Proceedings of the Standing Senate Committee on
Agriculture and Forestry

Issue 1 - Evidence - Meeting of April 21, 2009


OTTAWA, Tuesday, April 21, 2009

The Standing Senate Committee on Agriculture and Forestry met this day at 5:10 p.m. to study on the current state and future of Canada's forest sector.

Senator Percy Mockler (Chair) in the chair.

[English]

The Chair: I declare the meeting in session.

I welcome you to this meeting of the Standing Senate Committee on Agriculture and Forestry. Thank you very much being here.

I am Percy Mockler, from New Brunswick, and I am chair of the committee.

[Translation]

I would like to invite all members of the committee to introduce themselves.

[English]

I would like to ask the members of the committee to introduce themselves. I will start with the deputy chair of the committee.

Senator Fairbairn: I am Senator Fairbairn, from Lethbridge, Alberta, in the south part of the hills in the Rockies. I have been on this committee for quite some time, and I am delighted that we are able to speak to those across the country.

[Translation]

Senator Eaton: My name is senator Eaton, from Ontario. I was just appointed senator and I am a new member of this committee.

Senator Poulin: My name is Marie Poulin. I have been representing Northern Ontario in the Senate since 1995. I think that, with the staff and members of this committee, we will meet our objectives, and our study will be fruitful and will support Northern Ontario growth.

[English]

Senator Cordy: I am Senator Cordy, from Nova Scotia. This is my first time. I am brand new to this committee.

Senator Poy: My name is Senator Poy. I am here to replace Senator Mahovlich. I did not know that this is the very first meeting. I have never attended the agricultural meeting before. This is my eleventh year, and I will find out how interesting this committee can be.

[Translation]

Senator Mercer: My name is Terry Mercer, from Nova Scotia.

[English]

I have been a member of the committee for five years now.

[Translation]

The Chair: I will ask the senator who just arrived to introduce himself.

Senator Meighen: I am here to replace senator Duffy who had a minor surgery, as I was told, and who has to take some rest. This is not the first time I attend a meeting of this committee. As my knowledge of these issues is somewhat limited, I am here to learn.

The Chair: Today is our first meeting about the current state and future of Canada's forest sector.

[English]

In order to gain an overview of the forest industry, the first phase of the study is to gather more global information. On that, today we have Assistant Deputy Minister Jim Farrell, who will make a presentation.

Mr. Farrell, we thank you for accepting the committee's invitation to appear today. I would now invite you to take the floor and make your presentation.

Jim Farrell, Assistant Deputy Minister, Natural Resources Canada: Thank you very much, senators. I have a short presentation that presumably we will follow with some questions and answers afterwards.

I thank you for the opportunity to speak to you about some of the challenges facing Canada's forest sector and the role that Natural Resources Canada is playing to address them.

As you are no doubt aware, the forest industry in Canada is in the midst of probably the most difficult period that is perhaps unprecedented in living memory. The situation is a result of a confluence of factors, some of which are cyclical in nature and others that are structural.

While segments of the industry, such as lumber and other wood products, generally prospered through the middle years of this decade, other parts of the industry, the newsprint sector for example, were challenged by factors such as declining North American demand and increased global competition.

More recently, the sharp weakening of the U.S. residential construction market, combined with the global economic downturn and tightening of credit markets have resulted in a situation where virtually the entire industry is facing an extremely difficult operating environment. Since 2003, employment in the forest industry has declined by nearly 100,000 jobs across Canada, with some 20,000 lost in 2008 alone.

Despite these difficulties, there is reason to believe that over the longer term, growing global population, combined with rising incomes in key markets, will create new opportunities in global markets for Canada's wood products sector. In addition, a number of emerging technologies in the forest sector open up the possibility of creating new markets for wood fibre-based products ranging from petrochemical substitutes to green power and cellulosic ethanol. The development and commercialization of these technologies creates the possibility of generating new economic opportunities and once again attracting investment in Canada's forest sector.

Through the 2009 Canada's Economic Action Plan, the Government of Canada is taking a series of measures that will help the forest sector, as well as the workers and communities that depend on it. These measures include: improved access to credit for businesses and consumers by providing up to $200 billion through the Extraordinary Financing Framework; extended, accelerated capital write-offs; eliminating tariffs for a range of capital investments in equipment and machinery; $1 billion over two years for the Community Adjustment Fund to help moderate the short-term impacts of restructuring in communities, including agriculture, mining, fishing, manufacturing and forestry; $8.3 billion toward the Canada Skills and Transition Strategy to help Canadian workers and their families through training and benefits, including the extension of the Employment Insurance Work-Sharing program; and $7.8 billion in tax incentives and funding for residential renovation and construction projects that increase domestic demand for lumber by as much as 1 billion board feet, while also increasing demand for other building products.

More specifically for the forest sector, last week in Quebec City, Minister Raitt announced the details of $170 million in funding over two years for measures specifically designed to secure a more sustainable and competitive forest industry. These measures include $40 million for the renewal of the Canada Wood Export Program, the North American Wood First Initiative and the Value to Wood Program.

Working in partnership with provinces and industry, the Canada Wood Export Program helps to grow demand for Canadian wood products and targets overseas markets, including China, South Korea and Europe, through education promotional activities and work on building codes and product standards.

The North American Wood First Initiative focuses on realizing the untapped potential to increase the use of wood within North America in commercial and institutional buildings or other end uses outside the residential sector. Last week's announcement also included $10 million to support large-scale demonstrations of Canadian-style use of wood for construction in offshore markets or non-traditional uses of wood in domestic markets.

These programs will showcase Canadian wood products and building systems in high-profile domestic and foreign markets. They will build on the experience of the Canada-British Columbia Wenchuan Earthquake Reconstruction Project, where Natural Resources Canada is supporting the construction of public buildings in the region of China devastated by an earthquake last year. Beyond its humanitarian benefits, this project is helping to showcase the value, quality and remarkable seismic properties of Canadian-style wood-frame construction technology.

In addition, $120 million over two years is being invested in advancing the development and commercialization of emerging technologies in the forest sector in such areas as bio-energy, bio-refining, nanotechnology and next- generation building products and systems. More specifically, this funding includes $80 million for the Transformative Technologies Program, administered by FPInnovations, as well as $40 million to develop pilot-scale demonstration projects of new products that can be used in commercial applications.

I will give you an example of a very exciting prospect in innovation. A consortium of researchers at FPInnovations and universities across Canada is working on the development of bioreactive, or "smart'' papers that could have applications such as the development of food packaging that could prolong the shelf life of food by repelling pathogens, or at least warn consumers of contamination via colour signals.

Another example is the development of products from the very micro or nano level of tree fibres called nanocrystalline cellulose. Light and extremely strong, this material is showing excellent properties in the lab, and, over the next two years, we will be funding pilot-scale operational projects to move closer to commercialization.

The Government of Canada recognized that the forest product sector is facing significant and immediate challenges. Supporting the sector and its workers continues to be a priority for the federal government as evidenced by the measures announced in Canada's Economic Action Plan. It also affirms our commitment to our traditional industries by creating the conditions that will enable them to succeed by adapting to the emerging market opportunities in the 21st century.

Senator Mercer: Mr. Farrell, thank you for coming here and starting off our study. It is important that we start with the federal department. You are probably one of a number of people we will talk to in the department. We may want you to come back at some point, and we hope you will be monitoring our progress so that you may give us direction if we have missed something as we go along because we are learning as we go.

I am a little confused. In the media this week, we heard the good news that the Government of Quebec made an offer to AbitibiBowater of some loan guarantees, I believe it was, and some actual money because of their problems. However, I was confused by the response that I heard. People talk about the softwood lumber deal being problematic with this. I do not see the relationship between paper and softwood lumber.

I come from Nova Scotia, where we produce a large amount of paper. I see a significant difference between paper and softwood lumber. Perhaps you could help me, and maybe others, understand why the Softwood Lumber Agreement would spill over into governments trying to assist paper producers.

Mr. Farrell: One of the provisions of the Softwood Lumber Agreement is an anti-circumvention clause. Under the anti-circumvention dimensions of the agreement, Canadian governments, both federal and provincial, are prevented from offering what would appear to be subsidies that may confer a benefit on the lumber industry.

AbitibiBowater, for example, is a firm that makes wood products, as well as newsprint and pulp. It is a highly integrated company, as I am sure you know. If there were to be a subsidy conferred at AbitibiBowater, the U.S. would no doubt challenge us under the anti-circumvention clause of the agreement.

Senator Mercer: If the Government of Quebec, or any government, who made this offer were to restrict the aid or benefit to only the paper portion of their operation, would that help not impose the problem?

Mr. Farrell: It would be difficult to make that argument in an arbitration hearing. Again, I want to clarify that the action that Quebec took last week, in our minds in Canada, was not a conferred subsidy. The Quebec government reacted quickly after the company declared protection under the Companies' Creditors Arrangement Act and offered what they call debtor-in-possession financing, which is something that lending institutions would do as a matter of course to all businesses. In their particular case, they offered up $100 million under pretty strict conditions of restructuring.

Senator Mercer: I am excited about the Province of Quebec being the first one off the mark to do this. I would like to explore that further with them at some other date. I am not being critical of them but trying to find out more.

In your presentation, you said that, since 2003, the industry has declined by nearly 100,000 jobs, and 20,000 jobs were lost in 2008 alone.

I know this is only April, but much has been happening in this industry in 2009. I am not suggesting that you would have hard numbers, but you must have some estimate as to how that number has grown, just in the first four months of this calendar year.

Mr. Farrell: You are right, senator; I do not have a number off the top of my head. Those numbers include temporary curtailments, as well as permanent closures. Certainly, since January 1, we have heard more announcements of either new curtailments or extending curtailments based on the poor markets and poor pricing out there.

Senator Mercer: Again in your presentation, I was excited about the Canada-B.C. reconstruction project in China and the marrying of a problem that we have — an ability to produce wood products with a pretty soft market — with our foreign aid or emergency aid.

Is this a new innovation, or is it something we have done in the past? If it is new, are there plans to continue to link the availability of wood products with perhaps the operation of the Canadian International Development Agency, CIDA, and other organizations that are working overseas to provide Canadian aid to places such as China? We are obviously active in Afghanistan and other parts of the world.

Mr. Farrell: I would have to defer to the officials at CIDA, but the project in China is essentially based on a partnership with the Chinese government as well as the state government to actually demonstrate the use of wood in their suite of construction.

China does not have a culture of using wood. It may have many years ago, in terms of temples. However, certainly in China today, it is nearly all concrete; unlike the work that we started in the late 1960s and 1970s when we opened up a market for Canadian wood products in Japan. We were working with a culture there that used wood, but the applications we were looking at were a little different.

In China, it is a bit more of a challenge in that there really is not a wood culture. However, the attractiveness and what helped in Japan was to be able to see how well wood stood up in severe seismic conditions. In the Kobe earthquake, which I believe was in the 1990s, the wood construction — two- or three-storey wood buildings — fared much better than the concrete and steel buildings.

[Translation]

Senator Poulin: Mr. Farrell, thank you for your excellent presentation. As I said earlier, I represent Northern Ontario, and you are probably aware of the fact that the forest industry is very important for this region. When I look at the history of our families, my grandfather, Émile Charrette, settled in Northern Ontario just outside Sudbury, where he bought and developed a wood yard. He was coming from Quebec City, and during the recession, he managed to sustain his family and create many jobs in the region.

Yet, one hundred years later, we see our cities and communities in Northern Ontario completely devastated because of the weakness of our forest industry.

You have probably read our order of reference, for the Committee on Agriculture. The first item is to identify the causes and origins of the present forest industry crisis.

In your presentation, you talked about the decisions made by the government in this regard. I would like to ask you, Mr. Farrell, as the assistant deputy minister, what are, in your opinion, the causes of the crisis we are going through and its impact on all regions of the country.

Mr. Farrell: May I reply in English?

Senator Poulin: It is always easier to speak in one's mother tongue. When you speak in English, I understand you very well, and when I speak in French, you understand me as well.

[English]

Mr. Farrell: I started my career in the forest products industry in 1974. I spent eight years with AbitibiBowater before I worked in the provincial government in Southern Ontario and then with the federal government. I have had a chance to see the industry over the last 35 years.

It is a good question. These sorts of challenges do not occur overnight. The issues are different in the wood industry than in the pulp and paper industry. In spite of the market today, Canada probably has the most competitive softwood lumber mills in the world, primarily in British Columbia.

These two sides of the industry in Canada are highly integrated. That is what happens when one part of the industry has trouble. There is a supply and demand dimension between wood and chips, and between the pulp and paper industry and lumber.

The pulp side of the industry is a very capital-intensive industry. The mills going into places such as Central America and South America are in the range of $1.5-billion to $2-billion investments. We have not seen a greenfield operation invested in Canada probably since the 1970s. That was in Alberta when the province opened up their wood supply.

First, in simple terms, when you are in a commodity business, size matters. The new facilities across Southeast Asia, Central America and South America are much bigger. Therefore, their cost per unit is much more competitive than our own. Having said that, Canada has a very attractive fibre basket with the kinds of species we have in softwoods. Nonetheless, technology and printing capacity currently has narrowed the gap in many respects between a good- quality fibre and a marginal-quality fibre.

Second, in Eastern Canadian, I spent 14 years living in Sault Ste. Marie, Wawa and White River. I am familiar with the mills in some respects. The newsprint industry in North America has been seeing a secular decline. Thirty years ago, everyone forecasted the paperless office. We are getting there quickly, especially in newsprint.

It is no surprise to anyone here that the next generation gets their news from different places than I do. I still enjoy my newspaper, but my children would much rather get it on the Internet. Therefore, we have seen approximately a 20 per cent decline in demand in North America for Canadian newsprint. Some of our newsprint producers still market all over the world. However, we are still quite heavily reliant on the U.S. market for newsprint.

It is a combination of demand, cost of production and our input costs. Our wood costs in Canada, especially in Eastern Canada, are quite high. The forest products industry in Canada assumes a large degree of responsibility for land management. As a result, we are shipping delivered timber a long way. In Northern Ontario, some wood is hauled over 250 kilometres.

All of those factors together make it difficult for the current model and the model of the past that produced commodities from Canadian forests to be able to compete worldwide. We went through that brief period with a high Canadian dollar for about 20 or 25 months. That was tough for the industry given that the differential between the Canadian and U.S. dollars was one that gave Canada extra advantage. In 2007, the U.S. housing market started to deteriorate.

In going forward, I fully expect the wood products industry to continue to be competitive once the economy starts to pick up again. Challenges will remain for the newsprint industry. Our pulp industry will be looking for opportunities to differentiate their pulp product from some of the globally-traded products. Some firms have already been able to do that.

Senator Poy: Thank you, Mr. Farrell. This is new to me, so would you explain what FPInnovations is?

Mr. Farrell: FPInnovations is a newly created forest products research institute here in Canada. It has a unique structure from that of any of our competitors in the world. Until about two years ago, we had three national forest research institutes: Forintek, which used to be part of our department back in 1979 but spun out and succeeded on its own, focused on wood products; Feric, a forest engineering research institute, which did transportation harvesting; and Paprican, which did pulp and paper research.

The board of directors — at the time I was a member — came to the view that this is a highly integrated industry, and it did not make sense for the innovation system to be as fragmented as it was. In fact, it was becoming a liability. The board of directors was made up of provincial deputies and industry CEOs. They agreed to consolidate these three institutes. My own organization, the Canadian Forest Service, created something called the Canadian Wood Fibre Centre, which is a fourth body that focuses on how to extract the most value out of the Canadian forest.

We now have this continuum from the forest all the way through manufacturing and targeting markets at the end. Even in a time of bad news for the sector, we are counting on that innovation system to position us for when better times arrive. We have invested heavily on the innovation in that system.

Senator Poy: Can you explain a little more about nanocrystalline cellulose?

Mr. Farrell: I can try. I am not a chemist or engineer. The part of the tree that makes paper and pulp products is the cellulose, which consists of strands that are glued together by lignancy. When the lignant is melted out, cellulose is left. At the nano level, particles can be manipulated to change some of the characteristics at the cellulose level or even at the wood-product level. It creates a product that has unique characteristics in terms of weight and strength. Work has been done on this in various places around the world.

However, over the last three years, the work done at FPInnovations has moved the research and development agenda forward remarkably. We are already looking at a couple of pilot-scale projects that will have private-sector investment as well as applications in product areas such as aerospace and automotive. If you can imagine a very light- weight body, either on a car or in an aerospace application, it would be a remarkable development.

I do not think we will see a commercial product within three years, but I would say that perhaps within five to six years you could start seeing some of this on the market.

Senator Poy: Currently, are smart papers being produced?

Mr. Farrell: The Sentinel Bioactive Paper Network is headed up at McMaster University and FPInnovations is heavily involved. It began as a Network of Centres of Excellence, NCE, and is into its fifth year, I believe; it is a good five years out. The challenges are remarkable, but the team they put together is equally as remarkable in terms of microbiologists, chemists and others with the types of skill sets you would not normally associate with the forestry sector.

The application is not only in the packages industry but also in the sanitary-products industry: for example, hospital applications such as a surgical masks that gives a colour signal when it comes into contact with a virus or a bacterium. In the future, it might actually have the capacity to neutralize the virus or bacterium.

I received a brief on this two weeks ago or so and learned that great progress is being made but technical challenges exist to producing this on a large scale. If it remains a boutique item, it will not serve the industry well. To be able to produce a paper-based product in mass quantities that is recyclable and to utilize it well while taking into account the fine engineering requirements around biotechnology and microcircuitry in some of these applications is truly quite demanding. I am told that if we can keep the investments up, we could have something out there within five to seven years.

Senator Poy: How do our innovations and research and development compare to other countries? I would like to know whether we are ahead or lagging behind.

Mr. Farrell: You will likely hear from other witnesses who are more expert on this subject than I am. We focus specifically on those two areas because they give our natural fibre basket — black spruce, Jack pine and boreal trees — a specific advantage, although perhaps not some of the other areas of pulp and paper production. Our innovation strategy is such that we need to go with our strengths. If the rest of the world can produce many commodities more cheaply than we can do it, then we must ensure that we carve out a niche where we will have a long-standing, competitive advantage.

Senator Fairbairn: Mr. Farrell, thank you for painting a picture for us in terms of how we are doing competitively. It is most helpful for us to know that.

This committee decided a few years ago to travel to every province and territory during its study on rural poverty. We heard about the difficulties faced by people, whether they were growing wheat or working in the forestry sector. As a committee, we made a commitment to that study and released a final report just prior to last summer.

In respect of the forestry industry, we visited all of the provinces and as many areas of the territories as possible up North. I am thinking about all of the efforts made by the government to try to keep up with not only the selling but also the producing in the various parts of our country, which are quite different. At one time, Northern Ontario was really hopping in the industry, and then, suddenly, it had moved, which raised great concern for them. They were concerned about schools and buses and all the regular daily activities because they were losing their foundation. Various sorts of realities existed in other parts of the country.

I come from Lethbridge, Alberta, near the Rockies and cross-border into British Columbia. We have had a marvellous forestry industry in our history. Currently, we face a difficult situation because of the pine beetle. We went to Prince George and saw the effects of the mountain pine beetle. It was quite breathtaking. In one small town people picked up these pink wood tree things that were on the ground and thought that perhaps they could make something from them. They insisted on us coming to see them. They were making decorative items for the dining room, living room or bedroom. People were coming to that town and buying the items because they were so attractive and slightly pink. Unfortunately, we have learned since that the place has shut down.

At the heart of the industry, which you know, is the issue of the pine beetle and the devastation it is causing. I am not sure how far it is jumping the border in Northern Alberta, but it is working its way south. We are looking intensely in all those little towns in the Crowsnest Pass because if it appears there, we will be in dreadful trouble.

It is natural to think that we can do nothing about it. However, in the last year, has the federal government made any effort to hone in on the science that is working hard to try to stop this pest? How has government been helping those who, in spite of it all, have survived and are trying to get into the marketplace?

Mr. Farrell: A $200-million investment was made in 2006 that had two dimensions: slowing the spread, which was basically through the forestry program; and $100 million to mitigate the impact through community economic development and investment in infrastructure. Certainly, before the global slowdown, the western Asia Pacific Gateway and some of the networks around Prince George and Prince Rupert being part of that intermodal transportation were gaining enthusiasm. Those investments have been made.

The primary focus in the forestry program was twofold. One was doing what we could to slow the spread. As you can imagine, with a 9-million hectare infestation, the key question is where to start. That goes back to the science that we have done at the Canadian Forest Service to forecast where the beetles will be so that efforts to slow the spread of the pests can have the maximum impact.

We have resigned ourselves to the fact that we will not stop the pine beetle's advance specifically through controlling the spread. The key thing is to try to buy some time to salvage as much value as possible and to return to the weather that we used to have that would slow the pest down naturally — primarily for the fall to be cold before the beetles bore in and settle for the winter. A couple of colder falls have slowed it down, but it will in all likelihood take more than that to have an impact.

Alberta has invested much time and effort. Again in the southwest, as you know, in the foothills of the Rockies, the water source for many of the rivers in the southern part of the province — I do not have to tell you this, senator — is a concern.

Senator Fairbairn: The Oldman River.

Mr. Farrell: The Oldman River is a major concern. In the northwest part of Alberta into Grande Prairie, again, there has been a great deal of effort to try to slow that pest down.

In terms of control, some chemical products have been developed. However, they are pretty expensive at this point; it takes time to get the application cost down. Also, given the size of the infestation, it is not up to the challenge of mass control, unlike spruce budworm, for example, where the larvae are out and exposed in a feeding period for four to six weeks. They are exposed to some sort of biological applications. With beetles, they spend such a very small part of their life cycle outside of the tree and as soon as they hatch, they fly off. Therefore, being able to target them in a feeding state is essentially impossible. They feed inside the tree, so it makes control much more of a challenge, certainly mass control.

Senator Fairbairn: Recently, travelling out there, I ran into a couple of young fellows from New Brunswick. They had their boots on, and I saw them carrying stuff into the plane. When I asked, they told me that they had been studying this and were going to Crowsnest Pass as part of an army to try to make it all stop, if possible.

These young people, who had been discovering different ways to tackle issues with other insects or whatever in their own areas, were not feeling down and under with this issue. They were full of confidence that they would really accomplish it. I am quite sure that the department is part of encouraging this, to get people who think they can help to move across the country to do their best in our area.

There is hope. There is no doubt about it, but it is scary stuff.

Senator Tkachuk: Senator Fairbairn and I were at hearings in Vancouver — this would have been about 10 years ago, maybe not quite that long. We were looking at climate change and agriculture at that time. We had these scientists from the University of Victoria who told us that they had predicted and told government officials that the pine beetle infestation will become a serious problem if we continue to practise the forestry methods that we practise, which is basically not to let forests burn.

They said that the officials did not listen, and hence we have a pine beetle infestation. I do not know whether the Americans have one or not.

Mr. Farrell: Yes, they do.

Senator Tkachuk: It is not just the cold weather. It is the fact that we do not let forests burn. Maybe we should light them up. Something has to happen; otherwise, they will continue to proliferate, and they will always be here.

Mr. Farrell: The pine beetle is an endemic pest to western North America; they have always been part of that ecosystem. Before European settlement, the pine forest, the ponderosa pine — what they call the interior pine forest — was probably on a varying burn cycle of 35 to 45 years. You would constantly have this fire as part of that ecological cycle, which would have a tempering effect on any pest outbreaks. In many respects, it was similar to Eastern Canada in the boreal.

Public policy around timber management — as well as human settlement, more so in the U.S. — was to protect the forest. In our case, it was more for timber for commercial use, and in the U.S. it was more for human life and property. In Canada, we have had big outbreaks before. A cold winter, or a couple of them, would put the problem aside, and it would be a couple of decades before another real outbreak was seen.

With all due respect to the B.C. government, they were thrown off because they had been through these outbreaks before. The assumption was we would get another cold fall — maybe not this year but in one year, three years or five years — and by the time they realized we would not be having another really cold fall, the epidemic had exploded.

Senator Tkachuk: I do not know much about B.C. weather except that I have spent some time in B.C. and know the northern part gets cold at times, particularly Prince George and that area. However, Southern B.C. does not get cold. It is pretty warm all the time and has been.

This issue has to be addressed. It might be a good idea to analyze how much the forests have really been saved by the forest policy because it has all been destroyed by the pine beetle. Maybe controlled forest-fire management might be a better way to go, to let nature take its course from time to time to get rid of these pine beetles. In the long run, it will save the forests rather than destroy them.

It would be a worthwhile study.

Mr. Farrell: It is an ongoing challenge for provincial governments to try to incorporate what they call prescribed fire as part of that regime. Even though we know much about prescribed fire, it is never 100 per cent. Every now and then, a fire gets away, and that, unfortunately, does put back the fire policy for a number of years. It has always been part of the ecological cycle in the boreal, particularly in the inner mountain area of British Columbia.

It is important to remember that it is the pine trees in the interior of British Columbia that have suffered. The question that the B.C. government is still working on is how many other species will be there? Not all the trees are gone. In some parts of the interior, pine represented a high percentage; but other parts with spruce and poplar will continue to make up a substantial portion of that forest. However, some areas will be heavily hit for a number of decades.

Senator Eaton: Who are our biggest global competitors in terms of forest products?

Mr. Farrell: It will depend on the product. In terms of lumber, our biggest market by far is the U.S. Until recently, we had 30 to 31 per cent of that market. The balance of that market was domestic production, with the exception of about 3 to 5 per cent that came from Europe or Central America. Frankly, the U.S. domestic market is the big competitor for softwood lumber, in the U.S. market.

Senator Eaton: You were talking about the huge mills that are being built in South America. Are they competitive with us?

Mr. Farrell: In pulp, especially in hardwood pulp, yes, they are. The big competitors for hardwood pulp are Central and South America. Their cost of production is such that they can ship copy paper, or printing paper, into Canada much cheaper than we can even produce it.

Senator Eaton: When you talk about those big mills, you mentioned at the beginning that some things are cyclical and some things are structural. I guess I am more excited by the innovative part of what you presented.

What type of structural changes will we have to encourage in Canada in order to start making these wonderful cellulose masks, cellulose as ethanol, the wonderful wood products that we will ship to China that are stronger than steel and lighter than aluminum? What will we have to do?

Mr. Farrell: That will not occur overnight.

Senator Eaton: No. However, if we have a road map, we can begin to encourage people to go that way.

Mr. Farrell: My bias is that our great advantage here in Canada is the size of the forest. Even with the changing climate, a 400-million hectare forest, especially in the species that we have, is second only to Russia. We have infrastructure, skill sets and a governance and organizational structure that make it an attractive place to invest.

The key challenge is how to recast the investment opportunity for the Canadian forest.

Senator Eaton: If we were trying to create a road map in this committee, what would the road map look like?

Mr. Farrell: It would deal with two aspects, in my view: innovation and markets. We need be able to have an innovative agenda that extracts more of the value rather than the volume from Canada's forests. We have had a forest industry in this country that has been great, but it has been based on the volume model. We will always be producing pulp and some level of paper and wood products, but we need to diversify that portfolio of products.

We need to show the way in terms of what the opportunities are, whether they are nanocrystalline cellulose, NCC, or whether they are a more cellulosic-based ethanol. That is where the public investment comes in to set the table. However, at some point, it has to attract private investment, then, to move it forward to commercialization. Therefore, setting the table for that investment in innovation is a very legitimate and important aspect of our strategy.

The second aspect is markets. We will, in all likelihood, continue to be quite reliant on the U.S. market. However, we need to be able to ensure we have many options. That has been behind our developing a market for wood products in Japan, and, frankly, it is behind the same effort that we are now working on in Korea and China. If all the forecasters are right, these are parts of the world that will continue to move up the prosperity curve. Certainly, even though the dense populations in places such as Shanghai and Beijing will continue to make it difficult to build high- rises from wood, there is an awful lot of interest around what we call aesthetic uses for wood such as wood coverings and wood furniture. Again, that is a very competitive market. Canada is part of it, but it is a very competitive market.

Therefore, that road map would include opening up opportunities for the Canadian fibre basket with innovation as well as diversifying markets for our products.

Senator Eaton: Do you see that easily done?

Mr. Farrell: No, this will not be easy.

Senator Eaton: Why not?

Mr. Farrell: It will take some time to be able to refine the applications for Canadian fibre to the point where it will attract that first big investment in creating a product from the forest instead of creating a forest product; creating a product from Canadian fibre.

Restructuring will be difficult. Some mills will not open up. Again, having lived in Northern Ontario, the impact on the community is huge with that type of restructuring. Some of that will take some time. Replacement for a mill closure to a mill that will produce cellulosic ethanol will not be immediate.

The geographic distribution of where this infrastructure will be located will be different than where it is today, especially in Eastern Canada. Most mills are on the water because water was the source of transportation. If you were to put mills in the Canadian geography today, you probably would not put many of them where the existing ones are located.

Senator Eaton: Do you mean you would move them closer to urban centres?

Mr. Farrell: Possibly, or move them closer to the U.S. markets or to deepwater ports for access across the world.

Senator Cordy: By the way, Halifax has the only ice-free harbour in Canada. Let us send all the industry there.

I will follow up on Senator Eaton's comments. I am new to the committee, but when I look at the future of the forest industry, I get a little nervous, especially with 100,000 jobs lost since 2003 and 20,000 jobs lost in 2008 alone. We are all aware of a number of lost jobs in the first three and a half months of 2009.

In order to get the investment for research and development for innovation, will we have to change our tax system and provide tax incentives so that people will be more willing to invest in the forest industry?

Mr. Farrell: I am sure later this week you will have some guests who will have strong views on that. I will defer to them from an industry perspective. From the Government of Canada perspective, I really should not comment on tax policy.

Senator Cordy: However, one could say that we will have to make changes if we are to expect change. I guess I can ask you how you see the industry looking in 10 years time. What should it look like? That is maybe a better question because if we look at the number of jobs lost, it is scary.

Mr. Farrell: I am a forester by training, but a hard-edge economist view might be the fact that those who get through this will probably be meaner, leaner and much more competitive than perhaps the ones who did not quite make it. In many respects, you will likely have a smaller industry, one that probably is more tied to demand.

Some might tell you part of the issue is that there is far more supply than demand. If you look at newsprint over last five years, we see a desperate see-saw attempt to try to correct supply every time demand continues to decline. The reality is that it is almost impossible to catch up with that declining demand.

Ten years out, I think we will see fewer facilities but probably healthier companies. I would like to think we will see a bigger, broader suite of more higher-value and more knowledge-based products to fill out the mix. Perhaps we will see new players, maybe companies that are not even in the forestry business, such as energy or pharmaceutical companies. It would be great to see joint ventures that include transportation or companies that make aircraft, helicopters or auto parts.

That is the sort of more diverse mix that your average person would get very confused as to whether it is forest products business or not, which is great. It should be a business based on the forest.

Senator Cordy: In your opening comments, you talked about the announcement last week by Minister Raitt about the $10 million to support large-scale demonstrations of Canadian-style uses of wood for construction in offshore markets.

I am curious how you would spend the $10 million. Are the offshore markets mainly Asian? What do you do to demonstrate? I know you spoke earlier about building houses in Japan, I think you said, and they withstood China. What do we do? Is it similar to "if you build it, they will come''?

You also talked about non-traditional uses of wood in domestic markets. Can you give some examples of those? How is the $10 million spent to demonstrate to Canadians the non-traditional uses of wood?

Mr. Farrell: I will start with offshore markets. As I mentioned, in places such as Shanghai or even Seoul, the big challenge is that land is so expensive. The traditional single-family dwelling is not something that is saleable. Therefore, if we cannot go up, we will not be able to compete. Ingrained in building codes in places such as Shanghai and Beijing is an anxiety about fire and how far and how fast fire can move through a structure.

From a public investment perspective, it is codes and standards. Codes and standards basically decide residential construction in all parts of the world. It is usually decided by governments, whether they are city governments in China, state governments or even the national level of government. This interaction at a governmental level allows us to start having that discussion around codes. Their codes are entirely based on concrete. Therefore, this idea of introducing a wood product, which has historically been viewed as an inferior product, is one that starts as a technical discussion.

We have been at that in China, for example, for about seven or eight years with experts from FPInnovations who are engineers and technically competent. The next step, then, is a question of how far we can go. What if we build a five-storey structure? We built three-storey structures. The more we can increase height, the more we open the market because it is still on the same postage-stamp-sized lot.

Some of the demonstration models we will be looking at are five- and even seven-storey structures that are hybrids. We can build the bottom two stories with concrete and the top five with wood.

Another area for consideration in Chinese cities is roofing systems. In Shanghai, almost every roof is flat. From a landlord's perspective, unlike Canada, the top floor is generally the poorest because, inevitably, all the roofs leak. If we can build an extra storey with a peaked roof on the top, the landlord gets extra revenue because he has an extra floor, plus the leakage problem has been solved. It is one thing to talk to people about that but another to do it and show people.

Those are the two examples on which we have started working. We will expand it, but not necessarily to the Shanghai-type and Beijing-type cities. In many cities outside of Shanghai that have 20 million or more people, before the slowdown, the building boom was just as active as it had been in Shanghai.

In North America, we call the non-traditional uses of wood non-residential construction. This is something on which we are working with the U.S. In many respects, the difficulties we have had over the Softwood Lumber Agreement during the last 25 years have always been about market share. However, if we can grow the market, in theory, there is more for everyone.

The U.S. is as anxious as we are to see broader applications of wood in non-residential construction. In my own department, we have people working on concrete and steel who have done an excellent job engineering all that. Everything is codified. Wood is not a product made in a factory, so it has a natural variation.

The challenge is about getting codes and standards accepted, and getting designers, engineers and specifiers to be more comfortable with the use of wood. We are trying to engage an entire chain of people in the use of wood. We have a good story to offer on sequestered carbon; wood is recyclable, reusable and renewable; it is a greener product. Market acceptability is there. However, it is about ensuring the comfort level of the entire community that specifies buildings and engineers and designs them.

One of the best ways to do that is to have working examples of buildings made from wood. A number of buildings across Southern Ontario — hospitals, seniors' residences and community centres — are great examples of the use of wood. Work needs to be done around cost competitiveness, but nonetheless, that is a gap that we will continue to close the broader the applications are.

Senator Meighen: I can be quite brief since Senator Eaton and Senator Cordy explored the area in which I was interested. When you have been around as long as Senator Tkachuk and I, you remember events that happened. I think something happened five or six years ago, but it turns out to be 10 or 15 years ago. I remember the big push to convince the Chinese and Japanese to build their houses out of wood from when I was young.

I take encouragement from your description of the new and more innovative approaches being put forward now. I do not want to mix metaphors and say that they will catch fire, but I hope they will.

Senator Mercer: You mean catch on.

Senator Meighen: Yes, catch on. Thank you, Senator Mercer.

I must say that I am a bit sceptical. However, we will see. It seems to me that the landscape and practices in Canada are not changing radically.

I want to move on to the softwood lumber deal. I cannot remember how many years are left now before it expires. Even during the course of the agreement, an irritant pops up once in a while. It may be about shares, but it is also due to the fact that we have different regimes within Canada of timber management. Is that what you would call it?

Mr. Farrell: It is more public policy.

Senator Meighen: Also vis-à-vis the United States.

Therefore, it seems to me, perhaps incorrectly, that those differences were at the base of the dispute. Perhaps out of ignorance, I am not aware of any fundamental changes that have come to pass to remove them. Can I expect in another four or five years when the Softwood Lumber Agreement expires that we will go through the same old negotiation dance that lasts so long and causes such injury to the industry?

Mr. Farrell: The deal was negotiated and signed in 2006 for seven years. Presumably, we will maintain it for seven years. With any agreement with the U.S. that we have had over the last 20 years, we have had differences of view and different mechanisms have resolved those. We have an arbitration process now that is used to resolve differences.

Canadian provinces have made specific changes to public policy. You may want to invite representatives from Foreign Affairs and International Trade Canada at some point to appear. They have the lead on the Softwood Lumber Agreement and all trade policy issues. We do a large amount of work with them around economic and policy analysis.

I would not want to identify any specific provinces, but I would suggest that all of them have made progress in moving to a market-based system, in particular, the four main provinces — B.C., Alberta, Ontario and Quebec. In many respects, that was part of what was at the heart of the concern with the U.S.. Market share is definitely an ongoing issue.

We have certainly seen a much tighter relationship between operating levels and the sale price of lumber. Some of the American criticism in the past has been that when the lumber price continues to drop, Canadian mills keep operating. As we have discussed, that is certainly not the case today.

I do not know if those issues will ever entirely go away. About two years ago, we had work done to try to identify the history of disagreements between Canada and the U.S. relating to lumber. Apparently, the first notation is around 1780. New Brunswick and Maine exchanged shots over white pine logs. I am not sure if that is the first dispute, but it goes back a long way.

Senator Meighen: The Maritime provinces have less change to bring about in public policy than some other provinces, as you are well aware, Mr. Farrell.

Both the provincial governments and the federal government have a substantial role to play in forestry policy in Canada. Is there a clearing house to ensure the left hand knows what the right hand is doing? To what extent has it been successful?

Mr. Farrell: There are two avenues: First, the Canadian Council of Forest Ministers, CCFM, involves all the provincial and territorial ministers and the federal minister responsible for forests. They meet at the ministerial level once per year, and the deputy ministers meet two or three times per year. Below that are numerous groups working on issues ranging from national pest and fire strategies and national forest inventories to working through some competitiveness analysis. This was undertaken about a year and a half ago before the serious downturn.

Second, Foreign Affairs has done an outstanding job in building a network with all the provinces and territories starting in 2003-04 when the previous agreement expired. They worked together on a collaborative approach that is not easy to achieve, as you can imagine, given the diversity of regional circumstances and public policy. That mechanism has been in place specifically around lumber issues as they arise and has been working quite effectively.

Senator Mercer: Thank you again for being here; we have learned a great deal tonight. You piqued our interest in research when you talked about FPInnovations, McMaster University and the Sentinel Bioactive Paper Network. I quickly added them to my list of potential witnesses.

Who is doing the best research in the field in Canada today? You mentioned research at McMaster University, and other universities are doing similar work. Who is doing the most interesting research?

Mr. Farrell: I have to be careful in my response here. I happened to mention McMaster University.

Senator Mercer: Where did you graduate from?

Mr. Farrell: The University of Toronto. Bob Pelton, the lead in the research group, works out of McMaster University. Highly interesting work is happening at many universities. You might want to hear from the Chief Executive Officer of FPInnovations, Pierre Lapointe. FPInnovations has a number of networks: nanotechnology, genomics and smart paper. That might be a good place to start, depending on the interest of the committee and what areas you want to explore — wood products or novel pulp products. Many universities have a remarkable amount of research work, even beyond the classic forestry universities, such as Laval University, University of New Brunswick, University of British Columbia and Lakehead University. When you take a broader view of developing forest products, you move into areas that are beyond the normal purview of forestry. The truly rich opportunities are to innovate in applying Canadian fibre to novel, different applications.

Senator Eaton: How do we bring the research to the market? That will be the challenge. Is that right?

Mr. Farrell: That is right.

Senator Eaton: We need to determine how to take it from bench to bedside.

Mr. Farrell: Yes.

The Chair: Mr. Farrell, we all know that building codes fall under provincial jurisdiction and, in some areas, federal jurisdiction. In order to enhance our construction by using more wood or a combination of wood fibre and cement, we could look at other avenues.

What could we do to impress provincial and municipal jurisdictions to amend building codes in order to allow the use of wood products for the first 5 floors when constructing a 15- or 20-storey building?

Mr. Farrell: I might encourage the committee to hear from someone who is an expert on codes. The Canadian Wood Council, CWC, is located in Ottawa, and they are the experts on building codes and standards. I would be cautious about what I say.

In many respects, the codes and standards are not the issue. They do not create a real limitation in Canada. A program called WoodWorks is operated in collaboration with the CWC in many provinces, including Ontario, which promotes the use of wood. The CWC works to give the specifications experts — engineers and designers — the tools to make it easier and more attractive to use wood. Those are the real challenges, more so than the codes and standards. We are moving to performance-based codes that are, in theory, blind to any material we might use to achieve the performance standard. It is the promotion of using wood and some of the benefits associated with it, in particular from a life-cycle analysis. That is the promotion we are trying to develop, both domestically and further afield.

The Chair: Thank you for the suggestion. Some areas of Canada have been planting trees for over 50 years; and I know you follow that closely. I would like to have your views on silviculture and hardwood stands.

Mr. Farrell: In temperate hardwoods, the types that we see in Ottawa such as maple, birch, poplar and some softwoods, the general prescription is to not clear-cut, although perhaps more so in Algonquin Park and the Gatineau Hills. It is what they call an improvement cut. Such a prescription allows a harvester to intervene in the stand and cut a portion of it every 20 years. A good, well-managed hardwood stand will allow an entry every 20 or so years to take out some product.

One of the challenges in Quebec and Ontario is that over the last 60 to 70 years, a number of areas of the forest have deteriorated, in that to bring them back into some sort of an ongoing cut every 20 years that would yield good-quality timber, the first couple of entries would be low-quality cuts. That is the challenge to good hardwood management.

Once you have taken out two passes of firewood or some low-end saw logs in many areas of Quebec and Ontario, you will begin to see a much better yield. The prescription is to manage the stand for crop trees that will give you high- end saw logs or veneer logs.

The Chair: What percentage of forestry R&D in Canada is done in the hardwood sector?

Mr. Farrell: In forest management, not much R&D is done, although I stand to be corrected. The prescriptions to raise the yield are reasonably well understood. However, the ongoing questions arise around topics such as biodiversity and sustainability, which are much more complicated than simply maximizing the yield. The effects on flora and fauna succession over time are still being sorted out.

In terms of manufacturing, a fair bit of the research on wood products being done both in universities and in FPInnovations relates to hardwoods.

The Chair: It is quite promising in some areas of Canada.

Mr. Farrell: Yes. Certainly, the hardwood industry in Canada was more prominent years ago than it is today, but it could be prominent again one day.

The Chair: Another concern of ours is access to credit for the forestry industry. With your experience, what would you deem to be the challenges and the recommended mechanism that would help the industry gain access to credit?

Mr. Farrell: The Export Development Canada, EDC, is a separate banking institution that operates similar to an independent bank. They have responsibility around confidentiality of the clients with which they deal.

With the unfortunate situation today, I have gotten to know EDC quite well, and they do outstanding work. At the same time, because of the business that they are in, they are not in a position to speak publicly about the work they are doing with clients, including the forest industry.

As an export industry, EDC has been a partner with many, if not most of the forest products companies in Canada that export across the world through their insurance program. However, EDC is an organization, a bank that operates on the basis of commercial terms, and they provide that service to firms that propose a commercial business case. I can only guess that many of those discussions are occurring today.

The Chair: Another issue with which we are faced with the stakeholders across Canada is black liquor energy subsidies with our friends down south. I would like your opinion on that. Can you apprise the committee on the status of that particular issue?

Mr. Farrell: In 2005, the United States Congress approved a substantial transportation bill that provided all sorts of incentives to essentially expand the use of biofuels. An amendment was made to that bill in late 2007 that provided an incentive in terms of a tax rebate for new blended fuels that were derived from biomass — liquid hydrocarbon, which is a fuel from biomass.

Translated, that appears to have provided an opening for the U.S. pulp industry in claiming credit for one of the interim products they produce in the kraft process of making pulp. Unlike the mechanical process, which grinds wood down and then releases the fibre, the kraft process essentially cooks trees and melts away the lignin, releasing the cellulose to make pulp and ultimately paper products. The glue that held it together, primarily lignin, in the cook is called "black liquor.'' It is a routine part of the kraft process that they extract the chemicals and then burn the liquor to provide thermal energy for the plant.

In Canada, one of the biggest producers of bio-energy is the Canadian pulp industry, which is primarily based on this black liquor.

It is our view that this tax rebate, which is 50 cents a gallon of black liquor produced, was an unintended consequence of this incentive. At 50 cents a gallon, the subsidy represents a significant rebate in terms of the cost of production.

Whereas the U.S. primarily uses their pulp domestically, Canada ships a large amount of pulp into the U.S. If that domestic production continues to enjoy a substantial subsidy, it will make it increasingly difficult for our Canadian pulp producers to compete in that market.

The Chair: Do you have any suggestions on how we can find solutions for that particular problem?

Mr. Farrell: I believe you will have a witness later in the week that I am sure will have some suggestions. We have been in discussion through our embassy in Washington with the U.S. registering our concerns; it is a discussion that is very active right now.

The Chair: When we talk about the vision of long-term positioning in the industry and the stakeholders in the forestry sector, do you have any suggestions on how we can better improve the relationship between the stakeholders — namely, the employees, the industry, sawmills, pulp mills; and on the environmental side also, cities, provinces, federal government, even though we know that the policies for forestry are the prerogative and under the regulation of the provinces?

Mr. Farrell: I am not sure if I am an expert from a labour-relations perspective. However, it is interesting to see over the last three to five years, that the industry, the employees and the communities that support mills are rallying around this notion of sustainability — ecological and economic sustainability — and the impacts that has across rural Canada.

In many respects, the recent downturn has complicated many of those relations, but there clearly was a growing consensus around how important that is to the viability of the sector. My sense is that that will continue to be an important topic as we come out of this recession.

Given that the vast majority of the forest industry operates on public land, clearly the public has a big say on how that land is managed. Certainly the industry, communities and employees all recognize the importance of maintaining that social licence to being able to operate domestically, as well as to be able to sell products overseas.

The Chair: Are there any other questions from senators? If not, on behalf of the committee, I would sincerely like to thank you for participating. If we need additional information, there is no doubt in my mind that you will follow the mandate of our committee. We have some interesting stakeholders who will be coming to the committee starting this week and ending in June.

I would like to remind committee members that on Thursday, the meeting will be at 8 a.m.

If senators could stay for a few minutes, I would like to have an in camera session for a short time.

(The committee continued in camera.)