[Recorded by Electronic Apparatus]
Wednesday, October 25, 1995
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[English]
The Chairman: Ladies and gentlemen, I'm going to call the meeting to order and welcome our witnesses.
From the Department of Agriculture and Agri-Food, we have Tom Richardson, a director general with the department. This afternoon he is going to give us some ideas and clarifications and answer questions with regard to farm inputs.
So without further ado, Mr. Richardson, I would ask if you would be kind enough to introduce the colleagues you have with you, and if you have a brief presentation, we'll listen to that. We will then open to questions.
Mr. Tom Richardson (Director General, Farm Income Policy and Programs, Department of Agriculture and Agri-Food): Thank you, Mr. Chairman. With me is Alan Asselstine, who tracks the key input industries that we're going to be talking about this afternoon, namely fertilizers, chemical prices and fuels; and Ivo Krupka, who works for the pest management regulatory agency, and he's here in case members want to ask questions about that agency and how it relates to chemicals.
In advance, we had sent to you a brief package. There are twelve overheads in that package. I'm going to follow through them in sequence and try to do a brief presentation for you.
I should say that in response to the committee's request to the minister, he is currently looking at an update to the 1987 report, and as you know, that report is broader than just fertilizers, chemicals and fuels; it has other chapters in it. I understand that it will be coming to the committee fairly soon, and we'll try to update that fairly comprehensive report from 1987.
We will be sending you, in addition to these twelve slides, a lot of other information we have on pricing, hopefully near the end of the week or early next week.
I could say, Mr. Chairman, that as you go on through your deliberations on this topic, we would be available for further follow-up if there are things where we could be helpful to the committee, because certainly in terms of the bottom line for producers, prices are very important on the input side.
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Before I take you through the slides, I'll attempt to give you in very few words our bottom line. Of course, if one tries to give a brief bottom line, one runs the risk of overgeneralizing, and then somebody says, you've got it wrong. So I'll try, but don't necessarily hold me to it precisely.
I believe our bottom line on fuels, chemicals, and fertilizer prices is we feel that Canadian producers generally are getting comparable prices relative to their competitors. What I mean by that is, when we look at those inputs and we look at what Canadian farmers are paying across the country, and we look at U.S. producers and other countries, we feel that the prices they are paying are comparable when you take into account key factors like transportation, taxes and market conditions.
As we go through the graphs, you'll see that in fertilizers the main determinant of prices tends to be transportation. In the case of fuels, the main variable that affects prices is taxes.
In the case of chemicals, it's much more complicated because of the regulatory regimes in different countries, because every chemical is in a very specialized market. It's much more driven by what alternative producers have, both in terms of chemicals and alternative methods of production. So it's much more complicated.
But nonetheless, when we look at the prices and the way the prices vary, we don't see any sort of systemic discrimination or difference in terms of pricing that producers pay.
That doesn't mean there may not be a question of competition. I understand that Jack Wilkinson talked a little bit about that when he was here. It may be, for example, that all producers in North America are paying too much for fertilizer, but that's not something we're mandated to look at. So we don't look at whether there is competition. That's the competition bureau's responsibility. But in terms of looking at prices, we feel that the situation is reasonably comparable.
I'd like to go as quickly as I can through the overheads that were passed out to you.
The first one is simply a pie chart that shows the distribution of operating expenses for all farms in Canada. Farmers are spending about $20 billion a year on input. It's a big number; therefore it matters when it goes up or down in terms of whether people are making money.
We're going to focus on the three pieces of that pie chart that are on the upper right: fertilizer, pesticides, and energy. Together they add up to about $4 billion, or around one-quarter of total input costs.
If you go to the second pie chart, it shows the situation for a Saskatchewan grain and oilseeds farm. Obviously crop production uses more of all of fertilizer, pesticides, and energy, so the percentage for that Saskatchewan grain farm is, in fact, 30% relative to the 25% for all farms. So it is a big number.
We have other information that shows what the percentages are for other types of farms.
If you go to the third graph, which is a composite fertilizer price index, this table is a weighted average of the three fertilizers that farm has used, namely: nitrogen, phosphate, and potash. Obviously the two big ones are nitrogen and phosphate, and so they tend to drive this price index.
We have split that into eastern Canada and western Canada. You see that they track fairly well, except that in the period of the 1980s the price fell further in western Canada than it did in eastern Canada. There are transportation explanations for that.
I would split the graph into three parts. In the period from 1974 to 1980, you can see that the price goes up very rapidly. I guess we would characterize that period in time as being a seller's market. Those of you who were around then know it was a period of rising expectations and high inflation, land prices were going up very rapidly, and people were willing to pay prices for some inputs that probably in the early 1980s some of them unfortunately lived to regret as we saw the financial conditions of the early 1980s. But it was definitely a seller's market and there were some capacity constraints in North America, so you do see a very rapid price increase.
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From 1980 right through to 1992-93, in fact the price comes down, and I think that period could be characterized as a buyer's market. A number of things were going on. Obviously grain prices were in very bad shape in that period. There was rationalization in the fertilizer industry, a reduction in capacity as demand flattened, and in some cases declined, in North America. So over that period, that 12- or 13-year period, we see prices coming down.
In real terms, of course, they came down even further, because this graph is in nominal terms. If you took inflation into account, prices probably fell, or did fall in real terms.
Then you see prices moving up again in 1994-95 with the very strong grain and oilseeds prices in the last two or three years. We see a repeat perhaps of the mid-1970s, and once again it's a bit of a seller's market.
Over the long term, this is the pattern we've seen, and in terms of the price increases we see right now, they seem to be in a sense following the commodity prices up. With capacity constraints, there is a situation where it definitely is a seller's market.
In regard to what's happening between Canada and the United States, if you go to the next one it shows Manitoba versus North Dakota-Minnesota. We do a number of price surveys in Ontario and Manitoba for the purpose of trying to see what our producers are paying relative to the neighbours to the south - a consultant named Joe Thomsen collects this data under contract for us, and this is his data. You can see that for the phosphate that is being compared here, the North Dakota-Minnesota price is somewhat below the Manitoba price.
Just today we got in the latest Statistics Canada information, which is comparable to this data. In fact, the Manitoba price is falling from just over $400 a tonne down to $370. So it's coming down to what the Minnesota price is right now. Of course, that Minnesota price may also be falling.
Generally speaking, because fertilizers are based on prices in the Gulf of Mexico, there's a transportation factor, and to some extent that can explain some differences between states that are further south than comparable Canadian provinces.
So those prices are fairly close. They're not exactly the same, but they are in line. They're not outrageously different.
The next overhead shows a nitrogen comparison between southern Ontario and Michigan. This data is collected by Ridgetown College in southern Ontario. We have a contract with them that costs us about $60,000. Ridgetown does two things; they look at spot prices in Michigan with southern Ontario and look at spot prices in different parts of southern Ontario. They make that information available to producers in terms of them making their buying decisions. This data comes from Ridgetown on contract from Agriculture Canada.
You can see on this nitrogen line that the numbers bounce around, but basically they're very similar and there's really not a lot to choose. At some times Michigan is a little higher, and sometimes Ontario is a little higher. So basically we don't feel that there really is a significant difference in terms of the prices that producers are paying for those two key fertilizers on either side of the border.
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We do have a lot more data on fertilizer, and we'll be sending that to you later. There are other situations where sometimes there may be a little more difference, or sometimes one is higher and then the other is lower.
I'd like to look now at chemicals, which is the next overhead. There is a bar graph to give you an idea of the different kinds of chemicals that farmers buy and what their relative importance is.
Total chemical sales are running around $1 billion. That includes non-farm as well. Of that $1 billion, I think total farm is around $800 million. But basically, chemical sales in Canada are around $1 billion.
Herbicides are obviously the most important at $800 million. So about 80% of all chemicals are those field chemicals. I guess everybody knows what Roundup is, and that's one of the more important ones.
Both insecticides and fungicides each are under $100 million, but fairly significant; they can be very important in some specialized production. In other cases, of course, they're more generally available.
But that's where you get to the $1 billion. Specialty products are things like growth hormones and growth retardants, things like that. As I said earlier, chemical markets are a lot more complicated than fertilizer markets.
The next graph demonstrates pesticide prices. You saw how the fertilizer prices tend to bounce around depending on what's going on in the commodity markets they're serving. In the case of pesticide prices, you see that over that period from 1989 to 1995 there's really not any bouncing around. The price index of pesticides sold in western Canada just keeps going up gradually. Overall, it's not bouncing around the way fertilizers do.
What does bounce around is the price of the individual chemicals. The next one is from an Australian study, and the way this bar graph is put together, if you look at the Australia part of it on the far left, they've normalized Australia at an index of 100 for these four chemicals. Then what they've done is, where there was a price available or where the chemical is used, they've showed you the comparable price in those other countries.
If you take a chemical like glyphosate, which is basically Roundup, you can see that in Germany the price is about 2.5 times the Australian price, the same in the U.K., and a little bit lower in Italy. The U.S. price is about the same, a little bit higher than Australia.
Then you have some of the other chemicals where in Germany the price of gramoxone is right through the roof relative to some of the other countries. We certainly can't tell you why you get that kind of pricing. What we see is that there are regulatory environments that are different in every country.
Depending on what's being grown and what alternatives the producer has, it may be that the farmer has more choices in one country than another. So lo and behold, you're going to see pricing by the industry according to what the situation is.
What we see in the chemical industry is that really the pricing tends to be very specific to the local market. Sometimes that can be quite complicated, and a lot of factors come into play.
If you look at the next one, this is again from the work that Ridgetown College does on contract for us. For a number of key chemicals that are used in southern Ontario, it shows you whether the price is higher in Ontario or lower in Michigan.
For these herbicides, which are the main chemicals for field crops - and you recall that's about 80% of what farmers use - you can see that for most of the chemicals listed here, the Ontario price is lower than the Michigan price. Of course the one that's most obvious here is Roundup, which is a very important chemical. The price in Ontario on October 12 was 47% below the Michigan price.
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So generally for herbicides, what we see from this kind of survey is that Ontario producers are doing okay and there's not a systematic problem. In fact if I were a Michigan producer, I'd probably want to know what's going on here or I'd be trying to buy my chemicals in Ontario if I could.
The next one again compares Manitoba with North Dakota and Minnesota, and again this is by Joe Thomsen. This covers all the chemicals, both the herbicides and the insecticides. We've ordered them so you can see that the ones on the top of the graph are more expensive in Manitoba and then it goes down to the less expensive.
What this shows is, except for the first one, if you look at malathion and the next three or four chemicals, those are all insecticides, and they tend to be higher in Canada. Again, in the west you can see that things like Roundup, which is at the very bottom, are a lot cheaper in Manitoba than they are in North Dakota and Minnesota.
This isn't a weighted average. These are just the prices of these chemicals. It is correct that when you look at the big chemicals on this list, overall Manitoba producers would be paying less than producers in North Dakota. We feel producers are doing okay there in terms of the price comparison.
The last one is on fuels. As I said to start, the basic conclusion we get is that what drives differences in gas or diesel prices is the tax situation, and the purpose of this table is to demonstrate that to you.
The first line of the table shows crude costs. Basically it's saying that the cost of crude in Canada and the United States is about the same. The fourth line is the retail margin in refining and marketing. Here again, the U.S. and Canadian costs appear to be about the same. So what's different are the taxes - the federal and provincial taxes and the U.S. federal and U.S. state taxes. Depending on where you are and what rebates you get, you should see a difference in price.
In the case of this table, of the 13.9¢ of federal tax, 10¢ is the excise tax. There is no rebate on that for farmers. But the remaining 3.9¢, which is the GST, farmers would get rebated. So a farmer in Canada would be paying the federal excise tax, depending on which province they're in. We'll send that table to you next week.
There are different rebates in different provinces. In some provinces you might have all of that 14.7¢ rebated; in others you might pay a portion of it. In the U.S., I think it's correct, Alan, that most states rebate at least a portion of the tax, and in some cases all of it.
We don't have a state-province comparison, but I'm sure producers who live close to the border would have some sense of whether the people across the line are paying more or less than they're paying. The message here is it is really based on taxes. That's the situation.
Just to wrap up, generally we think producers are getting comparable pricing. That doesn't mean there aren't situations where there may be price differences that are not explainable, but generally we're reasonably comfortable that things are okay. In some cases Canadian producers are paying less than their American competitors are. We're not particularly concerned in general that there is a significant problem.
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I'll stop there, Mr. Chairman. As I said, we will be sending more material next week. As you continue, if there is specific data we can bring to bear, we'll be happy to work with your staff to do that.
Thank you.
The Chairman: Thank you very much, Mr. Richardson. We certainly appreciate your presentation. It was brief and yet reasonably clear on what the department sees in general right now. We do appreciate that.
Our first questioner is Mr. Landry.
[Translation]
Mr. Landry (Lotbinière): Mr. Richardson, I am pleased to meet you.
Looking at the table on page 8 entitled Pesticides Price Movement Western Canada, I see that prices have risen sharply between 1989 and 1995. Is this due to tax increases or pesticide production inputs? How have producers in Western Canada responded?
[English]
Mr. Richardson: It's definitely not taxes in how we look at it. It may be partly the introduction of new chemicals or chemicals for which the quality has changed. That is to say, it's an index of what farmers are buying; it's not necessarily that the basket of chemicals may have changed over that period of time. It may partly be that the quality of what they have has changed.
The second question was on how they have responded. My sense is there are two parts to that. First, I don't have the numbers with me, but in that period of time the market price of crops in western Canada went up at least 25% and probably more than that. I don't carry the 1989 wheat price in my head, but seeing as how 1988-89 was the bottom of the grain trade war, I would think that wheat prices have probably gone up at least 50% and maybe more in that period of time. So partly it is that revenues have gone up more quickly than inputs.
Alan, I don't know whether you feel that producers may have targeted more their use of certain chemicals.
Mr. Alan Asselstine (Economist, Farm Inputs, Farm Income Policy and Programs Directorate, Policy Branch, Department of Agriculture and Agri-Food): Users have targeted and developed techniques to better use their product. Also, on the supplier side, the industry has introduced, on a voluntary basis, improved warehouse standards. It costs $1 million to replace a warehouse, so that has to be factored in. It's an environmental benefit. Also there's the recycling of containers and these things.
We know of some increased environmental costs that will have to be either absorbed by the supplier or passed on to the farmer-consumer. There are some factors like that. How big they are, we don't know.
The Chairman: I just want to get a clarification on what we are comparing here as well. I think it is important. Is there any adjustment here for the consumer price index or indexing over the time period? The change in price is about 4% per year over that time period, for a grand total of 24% in 6 years. Inflation would probably have quite a bearing on that if we were to factor it in. I'm not sure if it is or isn't.
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Mr. Richardson: No, that's just the raw price increase.
The Chairman: Do you know what the consumer price index increase has been over that six-year period so that we can make a reasonable comparison with what's happening?
Mr. Richardson: We'd have to check that. The last two or three years it's been around 2%, but if you go back a little earlier.... My guess would be that we're averaging around 2% or 3% a year, but 4% seems a bit high.
The Chairman: If we had that, that would make a reasonable comparison to where we're at. Without that I think we miss what is happening.
Mr. Hoeppner, please.
Mr. Hoeppner (Lisgar - Marquette): Welcome to the committee, gentlemen. This is interesting information that you have here. Is this totally price increase or are we also talking about volume increase in some of these graphs?
Mr. Asselstine: The indexes are price increases. We lack detailed data on pesticide volumes. It is not collected.
Mr. Hoeppner: I was looking at that graph on page 5 between Manitoba and North Dakota, and I think you were talking about phosphate there. It would have helped us if we had had some comparison on the prices of products. During some of these periods U.S. grain prices were quite a bit higher than Canadian grain prices, so we are actually paying a bigger percentage of our input costs.
Mr. Richardson: Yes, exactly.
Mr. Hoeppner: What you said about transportation holds true in phosphate production, because if you have grain going one way and phosphate the other, you can reduce your costs by bringing in the fertilizer. So that has something to do with it. It would help us for some of these issues if we could also have price comparisons for the products we sell to really pinpoint what the farmer is facing as far as cost price squeeze goes.
I was quite surprised at what Mr. Landry pointed out. Could you get that information for us in the U.S.? I think it would be very helpful to know what their line looks like in pesticides, because that would also give us some comparison.
The other note I made was on page 11, where we talk about the Manitoba-North Dakota-Minnesota comparisons. I'm looking at Poast-Merge/Poast, which is a herbicide. I'm astounded that we are paying 38.6% more than in the U.S. We use a tremendous amount of volume on that, so we should be able to compete.
Mr. Richardson: That one is a bit of a surprise, because most of the other big field chemicals tend to be the other way. We don't have an explanation for that one. It puzzles us because the next three or four insecticides - obviously they are used, but they're not big users. The Poast-Merge one kind of sticks out. We can look into that one and see if there's an easy explanation.
Mr. Hoeppner: That's interesting to me because I know how much product we use and that it was originating in the U.S. Then we improved the product over here with a combination of Poast-Merge, I think. I think that's a Canadian regulation or a formulation. That would sure help me, because I found it disturbing to see that kind of difference.
Mr. Asselstine: We don't buy it, so it wasn't disturbing to us, but it was surprising because it is a major chemical. One of the problems is why, but we will try to give you a bit of history with that chemical because we do have previous years. That may help explain why, but as Tom was saying earlier, it's hard for us to estimate exactly why these things are like that. We're better off just reporting them to some extent. That's unfortunate, but to assess these markets is very difficult.
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Mr. Hoeppner: Because our canola prices have been very profitable to the western farmers, I'm just wondering whether that has any impact on the companies pricing that product. I think that is really what we're looking at.
Mr. Richardson: I think we were making that point on fertilizer prices. With the commodity price of the fertilizer or the main commodities where fertilizers are being used, they certainly track with a lag effect. That's what we see in that long history graph there on fertilizers, and it may be that's what you're seeing here with this chemical. When canola prices go through the roof, the input industry is taking a piece of that. That's certainly a hypothesis.
Mr. Hoeppner: It would be nice.
There was another thing I was wondering. I don't know whether it would be of any value to this committee, but I know the Manitoba Keystone Agricultural Producers were tracking fuel prices, and they found that even in the province it varied quite a bit. I was wondering if we could get that information, because I think there was quite a bit of variation there.
Mr. Richardson: Sure.
Mr. Asselstine: Statistics Canada does give you the prices of fuel in different parts of the province, in regions of the province, over the last three years. The question is how much data you want, because we can do that for Saskatchewan and Ontario too.
Mr. Hoeppner: The only reason I brought it up was that it would probably give us an idea of whether there is.... Well, I wouldn't want to say smuggling, because that's unknown in the Manitoba country of Snowflake.
Mr. McKinnon (Brandon - Souris): Yes, Snowflake.
Mr. Hoeppner: It seems that the closer you get to the border, the lower the prices are for fuels. I'm just wondering if it would be valuable to have some of that information.
Mr. Richardson: Yes. I think the other observation that Keystone has made on their data in the past is that they wanted to look at where the farmer was.... Because the farmer wasn't paying certain taxes, there should have been a spread between distribution points where the main users were producers.
Sometimes they felt the spread in the price didn't reflect the difference in taxes. If you looked at a consumer price in Winnipeg and then you were someplace like Pilot Mound - I was just talking to Earl Geddes, who comes to mind - you might find that the spread in price there was not the same as the taxes. So it's that kind of thing they were concerned about.
Mr. Hoeppner: That's all I have for the time being, Mr. Chairman.
The Chairman: Thank you very much, Mr. Hoeppner.
The next person I have on the list is Mr. Calder.
Mr. Calder (Wellington - Grey - Dufferin - Simcoe): Thank you very much, Mr. Chairman.
I want to follow along exactly where Jake was going, because I noticed the same thing here.
On page 11, those higher input costs definitely relate directly towards wheat and canola, and we're also seeing very strong corn prices right now. I know that if we are going to get into this farm input cost business, we are going to have to make sure that the industries themselves, if they see farm gate prices strong, don't try to inch up the input costs at the same time.
I have three questions here. I'm just wondering how at the present time we monitor input costs. How do you come up with these figures? I see the sources here, but maybe you could explain a little bit more.
How are we going to make sure these input industries do not jack up their prices? What I'm talking about here is price fixing, when they in fact see that the farm gate prices are good and they figure they can get away with this.
Finally - I guess this is sort of a motherhood question - how do we improve the farmers' bargaining position in terms of input costs? That's something we're going to have to address.
Mr. Richardson: Al, do you want to talk about how the surveys are done?
Mr. Asselstine: Briefly, we finance three surveys, which we started approximately three years ago.
The main survey is Statistics Canada. It deals with the three inputs that we are talking about here: fertilizers, pesticides and fuel. They collect prices across Canada. They publish them by region within provinces for the major provinces and then just for each province in the Atlantic region.
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The way they do the survey is to go out to dealers and ask for a price on a quantity that is based upon what a commercial producer in that region would buy. They get a price quote.
It is not a perfect way. As many people involved in the industry know, you really don't find out the price until you start negotiating. It provides the data. They publish it so people can compare it.
The second survey we do is in southwestern Ontario at Ridgetown College of Agricultural Technology. As Tom says, it costs us about $60,000. The method is basically the same: asking dealers to quote the price. One of the differences is that the prices are published the day after they're collected, and they're published by centre. So it will say that in Chatham the average price for Roundup was x dollars per litre or whatever. They also do the same for the Michigan prices.
This is made available to the farmers or anybody who wants it. The comments we have from farmers is that the quality of the data is very good, and they can use it. They don't tell us if they get better prices, which they may do, but they can use it. We've had a good response. It's a very elaborate and expensive survey.
The third survey involves comparing prices with Statistics Canada in Manitoba. We had Joe Thomsen collect the prices. He doesn't report them as fast. At the end of the year, he compares his prices in southern Manitoba, northern North Dakota, and Minnesota. Then he makes comparisons with the whole province and the whole state sort of thing to get at some of the things you were asking about.
He only does that at the end of the year. He hasn't finished his October survey yet, so we don't have 1995 in; we have 1994 in.
Those are the three surveys that we have others conduct for us. They're basically all the same method, which is to give us a price on this day.
We use the exchange rate of the day of the survey. It's not perfect, but it's always the same exchange rate.
Mr. Richardson: Mr. Chairman, I guess in terms of the other two questions, I think there are maybe a number of ways to think about what one does.
As I mentioned in the introduction, clearly there are three or four big fertilizer companies in North America. If those companies are systematically colluding on price, then that's a matter for the competition bureau. Where you have that kind of market structure, that's always something to look at.
Another way to look at it is - that's why we've been very interested in our department in looking at price surveys - to try to keep the system honest, if one can use that term, by trying to have information available that farmers can use to price-shop.
I guess the kind of information we're talking about here doesn't deal.... If there is a situation in which there is major industry collusion across North America, then obviously the price information doesn't help you. But price information can help you when the markets may be fragmented or when, if you go a little further, you might get a better deal. That kind of price information can help.
Here's a third part of it. Certainly different producers try to keep their prices under control by doing different things. Sometimes people combine in terms of buying. Sometimes they buy at different times of the year.
In terms of the role of government, say you asked what the department should do where Alan and I work. We feel that on the price side there is potentially a role for the department. What we've talked about and what we would prefer to see, I guess, is a situation in which either a farm organization, or possibly a private company, would be interested in taking on price information surveys. We even talked about trying to kick-start that kind of effort.
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If we do it systematically ourselves, we have some concerns about that. We know from the past that when the Government of Saskatchewan used to systematically do price surveys, they came in for a lot of criticism. Eventually they got out of that business.
From our point of view, it would be better if some of these surveys that would be useful to farmers were done in the private sector rather than having the government do it. We're not sure we have the answer on that, but we certainly are interested in looking at options in which price information could help.
I think those are the kinds of things that come to my mind. Alan, have you any other thoughts? What kinds of steps can one take to keep things in balance?
Mr. Asselstine: Our basic idea is that if you get information on the market, it helps people. The question, of course, is can we get some commercial people to do it? The dealers will buy the information too.
On your second point, though, there was one thing that we always have to keep in mind. The flip side of price in availability.
What happened in the fertilizer industry is that a lot of capacity went out because the margins weren't there. Now you end up with a capacity problem with pesticides and minor-use chemicals that aren't registered. If the pesticide doesn't get the margin or doesn't have a large enough market, they won't register it. So you have the availability problem.
Whenever you start thinking about prices, don't forget the other aspect of it, which is the availability side. You want them to supply that fertilizer in that area at that time. Whether it's fair or not is always hard to judge.
The Chairman: Mr. Richardson, I might follow up on getting statistics. I'm not sure if you're aware of Globalink, which is a computerized satellite dish that, through hook-ups, gives you daily printouts of costing on commodities. They also provide charting with it that covers longer periods of time and provides relatively quick comparisons immediately for information.
I thought that looking into that might save a tremendous amount of money for the federal government if it's going to supply the information that you require. It's pretty industry-accurate. I don't know if you've looked at that or if you have any idea about it, but Globalink is a computerized price comparison that I think would be relatively important for the Canadian government to follow in the future, at least.
Mr. Richardson: I'm aware of it, but I haven't looked at it lately. I didn't know whether it had gone down to local prices or whether it tended to give you a Chicago price of the chemical. I'm not clear about how detailed it is.
The Chairman: Jean-Denis, our researcher, would be glad to share with you later the information he has. It was a thought that came forward when we were talking about putting information together. It would be a good idea to look at that.
Mr. Richardson: I guess in terms of what Alan was saying, one of the things, especially in chemicals and fertilizers, is that when you try to get a price, you've got to get it net, which is after all the rebates and all the weird and wonderful taxes. When you're trying to do price comparisons, the more local you get the more difficult it becomes to make sure that whatever you're comparing is comparable in terms of quantity and all those variables.
I wonder whether Globalink is at a level of aggregation that serves one purpose. For example, let's say that the commodity price is not going up as rapidly as input prices. That's one thing. But when you're trying to look at local conditions, it may or may not be able to help. We'd certainly look at that.
The Chairman: Thank you very much. Mr. Calder, does that complete your concern?
Mr. Calder: Yes, Mr. Chairman.
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The Chairman: Mr. Reed.
Mr. Reed (Halton - Peel): Thank you, Mr. Chairman.
I have some questions. I don't know whether you're going to be able to answer them, but I think they're worth putting on the record so that we can get some answers.
I was looking at the Canada versus United States gasoline prices on page 12. Something jumped out at me; maybe there's a logical explanation for it and I just haven't clued into it. You have cost per litre here and Natural Resources Canada has written in 15.4¢ a litre as crude costs. I don't know what the parameters are for arriving at that.
There are 203 litres of crude oil in a barrel. If the price of crude is at $17 a barrel, that would be 8.5¢ a litre, roughly, or a little less than 8.5¢ a litre. I'm wondering whether this 15.4¢ is the refinery gate price of the crude or whether it's the crude out of the wellhead. Just how is it arrived at?
Mr. Richardson: It's how they split the crude cost with the margin. We'll check it out for you.
Mr. Reed: Okay.
Mr. Asselstine: We don't have a rack price of fuel in Canada such as they do in the states. The refining costs are in the marketing. There is an adjustment, but I don't know the details. We'll put that in the details and put it on the record.
Mr. Reed: Yes, put it on the record. I'd ask the question and hopefully we can get an answer. That's the only question I have, Mr. Chairman, thank you very much.
The Chairman: Thank you very much, Mr. Reed.
Mr. Collins.
Mr. Collins (Souris - Moose Mountain): I want to review with you some of the statements you made so that then hopefully I'll have them correct in my own mind. Did you suggest that input costs follow commodity prices? Is that a proper perception?
Mr. Richardson: I said that. This is especially clear in the case of fertilizer, for which we have time series data. The price for a commodity such as fertilizer will go flat or fall, such as happened in the 1980s when fertilizer prices fell, but after a lag of a year or two they went up again.
As we were saying, it's a combination where, on the one hand, when the demand for fertilizers fell you did have rationalization of capacity and capacity went down, because there just wasn't a demand there, and then when demand takes off, capacity catches up. So there's partly supply and demand and partly this idea that if people...I suppose it's more of a colloquial thing, Alan. If the dealer sees everybody driving around in new four-by-fours, maybe he thinks they can pay more.
That's the man in the street view of the situation; when times are good everybody jumps on the bandwagon. Is that good, is it bad, is it illegal, is it reality? I think it's a way some people think about it. We're economists, so we tend to think of supply and demand, but there's no question that we feel that people do respond.
Mr. Collins: Goodness, Mr. Chairman, I was only looking for a yes or no.
Mr. Richardson: You can't get a yes or no.
Mr. Collins: I appreciate that, but I'll never get my questions in if we go through all this. I appreciate that you want to give an explanation here. I'm trying to keep them simple, Mr. Chairman.
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Did you leave us with the observation that we're comfortable and that things are okay?
Mr. Richardson: In fuels?
Mr. Collins: Yes.
Mr. Richardson: We're comfortable that we can explain fuel prices.
Mr. Collins: Okay. I want to come back to a couple of these later, if that's all right.
You said that prices are in line if they are comparable with competitors. Did I write that down correctly? You use a measuring stick, using that as a vehicle for coming to a raison d'être.
Mr. Richardson: They're comparable.
Mr. Collins: Okay.
Mr. Asselstine: We're not in a position to judge whether there's price fixing or anything like that.
Mr. Collins: I agree.
Mr. Asselstine: If ``in line'' means that the answer is no.
Mr. Collins: My observation is that the two of you are not farmers. Is that fair ball? You're an economist?
Mr. Asselstine: That's correct.
Mr. Collins: Your surveying process is surprising but not disturbing. When you see changes you find them surprising but you don't find them disturbing.
Let me assure you that out in Saskatchewan I think the reverse is in order. They find them very surprising and they find them very disturbing. That's why we are in the process today of going through this, even though we have the 1987 review. I think you want to attach to this that not only do you find it surprising, but that it should be disturbing. As these things are moving, the people in poor old Jake's country are having a very difficult time comprehending why these things are moving at the rate at which they are going to move.
I'll use one example as I get through it. I want to supply to the committee, Mr. Chairman, if I can, some documentation about the purchase of - and I will pick it - some kind of chemical out of Saskatchewan. What I would then ask, Mr. Richardson, is that you, if you would be so kind, look at what I have in the way of information and see whether you find that acceptable or unacceptable in terms of what we're trying to do in the competitive market of producing grains out west, particularly in Saskatchewan.
I'm sorry, but I don't have that example with me right now. I'm tempted to phone and get it, because I would like it to go on the record that this is what's happening.
In summary, my problem is that when we produce fuel in the city of Regina, we truck it to North Dakota, to Noonan, and then we give it to our American counterparts so they can farm at reduced costs to ours. For the life of me, I have never been able to comprehend what we're doing in that regard, and maybe you've been able to track that. I know we do it on a continual basis day after day. We see our fuel produced in Saskatchewan, sent down to North Dakota so they can have reduced farming costs to compete against our farmers like Jake in Manitoba.
Were you aware that this goes on? If so, who do we go to? I don't want to go to the Bureau of Competition Policy. I do say that I think we had better be in very close contact with the Bureau of Competition Policy when we see these prices going all at the same time. In the city of Estevan, when they move gasoline at Harry's place, Pete and Joe and everybody else move theirs just like that. Is that competition or is it just the wisdom of Job in there? I'm not so sure.
What I do see is that the prices go up, and if you go to Moosomin, Saskatchewan today, the price on the pumps on the highway are 61.9¢ per litre. I'm here in Ottawa, and what are the prices here in Ottawa? You'll say, yes, there's some difference, but 61.9¢ compared to what we're paying here is a difficult concept for us to handle.
Anyway, I'm sorry I went on a little long. Could you give me some rationale for what is going on in Saskatchewan?
Mr. Richardson: I've heard of that situation. I guess we could look at the prices and see if it relates to taxes or whether it's more than that. It may be. I don't know.
Have you looked at that at all or heard about it?
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Mr. Asselstine: Mostly the concerns are raised about fertilizer going south, more from Manitoba or even in Alberta, where the price of fertilizer right beside the plant is equal to the price in Montana, in the case of Alberta, plus the transportation to get it back, and it goes in the same truck.
The fertilizer market has the lowest prices in the gulf states, possibly because there's more competition there. It was that way in 1987 when we looked at this issue, and it still tends to be that way, possibly because they have more alternatives.
In the case of fertilizers and fuel, there are no restrictions at the border. There may be tax differences but there are no restrictions at the border. There are no government policies that I know of that would cause that to happen. So it's commercial...happening.
I'm not a farmer, but I do buy gas and I know that the price of gas in Ottawa has been higher than in Toronto a lot of times, and now it's the reverse. Why is it the case? There have been many people looking at that, but I have not seen a satisfactory answer. Perhaps it's lower now because the competition bureau did look at the Ottawa prices.
I can't answer your question.
Mr. Collins: Would you look into that one for me, for the committee, so that we have some understanding of what's going on?
Mr. Asselstine: Yes.
Mr. Collins: My friends in the Saskatchewan agriculture industry are telling me that fertilizers are going to move up again, and they're moving up faster than any prices that we can see. They're saying it's fine to get a new increase in the price of our commodity, but these other things are racing ahead at breakneck speed.
The other thing I would ask is, where you do find some of these things, do you cue in the competition bureau?
Mr. Asselstine: Yes, if they ask, and all the information we provide is public. When they do any investigation, they don't tell us what they're up to or anything. But any time they ask, and all our information is public, we do and have provided information in these areas before.
The Chairman: Mr. McKinnon.
Mr. McKinnon: This is all very interesting for my neighbour. His riding and mine bound each other across the Manitoba-Saskatchewan border.
Mr. Reed: Isn't that a pleasure - that's pretty neat. What about poor Jake?
Mr. McKinnon: Maybe we'll keep going over to Mr. Hoeppner.
The question I would have is, as we have got ourselves into a regime of less subsidization in transportation, we believe some scenarios are going to happen; namely, we're going to be diversifying our crops, some of which will have a greater use of some of the inputs with which we're dealing today - chemicals for spraying specific crops. I can go back to the last two crop years just completed. Manitoba from the air is almost yellow with canola growing, and I'm sensing that we have had greater demand.
My question of you is, has this really led to a lowering of price because of greater demand and hence greater production? Or have we actually got ourselves in a position as we have changed our crop rotation pattern such that we're setting the price in tandem with what we're growing? In other words, what we need to spray the bugs on canola will drive the price up as we grow more of that product.
Mr. Asselstine: The pesticide industry is very interesting. We know that with some of the small crops - like when canola started - there's a problem getting the chemicals you want, and getting them registered. On the other hand, we have a product like glyphosate or Roundup, which had a huge market, and the price has gone down.
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I think if we look through our list and looked at canola pesticides, we will find the prices have gone up to some extent, and some of them were higher. So if demand goes up, do the chemical companies follow? It's not always the case.
Mr. McKinnon: It's a mixed bag?
Mr. Asselstine: It's a mixed bag. I don't know. Ivo, do you have any comments on the chemicals for these specialized crops?
Mr. Ivo Krupka (Executive Secretary, Pest Management Secretariat, Department of Agriculture and Agri-Food): No, I don't.
Mr. Asselstine: We find it very hard to sort of go beyond monitoring and saying ``this is what's going on'', to go in and say why it goes on.
The problem with chemicals is that when a manufacturer decides to market a chemical in Canada, they have large upfront costs. They look at the margin; they want to make enough to cover all those upfront costs, and also pay for the research and development of new chemicals to contribute to the fund.
As you saw - that's part of our message - when you looked at the Australian study that looked at Europe, you saw how Germany and France, for example, which border on each other, have prices for the same chemical twice as high in one country as in the other. Why? Because the chemical companies, I think, who tend to set the prices, tend to look at each market as a separate, differentiated market.
Mr. McKinnon: I understand.
The Chairman: Mr. McKinnon, is that all?
Mr. McKinnon: Yes, I think I'll stop.
Mr. Asselstine: Not generally i the chemical prices. The question was, are there taxes in the chemical prices? No, because you'll find one chemical is twice as high in Germany and then another chemical is lower in Germany than France. There's no consistency.
The Chairman: I've two people on the list as second questioners right now. With the indulgence of the committee, I would like to ask a couple of questions.
One of the reasons we're here is the skyrocketing price we've seen in fertilizer in the last 12 to 15 months. Your chart on page 6 clearly shows that increase. I guess when people are receiving a reasonably good price for their commodity, that may not be as significant as it would be if the price for a commodity was not there.
Can you explain, first of all, in simple terms, what happened to cause that escalation?
Mr. Asselstine: From our studies it seems the escalation occurred both in Canada and the United States and in other parts of the world.
The Chairman: Yes, I realize that.
Mr. Asselstine: We know that in the 10 years or more before that there was rationalization, there was reduction in facilities, and the fertilizer production facilities were running at capacity. Corn farmers in the United States want fertilizer, and so do farmers in China. The price of the two commodities in the fertilizer mix, the nitrogen and the phosphate, went up. They plateaued through the summer, and our indications are that they are going down. With potash, where they weren't running at full capacity, the prices have gone up slightly, but nothing the same as the phosphate and nitrogen.
The Chairman: Thank you. If I were to put forth a little scenario about what I think happened, could I ask for your comment on it?
There are four areas where we can get fertilizer in this country, in the west. We manufacture some ourselves; we get some from barge price in the Gulf of Mexico, we get some from the Middle East and we get some from the former Soviet Union.
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I understand the former Soviet Union was running at full capacity but not really paying its bills. When it broke up, they still produced it. However, as they broke up, they were unable to pay the energy costs they used to generate the phosphate material and so on. When the creditors came back to them, they couldn't continue the operation. They weren't really making a profit, but they weren't paying their bills in order to manufacture the product.
As a result, many of their plants that were in full production had to shut down because they couldn't get credit and continue. Therefore, there was a great nosedive in the amount of product available, certainly from the former Soviet Union, which caused a greater demand from other areas of the world.
The end result was greater demand. It takes about two years to build plants that will produce more. In the west right now, there's speculation we're going to have a fair increase in demand and in other areas we're going to have a greater demand for production. With the demand comes more production. When the Soviet Union shut down, the price started to go up because it could be demanded and the competition wasn't there to slow the price down.
The idea of it going down again comes into play. When the plants that are now in production increase capacity, the price will fall. That takes a couple of years to come about. Is that realistic in your mind?
Mr. Asselstine: The new plant in Saskatchewan produces over 500,000 metric tonnes per year of nitrogen fertilizer. It took two years or more, even the planning stage, to get into production. If you're going to add new facilities, you always add new facilities that are competitive worldwide. You're not going to just build up little plants. It takes a long time for new facilities to get in.
I agree with you about the Soviet Union. It was an important player in that 1991-92 period when they were actually exporting some. It continued the process we call the buyer's market.
The Chairman: I believe there's another part to that argument. You mentioned China, but I think it's extremely significant that the United States and China are by far the greatest consumer countries. As a result, the growing market in China is putting a world demand on that has to be fed some way. Right now that growing demand has caused inflationary prices in the industry over a period of time.
Mr. Asselstine: Yes. Fertilizer is a commodity. You cannot go and just say this is the price of natural gas, this is the price of doing it, this is the price of fertilizer. It doesn't work that way.
At times the fertilizer companies were losing money - through the 1980s - and that's why they closed down. Now they're going to be making margins, but you can count every time with the fertilizer industry that there's somebody who will see a good margin and they're going to get in.
They're talking about a plant in North Dakota. Despite a plant being on fire in the United States, the industry in North America still produced more than last year. It lost 2% of its production due to that fire at the Terra plant.
They're going to have that back. The margins are there. They're getting back in. We see the prices have flattened out this summer. We've got some indications they're going down. The question is whether that's going to continue or not over the winter. I'm an economist, but I'm not that good. It's very close.
The Chairman: Since it's a world price based on competition, can you not make projections as to market versus supply of material?
Mr. Asselstine: When you're at the point where we are now where supply and the capacity and the utilization are very much close to balancing, it only takes a slight over-supply to get the price going down or a slight under-supply to cause it to go up. It becomes very sensitive. As I say, there was a plant in the United States with 2%, and when it burned the price of fertilizer jumped 10% within a few days. So we are in a very tight situation.
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The Chairman: Thank you, Mr. Asselstine.
My second question has to do with fuel prices and goes back to what Mr. McKinnon and Mr. Collins talked about. Let's look at that chart on page 12. The standard costs are constant. The constants are the price of crude, federal taxes and provincial taxes. Those eat up a good portion of the fuel costs. The marginal or market variations would come in the retail margin refining costs - the two put together.
As I drove across Ontario last weekend I saw gasoline selling on the 401 for 48¢ and 57¢, and I saw variations by region. Whether the Toronto, Ottawa or Windsor region, for the last six years I've seen the same variations - up to 9¢ on a litre of gasoline. The taxes stay the same, so let's eliminate the taxes. The crude costs are basically the same wherever they sell it, so we have a retail refining change. I would take 9¢ on 15¢ as a 100% variation in what's happening. Can you explain that difference?
Mr. Asselstine: I've seen it too.
The Chairman: But that's a huge difference when we look at the fluctuation, and we're taking that fluctuation from 15¢.
Mr. Asselstine: You're right, I agree with you, and I've come to the same conclusion that it's in that area. Sometimes it's the retailer because the retailer's margin is in there too, and sometimes it's the manufacturer.
You can import gasoline ready to sell. It's about 2¢ a litre less to bring it over from the United States. In general, anywhere you find lower prices in Ontario - this is retail - there is somebody, an independent dealer, who is competing by bringing in gasoline from the States. But as soon as he drops his price 2¢ a litre, you can bet everybody around him will drop too.
I guess it's important that you can import, because that allows for competition. There are always people who are interested in increasing their margins, so they're going to push it up, but as long as we allow some competition, that'll keep it down.
The Chairman: I do not want to dwell on this much further, but the price is the same in a region or a whole area. People I know in the retail sector tell me that they receive a telephone call and are told what to put on their pumps. Everybody in the area is told what to put on their pumps. So I'm not sure it has to do with imports.
Mr. Asselstine: There was one dealer in western Ottawa who was willing to bring it in from the United States. When he brings it in from the United States, he decides what he puts on his pumps. Once he's introduced it, everybody around will adjust. In the Hamilton and Toronto areas, where you are closer to the border and have more imports, the price was lower than in Ottawa for a long time. Generally, where you find lower prices you will find more independent stations.
The Chairman: Perhaps we should see how much is flowing across the border in trucks to cause the price to vary so greatly in every province. That's an interesting scenario.
Anyway, thank you for your indulgence.
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Mr. Hoeppner: I'd like to go back to page 9 for some clarification. Do you have any comparisons for Canada in that chart? I see that it's international, but where do we stand in those price comparisons?
Mr. Asselstine: The report that was provided to us did it in exactly that form. They said Australia is 100 and everybody else is different. It was done three or four years ago. We have some U.S. that we could possibly do. We know that our price of Roundup would be fairly close to Australia's, but I don't know about the other ones.
I agree with you. I'd like to put it in, but we didn't have the raw data. We are cooperating with some people who are doing research in this area and are collecting international prices. We're exchanging ours with them in the belief that they will send theirs back, which will help us with that.
Mr. Hoeppner: Thank you. I want to quickly address what Mr. Collins brought up about the variations on fertilizer and especially gasoline.
I had a number of phone calls this fall about the cost of propane for grain drying going up from 15% to 24% in a matter of two weeks. That really bothers me. I don't think that is just demand, I think it is probably gouging. As I said the other day, price fixing is probably too strong, but I think we have to take into consideration what Mr. Collins said.
The other thing I want to point out to this committee is that with the pesticides or herbicides.... Farmers in Manitoba ran into a real problem last year because we had the moisture problem. Mustar, which came on the market not too long ago, which is very effective at taking mustard out of canola...it happened because of the moisture conditions. We had an extreme problem with mustard. People started bidding on that. The dealers didn't set the price, because the farmers had to start bidding to get the quantity that was there. If they didn't use it, they would be called on poor farming practices and they had no crop insurance. Especially for the guys who were in zero tillage, if they didn't pay double the price to get that stuff, they had no crop insurance and they lost all of their input costs the other way.
That is where farmers are sometimes hand-tied, in making decisions and having to pay these prices.
I think this committee should address that to make sure companies do produce sufficient amounts of product. With crop insurance demanding that you use it, they know that if there is a shortage, the prices will be favourable to them. I think that's something we should watch in this committee.
Finally, the Russian situation does apply to phosphates, but nitrogen - most of the nitrogen in my area is anhydrous, which comes from natural gas. There's a sufficient amount of natural gas to produce nitrogen. I'm not sure if the companies have the productivity to do it, but that's the variation there.
The other thing is that moving farm fuels across the border is a bit complicated. I know that in Manitoba you have to dye them, and that takes some of the competition out of it. Some regulation would simplify that and would help in pricing some of the fuels.
The Chairman: On the anhydrous, I've been led to believe that because it's such a volatile substance, anhydrous ammonia is very expensive to transport. That's where many of the extra costs come into it - in transportation.
Mr. Hoeppner: Yes, but you'd get that same cost during a low-price period.
The Chairman: Sure, I realize that.
Mr. Hoeppner: We have the raw product to produce it. We don't depend on a foreign market. I just wanted to bring that forward for information.
The Chairman: Thank you.
Mr. Asselstine: Mr. Chairman, nitrogen is imported in Ontario. Some nitrogen came into Ontario from the former Soviet Union, but Canada is close to a balance in fertilizer. We export from the west and import in the east in nitrogen fertilizers.
Mr. Calder: Mr. Chairman, I want to go back to what I was talking about before - price fixing - because I was listening to what you said to Mr. Collins down here. I'm not convinced about this and I want to pursue it.
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The Chairman: Before you go ahead, sir, we have been notified there is a bell at 5 p.m., which just started flashing. There is a vote at 5:15 p.m. We can probably get to the House in 10 minutes without a problem. I'm at your discretion as to what the committee wishes to do. Do you wish to have Mr. Calder wrap up his question in five minutes and then if we're satisfied, we can adjourn?
Some hon. members: Agreed.
Mr. Calder: Thank you very much, Mr. Chairman.
Tom, you said to Mr. Collins that when the grain prices went down, fertilizer prices went down too. That tells me right off the bat that fertilizer prices are in fact tied to the commodity prices. You said that if there was any price fixing, you have surveys you follow with these companies to make sure in fact that doesn't happen.
We don't have a lot of fertilizer companies and we don't have a lot of chemical companies. What if these people all get together because they see there is an extra draw on supplies with Russia - the problems they have with the fertilizer industry - and they know prices are going to go up because there is going to be a demand and probably a shortage of components going into each one? What if they say, if the price is going to go up, say, $2, let's tack on an extra $1 just because we can all get together on it? Your surveys would show everybody is going up to the same price. How do we get around that? How do we make sure that doesn't happen?
Delegation, this is an economist question.
Mr. Richardson: It may be a competition bureau question. In terms of fertilizer, just go back to the way you saw fertilizer prices in the 1980s, when people were losing....
Mr. Asselstine: One thing is that because you can import fertilizer - and our survey showed U.S. prices are the same - it means they must be getting together more than just in Canada. How do you know whether they're getting together or not?
Mr. Calder: You say they're getting together. Where's the parent company?
Mr. Asselstine: That very often is the same place. I know a farmer in southern Ontario who did not pay a high price for fertilizer this spring because he purchased his all last fall from offshore. He was ordering large quantities and helping his friends along. But there are people who are doing arbitrage; they brought boatloads of fertilizer from Pakistan into North America. The question is always how you stop people getting together, how you prove they're getting together. You can only collect information.
Mr. Calder: I'll flip it on its head, then. Can your surveys pick it up?
Mr. Asselstine: I don't know. No, they just show the price. They can only compare our price with others. If they're getting together, we cannot prove or disprove it.
The Chairman: I have to say to each one of you, Mr. Richardson, Mr. Asselstine and Mr. Krupka, I really appreciate your coming forward. I appreciate the testimony you've given. You've done a lot to help enlighten us about some of the concerns.
The one thing that is achieved here is raising the concerns so that when the industry people come in, they will have a basis under which they can review the concerns of the committee as well. The questioning here will go further in trying to get the industry people to answer the inquiries that were raised here.
So we'll have a greater opportunity when the industry people come in to pursue these in detail. I hope they will come prepared to answer those questions as well. Thank you very much.
The meeting is adjourned.