Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 8 - Evidence - Meeting of April 27, 2004
OTTAWA, Tuesday, April 27, 2004
The Standing Senate Committee on Agriculture and Forestry met this day at 6:15 p.m. to consider issues related to the development and marketing of value-added agricultural, agri-food and forest products, on the domestic and international markets.
Senator Donald H. Oliver (Chairman) in the Chair.
[Translation]
The Chairman: First of all, I would like to welcome everyone, including the people who are tuning in to these proceeding via CPAC and the Internet. Today, we continue our study of issues related to the development and marketing of value-added agricultural, agri-food and forest products on the domestic and international markets.
[English]
Over the last weeks, we have listened to various witnesses who explained to us the issues surrounding the development and marketing of value-added agricultural, agri-food and forest products. This evening, we have invited Mr. Tony Stewart, the proprietor of Quail's Gate Estate Winery, to provide us with an overview of the issues his industry is facing in relation to the value-added-product opportunities for farmers.
I will now invite Mr. Stewart to begin his presentation.
Mr. Tony Stewart, Proprietor, Quail's Gate Estate Winery: Thank you for the opportunity to appear before you. I will comment on policies for which the wine industry is seeking support, bearing in mind that the Canadian Vintners Association is making a presentation next Thursday. I will leave the more detail to Mr. Bill Ross.
By all accounts, the current state of the Canadian wine industry is a great success story. In little over a decade the industry has transformed itself from an industry on the verge of elimination to one where it is not uncommon to hear, weekly, of a Canadian wine that won an award at an international competition, or wines being served at state functions in Helsinki or other venues around the world. Canada is now the foremost producer of ice wines.
Despite its success, the industry has faced some challenges in the last few years. The last two winters in Ontario have severely affected the Grape Growers of Ontario. The Asian ladybug crisis in Niagara was another issue that beset the industry there. Most recently, in the British Columbia forest fires, we saw one winery burn to the ground and grapes were destroyed in a number of vineyards.
The industry is confident we can face any challenges we have — we only require a partnership with our stakeholders, and certainly the Government of Canada is one of those.
The Canadian industry is seeking some policy changes, three of which I will speak to: excise duty relief, domestic market support, and research and development. I will allow Mr. Ross to comment further on the other three changes.
I would like to start with what I call the ``British Columbia perspective'' on the success of Canada's grape and wine industry. In the past decade, the industry in British Columbia has become a lean, clean and green model of success for our province, and the same would be true in Ontario.
The industry currently has 82 wineries, $800 million in capital invested, $230 million in annual sales, $100 million in tourism revenue, $110 million in direct contribution to the province, about $24 million direct contribution to the federal government, and $543 million in planned investment over the next five years in tourism facilities, vineyards and plant facilities.
I thought French trade paradox, might be appropriate for the value-added review that you are going through. As part of free trade, the Canadian wine industry supplied low-cost value-based wines primarily from imported juice. In the late 1980s, the FTA sparked the end of what our family thought was a long history in grape growing. However, there were changes made and the industry opted to focus on a quality program.
The 1990s saw the creation of the British Columbia Wine Institute, which started to set the minimum quality standards. In 1991, British Columbia adopted the Vintners Quality Alliance Program, which was started here in Ontario. That shift to quality brought about some changes. The provincial initiatives that were launched all focused on quality; there was nothing that was a subsidy to help an existing system that was not working. It was all about getting the quality program going. The marketing boards were eliminated to allow for free pricing of grapes, which was unheard of before.
Since 1992, the result of these changes has seen double-digit growth in Vintners Quality Alliance, VQA, sales. Last year the only category to outpace VQA sales in British Columbia was Australian wines at 24 per cent; B.C. wines were at 21 per cent. The success of wineries in Ontario and in British Columbia has garnered international attention and raised the profile of the industry. Plantings exceed 5,500 acres now and total investment is noted at $800 million.
I would like to provide a quick comparison to give you the then and now snapshot, which is pretty profound. While it is still as small industry, it is a huge change from what it was.
The market reality is that we will only be successful as a premium-niche producer. We are not going to be going head-to-head with volume-based regions around the world. We have to maintain quality and a price point that shows value to the consumers. Our niche strategy is that we will relentlessly pursue a premium product. We will strive to educate our domestic consumers on the value of Canadian wines. We will continue to develop the wine country experience because it is a huge bonus to the country to bring people here, allow them to tour and see what we are doing, take processing to where it is returning something back as a tourism component. We will also seek out niche premium export markets, such as Japan, London and other markets around the world.
Why is it important? For every bottle of imported wine sold in Canada, 51 cents stays in the country, versus for every litre of VQA wine sold in the country there is $4.16 — an eight-fold return to the country.
A review of wine policy around the world shows that the domestic wineries produce the lion's share of what is consumed in other countries. In British Columbia, we consume 49 per cent of Canadian wines, of which only 14 per cent is 100 per cent Canadian product; in Ontario it is about 32 per cent, so it is even lower. Therefore, we need to have a strong domestic base to operate from, and all our competitors have that.
The VQA sets our minimum requirement. You have all heard about the success of the program, but it is our minimum. We shoot for higher than that. The wineries continue to develop their own brands. We market ourselves and that will be very important as I near the end of my presentation.
We are increasing the value of wines between $15 and $25 — which is where we feel we have our competitive advantage. Our industry contributes considerable amount annually into R&D and we need to look at ways of partnering that so that industry-led R&D is being brought forward in a partnership with government.
We will develop and promote VQA, continue to create the wine experience, and demonstrate to our Canadian consumers that we have the best premium value products available.
Excise duty relief is done elsewhere. We have actually taken the policy of the United States as a model for the consideration for the government here. Excise duty relief allows small producers an opportunity to build up a critical mass, so they are given a bit of a break on a production below a certain level. It is not for the big guys, it is for the small guys. As you see in many regions, a lot of those small producers really drive the brand.
Domestic marketing support is hugely important right now. We had a program in place up until 2001 and we ran events such as Canada à la Carte, a joint collaborative value-added food group exhibition. It showcased producers from around Canada and brought out the best of what we can do. We no longer can afford to do those types of programs because as an industry-led initiative it is too costly. With all the other sectors having the problems they have, it is a huge opportunity for us to consider reinstating the Canadian Wine Marketing Development Program in conjunction with other value-added products.
The problem with R&D currently is that it seems to be on a year-by-year basis so long-term research projects are sometimes left off the table. We need to look at ways to continue such projects — perhaps through an endowment of funds that would provide consistent funding to the sector.
The Canadian Vintners Association will speak to the issues of national standards and food and drug regulation, and packaging and labelling.
In respect of questions agriculture policy, I should like you to consider some points. Historically, branding of agricultural products is done by country or province, such as Canada Grade A, extra fancy, B.C.-grown. The consumer sees little or no difference between these products. It is all one brand. The lowest common denominator sometimes sets the standards, and the consumers' concerns or questions are not always taken into consideration. That is hugely important.
There have been some changes. We are seeing an increase in organic food sales; consumers are willing to pay more to insure quality or perceived benefit. There is increasing public concern over GMOs and protein supplements. Consumers are now setting new standards — they are telling the food producers and value-added agricultural products what they want to see. Maple Leaf's decision to switch to allowing only vegetable-based meal protein feeds for their poultry cost $16 million cost and they figure it is worth it. Hence, there is a huge change occurring in the marketplace.
Export market considerations have to be set because other countries around the world will set the standards if we do not. I believe Canada's policies in agriculture have allowed us to produce some of the highest quality, best value-added agricultural products in the world. However, the market is changing and unless we change, we will be left far behind.
I would suggest a new approach. Farmers might broaden their brand association and engage their customers. Sour cherries and cherries in British Columbia were totally non-viable a few years ago. Today the farmers there are making substantial profits in that business. Why? They went out and engaged their customers. They go to Japan, they meet their clientele, they pack the fruit, they send it out and they deal one-to-one with their customers. They do not go to a one-standard homogeneous brand. They brand their own products.
We need to reduce the tendency to reject consumers' concerns. I had the privilege of sitting on a committee where we had to deal with the GMO issue, which was continually discarded as non-viable due to scientific research. The consumer does not understand that. The food groups that deal with GMOs need to look at the concerns that consumers are bringing forward and try a new way to deal with them.
We must establish standards that promote producers and process to brand higher. There is a success story in the wine industry. VQA has worked. We brand above that, not just to it.
Development of new industry practices will allow the greater segregation of product and a branded approach. The individual groups — the value-added products producers — need to have a brand in mind. If they do not have their own individual brand they run the risk that one producer will bring them all down. We should set the standard for the world based on quality, not on cost.
I welcome any questions senators may have.
The Chairman: Thank you very much, Mr. Stewart. I found your presentation to be excellent.
This committee started the study a little while ago and already we have received a lot of support from farmers and farm groups from various provinces who say they are delighted we are doing this. Even the Minister of Agriculture has said that he was happy we are doing this study, in trying to look at marketing and looking at promotion and the retailing side of some of these products to find out how we can add more value and leave more money at farm gate for farmers. We have no idea what results and recommendations we will have at the end, but it is presentations such as yours that stimulate us into a lot of new ideas and I thank you for that.
There are two questions that I would like to ask. One thing has always concerned me about many Canadian agricultural products such as wine, cheese, meats and many others: It is often difficult to move such products from one province to another — internal domestic trade.
My first question deals with that issue. It has been argued that the federal-provincial Agreement on Internal Trade, AIT, actually improved the distribution of alcoholic beverages within Canada. Has the interprovincial trade in wine improved since the signing of the AIT as far as you are concerned? Are there circumstances in which it is easier for a large, foreign supplier to sell into a province such as British Columbia, Ontario or Quebec, than it is to sell province-to- province to stores that preserve shelf space for French wines rather than for British Columbia wines? Does the Canadian marketing system for alcoholic beverages, which is managed by provincial liquor control boards, inhibit or stimulate the development of value-added products?
I would love to hear your comments on those questions because they raise the issue of interprovincial trade and interprovincial trade barriers. If there are such barriers and if this committee could make recommendations to eliminate those barriers, would that help to put more money on the farm gate?
Mr. Stewart: In response to your first question, the challenge that we face on international trade issues is that it such a huge source of revenue — for our product in particular — for provinces across Canada that they have implemented monopolies that are vested with the responsibility of ensuring that they make the best return possible. We have a challenge with that because we are small, niche producers and we do not have the marketing dollars that some countries have to approach a liquor board in Canada and demand certain shelf space.
British Columbia and Ontario have wine regions and their respective liquor boards have been very supportive to their provincial groups. However, the boards have been less than enthusiastic in welcoming products from other provinces.
The United States implemented reciprocal direct delivery as a method to allow wine-producing states to expand their customer base. Certainly, I would encourage this committee to make that recommendation because that would be a huge benefit for consumers across the country.
The Chairman: Could you explain to the committee how that works?
Mr. Stewart: In the United States, many wineries have a reciprocal agreement such that one state will allow another state to sell within the state. We can direct-deliver within British Columbia and Ontario wineries can direct-deliver within Ontario. However, the Ontario winery cannot direct-deliver into British Columbia and vice versa. The other provinces have no domestic industries so there would be a loss in revenue if they were to look at such a system. I do not know how they would see the benefit in allowing it. That is my only thought.
Generally, we all go through the same hurdles. The key challenge facing domestic producers is the issue of size. The number of marketing dollars that California spends in Toronto is probably five times what our industry would spend in the whole country of Canada. You have to be aware of the amount of money behind some of these wine regions.
In response to your second question, with respect to either stimulating or setting back for value-added products, I think that the move to provide an increased awareness of Canadian products is everywhere. We find that we are receiving support on that front but there is definitely a need to have a collaborative approach to marketing. I mentioned that event, Canada a la Carte, which was a national program whereby producers from each province — cheese, dairy, beef, pork, et cetera — got together to market their products. The advantage of such a program is that each province can put in its own value-added products. Thus, B.C. may put in wine and poultry and Alberta may put in beef and something else, and so on with the provinces across the country. Canada has great cuisine and great producers and if we begin to define ourselves in the broad sense of our production capabilities, it would be of great benefit for all.
The Chairman: When did that begin and why did it finish? Could you tell me a bit about it in terms of what we might want to investigate about it?
Mr. Stewart: From 1994 to 2001, the payback was $4.5 million into the domestic Canadian wine development and marketing program. The issue was that in conjunction with aims funding for exports. There was a feeling that we had not achieved the numbers they wanted.
However, bear in mind that it is a very slow process to get things going in this business. If consumers decided today that they want more Chardonnay and I may want to provide it to the marketplace but it will take at least six years before I can do that; and if it is a cabernet sauvignon, it will take eight years. We were looking for expert opportunities but we could not bring the product to market quickly enough. Now we do have products on and we are beginning to realize that we have the necessary critical mass to deal with the markets. I think it is time to take a second look. Perhaps the funding was worthwhile but it was early days for the industry. Now, the results would be much better.
Senator Fairbairn: Most of us remember when Canadian wine was certainly undermined because of the way people made reference to it in comparison with other wines. Undoubtedly this occurred before the industry had a marketing strategy that helped the product, and, as you pointed out, it takes many years to build such an industry.
In respect of promotion of products, you said that we have been recognized internationally, in a number of ways, for having astoundingly good products. To what degree would you hope that marketing might come from the federal government or from a kind of federal-provincial arrangement? Is that getting into more complication than it would warrant?
We have the product. Could you give the committee an idea of how the product could best be promoted with, presumably, the help of the industry within the entire area of international trade? We have made great strides in the industry to date in Canada. The American industry went through such a period as well before it suddenly blossomed. We are now blossoming. What is the best combination of partnerships that we might recognize or promote within our activities to make this industry not only one that is focused in Canada — which is important — but also has a hard edge and lively marketing program internationally?
Are we ready to do that? Is the product, in its excellence and its quantity, ready to be promoted to that degree?
Mr. Stewart: Yes, I think we are ready.
In respect of support, on a sector basis it would be difficult to convince anyone in international trade that the wine industry is going to return huge dividends to the country, just based on our size. That is where they are missing the point. When I go to one of our embassies and I want to do market work, why do they not couple me with the beef industry? Why do they not couple me with the pork promotion? They do not — they look at it by sector or by food group, and that is where we are falling down.
As a wine industry, we are promoting a luxury product — it is not an everyday need — and therefore we have to market it as such. We have learned a lot about marketing and promotion, and what to do and how to get people's attention. We can share that information with the other groups.
We can go on a trade mission to Japan with the intent of selling other products, but the wine industry can act as the hub. We can host an event with these groups and showcase our product. We are ready to do that. We are ready to get out there and help in that regard. The big guns that Canada has in agriculture can then come in and make the deals that are necessary to make this whole thing viable, but right now there is not that spirit of cooperation.
For example, we export into Japan and there was a program to try to get Canadian producers there. We wanted to do something, but we could not get a collaborative approach. They accepted us coming but they seemed hesitant. They wanted to rent us the space and said that they did not know if they could get the people out. We wondered if we should have even bothered. We were spending $10,000 to send one of our company employees there. I was thinking that we have a crisis occurring among all these other food groups and that we should be going over there together to promote our products.
Senator Fairbairn: Have you been involved, in recent years, with some of the trade missions that have gone to various places in the world?
Mr. Stewart: Yes. In 1997, we went to Expo in Asia and we did four cities and it was done in that format. We had chefs from Fairmont Hotels come along and the results were unbelievable. When you walked in that room, you knew you were coming into Canada. There were cheeses from all over the place, wild salmon — all kinds of things. It was a huge, huge event. People were coming in and telling us that they did not know that Canada had such phenomenal products or that we had such phenomenal chefs.
Senator Fairbairn: Mr. Chairman, this is a relatively young industry in terms of its outreach. It would seem that in very rough times — as we have had in the beef industry in the past year — this is an opportunity, through this adversity, to try to take some initiatives that would push the product that you obviously have raised to a level where it would be internationally appreciated. We should look into that.
To what degree were the vineyards in British Columbia challenged and, indeed, hurt by the fires over this past summer — and may there be no more this summer?
Mr. Stewart: The fires affected about 3 to 5 per cent of the crop. The damage occurred mainly in the Kelowna area. It was the smoke taint that affected the wine — it then could not be processed. There is not really any insurance for that type of disaster, so such and event can be devastating. It was specific to three producers. In their case, it was 60 per cent of their production — in one grower's case it was 100 per cent. In the individual cases, it was very substantial; as an industry, the damage was 3 per cent to 5 per cent over all.
Senator Fairbairn: In that case, though, was this included in any of the emergency support that would come through the mechanism of the federal government?
Mr. Stewart: I believe they are looking into that right now, but I do not think anything has been confirmed at this point. I can get back to you on that.
Senator Fairbairn: I would like to know that.
Senator Callbeck: I wanted to ask you about the minimum standards set by the VQA. They just exist now in Ontario and British Columbia, is that right?
Mr. Stewart: That is correct.
Senator Callbeck: I think you said there are 82 wineries across Canada.
Mr. Stewart: There are 250 across Canada, 82 in British Columbia.
Senator Callbeck: How many would meet those standards?
Mr. Stewart: I would say that 90 to 95 per cent of them would be in the VQA standard. Of their production, though, it would be considerably less. As I pointed out, in B.C., where 49 per cent of the wines produced by Canadian wineries, only 14 per cent are actually 100 per cent VQA wine.
Senator Callbeck: Do you want the excise duty eliminated only on the VQA wine or on all wines?
Mr. Stewart: It is on 100 per cent Canadian wine. I would make the recommendation on the basis of a quality standard, and VQA would be the standard that I would attach it to.
However, the position of the Canadian Vintners Association is it is 100 per cent Canadian wine content. The reason it may not be VQA is not because of quality, but maybe because it does not conform to some of the packaging standards within VQA.
For our winery, we only produce 100 per cent VQA product. We do not sell anything but that. Our goal is to produce substantially higher than that. If you look at the standards around the world, very few have a tasting panel attached to them and ours does. There is a lot of debate as to whether or not that is warranted, but that process raises the standard. It is a fairly effective system.
Senator Callbeck: Is the industry itself responsible for the enforcement?
Mr. Stewart: The responsibility is shared between the provinces and the provincial wine authority. In British Columbia, it is the British Columbia Wine Institute. In Ontario, it is Ontario VQA. However, we are in the process of developing national standards now. It would follow under the Canada Agricultural Products Standards, CAPS, Act as a federal standard. We hope to clear through that this year, although there have been some obstacles.
Senator Callbeck: Right now, if you have a winery in a province and you want to sell to another province, you have to have both a provincial licence and a federal licence, do you?
Mr. Stewart: No, you have a provincial licence. Under the proposed new structure, if you want to sell to another province, you will have to be registered with Canadian Food Inspection Agency, CFIA, to sell into the other provinces.
Senator Callbeck: You said that imports represent approximately 66 per cent of the domestic market. Ideally, what should be the domestic market share of Canadian wineries?
Mr. Stewart: We are limited in our land base, but B.C. is one of the highest levels at 49 per cent Canadian domestic product, that should be a minimum objective we have for the country. However, as I say, in Ontario and Quebec, it is substantially lower than that. I would like to say that at least 50 per cent would be a good objective, and there is no reason why it cannot be done. The larger companies such as Vincor and André's are doing a lot of aggressive marketing work on that.
Senator Mercer: I had the pleasure last year of visiting a number of wineries on Vancouver Island, which are mainly small and new and are growing. As a senator from Nova Scotia, I need to remind you that there are wineries in Nova Scotia, as well as in Quebec. It is not just Ontario and British Columbia in this business, and we hope to grow bigger.
I am excited by your mention, in response to Senator Fairbairn's question, of blending the sale of wine with the sale of other products internationally. It seems to me the national organization is a natural to travel on any further Team Canada trips or whatever they might be called in the future. It seems to me that combining with beef and fish and other products, you could showcase Canadian products from the appetizer to the dessert wine.
My frustration as a consumer of wine is the availability of British Columbia wine in Ontario. It is very limited here and it is almost nonexistent in Nova Scotia and that is an issue I would like to address. However, I am more concerned about the price of wine. When British Columbia or Canadian wine in general is available in Ontario, it is fairly competitive in price. However, when you move to Nova Scotia it is not competitive. The price of wine, period, is expensive.
The Chairman: There are transportation costs.
Senator Mercer: There is that but there is also the taxation part. If we were to remove the excise duty my concern is that our provincial colleagues would quickly move in and fill the gap. If the price of a bottle of wine were to drop, say, a dollar because we remove the excise tax, then the provincial sales tax on wine and alcohol would quickly move up to cover that.
That is not something you may be able to answer, but have you addressed that in your presentations before? I think it is a very real issue. If we are going to do this, like all other actions of government assisting people in agriculture, we want to make sure it gets to the people who need help and need our assistance. That is the case of the wineries.
My next question is, you talked about R&D, and I think this is an exciting part of what we can do —
The Chairman: You have asked four or five questions in the first part of your question. I will not cut you off but I want to give the witness a chance to answer.
Mr. Stewart: I understand your frustration with trying to find the products across Canada. We share that frustration. I once had a dream that we would have our limited-release Chardonnay and Pinot Noir in every liquor store across Canada readily available for any consumer. Six years later I am still trying to do it and not having much luck. There is a lot of pressure on the system we have in place, and we have to look at this system to address the availability issue.
Alberta decided to move from a monopoly-based system to a flat-tax model. That allowed them to have many more listings. Therefore, they went from having 2,500 products to having over 10,000 in about two years. As a consumer you could walk in and say, I love these wines from Nova Scotia. Can you get them in? The wine store would just call the winery and place the order.
Unfortunately, in the monopoly system the number of listings is suppressed because they have so many stores they are trying to run. They are trying to be efficient in that model. They cannot open the door and have every store have different products. They have to have a homogeneous system of stocking core products. In that very model, the small producer — and Canadian producers are all small, with the exception of three or four companies — cannot be viable, because they say we would like to have you in all our stores but the minimum quantity you need is 6,000 cases. That might be the entire production of one of our products. I am not going to sell it all to one market so I have to limit it. That is unfortunately a problem with the monopoly system.
Unless we make a recommendation that we do not need a monopoly system I do not see how to get around that, other than the provinces being encouraged to offer a speculative listing program such as those that exist in Ontario and Manitoba. We just got our first listing in Nova Scotia so it has changed.
With respect to excise tax, the changes that were made in the Excise Tax Act review, while they benefited large producers in the way in which they managed their cash flow and paid the tax, the unfortunately and inadvertently penalized small producers. They put in place a more rigorous auditing procedure for small producers, which ultimately raised the cost of business because the taxes applied were production-based as opposed to sales-based. The taxes paid in most instances by the winery itself — it is only when you ship to a liquor board that you do not submit the excise — may be where the provinces do not want to refund that but I think on the other sales that the province would not have the mechanism to draw that money back to them.
Senator Mercer: You mentioned earlier that as a resident of Nova Scotia that I could not order a wine from your winery and have it delivered to me. I would have to go through the liquor board, whereas in British Columbia someone can order directly from you?
Mr. Stewart: Yes.
Senator Mercer: I visited the Web site of a winery in British Columbia in preparation for tonight. I thought I might order a case of wine tomorrow but I will save myself the time and not bother.
Mr. Stewart: In that instance there is a debate. If I phone a winery and have it shipped at my own expense, am I actually completing the sale in British Columbia or in the province I am phoning from? That is a legal matter, but I know a number of wineries will ship that way, but I doubt they could do it in any large volume.
Senator Mercer: You mentioned R&D. I think that the Government of Canada has some capacity in research and development, in agriculture. You also mentioned the industry, and you talked about the creation of endowments to support it.
What have industry participants themselves contributed to R&D and have they established any central body for R&D or is research just taking place on individual wineries?
The second aspect of that question is, can that research be regionalized? As a senator from Nova Scotia I think of the Agricultural Research Station in Kentville, which is conducting good research in other matters. Can they do research on grapes that can grow a better quality grape in the regions, and can that be across the country, because we have research stations in Quebec where there is a much newer wine industry and a very large market?
Mr. Stewart: I can only speak on behalf of British Columbia with respect to what we contribute for R&D. We voluntarily assess our members at $10 a metric ton on the winery and $10 a metric ton on the grower, which leads to approximately $400,000 revenue each year for research and development.
That was doubled at our last annual general meeting. That is not matched-funding. It is money that we put in. We have partnered with some federal programs. I had the opportunity two weeks ago to speak with the people at the station in Summerland in the Okanagan Valley. When they are looking at certain research and development projects for viticulture, some may need a longer period of time and it is difficult to establish funding that may have to stretch a six- or seven-year plan.
We were hoping to establish a consistent amount that is available on a year-by-year basis, which is matched with industry and used to fund these long-term R&D projects.
We have a program right now in British Columbia where we have mapped every vineyard block in the valley using GIS. We have lists of the soil types and watering programs and have started to collect data at every vineyard site. This is proprietary technology where they attribute awards and results of the wines back to those blocks. If successful, this can then be marketed to Napa or Tuscany or other regions. There is a pay back in these programs as well.
The other issue was with respect to regional R&D programs. I believe it has to be regional because site-specific issues vary between Nova Scotia, Quebec, Ontario, British Columbia and Vancouver Island. Research needs to be done in the broader sense of regional climactic areas.
Senator Mercer: Recently we have been studying BSE and the terrible effect it has had and continues to have on the beef industry. You mentioned the Asian ladybug. I always get nervous when I hear people tell me about something that could be a major risk to an industry. As you know, in your home province all the chickens are being killed as we speak. How risky is the Asian ladybug? What is the threat, and how devastating could it be to the industry?
Mr. Stewart: My understanding is that we saw the full devastation in the 2001 vintage. I do not know all the specifics of it, but I do not think Ontario is anticipating that phenomenon will be another major issue, although they are very aware of it.
This is an industry that had a problem that affected the image of VQA wine. However, VQA is the standard, and secondly and more importantly, it is the brand. Consumers quickly established which brands did not take the proper measures to deal with the problem. Wineries said, ``Our products are gone, and that wine is not up to the level on which we pride ourselves. We will not produce it.'' The consumer says, ``I will buy from that winery because they had a crisis and they dealt with it properly.''
The beef industry could not do that because it was not product specific. One bad apple, and boom, it hits everyone because there is not enough of a segregation between, say, Black Angus or Sterling or these other products. They need rigid separation between them so you can say, ``No, this is totally separate.''
Senator Ringuette: I must say that I am very impressed with the growth that has happened in B.C. with your winery.
I must also indicate to you that I think Senator Mercer was on the right track. If we remove the excise taxes, the provinces will levy more taxes on alcohol products. It is a major source of revenue for them. The consumer would not probably see a decrease in the price of the product because I truly suspect that the province would move to capture a good portion, if not all, of that taxation ability. We have seen that in other sectors.
One indication is that the provinces are requesting that you register provincially. That should be a strong indication to you that that is coming, because it is a tax on the consumer product. If you have an order from Senator Mercer in Nova Scotia and you are not registered in Nova Scotia, the burden falls on Senator Mercer to pay the provincial sales tax on the wine. However, if you are registered provincially, the burden is on you to charge the provincial alcohol tax of Nova Scotia when you sell the product.
I am a promoter of Canadian wines, and I have been following the progress that Canadian wine has made as a result of Agriculture Canada and our government endorsing the quality of wine. Finally, after 30 years of effort, we have opened the door to France. That was a closed market and no Canadian wine could be shipped to France. All kinds of windows of opportunity have opened. I would suggested that this is because you have put your act together with VQA and niche markets and specialty wines like ice wines. The wine producers in Canada have done a tremendous job.
I am looking at your chart entitled ``Improved Domestic Sales Help All Canadians'' in which you compare VQA wines with imported wines. I can easily believe the economic value of the VQA wines. However, your 51-cent economic value on imported wine certainly does not include the excise tax and the provincial sales tax.
Mr. Stewart: That particular slide refers only to the economic component. This is net of tax. It is saying that of the consumer cost spent in a government store, about 60 per cent of that goes back to the supplier. Of that 60 per cent, $4.16 stays in the country because of the labour for glass and growing the grapes and harvesting the fields. In the case of imports, the only thing staying in the country would be the commission to the sales agency and any promotional dollars spent here.
Senator Ringuette: How much does it cost you to belong or to get your VQA certification in one year? Is it on a per- bottle basis? How does that mechanism work?
Mr. Stewart: We pay a tonnage levy to the British Columbia Wine Institute, and currently it is running at $70. If I grow a metric ton of grapes and I bring that into my winery, it is about $70 a ton. We are about a 700-ton winery, so we are looking at $50,000 a year, plus fees on top of that for things like the individual submissions, which are another $50 per product. I have 23 products.
The Chairman: Does that include research?
Mr. Stewart: The R&D is included in the $70 figure. It is a fairly expensive program that is industry supported.
The British Columbia government is saying that things are going great, so we will get rid of this and get rid of that program and start moving back. Our issue is that we have all made this huge investment in the production to ensure that we have enough product to do what we say we will do and we need many of these programs to raise the profile of a quality-producing product.
We have made our request concerning the excise tax as a result of the huge capital outlay attributed to starting a winery. The auto industry is considered one of the most capital-intensive businesses in the world, with a cost of about four dollars in capital and facility for every dollar in sales. The wine industry is five dollars for every one dollar in revenue. There is a huge investment at the front. As a result of the time lag, these small producers need a substantial amount of capital to make it through the process.
In the U.S., they developed it by saying that up to a certain level, we will provide this window. There is already an exemption up to $50,000 in the Canadian Excise Tax Act, so it is already recognized as a viable solution to allowing small producers to go forward. We are suggesting that level be raised to be more consistent with the industry's size and the economics of a small winery.
Senator Ringuette: You mentioned earlier that you are working towards a national VQA standard. How would your VQA costs compare with the current Ontario VQA producers' costs?
Mr. Stewart: The Ontario system is actually more expensive. The only thing that you need to know about the Ontario system is that it was shared at the beginning by the province and worked through to be fully self-supporting. In British Columbia, that was not the case. It was 100 per cent industry supported throughout the whole process. We did not have the resources in British Columbia to reach the same levels that Ontario did. They have more staff available for the program and they have a higher level of inspection than we would have. We want to bring that into alignment through the national wine standard program but, again, that comes down to costs. If I am already spending $50,000 or $60,000 to be a member of the British Columbia Wine Institute today, I cannot afford to spend another $70,000.
Senator Ringuette: I wish you the best of luck. I know that you have all the right ingredients to have much success.
Senator Hubley: Mr. Stewart, between 1990 and 2002, as illustrated in your presentation, B.C.'s grape and wine industry saw phenomenal growth. In some categories, it doubled and redoubled and maybe redoubled again.
Does the industry point to any specific circumstances or special conditions that have helped with this phenomenal growth?
Mr. Stewart: I will share with you our own family story. My father grew up in the nursery business and purchased the land that we have our vineyard on in 1956. We grew grapes in the 1960s and 1970s for a number of commercial wineries.
Leading up to free trade, it was increasingly difficult to be a viable operation, because it was all about producing for a lower cost. We had apples and other soft fruits at the time. The pressure was the same everywhere: we had to have lower costs and come up in under this threshold. It reached the point where we were losing money every year. For 10 years we lost money. If it were not for my father's other business, we would not have been viable or here today to tell you what we are doing.
When we got into the wine business, we took charge of our destiny. We met with our customers and talked to them about what we were selling. In the other model, where we sold to commercial wineries under a great marketing board, and we sold apples under the existing system that is in place today, we brought our fruit in and were paid whatever was left over — that might have been half of what it cost to grow it. In this other model, we go to the marketplace, understand what the pricing is, come back and determine whether or not we can meet it.
In 1989, we started the winery annual payroll at Quail's Gate. We had two full-time employees and some part-time workers and an annual payroll of about $200,000. We anticipate that our payroll this year will be more than $2 million. The economic impact to our community in less than 15 years is huge. We are still using the land for the same purpose. We have changed what we are doing with it.
The Chairman: You are adding value. Instead of selling grapes, you are selling a product made with the crop.
Mr. Stewart: Absolutely. I meet with my customers in Japan. I meet with restaurateurs in Toronto. They tell me if our wines are too expensive and there is no way they will be able to sell them there. Then I go back and readjust our model. If I cannot do it, I know I will not be around very long. It is very important to be able to do that.
Senator Hubley: It is nice to get a first-hand view of the industry.
My second question has to do with value-added. Almost 50 per cent of the revenue that is generated within the industry is from tourism. Tourism goes hand-in-hand with the industry. How wonderful and lucky you are to have that. Will the tourism component continually increase as you expand the industry?
Mr. Stewart: I believe it will. Ontario has seen this. However, Ontario has a number of products. I have spoken with Hans Jost in Nova Scotia and others. There is a growing interest among the consumers to learn about wine; they love it. When they are out looking at wine, they also want to learn about lavender jelly and new salad dressings made by someone else. It is like foraging for treasures.
Our company looked at the business we are in. We came down to being in two businesses; the first is being the producer of a value-added product, which has to sell in a retail market, which has monopolies and three-tiered systems in the U.S., which has department stores in Japan. The second is that we are a customer-destination tourist facility. It is all about wine, but we can piggyback so much on that wine.
We run a restaurant that is only open in the summertime. You can come and have wild B.C. salmon, scallops brought in from Nova Scotia or beef from Alberta. You can try these dishes and we talk about them. We say that a certain wine will go well with a meal. It works in our restaurant; it has to work elsewhere.
Senator Hubley: This is a conscientious part of the industry for you to develop the tourism side. If you are running a restaurant, you have made a fairly substantial investment in that part of your business; is that correct?
Mr. Stewart: Absolutely.
Senator Hubley: I would think most wineries have; is that correct?
Mr. Stewart: Yes. In dealing with the suppliers to that restaurant, you quickly learn who has been successful. That is why I brought the example of the cherry producers. We have been talking about them. We tried a dessert item on the menu last year with these cherries. They are engaging us and asking us to do things. Whereas, I find that other sectors of the agriculture community have been down in the dumps so long that they do not think it will work and they do not want to talk about these things.
We need to get all the successful businesses together and start nurturing them. We will have to rebuild the beef industry. With a team effort, we can work to develop a great sharing of ideas for each sector.
Senator Hubley: Where does the Canadian consumption of wine stand on a global scale?
Mr. Stewart: That is probably the most important thing that the committee can recommend: Canadians must drink more wine.
The Chairman: More wine produced in British Columbia.
Senator Hubley: We could probably set the example.
Senator Mercer: I am doing my part.
Mr. Stewart: We would like to get up to half of what they do in Italy. Consumption in Quebec is the highest; British Columbia is the second highest. The number per capita in Quebec is about 15 litres per person; in B.C. it is 14.9 litres.
Wine is one of the few categories that is growing. Oddly enough, what is growing is the consumer is buying less volume, but more premium product. We are starting to see those consumers who previously bought 1.5 litres or a bag in the box product move into bottles and then they move up and are buying more expensive products. The $12 to $14 range is the fastest growing category in British Columbia. I suspect in Ontario it might be $11 to $13. That is reflected similarly throughout the country.
The Chairman: Mr. Stewart, you recommended that if wine, cheese and meat producers worked together, they could find greater economies of scale. You should know that three weeks ago Pulse Canada suggested to this committee that Canada needs to bring all commodity groups together to develop a comprehensive agricultural research framework.
You were talking about a marketing framework. What do you think about a research framework? Can you see any value in that suggestion by Pulse Canada?
Mr. Stewart: There would certainly be advantages in having all commodity groups get together on significant research and development issues such as water management, environmental impact, wastewater management and so forth. I can see that having a huge benefit to all sectors because individually it is very expensive to get into any sort of meaningful research on specific issues.
At a very high level yes, at a low level no. It is not feasible because of the various issues of research and development. You are dealing with clonal selection of grapevines or different diseases, drip management versus overhead sprinklers. I do not know if there would be many commodities that would have that same need. At a very macro level, however, yes, that is a good idea.
The Chairman: You compared amount of wine that is produced and consumed in Canada with the amount of wine produced outside Canada that is consumed here.
What should be the amount of domestic market share of Canadian wines? How could we increase this market share? What are some of the things that we as a committee should know about increasing the amount of Canadian versus imported wines that we consume in Canada?
Mr. Stewart: I said that 50 per cent is a reasonable goal of market share across Canada for wines produced domestically. The key to doing that is building our businesses. It is very costly to develop production facilities and purchase oak barrels and plant new grapes. Vineyard land in the Okanagan is $50,000 an acre. No one has factored that increase in value into the economy of the region. I am sure that there is similar interest in Ontario, Quebec, Nova Scotia and other regions because wine is a very exciting product right now.
Domestic promotions are critical. It is an issue that has to be cited in this committee's report, that interprovincial trades for domestic producers in wine is challenged because of marketing dollars available to France, for instance, or simply the fact that there are only so many listings available and not enough specialty listings for small producers. Those are issues. I am just thinking down how far can you go with dismantling that system.
On the promotional end, there is a need to engage the consumers throughout the country and show them what is going on in the other regions around Canada and what is the value like, why it is worthwhile. Sure, they may have to look a little bit to find these wines but it will be worth it. Raising our profile is important.
Senator Fairbairn: Last week we had some terrific testimony here from people from the Canadian Organic Growers. They also had great frustrations in respect of gaining recognition and the difficulty of getting into the marketplace. However, they were extremely vigorous and obviously skilled. They had their information in top form. You mentioned at one point, if I am not mistaken, that wine growers had been working in some way with organic farmers. Could you give us an example of that?
This group felt that as a smaller group, they would benefit a great deal from being part of a federal effort at listening and communications through round table discussions. Such activities have been going on a great deal to the extensive comfort and help over this past year within the cattle industry and related industries.
Could you place for us yourself vis-à-vis the organic farmers and the degree to which you are working with them, who also have a product that shows tremendous promise but how to get there is critical?
Mr. Stewart: We have worked closely with the organic food sector in many ways. I serve a number of organic products on our menu at the patio at Quail's Gate. They are definitely a group that gets it and though they may, in some circles, be seen as radicals they are certainly aware of the growing concern that is not being addressed.
If we go back to your comment about whether we are ready, there are big sectors in Canada that are not ready for what we are talking about. Their view is that it is strictly about cost. It is a commodity and it has to be delivered at a price. Unfortunately, we will have to think quality and organics are part of it and that in order to do so there has to be a shift in mindset.
The organic growers have struggled a lot to understand their standards. I do not think in the beginning they were being reasonable in some ways. Certainly now they seem to have a much more organized approach, a much more scientific basis for what they are saying and it makes a lot of sense given the events of the last three years.
Senator Mercer: I note that sometimes we do not introduce our guests properly and they do not introduce themselves properly. In my research I note that our guest was awarded one of Canada's top 40 under-40 awards in 2002, so we are not dealing with any slouch here. Congratulations on that.
I also learned — and this may be a question that I should not ask as a government member but I could not resist — that in October of 2003 you travelled with a wine delegation to Finland and Iceland in a state visit with the Governor General to promote the high quality wines created in British Columbia and tourism as well. In your estimation was that a success? Was it a worthwhile venture?
Mr. Stewart: It was a huge success. One of the things I mentioned was the dinner that we had in Helsinki, which served Canadian wines at the event. I believe there were 300 people at the event. It was actually one of the best food pairings that I have ever experienced. I was impressed that both the Canadian wines in the dinner showed well.
It was a huge success in that part of what we need to do as Canadians is get the word out about what we can do and what we are all about. The success of that tour is a good example of what we are talking about with this idea behind the Canada à la carte theme. That tour had a cultural and educational component as well as an exchange program and a business component.
Our industry needs a business component of this. The trade offices, unfortunately, look at each group by sector. They look at one group that might be doing only $12 million in annual exports and another that is doing $700 million each year and they can only allocate X amount for the smaller group. In fact, they should be bringing the two groups together and conducting a similar type of promotion in our export markets.
The objective should be: What can we do in total exports as a group, as a category working together versus working individually? If wine is $12 million and beef is $700 million and whatever is from wheat and from dairy, what can we do as an agriculture group working in a market like Japan? Can we strive for a 10 per cent gain working collaboratively? Why not?
I would like to see the establishment of a committee that has industry support as well as support from government — and the Department of Foreign Affairs and International Trade — that would do a test market in a region. They could determine the specific measurables and provide support on the condition that the groups commit to undertaking the program for a certain period of time. The group receiving the support sets the objective and if it does not succeed, it is obviously not worthwhile. You can manage us by objective; we will tell you what we can do and if there is a return there, I cannot see why we would not do this as a country. It is a huge opportunity.
The Chairman: Mr. Stewart, you should also have told Senator Mercer that at the lunch on the day that you had the tasting in Finland there was a blind tasting of your 2000 Pinot and yours stood first. So it was a good day, I think.
Mr. Stewart: It was an exciting day.
Senator Callbeck: There is a chart in the information you gave us that shows the tremendous progress that has been made in British Columbia from 1990 to 2002, where you had a capital investment of $800 million. You say the planned investment in the next five years would be roughly $543 million — up around 70 per cent.
Will most of those capital dollars be spent by the existing wineries or are there a lot of new people wanting to get into the business?
Mr. Stewart: The existing companies are spending most of it. Vincor, which operates Jackson-Triggs, Sumac Ridge, and Hawthorne Mountain, and Inniskillin in the valley, have both had significant investment and continue to do so. Mission Hill is probably the largest capital injector of that planned investment. These are figures that came from a KPMG study done in 1999 and a secondary study done by Grant Thornton.
For us and other producers, production facilities are a large component of it. We need to process all of those grapes that have been planted. The tourism facility is probably the largest component and that is because with success the type of customer you are attracting is demanding certain things. They want to have lunch in a restaurant and they are not afraid to spend the money to enjoy a great meal, but they want to have a facility to do it in.
Unfortunately, at this point in time, we have not invested that money so we have to build up over the next 5 to 10 years to see that happen. The rest of it would be in vineyards.
Senator Callbeck: I read somewhere where the leading five wineries in Canada account for close to 90 per cent of the production. How many of those five would be in British Columbia?
Mr. Stewart: Two.
The Chairman: Mr. Stewart, you can tell by the length and the nature of our questions that we have thoroughly enjoyed and appreciated your presentation and we have learned much from it. Do you have any last word of advice to this committee on things you would like us to keep in mind as we think about recommendations we will make at the end of our study of agricultural products and looking at ways to add value to them?
Mr. Stewart: As a parting comment, I would like to volunteer to assist in some way. When I sat on a committee for the agricultural sector, I dealt with a number of stakeholders from different groups. We discussed some of the issues I outlined here. It was a very heightened level of discussion, to say the least about any concerns or criticism that someone might have over the existing systems that were in place. However, with our latest problems in British Columbia with avian flu, BSE and all other sorts of issues out there, I think it is the greatest opportunity we have today to really tackle this. People will listen.
We must figure out how we can start to bridge with those groups and look at ways to change past ways of doing things. We need to start somewhere. I think that a committee — a working group — comprising together people who are prepared to look at new ways in how we deal with some of our products and develop some ideas for the sectors we could make some great strides. I think it such a committee would be a safe bet because then the country can see the results and follow it from start to finish and be happy they have made the right decision and they have not wasted taxpayers' money. They actually put together a business plan and launch a business plan with obtainable objectives.
I would love to assist in that because I think we stand at the turning point of taking a new direction and making agriculture in Canada the envy of the world.
The Chairman: Again, thank you for your enjoyable presentation.
The committee adjourned.