[Recorded by Electronic Apparatus]
Tuesday, November 21, 1995
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[English]
The Chairman: Ladies and gentlemen, this morning we have Roger Larson, managing director, and Barry Clarke, consultant, from the Canadian Fertilizer Institute. We have regrets from Mike Chorlton. Mike was supposed to be here this morning, but he came down with one of those illnesses and it prevented him from being here today. If we find it necessary to have Mike at a later point, we certainly could make time to bring Mike in whenever possible and convenient to him. We can keep that at the back of our minds.
Possibly to get under way this morning it would be best to turn the floor over to Roger and have them give us a bit of background on fertilizer distribution and pricing and some general information from the Canadian Fertilizer Institute. Roger.
Mr. Roger Larson (Managing Director, Canadian Fertilizer Institute): Thank you, Mr. Pickard.
I'd like to introduce Mr. Clarke more fully. Barry is affiliated with Fertecon International, a member organization of the Canadian Fertilizer Institute and an internationally respected consulting firm. They are consultants to the International Fertilizer Association and to the Government of Canada Departments of Industry and Natural Resources.
I'm not going to read our brief today. I have about five minutes of opening remarks and then I'll defer to any questions.
The recent fertilizer price changes seen in Canada are not a local phenomenon. Fertilizer is a commodity that is widely traded throughout the world and price changes up or down here reflect the situation in the rest of the world. The price of fertilizer is set by many international factors, in the same way as world markets affect the price of corn or wheat. Fertilizer, like any other commodity, is governed by the relationship between supply and demand.
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Commodity costs may determine the base for product pricing, but they do not set the actual selling price. Prices historically increase when, as recently experienced, there is a strong demand for fertilizers and supplies are limited. Because of this relationship, fertilizer prices are cyclical. When demand is great and supplies are limited, prices increase. If demand falls off or excessive new production is added, prices head downwards.
Today's prices are higher than those of the past few years when prices were depressed, but today's prices are no higher than those of some of the past high points in the price cycle. In fact, if prices are adjusted for inflation, fertilizer costs are less today, in fact considerably less today, than they were 15 years ago.
Demand for higher crop production drives the demand for fertilizers. The world's population is still growing. The demands for food have grown with more mouths to feed and a desire for better diets. As a result, world stocks of grain have been severely depleted over the past few years. Grain stocks, as a percentage of use, now stand at lows not seen since the 1972-73 food crisis. This demand has translated into higher grain prices, and therefore the need to produce larger crops.
The demand for more food has translated into higher fertilizer use in many parts of the world, including Canada. China's buying, as the world's largest fertilizer importer, is again leading the market. As evidenced by the drastic reduction in China's corn exports, there is strong demand to increase internal food production in China. That country, like much of developing Asia, wants and can now afford a better standard of living. Fertilizer use will be the key.
In the U.S. domestic market, strong fertilizer demand is expected, given the positive crop price environment. In light of the low U.S. corn inventory and pressure to reduce government spending, the U.S. is expected to reduce the acreage reduction program's corn set-aside to 0% this year. This will also have a positive impact on fertilizer use.
Strong demand for this coming spring is anticipated in Canada as well, following indications that Canadian fertilizer consumption for this past spring reflected another increase in use. This occurred despite the generally unfavourable spring planting conditions. With crop prices higher than last year, continued strong fertilizer demand seems likely.
Worldwide fertilizer production has been relatively flat in the past few years. The lower prices since the mid-1980s discouraged construction of new production facilities, as capital costs for these plants are relatively high. With little profits and some losses since 1984, there has been no financial incentive to build new manufacturing plants. Older plants were forced to shut down and the reliability of many facilities decreased as maintenance budgets were squeezed.
In addition, the former Soviet Union began a change to a market economy. This meant that the costs of natural gas feedstock to Russian nitrogen fertilizer plants increased to reflect world prices. These cost increases were then incorporated into the price of fertilizer in their fertilizer exports.
With fertilizer production capacity relatively flat worldwide, and in fact declining in some regions of the world, increasing worldwide consumption of fertilizers eventually caused demand to reach supply potential, and rising prices resulted.
Fertilizer producers have responded to the tight supply situation. Manufacturing plants in Canada and the United States are running flat out. Some of the old plants that had been shut down are being restarted. In Canada, this has added 225,000 tonnes per annum of ammonia.
During this past year, CFI members have further announced several projects, adding 775,000 tonnes of either ammonia or urea capacity, with an overall investment exceeding $275 million Canadian.
As we look into the future, the importance of transportation to our competitiveness needs to be emphasized. Canadian agricultural exports - grains and fertilizers - represent respectively the largest and the third-largest volume commodities transported by Canada's railways, totalling over 50 million tonnes. Changes proposed in Bill C-101 will significantly impact on shippers' ability to utilize the competitive access provisions contained in the current 1987 NTA.
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CFI urges that the Standing Committee on Agriculture and Agri-Food address this issue to the Standing Committee on Transport, the Minister of Transport, and the Minister of Agriculture and Agri-Food.
Mr. Chairman, thank you.
The Chairman: Thank you very much.
Mr. Hermanson, would you like to start off?
Mr. Hermanson (Kindersley - Lloydminster): Thank you, gentlemen, for appearing before the Standing Committee on Agriculture.
I want to briefly touch on the points you raised with regard to the role of the former Soviet Union in the supplying of fertilizer. Do I understand correctly from your report that you are saying they are not as competitive as they were and that we needn't look to Europe or to the former Soviet Union for supplies of fertilizer because they are not competitive enough any more to fill North American requirements? Is that what you're saying in this report, or are they still players in supplying fertilizer? Might they play a role in providing competition for the North American industry?
Mr. Larson: It's my understanding that as they move to a market economy, they will encounter significant costs that previously their producers were not exposed to, including natural gas costs in the case of nitrogen and phosphate fertilizers and transportation costs, as well as some of the port costs. You now have several countries, the Ukraine as opposed to Russia.
I would like to refer the question to Barry Clarke, who is much more of an expert in this area.
Mr. Barry Clarke (Consultant, Canadian Fertilizer Institute): Prior to the break-up, the fertilizer system in the Soviet Union was supply driven, so the plants were built according to ten-year or five-year programs. They were not cognizant of the farmers' demands for fertilizer. Many of them became export-oriented plants where the product was put into the world market, but not on the cost basis that the rest of the world was dealing with. Within the Soviet Union gas costs were less, transportation was not at real levels, and port costs were not realistic. So these products actually came into the world market and kept prices very low.
When the break-up came, of course, the farmers were not given fertilizer any more. The initial reaction was that even more product came into the western world.
Laterally, what has happened is that the plants have become more market oriented, so they will only produce what they can sell within the East Bloc or within the former Soviet Union. Therefore, they've reduced their production ability. The phosphate production has gone from 10 million tonnes per year to 2 million tonnes per year. The former Soviet Union now imports foodstuffs or finished fertilizers to meet its demands and very little is exported.
Mr. Hermanson: Have we put up trade barriers, either in Canada or in the United States, to prevent that product from entering North America? Is that why they've reduced their production?
Mr. Clarke: I think the production was reduced because of internal factors as well, but there were trade barriers. There were dumping issues within the European Community and within North America against some products.
Mr. Hermanson: But there is no more basis for anti-dumping concerns?
Mr. Larson: There was nothing within Canada.
Mr. Clarke: Within North America there were some and within the EC there were some. At the moment there aren't any, I believe.
Mr. Larson: As recently as two years ago I think almost half of the imports of monoammonium phosphate into eastern Canada was supplied by Russian production sources. About 100,000 tonnes came in.
Mr. Hermanson: Do you feel that unfair trading practices were involved back then? Did your association fight or resist the importation of fertilizer from the former Soviet Union?
Mr. Larson: CFI took no trade action. Our members include the importers who were importing that fertilizer.
Mr. Hermanson: I want to change the subject a little bit now to the matter of barriers to trade within Canada, between provinces. I raised this a few weeks ago and I'll raise this issue again.
At one time when I was trying to purchase fertilizer, my retailer said he could buy fertilizer that was produced in Brandon, Manitoba, exported to the United States, and distributed back into Canada. He could buy that fertilizer more cheaply than he could from a plant in Manitoba. Why is that? Why could you truck that fertilizer into the United States and move it back into Canada for less cost per tonne than that for which you could buy it from Manitoba?
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I live in Saskatchewan.
Mr. Larson: I'm not sure exactly how to address that question. The CFI does not get involved in commercial competitive-pricing activities of our members, which are regulated by competition law.
Maybe Barry could touch on some background theoretically.
Mr. Clarke: My expertise is largely in the global business. I see Canada as being a fairly small market for fertilizers. The only way to build a fertilizer plant anywhere in the world is to build a world-scale plant. You have various locations where raw materials and transportation factors come together to build world-scale units within Canada. The total revenue for that plant and the justification for building it are based on a variety of markets. They might target a local market, the offshore market, or the North America market, but the company that makes that investment treats it as a whole entity.
Like Roger, I'm not familiar with the individual pricing policies of those companies, but I assume that this anomaly could arise through a pricing policy of one or more of those companies that has a world-scale plant.
Mr. Hermanson: If that was a pricing policy, would you agree that it was a proper one? Or would you suggest that the companies involved were in fact taking more profit than they should because they felt they had a captive market?
Mr. Clarke: I have no opinion on that.
Mr. Easter (Malpeque): I'm certain that you've heard, as we have heard, a lot a grumbling from the primary producers because of fertilizer cost increases this year. Just to try to get at that, on the downstream side of your costs of fertilizers in Canada, what contributed to the increases last year? In your submission you have mentioned the costs of raw materials, basically phosphate, nitrogen, and so on. Are there other factors, transportation or whatever? What's the main reason for fertilizer prices going up as substantially as they did?
Mr. Larson: I think it would be fair to say, as we mentioned in our brief, that supply and demand will determine the level of prices this year, last year, or next year, and not per se the costs of producing those materials.
It's part of the functioning of a commodity market that when you make a major investment - for example, to build a new nitrogen fertilizer complex now would cost upwards of $450 million Canadian - you're taking a risk as to whether or not you're going to be able to recover a return on that capital investment. The commodity market movements in the future will determine success or failure in that regard.
Mr. Easter: If you look at some of these capital investments that the fertilizer industry has made, I believe the one in Saskatchewan had substantial government investment.
Are you saying that the prices you're charging have no relationship to the costs of production? You're going back to the market, supply and demand, but are you telling me that the prices you're charging have no relationship to the costs?
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Mr. Larson: No, I think what we said in our brief was that prices do have a relationship to cost. When the price is down at the point of your cash cost of production, that becomes a floor. But other than that, supply and demand factors will determine where the price goes to.
Mr. Easter: From our perspectives, certainly in government, one of the things producers are telling us is they can't understand why costs have increased as substantially as they have. And they don't want to see the fertilizer companies taking unnecessary profit margins from the farming industry which is finding itself under some financial pressure in some sectors.
If I look in my own province, Prince Edward Island, the thing that always strikes me is if I shop around to buy my fertilizer and I go to three different companies, the price is virtually the same. I wouldn't say there's price fixing or price collusion, but why is it that there doesn't seem to be substantially competitive pricing between the companies and the sale of the product at the farm level?
Mr. Larson: If I can go back to what I think was the first question, there hasn't been a substantial increase in fertilizer prices. There's been a significant recovery in fertilizer prices. According to the Statistics Canada price index, retail fertilizer prices in Canada today are about 18% higher than they were in 1981. In that time, the consumer price index has risen by something like 77%, and the farm input price index has risen by over 40%.
During the last 15 years, for a substantial number of years the fertilizer price index was down well below 90% of 1981 prices. I think our members lost $170 million in 1987-88. So no, in that sense there isn't a relationship of cost and price. The supply and demand conditions of the world determined where the Canadian market prices were.
Mr. Easter: Leaving that for a moment, in The Financial Post on November 14, there's a story about the United States fertilizer merger. IMC Global Inc. and Vigoro Corp., two major Chicago-based companies, have merged. I think this is certainly a further concentration of the suppliers of raw product in the industry.
Probably the question might go to Mr. Clarke. There's certainly a fear out there that concentration in the industry will force prices up, that you have too much power remaining in the hands of a very few suppliers. What impact if any do you see that having on fertilizer prices, in Canada especially?
Mr. Clarke: First of all, that's a U.S. situation. It's something that's happened in the United States. So the trend has been for fertilizer companies to exit the business after a period in which they have had selling prices below their cash costs of production. So there have been several fertilizer operations in the U.S. for sale. They have had ``for sale'' signs on them because of the poor market conditions since the middle of the 1980s.
I think what we're seeing now and what we saw with the IMC-Agrico type of operation or merger was an attempt to consolidate to ensure their continued operation.
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With one exception in Wyoming, the U.S. has not built any new fertilizer plants since the late 1970s. And then in the coming year, 1996, they're going to de-bottleneck and bring back two new phosphate plants. So they're striving to bring back phosphate production to meet demand. But what you need for that are stronger companies to do it, so I see that just as part of this trend. The phosphate industry really needed to invest in future capacity.
Mr. Easter: Yes. I guess the trick is, though, how much stronger should they be? I know from being a producer myself that when we end up having to produce below our cost of production, which seems to happen all too often, we're told to be more efficient.
What worries me is that as these companies gain more concentration and more market power, they might price the product at a level that is cost prohibitive to the farming community and at the same time increase their margins substantially and unnecessarily.
Mr. Clarke: I don't think they want to make a product prohibitively expensive. That's not the business they're in. They're there to manufacture fertilizers and provide the farmers with fertilizers.
Mr. Easter: In your last paragraph in your brief, you talked about transportation and Bill C-101, which, I would agree with you, is extremely crucial in terms of the agricultural industry, especially in western Canada.
Have you been before the transportation committee?
Mr. Larson: Yes, sir, we have.
Mr. Easter: I guess I could go and look at the transcript, but what specifically are you asking for in changes to Bill C-101 to meet your needs?
Mr. Larson: We are asking that subclauses 27(2), clause 113 and subclause 34(1) be deleted from the new legislation and that language be incorporated that would ensure shippers, at a point of interchange between a provincial or a new short-line railway and a federal or class 1 railway, an unencumbered availability to the competitive access provisions of the legislation currently embodied in the 1987 NTA. Those are competitive line rates, interswitching and final-offer arbitration.
Those are the two specific items we have repeatedly asked to be changed. Meanwhile, we have supported many other changes in the legislation that the government has brought forward which will give the railways the freedom to manage their costs. You can compare railway costing data in the U.S. railways and the Canadian class 1 railways. Many experts have said the railways have a cost problem rather than a revenue problem. So we sincerely do not believe the revenue situation needs to be addressed and we feel that those three clauses, in particular, reopen monopoly rail freight rate-setting capabilities.
Mr. Easter: I understand your concerns. In fact, most of the presentations coming from the west are outlining those points of concern. However, we are a Standing Committee on Agriculture and Agri-Food and the Standing Committee on Transport is looking at Bill C-101. But it's the producers we're responsible to who are going to face the impact. Do you have any suggestions on how we can get at that? This is something I don't mind at all. I've been grappling with it and I wouldn't want to accuse the transport committee of maybe not being as fair as it ought to be - I believe they have been fair - in terms of understanding the western problem.
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Do you have any suggestions for what we might do, as an agriculture committee, to address that concern, which seems to be falling on deaf ears at the transport committee level?
Mr. Larson: I'm not a political strategy expert, Mr. Easter.
We are hoping - and we are today writing letters to Minister of Agriculture Ralph Goodale, Minister of Natural Resources Anne McLellan, and Minister of Human Resources Lloyd Axworthy, as three senior cabinet ministers in western Canada - that they will look at the impact of railway legislation beyond the railways themselves and look at it from the perspective of Canada's industrial competitiveness around the world and what is good for public policy for Canada. We are a free-trade industry. We complete globally. We have dramatically addressed our costs in the last ten years, and still we have not received a reasonable return on capital.
Our return on investment for the last ten years has been, I think, 7.1% pre-tax in the nitrogen sector and 7.7% pre-tax in the potash sector, in spite of the fact that our members have restructured and reduced costs. In fact, we have 25% fewer employees in our basic industry today than we had ten years ago, in spite of the fact that our production has increased from 14 million to 20 million tonnes. Most of that volume has been exported, and we are facing some very tough international competition.
The Chairman: I would like to comment on your question as well, Mr. Easter, because I think there has been a fair amount of effort behind the scenes to move the agricultural concerns forward. Mr. Goodale, our minister, along with me and Mr. Vanclief, sat down and met with the chair of the transport committee and the parliamentary secretary in order to clarify those concerns that have been brought forth by the agriculture committee, those concerns that your subcommittee on grain transportation looked at...as well as an analysis of the concerns brought forth by departmental personnel. In all fairness, I believe a very strong case has been put forward to those people in the transport committee, and maybe at this point we're prejudging things. I would rather suggest there have been some pretty strong discussions there.
Mr. Reed.
Mr. Reed (Halton - Peel): Thank you, Mr. Chairman.
I have two basic questions. One has to do with energy consumption.
This goes back to the fertilizer industry's input costs. Can you educate us a little on how much energy of various types goes into manufacturing a tonne of urea or a tonne of ammonium nitrate and so on? I presume that feedstock is essentially natural gas. But then you have some processes that require a lot of electricity, if you're still using those processes. I was interested in having the committee find out how much influence those prices have on the end product you sell.
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Mr. Larson: I believe the estimated energy consumption to produce a metric tonne of ammonia is roughly 24 MCF of gas, plus the energy component. That's the feed stock component. That's what provides the hydrogen that goes into making NH3, which is ammonia.
Depending on the energy efficiency of the plant the energy component can range between about 6 or 7 MCF for the most modern, most energy-efficient, world-scale plants to probably about 10 MCF for a less efficient plant. Canada's nitrogen fertilizer plants are among the most energy-efficient in the world largely because they tend to be among the most modern.
So the average is probably some place in that range. If I had a calculator I could probably punch the numbers out. I think there were 4.1 million tonnes of ammonia produced last year and the consumption was 165 million gigajoules. We could divide it and tell you what the average per tonne energy consumption is.
Mr. Reed: I guess it's safe to say that right now the fertilizer industry is enjoying relatively low input costs, particularly vis-à-vis its natural gas component, and that two or three years down the road we may be looking at an entirely different scenario.
Mr. Clarke: The nitrogen sector has probably been benefiting from lower input costs on nitrogen but other sectors are not or they're energy consumers in other ways. You alluded to electricity. I imagine the potash industry is a large user of electricity to produce potash. The phosphate industry is probably a net producer of energy during the production of fertilizer. Each of the nutrients has a different profile as far as energy is concerned.
Mr. Reed: Thank you for enlightening us on that. I have one other question. How many fertilizer companies in North America control the North American market?
Mr. Larson: I don't think it's fair to say they control the North American market. They may be producers in the North American market, but as I mentioned, we are a free-trade industry and not only do we compete internationally, we face international competition. I mentioned Russian MAP coming into eastern Canada. There was also urea from a variety of countries. Even though we are major exporters of urea a good part of the eastern Canadian market is competitively supplied by international sources.
Mr. Reed: Obviously with the economies of scale and the size of your investments you have to achieve, this is not a game for a mom and pop operation in the backyard. How many companies operating in North America now are producing fertilizer?
Mr. Larson: There are about half a dozen nitrogen fertilizer producers in Canada and a similar number of potash producers. I don't - -
Mr. Clarke: But North America is much larger -
Mr. Reed: Are they the same companies in Canada and in the United States?
Mr. Clarke: For the large part, no. They're -
Mr. Reed: They're competing with each other.
Mr. Larson: It is true to say that the Canadian companies also have a market presence in the U.S., where the fertilizer market is much larger. Not all of the U.S. companies have a major presence in Canada.
Mr. Reed: For instance, I think about a company like Cyanamid. It's a cross-border company and works both sides of the street. It's obviously not competing with itself.
Mr. Clarke: There are probably a hundred basic producers of fertilizer in North America under the law.
Mr. Reed: Are they divorced from one another and not interconnected? In other words, are they in a competitive position with one another?
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Mr. Clarke: It's at that order of magnitude. There are a large number of producers. The phosphate business, for example, has at least thirty producers competing with one another.
Mr. Reed: Thank you, Mr. Chairman.
The Chairman: Thank you very much, Mr. Reed.
Mr. Benoit.
Mr. Benoit (Vegreville): Thank you, Mr. Chairman.
Just before I get to the questions, I thought the chairman's comments on the behind-the-scenes discussions taking place on Bill C-101 were kind of interesting. I think it would really be beneficial to let the committee do its job and to allow it to do that job well. I understand Mr. Easter's concerns with the way that committee is working with Bill C-101.
I think your concerns are in common with those of all the shippers who have appeared before the committee, those centring around subclauses 27(2) and 34(1), and clause 113. I just want to ask a question for clarification on the final-offer arbitration, though. I didn't understand what you said on that point.
Mr. Larson: I'm not sure I said a lot with regard to FOA, or final-offer arbitration. I just mentioned that we thought it was important that the language be constructed around the recognition that there will be new provincially legislated railways or short-line railways. The same competitive access provisions that you have right now - competitive line rates, interswitching and final-offer arbitration - if you are served by CN or CP, either at your plant or mine, must still be there at the point at which a short line connects with the class 1 carrier if a piece of track indeed becomes a short line.
Mr. Benoit: Just before I move on to the fertilizer, in terms of the final-offer arbitration, do you see the method of final-offer arbitration that has been used under the NTA, 1987, and that is proposed under this legislation as being a fair type of final-offer arbitration for dispute settlement, where one side - the shippers - presents its offer and the railways then decide whether they want to accept the offer or not? It's not a double-blind process, which is the normal way in which final-offer arbitration is used.
Mr. Larson: It's probably not the way you or I would classically define a final-offer process, I agree.
Mr. Benoit: It hasn't been used much, so it probably hasn't been that much of a concern to shippers. My guess, though, is it's going to be used a lot more under this new legislation when it goes in.
Would you prefer to see the double-blind final-offer arbitration procedure in which each side presents its best offer and the arbitrator takes all of one or all of the other?
Mr. Larson: I think that would be an enhancement to the current legislation. When we went before the Standing Committee on Transport, however, we were asked if we would be willing to give up the other competitive access provisions - interswitching, extended interswitching, competitive line rates - for a new and enhanced final-offer arbitration that would be truly double-blind.
We expressed grave reservations with making that kind of change. Our reasoning was that the interswitching schedule is published by the NTA. It's right there and it's very quick. A shipper can pick up a phone and say, I'd like to interswitch my cars here and the rate for a unit train of potash is $60 per car. It's very straightforward. But in order to prepare a final-offer arbitration case, you're hiring transportation consultants and transportation lawyers, and you're spending a tremendous amount of effort. That unit train wouldn't get interswitched if you had to do an FOA on it.
I think what we've tried to stress is that rules that are easy to interpret do not involve a lot of legal work. They are vastly preferable in transportation if we want to have true competitive access. The more clear-cut and well defined those rules are, the better the system will work.
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Mr. Benoit: One shouldn't necessarily exclude the other, though.
In terms of transportation costs and fertilizer - and let's look at the Alberta market, and particularly anhydrous ammonia and urea - do the transportation costs really limit the size of the market in practical terms? With the transportation costs as they are now, is the North American market open to those anhydrous ammonia and urea manufacturing plants in Alberta?
Mr. Larson: Part of the North American market is. I think our members have typically described the potential market as the northern-tier U.S., the Pacific northwest, and the midwest - a sort of thirteen-U.S.-state area - and the Canadian prairies. So yes, transportation is a limiting factor if you look at the limited amount of nitrogen fertilizers we export through the port of Vancouver. Some of it is port costs and everything else, but it is ultimately the amount of dollars it costs you to get a shipload of urea on a boat ready to go to China as opposed to shipping it to the northern U.S., eastern Canada or the Canadian prairies.
Mr. Clarke: World shipments of nitrogen fertilizer are based on tidewater. They produce the gases moved to the tidewater, the product is produced on tidewater and is exported from there. That's how world prices are basically set, so Alberta is at a real disadvantage in terms of shipping to Vancouver.
Mr. Benoit: In terms of exporting and importing.
Mr. Clarke: For exports.
Mr. Benoit: So practically, what is the size of the Alberta market when looking at, say, 90% of the product and where it is sold? What area would that encompass? I'm trying to get an idea of the size of that market in practical terms.
Mr. Larson: Statistics say half of it is sold in Canada. Virtually all of the other half is sold in the U.S.
Mr. Clarke: I think that's reasonable.
Mr. Benoit: Does it get as far south as Kansas?
Mr. Clarke: Probably not. It probably stays in the northern tier.
Mr. Benoit: I think there is only one manufacturer of anhydrous ammonia and urea left in Alberta.
Mr. Larson: No. At the risk of forgetting one off the top of my head, there are.... Actually, I'll pull out the statistics to make sure. In Alberta, you have Sherritt Inc.; Agrium Inc., which was formerly Cominco Fertilizers Inc.; and Canadian Fertilizers Limited, which is owned by the co-ops. You also have Saskferco Products Inc., in Saskatchewan; Simplot in Brandon, Manitoba; and an ammonia producer, Mitsui & Co. (Canada), which is based on the B.C. coast and is one plant that does compete in the offshore market.
Mr. Benoit: That's in western Canada.
Mr. Clarke: You might be referring to phosphate. There's only one remaining phosphate operation.
Mr. Benoit: Is that Cominco?
Mr. Clarke: No, that's Sherritt.
Mr. Benoit: Sherritt? Out of where?
Mr. Clarke: Out of Redwater, Alberta.
Mr. Benoit: Okay. In terms of nitrogen, just to follow up on what Elwin asked about earlier, I have in the past gone to the northern United States to buy my fertilizer - both phosphate and nitrogen. In some cases I saved a lot of money. This fertilizer is fertilizer that was shipped from the plants near Edmonton and down into the northern states. It doesn't seem to make sense that with the manufacturer being in Edmonton - and I live just a couple of hundred kilometres from Edmonton - and shipping down into the northern states, I would be able to buy it there, bring it back over the border and still save money. But that's been the reality of the situation for some time.
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In terms of competitive pricing and with the high cost of freight, why does that happen? Why does the market have what seems to be an anomaly?
Mr. Larson: I think when the Canadian Federation of Agriculture appeared they mentioned several factors: spot pricing, volume buying, early season purchases. I think there were some articles in the paper a few weeks ago about prices being lower this fall than they were last spring, so if somebody makes a purchase theoretically in the fall and come February they don't think they're going to sell it all in North Dakota or whatever - they might have a few tonnes left over that they pre-purchased at an off-season price and if they can't sell it in their local market - they're going to be motivated to find a buyer even if they don't make a profit on that remaining volume.
There's a number of spot-competitive reasons in a dynamic market for why you might see anomalies, but I don't think it would be true to suggest that the typical pricing data that would come out of StatsCan or something like that would show Canadian prairie prices being higher than northern-tier U.S. prices. In fact, I think to some extent the opposite has been true.
Mr. Benoit: Yes, I've priced over a good number of years at different times of the year and I've found a saving from buying that fertilizer. It would have been a bigger saving had they allowed the truck just to go from the plant at Fort Saskatchewan to my farm, 200 kilometres. Of course, the wholesalers or the manufacturers wouldn't allow that. It would have saved an awful lot of cost in freight of shipping it down to the United States and then back again.
So I think there are some real concerns. I know farmers who have expressed concern over that. It doesn't seem to make sense. I've never gotten an answer that really explains it.
Mr. Larson: I think the important thing to express is that it is an open market and the farmers are not captive to those manufacturing plants. They do have the freedom to make their purchases from other sources of supply, and I think in a market economy that aspect of the marketplace is the discipline that's needed for economic efficiency. It's that freedom to import and it is there.
Mr. Benoit: It's very difficult for most retailers to change suppliers. It's a very difficult thing, and you're usually not allowed to buy from more than one supplier. There are restrictions put on it.
On a different issue, I wondered if you think it would be A worthwhile thing from the point of view of fertilizer retailers or manufacturers to establish fertilizer contracts on the Winnipeg Commodity Exchange? Would it be useful from a fertilizer manufacturer's point of view?
Mr. Clarke: DAP and ammonia are listed on the Chicago board. DAP is marginal; it's barely enough of a market to trade. It went through some very tough times initially. There are not enough contracts to justify it.
Mr. Benoit: I know it isn't working in Chicago; I don't quite know why. You don't see any real advantage from your point of view?
Mr. Larson: They're relatively new contracts. I think most people would feel that it's going to take a few more years for the phosphate and ammonia contract to develop. It will never be as widely traded as a corn or wheat futures contract, obviously, but some people in the industry do feel it is an important hedging mechanism and there has been a fair bit of support for developing the contract.
Given that you do have some fluctuations in exchange rate between Canada and the U.S., that would reflect some theoretical risk for, say, a Canadian farmer who wanted to hedge, but fertilizers are basically priced in U.S. dollars worldwide so that might be the appropriate market for them to hedge in anyway, a U.S. dollar market.
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Mr. Benoit: So there is an awfully large volume of fertilizer purchased in Canada every year. There is a substantial market, and whether it would work or not in Winnipeg, I guess, we may or may never find out. Just because it isn't working in Chicago doesn't mean that it couldn't, but it would certainly have to be a much longer contract and you have to trade further ahead than you would with grains to make it worth while. There's no doubt about that.
Mr. Larson: I would think that the success in the Chicago would be greater simply because the U.S. market is so much larger. It's in U.S. dollars and fertilizers trade worldwide in U.S. dollars.
I don't want to appear to be speaking against the Winnipeg Commodity Exchange, because I certainly would like to encourage success there, too. I'm just suggesting that the market may be too thin to sustain a Canadian-denominated market as well.
Mr. Benoit: Thank you.
Mr. Calder (Wellington - Grey - Dufferin - Simcoe): I want to go back to Bill C-101.
I was on the committee for the privatization of CN and I found out a lot of interesting information. My own observation was that the NTA of 1987 basically tended to take the shippers' side and that's what caused the railways a lot of trouble. I agree with your statement about their having an expense problem. Some of it is their own making; some of it is our making, too, underneath how taxes are done municipally and everything.
I believe now that the government may be taking Bill C-101 too much the other way, it's against the shippers. I would like your comment as to where you feel the centre of the road would be on this, which leads me into your statement about subclause 27(2). I know you will probably be telling me that in your opinion it's too vague. I would like some background as to how you think it should be worded to make it clearer.
You talked about interswitching, too, on that. I know right now if the radius of interswitching...so that a shipper does not become a captive shipper, depending on how short-line railways are organized, because we're going to see a lot of that out west. I'd like your opinion on how interswitching can be done, what the radius should be for interswitching so that you wouldn't become a captive shipper on a class 1 railway.
Mr. Larson: Those are very detailed questions, and I don't think I have the expertise to get into defining where I think an interswitch should begin and end, or what a less vague wording for subclause 27(2) is. I'd solve that problem by just deleting it, and then we don't have to try to define what significant prejudice is. That's probably in the interests of keeping the courts from being jammed up by transportation lawyers fighting over these narrow definitions of whether a shipper is being significantly prejudiced or not.
Mr. Calder: I figured that this would probably be the answer I got. Obviously, what I've just talked about is going to be an expense for you guys. If it's going to be an expense for you guys, that's going to bring up the cost of the product and that's going to be an input cost for us, which is what we're talking about here right now.
Is the fertilizer industry developing a position on this? I think maybe it might be interesting for the Standing Committee on Agriculture and Agri-Food to see what that position is going to be on Bill C-101 and transportation.
Mr. Larson: We have submitted a brief. I'd be happy to share a copy of that brief with you.
I'm not sure if I understood -
Mr. Calder: As to the transportation aspect of it.
Mr. Larson: I'm sorry. I didn't understand your question.
Mr. Calder: What I'm talking about is the questions I've already asked you, about which you said you didn't have the expertise. Has your industry developed a position on that?
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Mr. Larson: I will undertake to talk to the members of my industry and try to get a response back to you. Yes, I will do that.
We did suggest in a letter to Minister Young yesterday that a middle ground might be the deletion of the three clauses I mentioned, the language accommodating short lines and competitive access that I mentioned, and that shippers would accept that our proposals to implement limited running rights legislation would not be included in any consideration of Bill C-101 at this time. So basically it would keep things on a stand-pat....
It was our suggestion that instead, the concept of running rights, which has received a considerable amount of opposition from the railways, should be something that would be transferred to a forum representing shippers, railways, and government, and that the concept and some of the terms and that kind of thing could be discussed in that kind of forum before being reconsidered in any kind of legislative environment. We thought that would be a fair and balanced middle ground, because Bill C-101 is very friendly to the railways in terms of cost management, etc. We thought that would be a good balance.
The Chairman: For carriers and short lines and all, you're looking for the Fertilizer Institute to come forward with some type of statement or policy or position balancing efficiencies and service, making sure they're both incorporated in that, because we don't want to see the most efficient system set up and service gone for a lot of people in our provinces in the west either.
Mr. Calder: The whole thing, Mr. Chairman, is how do we know where the middle of the road is unless we hear from both sides?
The Chairman: Exactly.
Mr. Larson: I think it's also fair to say that as the third-largest customer group of the Canadian railways, we have a very strong interest in seeing that the Canadian railways are viable. We don't get our potash to Vancouver if the railways don't have a track; and yes, we do want to see profitable, viable railways in Canada.
So we also have an interest in finding a middle ground. We do need service as well as cost from rail freight, because we need to be able to access markets on a timely basis. We need to have quality product when we get those products to market. Service components are important to us, and an industry that's not profitable starts cutting too hard.
The Chairman: One of the areas brought forward to the committee in comments from various groups is that marketing and shopping are not as easy in the type of environment that is there. Input costs, if we have some type of structure by which people can access different pricing, different companies' commodities, different access to information...means a farmer could very quickly shop and check the price of fertilizer from various companies and various groups, various sources. With today's modern technology, it seems to me that type of marketing would benefit not only the industry but the consumer, because the consumer could comparative-shop and pick up....
I don't know if the Canadian Fertilizer Institute is looking at discussions by which the consumer of your product has access to as many sources of purchase as possible, but I think that makes a good, competitive market and a stable environment for the farm community in order to look at their sourcing of fertilizer.
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Just as several people have said, when I go out to shop, I find different prices. I don't know how to access all the information I have without going through a very long process of trying to find....
Is there any way your industry or your group could set up some means of communication by which to help farm communities and farmers themselves to source product at competitive rates? It would be what's most economical, I would assume, in that case.
Mr. Larson: The Canadian Fertilizer Institute doesn't do anything with regard to price. We are an industry of competitors, and our policy has been that we avoid price issues and discussions.
I think there are other public mechanisms that do some of what you described, such as Ridgetown College of Agricultural Technology and, at one time, the University of Saskatchewan and Statistics Canada.
Barry.
Mr. Clarke: There's a commercial opportunity here, I guess. There are commercial publications and services. That's what Fertecon does internationally. That's our main business: providing information on world prices to consumers and producers around the world.
I don't know the Canadian retail section in that much detail, but there must be publications and commercial activities that would give the buyers access to information on prices and the availability of product.
The Chairman: In today's computer-technology-driven system, I hope we get to a point at which pricing in various commodities can be reached very quickly by farmers sitting at home and punching in whether the commodity prices of these products on the market can be accessed, rather than going through an elongated process of shopping around.
Glen.
Mr. McKinnon (Brandon - Souris): I think Mr. Benoit took some of the steam out of what my remarks were going to be, but that was in relation to the pricing in the northern states.
My question really is how much influence do the two regimes have in setting the price of that product? In other words, the producers of fertilizers in the U.S. and our own system here in Canada - when they get into the Dakotas and Montana, there is some blending of pricing occurring from both sets of production. Could you comment on that?
Second, I think we are here because of natural concerns of the farming community about input costs of fuels, fertilizers, pesticides, etc. There is always a concern as we reduce the number of companies or players, if you will. Mr. Benoit was under the impression there was only one producer in Alberta, and you intimated there were more. Do you feel that as we reduce the number of players, we're having less competition in terms of the pricing of fertilizer products?
Mr. Larson: Barry, do you want to answer the first question?
Mr. Clarke: The northern-tier states and probably the Saskatchewan-Manitoba border are almost demarcation lines between fertilizer products that are made in the U.S.A. and coming into Canada, or have the potential to move into Canada, and Canadian-made products that are pushing down through the provinces and into those states.
So you're likely to get mixed pricing in those border states, because the U.S. plants are build to world-scale size. They're built not only to satisfy the local market but also to push that product further, either back to the midwest or north.
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Mr. McKinnon: Was that Brandon plant, the Simplot plant, causing that?
Mr. Clarke: I don't think it's causing it. The best place to build that type of a fertilizer plant is in the marketplace.
Mr. McKinnon: Which is my riding, by the way.
Mr. Larson: They would have to compete within that environment, and they would have to make their marketing decisions competitively, based on the variety of factors they would face, yes. When they looked at making the investment that they just announced on building a new ammonia plant, they would have to consider all those factors. That's part of the marketing and pricing strategy that each individual competitor company makes.
Mr. McKinnon: How about my second question?
Mr. Larson: I'm not sure what we can say. It is within the constitution and mandate of the CFI to foster and encourage a competitive Canadian industry. The very large capital investment needed in order to build a world-scale plant today is one of the considerations in terms of how many manufacturing plants will be in a given location.
Whether or not new competitors considered building more plants in western Canada would depend on a variety of things, not the least of which are the security of supply of natural gas, the competitiveness of the railway system that would give it access to the U.S. markets, and Canadian gas costs versus, for example, Arab gas costs.
You can't force something to happen that doesn't have an economic base. If you do, then disaster usually results.
Mr. Hoeppner (Lisgar - Marquette): I want to pick up on Mr. McKinnon's plant at Brandon in one of my questions.
Mr. McKinnon: I wish it were mine.
Mr. Hoeppner: How big a player is Imperial Oil in the fertilizer business?
Mr. Larson: Imperial Oil has changed its relationship in the fertilizer business quite dramatically within the last two years. At one time they would have been the owner of the world's, or certainly Canada's, largest nitrogen fertilizer plant, the largest phosphate fertilizer manufacturing facility. They sold that manufacturing business to Sherritt about a year and a half ago, and their stated reason for that divestment was their dissatisfaction with the economic returns in the fertilizer industry.
Mr. Clarke: On the world scale, virtually every oil and gas company has divested its fertilizer assets. It was a disaster for them -
Mr. Hoeppner: I wasn't aware that they had totally divested.
Mr. Clarke: Virtually every oil and gas company in the world has divested its fertilizer assets. It was a disastrous investment for the oil and gas business during the 1970s. Imperial had two plants left, Redwater and one in Pakistan, and they were both sold in the last two years. So Imperial, or Exxon, has no fertilizer interests whatsoever now.
Mr. Hoeppner: They haven't for a few years, but I know they were a very big player. I wasn't aware that they had divested themselves totally of these plants.
Mr. Larson: On a manufacturing basis they have.
Mr. Hoeppner: They kept no shares in these companies?
Mr. Larson: Not that I'm aware of. Imperial Oil is still involved in the fertilizer industry as a retailer. They continue to be members of the CFI and are a major retailer in western Canada. They purchase their fertilizer needs from the basic manufacturers.
Mr. Hoeppner: What percentage of the retail trade do they control?
Mr. Larson: That would be confidential competitive information.
Mr. Hoeppner: I know what has been happening in our local area, so I'm just questioning it. Because you're representing retailers, you are representing them more or less, aren't you? Am I wrong?
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Mr. Larson: There are perhaps two definitions of retailers. When we say we represent the basic producers and most major distributors and retailers, we're referring to Imperial Oil as opposed to the dealer in Portage or the dealer in Souris or the dealer in Moosomin, who I think are more adequately represented by the retail dealer association groups. I think Pierre is appearing tomorrow before the committee.
Mr. Hoeppner: So you don't represent independent dealers in the country, then.
Mr. Larson: That's correct. We have an affiliation with CARE, but we don't directly represent them.
Mr. Hoeppner: My next question was along that line. What always amazes me when I shop for fertilizer is the number of same prices I run into. When I go shopping for a combine or a swather, I can get very different prices because the mark-up on those machines gives them leeway to adjust. This I don't find in the fertilizer industry, and it surprises me sometimes. I'm wondering if there is a sort of understanding that dealers do not discount prices, that if there is any discounting it has to be done by the manufacturer.
Mr. Larson: It might be more related to similar profit margins to start with. I'm not sure.
Mr. Hoeppner: The reason I'm asking is that I want to get back to Mr. McKinnon's plant at Brandon, Simplot. We know that if we want to get discounts we have to go into the northern U.S., and that's fertilizer that's manufactured in Brandon. That can be proven very validly. It seems that the discounting these big manufacturers do is outside of the territory where they really are existing or where we buy the product from.
We've had instances where it was just unbelievable how much cheaper you could buy your fertilizer in the U.S. Then other years it's vice versa and we see the Americans coming in here to pick up fertilizer. So there seems to be no rhyme or reason in how it's priced.
Mr. Larson: I think it's probably an accurate statement that you will have anomalies and swings, but I think it is normal in a commodity market that prices will tend to converge.
Mr. Hoeppner: Would you call it dumping to keep the price up in the local region where it's manufactured? If we dump grain into the U.S. below market price, couldn't we be charged for it?
Mr. Larson: I don't think I would want to comment on anything with the word ``dumping'' in it.
Mr. Clarke: I've been there and I've seen these companies quite aware of the dumping requirements in the U.S.
Mr. Hoeppner: I want to give you some tough questions. The other one I want you to try to explain to me is this.
When I went to Mr. McKinnon's plant sometime in the mid-1970s we had transportation problems. As you know, most of the fertilizer was handled in bags at that time. I had bought it from a certain company, and when they couldn't deliver it by rail we were instructed to go and pick it up by truck from Brandon. I was astounded; there wasn't a brand of fertilizer coming out of that plant that had ever been mentioned in the trade. They were all coming out of that same plant. Now, is that still continuing with the bulk fertilizer?
You had Cominco, you had Sherritt Gordon, you had co-ops. Everything was coming out of that one plant, bagged as different brands.
Mr. Larson: There are strategic product exchanges amongst competitors, yes.
Mr. Hoeppner: So that would compensate for some of the rail traffic problems.
Mr. Larson: I don't know if that would be their motivation.
Mr. Hoeppner: That really astounded me. Here I thought I was buying on a competitive basis. I was looking around for companies to give me a better deal, and when I saw the product of all the different brands coming out of one plant, it just flabbergasted me.
Mr. Larson: It is a commodity product, and -
Mr. Hoeppner: So is that one place we should be looking at as far as costs and pricing are concerned? We have a job to do here, and we're representing a lot of farmers who are looking for some answers from us. Where should we look?
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Mr. Larson: I think strategic product exchanges are decidedly in the farmer's interest because they do reduce distribution and transportation costs. I would personally say that in theory it should be a very strong competitive plus.
Mr. Hoeppner: What about moving excess product out of the area of competition?
Mr. Larson: These plants are world-scale plants and they have to compete in a number of markets to survive. I'm not sure if there is an out-of-market place where.... They're in all these markets and they need to market profitably a portion of their production in all of these areas.
Mr. Hoeppner: I've been kind of hammered here a few times when I've suggested that there's price fixing or collusion or something. You probably can't prove it. But it becomes very suspicious when you see products and brands transferred, and the price doesn't seem to be too variable from one dealership to the other. If product is manipulated, why couldn't prices be?
Mr. Clarke: I don't know enough about the commercial operations of the companies to comment on that.
Mr. Hoeppner: Well, wouldn't it be in one of your job descriptions as a fertilizer institute? You're helping to move product, aren't you?
Mr. Clarke: No. The institute is representing the basic manufacturers.
Mr. Hoeppner: Yes, but they're in the business of selling products.
Mr. Larson: They are, and they are also in the business of competing with each other. As an association, we do not get into competitive issues. We represent the industry in areas where there is a common benefit in the public interest - environmental questions, transportation policy discussions, public affairs. Those are the areas where an industry association can serve the interests of the industry and the public.
The questions you're asking are very specific competitive policy questions that each producer would guard very closely, I would suggest.
Mr. Hoeppner: So how do we get at the problem of high input costs?
Mr. Larson: Maybe I've been unsuccessful today, but one of the cases I've been trying to make -
The Chairman: Excuse me, Mr. Larson, for just one moment.
Jake, I hope I'm not intervening, and we will allow Mr. Larson to finish, but the health committee is sitting and waiting. We're a little bit over our time.
Mr. Hoeppner: I'm sorry. I didn't realize that.
The Chairman: Could you do me a favour, though, Jake? I would really appreciate if you could get us some of that variation in price that you were referring to. I know we have the Statistics Canada information. It shows prices pretty consistent, probably edging a little better on the Canadian side than the American. I realize it involves generalities, it goes over a few years, but if you had some specifics, that might help us look at that a little better, that's all.
Mr. Hoeppner: I'm wondering, Mr. Chairman.... When I farmed - that was in the late 1980s and early 1990s, when we brought the fertilizer in from as far as Minneapolis - I knew what the spread was. How that would compare to StatsCan, I don't know. My personal experience is my only basis for speaking about this, and I'd have to go back to my books and bring the prices, because -
The Chairman: Yes. The numbers we have here are only since 1993 going through to 1995, so -
Mr. Hoeppner: I retired in 1990. That was my last crop, so.... Good.
The Chairman: Thank you very much.
I have to say, Mr. Larson and Mr. Clarke, we very much appreciate your input. You've been a great aid to our committee. We appreciate your insights, and certainly it will help us go forward with our committee's final report, which I think you can eagerly anticipate. We'll try to get that to you, and any further help that you can give us we certainly would appreciate as well. Thank you very much for coming and thanks for your frankness and clarity in giving answers. We do appreciate that.
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Mr. Larson: Thank you, Mr. Chairman and committee members.
The Chairman: The meeting is adjourned.