Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 4 - Evidence - Meeting of March 25, 2004
OTTAWA, Thursday, March 25, 2004
The Standing Senate Committee on Agriculture and Forestry, authorized to hear from time to time witnesses, including both individuals and representatives from organizations, on the present state and the future of agriculture and forestry in Canada, met this day at 8:37 a.m.
Senator Joyce Fairbairn (Deputy Chairman) in the Chair
The Deputy Chairman: Honourable senators, I am pleased to call to order the seventh meeting of this committee on the issues related to the cattle industry and BSE, bovine spongiform encephalopathy, which has attacked our cattle areas across this country.
I thank all of those who are watching this on CPAC, as well as those who are following our deliberations over the Internet.
For several months now, Canada has been faced with the consequences of BSE. Although, at the beginning, only one single case was discovered, this event has greatly affected farming communities across Canada. As we are all aware, the U.S. border was immediately closed to all Canadian cattle and beef products. The United States announced a partial opening of its border, by allowing beef imports of boneless meat from cattle less than 30 months old and from calves; however, the border still remains closed for live cattle. This represents more than 40 per cent of the value of exports of Canadian beef and beef products.
Over the last few weeks, we have heard from witnesses who have described for us the hardships experienced by Canadian farmers. Witnesses outlined for us the stressful and serious economic situation facing Canada's beef industry and raised several questions regarding trade issues, health and safety measures, compensation programs, as well as questions regarding the price of beef. I should underline that the health issues surrounding this crisis are very real in cattle country.
Earlier this week, the Prime Minister and the Minister of Agriculture, Mr. Bob Speller, announced a $1-billion support program aimed at helping the livestock sector recover. It is designed to direct payments to producers as we, it is hoped, move towards the opening of the U.S. border for all our live cattle.
Honourable senators, this morning we have the pleasure to have before us two important groups. I should like to welcome, appearing on behalf of the Canadian Cattlemen's Association, Mr. Stan Eby, Mr. Hugh Lynch-Staunton, from southern Alberta, Ms. Anne Dunford and Mr. Jim Caldwell.
Following their presentation, we will hear from Mr. Art Price, from Sunterra Farms.
Welcome to Ottawa, although we seem to see you here all the time. We were very pleased to see Mr. Neil Jahnke, who is the president of the Canadian Cattlemen's Association, with the farmers in Picture Butte on Monday.
I now invite Mr. Eby to start off. We have one hour. Following your presentation, I would encourage my colleagues to be smart and snappy with their questions, so that we can get the most information possible on the record.
I should also like to welcome the Leader of the Opposition in the Senate, Senator Lynch-Staunton, who is here because he is interested in the issue.
Senator Lynch-Staunton: Also, I am here to declare a very welcome conflict of interest.
The Deputy Chairman: Yes, Senator Lynch-Staunton's cousin is here. We know that this is a happy reunion for both of them.
Senator Lynch-Staunton: It is. I appreciate that.
Mr. Stan Eby, Vice-President, Canadian Cattlemen's Association: Honourable senators, it is a pleasure to be here today representing the Canadian cattle industry. As you are well aware, the cattle industry is nation-wide. We represent each province at the Canadian Cattlemen's Association level.
We welcome the opportunity to meet with you today. You have already introduced Ms. Dunford and Mr. Lynch- Staunton. Mr. Lynch-Staunton is also in a political frame of mind today: Tomorrow, he is running for vice-president of the Canadian Cattlemen's Association tomorrow. We wish him well.
My presentation will be short. I believe it is more important that you ask questions, and we will try to answer them for you.
I am sure you are very much aware of just how tough things are in our industry. We have a real mess on our hands. Our industry is 10 months into the BSE crisis. Although there have been times when things have looked somewhat optimistic, there have been many lows along the way. Each time we seem to get a gain, an offset appears.
While we are optimistic that our trade restrictions will be lifted, we also have to live with the possibility that many cattle, especially older cattle, will not be treated for quite some time. The December 23 diagnosis of a second BSE animal, which was imported from northern Alberta, sent a shock wave through the industry. Prior to the second diagnosis, we were optimistic that the market to the U.S. would reopen. Now, not only are we closed out of the most international markets, so too are the Americans. The Americans have also seen their prices fall. This has come home to haunt them as much as it is haunting us.
Even if the U.S. border were to open tomorrow, it will not be the same market it was prior to December 23, 2003, or even prior to May 20, 2003. There was a great deal of optimism in Canada prior to the new case in Washington State. It appeared that the U.S. market would soon open to live, young cattle, and this was reflected in the marketplace. Replacement cattle were selling close to pre-BSE levels.
The uncertainty that has gripped the industry is further complicating its ability to obtain capital. Lenders are starting to apply pressure. The uncertainty has pushed producers to the edge of desperation and panic. It is important for everyone to recognize the stress factor here, not only with respect to producers but also in terms of other associated businesses in our industry.
The budget announcement this past Tuesday will provide some assistance to producers. Given that we are facing severe financial trouble, we welcomed, and appreciate, the announced government help.
To digress for a minute, as honourable senators are aware, our industry is made up of different sectors. It is important to recognize that the level of hurt has been different in different sectors. Our association is doing all we can to try to keep the industry functioning. We continue to lobby our American counterparts; it is in their interest to have the border open and for normal trade to resume between our two countries. The Canadian government has also been working hard to convince their counterparts in the U.S. government to open the borders.
As a point of interest, our export markets — as you are well aware, we export more than half of our production — are closed right now. We have tabulated that it is costing about $192 per animal, not having all of the export markets open to the various cuts and pieces that go to other markets. I can supply the details of that $192. That is an indication of the value of export markets on a per-head basis in our country.
While the market is not functioning as it should, there has been progress in getting markets open and trying to create demand for Canadian beef products.
Last September, we started to export beef to over a dozen countries, and the list continues to grow. The biggest market is the U.S.; and Mexico has also come on strong, which pleases us. Our slaughter volumes are running about pre-BSE levels. New capacity should be coming on stream later this year. Much of this new capacity will be directed to manufacturing-type animals, cows and bulls, which have not had a market since the border closed last year.
Our processors tell us they are able to sell all that they are producing and the system is not backed up for beef and beef products.
Domestic demand and consumer confidence have held firm, according to consumer research conducted in January in both Canada and the U.S. There is little doubt that consumers have been more than loyal to the beef industry, and we certainly appreciate that.
There has been some question, however, about whether lower prices received by producers have been passed on to consumers. This is presently under review. There is a time frame in play here, however. We are seeing things return to normal market functionality, as we speak.
Everyone wants to know when the border will open. We wish we knew. Every time we make a prediction, there is another bend in the road. However, the United States has completed its investigation on its case of BSE. We now know that the comment period for their new rulemaking process will end April 7. We hope the review of the comments will be short and that the borders will be opened as soon as possible after that date. That will allow live cattle to start moving south.
This rule could establish the template that many countries will use to reopen to both Canada and the United States. In other words, a number of countries are watching how the U.S. is treating Canada.
The international panel of experts has completed its review of the U.S. investigation. The panel has indicated that this is a North American industry and as such has called on the United States to take leadership in trade matters by adopting import-export policies in accordance with international standards, to encourage the discontinuation of irrational trade barriers.
The BSE round table that reports to the Minister of Agriculture is working on various scenarios that look at different dates for reopening the border to live cattle and the necessary transition measures to deal with the various possibilities. In other words, if the border does not open, what are our contingency plans? Those are being worked on.
How do we make the cattle industry less vulnerable to this type of risk in the future — which is one of the major long-term concerns of our industry? How do we make it less vulnerable and remain viable and functioning well?
Another area of concern, and something the Canadian government has been working on for some time, is harmonization of rules with the U.S. vis-à-vis their specified risk material and the feed ban. Those consultations are ongoing. There has been movement on that. There is a group working in Washington at present. There is a three- nation meeting next week to address these issues and to harmonize the systems.
I should point out that harmonization has to be done right, and we only have one chance to do it. We must be diligent to get it right.
There is no easy answer to the current dilemma. We do know, however, that this is a joint venture. We have been working closely with the government as well as opposition parties. We have worked closely with our American counterparts at the National Cattlemen's Beef Association, the NCBA. We believe that without their cooperation, we would not have the border open as much as we have today.
The NCBA understands that a North American market is what we must work toward. They also realize that the rules governing BSE are too harsh for the risk involved and must be changed.
However, we also realize that this is an election year in the U.S. I do not know why politics and science mix, but we are in that situation.
Madam Chairman, that concludes my formal presentation. I would invite questions to our people here.
The Deputy Chairman: First, in response to your fine brief, on behalf of the senators, I want to thank your association for its fine work with your American counterparts. Your work has been never-ending, and it is very much appreciated by the government.
I believe you also know that our Minister of Agriculture, Mr. Speller, after the announcement on Monday of the emergency relief program, the transitional program, for the cattle industry, was on his way to Washington for another round of talks on this matter.
In my working life I have always been paid to look at the worst possible scenario. However, based on the views of your association president and our minister, there does seem to be a flicker of light down there. The more we can do to make it brighter, we will.
Everybody considers this an issue of borders, cattle and money. However, it is also an issue of people and families and towns, and their ability to retain their businesses, which are all in a precarious state right now. Perhaps you could say something about that, because there is more to this than simply the business side of it. This is about people.
Mr. Eby: The stress on various components of our industry and of the fabric of our community is certainly challenged with this kind of a situation. Prior to May 20, where we had a functioning market, did we really appreciate all that was involved in our market and industry? When it stopped, we definitely had an appreciation for what was involved.
We are now seeing pressures from lenders. Our livestock has not moved as it usually does, so auction markets, trucking operations and the suppliers of those businesses are also feeling the ramifications of a market that is not functioning. It is very difficult to measure.
We are seeing a higher level of frustration each week as this moves along. Part of the frustration, I believe, is that people are so far away from where the decisions are being made. Mr. Lynch-Staunton, Ms. Dunford and Mr. Caldwell are close to it, but we are still somewhat distant from it. As I mentioned before, the harmonization of rules has to be done right, once, because there are long-term ramifications of that. As a producer, I feel that I am far away from things, I have no control, and that adds to the stress in the community. To evaluate the toll that it is taking on the community in other businesses is very difficult, but it is also very real and it is happening.
Senator Mercer: I should first like to welcome you. We are very glad to see you. We have heard from all of the players over the last little while. We have had some people from the industry — retailers, packers, the scientists and the producers. As the representative of the producers, I have a number of questions for you, but, first, I want you to know that you are among friends here. One thing that has been common throughout the debates of this committee is our support for the producers and the farmers, and trying to help find solutions to the problems.
I have particularly been on the side of the consumer as well, but I will drop my consumer questions to a certain extent this morning, to try to concentrate on the farmer.
I am trying to ascertain whether, over the past little while, you as a producer, or us representing the government, have been taken for a ride by somebody in the system. Money has been put into the system, both by the federal government and by provincial governments — close to $1 billion previously, and now the Prime Minister-announced $1 billion earlier this week. I applaud that effort. I only hope that all of the farmers will benefit.
What I really want to know is this: In your evaluation of the program — the previous program, not the one announced this week — did the money actually get to the producers? If not, do you know where it went? If the initial programs were designed to help farmers and no money ended up in their hands, are you satisfied that the new program will get money in the hands of the farmers? We have questioned whether the money actually ended up where the government wanted it to go.
Mr. Eby: I will ask Mr. Lynch-Staunton to reply to that.
Mr. Hugh Lynch-Staunton, Director, Canadian Cattlemen's Association: He is leaving the easy questions to me.
It is very hard to know where the money went. Let me just back up a little bit and add my appreciation to the Government of Canada and the provincial governments. They have been remarkably generous and, particularly the last few months, have included us and have consulted with us. We appreciate that.
The previous program, in our view, was flawed, in that the money was tied to slaughter and there was a time limit on it. We had a situation with limited slaughter capacity and a very strong incentive for these cattle to hit a market. There have been many fingers pointed at other people in the food chain, but what happened was unprecedented.
Where did the money go? It is hard to trace. Some of it was passed on through the feeding industry back to the price of feeder cattle. There has been much speculation about excessive profits. I cannot tell the extent of that. I suspect, personally, that the excessive profit has been exaggerated a little bit. We think the new program is market neutral. As you are aware, that is always the difficulty when you put significant money into an industry. We think this one will work a lot better.
Senator Mercer: I am from Nova Scotia, so I am interested in what is happening in Nova Scotia. The vice-president of the Nova Scotia Cattlemen's Association, Jim Bremner, says that the fine print of the new deal announced this week indicates that he will not be getting much money through the aid package. As an eastern Liberal, I never thought I would read these words — I am quoting from a farmer in the East: Mr. Bremner says this: ``We have tried to get help for the industry. In the end, it all boils down to politics.'' My other colleagues from the East will find this amusing. Mr. Bremner goes on to say, ``It is a political thing. It is counting votes in Western Canada.'' It is unusual for us Liberals to read a line like that, that we are counting votes in Western Canada.
In certain parts of the industry, for example, in Nova Scotia, many farmers have sold off their herds but still have a serious interest in what will happen. Do you see any way that the newly announced program can help those people who have sold off their herds but who will want to be back in the business as soon as there is movement of cattle across the border?
Mr. Eby: Bear in mind that the program announced on Monday of this week was split in three areas. There was a $680-million direct cash payment; there was $250 million — I think the numbers are right — for transition; and there was a $65-million top-up to the 2002 Canadian Farm Income Program, CFIP. There is also the new agriculture policy framework and the CAIS program that fits in this. Working with some of the Agriculture Canada people the other day, I asked: How much money has the federal government put into the beef industry this year? It is difficult to come up with a final figure because we have overlap of these programs.
In direct answer to your question — will your friend who sold his cattle get anything out of this program? — there is a possibility that he will. With the CAIS program that is in place in your province, how will his margins work on that?
In designing the program, how do you get as many people as possible covered for the various situations? Bear in mind, I mentioned earlier the various sectors — for example, the purebred sector, the commercial cow-calf sector, backgrounders and feedlot sectors. The situation across those sectors differs.
So, I said, I think your friend will have some response. Will it be enough? That remains to be seen; that could be the big question.
Back to the original question: We certainly want to acknowledge the non-partisan approach to our BSE concern from all parties. There has been a positive response from all parties — which makes it much easier to keep the politics to the side and the issue ahead of us.
I will ask Ms. Dunford to talk about the numbers, the way our market stopped and what we had to do with the program to get things started.
Ms. Anne Dunford, Senior Analyst, Canadian Cattlemen's Association: We have 90,000 producers across country and close to 15 million cattle. How do you get the money to the right places? Obviously, that is a challenge.
The first program was directed more to getting the slaughter cattle markets moving and happening again. It did that — it forced cattle to market in order to get the payment. You then get this dysfunction of supply and demand.
Initially after May 20, slaughter levels dropped from 70,000 head a week to 40,000. We could not continue at that rate. We needed to get back up to capacity. As we moved through the summer of 2003, that certainly happened. You heard Mr. Eby's comments this morning. Processing levels are running at capacity now, so we are getting through the cattle, but we are still most certainly challenged with more cattle than capacity. That will be an ongoing issue until this situation is resolved and the border is reopened.
The Deputy Chairman: It might be noted that, under the new program, the producers with cattle will receive a payment of up to $80 per bovine animal on inventory as of December 31, 2003.
Senator Lynch-Staunton: Obviously, I am not here for my knowledge of industry but to hear my cousin and his associates' views. I had the opportunity to visit the Lynch-Staunton cattle ranch in the foothills of Alberta, near Pincher Creek. Every time he and I would sit across a table, he would complain about all that was wrong with Ottawa and advance his views on legislation, both proposed and passed — not to name any in particular, but gun registry comes to mind, as well as cruelty to animals and a few others. I am now tempted to reverse roles. However, that may handicap his election campaign.
Welcome. This is a learning process for me. At the risk of asking you questions the answers to which are known by my colleagues, I will begin my questioning. You mentioned, Mr. Eby, that 50 per cent of your industry depended on exports. Can you break that down between live cattle and products, and between countries, so that we can know how important the American market is to Canada?
Mr. Eby: Thank you for the question. I will ask Ms. Dunford to reply. Actually, 50 per cent was low.
Ms. Dunford: In 2002, 60 per cent of the production in Canada was exported in the form of live cattle or beef. About 87 per cent of that went to the U.S. market, by far the largest. Between live cattle and beef, about 60 per cent was beef and 40 per cent was cattle, as you heard in the opening comments. It is most certainly weighted to those markets. Between Japan, Taiwan and the other Asian countries, it would make up 5 per cent, with the remaining largest chunk going to Mexico.
Senator Lynch-Staunton: Have any of those markets shut your industry down then reopened them for live cattle, or are they all still closed?
Mr. Eby: No markets are open to live cattle.
Senator Lynch-Staunton: Is that true for the American market now? Are the American exports being protected also?
Mr. Eby: Yes.
Senator Lynch-Staunton: Do the Americans have any advantage in seeing live Canadian cattle not being exported to them? Is there an economic advantage to them?
Mr. Lynch-Staunton: Some sectors take a protectionist view. Most of the people in the meat industry take a different view. The export market is not as important for the Americans as it is for us, but what they do export is high value into Asia. I think the general consensus in both the meat trade and in the primary production in the United States is that it is in their interests to integrate the North American market.
Senator Lynch-Staunton: That was going to be my last question. There is integration taking place between the three North American countries?
Mr. Lynch-Staunton: There is an attempt to do that. The major cattle organizations in the three countries have agreed to harmonize as much as possible. I believe the governments are working in that direction. They have agreed to the principles of it, but it is a very cumbersome process.
Everyone is trying to get it right. In the meantime, however, our cattle are backing up. We need some relief of this pressure while this happens. Finally, it looks like this is achievable.
Senator Lynch-Staunton: You may or may not agree with what I will say, but it appears that if the protectionist element of the American industry is strong enough, it will see that nothing happens between now and November.
Mr. Lynch-Staunton: That is certainly their intention.
Senator Lynch-Staunton: Yes, and it is working so far?
Mr. Eby: I do not think so. I think we are okay, but we do not know.
The Deputy Chairman: A side note question to Mr. Lynch-Staunton. Has there been, very recently, some special opening on the Mexican side of the border?
Mr. Lynch-Staunton: Yes. It is my understanding that the Mexicans opened their market to American cattle, and they applied the same protocols that the Americans have applied to Canada. This has been very useful for us because it has focused the American attention on exactly what kind of ball game we are in. This is one of the very positive things that are happening. The Americans now know that they are setting the protocols, and because of the situation what they set for Canada will likely be the exact same thing that will be imposed on them by the rest of the world.
Senator Ringuette: You mentioned that your slaughter volume was up, that usually you export to 12 different countries. You also said that you export 87 per cent to the U.S., both living and beef cuts, and that the U.S. exports high value into Asia. This always seems to bring me back — in regards to the current situation — to the priority to get the borders open. However, are we also putting additional energy, thought and planning into additional processing in Canada, so that your industry becomes less vulnerable in these types of situation — in other words, adding value for the products you are currently producing, from Canada, instead of the added value being done in the U.S. and then going to Asia?
I remember distinctly when all free trade arguments were negotiated in the 1980s the main thrust being the ability to add value to our current production in all the industries.
To come back to my main question: Is there a strategic plan in regards to eliminating some vulnerability of the industry for the future by added-value processing?
Ms. Dunford: May 20 certainly led many producers across country to look at that issue — supply, demand, commodity capacity — supply pretty much set in stone. There have been numerous start-up ideas, investigations and proposals into new capacity, reopening old capacity that was previously shut down, and converting capacity to cattle, especially to deal with our older cattle that will be an issue for some time, as you heard at the beginning. Some capacity will be coming on in 2004. Some of it is here in the province, in Kitchener, through the former MGI plant, now Gencor Foods Inc. This will be on stream this year. It is a new capacity they are operating in this province. It will come on stream in Atlantic Canada as well with Atlantic Beef.
Beyond that, the round table is addressing long-term capacity issues. There is more interest in capacity, producer co- ops, and those kinds of things, than we have seen in 10 years.
Everyone is seeing exactly what you described, that the capacity is necessary.
Mr. Eby: Along with that, our overall vulnerability is tied very closely to this. We are concerned about the potential of a dumping charge from the U.S. on too many live cattle moving down, so value-added here is very important to us. We also will be approaching governments on some of that issue, because we have a trade policy that lets in additional beef — we will call it manufacturing beef — with no additional tariff or charges on it.
My point is that if we are going to get additional capacity here on a long term and make it viable, we must ensure that the climate is right for them to operate in.
Senator Ringuette: Madam Chair, I would suggest that this committee have an opportunity to meet with the round table people, to get an understanding of the long-term projection.
My suggestions regards to the other study that we have undertaken, relating to added value of agriculture and forestry products.
The Deputy Chairman: I would draw your attention to the fact that our beloved chair, Senator Oliver, is here, and I am sure he will also take note of that.
Senator Hubley: My question flows somewhat from what Senator Ringuette was speaking about. It has to do with the fact that we are moving beyond the crisis and we are now managing it. It has to do with our new capacity for slaughter.
Presently, our volumes are above the pre-BSE levels. The increased capacity will be directed at the older cows and bulls. Therefore, we are expecting that the border will have restrictions. We will not see an older animals being moved back and forth across any borders. Would that be a fair assumption?
Mr. Eby: That is being negotiated at this time. There is a potential that the border could open for the over 30 months also.
Senator Hubley: There is that possibility?
Mr. Eby: Yes.
Senator Hubley: If we are building in this new capacity, and if the border opens, how will this affect what would have been the normal flow of product back and forth?
Ms. Dunford: I am not sure if I understand the question.
Senator Hubley: I will make myself clearer. We are now increasing our capacity to address the issues that we are facing today within the industry. However, when the border opens, will we see that capacity wane, or businesses going down that have been brought forward to address the problem as we are facing it?
Ms. Dunford: Some of the capacity that has come on stream with larger numbers, especially in 2004, has been through working overtime, double shifting, extra hours, six days a week. There are, most certainly, some labour challenges and draining resources. We could not run at this rate for an extended period of time. Plant workers are working overtime to get capacity levels where they are today.
There is no question that, when young live cattle are open to move, there will be some movement. However, we are talking about marketings on an annual basis of about 4.5 million head. Our capacity prior to this, prior to May 20, was about 3.5 million. We are not talking about a small difference between our slaughter capacity and our supply capacity. It is about 1 million head. We have a fairly big surplus of cattle.
Mr. Lynch-Staunton: However, when the border opens to live cattle of any description, our markets will be more competitive for the packing industry. That puts pressure on them — and from my point of view that is good.
However, you are quite right that we have identified our capacity as a weakness in our industry, and we would be more secure if it were closer to our production. I am not an expert in the packing industry, but in theory there should be a considerable freight advantage in doing that closer to source. One would think in a natural evolution of things that capacity would increase.
While I think of it, I must say that the packers I am familiar with are very good at what they do. They have gone through quite a process, and they are very good businessmen.
Senator Callbeck: You say new capacity should be coming on stream later this year. In your opinion, how much more additional capacity do we need?
Ms. Dunford: As I just mentioned, the magic number right now is close to either side of roughly 1 million head. Hence, you are going to see small increases this year in some capacity, but by no means to that degree. A large packer, the size of some of the ones we have in Alberta, would be looking at half a million. A very large plant would be half a million head a year. So we are making small dents in it, but you would be looking at two completely new plants.
Senator Callbeck: Two new ones?
Ms. Dunford: If you were to look at making up for the capacity that is missing.
Senator Callbeck: There is only one on stream now, correct?
Ms. Dunford: Not even of that size.
Mr. Eby: To come at it from another angle, ideally, we would like to keep our exports of live cattle under 500,000, maybe even less than 400,000. There is naturally a move back and forth across the border. We saw it in 2002, due to drought — a number of feeder cattle went south. The same situation has applied to the feeder cattle that have come north.
However, we are a bit sensitive — going back to 1999 when we had an anti-dumping charge that we successfully defended. We are concerned about a dumping charge, if too many cattle move into the U.S. If we can keep the number below 400,000, not more than 500,000, there is less chance of a dumping charge being levied on us.
Mr. Lynch-Staunton: The other thing we can do, which is more risky but we are working hard at, is to harmonize the rules of trade. If we can get an understanding with our trading partners that is not vulnerable to disruptions, that would work, too. However, that is a tough one to accomplish, although we are trying to do that.
Senator Callbeck: I want to ask a question related to the cattle identification system, which I understand has been in operation for three years. There is a quick trace back to the index animal and to the offspring, but the government has announced funding of $92 million over five years to help upgrade this system. What are the problems with it, or what are your suggestions as to how it can be improved?
Mr. Lynch-Staunton: I am not quite sure where the money will be spent, but we want to replace normal tags with electronic tags, which will be expensive, but they are much easier to read. They can be read with scanners. We think this will speed up the process.
Our identification process will work very well, and will work quickly. I think we can be pretty confident in that aspect of it.
Senator Callbeck: Will those electronic tags be an added expense?
Mr. Lynch-Staunton: Yes.
Senator Callbeck: Will it be very expensive?
Mr. Lynch-Staunton: We are pioneering these things. We believe that when we get into mass production we can bring the cost down to $2 or $3 a tag, I believe.
Can you confirm that, Ms. Dunford?
Ms. Dunford: That is what they are talking about.
Mr. Lynch-Staunton: That is our expectation. They are $5 to $10 per tag now. All sorts of tags are being developed; it is still in its infancy.
Senator Lawson: Following Senator Lynch-Staunton's questions, now that the Americans — to use Bill Clinton's words — feel our pain, are your counterparts more responsive, more sympathetic, to the situation we are in now that their borders have been closed and their exports cut off?
Mr. Eby: Yes.
Senator Lawson: That is probably very helpful.
Mr. Lynch-Staunton: They were always sympathetic, but they are more focused now.
Senator Lawson: As long as they are focused in the right direction, and the protectionists are not taking over.
Mr. Eby: Bear in mind that this was a crisis in our country, but merely an issue in their country, until December 23. The dynamics have now changed and we are seeing a number of things coming together.
Senator Lawson: Some people might even facetiously suggest that it was a good move on our part to ship that one cow to Washington State.
You talked about the surplus. If you are forced to depopulate animals, do you have a program as to how to deal with that, or is that something you are trying to avoid?
Mr. Eby: That is something we are trying to avoid. We feel that we are able to work our way through some of this. The next few months will tell us that. The contingency planning being done by the roundtable is taking that into consideration, that is, how we would best go about that if it becomes a reality. We feel that it will not become a reality.
Being food producers, we have to be optimistic, and we are optimistic that we will get the borders opened and get into a more normal trading pattern.
Senator Lawson: I want to add that I agree with what the deputy chairman said this morning. I am a new member of this committee, but I was a member 30 years ago. The cooperation and responses we receive from your industry representatives have been outstanding. Thank you for being here.
Mr. Eby: We thank you for that comment. Building relations, regardless of whether it is with your group or internationally, is extremely important, and the value of those relationships has been demonstrated in the last few months.
Senator Oliver: I apologize for not being here earlier, but Senator Gustafson and I, along with others, were at the National Prayer Breakfast.
When the committee finishes these hearings on BSE, we will prepare a report, which will go to the department, to the minister, and others. One of the things that we are asking a number of witnesses about is the question that you raised near the end of your presentation today. That is, we know that the Canada-U.S. market is harmonized. We know we have control of SMRs, and we know that both Canada and the United States want to reopen the huge markets in Korea, Japan and other parts of the East, and so on.
As you say in your remarks today, how do we make the cattle industry less vulnerable to the type of risk we are currently experiencing? In other words, how does a public policy-maker such as a Senate committee, a government committee, bring in recommendations for new regulations, new laws, to ensure that the next time we face a case of BSE — and there will be another one — the market is not closed and we do not lose another $2 billion?
I would love to hear from you the types of infrastructure changes you would like to see us recommend, changes that would help to ensure that we do not lose another $2 billion as a result of a closed market because of one cow.
Mr. Eby: I will ask my colleagues to add to my response.
The international regulations from the OIE are being addressed presently. Bear in mind, those are guidelines. Presently, no country is living up to them. One of the concerns is that they are just guidelines. Those are being worked on, and there seems to be considerable international pressure to view BSE, in particular, in its proper light, that is, it is not the human health risk that it was once thought to be. Science is evolving around that, but international guidelines are a critical aspect.
As we worked through some of the other questions such as the capacity issue, we found that more value adding in our own country would give us less vulnerability on trade with live animals. In the meat trade, we must focus on international regulations.
Senator Oliver: In your paper, in dealing with the Americans, you refer to the phrase, ``to discontinue irrational trade barriers.'' What advice do you have for us to ensure that we do not come across more of these irrational trade barriers, such as the closing of the border to live animals?
Mr. Eby: Although I am not a student of the free trade agreements, I believe we should live up to the spirit and the intent of the free trade agreements. As well, the intent and the spirit of international regulations are very important. Those are most important when it comes to protection from this type of situation.
Bear in mind that there are a number of issues that can come up, including health issues. I am not focussing particularly on BSE but, rather, processing health issues and others. These are ongoing concerns. In our relationship with our major trading partner, it is important to keep that standardized so that we can maintain consistent business.
Senator Oliver: Mr. Lynch-Staunton, did you have a comment?
Mr. Lynch-Staunton: One of the dangers in times like this, when there has been a financial need and the governments have responded, is that the assistance we receive must be given in such a way that it is not deemed by our trading partners to be an unfair advantage. We do risk the threat of countervails and other trade challenges if the public generosity is channelled in the wrong way. We must be conscious of that.
Mr. Eby: To add to that, some days ago a chap mentioned to me that we have moved the industry ahead 10 years in a few short months. That is a pretty rational way of looking at the situation. Harmonization discussions had been going on and they suddenly had to be fast-tracked.
Were we ready to take the jolt that we have had? We were driving in the direction of harmonization, the international market, the North American market and we were looking at the marketing of North American beef. All of a sudden, BSE struck us and now it is driving us much faster down that road than we had planned.
Senator Oliver: I would like to know what you, as a Canadian industry, have learned or heard about the reopening of Japan and Korea as markets. What is the barrier? What will it take to get those open again so that western beef can be sold again in Japan?
Mr. Eby: That is a difficult issue. The Canadian government has moved Dr. Norm Willis into Tokyo to work with the various regulators and the trade people. For those of you who do not know Dr. Willis, he is a former Chief Veterinarian for Canada. He is also a past president of the OIE, and is very well respected internationally. We feel we have one of the best people in the world on the ground in Asia to work through that.
There are a lot of cultural questions to be considered. Once again, we have to build relationships. We feel that he is the perfect man for that job.
Senator St. Germain: It is nice to see you here but I wish you were not here. If you were not here, you would be on that beautiful ranch of yours in the foothills and you would not have to worry about this.
I wish to ask about the depopulation scenario. If the borders were to open, would a depopulation process still have to take place, or would the product be absorbed into the market?
Ms. Dunford: By no means, if the border were to reopen here in the foreseeable future. Producers are a very resilient crowd. Many have had to deal with what has happened over the past 10 months and have responded. Cows were rebred and put back into the herd. Basically, another year was bought. We have aged our cow herd by about six months because of what has happened. We have not been able to cull at the regular rates that would be industry norms.
We have a group of resilient producers across this country that faced the crisis and decided that they would buy some time. They have bought time. The opening of the border for some class of live cattle would certainly remove that need.
Senator St. Germain: I think the government should be complimented for its efforts in trying to help the industry. Will the benefits flow through to the auctions and cattle haulers? These people are being hit hard as well. The ranchers and the farmers needed assistance, but there has been a huge impact on these other folks as well. There are many support industries out there that I am sure have been hammered over the head, to put it mildly. Will any of these benefits that the government has come up with flow through to these people, or will they just be victims in the process?
Mr. Lynch-Staunton: It is hard to tell how, and in what direction, money will flow. You are quite correct, Senator St. Germain, the businesses that serve our industry have suffered at least as much as we have.
One thing I can promise you with certainty is that we will spend the money somewhere.
Senator St. Germain: I know what a tough question that is.
Mr. Eby: We talk about market functionality. That encompasses your concern. If our markets start to move, the cattle will move, the truckers will move and the auction markets will do business. We are seeing that in Western Canada, and to some extent in Eastern Canada, as we speak. We see it in the numbers that are coming to markets. Things are starting to roll better.
Senator St. Germain: I must apologize for being late. I was at a meeting on Aboriginal affairs in the Centre Block.
Will the disbursal of the funds that have been put in place to assist the industry flow through to the people at the farm gate?
Mr. Eby: I would say yes.
Senator Callbeck: My question has to do with the mandatory reporting of the price in the United States and the volume of cattle being processed. I understand that they have to do that. Do you believe that is something that Canada should be looking at?
Ms. Dunford: Mandatory price reporting in the U.S. is fairly new. In the beginning, it was pretty cumbersome, and it is still pretty cumbersome. There are still many private operations from which you can get information faster. Of course, markets and market decisions are made quickly. That has been one of the challenges in the U.S. Do they have it working perfectly? No.
Canada has always had a voluntary system. I would be interested in hearing what the producers have to say about whether that would be helpful or not. There is no question it would likely slow the process down, but it would likely be more complete.
Mr. Lynch-Staunton: Price discovery has always been an issue, and it is a controversial one. We would all like to have better information, as a matter of principle, but the logistics are pretty horrific and it is a tough thing to do.
Mr. Eby: To add to that, we are seeing some specialized programs from-gate-to- plate branded programs that may pay on a different scale, on a grid. The Canadian cattlemen developed a computer visioning system that can evaluate the amount of red meat in a carcass. We value it differently. Different pricing mechanisms are surfacing. Historically, mandatory price reporting has been done on a live basis. In Ontario, in particular, 85 per cent of the cattle is traded on a dressed weight basis. You have a variation of programs in there. With respect to mandatory price reporting, it is very difficult to come up with good, solid information.
Senator Gustafson: My understanding is that the payments will amount to about $80 a head only for certain groups of cattle. What are the age groups and what is the period of time?
Mr. Eby: At this time, it is the cattle on inventory as of December 23, 2003, excluding breeding cattle. This goes back to one of my earlier comments about where the industry is hurting and what will stimulate the industry to move forward to get into market functionality.
Senator Gustafson: That means the feedlots will get the biggest.
Ms. Dunford: Or any producers that did not move their calves.
Senator Gustafson: Anybody who sold earlier would not get any benefits
Ms. Dunford: Not if they sold everything.
Mr. Lynch-Staunton: This will not be fair to everybody, but none of these programs is. When this program was developed, the rationale took into account that feeder cattle prices this fall were pretty good. The person who sold on to that market is probably not hurting too badly. There have also been government programs to assist the cow-calf person who has had to keep extra cattle. Some of that pain has been alleviated.
There is also the expectation that the CAIS program will eventually plug some of the holes. There was an effort to address the immediate problem and the greatest degree of pain. No one knows how this will all sort itself out.
The Deputy Chairman: Thank you for coming. You have added to our supply of information and wisdom. Colleagues, we will be able to meet more informally with our friends from the Canadian Cattlemen's Association later in the day. I look forward to seeing you.
Mr. Eby: Once again I thank you for the opportunity to be with your group. We are available at any time. We have a function in room 200, West Block this evening at 6:00. We would like to invite you to that reception to enjoy some Canadian beef with us. Thank you.
The Deputy Chairman: We will take a brief break as Senator Oliver reclaims the chair.
The Chairman: Honourable senators, our next witnesses are Mr. Doug Price and Mr. Art Price from Sunterra Farms. I do not know which of you will make the presentation, but after you do, honourable senators will have a number of questions for you.
Mr. Art Price, Chairman, Sunterra Farms: Honourable senators, I have been lucky enough to have had senior business experience as CEO or director of a number of companies in telecommunications, oil and gas, broadcasting, mining and steel industries, besides these agricultural industries.
Mr. Doug Price, Director, Sunterra Farms: I run the grain and cattle side of the operations of Sunterra Farms. I also sit on the Alberta Beef Producers, the Alberta Cattle Feeders' Association and the Feeders Association of Alberta as a delegate.
Mr. A. Price: You also own a ranch.
Mr. D. Price: I run a bunch of cows.
The Chairman: How many?
Mr. D. Price: Sunterra Farms is a feedlot operation, but my wife and I, personally, run about 3,000 mother cows.
Mr. A. Price: Sunterra Farms is a family-owned business. It is owned by a number of individuals in the family and a few others. It is a Western Canada-based business that has gone from the farm down to valued-added in the pork, veal and lamb industries. It is a farming enterprise that has gone into specialty processing and specialty retailing, and markets both here and internationally to places like Japan and Mexico.
I would quickly highlight the presentation that we provided to you. Then I think it would be most productive to get to any questions you may have.
Currently, the Western Canadian beef industry produces 30 per cent more live animals than can be processed in Canada. The investment in the production end of the business is multiple times the investment in the processing end of the business. The international borders have been closed to live animal movement in cattle and sheep. Over 80 per cent of the processing capacity in Canada is in two American processing plants in Southern Alberta.
While we have had significant discussions about the international borders being closed, they are, in fact, open to meat with particular specifications. For instance, the ECU was never closed to meat from Canada because of BSE.
No other country in the world has an animal production industry that depends on this amount of international trade of live animals.
Regulators, trade agencies and health agencies are becoming more active as science moves forward and new tests are being developed. It is not just related to BSE. There is a change happening in the whole marketplace.
Depending on international trade of live animals makes no sense. There are health issues with live animals that are much more complex than with meat. Live animals have a limited shelf life and have an everyday carrying cost. Live animals are a potential health risk to other live animals. The cost of processing is minor relative to the cost of producing the animal. The cost of transport of meat is much less than the cost of transport of live animals. Why are we exporting employment opportunities associated with processing?
For a little background, why did the industry evolve this way? The fact is that Western Canada is among the best locations to raise and fatten cattle. From a fundamental economics point of view for the producer, western Canada is one of the best places in the world to do that. The environment is good, there are superior genetics, there is a significant amount of land that is less useful for other purposes and there are abundant cereal grains for feed. The meat produced is superior meat.
Historically, the processing has been driven by low-cost economies of scale, not value-added economies of scale. The main economies of scale were derived from the value of the non-meat part of the carcass. Small processors could not make up on the revenue side for the loss of competitive cost advantage on the non-meat side.
Now the main processors have buying muscle as well. They have a market-dominating position. Even though producers have much more invested than processors, they are many individuals who do not have access to the same capital markets as do major corporations.
The producing industry has had enough efficiency advantages in its own right to thrive, even though it had access to a much inferior processing marketplace from a competitive viewpoint. The processing marketplace in Canada, from a competition point of view, is much inferior to that of the United States. The discipline in the market was the producer's ability to export live animals to U.S.A-based plants.
What are the characteristics of a lasting solution? It is apparent to us that the solution requires creating a realistic market for live animals in Canada. That means increasing the processing capacity so domestic processing is able to handle domestic production.
Create the next generation value chain. The value chain that is dominating the industry now is this mass market, commingled, commodity based, cost-oriented value chain. The marketplace needs to have a portion of the market catering to the value-added specialty brands directly targeting specific markets, whether in the United States, Asia or Europe.
We need to get away from the lose-all risk of the Canadian brand. Major government policy — at the national level, in particular — has been a policy aimed at promoting the Canadian brand. What happens with that kind of branding is that one Canadian animal compromises every other Canadian animal.
Create an environment that gives producers the option of investing in value-added and marketing as opposed to being forced to accept the outcome of a non-competitive, cost-based marketplace. We need a different piece of the marketplace to create an alternative. If producers had the option to create a viable alternative to the status quo, then a number would evolve, and the government would no longer be exposed to the risk that the trade in live animals could be disrupted by other governments.
A key part of this whole lasting solution is that we focus on the things that we control, as opposed to focusing on things that the White House or Congress in the United States controls. I have a long history in doing business with the United States. We would all like that to be a more reliable process. The track record of the United States thinking, balanced with its relationships with Canada and the trade sector, is a long track record we all know about.
In most industries, whether it is softwood lumber, hogs, beef, pork, even automobiles from time to time — sulphur in my history, natural gas in my history — there is always a United States position that is grown in the United States, goes through the political system in the United States and is adopted by the United States. That process truly does not care about Canada.
That is a highlight of the background.
There is additional information here about Rancher's Beef, which is an initiative that is aimed at this part of the solution, and it is an example of what we think is a critical component of the solution. There should be more than just one. This is the one that we have, through Sunterra Farms and with other principals, created — and is in a current position in the marketplace where ranchers are signing up for ownership units in Rancher's Beef.
I would now invite any questions.
The Chairman: Before I go to questions, for the benefit of people who might be watching this on TV who may not know much about Rancher's Beef, is it a co-op? If so, what is it and what does it do? Could you give us more background on what it is? I note that it has $15 million in cash committed and has assets of about $25 million. What do those assets consist of? If you are an investor, what do you get and how does it promote the beef industry? Just explain a little bit more about what it is.
Mr. A. Price: Its legal structure is that it is a limited partnership. People buy ownership in a partnership. It is governed by a master partner under corporate governance-type rules. It is not really a co-op, but it has open, available ownership units. Those ownership units are structured to deliver this kind of value chain.
I will let Mr. Price describe where that is at.
Mr. D. Price: It originated when about 14 of us who wanted to set it up got together. We then took it to a wider group of people. We are up to about 60 or 70 people now.
There are a couple of different reasons that drive an investor to invest in this company. A feedlot operator, for example, needs to cover off the risk of border closure. He wants to take his animal and sell it in the market. It does not matter to him whether he makes money at the feedlot operation or the packing operation as long as he ends up making money.
Other investors are cow-calf producers. In their case, ownership can be retained from the birth of that calf through to the meat. They cover off all those different sectors. Value can be brought to the chain by doing what you are best at. A cow-calf guy is best at producing calves, but he can participate in the profitability of the whole chain and can still have the border risk covered. He can then take to the consumer a full, traceable product. Many people are interested in taking that extra value to the consumer. He understands exactly what he is producing. He can take a look at genetics, what is producing the most meat or the best quality meat in his operation, and have the synergy of everyone working together with his or her expertise in each individual area.
There is a real variation of people who want to invest. We have thrown it open to anyone, but the problem we have is, as you know, that the equity is missing from the industry now. I wish we had done it two or three years ago. We would have been in good shape. We see these border issues often arising. The investors feel this will not be the last time. If it is not BSE, what else will it be? Any time the border closes, then the issue comes right back to the producer.
The other issue is why we are not doing all the value-added production here in Canada or Alberta. Why are we not looking at more markets rather than just the U.S.? It is a huge market for us, but if we can develop many different markets, we would want to be involved in that.
The Chairman: That is a fascinating prototype. In addition to studying BSE, this committee is also looking at value- added products in farm and forestry with the view finding what can be done to leave more money at the farm gate. Your particular prototype you have just described seems to me an excellent way of doing just that. Congratulations. I think it is an excellent undertaking.
Mr. A. Price: To add to that, an ownership unit in Rancher's Beef relates to a through-put unit in the feedlots and the processing.
The Chairman: Right through to the finished beef.
Mr. A. Price: It actually relates to a unit of through-put though, so a producer can say I have 500 head of cattle, I will buy 500 ownership units, and in that way they can attach it to their actual production environment, or they can buy 250 and do half.
Mr. D. Price: He can do whatever he wants. That guarantees him a slaughter slot through the packing house, but it is still open enough so that, if he decides not to do that, he need not.
The Chairman: Is it true that you need not have 500 head, or any head, to make an investment?
Mr. A. Price: That is right.
Senator Fairbairn: How fast could your group be up and running? What kind of process do you have to go through in terms of having the ability to form this new operation?
Mr. D. Price: If all the capital raised were raised, at that point our construction could proceed. We will locate in the northeast part of the City of Calgary. In a perfect world, if we can get all the permits and the construction goes forward, we could do it in 12 months or less.
Senator Fairbairn: From whom do you get those permits?
Mr. D. Price: The City of Calgary deals with land use and so on. We have already had meetings with the city. We are very optimistic. They think it is a great location. It will create 250 to 300 jobs. We have already had our first meeting. It looks as though we can start building on the foundations prior to being issued the full permit, so I think we are aiming for 12 months after the capital is raised.
Mr. A. Price: The City of Calgary is using a fast-track process to deal with it. Essentially, it is a $40 million to $50 million project, with all its components.
The Chairman: Is financing in place?
Mr. A. Price: We have $25 million of committed assets, about $17 million of committed equity. Interestingly, with the border being such a major variable and the marketplace being so uncertain, all the traditional debt markets do not understand this kind of investment. The practical thing is that the economic interest in creating this plant relates to producers and wider public concern interests. The existing processors have no interest in removing the surplus of supply, so the two dominating processors would never expand their plants to start competing with each other without a shortage of feed stock. Our challenge is that there are no traditional debt markets. The equity market interest comes from the ranchers and the feedlot people, who are financially stressed from the BSE picture, and even in that environment we are at this $15 million to $17 million level.
We are having discussions with the Government of Alberta and the Government of Canada about financially structuring some of the remaining capital. This is not an economic support question. We have been in the other parts of this business to understand what the economics and the approaches are as far as processing meat. We do it with respect to pork, veal and lamb. We have done it at the ranch level, at the feedlot level and at the store level. Sunterra has specialty stores where we sell our products. Doug said that it was too bad we could not have done it three years ago. Actually three years ago we knew that this structuring of the beef industry was all wrong, and we met with a number of people to try to start up this kind of value chain in beef, but the economies of scale of the non-meat part of the carcass in the pre-BSE environment dominated the economies of scale. The non-meat part of the carcass drove the economics. You could never capture enough in the meat side to make up for the advantage in the non-meat side.
The Chairman: Is that because of sales to Asia, which wanted the non-meat parts?
Mr. A. Price: Yes, as well as the rendering, it was a combination of the rest of the animal. Of course, after BSE, the non-meat side is not worth nearly what it used to be, and so the advantage they had in the non-meat side has all but evaporated. Now this business is an economically viable business, but it is in a financially stressed period.
Mr. D. Price: I will add to that, although it is not totally related to the question. We may get off topic. For me as a producer, I see what the governments has done in the short term by throwing a lot of money at the industry. Of course, we needed that to deal with short-term issues. However, coming out of this we have to ensure we do not have to do this again. The root of our problem is we have a capacity issue relating to the slaughter of processing cattle.
Ms. Dunford probably told you that we have been exporting 1 million cattle across the line per year. For a $100 million investment we could process all those cattle and create another 500 or 700 jobs. As producers, we have to ensure we invest that $100 million somehow so we get off the treadmill and not get into this again. The border generally always stays open for meat. When the border does open we have 150 liners sitting at the border waiting for it to open to send live cattle. Are we looking at countervail? Will we be right back at this again? They will not do it with regard to meat.
Senator Fairbairn: I have one question to help me understand this clearly.
The other packers obviously sell into the Canadian market as well as elsewhere. As I understand it, your plan is not to be necessarily going head to head with them; you are also seeking, as you called it, a specialty market or a niche market, not just in Canada but you have mentioned the U.S.A., Asia and Europe. Could you clarify that for the committee? In a sense, you are looking for the kind of climate in which you can survive and prosper by not directly competing with all of these big plants because, within their type of operation, they have a divided way of doing business. You are setting off on a different track that will in some ways, I suppose, compete with some of their produce nationally and in the international markets, but basically you are looking at something new.
Mr. D. Price: We want to do as many things as we can that the bigger players cannot do and are not willing to do. We see a real marketplace there that is not being serviced. By having producers right back from the cow, we can drive many of those things. As Sunterra has always held the view that the customer is always right. If a customer asks me to do something, I will see what it costs to do and I will offer that, whereas the commodity players have a product to sell. They tell consumers, ``This is the best for you. This is an awesome product. You buy it.'' We think it is more of a customer pull than a supply push.
Mr. A. Price: The critical aspect is that you can have a value chain that caters to a customer desire, or you can have a value chain that creates a commodity product. The two existing players have no choice but to use a co-mingled commoditized process because they need such a big percentage of market, and that is the only way they can get it.
Our analysis would be similar regarding the hog industry. The size of our processing facilities in the hog industry are much smaller than the mainstream processing industry in hogs, and we deliver specialty branded product to Japan with the Sunterra brand. It is a specialty product in the grocery stores in Japan, and we deal directly with those people.
Senator Fairbairn: You do pretty well.
Mr. A. Price: We do decently.
Mr. D. Price: To give an example, if we were to sell Rancher's Beef to you, we could say that our product is fully traceable back to the producers. We have had control of that animal all the way.
Senator Fairbairn: It has not been anywhere you do not know about.
Mr. D. Price: We know where it has been all the way through right to the box.
Mr. A. Price: We know what it ate.
Mr. D. Price: Yes, and if you wanted a special product, we would do that for you — provided we would make some money.
In comparison to an IVP or Cargill product, we can sell our product for the same money as theirs because we are just as efficient and it does not cost us anything to have a traceable product. Now, for the same money as Cargill beef, you can buy Rancher's Beef that is fully traceable, because we never lost control of that animal.
Senator Fairbairn: The consumer?
Mr. D. Price: Yes, the consumer. Which would you buy? Make sure you answer that correctly.
Senator St. Germain: Thank you, gentlemen, for appearing before the committee. You are trying to develop a special sector in the market, but what would have happened had you been operational and BSE hit the way it did?
Mr. A. Price: We would have paid this plant off in six months.
Senator St. Germain: However, let us say you had had these markets that you are talking about overseas and a vast percentage of them would have been Japanese or Korean or what have you, and BSE hit Canada. How would you maintain your market in those areas? I am saying that you are as vulnerable as the rest of the industry. I am not saying you do have not a niche in the market.
Mr. A. Price: The period of time that the border was totally closed to meat was zero. The European border was never closed to meat, it was never closed to Canadian meat for BSE reasons, and it still is not. The reason the European market is not catered to is they want it hormone free, and the two existing processors have a co-mingled supply base. They have no capacity to deliver hormone-free meat because somewhere in there hormone meat is going into their plant from a wide range of suppliers, and they have no chance of delivering hormone-free meat. If this had happened and we already had a market in Europe that was, let us say, for hormone-free meat, that market would not have been affected.
Senator St. Germain: Theoretically, the Europeans could have said they did not want Canadian beef.
Mr. A. Price: They did not.
Senator St. Germain: The fact is they could have. I am just trying to figure out where you are coming from. I have been in the poultry industry, and I see what happens with the processing plant in Alberta, particularly Lilydale Farms.
You are trying to do something similar, but without a marketing board.
Mr. A. Price: What we do in the hog, veal and lamb industry is similar. It is not in a regulated market. You either have a structured market with quotas and so on, or you have this other market.
The beef industry is in the other market. It is not a viable competitive marketplace, yet, that is the one it is in. No other industry does not have a meaningful segment of specialty business. In every industry, there are always the commodity people and the specialty people. The reason it has not happened in beef has been the non-meat part of the economies of scale in history. That is why those plants are so big. No one could start up a plant.
Another reason is that, to be in the game at the economy of scale level, you need a $30 million plant, not a $5 million or $8 million plant.
The Chairman: How much is that capable of processing a week?
Mr. A. Price: About 250,000 head a year.
Mr. D. Price: You have to be that size in order to get the efficiencies of the dropped value or non-meats.
The other day I was sitting with Ms. Dunford along with the CEO of IVP and of Cargill. It was to address the short- term problem and see how many more cattle we could process. Those guys are running wide open. They gave us four reasons why they could not do any more, and those were cooler cut capacity, labour, water, for example, in Cargill, and one other reason that I do not recall. As a producer, I listened to that and thought that was a little weird because they never brought up the sale of product. That was not a problem.
Mr. A. Price: This is in the worst marketplace of all time.
Mr. D. Price: They are just flogging it south and buying it cheaper. The market is there. The sale of product was not even on the radar screen.
Mr. A. Price: There is risk in the meat market. It is just much less than the live animal market, and the disruptions in the meat market are more manageable, so that the cost of that international trade risk is less. It is not zero; we are not advocating it is zero at all. It is just much less, and there are many different ways of dealing with it.
This style of value chain means, whatever the reduced cost is of being in the meat business, it actually flows to the producer as opposed to being captured. The producer gets the whole cost.
Senator St. Germain: I hear what you are saying. The only thing that still bothers me is, regardless of whether you have a tracking process, hormone-free product and your plans to establish markets is successful — and your offshore markets are the ones you will develop — if we have another disaster, heaven forbid, I cannot see how you will not be a victim to a large extent.
I am not trying to take away from what you are doing, I think it is a good thing because it is a niche or a specialty area you are going into, but I do not know how you eliminate the risk.
Mr. A. Price: There is no ability to eliminate the risk short of a government guarantee for all shortfalls, so we are not trying to eliminate all the risk. We are trying to create a viable marketplace that has a level of risk that you can manage. We have not got that today.
The Chairman: Do you mean less risk than the present system with live cattle?
Mr. D. Price: As long as our costs were in line, we would look like the rest of the people in the industry. We would look like an IVP or Cargill in any kind of those markets, when the border closed.
Senator Gustafson: Thank you for appearing, gentlemen.
The relationship with the cattlemen of Canada and the United States has been a strong one. It is probably one of the best examples, outside of the automobile industry, in terms of free trade and moving back and forth. Our farm has had cattle — small compared to your numbers — since 1970. This is the first big problem we have had. Breeder cattle have crossed the border and exotic cattle have crossed the border and there have been problems but there is no question that it has been a pretty good relationship.
This is the fourth group that I have heard about who want to start a processing operation. The same thing happened in the grain industry. We built many terminals, and now we have more terminals than we have grain in Canada. It seems that the grain farmer is getting less and less of the income from grain. We have had a little blip in the canola market. I just revealed the figures in the Senate for the price of grain in Crosby, North Dakota and the price of grain in Ontario and Western Canada, and there are some pretty shocking numbers.
My concern is that, if we get into the same position that we are in, in the grain industry, where the Americans look at us in a very negative way, we will have major problems. Do you think you can capitalize that market in the international market to the same extent that the Americans have done with Japan and other countries? Much of that is just flow-through cattle to Japan and other countries, after they process it. I admit that. However, we have had 600- pound calves bringing in $1.40. There have been some pretty strong cattle markets in recent years. This is the first big downturn we have had. In the grain industry, we have had it for the last six years.
I would not want to see what has happened in the grain industry happen in the beef industry. As I said, I just heard of an operation in Edmonton where farmers are putting up $5,000 each and they are talking about committing all of their calves to the plant. I would like to hear your remarks on that.
Mr. D. Price: We have had countervail on beef before. We fought that for a year and a half when they put countervail on because of undue subsidies and they labelled the Canadian Wheat Board as one of the majors. I know the prices have been tough but I would hate to see the grain industry without the value-added industry in Western Canada. If all the grain that we actually feed cattle had to go through the Canadian Wheat Board freight under U.S. prices, we would be in tough shape. In our operation alone, the feeding industry feeds about 7 billion metric tons, between hogs and cattle. If we did not value-add that then the grain terminals you are talking about would look like storage facilities, not value-added operations.
Senator Gustafson: I came back from Washington last week, as did Senator Oliver, and they told us there that we import over twice as much corn into Canada as we sell wheat into the United States.
Mr. A. Price: I think your point is that the trade relationships with the United States are hardly balanced. That is the fact. The practical approach is: why would we rely on those trade relationships to this degree in live animals? We are not asking for any subsidies or any grants and the industry is looking for ways to invest in value-added processing in Canada. That is not a risky trade issue; that is actually reducing the risk of the trade issue.
Senator Gustafson: The trade issue with the Americans is this: Because of the marketing boards in milk, eggs, chickens and so on, which are very lucrative for Eastern Canada, Ontario and Quebec, they are not allowed to sell into that market. They say trade is a two-way street. I think this is more of a political issue by far, which many of us have been very cautious about raising, but I think this is a bigger political issue than it is a dollar-and-cent issue.
Mr. A. Price: The problem is that trade is nothing but politics, so it comes down to: What is a political issue? If we were going to take on the dairy industry, we would have that discussion. However, this industry is a free-trade industry in a marketplace that is not a viable free-trade marketplace, so have more processing capacity. Coming back to the Canadian risk, that is why we are saying, we want a Rancher's Beef risk, not a Canadian risk. We want the same risk that Ford Explorers had with their tires. It did not hit every other vehiclle; it was just Ford Explorers. What kind of industry would ever take the risk of every other party who does whatever they are doing in that industry?
This concept of Canadian branding and treating every animal in Canada the same from a marketing point of view is the worst concept of all time. We have never had BSE and we are in the same box as the people who did. We can set up a value chain which assures that anything that goes through our process would never get anywhere, based on technology and testing, but right now with the Canadian branding policies, that would not mean anything because it would still be from Canada. We have to get off that hook and say, create brands and let the brands stand for themselves. If Rancher's Beef has a problem let them deal with it, and Cargill beef has a problem, let them deal with it.
The Chairman: What about country of origin?
Mr. A. Price: That is not our issue; that is their issue. We can talk here about country of origin, but for the actual decisions, we are at the wrong Senate for that discussion, right?
Mr. D. Price: Under country of origin you can still go with the meat into the whole food-service side as not being country of origin.
Mr. A. Price: The food service part of the marketplace can still buy Canadian meat under country of origin.
Mr. A. Price: It creates an opportunity for the processor, a specialty processor.
Mr. A. Price: The challenge for the big guys is how they deal with country of origin. They will push the price discounts back to the producer. A specialty person goes to a McDonalds and creates a relationship with McDonalds under country of origin that is totally acceptable.
Mr. D. Price: Ours is the only country in the world that relies on their finished product to be processed on the other side of a border. There are other countries that ship feeder cattle but we rely on that border to be open on this commodity. It just keeps getting bigger. We cannot put it in a bin and store it; it has no shelf life. We rely on the border to be open, to process it. As soon as we get into this kind of situation, we are stuck. We have no place to process.
The Chairman: We know one of the big problems relates to cattle over 30 months.
Senator Fairbairn asked about testing and so on. Are you willing to test all your cattle for BSE in order to be able to export to Japan, given the conditions that the Japanese have put on imports to them?
Mr. A. Price: We have already had discussions in this Ontario group about beef in Japan because we already send pork there. It comes down to whether the price they are willing to pay for that tested product — would they be able to take that back to the value chain and make economic sense? In this style of plant, we could test all of that beef. We would not have to test all of the beef. We could test all that beef for that customer who wanted that service.
The Chairman: At what cost to them? How much are you looking at per head?
Mr. D. Price: It would be an economic decision, but it looks like we could test that in-house for $30 a head.
The Chairman: What if they pay $180?
Mr. D. Price: I will be there in a minute. The customer is always right. Even if the science does not make sense, the customer is right. If I can make an extra $100 a head on 1,000 head a day, I will do it.
Senator Mercer: I am a left-wing, East Coast Liberal. I like what you are doing. I did have a look at your Web site, at ``Our Story,'' as it is referred to on www.sunterramarket.com. I liked the whole thing. You did make a comment that you do ``decently.'' When a businessman tells that me he does decently, it means he is doing pretty good; is that right?
Mr. A. Price: In this marketplace, it means we are not losing as much money.
Senator Mercer: That raised a question to me, coming from a region that is dominated by one, two or three major players in all aspects of our economy. New Brunswick is dominated by the Irving and the McCain families, and the Sobey and Joudrey families dominate Nova Scotia. They are family-oriented businesses. Why is Sobeys not involved in this business? They have many more retailers than you.
Second, I am concerned about the capacity to handle cattle. It is well worth saying that we need more capacity. The place that we have little or no capacity is in Atlantic Canada. Do you think a system like this would work in a market like Atlantic Canada, taking all four Atlantic Provinces together, not singling out one or the other?
Mr. A. Price: Let me take a first part of that, and turn the second part over to Mr. D. Price. First, I think McCains did this. They started with potatoes, and evolved it into this business with the strength of production they started with. The challenge here is that the strength of economics of production is in the West. That is where the economic advantage is located in the production end. So, if you are doing it from the bottom up, you have to leverage from where the strength of the economics of production is, and then add to it.
Second, as to whether a scheme like this is practical, I have two comments. First, at this point, in my mind, there will be two kinds of specialty processing environments. There will be the one that is big enough to cater to international markets, do international testing and have international accreditation. Then there will be the specialty guys who are quite a bit smaller, who will cater fundamentally to domestic marketplaces. It will take this size of facility that Rancher's Beef is talking about to cater to international markets. I suspect the Maritimes does not have the strength of production economics to support this size of facility catering to the international markets.
Senator Mercer: If we added Quebec into the mix, that might make more sense.
Mr. A. Price: You need an aggregation of production strength.
The Chairman: Then you have transportation costs.
Senator Mercer: We have transportation costs now when we want to go to slaughter. We have to move our cattle quite a distance.
Mr. D. Price: It is much cheaper to ship the meat than the live animals. You might have a benefit there.
In order to be competitive in the environment, we have to process a minimum of 500 head, in order to get the drop value, which is the off meats. After saying that, as a group of producers, if you look at all other industries, whether it is chickens, hogs or beef in the United States, we are heading into a more integrated operation from either the top down or the bottom up. If we are going to play in this game, then we need to be integrated throughout the operation — either that, or we will have a tough sled ahead. If we are going to be integrated from the bottom up, then we are in a far better position tomorrow than we are today.
Mr. A. Price: It creates the other option. We still have the option of dealing with the other commodity-based part of the value chain.
Mr. D. Price: In this kind of an operation, it can give you a leg up because there are a bunch of guys that cannot do that.
Senator Mercer: My final part of the question. You are the full meal deal. You go from being the producer to slaughter and then to retail. Over the past number of weeks, to all of the various people who have appeared — you are the only people who have been in all aspects of the business in reality. My question has consistently been this: Where has the money gone that the government has invested, both the federal government and in your case the Government of Alberta?
My concern is that I do not see the money going to the farmer as much as I would like. I see too much of the money disappearing somewhere in between. As a consumer, I do not see the price dropping when I buy my steak for dinner this evening. The price will not be lower as a result of the crisis in the market.
I would appreciate your comment, because you are in different aspects of the business. Where do you think the money went?
Mr. D. Price: I will do it from the production side, and let Mr. A. Price cover off. If we had not had that money, the industry would have been broke, on the production side. The money flowed in many different directions, but I cannot imagine what we would have looked had we not had some help through this.
With respect to the Sunterra operations, for example, we would only use about 100 head per week. That part of our operation is very small. We understand it. However, if we use 100 head a week, then it would be more like 8,000 a week in our production.
Mr. A. Price: We are bigger farmers on the beef side than we are sellers, but we are in all parts of the market.
I would characterize it like this: You have a marketplace in which the prices are established by buyers and sellers. However, two buyers and 500 sellers establish the prices. In our experience, what happened with the first round of support, in the middle of last year, is that it kept the people who owned the live animals more or less whole. They did not make money; they just did not lose a lot of money. What Mr. D. Price is saying is that had that not been there, they would have lost a lot of money.
What happened in the marketplace was that the buyers paid far less money for the animals. The producer did not lose money because the producer got the offset. The marketplace let the buyers pay far less money for the animals, and they sold them into a market where we were on the buy side in our stores, where we watched the wholesale price. The wholesale price never came down from those processors for four months.
What happened then was that the live animal price dropped, the government covered, to the producer, the losses, the margins in the processing end went wide and the wholesale price never really dropped for a period of time. It then dropped some but nothing like the live animal price.
From all of the information that we have, while the processors have had higher costs, their higher costs were nothing like how much higher their margins were.
Mr. D. Price: I would like to comment further on that. If you take a look at where we are at today, normally we have about a 7 cent Canadian discount on our live animals, which is basically freight to get them to the United States to be processed. That is just a trucking charge.
When the border is open, I would take bids. It would be a U.S. plant, whether in Washington, or Greeley, Colorado, or Brooks or High River, Alberta. At this time of year, we are usually paying about 7 cents a pound less than U.S. plants are paying for live cattle. Today, it is 35 cents.
The United States was the last country to have BSE, but they have less supply than they have capacity. As I said, there would be no trouble selling the beef. If we had the capacity, we would have a $7 basis, which is about $250 a head more than we have today.
Mr. A. Price: To clarify, that is a discount today of $250 a head more than prior relative to the U.S. market netbacks.
Mr. D. Price: We have not seen anything yet, because we have gone to 60 to 70 cents. It has been as narrow as 20 cents, and normally it is 7 cents. The cattle are just starting to come on now. Hence, as the supply comes up, there is nothing to stop the price from going down because we cannot truck them to the States.
Mr. A. Price: To crystallize this, what is the profit margin in those animals?
Mr. D. Price: If we could make 2 cents a pound year in, year out with a five-year deal, I would grab that. That would be $30 a head.
Mr. A. Price: Therefore, 2 cents a pound is the gain and the unusual discount in this marketplace is 30 cents a pound today.
With regard to the incremental cost structure, I am not aware that the processors can add up incremental costs that remotely relate to that discount.
Senator Mercer: I am back to the packers being the culprits in the process.
Mr. A. Price: The packers are in a free market. They are running flat out and the sellers are selling. You either regulate the market or you get enough competition in the market so that it works in a more effective way. They are running flat out, and people are willing to sell at these prices.
Senator Hubley: The vulnerability in the cattle industry as a result of BSE was probably predicable. It probably went through the minds of cattlemen that this might happen at some point. Your response to the crisis is Rancher's Beef. In other words, you are taking hold of your industry and you will be responsible for it from the beginning to the end.
Is your model something that we will now see more of within the industry? Are more groups of cattlemen moving in this direction? If they are, that will certainly have an impact on the movement of cattle. As you said, if we did not have to move our live cattle to the States to be processed, this would probably not have happened.
What is the next vulnerability? If, when the borders open, cattle do not flow to the processing plants in the United States, what might be the next step the United States would take?
Mr. D. Price: I believe we will experience countervail when the border opens. The Americans are already in Alberta buying cattle like crazy and placing them in feedlots. Because the border will open, because they have a shortage of feeder cattle and because they have equity, they are in Canada buying cattle. They have had a pretty good run down there and they have equity.
Senator Hubley: When they buy those cattle, do they use feedlots in Canada?
Mr. D. Price: I am feeding some for them. They make custom arrangements, where we charge them feed, plus labour, plus yardage.
Mr. A. Price: At this point, they have to, because live animals cannot go to the United States.
Senator Hubley: Yes, but they must have some confidence that the border will open and that they will again benefit.
Mr. D. Price: As soon as the border opens for live animals, we will see a massive exodus of live animals.
Senator Hubley: American-owned, in many cases?
Mr. D. Price: Yes — or Canadian or fat cattle or American-owned feeder cattle. There will be a lineup of trucks at the border waiting to move across the line at eight o'clock in the morning. Every rancher in Montana and Washington will witness these trucks of live animals crossing the border, and they will be screaming at their politicians that this is an unfair market.
The Chairman: They have already started. Senator Gustafson and I were told last week that this is their biggest fear. We have a million head of live cattle up here; if the border is opened, how will they avoid that flood? They are scared to death.
Mr. D. Price: Your original point was that we should have seen in advance that we would have market problems. We should have, but it is now staring us right in the face.
Mr. A. Price: That is immediate; it is sitting right in front of us. I realize you were asking about the next one.
Three years ago, we talked about this happening. We met with others and discussed how we would deal with this. The only thing we could come up with was that we would have to be in the processing business, but that the economies would not work because of the advantages the other people had. It is interesting. We could not come up with a contract strategy or a hedge strategy. We could not hedge the risk, offset the risk or contract the risk. We could not do anything, because they were not even our animals. We could not even manage our own animals.
The reason the government is in this position of supporting the industry is that the industry could not do anything about it. The way the market was structured and the way the business was structured, the industry could not do anything about it. It was a trade issue.
Going forward, in the immediate context, we have this big flush issue. When the border opens, every truck will have animals on it. The only limitation will be the number of trucks. That will be the immediate issue.
Longer term, the health consciousness of regulators and consumers is increasing. With the ability of science to do tests and to discern what might be a health risk, that consciousness is increasing. The list of issues that could compromise trade is increasing.
When BSE hit Europe, the Sunterra Farms group knew that the odds of it happening here were pretty high. It only takes one case.
The Chairman: You knew what you were feeding your animals.
Mr. A. Price: We knew we were not exposed to it, but look what happened.
It makes no sense to structure an industry around such an escalating risk. We should structure an industry around being able to manage an escalating risk, or put it in the quota world. Take your pick.
If you put it in the quota world, you would kill half the cattle right now, sell the quotas, give them to the people and then manage the volume. If you leave it in the free market, you must ensure that it is actually a free market that can deal with the various risks that are coming down the pipe.
Senator Hubley: We will probably see more of the Rancher's Beef model.
Mr. A. Price: There will be more. However, Rancher's is big enough to affect the market. Up to one half of the surplus is being taken out of the market. It is a business structure that will create a different paradigm, because while the competitors will not compete head to head with us as much at the product level they will be looking right at the supply base.
Once Rancher's is up and running, it has access to the regular capital markets just like them. The marketplace will start to evolve. There can be other people doing the same thing, and there can be specialty, smaller people. The challenge in the beef industry has always been how much of the carcass is not meat. It is hard to do this on a small-scale basis, because such a big part of the carcass is not meat.
Mr. D. Price: The other challenge, for producers in this environment, with the loss of equity, is investing in this thing.
Mr. A. Price: Many people are talking about it, saying they will put up $5,000. I mean no disrespect, but $5,000 does not go anywhere. Serious money is required. There will be people trying to get that type of money together. I hope quite a few of them succeed.
Mr. D. Price: I have been at meetings throughout B.C., Alberta, and Saskatchewan. I have never run into anybody who says it is not a good idea. However, I have run into an awful lot of people who have said, ``Good luck, guys, because I can't get any money.''
The Chairman: We know many farmers are overstretched.
Regretfully, I must call this meeting to an end because the clerk has said we are over time.
However, we could have gone on for a lot longer. Your evidence is important for two reasons. First, it deals directly with the issue we are dealing with in relation to BSE. More important, it overlaps a study we are doing on valued added and leaving more money at the farm gate. Your proposal for Rancher's Beef and so on is an excellent one.
I hope we will be able to talk to you more as our second study on value added goes on. There are many more questions that I and other senators have on that subject. I hope you would agree that we can keep in touch with you.
Before we close, one final question. I am a Canadian nationalist, and I like the Canadian brand. We talk about Canadian maple syrup, cheese, wine, potatoes and many other things. It stands for quality. When we were in the United States, they told us that Canadian beef is great beef, triple ``A''. It is a wonderful product. Yet, you are saying that we have to get rid of this Canadian brand and call it ``ranchers beef'' or something different.
In closing, could you tell me again why we cannot promote our wonderful brand of Canadian beef? Is it just because of the BSE scare? Is there not some other way that we could still be nationalists and promote our great brand?
Mr. A. Price: We can promote Rancher's Beef as a Canadian brand. That is what we do. We promote Sunterra Ranch or Sunterra Pork as a Canadian brand, but it is Sunterra from Canada. It is not Canada; it is Sunterra from Canada.
Mr. D. Price: Today, in the beef industry, there will be many customers who say: ``Canadian? That is where that BSE comes from.''
The Chairman: It is a subtle difference. Does it work?
Mr. A. Price: We are pretty compelling marketers from Canada when we are special. We are lousy marketers if we are just from Canada.
Mr. D. Price: In Japan, for example, the brand has a Canadian flag, and it is called Sunterra. When a customer pays at the cash register, mom and dad's face comes on the cash register. It is Canadian, but it is mom and dad and family owned.
Mr. A. Price: Just Canadian leaves you exposed to whatever the worst is. If you create your own brand and you are from Canada, you get the best of both worlds. You have to get best of both worlds; you cannot take the liability.
The Chairman: The difference is so subtle but so important. That is fascinating. Thank you both very much.
The committee adjourned.