Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 22 - Evidence - November 6 meeting
OTTAWA, Thursday, November 6, 2003
The Standing Senate Committee on Agriculture and Forestry met this day at 8:35 a.m. to examine the issues related to the development and domestic and international marketing of value-added agricultural, agri-food and forest products.
Senator Donald H. Oliver (Chairman) in the Chair.
[English]
The Chairman: I would like to welcome our presenters today, Mr. Perry MacKenzie and Mr. Allan Brigden.
This committee previously produced a report entitled ``Farmers at Risk.'' In that report, we looked at the effects that climate change might be having on farmers and what steps they should be taking to adapt. Today, we will be tabling in the Senate our report on climate change and the effects it will have on farming and forestry.
Our next major study, arising from that, is to examine what steps this committee can recommend to the Government of Canada to add value and more profit at the farm gate, and whether anything can be done by way of value-added products to add more value to the entire farming process.
With that in mind, this committee is now examining the issues related to the development of domestic and international marketing of value-added agricultural, agri-food and forest products. Today we have Mr. MacKenzie and Mr. Brigden to give us some information on the Prairie Pasta Producers.
Before we begin, I wish to say that today is a very special day for this committee because it is the birthday of one of our senior members, Senator Fairbairn. Senator Fairbairn is a longstanding member of this committee and I would like to wish her a happy birthday.
Senator Fairbairn: Thank you very much.
Mr. Perry MacKenzie, Chairman, Prairie Pasta Producers: On behalf of the members of the Prairie Pasta Producers cooperative, I would like to thank you for this opportunity to present to you the highlights of the past six years of our endeavour to enter into the value-added market of pasta production. I am the chairman of Prairie Pasta Producers cooperative's nine-member board of directors. My wife and I have been farming in the North Portal, Saskatchewan area for 25 years. With me today is Mr. Brigden, the Vice-chairman of Prairie Pasta Producers.
Prairie Pasta Producers cooperative is a new-generation co-op. Our goal is to involve as many farmers in the durum- producing region of North America as possible. Our mission statement is as follows: Prairie Pasta Producers will form and operate an international durum-processing plant which empowers its farmer owners to more profitably compete in the world market and revitalize their rural communities.
A feasibility study was commissioned by the international board of Prairie Pasta Producers to look at the North American pasta market. This study was returned to us showing that there was room for our entrance, with the recommendation that we seek a strategic alliance within the industry. With this encouragement, we pressed on with our business plan.
It became apparent to us that we had accomplished something that had never been done before. We were a group of Canadian and American durum producers who had agreed to work through our considerable differences and enter the pasta market in a new and unique way.
The concept of owning a common plant, delivering our grain to the same facility and sharing the returns according to our participation level was the conclusion. It became apparent to us as Canadians that we had a major issue to address.
The price the Canadian member was to receive for his grain would not be equal to the price that the American member was to receive. The American member would not be required to pay for the port terminal elevation charges or administrative costs, or have his grain pooled with grain that was sold offshore at the lower world price.
Upon approaching the Canadian Wheat Board and explaining our situation to them, Prairie Pasta Producers was asked what we wanted them to do for us. We asked to be able to deliver our grain directly to our plant, receiving the same payment per bushel as our American members were receiving. We were refused this request on the basis that it would not be fair to the other millers and processor customers of the Canadian Wheat Board. We made other suggestions to the Canadian Wheat Board, such as a separate pooling account for new-generation co-ops, or allowing us to use the small millers' exemption that they have in place for a new-generation co-op, with the common mill owned by the member farmers.
These requests were turned down on the basis that it would give us an advantage over the existing milling industry.
I must ask each of you: Would it be unreasonable if the farmers who produce the grain that is milled to own a portion of the milling industry in Canada? Would it be unreasonable to have the profits from what the Canadian Wheat Board has described as a ``healthy industry'' stay in Canada? What percentage of this industry is owned by Canadians today? What percentage of the milling actually occurs on the Prairies where the grain is grown?
To my surprise, what seemed obvious to those on the Prairie Pasta Producers' board was not obvious to our federal agriculture minister and the Minister Responsible for the Canadian Wheat Board. At this time, Prairie Pasta Producers had done something that had never been done before in North America. We had a membership of over 1,000 farmers from Manitoba, Saskatchewan, Alberta, Montana and North Dakota. This membership spanned the entire durum- wheat-growing region of North America. This was an opportunity to have farmers working together, considering each other's problems yet creating an atmosphere of understanding.
Today, we see the consequences of the lack of this understanding evidenced in the trade challenges to our wheat and durum exports, with tariffs in place and millions of dollars of farmers' money spent on legal defence.
As we moved forward with our business plan it became apparent that by purchasing an existing plant with market share and pursuing the strategic alliance that was suggested in our feasibility study, we could successfully enter this marketplace.
We proceeded with another first for Canada. That was the escrow drive. The escrow drive raised $2.8 million, representing 1.4 million bushels of durum. The minimum target level for the escrow drive was $5 million. All monies were returned to the participants according to the security law under which we were regulated.
We have seen our government enact laws for the incorporation of new-generation cooperatives that closely resemble those in the U.S. Unfortunately, that is where they stopped following the U.S. example. In the U.S., new-generation co-ops' shares are eligible for a low-interest-rate loan backed by the government, so that the farmer does not have to put up any additional security to purchase his shares. It would appear that they have recognized that a farmer does not have the capital resources that are needed to compete with the multinational giants in the food-processing industry.
Prairie Pasta Producers has continued to forge ahead, in the belief that a direct link from the farmer to the processing plant is a must for survival in an atmosphere in which post-Crow freight rates and elevator tariffs continue to escalate, causing Prairie farmers to find themselves receiving a smaller return for their grain when exported off the North American continent. The Prairie farmer needs value-added processing in which he has an ownership position to not only profit from the sale of his grain, but also from the sale of the finished product.
We have a strategic agreement with the third-largest pasta producer in North America whereby we have an option to purchase 3 million shares that represent one-quarter of their grinding capacity. Unfortunately, because of the trade challenges and the non-movement of durum wheat into the U.S., the execution of this strategic agreement has been delayed and we have been unable to add value to our members' durum and use a portion of it to purchase the shares. We find ourselves once again presenting to our members the need to finance these shares out of pocket so that we can exercise our option with the company shareholders before the expiry date.
This is an exceptional opportunity for the durum growers of Western Canada, because the third-largest pasta manufacturer in North America has approached us to form a strategic alliance. Not only would we benefit from the new market for Canadian durum, we would also share in the profits of the value-added industry.
Successfully developing a value-added processing industry on the Prairies has been a challenge. It remains a challenge because of the roadblocks that we have been encountering. None of these roadblocks has been created by the marketplace, but rather by government regulations and marketing restrictions that need to be addressed soon if we are to see a successful conclusion to the efforts and endeavours of Prairie Pasta Producers to add value to the members' durum and help revitalize Western Canadian agriculture.
The Chairman: Thank you for an excellent presentation. I was interested in the steps being taken in the United States to help farmers finance value-added type activities. In your paper, you talk about the new generation of cooperatives. You say that in the United States, they go so far as to make shares eligible for low-interest-rate loans. Are you saying that is not the case in Canada; you cannot pledge your shares in these new-generation co-ops to get low-interest loans backed by the government? If not, should that be the case?
Mr. MacKenzie: That is correct. When we dealt with institutions such as the Farm Credit Corporation, we had to be able to show an equity balance in our farming operation equivalent to whatever portion of shares we wanted to buy. Consequently, they were basing the amount they would loan on how much equity you had in your farm. Of course, if the Farm Credit Corporation is doing that, the banks will be no different.
In the United States, not only was the loan subject to a subsidized interest rate, the farmer did not need to put up additional collateral to secure the monies to borrow toward the purchase of those shares.
The Chairman: That is a tremendous advantage that you do not have in Canada.
Mr. MacKenzie: Exactly.
The Chairman: In a recent presentation before this committee, the CWB cited a survey by the Earnscliffe Group in which more than half the farmers surveyed said they would not be willing to invest in more value-added processing if it meant returns on sales of grain would be reduced. What are your views on the results of that survey? Did it surprise you as much as it surprised me?
Mr. MacKenzie: Personally, if any of us here today were asked about that, none of us would agree with it. Not having been a participant in the survey, I do not know how the question was worded. As you stated the wording of the question, Mr. Chairman, no businessperson would want to invest in something that would lower returns. Thus, the obvious answer is no.
If you were asked: If you had the opportunity to invest in value-added, would you do so if you felt there was a possibility of additional returns to your farm or to your business? The answer has to be yes. That is the way everyone would answer that question.
Senator Wiebe: First, I want to congratulate you people for seeing the tremendous value in new-generation co-ops.
That instrument will certainly allow farmers to offset some of the losses they appear to be incurring in the marketplace. By getting together, they can move a little further up the value chain.
It is a tremendous step forward. It is a something that the Americans were using long before we caught on to the idea here. I encourage you on that.
I noticed that you talked in your closing remarks about the roadblocks that you have encountered. You stated that none of these roadblocks has been created by the marketplace but by government regulations and marketing restrictions.
You spent a fair amount of time in your brief dealing with the problems that you had with the Canadian Wheat Board. That would fall under the marketing restriction side of it. I understand your original plan was to try to build a processing plant in Canada. You encountered some problems and are now seeking to join forces with a conglomerate in North Dakota in order to proceed.
Why not build that processing plant here in Canada?
Mr. MacKenzie: We are following the findings from not only our feasibility study but also our business plan. Our alliance partner is milling very close to grinding capacity. They are very close to the need to expand. We have to view our market as a North American market and not just a Canadian market. We need access to the American population.
This alliance allows us an opportunity to partner with somebody who already has access to that market and has sales. Their close-to-capacity position means that if they expand their marketing, we have the opportunity to offer a location for that expansion.
Senator Wiebe: Does that bode ill for the establishment of processing facilities for any commodity in the place where it is produced? I mean Saskatchewan. I understand that there is a new pasta plant under construction now in B.C. There will be extra capacity.
I took the time last night to page through your Web site. I noticed that you pose that question there, ``Why not build a pasta processing plant?'' I found some of the answers that you give on the Web site interesting. I speak of Saskatchewan because that is the province that I represent.
You state here that after extensive market research, followed by a detailed feasibility study, it became clear that there was, and still is, significant pasta manufacturing capacity in North America. Your study concluded that building a plant in this atmosphere would put members' capital at an unacceptable level of risk of failure. This was especially true if a plant was not located to take the best advantage of freight logistics, which are critical factors in today's highly competitive pasta industry.
We had the Wheat Board here two weeks ago. I asked, ``What percentage of the pasta produced in Canada is produced in facilities owned by Canadians?'' I was shocked by the answer. It is only 5 per cent. The rest are owned by people from outside.
I asked them what some of the problems were. They say that the major problem is that we are too far away from the market. It is not the cost of the freight to bring the raw product to the processing plant; it is the cost of the freight, and other challenges, to bring the finished product to the market.
Your answer reflects the real problem out there. Is that a correct assessment?
Mr. Allan Brigden, Vice-Chairman, Prairie Pasta Producers: May I respond to that, senator? Given the freight rates, the cost of shipping the raw product to the ports is high. As you are aware, and I do not think I have to remind anybody else, we are landlocked in Saskatchewan. When you ship pasta, you are shipping a lot of air. That product does get damaged in shipping, so the shipping costs from a plant in Saskatchewan to the markets is one of the roadblocks that you encounter. We identified that very early.
The other issue in building a pasta plant from a green-field start is market share. All of you will appreciate that gaining shelf space can be the cruellest thing to work on. The big people will put you behind the post, at the bottom, or up where the lady cannot see it. You cannot get market share.
Regarding roadblocks, we ran into many of them, as Mr. MacKenzie said in his presentation. I was in the group that met with the CWB, probably a half-dozen times or more. Every time we had an idea, we were told it was not feasible. I have no qualms about suggesting that the CWB is afraid that we will wedge the door open.
I may be a little like Senator Wiebe. I come from Saskatchewan and I have many questions and much wind. We know each other.
The grain industry has been in trouble for a number of years. As I told Senator Gustafson this morning, I have 42 crops behind me, strictly in the grain business. We are talking about value-added. Our two senators can recall that in 1968, the Wheat Board had a four-bushel delivery quota on a spring-wheat acre. If you had 500 acres of spring wheat, you could deliver 2,000 bushels.
In 1968, I became a dual marketer. I went into the pedigree seed business. That has been part of my operation for 35 years, and we add value. I can tell you what added value can do for your farm.
The grain industry has been in trouble for a long time. Last May we had the BSE. Prior to that we had the CWD, chronic wasting disease, which destroyed the elk industry. Two weeks ago, the PMU operations were cut by 40 per cent. Our producers are pushed to the limit.
You mentioned the Wheat Board study that found that producers are not willing to invest. Producers are strapped.
We are losing producers. I have been a reeve of my municipality for 21 years. I can see where the depopulation of rural Saskatchewan is heading.
In my municipality, there are six young fellows under 25 years of age who are farming full time; three of them are at my place. This is our problem. Everything is in trouble and nobody has any money to invest. The 60 per cent who say they do not want to invest are probably just saying that they will ride it out because they are too old to get into it.
The Chairman: I presume that the other young people under 25 have gone to the cities, where they can earn more money.
Mr. Brigden: No, some of them have off-farm jobs and they are subsidizing the farm. As I tell people, direct deposits hurt agriculture more than anything else — getting a job where your paycheque is direct deposited on the first and fifteenth of the month.
Senator Wiebe: I have another question on the subject. You certainly emphasized the problem with our young people. Our committee was in Europe to look at the subsidies being paid to their farmers. I was personally shocked when I learned that the most highly subsidized area of the world is the European Union. The second highest is the U.S. In spite of the high subsidies, they are still losing 3 per cent of their farmers per year, the same as in Canada, and they have the same problem with their young people, who are becoming better educated and do not want to stay on the farm. Rather, they want to move into the cities.
It is a serious problem that we have to address in some way if we want that transfer of our farms from generation to generation.
I come from Saskatchewan, where I have spent more than the usual amount of time talking to representative from the Canadian Wheat Board about this situation and the need to try to have more processing done on the Prairies. I know that the CWB does have difficulties, but as you said in your remarks, some economic incentives are needed to get some of these new-generation cooperatives up and running. I notice that the Wheat Board has given some flexibility to the NGCs in allowing for delivery opportunities whenever they wish, stock-switching and so on. These are the kinds of programs that are not available to other non-producer processing plants.
The Wheat Board is not in the incentive-giving business, unlike governments, and they are not mandated to do so by their terms or by their members. Therefore, is it not the role of the federal and provincial governments to provide the incentives to get these NGCs up and running, rather than expecting the Canadian Wheat Board to do it? Governments pass legislation and create regulations, and they have access to the dollars that represent all of Canada through tax revenues that could contribute to that. That would be better than if we as a committee approached the Wheat Board and said that it had to spend some of those dollars on incentives. Are we not better off to say that the responsibility belongs with the provincial and federal governments? Should we not put more pressure on governments to do that?
Mr. MacKenzie: Senator, to address your second question first, the Canadian Wheat Board has things in place that I addressed in my brief. Two stand out in respect of the way in which grain is handled. One is the port terminal elevation charge. As a Saskatchewan farmer, you invest $50,000 in our new-generation co-op and you sell your 5,000 bushels of durum to our plant. You realize that for every metric ton of durum you put in, you are spending in the area of $10 to $15 per metric ton to have it elevated at the port terminal. Yet your grain was never elevated there. That money was used to lower the cost of elevating someone else's grain or it was otherwise allocated. It seems fair, from our point of view, that because you were willing to take the risk in that investment, your grain should be dumped into your plant without you having to pay some of those costs that do not relate to your grain. Those things are not fair to you as the investor. That is the issue that Prairie Pasta Producers has had with the Canadian Wheat Board.
When it comes to incentives from the government, I agree wholeheartedly. I made reference to American policies regarding new-generation co-ops and how they go one step further than we do in Canada. They allow the farmer to profit from the value-added, from the advantage of the new-generation co-op through its investment and marketing incentives. There are other things that they allow. If we had two new-generation pasta plants, they could agree on the selling price and not end up in court over the action. They are exempt from that. They have allowed the farmer-owned co-ops to do things that permit profit to trickle back into the communities. It took Prairie Pasta Producers a while to realize that we could not put plants in Estevan, Weyburn and Swift Current in order to revitalize our communities. Rather, there would be only one plant in one community. Others who had invested in pasta plants would not have them in their communities.
To revitalize the rural economy, the profits from the investment need to flow back into the community. If you can revitalize the wealth of your community and all your neighbours can make a reasonable profit, then they will stay at home; buy their daily supplies in their local stores; and support their automobile dealer, tire shop and grocery store. The community will be strong and healthy because the local economy is flourishing.
Revitalizing our rural communities through value-added can work. In reality, our position was that we wanted to build a facility that was not just an on-farm facility. We wanted to encompass a large number of farms to spread the benefit across a large area. We wanted to compete in the North American pasta business and a large grinding facility was required in order to do that. We had forecast a 5-million-bushel plant. That is a huge amount of grain and resulting pasta.
Going back to your first question, they can now ship pasta in railcars because they have some special packing material into which they blow air for cushioning. In that way, when the train bumps and jerks and shakes, the pasta does not bounce around inside the cars and it reaches its destination in the expected good condition. Some developments have come along, and our strategic alliance partner is probably the only pasta manufacturer in the Great Plains area of North Dakota. It was built by a NGC owned by 1,100 farmers in that state. Seeking a strategic alliance with a farmer-owned pasta company seemed to be a fit for us because they already have a big part of that market.
Senator Gustafson: First of all, I would like to welcome my neighbours to our Agriculture Committee.
We have heard in this committee that the new-generation co-ops could be an answer to some of the problems that we are facing in rural Canada. I think it was vital that you brought that type of direction to the committee. How many farmers do you have involved in this project?
Mr. MacKenzie: After our initial escrow drive that I talked about — and having to return the funds to those farmers — we offered an investment in our strategic alliance partner. At this point, we have just over 200 Canadian farmers. It has tapered off. We do not have the American entity at this time. It is just a Canadian entity.
Senator Gustafson: Do you have any figures on Canadian production of durum wheat as compared to American production?
Mr. MacKenzie: Well, we certainly produce far more. I believe North Dakota is at about 3 million, and we are at about 5 million metric tons.
Senator Gustafson: Do you have any comments on the varieties and types of durum that we produce in Canada?
Mr. MacKenzie: It is well known that we produce a very high-quality durum that makes good pasta. We sent our strategic partner about four loads of durum and they were very impressed. They found that it produced very high- quality pasta. We are looking at developing a specific IP program to trace the product back to the farm it came from, and marketing the pasta on that basis. Our partner has been working on acquiring markets in Canada, based on the fact that we could sell pasta in Canada as being produced from Canadian durum, labelled as coming from Canada with Canadian production.
The Chairman: That is good.
Senator Gustafson: Is it just a matter of the logistics? It is a program that will work. We have a good product, probably the best in the world. We say it is. It seems that the millers and the pasta producers buy that. It is a matter of putting it together and finding a way to make it work.
If in fact cooperatives are proven to work, to enhance the rural community and put some profits back into the pockets of the primary producer, it seems to me that it is an important thing to do. I do not have a lot more questions about that, other than to ask, how do we get that done? What are the major hurdles that we have to overcome to accomplish it?
It certainly can be accomplished. It has been proven to work — cooperatives do work. It is probably the only hope that farmers have of competing with the big, multinational players. Otherwise, we cannot compete. That is a given.
Probably the only bright light that we have seen here in the committee in regards to re-energizing agriculture and the farm groups is the new-generation cooperative. Certainly we have to find a way to make this work.
The Chairman: Can I add a supplementary question? In your presentation to us, you said, ``We do have a strategic agreement with the third-largest pasta producer in North America, where we have an option to purchase 3 million shares that represent one-quarter of their grinding capacity.'' First, can you get the money to buy the shares? Second, you made a curious statement when you said, ``Unfortunately, because of the trade challenges and the non-movement of durum wheat into the United States, the execution of these strategic agreements has been delayed.'' What has caused the delay and how can it be overcome? What can be done to realize this great financial opportunity?
Mr. MacKenzie: A year ago, we took an option with the shareholders of Dakota Growers Pasta Company in North Dakota, and all their shareholders were given an option to offer a portion of their shares. We made an offering of a limit of 3 million shares, and they offered more than 3 million to us. We have an option on those 3 million shares until November 25, 2003. Yes, it is a little tight here.
The trade challenges that occurred basically stopped the flow of durum and put us in a position where the market price would have made it difficult for us to deliver on the option we took because of the way it was designed. When we started to move grain in the spring of 2003, our agreement was that a portion of the payment for the grain delivery would go to pay for these shares. Consequently, the farmers did not have to take money out of their pockets in order to buy the shares they wanted. They would be paid for as the grain was delivered. It seemed like a great scheme to us, but we are now down to the deadline here.
Currently, we have a letter before the securities commission in Saskatchewan. We want to offer our membership the opportunity to buy these shares, and they would have to finance them however they can.
The Chairman: Can you realistically do that in two weeks?
Mr. MacKenzie: We have an option for an extension.
The Chairman: For six months or something?
Mr. MacKenzie: Our lawyer says for maybe three months.
If the membership agrees to take the option on the shares, we will ask for the extension.
Obviously, since the agreement expires on November 25, those particular shareholders do not have to give an extension. They can remove their shares from the offering. We may lose a portion because of what has happened, or they may leave them there. That is an unknown. However, that is how the extension works. They have the option to pull their shares back, or they can leave them in the offering and give an extension.
The Chairman: I hope that something can be done to make sure that can be realized, because that is a wonderful way to add value. I wish you luck on that, and I hope you can get the extension.
Senator Fairbairn: Thank you for being here. Listening to you is both inspiring and frustrating. You are here on a day on which we are putting out our final report on the climate change study that we were working on for over a year, in an effort to bring attention to the Kyoto discussion in Canada as to what are the challenges that we will be facing, particularly in our farming communities.
All the evidence that we heard during those discussions led us to believe that a far different future will be imposed upon our industry as changes continue to develop, perhaps at a greater speed than had been anticipated. That makes the kinds of things that you are talking about ever more important as traditional expectations in the agricultural industry change. You are in a bind.
Mr. MacKenzie: We always are.
Senator Fairbairn: I know that. You are in a bind through the clash between what people are asking you to do — which is to be innovative and add value and do all these great things — and being seemingly stuck in a pattern that is not assisting you in kick-starting that development, which you are quite keen to do on your own once that happens.
You are here in Ottawa before this committee. My first question is will you be talking to people in the Department of Agriculture, and perhaps the Department of Industry, while you are here?
Mr. MacKenzie: The simple answer is no. The invitation to come to this committee was made to us, and we were very pleased to come here and present. We view this as a great honour. The time that we have had to prepare has not allowed us to do those other things. Senator Gustafson asked some of the same questions before the briefing started. We would have loved to be able to do those things that you are referring to and that Senator Gustafson suggested. We do not have those things sets up for while we are here, which is unfortunate, because we would certainly love to be able to.
Senator Fairbairn: I think you should come back. Anybody around this table would facilitate those kinds of meetings.
I have one observation. I am thinking of a little company in Lethbridge. I am from the most southern part of Alberta. I have a lot of questions and maybe even more wind than you do. This is a company called Let's Pasta. They decided that they wanted to get into the business of selling both domestically and, if they could, exporting their product. I have not been paid to say this, but it is an excellent restaurant. They managed to do this after incredible difficulties. It was almost as though the system was designed to keep them from succeeding, and yet they have had considerable success in marketing their product in the United States and in Western Canada.
You must feel frustrated, because we probably have the best product of any country, and as our industry is changing, the opportunities are changing because of difficulties with droughts, grasshoppers, fires, floods, winds and everything else, and it will not get any better. It is absolutely essential that you succeed in what you are trying to develop.
I am wondering if most of your connections are on the farm, at that end of the production system. How many connections are you developing with small companies like the one in Lethbridge?
Mr. MacKenzie: We have tried to keep a clear goal in mind. Our initial goal was to involve a large number of farms so we could spread the benefit over a large area, believing that we could always source the grain that we need to supply a plant of the size that we wanted. We were not looking at maybe competing with or necessarily involving small plants like the one in Lethbridge that you are talking about, because they have developed a niche market. Those work very well, and I believe that there are lots of little stories like that.
Our goal was to involve a number of farms to work together under the new-generation co-op act. That put us in a position where we would compete on a scale with the larger players in North America, which then changes the dynamics of the business. Given the direction that the NGC was taking us and the group goals that we had in mind, we wanted to try to stay focused on those original goals to offer that opportunity to as many farms as we possibly could. We have continued to do that, and I believe we still will. We continue to offer it to whoever wants to participate. It is a closed co-op, but it is not closed to participation. The one thing about a closed co-op is that you have to be willing to participate. There are no hangers-on. You cannot join and not participate. You must participate. We are certainly open to that. I do not know if I answered your question.
Senator Fairbairn: Clearly, you are doing the very thing that governments and so-called experts are asking Canadian agricultural companies and farmers to do. If this committee can be helpful, we will. We have to be able to break down the barriers that, as you point out, in the end will challenge the very existence of our rural communities, as the activities that we have traditionally counted on, in one way or another, are not able to do the job as they have in the past.
You are exactly the value-added type of people that we need to hear from, but more important, that government needs to hear from, and I do encourage you to come back and see if we cannot point you in the direction of people who will listen.
Mr. MacKenzie: Thank you, senator. I agree totally. I do not think the government should be afraid to help us on the grounds of being opposed to helping business. By helping us compete with large business, we end up with an economy —
The Chairman: This is a business. Farming is a business now.
Mr. MacKenzie: Exactly, but we hear there is a fear that helping a co-op or allowing farmers to join together and helping them get into the business will hurt private enterprise.
The one big issue holding us back, as Mr. Brigden pointed out here, is the lack of cash or the equity in the farm to borrow against because there have been so many problems in agriculture in Western Canada. Given the risk of the unknown, the catastrophic effects of drought, fire and grasshoppers, et cetera, the farmer is reluctant to risk that last portion of equity in a position that he cannot control directly. The farmer may be willing to invest if he thinks he can control it directly. He will buy another piece of land or a new tractor if he thinks it is necessary to get his work done on time. He can control that investment directly. The control of the investment is not the same in a co-op. If he has equity, he looks to these other things first. The legislation to help the NGCs work is good, but it has to go beyond the legislation to create the value-added. We need those other factors in place to help us put these value-added ideas into perspective and make them work.
Senator Fairbairn: You have made a powerful presentation, and I thank you for that.
Mr. Brigden: I might add that you really have your finger on the pulse. We talk about these barriers and producers not being able to deliver and not wanting to deliver. If it was arranged so that producers were guaranteed delivery of their durum directly to a pasta plant, with nobody else taking anything off the top, we would have them lining up all the way back to Lethbridge to join this new-generation co-op, and they would find the money to make it work. I cannot be more emphatic than that on it. I sit on the board of directors of Weyburn Inland Terminal, the biggest inland terminal owned solely by farmers in Canada. If we can deliver direct to your plant, we will go there; otherwise, there are too many unknowns. Too many people have their fingers on my cheque before I get it.
Senator Fairbairn: That is exactly the kind of answer I was hoping to get from you, because that is the reality.
Mr. Brigden: That is the reality.
Senator Hubley: Welcome to you both.
I like your mission statement. It spells out your objectives very clearly. It is to empower its farmer owners to more profitably compete in the world market.
I would like to hear about your experiences in trying to capture world markets. Does that set different challenges from North American markets?
Have you made any progress in identifying niche markets for your products?
Mr. MacKenzie: When we developed the initial vision for this, we saw the opportunity to involve farmers throughout the entire durum-producing region of North America, including Montana and North Dakota, because the durum triangle reaches into those states and we had significant membership there prior to our escrow drive.
With that kind of membership in the production area, and with our members producing 15 per cent of the product, we can influence its profitability.
Pasta is an inexpensive food source. It is very competitive in low-budget food preparation. Consequently, there is room to have the consumer pay an extra dime per box, which affects the farm gate price of durum. The impact of that is actually pretty incredible.
There are very few players in the pasta industry around the world. It is almost frightening to see how few. The number keeps shrinking, with fewer and fewer players controlling the market. Our vision was to unite these producers.
Durum wheat is a rather minor commodity. It does not compete at the same level worldwide as spring wheat because it is used specifically for pasta. It would be possible to align farmers in other parts of the world, such as Australia, who are also competing with us for the world export market. They could benefit from a project like this as well, because all of our grain goes into pasta production somewhere. The question is whether there is any reason why we at the farm gate should not receive some of the benefit of the value-added if it is done correctly.
Senator Hubley: How large is your industry? How large is the durum wheat triangle on a global scale? Are we first or fifth, for example?
Mr. MacKenzie: We are not first in production, but we are the largest exporter of durum wheat in the world. That is because of the size of our area of production and the fact that our small population does not consume that much of the product.
We grow some of the best durum wheat in the world. Senator Gustafson referred to the fact that it is high quality. Italian pasta has the reputation of being the best pasta in the world, and the pasta made from our durum is as good as any Italian pasta made.
The Chairman: Is the consumption of pasta products decreasing due to new trends in consumer attitudes towards grain-based foods?
Many of the current diets recommend not eating carbohydrates, which includes pasta. Are you worried that that will have a major impact on pasta growers in Western Canada?
Mr. MacKenzie: The North American industry saw a decline in sales of brand-name pasta of 5 per cent last year, and our alliance partner is working on opportunities to market pasta that could be attractive to that group of people.
However, trends come and go and farmers will always produce durum wheat. Farmers need to be connected with the production of pasta. We need the alliance between the farm and the processor. We will not be deterred from our goal of becoming involved in the pasta industry just because there is a downturn in consumption at this time. We have addressed that, first, by getting involved with an existing player that has market share, contacts and relatively good cost of production. They have a newer plant with reasonable overhead and they have the market in place. Therefore, there is a return and it is a solid investment. There is an opportunity for growth in the industry, and we could be there to respond with our alliance partner when that growth occurs.
Senator Wiebe: In response to an earlier question, you said that part of the reason for needing to hook up with large, established processing plants is the problem faced by niche producers and smaller processing plants in finding shelf space for their product. It has been evident to our committee that this is a concern of many individuals in that position.
One suggestion that has been made, although this does not necessarily reflect the view of the committee, is that the Government of Canada and the provinces should pass legislation to encourage retailers to allocate a certain percentage of their shelf space to products processed locally and in Canada.
What is your view of that?
Mr. MacKenzie: This is the first time I have heard that suggestion. You are talking about free shelf space. I understand that every position on the shelf comes with a different cost, depending on whether it is at eye level, at floor level or at the end of the row. The thing that surprised me the most when I got involved in this was learning that companies had to pay to put their product on a grocery store shelf. However, that is the reality.
We have not taken a position on your suggestion because this is the first time we have heard it. It sounds appealing to get something for free.
Mr. Brigden: On the one hand, we are asking for less control, that is, from the Canadian Wheat Board. On the other hand, we would be asking for controls to give us shelf space. Which do we want?
Senator Wiebe: That is why I asked the question.
Mr. Brigden: I think, senator, you have point there, but it is a double-edged sword. It is a difficult line to walk. You are risking causing other producers to wonder what happened to free trade and fairness. We are opening up a real can of worms in talking about that.
My boys and I want to run our own ship. We do not want intervention. If we cannot produce pasta that will sell, should we be in the business?
Senator Wiebe: To follow up on that, let's say that the Canadian Wheat Board restrictions that now apply were removed and the federal and provincial governments provided you with incentives to increase your share capital. Let's say that you were strictly a Canadian company, with no hook-up with an internationally established firm. You would then have to enter into the bidding war for that shelf space. That is a pretty competitive and a very —
Mr. Brigden: Cruel.
Senator Wiebe: — cruel way of proceeding. You will get shelf space in a small town with a population of a 1,000 people or less. You will run into considerable costs in larger areas and when you try to export that product. I think that is one of the biggest problems that home grown industries will face in the future. Is that a fair assessment?
Mr. MacKenzie: You have assessed it very well. The cost of getting shelf space has to be calculated in our business plan. Whether it is a retail store or a process to co-pack, you need to have some sort of numbers for that. It can be extremely costly.
Senator Wiebe: Perhaps you could give that suggestion some more thought.
Mr. MacKenzie: We certainly will.
Senator Wiebe: You could discuss it with your shareholders, a few farmers and people in the industry. If you come to any conclusion, we would appreciate a letter saying that you have had a chance to evaluate the idea.
That idea has been being presented to us a number of times. We have the same concerns as you about whether it should be legislated. We feel that the answers are out there amongst people like you.
We would appreciate you giving that some thought and dropping our clerk a line to say the idea has merits, but it is a disaster in certain areas.
Senator Hubley: Do you do your own packaging as well?
Mr. MacKenzie: We have not got that far, unfortunately.
Senator Hubley: I was following up on Senator Wiebe's question about shelf space and so on. All of the pasta that you produce is shipped in bulk to some other —
Mr. MacKenzie: We may have misled you somehow. We are not in the business of producing pasta at this time. We are still trying to enter that area. If we are able to fulfill our agreement and our option to buy shares, then our grain will be taken and processed. We will be able to have some of that identified as Canadian produced when coming back into Canada.
Senator Hubley: I see. I got ahead of myself.
Senator Gustafson: Senator Fairbairn tells me she has to leave. She presented something most important.
You are only at the beginning stages of this situation. It is important that you do come back here and meet not only with the Senate committee, but also with the agriculture committees and the players in the government. Unless you can pull the strings of government, you are in trouble.
We have to face reality here. Senator Fairbairn said it well. There seems to be a general consensus that when things get back to normal in Ottawa, you should plan to come back here and get through to those who can pull the strings to make this happen.
Otherwise, we are just wasting time. I wanted to say that before Senator Fairbairn left because I think she can pull more strings than I can.
Mr. MacKenzie: I appreciate that very much, Senator Gustafson. As we said in our brief, we have been working at this under the banner of Prairie Pasta Producers for six years. We have been doing it longer than that actually, because we spent time organizing to become the Prairie Pasta Producers cooperative. We are not at the entry level yet, although it is at our fingertips.
This has not been an easy process where we have been able to walk in and the pieces fall into place. Continual catastrophic events occur to block our course.
Senator Wiebe: I know the frustrations. I have been going after things for 30-some years, and we are starting to see a little movement. There is always hope at the end of the tunnel. You must persist.
Senator Ringuette: This is the first time I have heard about your project. I am from the East Coast, but I am a firm believer in cooperatives and the farmers getting more involved in owning the added value of the processing part.
What is Dakota producing? I know that it is pasta.
Mr. MacKenzie: It is dry pasta.
Senator Ringuette: Do they deliver that to wholesalers for further processing?
Mr. MacKenzie: They co-pack for different companies. One that you will probably recognize here in Canada is Unico. The Unico label is packed by Dakota Growers. They co-pack for different companies in the food industry and food services.
Mr. Brigden: They do a lot of work with the institutional industry.
Senator Ringuette: That is a huge market.
Have you discussed with Dakota them retaining that portion of the dry pasta for the institutional market, and you venturing into identifying more trendy pasta?
Mr. Brigden: The first step in our association with Dakota Growers is to deliver Canadian durum. They will do the processing, the packaging, the marketing and everything. Hopefully, with expansion, the next step would be to maybe have something to bring back north of the 49th.
The first step is to create value-added on the durum from Western Canada for the producers. That is what we are working to accomplish.
Mr. Brigden: It will cost in excess of $100 million to build a 5-million-bushel pasta plant and will take five years. When you make the decision to build a pasta plant you order the equipment from Italy, because theirs is the best, and it shows up four years later. This does not happen overnight, as Senator Wiebe said. I was invited to the first meeting about a pasta plant south of the 49th parallel 10 years ago.
Senator Ringuette: I understand that. You are still in the early stages of the project. I agree with my colleagues that it is promising and I would like to see you return to the committee so that we may help in any way that we can.
Mr. MacKenzie: Thank you, senator.
The Chairman: I have one brief question. The organic grain market is considered to be in the early stages of development. Sales are small but opportunities are emerging and there is excellent growth potential. Is Prairie Pasta Producers involved in this organic grain industry?
Mr. MacKenzie: We are pleased to be able to say that our strategic partner has a certified organic plant and our co- op is open to organic producers. There is a need for organic durum at our alliance partner's plant.
The Chairman: Do you have any organic durum growers in your co-op?
Mr. MacKenzie: No, not that I am aware of.
The Chairman: Why?
Mr. MacKenzie: Perhaps they have been marketing their durum elsewhere. They may not have been aware of our processing relationship. We do plan to make the facility better known to the organic industry as soon as we are able to move grains. Recently, our alliance partner's plant was certified by the Canadian organic system so that they can process Canadian organic grain. They have gone to the trouble of obtaining Canadian certification for their plant.
The Chairman: Mr. Brigden, you and your sons have been in the grain business for 43 years. Why have you not considered organic grain farming?
Mr. Brigden: Organic farming is a niche market. When you run 12,000 acres, chemicals and fertilizers are used so that you can seed 600 acres per day. It is a different operation from that of the organic farmer, who has a half section and may have his finger on the organic pulse such that some of his family are out there pulling the weeds. They get upset when we spray 1,400 acres in a day. It is a totally different operation. It was not my way of working in agriculture. Organic farmers around me have been using my seed plant. Now, they have reached the point where they will have to use organic seed. You could say that I am not in the organic farming business, but I do have an organic grower contracted and I will have 9,000 bushels of certified organic pedigree seed to process and sell to them for the first time next spring.
The Chairman: We were talking earlier about cash flow and return on investment. Is the return on investment for organic farming not better than for traditional farming? Would that not be an incentive to consider it more carefully?
Mr. Brigden: I always wondered about those numbers. You hear about $18 per bushel for their flax and $12 per bushel for their wheat. I do not want to denigrate the organic producers, because some are very good and are making a living. I read last week that 20 years ago, a farm had to gross $150,000 to make a reasonable living, or else the children would leave to get a job in the oil field or in the city. Today, 20 years later, a one-farmer operation has to gross $300,000 to make a reasonable living. We have never looked at organic production because of the way we have always run our farm. Some of them are doing quite well, but they have to work hard at it, just as we do.
You talked about low commodity prices. This is happening in the grain industry in Western Canada. We have producers who took the spring cash advance for crop input and the payback occurs when they deliver to the Wheat Board in the fall. When a producer delivers a load of wheat to the CWB, the price paid by the board at the farm gate is equal to the payback on the spring cash advance loan. He does not take a cheque home with him. That is how tight things are.
Then we had BSE and the cows went down in price. They are having trouble marketing their cattle. Western Canada is in trouble.
Senator Wiebe: It depends on the grade of the grain. Some may still owe after they haul their load of wheat to the CWB.
Mr. Brigden: I was giving them benefit of the doubt. In 2003, we harvested one of the highest quality crops that I have seen in my career. The red spring wheat is all No 1 — 14 per cent protein and higher. The durum is No.1 — 14 per cent to 14.5 per cent protein. This is a concern to the pasta industry because the protein percentage is considered too high. The barley is also high protein, but the maltsters do not want high protein.
If you had a 3 per cent or a 4 per cent durum, you would not be paying back what you should be paying per bushel. Yet our counterparts south of the border receive their money in a different manner. It is receive up front and the amount paid is higher than here. We wait to see what we will get.
The Chairman: On behalf of the committee, I thank you for a most excellent presentation. I think you can tell by the quality of the questions that this committee is very interested in this issue. You have added value to our value-added study with the comments you have made today.
It is always good to hear from farmers — people who are involved at ground level.
The committee adjourned.