Climate Change and Environmental Stresses

Farmers have had great difficulty in the last several years with drought conditions, whether they farm grains and oilseed crops, potatoes, fruits, or livestock. Keystone Agricultural Producers reported that, as far back as 1999, southwestern Manitoba and southeastern Saskatchewan had the equivalent of a drought because farmers were unable to seed their crops.

The Committee was told that climatologists have determined that Nova Scotia has been in a drought for five consecutive years. The Nova Scotia Federation of Agriculture estimated that the dairy industry in Nova Scotia alone may have lost up to $8 million in the year 2000 as a direct result of the drought. The P.E.I. Federation of Agriculture reported that the effect of the 2001 drought on the potato and vegetable sector was “crippling, with yield reductions of 40 [to] 60 [per cent].” It believes that the financial costs of the drought for the agricultural sector in P.E.I. will be about $100 million.

Successive droughts and other climatic stresses led several individuals, farm groups, and provincial representatives to address the issue of climate change, and its effects on Canadian agriculture. For many, it is an issue on which the Government of Canada must show leadership, as farmers may have to make significant investments to adapt their practices to contend with more climate variability and uncertainty in the future. Indeed, in some jurisdictions, farmers have to implement Environmental Farm Plans for their operations, further increasing their costs as they comply with these requirements.

Successive droughts across Canada have affected agriculture and have put the future of rural communities in jeopardy. The lack of available water is challenging the very development of rural Canada; as a consequence, it should be taken into account when planning for the future of these communities. In fact, during the course of this study, the Committee found environmental stresses to be such a pressing issue for agriculture and rural Canada, that the Committee has decided to undertake a comprehensive study on the effects of climate change on Canadian agriculture.

Costs of Changing Consumer Preferences

Compounding environmental issues, Canadian farmers must also adapt to changing consumer preferences as the country moves into the 21^st century. In order to meet changing preferences and demands with respect to food safety and environmental issues, farmers must make significant investments in their operations. These investments can include capital investments (for example, equipment or waste lagoons), management investment (for instance, seeking out new sources for organic feed or developing environmental farm plans and keeping records), and investments in production changes (for example, new crops or new methods of production).

In the case of environmental issues, farmers are adopting environmental management plans to contend with nuisance odours, greenhouse gas emissions, soil management, and water protection. In P.E.I., over 60 per cent of farms have already completed an Environmental Farm Plan (EFP); the goal is to have 95 per cent of the province’s primary agricultural sector complete an EFP by winter 2005. Despite initial financial assistance in starting such a plan, the ongoing record-keeping costs can be problematic for farmers, since they are limited in their ability to capture higher farm-gate prices from the market. This inability to recover costs may become critical if all farms are required to have an environmental plan, thus negating any possibility for farms that have completed an EFP to differentiate themselves from those that have not. This will be especially true for smaller farms with limited human and capital resources.

In the case of increased demand for more rigorous food safety systems on farms, again, farmers are faced with costs similar to those associated with Environmental Farm Plans. Systems such as Hazard Analysis and Critical Control Point (HACCP), though desirable, do entail record-keeping costs that farmers have difficulty in recovering. Although farmers recognize that such investments are necessary and beneficial, they may already be over-extended with limited cash flows and debt.

Higher Input Prices due to Decreased Competition in Input Markets

Witnesses noted that input costs have been rising in recent years. The Canadian Farm Business Management Council explained that there are fewer input suppliers across the country. With fewer suppliers, there is decreased competition in the input markets, resulting in higher input prices for Canadian farmers. For example, three companies distribute and retail the bulk of Canadian oil, gasoline, and diesel fuel, and three companies dominate the farm machinery sector. On this particular issue, Dr. Apedaile, Professor Emeritus in the Department of Rural Economy, University of Alberta, stated that:

“[T]he top five producers of fertilizer handle approximately 90 per cent of the supply of fertilizer. We say that concentration is starting to interfere with competitive outcomes that actually distribute revenue fairly to where the costs are being incurred. In grain handling, input processing and farm machinery…It is somewhat back to the territorial days when we only had one hardware store to deal with because the roads were so bad that we could not go anywhere. We had territorial monopolies. As soon as we could buy somewhere else, of course, we went where prices were lower. The competition phenomenon is that few firms account for almost all of the inputs to agriculture…”

The Effect of Transportation on Feed Costs

These increased costs are compounded by higher feed costs in the Maritimes due to transportation constraints. The Committee heard witnesses from all three Maritime provinces attest that they have faced higher feed costs since the Feed Freight Assistance (FFA) program was abolished in the 1995 federal Budget. The elimination of the FFA program has made feed grains expensive throughout the Maritimes; one dairy farmer from Nova Scotia stated that in 2000, he spent about 25 per cent of his gross output on purchased feed grain. He does not grow it on his farm because it is cost-prohibitive for him to do so. Porc NB Pork estimates that New Brunswick feed costs are $30 higher per ton than in Ontario.

Under the FFA program, payments were made to livestock producers in feed-deficit areas to lower their feed costs in order to maintain a viable livestock industry. The bulk of these payments were made in Atlantic Canada, British Columbia and eastern Quebec. The funds directed towards FFA amounted to some $15 million in 1994-1995.  As of 1 October 1995, FFA ceased operating as a transportation subsidy. In subsequent years, the declining amount, about $60 million over the 10-year period, was to be available to assist industry adjustment and development.[1]

In Western Canada, the loss of the Crow rate has obliged farmers to pay the full cost of transporting grain to port while at the same time input costs such as those for fertilizer, seed and fuel have continued to rise, according to the Association of Manitoba Municipalities.

Labour Costs 

Labour costs have also risen throughout the agricultural sector, as fewer people are drawn to it. The Agricultural Producers Association of Saskatchewan mentioned that the young people who are left in farming communities are working in the oil sector, not in agriculture. In addition, the Saskatchewan Association of Rural Municipalities highlighted the labour shortages in that province. This is also true of agricultural sectors in the Maritimes, such as the Christmas tree sector. The Nova Scotia Christmas Tree Council told the Committee that this sector employs 2,500 skilled, seasonal workers over a six- to eight-week period. These workers need a variety of skills in silviculture, pest management, marketing, business management, foreign exchange rates, export procedures, health and safety regulations in a variety of jurisdictions, and interpersonal skills. Sectors such as this are increasingly finding it difficult to attract labour, even at above-minimum wages.

In the Maritimes, the Committee heard evidence that the horticultural industry has a particular shortage of labour, as it is a labour-intensive enterprise relative to others such as grains. Indeed, Nova Scotia’s horticulture industry employs 30 per cent of all agricultural labour in that province. The seasonal nature of labour in this industry entails additional problems in attracting workers, because changes in the Employment Insurance program in 1996 limited the insurance benefits payable to seasonal workers.

Furthermore, the Committee heard from Potatoes New Brunswick that the Employment Insurance qualifications should take into account regional variations to help alleviate problems with labour. Although the main potato-growing areas of the province – situated between P.E.I. and the U.S. – have the same Employment Insurance qualifications as the Acadian peninsula, they have an unemployment rate of 4 per cent, whereas the rate in the Acadian peninsula is 23 per cent. This inflexibility in the qualifications results in increased costs for farmers.

Revenue from Product Markets

With respect to farmers’ revenues, a number of topics frequently arose during the Committee hearings, including prices in international markets, changes in consumer preferences, lack of competition at the wholesale and retail levels, and trade disputes.

Reduced Farm-gate Revenues due to World Market Prices

The Committee heard from witnesses across Canada that farmers increasingly are facing downward pressure on the prices that they receive. One significant source of this pressure is the low prices in international markets. Despite the aid package recently announced by the federal government, some producers in Western Canada have estimated that, at current prices, they will lose at least $40 per acre on every acre of grain and oilseeds they seed this spring. These low prices are primarily due to large supplies from the United States and the EU, attributable to subsidies from their respective governments. In 1999, for every $1 that Canadian wheat farmers received, only 11 cents came from the federal government, compared to the 46 cents that American farmers received and 58 cents for European farmers.

A number of witnesses expressed concern regarding the effects of U.S. and EU subsidies, and whether these subsidies comply with their respective World Trade Organization commitments. Their feelings are echoed by Mr. Laurence Nason’s statement that “Canada decided [to]…be a boy scout in terms of world trade agreements… [but] the U.S.A. and Western Europe did not dismantle their programs to the same extent.”

The Committee was in Washington not long after the House of Representatives Committee on Agriculture passed its Farm Bill proposal in July 2001. Since then, the Senate has approved its own Farm Bill version, which extends support to pulse crops. Although some groups and individuals described the House of Representatives proposal as “one of the greenest bills ever,” both Farm Bill versions remain highly production-distorting.

The EU will also start a mid-term review of its Common Agricultural Policy (CAP).  Although outcomes of upcoming elections in France and Germany will influence the CAP review process, EU officials mentioned that they have to look at different ways to support farmers. Furthermore, the EU has frozen the CAP budget until 2006, and will possibly have to integrate 10 new member states by 2004. Although the Committee believes direct payments will still be part of the EU policy, indications suggest a shift from producer assistance to more rural development aid that will be decoupled; that is, they will not be production-distorting.

During the Committee’s trip to Europe, there was some discussion about the changing world supply.  In the past 15 years, production has increased in countries with lower production costs, mainly in the southern hemisphere.  It has become more difficult to compete in bulk commodities and, unfortunately, demand in export markets has not increased substantially to offset higher supplies, further contributing to low prices.  For example, according to Agriculture and Agri-Food Canada, world demand for wheat decreased 47 per cent between 1995 and 2000, while world supply has risen by 26 per cent.

Changes in Farm-gate Prices due to Evolving Consumer Preferences

Another factor that affects the prices paid to farmers is changing consumer preferences. For instance, the increasing demand for organic foods means that organic foods now sell at significantly higher prices than conventional foods. Even though Canada’s market share for organics is still in the 1-2 per cent range, with estimated sales at $800 million, these sales figures will increase as more farmers, processors, and retailers are attracted by the higher prices.

Another example is the public’s wariness with regard to genetically modified (GM) foods. Since the public acceptance of such foods is limited, some growers of GM crops must accept lower prices, while growers of GM-free crops are able to command higher prices in some markets. This lack of public trust is affecting the decisions of processors such as domestic millers, who have expressed concerns about the introduction of GM wheat. In most years, domestic millers are Western Canadian farmers’ biggest customers. These customers are also exporters, and much of the wheat flour they produce goes to GM-resistant markets. U.S. millers are also worried about the introduction of GM wheat. The U.S. is another large market for Western Canadian farmers. The North American Millers Association has publicly expressed its position that crops that do not have wide market approval should not be placed on the market. These changing consumer preferences drive down the price that farmers can obtain for some crops – possibly even down to zero, if they cannot sell their crop. Thus, public concerns affect the planting decisions of Canadian farmers, and their revenues.

The Committee heard concerns from farmers and other agricultural stakeholders about the potential approval of GM wheat in Canada. The introduction of GM wheat in our country could jeopardize the whole industry, as markets are not ready to accept this type of product. As there is currently no way to effectively segregate GM wheat from conventional counterparts, the introduction of a single variety of GM wheat will close all markets that are reluctant to buy GM grains. Quite apart from the issues of science and safety, risking losing export markets for a commodity like wheat in times of great difficulty for our farmers is reason enough to act with extreme precaution.

Canadian canola exports to the EU peaked in 1994 at $425 million, but are now virtually zero because the EU blocked its approval process for GM varieties. During its fact-finding trip to Brussels, the Committee heard that the EU now imports its canola from other countries such as Australia. Although the EU Commission claimed it will resume its approval process in the near future, the Committee is convinced the EU market for GM crop is lost, and that farmers should be careful in making their seeding decisions because it could jeopardize all Canadian agricultural exports.

Under the current approval process in Canada, a new variety will be registered for commercial production if it meets criteria for end-use quality, agronomic quality, and human and environmental safety. There is currently no process in place to prevent the introduction of a new variety, even if it is clear that the new variety will have a negative market impact and will result in lower farmer returns. Therefore the Committee recommends that:

Recommendation 3: In addition to the current slate of safety, quality and agronomic evaluation issues, the government must include a “market acceptance” criterion in its approval process for new crop varieties.

The Effect of Limited Competition on Farm-gate Prices

Witnesses from across Canada expressed concern about limited competition – or lack of competition – at wholesale and retail levels, contending that it adversely affects the prices that farmers receive.  In the Maritimes, the Committee heard that only two retailers control 85 per cent of the market, and they compete against each other quite vigorously. One consequence is that they offer lower prices to farmers in order to maintain their profit margins. This dual monopsony[2] situation limits the ability of farmers to obtain the best price for their products.  Evidence such as this raises concerns about corporate concentration among input suppliers and food retailers.  For this reason, the Committee recommends that:

Recommendation 4: The Competition Bureau, prior to approving a merger or acquisition, be required to undertake a thorough analysis of the effects of the change on the agriculture and agri-food industry. This analysis should be reported to the agricultural committees of the Senate and the House of Commons. The analysis and report should be completed by Competition Bureau personnel who possess in-depth agricultural expertise.

Recommendation 5: Furthermore, the Committee recommends that the Competition Bureau investigate the agricultural input markets in Canada, as well as the grocery retail industry, to determine whether there is sufficient competition in these markets to ensure efficient prices for farmers.

Corporate concentration remains a concern for many in the agriculture and agri-food industry. While the benefits of some concentration are recognized, farmers must not be hurt by merger and acquisition activities in industries that affect their farming operations.  When there are fewer companies in the input sectors – and less competition – farmers have been forced to pay higher prices for their inputs; with reduced competition at the wholesale or retail due to few buyers, farmers become price-takers and are forced to accept lower prices for their products.

Safety Net Programs