in discussions on the comparison of government investment in agriculture in Canada with government investment in agriculture in the U.S. We often talk about the amount of money spent on agriculture in the U.S. However, it is not only about how much money is spent but also about how strategic we are in how that money is spent.

I have documents with me that illustrate some of our ideas for being more strategic in the way that we flow the money spent on agriculture in Canada. Currently, we are spending close to $5 billion per year from both levels of government and yet we are going through the worst income crisis we have faced in our history. Are we being as strategic as possible? Are we investing the money in a way that allows us to get the most utility out of it? We have some ideas on how to make the Canadian Agricultural Income Stabilization program, CAIS, more bankable and more predictable and on how we can utilize companion programs to address specific provincial needs. We emphasize the need to address the declining margin problem that exists in the grains and oilseeds sector and the horticulture sector. We will have to deal with that or our agriculture industry will continue to be decimated.

Members of the Canadian Federation of Agriculture, CFA, have begun to draft a Canadian farm bill that basically would divide the next Agricultural Policy Framework, APF, into three pillars: One is a public goods and services pillar wherein we suggest that incentive-based programs be negotiated so that our farmers can do what they would like to do but often cannot because of the income crisis. They want to be accountable and responsible and they want to ensure that they initiate and implement sustainable environmental programs, such as farm food safety, for the public good. However, they do not have the ability to pass those costs on to the consumer so the CFA suggests the creation of programs that would assist farmers in that. Such programs would create a win situation for farmers, because it would allow them to do some of these things that they would like to do, a win situation for society because it would speak to biodiversity, climate change, soil erosion, et cetera, and a win situation for both levels of government because it would decrease the load on existing programs.

I have already mentioned the second pillar — business management. The third pillar, strategic growth, would take us into developing the right trade strategies and fair and equitable trade rules while ensuring that we have the tools to compete against American farmers. This is where the issue of thick sugar beet juice surfaces: What can we do to ensure that we are as strategic as possible, that we actually grow our agricultural industry toward profitability and that we ensure that we adopt some of the strategies they have in the U.S. with regard to value added, et cetera?

The CFA wrote a letter to the Honourable David Emerson, Minister of International Trade, on the sugar beet issue. The CFA supports the sugar beet industry in ensuring that we deal with this issue in such a way that will not decimate our sugar beet production in Western Canada and that will ensure continued development of export markets rather than trying to find markets elsewhere.

The Chairman: Thank you. As an aside, the committee is very interested in looking at the CFA's farm bill because that recommendation was put forward in its last report on the grains and oilseeds study last year. The committee's recommendation was for a Canadian farm bill that would be more protective of our farmers when they are in a situation like the one they face now.

We will go to questions. Mr. Webster, this issue is not always familiar to everyone so feel free to provide any additional background information.

Senator Tkachuk: Mr. Webster, it is my understanding that the sugar beet industry has made a proposal to the U.S. federal register. What happens next? You mentioned that there is a 90-day period for comments, from anyone, I assume. What is the process after that?

Mr. Webster: After November 7, when the comments are due, the process is such that the Commodity Credit Corporation and the U.S. administration will review those comments and make determinations based on some of the questions posed. The timeline for anything coming out of the proposal stage could either be very short or very extended, depending on the mix of comments returned. We attend the annual American Sugarbeet Growers Association meeting each year. We know that they will put forward a strong lobby that the sugar beet thick juice be put under their marketing allotment system. Therefore, the domestic forces in the U.S. will be pushing for a very short implementation period of any rule.

There are people in the United States who are very worried that this might happen because it would be an assault against an agreed trade treaty. There is no set time period, but the forces in play, the domestic sugar industry and the United States, will want it implemented right away. That is the danger we face.

Senator Tkachuk: Do people outside the United States make submissions as well?

Mr. Webster: Yes.

Senator Tkachuk: Your industry would have made them.

Mr. Webster: Yes, the Canadian Sugar Institute, which I believe will be appearing next week, is making the Canadian industry's submission.

Senator Tkachuk: Is the decision made by the U.S. Department of Agriculture and the Secretary of Agriculture, or does Congress get involved?

Mr. Webster: It would be the administration that has to do it because the Commodity Credit Corporation administers the sugar policy scheme.

Senator Tkachuk: Would they sign off on it?

Mr. Webster: Yes. It has been the northern-tier senators and congressmen, particularly in the last couple of years, who have been pushing Dr. Penn and others from the USDA when they have been appearing before congressional and Senate committees to act on this issue. There is pressure on Congress to act quickly.

Senator Tkachuk: Does sugar beet thick juice have unlimited access to the U.S. market?

Mr. Webster: Yes.

Senator Tkachuk: Are there restrictions on it?

Mr. Webster: No; there are no volume restrictions and zero duty.

Senator Peterson: In the information notes, it indicates that there is a similarity in this matter to milk protein concentrates entering from the United States into Canada. How similar is it and how do we manage that issue? Also, you had indicated that we are very small part of the American market, so why do you feel that the industry in the United States is moving against this at this time?

Mr. Webster: On the milk concentrates, I am not any kind of expert. I do not have the knowledge. I am aware that is an issue in Canada but I cannot comment on it because we do not have any dairy farmers that are sugar beet farmers.

As to why it is an issue in the United States now, I think it is because of the elections in November. The political action committees of the sugar industry in the United States donate millions of dollars to candidates. We have been at meetings of sugar beet growers in the United States and it is on the schedule for presentations at those meetings.

It is a sore point with American sugar farmers even though it is a thimbleful of sugar in their market, which is growing again by the rate of population increase. What we send is not even the annual increase in their natural market, but it is a real sore point. It is raised at Senate agriculture committee meetings in Washington and congressional meetings and it is a high-profile lobby point with the American sugar industry.

I believe it has to do mainly with the election. There is a sugar dispute going on between Mexico and the United States. On January 1, 2008, Mexico should be able technically to send about 1 million ton of sugar into the American market, which would have a big effect on their market. I do not know if anything can be done about that, so action has to be, or at least appear to be, taken. There is that little Canadian industry and, if we beat them up, we can say we did something for the American farmer.

Senator Peterson: Do the processors there have extra capacity? Are they agitating, too — the processors of the sugar beet?

Mr. Webster: If you look at the American industry as a whole — and we go before the Canadian International Trade Tribunal every five years — particularly the cane refineries in the United States have extra capacity. The hurricanes last year hit the cane growing areas in Louisiana and Florida quite badly, but the U.S. industry has rebounded and their inventory of sugar has more than tripled in the last year. They were able to make an immediate response on the farm and in the sugar refineries there to solve that problem, and they do have extra capacity. Even the quarter of 1 per cent of market share, they would rather have themselves than let us occupy.

Senator Oliver: You have pretty well answered my question — which was about whether these notices that came out on September 6, 2006, with the midterm elections in the U.S. in November, were really a lot of political posturing. You have answered that part. However, after the elections are over, do you think they will have made their statement and President Bush will be able to take a new direction?

Mr. Webster: There is political posturing. If you look at statements made by Secretary Johanns, and Dr. Penn before he left, they have been very much oriented to something has to change with the U.S. sugar market or trade talks are going to be very difficult. I think the administration sees this as legitimate trade.

The Breaux report, which the USDA has to submit to Congress on a quarterly basis, tracks shipments of thick juice and other shipments of sugar into the U.S. That report has to contain a recommendation, and the USDA has always recommended that nothing should be done about Canadian sugar beet thick juice because it is a legitimate thing. The purchaser got a binding ruling from U.S. Customs before they started taking it into the U.S., so all the paperwork was reviewed and approved by the administration. It is political posturing that we hope goes away, but we know the U.S. sugar lobby will not be quiet after the elections.

Senator Oliver: Mr. Friesen, you said you were going to do something about declining margins, particularly in grains and oilseeds in the horticulture sector. I am always interested to hear about new ways that the margins for farmers can be improved. How are you going to do that?

Mr. Friesen: We have implored the AFC to analyze whether a contributory top tier in CAIS would be better than what the top tier currently does for farmers. When you talk about the declining margin issue, because triggering CAIS is based on historical margins, the lower those margins go, the less chance there is of triggering money in a claim year. That is the problem.

We are suggesting that they look at the merit of changing the top tier of CAIS to a NISA-like tier, so that farmers' contributions would be based on sales rather than on margins. They would make contributions and have matching contributions from both levels of government, which would give them more bankability and predictability — at least in the top tier.

We are not asking for outright implementation of that. Right now, we are simply asking the department to do the analysis to see whether that would work and whether farmers would be happier with that bankability and predictability than what is currently happening in that top tier — and whether that would give us better utility for the money we are spending. CAIS is flowing records levels of money, but they do not seem to be always flowing where they should be flowing; it has not created that predictability and bankability.

The other thing we are in discussions on is whether, if we brought back the ability for provinces to use some of the federal dollars to develop companion programs — if they contributed their own 40 cents and they could use some of the federal 60 cents — that would then allow provinces to address the declining margin in their province. The problem is the same across Canada, but we are beginning to realize that perhaps how we address that problem needs to be different from province to province and that that could be done through companion programs.

Senator Oliver: I would think the provinces would be concerned that if they started developing some of those companion programs it may encourage the federal government to draw back on some of the programs to which they are contributing.

Mr. Friesen: We are not suggesting that the federal government pull back. We are suggesting that we use the CAIS program as the basis for some of the things that we are suggesting be added to ensure that we get that bankability and predictability. Let us take for example the companion program that the grains and oilseeds sector in Ontario has suggested for their own province. That would create more stability in the grains and oilseeds sector and take a great load off the CAIS program. We would like an analysis of whether the savings in CAIS, as a result of creating stability in the grains and oilseeds sector and the horticulture sector, would take enough of a load off CAIS to pay for the companion program.

Senator Oliver: Have you had a chance to run these ideas by any farmers in the West yet?

Mr. Friesen: Our member organizations have run it past farmers, and that has been interesting because, as I said earlier, the problem is the same, but how farmers would like it addressed varies from province to province.

Senator Gustafson: I was going to ask about the American election, but that has been covered. I believe that is the source of the problem. Border security adds to it in some sense, especially from the American perspective.

With regard to grains and oilseeds, Mr. Friesen alluded to the fact that the last three years have been our most difficult years while they have been the best years for the Americans.

Do you believe that Canadian interests in agriculture have really looked at the global problem we are facing? We are not able to compete in the global situation because of the subsidies of the Europeans and the Americans. That will not change. We have quit buying the lie that we will get the Americans off of subsidies. In the last year or two, I have not heard the bureaucracy saying that we will get them off of subsidies.

On the other hand, we have not done anything to meet that. Look at freight rates since the Crow rate has gone. If you delivered 2,000 bushels of No. 1, 12-protein durum wheat, you would get a cheque for $6,000. From that $6,000, $3,000 would go to freight and handling charges, and you would end up with $3,000. That is not adequate payment for 2,000 bushels of grain.

Farmers are facing an impossible situation. The research that I have done shows that this is starting to affect land prices very seriously, especially in Saskatchewan and parts of Manitoba. It seems that the oil boom in Alberta has kept land prices stable. This will have a serious impact on the agricultural sector.

I hear dissatisfaction from farmers with regard to the CAIS program.

I should like your comments, particularly on the global situation.

Mr. Friesen: You began by talking about how the American election is affecting the sugar issue. I believe that to be true. I think the mid-term elections also affected their approach in Doha. The administration is willing to say all kinds of things when it comes to reducing domestic support, but let us keep in mind that the house decides how much they will spend on agriculture, so the administration can say whatever it wants. They obviously did not dare submit a proposal that suggested deeper cuts than what they had already submitted.

Having said that, their proposal would have resulted in them having to move some money around, and they would have had to decrease some of their most trade-distorting programs. However, their overall cuts did not put them below their actual spending in 2001. People have said that, regardless of whether there is a deal, the U.S. was going to spend the same amount of money.

The other thing that affected their Doha negotiations is the farm bill. I think that the fast-track vote on the Doha agreement and the vote on the farm bill is basically the same thing. If the administration were going to create too deep a cut in domestic support, I think they would have voted «no» in the fast track anyway. We are concerned about the next farm bill.

As far as domestic is concerned, we have a lot of government money in the pipeline. I would never say that we have enough. The issue of how much more money has to be spent in agriculture is outstanding. What is not outstanding is the need for better strategy. The U.S. has adopted an approach that primes the pump at the bottom. It cross-subsidizes into the livestock feeding industry and the biofuel industry. That is how they primed the pump in agriculture. Their strong biofuel industry was built on their farm bill.

We sometimes encourage farmers to diversify into crops that have not been affected by the farm bill. You will recall that, in Saskatchewan, farmers diversified into pulse crops because they were advised to grow crops that did not have to compete against the high subsidies in the U.S. They did that and then the U.S. included some of those in their latest farm bill.

They are priming the pump. In fact, about 95 per cent of their amber spending goes to five agricultural commodities. Of course, that accrues benefits to every part of the food chain. We need to be more strategic in how we invest our money.

As far as the CAIS program, it does work better for some agricultural sectors than others. It has worked fairly well for the red meat sector because that sector has shorter downward spikes and quicker recoveries than we have seen in the grains and oilseeds sector. Perhaps that is also the reason replacing the top tier in CAIS with a NISA-like tier is an important baby step toward addressing the declining margins. The fact that CAIS works better for some commodities than for others is also the reason we should address part of the declining margin problem with companion programs.

Senator Gustafson: With regard to the red meat industry, I was in Minot, North Dakota, on the weekend and I met seven cattle liners heading for Kansas with Canadian calves. That flow south in the cattle industry is the only thing that keeps the cattle market as strong as it has been. We do not have that in the grain industry. We have had it in canola, flax, and off-board grains, and that has basically kept the farmers alive for the last six or seven years. We have not had it in the wheat and barley industry that is handled by the Wheat Board.

As a result, rather than some kind of a working agreement with the U.S., we have confrontation, and that has never been positive for the grains and oilseeds industry.

Mr. Friesen: We have a free trade agreement with the U.S. Their farm bill — and this goes back to the sugar issue as well — has helped to pay for value adding in the U.S. It is drawing livestock feeding and sugar processing, et cetera, into the U.S., because their farm bill is attracting value-added inputs. That is why we believe we need to invest more top-down money in value added in Canada as well.

Their farm bill has attracted a lot of value added that we would like to keep in Canada. We become reliant on that market and that is why we can ill afford them closing the door suddenly on part of the industry that they have created for Canadian primary production.

Senator Gustafson: I have never seen the American farmers as happy with their lot as they are right now; I have never seen the Canadian situation vis-à-vis grains and oilseeds in such a devastating state of affairs.

The Chairman: It is in a devastating situation at the moment with sugar beets.

Senator Callbeck: Thank you, gentlemen, for coming here this morning.

I am sure you are aware that recently there has been an announcement on Prince Edward Island about establishing an ethanol plant, a pilot project, using sugar beets. Do you know of other plants like this in Canada or the United States?

Mr. Webster: In terms of ethanol production out of sugar beet, there are facilities in Europe that do that. In the U.S., they do not have any ethanol facilities for sugar as a feedstock.

The United States Department of Agriculture came out with a study in July on ethanol production from sugar versus other feedstocks and the National Academy of Sciences in the United States came out with a study on biofuels that rates the viability of various feedstocks. I do not think the U.S. industry is headed that way. The American sugar beet farmer would probably rather grow corn or soybean to produce some kind of biofuel.

Historically, sugar has been a contender. We have been in touch with the Prince Edward Island Federation of Agriculture within the last two months on this topic. We have been sending Mike Nabuurs all the farming information and cost of production, and so on, that relates to sugar beet in Alberta. It would be nice if an ethanol plant comes into play. Mr. Nabuurs says that the farmers in your province are very interested. We hope that it works out, but try to use the ethanol domestically. If we try to export it, some restriction might pop up.

Senator Callbeck: You mentioned that in the U.S. you thought the farmers would rather look at corn or another product rather than sugar beets. Why is that?

Mr. Webster: It is mainly because of the cost of converting the sugar beet into ethanol and also the amount of energy you get out of that amount of sugar beet. So far as the economics are concerned, soybean and corn appear to be more viable in the United States. In Brazil, they have turned huge quantities of sugar cane into ethanol and they have the scale up that makes that an economically attractive option. However, in the U.S., the industry does not seem headed that way.

Mr. Friesen: I am being told that we have the technology to create ethanol out of anything that we want but that some is more efficient than others.

This raises another important point that I briefly mentioned earlier — that is, the importance of creating an ethanol industry in Canada but ensuring that the feedstock comes from domestic production and ensuring that the benefits of the ethanol industry should accrue not only to the farm gate but also to our manufacturing part of that sector and ensuring that it can be profitable as well.

We had the president of the U.S. corn growers speak at our semi-annual meeting. We have subsidy envy and we have a bit of fun giving them a hard time, but he was blunt about it. He said, «We like the farm bill.» He is a corn producer. He said, «Why would I produce corn for food for $2 when I can produce corn for ethanol for $9?» That is the example he used. It has been extremely successful for them. We think we have a lot of opportunity there as well. We must be careful that we do it right, so that, again, it does not either just simply pull the feedstock out of the U.S. or it draws our production into the U.S. for their ethanol industry.

Senator Callbeck: To have a plant that is viable, how many acres of sugar beets would you need? I assume there is a crop rotation here.

Mr. Webster: Sugar beets should be grown on a four-year rotation, to prevent disease buildup in the soil. That is what we operate on in Alberta.

If you look at North America, Taber went through about a $60-million expansion in the late 1990s, an expansion that brought us up to 6,000 metric tonnes of slice a day. That is an average size for a modern sugar beet plant in North America. You need that size of plant with that kind of slice capacity and somewhere between 30,000 and 40,000 acres of production each year. That means you need 120,000 acres of rotation available.

The Chairman: Before we go to a second round, I wanted to comment briefly on something that our colleague Senator Gustafson has said and we have been struggling with over the last year or so. Never in our history has the grains and oilseeds industry been in worse shape, which is devastating people across the country. The sugar beet industry has been counted on for a long time. In the mid-1980s, it was shut down, almost through a government mistake. We saw a tremendous impact within a year in the small communities surrounding that area where the sugar beets were being grown. The loss of that industry affected the way the towns were able to do business and sell their products, everything from heavy boots up.

We are in the process of conducting a study that will continue into next year. We will be talking to farmers around the country about rural poverty, because these kinds of issues — for example, what has happened within the last short while with the sugar beet industry — trigger what the sense of rural poverty can be all about.

To what point can we play this game with the Americans before that plant in Taber would shut down? What can you imagine would be the effect, not just on Taber but on other communities in that area?

Mr. Webster: The Rogers Sugar officials will appear here. We have talked about this with them. There is not much room to move at all before one of the two facilities in Western Canada close because we must maintain volume. We need markets. If markets are taken away, or if our market is given away in trade negotiations and we do not get anything else, there is less production and it closes.

Sugar beet farmers are just about finished harvest in southern Alberta right now. They will bring in $40 million in income from sugar beet. The effect on Taber, Vauxhall and Bow Island would be devastating for that $40 million to disappear out of the economy.

Taber has a population of about 8,000. In the last year we have seen a Wal-Mart, a Tim Hortons and a Boston Pizza go up across the street from the sugar factory. If that factory becomes an empty building, then all these investments that other people have made in the business, and the retail that brings, will be severely jeopardized.

I moved to Taber in 1993, and on the main street and the adjoining streets there were shops that had been empty until about 18 months ago, because miraculously, contrary to many people's fears, when Wal-Mart moved in, the downtown did not empty out. All those empty spots have filled in. I would say that 70 per cent of the commercial vacancy rate in Taber was occupied.

Vauxhall has the biggest sugar beet acreage, about 12,000 acres. If that disappears, it will be replaced by grain, because the french fry factories were built in Southern Alberta when the Canadian dollar was at 70 cents. Now, at 90 cents, we will not add 30,000 more acres of potatoes or anything else. If the sugar beet industry disappears, it will not be replaced on the farm by an equivalent income but by a lesser income from grains, which are suffering the worst crisis that has been faced in a long time.

It is a very important to our Southern Alberta communities and farms that sugar beet stays in place. We have invested hundreds of millions of dollars in irrigation infrastructure there, both the Alberta government and farmers, and that is not necessary to grow grain. We can do that on dry land.

Senator Gustafson: The oil boom, in Saskatchewan at least, and I think in Alberta, has created two economies. The tremendous oil boom has been a negative in many of the agricultural economies, because you cannot hire a man. It is good for the pocketbook of the provincial government; there is no question about that. The small towns have boomed with the oil boom. How much of that effect is present in Taber and the surrounding area?

Mr. Webster: Taber and Vauxhall have small oil industries and service sectors. Certainly, one cannot find a person to hire to do almost anything. When we met with Minister Emerson on Tuesday, he was talking about truck driving and possibly visiting the sugar beet area. We said to him: You have a Class 1. If you come out, we will show you the sugar beet industry right up close. It was hard to get truck drivers to take the beets from the farm.

Senator Tkachuk: This letter to Ministers Emerson, Solberg, Strahl, etc., has no signature.

The Chairman: It is from the Lethbridge Chamber of Commerce, I believe.

Senator Tkachuk: The letter contains a couple of points I wish for you to clarify. It says that the United States has a very tightly controlled supply management scheme for sugar.

Mr. Webster: Yes. That is how the industry operates. It is a form of supply management. The domestic sugar industry in the U.S. is given an overall market allotment to supply X percentage of the market, and then WTO commitments and other trade commitments on imports fill the rest of the market. Yes, the U.S. sugar industry is supply managed.

Senator Tkachuk: I do not know if you have seen the letter. It says that the American government knowingly and deliberately established a tariff escalation scheme for intermediate products of sugar beet with Canada in 1995 and 1996. What was that all about?

Mr. Webster: Over time, before we had any free trade agreements, we had more market access into the United States than after we signed several free trade agreements, which has always been a curious point for us. However, I was at the American Sugar Alliance summer meeting in Idaho, in 2005, where I had a long discussion with the lawyer, who is now a sugar lobbyist, but he worked for the USDA and the USTR at that point in time. When WTO implementation came in, he told me quite deliberately, the following: ``We targeted your sugar in that trade agreement and we tightened up the rules and took away your access, and that was out of revenge.'' So it was directly related to an argument over supply management.

Senator Tkachuk: Just so that it is clear: The tariffs were increased during those two periods to prevent finished product from entering the U.S. market in the amount it was, in retaliation, and that was under WTO.

Mr. Webster: Yes. Initially, our access to refined sugar disappeared, and then there was a side agreement signed whereby the USDA's Re-Export Program could still operate in Canada, and we were given 10,000 tonnes of refined sugar as a benefit. That was not enough to keep open the Winnipeg sugar beet factory, because it sent 30,000 or 40,000 tonnes into the U.S. before the WTO and its market disappeared, so it had to close, and we face the same situation.

Mr. Friesen: Your first question on supply management illustrates the problem with thick sugar beet juice because they have quotas in the U.S. Previously, if they imported thick sugar beet juice, that manufactured product did not count against their quota at home, but now they want to change it so that if you import it into the U.S. and manufacture it, it will now go against the quota that is allocated to them domestically.

Senator Tkachuk: You know how I feel about supply management. At least my beliefs are consistent across the board.

Does the industry have particular political friends, such as consumer groups? Will consumer groups put forward a letter or a proposal or a brief to this registrar, addressing product? Are there political friends in the house or the Senate that we could access, or that the industry has, anything like that that would be helpful?

Mr. Webster: Yes, there will be allies of Canadian sugar beet industry submitting here.

Senator Tkachuk: Customers.

Mr. Webster: Yes. There is the Sweetener Users Association. Our president, Merrill Harris, vice-president Marcel Vanden Dungen and I attended Alberta Week in Washington at the end of June to meet with those people, and there are people in Congress who would like to see changes in the sugar program. There are allies such as consumer groups, sugar users, the company that imports the sugar beet thick juice, and the Canadian embassy is working hard, through the agriculture and fisheries counsellor, to ensure that our interests are heard. This is an internal debate for Americans. There will be many American industries commenting on this rule. Alberta has an office in the embassy and we hope that Murray Smith gets on this and gets on it hard. There are people who can be contacted.

The Chairman: Perhaps we could get some of those names.

Senator Tkachuk: I was thinking, chair, that there is no reason why we cannot make a submission as a committee.

The Chairman: That is a good idea.

Senator Tkachuk: We can talk to our trade officials here to see if there are any points that they need covered that we could cover, and there is no reason why we could not do that as well so they know how we feel about it.

The Chairman: Good idea.

Senator Peterson: I presume the product that you send down to the United States does not affect the price of sugar in the United States one way or the other. We cannot make the fact that we are affecting the price one way or another.

Mr. Webster: No, our one quarter of 1 per cent market share will not move that. The U.S. sugar program is managed effectively enough that they usually hit their target prices, and our supply does not change anything.

Senator Callbeck: You mentioned that one third of your crop in Alberta goes to the United States. Does the same apply in Southern Ontario? You mentioned a lot of it goes to Michigan. Is that also about one third?

Mr. Webster: One hundred per cent of the beets in Southern Ontario goes into the United States, and the sugar remains there because it is a higher price. None of it comes back to Canada. It is all to provide value added into the U.S. economy.

Senator Callbeck: What about other parts of Canada where sugar beets are grown?

Mr. Webster: They used to be grown in many parts of Canada, but the Manitoba industry shut down after the 1996 crop. In Quebec, it shut down about 1985, and in Ontario the previous industry was about 1967. There have been sugar beet industries across the country in many places, but Alberta is where it has survived, and it has restarted to some extent in Ontario but there is absolutely no processing done of the product here.

Senator Callbeck: You said one third of your crop goes to the United States, and you mentioned Rogers Sugar plants in Vancouver and one in Taber. Do those two plants take up the other two thirds or the rest of the production?

Mr. Webster: At the maximum, a third of our crop has gone there. We have just taken off a large crop, and we will have to send a large percentage of this one to the U.S. Basically, Taber supplies the Prairie market and Vancouver supplies the B.C. market. All of the specialty products are made in British Columbia. By that, I mean things like sugar cubes and Rogers Golden Syrup and other things. Cane molasses is palatable to humans, but you would not want to taste beet molasses. Cows like it, but you would not want to put it in syrup.

Senator Callbeck: Is there any way of increasing the value-added product in Canada?

Mr. Webster: The only way to do that is if we get changes at the WTO, which is where our trade challenges have to be settled, and get more market access so we can refine that sugar in Taber and send it wherever in the world, probably the United States, as packaged refined sugar. We would rather send it as product higher up the value chain to the U.S., but the situation is now that we have to take the market we can get. Certainly, we could do it. We are also looking at the non-food uses and so on. We hope that, over time, in order to get around this situation, we can find something else to do with the beet, because sending agricultural products across borders is a hair-pulling experience.

Senator Callbeck: You mentioned the non-food uses. What are those?

Mr. Webster: Ethanol is one that is popular. Research is being done all over the world — Innovation Place in Saskatoon, the Alberta Research Council and the bioplastics. There may be other options out there that could be favourable. As a growers organization, we keep on knocking on the door at Rogers Sugar and saying, «How about doing business with this guy?» Much of it is venture capital, so it has to be proved out before you take that step. We know agricultural markets are tough, and we will survive in the agriculture and we will move on to other things.

Senator Callbeck: In other words, all these things are still at the research level?

Mr. Webster: Yes.

Senator Gustafson: I wonder whether I should raise the subject, but in the last few years the political climate or the climate between the Canadian people and the American people has soured somewhat. I live right on the border, and I know what has happened. We are dependent, as you indicate, on your sugar beet market going down there as well as the oil and gas, the lumber and the cattle. We need a good working relationship with the Americans, or we are in big trouble. When we get high-profile people in Canada doing some of the things that have been done in the last two years, our situation is not helped at all. Quite frankly, I am very concerned about the anti-Americanism that is taking place in Canada, and it will have an impact on the economic outcome of Canada. That is all I will say about it. I think it is important, and I see Mr. Friesen's point. We have to make our point, and we have to be strong in defending Canada's rights, but there is a way to do it.

Mr. Webster: Southern Alberta is one area that is very supportive of the United States. Many sugar beet farmers have cattle and wheat. This is a never-ending merry-go-round, and that is why, on thimble-sized disputes like this, the United States should just walk away from them. The animosity it creates amongst the natural support constituency is worse than any benefit they would get from stopping 30,000 tonnes of sugar from going south.

Senator Gustafson: It is an exercise that affects the senators from each state and has a political downfall for us, if not given some reasonable approach.

Mr. Friesen: Certainly, Senator Gustafson is right. It is extremely important to develop export markets all around the world, but I am tired of doing that simply because the country right next to us with whom we have a free trade agreement is impeding our market access. We export somewhere between $26 and $30 billion a year. Half of that export value still goes to the U.S., and that is why trade agreements are so important. We can ill afford to have a country simply change their domestic rules midstream and undermine our agricultural sector. Thank you very much for your interest.

The Chairman: Thank you both. We are pleased you were able to come. We send Mr. Webster back to Taber with all good wishes. Please keep in touch with us. Comments have been made about the possibility of us in some way giving a hand in this. Senator Tkachuk talked about that. We will stay in touch and find the right way to do it. We will try to help.

Our next witnesses this morning are from Foreign Affairs and International Trade Canada, Tom Oommen, Acting Director, Multilateral Market Access, and Jennifer Fellows, Senior Trade Policy Officer, Multilateral Market Access. We also have, from Agriculture and Agri-Food Canada, Susan Sarich, Deputy Director, Western Hemisphere Trade Policy.

Tom Oommen, Acting Director, Multilateral Market Access, Foreign Affairs and International Trade Canada: The Department of Foreign Affairs and International Trade along with officials at Agriculture and Agri-Food Canada and our embassy in Washington have been working on the issue of recent proposals from the United States that could affect Canada's exports of sugar beet thick juice. I thank you for this opportunity to update the status of our activities.

As was said earlier, in September, the U.S. Department of Homeland Security, and the Department of Agriculture, published separate notices in the U.S. Federal Register seeking comments on proposals that could significantly reduce exports of sugar beet thick juice from Canada. Sugar beet thick juice is classified by U.S. Customs under the Harmonized System tariff line 1702.90.40. This particular tariff line in the U.S. system is not covered by a tariff rate quota so sugar beet thick juice from Canada currently enters the United States duty free. However sugar, which can be refined from sugar beet thick juice, is subject to a tariff rate quota, a TRQ.

In 2005, Canada exported almost 36,000 metric tonnes of sugar beet thick juice, which was valued at about U.S. $12.5 million. That 36,000 metric tonnes of sugar beet thick juice is equivalent to about 23,000 metric tonnes of raw sugar, which is more than double Canada's specific quota for refined sugar of 10,300 metric tonnes. That is a lot of sugar beet thick juice compared to our sugar quota.

Exports of thick juice from the plant in Taber, Alberta, help maintain the viability of the sugar beet industry in Alberta.

Some U.S. sugar producers claim that imports of sugar beet thick juice compete directly with sugar produced in the United States and that therefore there is some circumvention of the intent of the U.S. domestic sugar program. They have petitioned the Department of Homeland Security to reclassify sugar beet thick juice so that it is covered by a tariff rate quota.

This could significantly reduce Canadian exports. This is the subject of the first of the two notices that I mentioned. The second notice is what is called an Advance Notice of Proposed Rulemaking and in that case the U.S. Department of Agriculture is soliciting comments in preparation of a proposed rule to change the way the U.S. domestic sugar allotment system is administered.

The U.S. sugar program is based on matching the domestic supply in the United States with domestic demand at a level that maintains relatively high prices for U.S. sugar beet and sugar cane producers. In a system where supply is matched to demand, sugar coming into that market must be controlled. Therefore, the system is dependent on tariff rate quotas as a means of controlling import levels along with an allotment system for domestic processors in the United States that restricts the amount of sugar they can produce to a level calculated to match domestic demand at a certain target price.

Currently, sugar produced from imported sugar beet thick juice does not count against a U.S. processor's domestic allotment. The Notice of Proposed Rulemaking is about changing that and making that amount count against domestic allotment. It is not known if or when this proposal might actually go forward. It is estimated that sugar produced from thick juice from Canada would represent about .5 per cent of the domestic allotment in the U.S. of sugar from sugar beets and .3 per cent of total allotment, which includes sugar from sugar beets and from sugar cane. Should this proposal be implemented, it could reduce significantly Canadian exports to the United States. We are concerned about the suggestion that imports of sugar beet thick juice from Canada are somehow circumventing the U.S. sugar program because the U.S. imports of Canadian sugar beet thick juice are such that the Canadian exports fully comply with U.S. customs requirements.

Comments on the USDA FAS Federal Register notices are due by November 7, 2006, and on the U.S. Department of Homeland Security Federal Register notices by November 13, 2006. Officials from the two departments are working on drafting comments on the two notices in support of the Canadian sugar beet industry. Of course, throughout this process we have been in touch with industry. We will continue to consult with them as we work to finalize the government's comments.

Senator Callbeck: Mr. Oommen, you said that if the proposals are implemented, they could significantly affect our exports to the United States. If they are implemented, there is no question that they will affect us. Why did you say they ``could affect''?

Mr. Oommen: Senator, I am being cautious because we cannot know for certain what the future will bring. I want to emphasize a point made by previous witnesses that we do not know what the results of this process will be. There are many factors to consider, including the politics surrounding mid-term elections in the U.S. It is difficult to predict what will happen as a result of this process if implemented and afterward.

Senator Callbeck: If these proposals as they stand go through, that would definitely affect our exports. Is that right?

Mr. Oommen: Yes, I would say that is right.

Senator Peterson: Previous discussions in committee indicate that this could be driven, and in all probability is driven, by political considerations at a higher level. Therefore, the elections coming up this fall are driving much of this, so they might change the wording to make it advantageous for their side. At what level do we try to deal with this matter? Is it a trade issue over which we can fight the wording they might choose to use? How should Canada approach the issue?

Mr. Oommen: Senator, as you are aware, the Federal Register notices came out at the beginning of September. Since then, we have been working to analyze the substance of the notices and to establish our best line of response. Certainly, we will comment formally through the system available to us on both notices. I could speak to partial substance of each of the notices and what our focus might be, but we are going through the formal process, after which we will likely have recommendations to our ministers with respect to the next steps that might be pursued at other levels as well.

Senator Tkachuk: Would this application by the sugar industry in the United States result in a tariff on all exports, or are they suggesting a quota?

Mr. Oommen: The current tariff rate in question is zero for Canada. The tariff line is 1702.90.40. The advantage of sugar beet thick juice being under 1702.90.40 is that we pay no duty and there is no Tariff Rate Quota. The U.S. notices contain the proposal that sugar beet thick juice could be classified under 1701.12.10 or 1701.12.50. The U.S. system works such a way that those lines would result in our being subject to a TRQ.

Senator Tkachuk: Would it result in a TRQ or in an immediate tariff off the first tonne that enters the United States? How would that work? Would a certain amount be tariff-free after which a tariff would be imposed?

Jennifer Fellows, Senior Trade Policy Officer, Multilateral Market Access, Foreign Affairs and International Trade Canada: I believe that both of those tariff lines have TRQs associated with them, although I do not know what the in- quota tariff is or what is currently exported under those tariff lines. I believe it is some other form of sugar beet so a certain portion would be of that tariff line — either very low tariff or zero. Whether that would be filled with thick juice, in the event this is qualified as such, or by some other product, I do not know. It would depend on how precisely the TRQ is administered.

Senator Tkachuk: By slipping this under 1701.12.10 and 1701.12.50, they are throwing beet juice into another product line. Is that right?

Mr. Oommen: That is right. It is the department's opinion that the 1701 headings were meant for solid forms of sugar.

Senator Tkachuk: Would that be raw or finished product?

Mr. Oommen: It would be raw sugar product in solid form. There is another one that U.S. petitioners are suggesting as a possibility — that is, 1702.90.58. Again, it is the department's opinion that 1702.90.58 is not the right heading because it is a kind of «other» category, to include such things as other than sugar beet or sugar cane input. It seems clear to us the petitioners in this case are asking for a change to a tariff classification that does not make any sense.

Senator Tkachuk: You have told us that you are developing a response, that there has not been a response issued yet, that it is still being put together. If we decide to write, is it better to write to politicians or better to add to the bureaucratic response that you are attending to — or perhaps both? I think I know, but it seems fairly technical when we get into this thing; it is beyond my capability, in any case. I am sure there are other senators here who will be able to figure it out.

Would that be helpful?

Mr. Oommen: Our standard approach is to use all the tools that are available to us. Hats off to the Americans, there is a fairly transparent federal register process that has solid deadlines and is open to any and all commentators. We will take advantage of that, certainly. That is the formal route.

We will be making recommendations to our ministers for more direct approaches. Different approaches are possible, but one that is immediately open to us and available is certainly one we will be participating in.

Senator Tkachuk: Have there been cases like this before, or ones that are similar? I am sure there have been. Following the closing of the deadline, when will they make some decision as to what to do?

The election will be over. It is not going to help them into the election. Then there is a deadline for Homeland Security, which is even later. How long does it take them to decide what to do after the deadline dates have closed?

Susan Sarich, Deputy Director, Western Hemisphere Trade Policy, Agriculture and Agri-Food Canada: It depends on the issue. This is like a heads-up, a pre-Gazette, in terms of saying they are thinking about something and they want to get the feel of it from interested parties domestically. It also provides an opportunity for international and other parties to comment into their process, which we are doing.

It could go quickly or slowly. It depends on the momentum within the USDA. It will take time to read all the comments. It depends on the number and the complexity of comments. Following their analysis and an internal decision-making process, they could come out with a decision.

However, on this one with reclassification, it is not an advance rule. It is not like the USDA rule, which is an Advanced Notice of Proposed Rulemaking — that is what they are making it under — falling under the allotment. The one with the tariff reclassification is just saying, ``We have been petitioned by our industry to do this and we are taking comments.''

On the other notice that came out by the United States Department of Agriculture, they put it as an Advanced Notice of Proposed Rulemaking, which gives a little bit more indication that there is some internal thinking about some change in policy-making. The next step forward would be a proposed rule. ``We have put out this notice, we got all sorts of comments.'' If they want to move forward on it, it would come out in the form of a proposed rule, which would have a commentary period as well.

Senator Tkachuk: When they make a rule, is that similar to our making a regulation here, or is it an actual product of legislation?

Ms. Sarich: I cannot say for sure. I think it would be more in the regulation as opposed to legislation, because legislation means it would have to go through the House. The other would be an internal change of their policy, which would be done outside the House.

The Chairman: If this committee were in agreement that we wanted to write a letter, or whatever form is appropriate, could we count on you for some help?

Mr. Oommen: Of course. We will provide support through our ministers' offices.

The Chairman: I am glad you raised it because it is something we should be thinking about doing.

Senator Tkachuk: There are also agriculture committees. They have their own issues; I am not sure what side they will fall on, how they will deal with this.

The Chairman: They are still on BSE.

Senator Tkachuk: That could be. We should take some political route if we can identify who we would send the letter to. I think that is the most important part, whether it should be a formal application or maybe go the political route.

The Chairman: Our researchers can take a look at that, perhaps.

Senator Gustafson: I have one comment. Our chair knows it probably better than I do. A lot of hard work goes on in this industry; a lot of it is done in rubber boots. The point I make, which the chairman has been making both in the Senate chamber and here, is that the lives of these people are affected by this. It is important that we take it seriously and do what we can to support them. Hopefully, it will straighten around. If it does not, the fallout will be unpleasant.

The Chairman: I agree with what Senator Gustafson says. Sometimes when you are living in the nation's capital and working here, you forget what is happening on the ground. Senator Gustafson never forgets because he is on his tractor and harvesting a lot. He knows what is on the ground.

I try to stay close to this industry because it is special. Clearly, harvesting is a time of joy and enthusiasm. This was a very difficult time because all this was happening just when they were ready to have their celebration last weekend. It was certainly toned down from its equivalent in previous years.

Nonetheless, as the senator said, this is a hard-working group. It has a product that is necessary. The fallout that comes, if there are changes to the farm part of the group, automatically shifts over into the community and the economic situation of that community. Rogers has a major plant in Taber. The implications would be serious and would spin out even into my own city of Lethbridge.

Senator Peterson: An earlier presenter indicated that our exports into the United States on this product have absolutely no effects on producers there or anyone else. It is a minuscule part of it.

Usually in a trade dispute of this nature, someone is being hurt — a producer is being hurt, he is being undersold or there is dumping. That is not the case here at all. All these numbers you had, reworking and trying to slide it into there, are just a smokescreen, trying to shut down the border. The strategy is all value added, they want everything, so it seems to me their strategy moving into this has to be on this trade distortion. It is not affecting them down there, it is not hurting anybody, so what is provoking this?

After November, maybe it will go away if the issue, as has been said earlier, is driven more by elections than anything else. It is an odd situation when such a small part of the market, which is not hurting anyone, gets closed down. As we look into the strategy, it has to work around that situation.

The Chairman: Certainly, this is one track we will follow. Are there any other thoughts, Mr. Oommen, from your perspective and the department's perspective, on how we can be useful?

Mr. Oommen: I want to mention that the fact that we are here on relatively short notice I think points out that both the Minister of Agriculture and Agri-Food and the Minister of International Trade are engaged on this issue. They have asked us to look after it and to do whatever we can to help our producers. I wish to emphasize that this is a priority for us.

The Chairman: I thank you for that. When I arrived in Taber last Thursday night, I noticed the presence of a young man from the embassy in Washington. He had been helping Senator Tkachuk, Senator Gustafson and I in our tour around Capitol Hill on another issue on BSE. The presence of this young man, Fred Gorrell, in Taber made my antennae go up and made me think that there is a reason he is here and that this is important. I must say it was very encouraging for the farmers there that his presence did indicate that the embassy was concerned, as are we all, and that he cared enough to come, as we often say in politics.

Senator Tkachuk is leading the charge here. We will carry on and perhaps be in contact with you. Certainly, we will not take action without first alerting the ministers involved, and for any assistance they might give us.

Thank you very much for attending here. It means a great deal to those who may be watching from Taber, and elsewhere, that our national government and its operations are on the job and working hard for them.

The committee adjourned.