Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 3 - Evidence - Meeting of December 13, 2007
OTTAWA, Thursday, December 13, 2007
The Standing Senate Committee on Agriculture and Forestry met this day at 8:03 a.m. to study the present state and future of agriculture and forestry in Canada.
Senator Joyce Fairbairn (Chair) in the chair.
[English]
The Chair: Good morning, honourable senators, witnesses and all of you watching our Standing Senate Committee on Agriculture and Forestry. We are convened here this cold, early morning to discuss the worrying developments occurring in the United States that may have profound effects on Canada's sugar beet industry.
Last year, the United States administration proposed regulatory changes to import rules regarding sugar beet thick juice that, if implemented, might well have eliminated Canada's ability to export this product south of the border. Our committee, along with the federal government, provided comments to the United States administration on these two regulatory proposals, and one of the proposed changes was denied earlier this year.
However, there has been a recent development this year. The House of Representative's mark-up of the 2007 Farm Bill introduced in July proposed similar changes to the U.S. sugar program. These proposed changes would have a devastating impact on Canada's only sugar beet processing plant located in Taber, Alberta, as well as to the sugar beet farmers relying on its continued operation.
With us this morning to brief us on this situation and these worrying developments from the Department of Foreign Affairs and International Trade Canada are Martin Foubert, Deputy Director, Multilateral Access Market Division; Kendal Hembroff, Deputy Director, Bilateral Market Access Division; and joining them from the Department of Agriculture and Agri-Food Canada are Steve Lavergne, Director, Western Hemisphere Trade Policy Division; and Frédéric Seppey, Director, Regional and Market Access Negotiations Division.
We have one hour today with these witnesses, so I would invite my colleagues to keep their questions as brief as possible in order to allow our witnesses time for full responses and for everyone to be able to contribute to the discussions this morning. They are very important discussions, and we want everyone to say what is on their mind and get every bit of information you can offer to us.
Who would like to start?
Steve Lavergne, Director, Western Hemisphere Trade Policy Division, Agriculture and Agri-Food Canada: I will begin, and then perhaps turn to my colleagues for additional remarks.
Let me begin by saying thank you, Madam Chair and members of the committee, for the invitation to address the Standing Senate Committee on Agriculture and Forestry. We have been asked to brief the committee on a few trade- related issues regarding proposed changes to the U.S. sugar program that may affect the Canadian sugar beet industry, changes which are part of the development of the U.S. Farm Bill. I will speak to some prepared notes and, following that, I will be happy to address any questions that the committee members may have.
The Chair: Our senators are eager both to hear what you have to say and also to ask some questions.
Mr. Lavergne: Thank you. As most of you already know, the U.S. Senate and House of Representatives have been working to develop a new Farm Bill which will be the basis of agricultural programs in the United States, including the sugar program, over the next five years from the period 2008-2012. The provisions of the current 2002 Farm Bill expired at the end of September this year. They have been extended to December 14, and we anticipate will be extended again to provide authority to continue funding programs at 2007 levels as the debate on a new Farm Bill continues.
It is uncertain whether a new Farm Bill will be passed before December 31 or that such a bill will have the support of the administration. I will make some remarks on the version of the Farm Bill passed by the House of Representatives and the version currently under consideration in the U.S. Senate.
As you may be aware, the U.S. House of Representatives passed their version of the Farm Bill on July 27 of this year. While the House of Representatives bill received bipartisan support at the committee level, the vote on the floor was ultimately split along party lines as a result of a last-minute inclusion of certain corporate tax provisions added to provide additional funding for spending priorities. The Senate agriculture committee passed its version of the bill on October 25, 2007; however, debate on the Senate floor stalled as a result of procedural dispute between the Republicans and Democrats over the number of amendments and whether they had to be germane to the legislation. The logjam was finally broken when agreement was reached on how to deal with the amendments. Debate, which began on the Senate floor on December 10, could extend to the week of December 17. Votes began on the amendments on December 11 and will continue as the Senate addresses each of the 40 amendments.
Under the agreement, each party was allowed to present 20 amendments. Once the Senate passes its version of the Farm Bill, then the Senate and House bills are to be reconciled in a conference committee before each chamber votes on a final, common bill. House and Senate negotiators could draft a final version early in 2008 to be passed by both the House of Representatives and the Senate. The final bill will then be sent to President Bush for his signature.
U.S. Acting Secretary of Agriculture Mr. Chuck Conner has noted that the U.S. administration believes that the proposed spending under both the House and Senate versions of the Farm Bill is too high; that the proposals lack real farm program reform and that they shift the balance of support in a more trade-distorting direction. Acting Secretary Connor indicated in early December that the administration would veto a Farm Bill passed on the current text being considered. At this point, it is too early to judge, therefore, whether the version of the Farm Bill that will appear before the conference committee will include changes that will satisfy the concerns of the U.S. administration.
Both the House and Senate versions of the Farm Bill include provisions that would modify the U.S. sugar program in a way that would reduce the commercial opportunities for exports of Canadian sugar beet thick juice. The first major change would modify the program so that sugar made from imported sugar beet thick juice, of which Canada is the major supplier, would count towards processors' marketing allotments for refined sugar. Currently, sugar produced from imported sugar beet thick juice does not count against U.S. processors' marketing allotment. However, if this change is implemented, it would likely result in Canadian sugar beet thick juice becoming less attractive for U.S. refiners.
The second major change to the U.S. sugar program affects the administration of the TRQ — the tariff rate quota — for the importation of raw sugar cane and refined sugar. While this does not affect Canada's existing country- specific tariff rate quota of 10,300 tonnes for refined sugar, it would affect adjustments to the TRQ during emergency sugar shortage situations. Specifically, by way of example, during a sugar shortage in the fall and winter months — between October 1 and March 31 — Canada would only be able to export refined sugar after the U.S. domestic production and imports of raw cane sugar were exhausted. However, during a sugar shortage in the spring and summer months — April 1 and September 30 — Canada would be precluded from supplying any refined sugar to the U.S. market. That is outside our existing TRQ.
These changes are being proposed against the backdrop of concern from U.S. sugar growers who are alarmed at what they see as a potential surge of Mexican sugar imports into the United States next year as a result of the implementation of the last provisions of NAFTA on January 1, 2008. The new Farm Bill legislative proposals on sugar resemble the regulatory changes sought last year. At that time, Canada was successful in encouraging the administration not to take any further action on either of these two rules. Canada continues to actively lobby on the two issues in the context of the new Farm Bill development process.
I will add that we do understand the Canadian sugar beet industry's concerns about the proposed provisions in the draft Farm Bill, and support for these views has been demonstrated both in Ottawa and at the Canadian embassy in Washington. Under our trade advocacy program, for example, Agriculture and Agri-Food Canada has provided the Canadian Sugar Institute and the Sugar Beet Producers Association with support to promote access initiatives on the issue in the United States.
In Washington, officials from the Canadian embassy, as well as from Ottawa, have made Canada's concerns with the Farm Bill known to key players on Capitol Hill and further interventions are planned. Canadian officials have indicated that the impact of the legislation being considered could reach beyond the United States.
Thank you for the opportunity to speak. That brings me to the end of my presentation.
Frédéric Seppey, Director, Regional and Market Access Negotiations Division, Agriculture and Agri-Food Canada: I have nothing to add. Thank you, chair.
Martin Foubert, Deputy Director, Multilateral Market Access Division, Foreign Affairs and International Trade Canada: I do not wish to speak at this time, thank you.
The Chair: We have some enthusiastic senators who have come to know the sugar beet industry from your people and the farmers themselves, and the people in the United States, over the last difficult years. We are eager to do anything we can that would be deemed helpful in this new campaign that confronts us.
Senator Gustafson: What percentage of our production goes to the United States?
Mr. Seppey: In 2006, we exported all sugar types. If you take into account all types of sugar, be it raw, sugar beets or refined sugar, we have exported to the world a total of 73,000 tonnes of sugar, of which 68,000 tonnes were sent to the United States. Most of it is refined sugar, but there is a portion of that that takes other forms, such as molasses or sugar beets.
Senator Gustafson: What percentage of our production is consumed in Canada?
Mr. Lavergne: It is my understanding that industry representatives will be appearing before the committee. Perhaps those questions would be better addressed to them.
Senator Gustafson: This may be a little off track, but is water or irrigation a big problem in this industry?
Mr. Lavergne: It is not, that I am aware of.
Senator Gustafson: We hear that there are problems with getting enough water to irrigate the southern Alberta region.
Mr. Lavergne: I am not aware of this industry having specific additional challenges over the challenges faced by the farming and agriculture sector in that region.
Senator Gustafson: If the American Farm Bill comes down containing what it did last year, how will that affect you, if it does not change?
Mr. Lavergne: It is our understanding that if the provisions currently contained in the House version of the bill and the Senate agriculture committee version of the bill go forward, it could effectively close exports of Canadian sugar beet thick juice to the U.S. and also limit the ability of the Canadian industry to ship refined sugar over and above what is allowed under the current Canada-specific TRQ.
Senator Gustafson: This is a very serious situation.
Mr. Lavergne: Indeed it is, for sugar beet thick juice in particular, but there would be no room for growth or limited scope for growth, I believe, for the refined sugar industry as well.
Senator Gustafson: What can this committee do, beyond just writing a letter of support for the industry?
Mr. Lavergne: As I mentioned in my remarks, there are two scenarios. The Senate will pass its version and the two versions of the bill will go to conference. Basically, the conference committee is a joint committee of the two Houses of the U.S. Congress, where it is designed to reconcile differences. There may be merit in the Senate committee writing to the chairs of the two agriculture committees during the conference period, or in advance of that period, outlining Canada's concerns, the industry's concerns and the potential implications for Canada.
The second scenario, however, would be again as outlined briefly in my remarks. Acting Secretary Conner, and his predecessor before his departure, had both indicated that if the bills currently before the committee come forward in more or less standard form, they would be recommending to the president that he not sign the bill. It is not yet clear whether the Houses could overturn a veto or not on this issue. In that case, if the administration vetoed it, we anticipate that the U.S. Congress would have to find a way to extend the current version so that the proposed changes would not come into effect. For the sugar beet thick juice producers, that would be a better scenario. Under the first scenario, there may be merit in at least writing a letter to the committee chairs.
Senator Gustafson: Is the border more difficult now? It seems that there has been a great deal of talk and discussion about terrorism, and so on, and the border. Is it more difficult to communicate across the border? Is that a problem?
Mr. Lavergne: Certainly, since September 11, 2001, the focus of the U.S. government has been enhancing homeland security. Since 2001, the U.S. has implemented a series of measures to enhance security. Some of those have had, perhaps, an unintended impact on the ability to facilitate trade back and forth. That affects the movement of people, as well. One of those measures is the Western Hemisphere Trade Agreement. The initiative now requires the use of passports for people travelling across by plane into the United States. After 2008, a passport or a more enhanced document may be required to get across by road. That is for the movement of people.
Earlier this year and late last year, the U.S. implemented some new inspection fees for produce, fruits and vegetables going out from and into Canada. There is enhanced inspection at the border. Agriculture and Agri-Food Canada, along with the Canadian Food Inspection Agency and the Department of Foreign Affairs and International Trade, has been working closely to engage the U.S. on a number of these issues. We share the objective of maintaining or enhancing the security, but we should focus on facilitating the flow of legitimate, risk-free trade and the movement of people between the two countries. We are engaged on many levels, and on many issues, to try to keep the border operating smoothly.
Senator Gustafson: One of the things that has arisen in this committee is that we should have a ``Made in Canada'' Farm Bill. What is your reaction to that?
Mr. Lavergne: I am not implicated in the process of the investment, of the going forward or the next generation of the agricultural policy framework, so I would not go too far. In my conversations, some groups have said we would like a made-in-Canada Farm Bill and others have said we would not want to get involved in the types of discussions that the U.S. is having now. My view is that it is more comprehensive and deals with more issues than the agriculture sector.
Mr. Seppey: May I comment with respect to your question in terms of trying to see if we could have our version of the Farm Bill? One issue that significantly affects the Canadian agriculture and agri-food exporters is the trade distortive subsidies, be they domestic support or export subsidies. In the United States, they have this tradition of having a significant level of those types of subsidies. In Canada's case, given our size and characteristics, we need to be able to have rules in place to codify what kind of subsidies you can offer and what you should not be able to offer in order to have a level playing field. This is why, at the World Trade Organization, we are strongly advocating for rules on domestic subsidies, and for the prohibition of export subsidies. Our agriculture exporters are able to be competitive if there is such a level playing field.
That is why we launched a case against the level of the agriculture subsidies in the United States. Over the previous years, they have exceeded what they are entitled to spend as part of their commitments at the World Trade Organization. We have made a case against them because our exporters, whether cereal, beef or pork, are negatively impacted by those measures.
We are hopeful that, through advocacy with the U.S. authorities and through recourse to trade litigation to ensure that the U.S. live up to their international commitments, we are able to ensure that we can influence the development of the future Farm Bill. Also, we hope to ensure that the United States lives up to their commitments. We also want to help rebalance the condition of trade to the benefit of our exporters.
The Chair: Thank you. Senator Peterson, you are next on the list, followed by Senator Callbeck.
Senator Peterson: Thank you to the presenters. When we discussed this issue last year, it was determined that the amount of product we send to the United States is very small — half of one per cent of their market. I presume this has not changed; it is probably still in the same magnitude.
My question is: What would be driving this issue back on to the table again? Is it the producers in the United States, the Department of Agriculture in the United States, or are there other factors?
You indicated in your presentation that there is a lot of product coming in from Mexico to the U.S. I understand there is also a lot of product coming from South America. Is this causing the distortion or concern that, for the small amount we send down there, they would attempt to have that closed off?
Mr. Lavergne: I am reluctant to speculate too much. As you pointed out, in our case, our current contribution or share of the U.S. market is very small relative to the total size of the market.
It is our understanding that this initiative is being driven by the U.S. industry in light of concerns about the potential in-flow of sugar from Mexico. That follows the implementation on January 1, 2008 of the final elements of the North America Free Trade Agreement. I do not have specific numbers for the imports from Mexico into the United States but it is the anticipation of the additional market opening that will happen, and the fact that Mexico will have enhanced access to the U.S. market. The U.S. is looking to close any window or door, no matter how small.
Senator Peterson: Therefore they would close the market from Canada to allow some flexibility for the product coming in from Mexico? They do not know what that is now, but they think it will be significant?
Mr. Lavergne: My understanding is that the U.S. industry has a strong lobby element.
The Chair: That is putting it mildly.
Mr. Lavergne: I lost my train of thought. Could you repeat your question?
Senator Peterson: I am asking what is driving this initiative. They think there will be an impact from the Mexican market and, therefore, they decided to pick on someone and close the border to Canadians. Are they thinking that will look after this nebulous or potential market issue?
Mr. Lavergne: The U.S. would argue that they are just bringing the rules for imports of sugar beet thick juice from Canada into line with how the system treats domestically-produced product of this nature. I would share your concern regarding the potential impact of in-flows of sugar from Mexico.
Senator Peterson: If we are trying to help, I guess our target cannot be the producers because, as you say, they are quite strong. Who would it need to be? Would it need to be the Department of Agriculture? Would the matter of free trade and open borders be the thrust?
Mr. Lavergne: Our engagement strategies vis-à-vis the U.S. or any country is engaging potential allies in the United States. In this case, I am sure industry representatives could give you their views on specifics. The sugar users industry and those who use sugar in processes will be potential allies. It is our understanding that the U.S. administration is sympathetic to the case Canada has put forward. They would argue that they are just being driven by what is coming out of the legislative process.
In our advocacy work, we are trying to reach out to members of Congress who may have constituents who may have an interest in maintaining access to Canadian sugar: For example, U.S. firms that may have an interest in keeping access to Canadian product. It is in identifying the allies in the U.S. that we can work with. It is good to have a good relationship, but it is important to be able to identify the U.S. stakeholders and U.S. players who are sympathetic to the case we are making.
Senator Peterson: Would you feel that the impending election there is having some impact on this situation? In other words, is it difficult to get decisions and/or people saying anything because of the elections coming up? Will it make negotiations more difficult?
Mr. Lavergne: I am not sure that I want to speculate on that question.
The Chair: Thank you.
We sent our letters, with assistance from the government officials and with the approval of the ministers, to the Department of Agriculture and, I believe, to the Department of Homeland Security.
Senator Callbeck: Thank you very much, Madam Chair. Thank you, witnesses, for coming this morning.
You mentioned the amount that we export to the United States. What about other countries? To what other countries do we export?
Mr. Seppey: In terms of sugar, the overwhelming amount of exports are to the United States. I think, when you hear from the industry, they will confirm that there are few markets that are open, or where the competitive conditions are such that we can export. For example, in 2006, a very distant second in terms of exports of sugar was to Jamaica. Compared to 68,000 tonnes exported to the United States, we are talking about 1,300 tonnes to Jamaica. That gives you an indication of the magnitude of the importance of the U.S. market for our exports. Of course, in terms of production of sugar, the bulk is produced and consumed in Canada.
In terms of exports, we are very dependent on the United States, and hence the seriousness of the problems with access to the U.S. markets. This is why, with the industry, we are trying to gain more open access to the U.S. market — be it through advocacy or through ensuring that the U.S. lives up to their international obligations. For example, in the current multilateral trade negotiations at the WTO, the Doha Round, we are not the only ones interested in opening up the U.S. market. However, we want them to open up markets to refined sugar where we have an interest.
Aside from that, we are working with the sugar industry in identifying potential other markets that could be open to Canadian sugar products through bilateral free trade agreements. For example, I said Jamaica was a distant second in terms of an export destination for sugar. We are about to initiate negotiations with the CARICOM, which is the Caribbean community of nations. We have a niche market and there are opportunities in that specific region. Therefore, we will try to open the market as much as possible to our sugar exporters. There is a multiple track approach, but the emphasis will be on the United States.
Senator Callbeck: Is it fair to say that we are aggressively seeking other markets?
Mr. Seppey: In terms of agriculture, the answer is yes, in general. We are a significant exporter in terms of agriculture and agri-food products. We are aggressively pursuing an FTA strategy that is driven by two factors: One is the fact that in many markets we are in competition with the United States. Therefore, when the United States concludes a free trade agreement, there is always the risk that we lose our market share.
To give you an example, the U.S. Congress just ratified last week the free trade agreement that the United States had signed with Peru. Peru is important in terms of grains, beans and lentils. Therefore, if the U.S. gets duty-free access for those types of products, it is important that we export as well. Then it becomes very competitive. If our grains are subject to a tariff rate of 20 per cent into Peru while the U.S. gets in duty free, that will be problematic. One thing we are seeking is to maintain parity of market access with our main competitors, especially the U.S.
The second thing we are trying to pursue through FTAs is to open up new markets. Gulf states such as the United Arab Emirates or Qatar are small but fast-growing markets. They are looking for processed agricultural goods. The United States does not have an FTA in that region, but we think we have a chance to not only maintain but expand our market access there. We are pursuing those types of strategies across the board.
Senator Callbeck: My question is regarding the Rogers Sugar Taber plant. If Canada loses its abilities to export this thick beet juice, what are the options for the Taber plant? Can it be used to produce ethanol, or beet juice?
Mr. Lavergne: I think that question would be better answered by our industry colleagues.
Mr. Seppey: I believe there are studies being done by the industry. I think Mr. Lafrance from Rogers Sugar Canada is knowledgeable in that area. There is some potential, but we are only beginning to examine these issues. It is one possibility, but it needs to be investigated further.
Senator Callbeck: Thank you.
Senator Mahovlich: I just have one question: Where are the refineries in the United States? What states are they in?
Mr. Lavergne: I believe there are refineries scattered across the U.S. My understanding is that the sugar beet thick juice production is across the central-northern states, such as Minnesota.
Senator Mahovlich: Is the Taber plant in competition with those refineries?
Mr. Lavergne: Some would see it that way, yes.
Senator Mahovlich: Do they have their lobbyists working in Washington complaining about the Taber plant?
Mr. Lavergne: Certainly, there would be members of the industry expressing the U.S. industry's view. One additional challenge is that Congressman Peterson, the chair of the House Agriculture Committee, is from Minnesota.
Senator Mahovlich: With world trade, is Asia interested in beet sugar juice? Is there any demanded for it over in Asia?
Mr. Seppey: There is some demand. However, there are some heavy players on the world scene in sugar beets. For example, I believe Australia is a very aggressive exporter of those products. I was posted in Geneva for several years, and I recall negotiating the accession of new members to the WTO. Australia was keen to extract concessions from newcomers around sugar beets where there is significant competition on the world scene.
Beet thick juice may pose challenges in terms of transportation. Long term business relations play a role. Therefore, our proximity and natural links with the United States makes it attractive for export and to exploit these business opportunities. The best thing is to keep that market open.
Our current trade patterns in sugar, which is probably very similar in sugar beets, is very focused on the United States and a couple of niche markets. Sugar tariffs are fairly high in various countries and bilateral agreements play a role. We are in negotiations with Korea and Singapore, but there is not much presence in Asia.
Senator Mahovlich: Are we new in this field of supplying juice to the United States? When did we start?
Mr. Lavergne: I apologize, but the industry representative would give a better sense of the timeline when production started. With regard to sugar beet thick juice, it is an intermediate product in the production process which they ship.
Senator Peterson: You mentioned a bilateral agreement with Peru. How many other bilateral agreements does the United States have with sugar producing countries?
Mr. Seppey: An agreement has been negotiated with Colombia, which is a very competitive producer both in raw and refined sugar. Colombia is investing in improving their capacity to refine sugar and in producing bio-fuels from sugar. Conditions are making it easy for them to become competitive in that area. The adoption of that agreement is facing challenges in Congress.
Negotiations on the U.S.-Peru agreement were concluded several months ago. However, it was only approved last week. The Colombia agreement is facing a lot of criticism in the United States. Part of it is lobbies from various industries that may be negatively affected by this agreement, but also there are concerns about human rights.
Another agreements involving sugar producer countries is what we call CAFTA-DR, which was concluded between the United States and the Dominican Republic along with five Central American countries: Costa Rica, Guatemala, Honduras, Nicaragua and El Salvador.
Senator Peterson: Do they also have an agreement with Brazil?
Mr. Seppey: Brazil is a challenge to negotiate with, given its size and that it is one of the most competitive countries globally in terms of agriculture generally, and sugar in particular.
There was an initiative called the Free Trade Area of the Americas, which was trying to establish a free trade zone from Ellesmere Island to Tierra del Fuego. Those negotiations were put on indefinite pause some years ago because of difficulties mainly between the United States and Brazil. Brazil is part of a customs union called MERCOSUR with Argentina, Paraguay and Uruguay. Therefore, they usually negotiate as a block, and it is quite challenging to engage with that block. The European Union has been negotiating for five years and they are not making much progress. The prospect of bilateral negotiations between the United States and Brazil would be in the category of medium- to long- term objectives.
Senator Peterson: When bilateral agreements are signed, the countries get preferred trading conditions. Has Canada negotiated any bilateral agreements?
Mr. Seppey: Yes, we have negotiated a series of bilateral agreements. The first one was negotiated with the United States in the 1980s and evolved to become NAFTA. In the year following NAFTA, we concluded two sets of negotiations with Israel and with Chile. That was followed by a pause of several years in conclusion of other negotiations. We then concluded a free trade agreement with Costa Rica in 2001 or 2002. Last summer, we reached an agreement with the countries of the European Free Trade Association — Iceland, Switzerland, Norway and Liechtenstein.
In addition, we are currently engaged in a series of bilateral negotiation with a number of countries. In terms of sugar producers, we are in negotiation with Colombia, Peru and with the Central American countries referred to as the CA4.
The Chair: Sugar beets have been around a long time in south-western Alberta; since I was a little girl. After the harvest was over, it was like a giant mountain that my father would take us to see. Farmers have been in this industry and it has served our people well. It would be a blow should it be shut down.
We will stay in touch and if it comes down to writing to the two departments to which you referred, we would do so with your assistance and support.
Mr. Lavergne: Thank you. We will continue our efforts from Ottawa and Washington to advance Canadian interests on this file and would be prepared to assist the committee in moving forward.
The Chair: One issue would be timing, and that would be something on which you could advise us.
Mr. Lavergne: That is correct.
The Chair: Thank you. We appreciate all the efforts that we know you are making to try and keep this border open.
Honourable senators, we will hear next from the industry.
Good morning honourable senators, witnesses and all who are watching our Standing Senate Committee on Agriculture and Forestry.
We are re-convened here this morning to discuss the worrying developments occurring in the United States that may have profound impacts on Canada's sugar beet industry. Last year, the United States administration proposed regulatory changes to import rules regarding sugar beet thick juice that, if implemented, might eliminate Canada's ability to export this product south of the border.
Our committee, along with the federal government, provided comments to the United States administration on these two regulatory proposals. One of the proposed changes was denied earlier this year.
This year, however, there has been a development. The House of Representatives mark-up of the 2007 Farm Bill introduced in July proposed, again, similar changes to the United States sugar program. These proposed changes would have a devastating impact on Canada's only sugar beet processing plant located in Taber, Alberta, in addition to the sugar beet farmers who rely on its continued operation.
With us this morning, in order to give us the industry's perspective on these worrying developments, are people who are not new to this room. In fact, we are getting to be really old friends, which is both good and worrisome. We want you to meet Sandra Marsden, President of the Canadian Sugar Institute; Bruce Webster, General Manager of the Alberta Sugar Beet Growers; and Daniel Lafrance, Vice-President and Chief Financial Officer of Rogers Sugar.
We have one hour with these witnesses this morning, honourable senators. I would ask you to keep your question as brief as possible in order to allow the witness to answer fully and to allow everyone to contribute this morning.
I think it is fair to say that this is business. It has also, over time, become friendship. Witnesses, we are as keen as you are to see if we cannot maintain our association with the United States for the benefit of Canada, Rogers Sugar and, most particularly, the farmers themselves.
Sandra Marsden, President, Canadian Sugar Institute: Thank you, Madam Chair and honourable senators. It is a pleasure to be here today to provide a perspective on the U.S. Farm Bill and its impacts on our sector.
The U.S. Farm Bill, as proposed in Congress by the House of Representatives and the Senate in the United States, is advocating more support to U.S. sugar producers who are already highly supported and proposing more import restrictions, some of which target Canada. All of this is happening at a time when the World Trade Organization negotiations are ongoing to try to liberalize trade internationally.
Our exports to the United States are minuscule; they are less than .1 per cent of the U.S. market. That includes both refined sugar and exports of sugar beet thick juice. However, it is very important to the sugar industry. We are a relatively small industry compared to our neighbours, we live next to a highly-restricted market and we face significant export barriers in the U.S. and other countries. Even small changes to the U.S. sugar program can have a big impact on our sector.
I know there were a lot of questions earlier, so perhaps I can answer some of those. The industry produces over 1.3 million tonnes of refined sugar annually in four provinces. We have cane refining operations in Vancouver, Montreal and Toronto. Additionally, we have the sugar beet processing operation in Taber, Alberta. The industry has consolidated over the years. Up until 1980, we had 10 plants and we now have four.
We face stiff competition from imports, from other sweeteners such as high-fructose corn syrup in the liquid segment and we face limited export opportunities. Over the long term, we are hoping that the World Trade Organization negotiations will liberalize sugar trade, but the prospect of that is long-term. Given the focus on sensitive products in the current round, commercially meaningful opportunities will not likely be achievable in the foreseeable future.
Let me emphasize how unique we are in the world situation. The Canadian sugar market is not supported by any subsidies; we have no quotas or tariff-rate quotas as opposed to the United States and Europe and many other countries. We have no export subsidies. That is in sharp contrast to the United States, which maintains strict quotas on refined sugar and many sugar-containing products. Any exports above those quotas face prohibitive tariffs in the order of 150 per cent. Our tariff is about 8 per cent.
As I mentioned, World Trade Organization liberalization is key for the industry. We work closely with the Global Sugar Alliance, major exporting nations, and with the Canadian Agri-food Trade Alliance. However, the prospect of liberalization is long term. In the meantime, we are trying to manage our sales in the Canadian market and the limited export opportunities we have. That is why U.S.-proposed restrictions in the Farm Bill are significant. We need to struggle to hold on to what we have.
In 1982, the United States first imposed restrictions on a quota basis. We have faced a long history of quota restrictions. Those restrictions have changed in character but not in substance. In each free trade agreement, we have faced more, not less, restrictions in our access to the U.S. I will not bore you with all the technicalities. Nonetheless, the devil is in the detail, and we struggle to hang on to the small export opportunities we have.
For example, in the 2002 Farm Bill, the sugar program was modified to enable U.S. producers to export refined beet sugar to Canada which, under their special re-export program, they had not been able to do before. In the past, they were restricted to importing raw cane sugar and exporting refined cane sugar under that program. The program was changed, and we were not able to successfully challenge that.
Again, we face more proposed changes which will restrict our ability to export under this Farm Bill. To put a few numbers before you: We have a 10,300-tonne share of the U.S. refined sugar quota. The global quota is a 22,000 tonnes on a historical basis since 2005. The year 2006 was an unusual year in that we exported about 70,000 tonnes. That was as a result of the hurricane damage to cane crops and refineries in the United States. Normally, we would export about 10,000 tonnes of refined beet sugar to the U.S. and a small quantity of refined cane sugar under their global quota. This is very small in relation to the U.S. market, but very important to us.
You will hear more on beet thick juice from Daniel Lafrance with respect to the value of that product to Rogers Sugar.
There are two amendments to the Farm Bill that you have heard about: One that would essentially make it very difficult for us to export refined sugar to the U.S. if there was a particular supply shortage. It was important to food processors in the U.S. to have access to refined sugar in 2005 and 2006 after Hurricane Katrina. Regionally, the U.S. did not have the capacity to refine enough raw sugar. We were not disrupting the market; we were providing a needed product. That potential opportunity will be cut off.
Thick juice is one of the variety of products sold by Rogers Sugar in Western Canada. Trade agreements dictate the rules and the tariff lines. They must not dictate the specific products that the company sells. Therefore, Rogers Sugar is free to determine the mix of products. There are variable demands from customers, both in Canada and the United States, and we do not want to see any particular product opportunity cut off. Mr. Lafrance can speak more to the financial impacts of that.
With this Farm Bill, the U.S. is creating trade restrictions characterized as a modification of their domestic program. However, it is actually contrary to their international obligations. Our exports of sugar beet thick juice will not disrupt their market, yet it is very important to us. We should have an ongoing opportunity to improve our exports of refined sugar, given the static nature of that market.
We would like support from members of the Senate and any other Canadian officials in arguing against these restrictions. We can talk more about the specifics of those interventions in the question period.
The Chair: Thank you.
Daniel Lafrance, Vice-President and Chief Financial Officer, Rogers Sugar: Thank you, Madam Chair. There is no doubt that this issue is very important to us. I made up a small presentation which I left with you, and I will speak about a few pages and address some of the points discussed before the previous meeting.
Our market is 1.2 or 1.3 million tonnes. Most of that is in Eastern Canada. We are a national company. We have plants in Eastern and Western Canada. Rogers Sugar has two plants: a cane refinery in Vancouver and a sugar beet plant at Taber. When we look at Western Canada, the business has fallen over the years. There is no doubt about it. Last year, Vancouver produced 100,000 tonnes when its capacity is 250,000 tonnes. The plant operated 28 weeks out of 52 weeks.
We sold 100,000 tonnes of sugar out of Taber. The plant's capacity is about 150,000 tonnes. We do operate two plants at low capacity out west. One of the major reasons was that we have lost some business to high fructose corn syrup. Western Canada was the only location in Canada where the bottling industry was still buying liquid sugar from Rogers Sugar. In Eastern Canada, this business has been lost since the 1980s to the corn industry. There are Casco operating plants in Ontario supplying eastern Canada. It is the same thing in the United States: The bottling industry has moved to high fructose corn syrup since the early 1980s. There is no corn processing plant in Western Canada. Therefore, any high fructose corn syrup would have to come from the American Midwest. In 2006, the price of sugar, which was normally about 10 cents a pound, rose on the market. In the span of three or four months, it went from about 10 cents a pound to about 20 cents a pound, which was unusual. Today, the price of sugar is back to the 10 to 11 cent corridor.
In 2006, the two bottlers we were still supplying in Western Canada changed to high fructose corn syrup. Corn syrup comes from the United States Midwest. We lost about 60,000 to 70,000 tonnes of business to high fructose corn syrup. Therefore, our two plants right now are producing at very low capacity, which is a danger for the survival of these plants in Western Canada.
When we expanded the plant at Taber in 1998, it was to supply the Prairie provinces and the quota we had in the United States. We did have a sugar beet plant in Winnipeg that we shut down in 1997. Before that, we used to supply approximately 40,000 tonnes of beet sugar into the United States. As Ms. Marsden mentioned before, that quota was reduced to 10,000 tonnes. We had no choice but to shut down the Winnipeg factory.
At the same time, in order to supply all the Prairie provinces, we expanded Taber. We invested over $55 million in expansion. As Madam Chair was saying, during harvest we have all these beets that come in, and we have mountains of beets near Taber, Alberta, but they have to be processed 24/7 because they will deteriorate the longer they stay in the pile. The plant operates 24/7 until all the beets have been processed.
One thing we cannot do is process all these beets into refined sugar immediately. It would be expensive to expand the plant for a three and a half or four month campaign, so we have an intermediate process that is called thick juice. As we process an average of 6,000 tonnes of beets a day, about two thirds of that will be processed into sugar right away; one third will be in thick juice and kept in various tanks in our plant, to be processed later during the year when we need the granulated sugar.
Since 1998, we have had this intermediate process called beet thick juice. It is a mixture of beet molasses and granulated sugar in thick juice. We did find opportunity to sell some of the thick juice to a customer in the U.S. starting in 2004. We sold about 20,000 tonnes, as you will see in our statistics. We did raise this volume to about 32,000 to 35,000 tonnes in 2005, and again to 19,000 to 20,000 tonnes in 2006. The reason it decreased in 2006, as Ms. Marsden mentioned, is that the United States had some problems and opened some special quotas. We did process some of that into granulated sugar in order to supply the various quotas available in the United States.
In the meantime, the customer buying the thick juice was being pressured by the United States to stop buying the thick juice because it would be charged for any sugar that would be produced out of this import under its allocation. In the United States, the growers, farmers and processing plants have a marketing allocation. They have so much sugar they can sell within each facility. The buyer we had was being threatened that if it were to continue, it would be charged against its own allocation. Therefore, it would not be able to produce as much within its own plants. The company stopped buying from us in 2007 because they were still in jeopardy, and were not sure if the import would be charged against allocation or not and what the new Farm Bill would contain. Therefore, we lost that business.
It was even more important in 2007 because we were blessed with a large crop in Taber. Normally speaking, we would be very happy with a large crop, but that year we were not very happy, the reason being that we needed about 100,000 tonnes of sugar to supply the Prairie market and the quota we had in the United States. We produced over 125,000 tonnes of sugar, in a market that is not growing, with no other export opportunities, as we mentioned before. What did we do? We did find some Mexican export opportunities. In 2007, with our fiscal year ending in September, we shipped 12,000 tonnes of sugar into Mexico. That was put in one-tonne tote bags and shipped by box railcar to Mexico.
Mexico is a large producer of sugar, but it also has subsidy programs and a high price of sugar. The problem is that many industries — candy manufacturers and high sugar-containing product manufacturers — have moved some of their production to Mexico. They need quality sugar. Mexican sugar today is of two qualities: One is a higher colour and a bigger grain of sugar, that is not consumed in Canada or the United States. The larger manufacturers would prefer a better quality sugar. About 20 per cent of the production is good quality sugar, so they can supply some of that. There was a niche market available there, with very low margin for us, but we had quantities of sugar to sell and we did sell 12,000 tonnes.
We still have a little business in 2008, but that will disappear. Under the NAFTA agreement negotiated in the early 1990s, Mexico and the United States will have free borders starting on January 1, 2008. All sugar from the United States will be available to be sold in the Mexican market, and the same with Mexico into the United States. The good quality sugar that Mexico needs will come from the southern States because the freight is cheaper. In other words, there is not an opportunity for us past next year. Basically, this opportunity is gone. We did look at that.
We have stored this year in a warehouse in the neighbourhood of Taber, Lethbridge and Calgary about 20,000 tonnes of sugar. This year we reduced the acreage by about 10 per cent. Again, we were blessed with a great crop, more than we anticipated. We anticipated probably 90,000 tonnes. We now estimate 115,000 tonnes of sugar when all beets are processed by the end of January. That is good news to the growers; not so good for us in one way, because we will have to store even more sugar. We will probably have about 35,000 tonnes of sugar stored by the end of the season.
I met with the growers after we had the first results of the crop and I told them that next year we will have to reduce the acreage even more. We are talking a reduction of about 25 per cent in the acreage. We are negotiating a new contract; our contract just ended. We have no other home for this sugar than warehousing it at the fairly substantial cost of $2 million to $2.5 million that we will have to carry forward. We will have to negotiate that with the growers.
We are having a problem also with the beet thick juice, but not just that. The bilateral agreements — as an example, the one signed with Costa Rica in 2002, which started in 2003 — allowed Costa Rica to come into Western Canada to sell white sugar. This is a problem for us. We have a limited market. When we have these bilateral agreements that might give us a little access to these countries, we are just not competitive. They are the producing countries. They produce raw sugar right there. They can transform it into white sugar. They have cheaper labour and environmental costs than we do in Canada. We would have to bring in sugar from Costa Rica, transform it here into refined sugar and ship it back. How can we be competitive? We cannot.
The government is negotiating another bilateral agreement with the Andean countries, such as Peru and Columbia, which we are worried about. Colombia is one of the largest white sugar manufacturers today. The human rights conditions in Colombia are very poor. People are not paid well, but they are producing very cheap, white sugar. If they have free entry or a quota of some sort into Canada with no duty, they will attack our retail business. This is where the highest margin is. When you look at this business in Western Canada of 220,000 tonnes, we have 60 to 70,000 tonnes in retail. That is very important to us, being one-third of our business. They will attack this first.
We will have to make a decision very soon if we keep losing this business. We are a beet producing country, but we also have a higher cost of living than many producing countries around the world, in nations such as India, Brazil and Colombia. Our cost structure is higher. There is no doubt about it. It is almost impossible for us to compete around the world.
Last year, we sold 3,600 tonnes of sugar to Israel at low margin, but that was an exception. All sugar sold around the world is based on the white sugar market and that market is a premium over raw sugar. Usually, this is a market that is dumped by manufacturing, origin countries. Due to a 3-month shortage last year, it peaked to $140 a tonne. We took the opportunity because, at that level, we could make a little money. We sold 3,600 tonnes. However, the price came back to around $60, and will stay at the $60 to $70 range. There is no opportunity for us there.
I know you will have some questions for us. Again, this situation is important for us. Exports to the U.S. represents 20,000 to 25,000 tonnes of potential business. We could probably do, as we say, 35,000 tonnes in year. In a 10-million- tonne market like the United States, that is not very large, but it will be very important for our industry in Southern Alberta.
The Chair: Thank you.
Bruce Webster, General Manager, Alberta Sugar Beet Growers: Thank you for once again agreeing to listen to us on the topic of the Southern Alberta sugar beet industry. It is a very important industry to farmers in our area. There are about 250 sugar beet farmers, and the income from sugar beet usually represents $30 to $40 million in sales value from about 35,000 acres of production, all on irrigated land. Irrigation in Southern Alberta only makes sense if we produce crops that cannot be grown elsewhere. We can grow durum wheat and canola and all those other crops on irrigation, but sugar beets can be grown on dry land without the input costs of irrigation. The tremendous public investment in irrigation only makes sense if we can produce special crops. That is why we keep on coming back to speak to our case on why keeping our access open to the United States is very important to farm families in Southern Alberta. It is about justifying the making of the land and equipment payments, and keeping the communities growing.
It is important to keep this diversification in our base because, with the recent change in value of the Canadian dollar versus the U.S. dollar, other special crops whose sales are predominantly in the United States will not be expanding. If sugar beet production is cut back or, hopefully not, even eliminated, we will not switch to potatoes or dried beans or other crops sold in the U.S. because those market opportunities have evaporated quickly in the last few months. That is due to having a strong Canadian economy. We have behaved in respect to our public finances, and there are many reasons why that trend will keep on going in our favour for a long time.
We do have a strong local market for our sugar but the Taber plant was built to handle the local market and properly-negotiated and -approved trade treaties. The one with the United States is the one up for debate. We appreciate the help of this committee in sending letters last year to the United States Department of Agriculture and the Department of Homeland Security. As you will recall, the result of that was the USDA and the U.S. government came back, saying, ``Yes, the treaties are being properly interpreted and applied. There is no need to bring in restrictions against thick juice. It was never meant to be included under our refined sugar quota, and it was a proper and fair trade.''
It is important that Canada key in on this. If you look at the Canadian sugar beet industry and the American sugar beet industry, there are no two agricultural sugar industries that are more similar. We have similar labour, environmental and technical standards, the same farming practices, and we cooperate on doing research. One of the criticisms of entering into liberalized trade is that some people will have an advantage. We have operated in an open market with almost no tariff protection for generations. Alberta farmers have faced competition through the generations and survived those labour costs and all these other things.
We think that having access to the U.S. is not just helping our farms, it also helps the U.S. economy. They only order up the thick juice or the refined sugar if it will be to their benefit as well. We very much appreciated the U.S. trade advocacy program. We have had some trips to the U.S. ourselves. We have made some of those trips under that program, and tried to make contacts and explain our industry to both American sugar farmers and sugar users. We do that, and will continue to do it. It is very important that we get the help of this Senate committee, the Government of Canada and the Province of Alberta in continuing to send the message.
One notable success I would like to mention: What the Global Sugar Alliance put in its comments on the U.S. Farm Bill about our little sugar beet industry. They put in a separate paragraph on the harmful effects that the U.S. Farm Bill would have on thick juice shipments. It is not that anyone else is sending that there. However, even the king-sized sugar industries in Australia, Thailand and Brazil have agreed to insertion of that comment about that aspect of the Farm Bill. They see it as ridiculous in targeting small industries like ours that are filling U.S. customer needs, and that we do not have the capacity to affect prices or marketing trends in the U.S. We are providing a valuable economic service for U.S. customers and we want to see that continue.
We want to say again that this initiative will be crucial in the upcoming year. We have been selling five to 10 per cent of our production as refined sugar to the U.S., and we have had a couple of big crops. Having that access to the U.S. market where we might sell the equivalent of 20,000 tonnes of sugar means that thick juice is important to us.
Our farmers want to sell sugar beet in 2008. Luckily, grain and oil seeds prices are such that we can make a switch for one year. However, if people stay out of production for too long, they may not come back. That would not be good for Rogers Sugar because, as Mr. Lafrance said, they are facing capacity difficulties and more issues may emerge if they cannot find growers to bring that capacity back to where it was.
It is important for us to continue concentrating on our access to the U.S. The U.S. government has said we have been doing everything perfectly according to the rules as they negotiated them. Yesterday, Senator Lugar was discussing the Farm Bill and speaking to other senators and saying ``You have to look at the possible trade impacts of some of these aspects in the Farm Bill,'' and sugar is one of them. We very much want to cooperate with the Government of Canada to advance this situation. We are not sitting on the sidelines, either. Mr. Lafrance talked about the Mexican market that became available last year but will be very hard to maintain. We have been looking at other things. Rogers Sugar has some ethanol studies going on. The Alberta Department of Industry and ourselves cooperated closely for two years to try to get a U.S. biotechnology company to establish in southern Alberta to produce non-food products out of sugar beet. That company is in the process of spending several million dollars to establish a plant in Taber, but will not develop its market in 12 or 24 months, either. That is why we need the continuation of the thick juice market to use our capacity. Farmers can make money, and it is to be hoped that in five or 10 years, if some of these other possibilities work out, we will not have to worry. For now, however, we are worried and that is why we are before you today.
The Chair: All of you know that you are not standing alone in this situation. Not only are we as a Senate group very supportive and want to be kept in touch but also on Parliament Hill we have a sugar group that is interested. As you know, over the last year and a bit, we have been studying rural poverty, as a committee, for the first time ever. We have travelled in every province of the country and had public hearings. We also will be finishing off that study in the early spring by going to the three territories. Then we will put out what we hope will be a very good report. It adds to our concern wherever in the country we hear of difficulties. This one has been one of growing concern for some time, and we certainly will try and help in any way we can.
Senator Peterson: On a point of information, for refined sugar you said there were four plants in Canada. Where is the raw material sourced from?
Mr. Lafrance: Most of the raw material right now is from Brazil and Central America.
Senator Peterson: I presume your clients in the United States are not signing orders right now.
Mr. Lafrance: There are no orders now with our one customer in the United States.
Senator Peterson: Is that because of the uncertainty of being able to do anything?
Mr. Lafrance: That is right.
Senator Peterson: Has that impacted the 2008 growing season already?
Mr. Lafrance: It has with this customer, and it would be impossible to develop any other business. Because of the proposed Farm Bill, they are shying away. That is why we are looking at next year's crop to be even lower.
Senator Peterson: By cutting it by a third, roughly, or you said 25 per cent, does that put you in a balance, or will you still be warehousing product?
Mr. Lafrance: Based on our volume in Canada and what we think we will sell under the 10,000 quota, which we fill every year, we need in the neighbourhood of 100,000 tonnes of sugar. If we have 35,000 tonnes, we will probably ask for 70,000 to 75,000 tonnes for other opportunities and have 10,000 tonnes over and above what our normal needs would be. For sure, with 35,000 tonnes of storage sugar right now, we need to reduce our acreage next year.
Senator Peterson: I presume you contract with farmers for the product. Is there any danger that they will, as Mr. Webster said earlier, start drifting away, as they must do something?
Mr. Lafrance: You are right. That is a danger. Mr. Webster mentioned it. At the end of the day, if we lose too many growers, it puts the plant in jeopardy because today, as it is, the plant operates about four or four and half months a year to process all the beets. We have the warehousing side, the bagging side that operates throughout the year, but the majority of the plant operates four and half months a year.
By the end of December, we will be done. To process what we will need to process next year, this plant will operate from October 1 to probably the end of December. Let us not forget that during that time period, over and above the permanent employees that we have, we employ about 200 to 250 part-time employees for that campaign. Thus the people who were working four and half months this year will next year be working two and half to three months. That will happen in southern Alberta. It is getting more and more difficult because, as you shorten the period, there are fewer people available to work two and half months a year. It will be a problem and a concern. To stay at that level for too long, as Mr. Webster mentioned, if we have two plants operating at 40 and 50 per cent, we will have to make a business decision.
Senator Peterson: How long can you store the thick juice, or do you have to refine it into sugar?
Mr. Lafrance: We cannot store it for too long. Eight, nine or 10 months would be the maximum period of time before the juice starts to crystallize at the bottom of the tank and we lose a lot of sugar because we cannot retrieve it. It has to be processed within the same year. If you process the thick juice in the fall, by the next summer it should be processed into granulated sugar.
Senator Peterson: What is the shelf life of granulated sugar?
Mr. Lafrance: It is two, three or four years if it is well stored, with good humidity.
Senator Peterson: Do we know what the timeline is on the bill that the U.S. Congress are now studying? Do we know when they will make a decision?
Mr. Webster: The reports out of Congress, from the different journalists and so on, vary. Debate on the Farm Bill might conclude by the end of December, and then the conference will be held, and there might be a Farm Bill early in the New Year but they may not get through their amendments. It could be dragged out or extended. There is still the threat of a presidential veto. We do not have a timeline because the passage of a Farm Bill is a fluid item in American politics. Most commentators say that there will be one; they are just not sure what it will be or when it will come about. Then we get into the request for proposal process after that if there are changes, and we go through the same process we went through last year, so there will be another year or more to bring in the regulations, to implement what is in the new Farm Bill.
Senator Peterson: I presume the wild card here in this go-round is the Mexican arrangement, which starts January 1 of next year.
Mr. Webster: Yes.
Mr. Lafrance: They knew what they were getting into. In the first two years, there will be high access to high- fructose corn syrup to Mexico with the big beverage industry there. As I said before, the United States produces good quality sugar, just as we do, and Mexico is not there yet. Maybe 20 per cent of its production is. There is need for good quality sugar. In the first few years, Mexico will have good access to the United States. However, you can see now that there is investment from the American sugar refineries into Mexico. There was an announcement last week that one was buying a plant in Mexico. There has been a cooperative marketing arrangement between one other producer and six Mexican plants. They are getting aligned right now.
Senator Peterson: We continue our support similar to the last time in trying to deal with the American government in this legislation.
Ms. Marsden: As Mr. Webster said, the process is fluid and we are unsure of the timing, but even if the bill makes it through the Senate, there is then the conference process. We encourage your support through that process to raise awareness through key senators and other congressmen that we really are not a factor in the U.S. market. We are small, and provide a small benefit to processors at times of need, but Mexico has certainly negotiated an agreement and the U.S. producers are concerned about Mexican sugar coming into the market. Canada is on the sidelines of that.
We should not be tarred with the same brush in connection with this worry. However, though logic does not always prevail when you are talking to Americans, we must try. We cannot roll over. In the past, we have not won all of the skirmishes and wars but we have fought every one of them, and staved off a lot of restrictions. That is what we are looking for.
Senator Mahovlich: Thank you, Madam Chair, and I thank the witnesses for appearing. The Canadian dollar has had an effect. Do you find that the cost is too much for companies? Do they look at the dollar at all?
Mr. Lafrance: It did have an effect, especially because we do have the 10,000 quota, we do sell in the United States and we sell that in U.S. dollars. Therefore we are getting less revenue. This is a negative on Taber. We also sell in U.S. dollars some by-products such as beet pulp and beet molasses. Again, this has a negative impact on Taber.
Today, the way the market is being sold in Canada is that the world price of sugar is based in U.S. dollars. All of our customers buy under the world price of sugar. We have a translation from U.S. dollars to Canadian dollars. For our cane plant, it is a pass through: Whatever we pay, we charge exactly the same thing to our customers. In regards to Taber, we pay our growers in Canadian dollars. On the other hand, the selling formula is based on world number 11, which is in U.S. dollars. Today, we are getting less money. That is more negative than what we sold locally from Taber. It has a net impact of a couple of million dollars for Rogers Sugar when we look at a dollar at par today. That is what we are talking about.
Senator Mahovlich: Would the American beet farmers be looking at other grain crops now because there is a demand for corn, for example?
Mr. Webster: In 2007, the size of the American beet crop was negatively affected by demand for corn and soybean and things like that. Therefore, yes, the U.S. sugar beet grower co-ops and their association both confirmed in public statements last year that they were losing acreage because of demands for energy-use crops.
Mr. Lafrance: Sugar beet is still a subsidized crop in the United States. The growers there are guaranteed 18 cents per pound for any crop. At one point two years ago, there was too much beet sugar grown and they had to plough over some of their crop. There was a threat of that last year as well. I do not think they proceeded with that, since there was very little that they were talking about ploughing over.
They have allocation and, when you look at the 10-million-ton U.S. market, there are 8.7 million tonnes produced in the U.S. Of that 8.7 million tonnes, almost half is beet and almost half is cane sugar. It is an important industry for the northern states — where the beets are grown — and it is a very lucrative industry. The sugar beet growers in Canada, right across the border, are getting much less money than the U.S. farmers for the same crop that is being grown on irrigated land. It is a very lucrative crop for the U.S. farmers. Even though a bushel of corn and other crops did increase in value last year, there are still enough growers to grow whatever they need.
Senator Callbeck: I am wondering about all the sugar substitutes on the market now. Are those making a dent in your sales?
Mr. Lafrance: They are is making a small dent, especially on the retail side. For cooking purposes, the sugar substitute right now does not have the right formula. If you bake with it, your cake would not rise properly; it needs volume, and sugar is important for that. Seven years ago, there was very little space for sugar substitutes on retail shelves. Today, however, you see more retail shelves with these types of products.
It makes a small dent. It is not major at the moment, but every year we see the consumption of our retail products reduced. There is no doubt that there is an impact. Sugar consumption by Canadians went from 36 kilograms six or seven years ago to 33. Sugar substitute is a part of that.
Senator Callbeck: Therefore It has gone down 10 per cent. Do you have a figure for how much sugar substitutes have gone up?
Ms. Marsden: We do not have accurate numbers. Part of the decrease is also due to high-fructose corn syrup.
Mr. Lafrance: There are weight concerns, also.
Ms. Marsden: There is no direct correlation, and many consumers will use sugar substitutes and not decrease overall sweetener consumption.
Senator Callbeck: You say you can store beet juice for eight or nine months. Do you sell beet juice to any other country besides the United States?
Mr. Lafrance: No, we do not. It is a liquid product,and very expensive to freight. You are freighting a lot of water at the end of day and that would be expensive. You must sell it nearby.
Senator Callbeck: What about the costs of producing a ton of sugar? I know you cannot predict all of your experiences in the future. However, looking back over the past five years, has it been more expensive to produce a ton of sugar from sugar beets than from sugar cane?
Mr. Lafrance: It is more expensive. When you receive raw sugar in Canada, it is 98 to 99 per cent sugar. You only have to remove the 1 or 1.5 per cent of non-sugar that is in raw sugar. With sugar beets, you are starting with something that contains about 14 per cent of recoverable sugar. You need to remove that sugar from the beet. In doing so, you are left with a pulp. Also, the costs are much higher in terms of processing sugar from sugar beets than from sugar cane.
On the other hand, we do supply the local community with that sugar. Alberta is right in the middle of Canada. It would not be easy to have to freight sugar from a western port or Eastern Canada right to the Prairie provinces. There is a freight advantage in being located right in southern Alberta, as we are.
However, the sugar process costs have increased. Energy is one example. We use a lot of natural gas in our business, and energy costs have increased tremendously over the last seven years. That cost that has been reducing our profitability. It is hard because we have limited volume that we can sell in Canada. We have good competition in Canada from imports, from Redpath and from another party that have tried to produce sugar from a small refinery in Saint John. Therefore, increasing prices has, at times, not been an option either.
Senator Callbeck: Mr. Webster, you mentioned another plant being built in Taber. Did I understand you to say that it uses sugar beets but for non-food products?
Mr. Webster: Yes, the company is an American company. It is listed on the U.S. exchange in New York and in Frankfurt. It is called Flexible Solutions International. It is owned by Canadians but it is a U.S. company. They make energy and water conservation products, and are looking to sign contracts in Europe to replace a current ingredient in laundry deterrent. They have a non-toxic, biodegradable product to substitute laundry detergent, and hopefully the regulations have changed. Right now, they make aspartic acid from a carbon feedstock that is cracked out of benzene in China. That is proving to be too expensive. Benzene is a carbon molecule, and they are looking to replace that with another. They determined that sugar was the best alternative. They searched the world to try to find the cheapest sugar.
Rogers Sugar has been very good over the decades at keeping us as an inexpensive source of sugar. This American- based company determined that Canada was the place in which to set up business. The Alberta government and our organization lobbied this company for two years to consider us. I had to be interviewed by their banker before they got their loan over the summer. They are investing several million dollars, and they have bought land and are building in Taber. They will be setting up a brewery and distillery in Taber to manufacture aspartic acid through a fermentation process. That will be further processed in their Illinois plant. However, they will also be making final water and energy conservation products in Taber, and hope to transfer that production from Calgary to Taber early next year.
That is a higher value-added product that avoids much of the impact of foreign exchange rates. It is an alternative use involving high risk venture capital, which scares some people. However, as we get squeezed out of our own market with trade agreements and are restricted from entering the U.S., it is something we must look at.
There is no government subsidy money. These people are putting up shareholders money and their bank has reviewed the products and is putting up millions. If it works, it will be wonderful, but if it does not, there is no loss to the taxpayer.
They will take thick juice and turn it into something else. No one will have to develop new skills, and we will keep doing what we do. It is to be hoped that, over time, it will make more money for us. However, it will take a few years to establish and that is the why the U.S. thick juice markets are important now.
Mr. Lafrance: The volume in 2008 or 2009 will be about 1,500 tonnes, and growing to 8,000 tonnes per year if everything is successful. It is important for us and would be a key customer for us at that higher level. It is far from the 25,000 to 30,000 tonnes we were doing in the United States but it will help and is a welcome addition to southern Alberta.
Senator Callbeck: Are there other companies that are looking at using the sugar beet for different products?
Mr. Lafrance: We are undertaking a study currently to see if we can produce ethanol from our sugar beet plant in southern Alberta. Sugar beets would be the most expensive input in terms of producing ethanol. We will not have the results to determine viability for six to nine months. A few beet plants in Europe are being used to produce ethanol. We visited one to see what they were doing and if there was something special being done to reduce costs. We would also use another feed stock in addition to sugar beets in order to operate the plant 12 months a year.
Senator Callbeck: In Prince Edward Island, farmers have a proposal before the government to grow sugar beets for ethanol.
Mr. Lafrance: We were surprised when we heard about that. We contacted the people but got very little information. They may have more knowledge than we do about how they can make money growing sugar beets and processing it into ethanol. Without subsidies, I think it would be difficult.
Mr. Webster: One of my directors and I were in Truro in October to meet with proponents of an ethanol plant. They wanted to learn about sugar beet farming. We passed on that information, but we do not know what process they would use.
Flexible Solutions International, our organization and another economic development organization called SouthGrow have put together preliminary information packages for another biotechnology company, but that is in the early stages. We continue to search for alternate uses. We are not intending to sit around and say we have done what we have done for 83 years and it must carry on in that way. We are trying to be innovative. We are not dependant on a government program and hoping we can collect the cheques forever.
Senator Mahovlich: Did we ever have a sugar refinery in Toronto?
Mr. Lafrance: There is one there, but it is not ours. It is our major competitor, Redpath Sugar, which is now owned by American Sugar Refining, the largest cane producer and refiner in the United States since March 2007. They bought the refinery from Tate & Lyle Canada. They also recently bought a small manufacturer in Mexico, so they are North American.
Senator Mahovlich: There used to be a St. Lawrence Starch Company that produced corn syrup.
Mr. Lafrance: There was St. Lawrence Sugar, which we own, and Ogilvie Starch that I remember in Montreal. I am not familiar with St. Lawrence Starch.
Senator Peterson: With regard to ethanol, more of the states are mandating a move to ethanol and the price of corn is rising dramatically. You said the sugar producers are being subsidized. Could corn trump sugar and if farmers move from sugar to growing corn, would that have any impact? Or would they simply need to import more?
Mr. Lafrance: It is hard to speak for the United States growers, but corn is also a good crop for them, especially with the rise in the price of a bushel of corn in the last year. Corn is becoming a better crop for them, and it is one of the largest crops grown in the U.S.
However, replacing sugar with corn because it is a better crop is harder to imagine. Farmers also need a rotation, and sugar beets are a resistant crop. Growers have a lot of investment in equipment and land, et cetera. The equipment needed to grow sugar beets is expensive. They also have good co-ops for marketing.
The United States had to put market allocation programs in place because, year to year, sugar beet production was always increasing. They were investing in sugar refineries and the output was increasing while sugar cane was no longer thriving in the country. Therefore, the U.S. government established allocations between the beet growers and the cane growers to help the cane industry.
I would be surprised if the sugar beet industry in Canada is impacted negatively because of the high demand of ethanol and corn in the United States.
The Chair: The situation that we are facing with the United States has been ongoing for some time. We all understand that it is the major piece in your future development. We will do our best to support you.
The committee adjourned.