[Recorded by Electronic Apparatus]
Thursday, May 18, 1995
.1101 
[English]
The Chairman: We have two witnesses this morning. First, from the University of Manitoba, we have Dr. John Heads, who is the director of the Manitoba Institute of Transport. The later witness will be Dr. Daryl Kraft from the Agricultural-Economic Farm Management Department of the University of Manitoba.
Welcome, Dr. Heads. I believe you wanted to begin first.
Dr. John Heads (Director, Manitoba Institute of Transport): Thank you, Mr. Chairman. I will commence briefly by saying who I am and what my background is as far as it is relevant to the work of this committee.
I am director of the transport institute at the University of Manitoba. Prior to going to the University of Manitoba, I worked for the Canadian Transport Commission, where I was executive director of the railway transport committee. During that time, I was heavily involved with the Western Grain Transportation, Act and I was responsible for the rate setting, costing and subsidy aspects of the act. I therefore have an in-depth knowledge of the actual provisions and administration of the act, an in-depth knowledge that will be completely irrelevant six months from now but is here at your disposal if you need to ask any questions on it at the present time.
Since I joined the University of Manitoba, I have been heavily involved in many areas of transport research, including grain transport research. The work on grain transport has included analysis of the probable future of the Western Grain Transportation Act, starting with a study in 1988.
We have examined grain short lines and the CWB basing point issue. I have worked for the producer payment panel in a technical capacity and we have recently completed a study for Western Diversification that included the probability or otherwise of the diversion of Canadian grain to U.S. transportation routes in the west.
When I was a civil servant, it was obviously inappropriate for me to voice any opinion on the method of payment of the WGTA benefit. When I became an academic, I was no longer under that constraint. I have strongly and consistently favoured the ending of the subsidy payments to the railways, from a publication that I produced in 1988 to the present time. In taking this line, I think this is typical of most academic commentators on the issue. I think we are as near to being unanimous as economists on that.
I therefore welcome the decision the government has made. In passing, however, I was a little surprised that the government was able to dispose of the issue on a pay-out of $1.6 billion, along with $300 million for transition payments, because the subsidy was, of course, running at $560 million a year before it was discontinued. I nevertheless think the government must have been right in this decision because there has been negligible public protest over the amount of money that is being paid out.
.1105
I have a view on the car allocation problem that is perhaps a little unusual, and I think it might be worthwhile if I put it forward to the committee.
At the moment there are effectively 19,000 government-owned or government-leased cars operating in the grain trade. These are the hopper cars, but there are also some box cars that were renovated at the expense of the province of Manitoba. Of these 19,000 cars, 13,000 are the government fleet, 2,000 are owned by the Canadian Wheat Board, and 2,000 are leased and paid by government. The balance are owned by the governments of Saskatchewan and Alberta.
It is my view that the optimum way to dispose of these government cars would be to give these cars to the two railways, half to CN and half to CP, because they each carry roughly half the grain. My reason for arguing this is that, first, these government cars were provided before the WGTA was passed, and I think they were provided by government essentially as a form of conscience money for the Crow rate in order to give the railways something to cover the fact that carrying grain was so uneconomical.
My second reason for advocating this is that the maximum rate scale, which has been set and will continue to operate until the crop year of 1999-2000, presupposes that the railways have no ownership costs with respect to the hopper cars provided by government. In other words, the rate scale is worked out on the proviso that the ownership costs of these cars are not incurred by the railways; therefore their costs do not appear on the rate scale.
My third reason for advocating this is that I believe that if the railways had direct control of the cars, there probably would not be a car allocation problem. At least, I think it would only arise on very seldom occasions. The railways provide cars for virtually all other commodities carried - with the exception of dangerous commodities, which I don't think I need get into this morning. It is rare for them to have really bad car supply problems in carrying other products. It is not unprecedented and it does occur from time to time, but in general I think the car supply problem would be much less if the railways were controlling the cars.
As far as the cost involved for government is concerned, what I am suggesting is that the cars should be given to the railways, not sold. They may be sold for $1, but essentially I am suggesting that they should be given to them. The 19,000 cars, less the 2,000 that are leased and the 1,000 owned by Saskatchewan and Alberta, leaves you with 15,000 cars. Their present value is about $30,000 or thereabouts, maybe a little less. So that would be a total amount of value of $450 million for those cars. I just do that calculation to give you an idea of how much money is involved.
I don't think, Mr. Chairman, that I will proceed further with any opening statement. With respect to the questions you have passed around so clearly for people coming to appear here, I don't think my technical background allows me to offer anything useful on question 1 or question 4. I do feel reasonably confident to answer any questions you wish to ask on questions 2 and 3. I also have a couple of minor technical points that I would like to make with respect to the papers circulated by Transport Canada on February 27.
I think that concludes my opening remarks.
The Chairman: Mr. Chrétien, do you want to start?
[Translation]
Mr. Chrétien (Frontenac): Welcome to Ottawa.
.1110
Dr. Heads, I would like to welcome you to the Sub-Committee of the Standing Committee on Agriculture and Agri-Food on behalf of the Official Opposition. This subcommittee deals particularly with the Western Grain Transportation Act.
I would like to note that, unfortunately, the opposition party which essentially represents the Western population is not represented at all here this morning. I hope that representatives of this party will join us before the end of the meeting.
Since I am from Quebec, my knowledge of Western agriculture is very limited. I would also like to thank my colleague, Mrs. Cowling, for giving us your curriculum vitae which, in passing, is very impressive.
I would now like to ask you to two questions. First, I would like to have further clarifications regarding the 19,000 hopper cars or box cars. If I understood your interpretation and given the calculations I did subsequently, there would be 13,000 cars owned by the Government of Canada, 2,000 by the Canadian Wheat Board and 4,000 by the three provincial governments of Alberta, Saskatchewan and Manitoba.
Regarding the 13,000 hopper cars owned by the government, you valued them at $450 million. You would be in favour of selling half of them to CN and the other half to CP for $1 each. You have presented arguments supporting this proposal.
If they are sold for $1 each, it amounts to making a gift of $450 million to the two transportation companies. Let me remind you that, this week, the government has tabled a bill on the privatization of CN. Can you go back to your proposal and explain things a little bit further. Since I am from Quebec, at least at the outset, I would be against selling the 13,000 cars for $1 to CN and CP. I would need other arguments than the ones you have presented.
I don't know if you'll be able to answer my second question because it doesn't concern transportation per se. I'd like to talk about the payout to farmers, the redistribution of the $1.6 billion. What is going to happen to the leased land owned by the provincial government, the banks and the lending agencies? Are they going to be given back to the landowners or to the many farmers who leased them?
These are all issues that should be examined in depth. Neither the government, nor the Finance Minister nor the Agriculture and Agri-Food Minister know yet how this sum of $1.6 billion is going to be allocated.
[English]
Dr. Heads: Thank you, sir.
I'm afraid I can't answer the second question because it's outside my area of competence. Hopefully my colleague, Dr. Kraft, will be able to comment on this one. He speaks to you shortly.
.1115
As far as your first question goes, I'm afraid I misled you by giving a quick account of one small aspect. Of the 4,000 cars that were left, 2,000 are leased and the lease costs are paid by Transport Canada. The Provinces of Alberta and Saskatchewan own 1,000 cars each.
I have already outlined my arguments for handing the cars over to the railways, and I haven't anything to add in a technical sense.
In terms of the give-away of public money, it is quite clear that the freight-rate structure up to 2000 assumes that these cars will be free of ownership charges. By 2000 the value of the cars will have further depreciated. I haven't done a precise estimate of what they will be worth by 2000, but it would certainly be in excess of $300 million, so there would be that amount left.
The point you raised asking why we should give $300 million to the railways in 2000 without some sort of guarantee and control that some benefit is going to arise from it is relevant. If the railways were then to be free to cost grain movements in accordance with what they chose, and if they were then getting return from this in dealing with government, there might be some double counting.
I think what I'm saying, sir, is that you have a point and I might have jumped in too fast.
[Translation]
Mr. Chrétien: In terms of justifying this shared distribution between CN and CP, I would be ready to bet that in the year 2000, CN will be privatized but it will still be there. It might keep its name or be given another. So, there will be two private companies. By the year 2000, the $450 million will have depreciated to $300 million, which means $150 million each. You know we live in a vast country and, when things are not done fairly, the matter is raised in this or that region. Yesterday, I was watching the Téléjournal and I heard that the federal government was studying the possibility of investing $31 million so that an arena could be built in Winnipeg and the hockey team could stay there. In Quebec, there is a similar situation. If you give something to someone, you should give the same to the other. We are a bit like spoiled children who are jealous of each other. If one of us has a big stick, the others also want a stick as big.
To me, giving away money is unfair. It's true that there is the rate scale, but are railway companies going to lose money because of the rate scale established by the government? I am convinced that if they lose money, they are going to do some lobbying and the rate scale is going to be adjusted so that their transportation activities are going to be financially viable.
[English]
Dr. Heads: On the speculation as to what might happen on the lobbying and re-establishment of rates, I think you are probably correct that this could well arise, but I don't think I can usefully speculate on this.
The Chairman: Mr. Chrétien, I think there are conditions established on some other things as well. I believe, in terms of the privatization of CN, the head office must remain in Montreal.
Mrs. Cowling (Dauphin - Swan River): I would like to thank Dr. Heads for coming to this committee this morning, bringing his talents in this very specific area.
The farmers in my riding and, I believe, in Manitoba as a whole are very optimistic about the changes that are happening. But they're also somewhat nervous about the massive change in making the system a deregulated regime. Some of those farm groups tell us we should extend the maximum freight rates and keep a cap on them beyond August 1, 2000.
.1120
I'm wondering what you think of that. Do you think that's the right way for us to move as a government?
Dr. Heads: I think everything should be satisfactory to 2000, as indeed you stated in your question to me.
Among the specific questions you asked in the briefing note to the committee, you raised the question of whether there should be some maximum rate protection for captive shippers. Canada has never been very successful over the last 30 years in arranging statutory protection for captive shippers. In fact, yesterday I delivered a paper on captive shippers in the coal and sulphur industries and the problems that are faced by shippers when they have only one railway and no effective means of competition.
By saying ``no effective means of competition'' I don't wish to degrade the 1987 National Transportation Act, which I think was very useful legislation in many ways. Nevertheless, if you are a captive shipper and you can't use the provisions of that act, you can't use inter-switching because there's no one to inter-switch with, and you can't use a competitive line rate because CN and CP have never had them against each other. You do tend to be somewhat at the mercy of the railways.
I don't think grain farmers will ever be in quite as difficult a position as the coal mines and the sulphur plants. Grain farmers can at least ship their grain to alternative elevators, although sometimes in some parts of the country they tend to be captive to one railway or the other.
Fortunately, your committee doesn't have to make a final decision on this yet, because you're having extensive reviews of the legislation, including the comprehensive review in 1999. Whether or not you should be tackling this at this point is obviously not for me to say, because I don't know what the priorities of the committee are.
I've given a rather long and rambling answer. To summarize what I have said, I think the fears of some farmers that they could be captive to one railway or the other are not completely unfounded. I think the fears are more realistic in the north for the producers that are served by CN, because in the south where you're served by CP you would have the prospect of crossing the border, if need be, and using U.S. railroads as competitors. So I don't think the danger is necessarily imaginary, but fortunately I don't think you have to take action immediately if you choose not to.
Mrs. Cowling: How far should we go in a deregulated regime, in terms of rate setting and branch lines?
Dr. Heads: In terms of rate setting, I understand the decision has been made that after we get to 2000 grain freight rates will no longer be regulated but will be dictated by the markets. Although I'm an ex-regulator, I have no desire for regulation; I think the freer things are, the better. So I don't think there should be a need to regulate grain freight rates after 2000, except if the problem of captive shippers arises, to which I have already spoken.
The branch-line abandonment process for grain lines reverts to what was established for the NTA generally, effective, I think, the beginning of next year. That procedure would also continue right through to 2000 and beyond. Those arrangements seem to be reasonably satisfactory.
.1125
Mrs. Cowling: I have another question, Mr. Chairman. One of the things I'm hearing from my constituents, particularly the municipal politicians, is that they are very worried and concerned about their road bases and how they will stand up once we get into a deregulated regime and we start moving much larger trucks through that road system.
Dr. Heads, can you make a comment on whether there are complications there and whether their argument can be justified?
Dr. Heads: Yes. I am already on the record as being sympathetic to that point of view. What I feel is this. When you abandon a branch line, the savings from abandonment are very considerable, but under the legislation as it stands - and I'm not critical of it because you can't do it any other way - the benefits of branch-line abandonment are enjoyed by all farmers in general.
But there are two particular classes of people who suffer when a branch line is abandoned: first, the farmers who are delivering grain to the elevators on that line, because they generally have to deliver grain longer distances; and second, the rural municipalities, because they can be subject to greater wear on their roads and there is no automatic recovery of that money from the system. So there are two groups of people who are suffering.
From investigations we have done in the past, the average breakdown appears to be that when you take the savings from a branch-line abandonment as an index of $100, the extra trucking costs average something of the order of $35 and the extra road costs average something of the order of $3 to $4. So in total, for every $100 you save, you incur over the average something like $39 to $40 in extra trucking costs and extra road costs.
Let me hasten to add that this obviously varies immensely from one line to another. This is a calculation I did on the basis of Saskatchewan data provided by the Saskatchewan Association of Rural Municipalities, who I think have done some very good work in this area, incidentally. This appears to be the average.
I believe - and this is not a terribly original personal belief - that if the community as a whole is benefiting but some people are suffering as a result of it, then it would be very helpful if the people suffering could be compensated. Indeed, the legislation does envisage that such compensation might be offered.
Obviously one can argue about the calculations I've just given you. One can argue about extra trucking costs, one can argue about what the value of a farmer's time is. In the area of roads, one can ask if you are merely upgrading gravel roads or if you are having to go and introduce improvements of a structural nature and so on.
I think what I've given you is a pretty general, broad indication of the savings. Clearly, with the legislation there can't be a compensation to farmers and to municipalities for extra trucking costs from now ad infinitum; it would have to be given as a capital payment. I don't think that logistically you have any other way of administering it, but I personally think the fears expressed by the rural municipalities have some justification in them.
My value judgment would be to compensate them, but I'm not paid to make value judgments; I'm paid to be a technician. So that's more or less the situation.
Mrs. Cowling: Thank you.
The Chairman: Dr. Heads, I wonder if you could give us a copy of your paper you've talked on in terms of the captive market you just gave. That would be useful. Although the grain industry is somewhat different, we'd certainly appreciate it.
.1130
I'm inclined...I wouldn't want to say to question your judgment, but to quarrel with you in terms of the overall impact over time and there being the ability for there to be some competitiveness between the railways.
Yesterday, in terms of talking to some people in the railway industry.... You can't see this map from here; I know this map needs to be larger, but it's of the railway system in Canada. The main lines and the secondary lines of CN and CP are marked in yellow.
From my perspective, over time, that is where the main railways want to go. Everything else, branch lines, will be closed down eventually over time unless a short-line railway picks it up.
If you're a farmer in those areas, those distances don't look very big on that map, but when you drive those roads in western Canada, as I have, they're certainly great distances at great costs and great economic impact in terms of road wear.
In the beginning you mentioned - and maybe it's a problem with me, but it's a problem I've had over all my time in the farm movement - that basically on changing the payment to the railways most academics agree, and I agree with you on that point; most academics do. But there's a hell of a divergence from where the farm community is at.
The difference to me seems to be that if you're wrong in terms of your academic analysis, you don't have to pay for it. But if we're wrong in terms of agreeing with your analysis as a government, and make those decisions, then the farm community has to pay.
I wonder what your thoughts are on that. Why is there the difference, the very divergent view, between the academic community and the farm community on this issue? I respect your point of view, but I've found a real divergence of opinion when you talk to primary producers versus when you talk to bureaucrats in Ottawa or academics within the university systems.
Dr. Heads: I think, Mr. Chairman, you're possibly raising two points, one dealing with the difference between the academics and farmer, but I think you're also dealing with the branch-line issue.
Could I give my answer in two parts?
The Chairman: Sure.
Dr. Heads: I think I'd better start with the difference between academics and farmers. On the point you have made to the effect that farmers suffer financially and academics continue to enjoy tenure - that may not last too much longer, of course, Mr. Chairman - but I think you make a very valid point there.
The academic arguments for favouring the end of the subsidy to railways will lead to greater diversification of agriculture production in the prairies, the use of more modes of transport for transporting grain, and so forth, and the elimination of some grain shipments, for example, some shipments of barley, where the profit of the farmer from the barley is possibly in some cases less than the WGTA subsidy payment. I think the committee is very familiar with these arguments, and I won't go through them.
Why do farmers disagree? I think the reasons are probably partly that way back in 1987 - in fact it goes back long before that, as you know even better than I do, Mr. Chairman - initially the situation with farmers was that they thought the subsidy paid to the railways was perhaps more politically safe than if it were paid to agriculture. It wasn't regarded as yet another agriculture subsidy.
Secondly, farmers also welcomed the provisions in the WGTA, which allowed government to keep an eye on the railways, to make sure they invested adequately and to make sure they met performance guarantees. I think also there's a world of difference between the quality of service provided by the railways compared to what they were providing before the WGTA, when they were letting branch lines run down into terrible condition, where boxcars were being sent without doors, and so on. So I think that might in part explain the difference in perception.
.1135
The Chairman: Thank you, Dr. Heads.
On your increased diversification point, one of the objectives of this committee, as you've seen from the focus questions, is to try to look into the future. Diversification is a big one, but we do need to come up with some recommendations in terms of how do you actually encourage that diversification. It's easy to say it'll be there. There are some within the various industries saying that diversification has already occurred within the livestock industry to a certain extent. So if you have any ideas in terms of how, from a government policy perspective, we can encourage diversification, we would certainly welcome them.
We went through fairly extensively the report on international competitiveness for which you were project director for the Western Economic Diversification. I have a couple of questions about that and then I'll turn to Bernie. In that report you state that as long as the Crow benefit under the WGTA is paid to the railways, the United States' railways and ports are not competitive for the movement of Canadian grain from the prairies. The report goes on to say:
- With all transport rates in Canada reflecting the full costs of moving grain, United States' rates
may then become competitive.
- That's probably a valid statement.
On that question of diversion to the United States, has the transport institute done or do you have any projections in terms of the impact that will have on the Canadian system in a number of areas? If more volumes are going to the United States, what is the impact in terms of Thunder Bay, in terms of Montreal-area ports? If our volume goes down through Canadian ports, to a certain extent our costs at the ports are going to go up. What about quality control in terms of that diversion through the United States? Do you have any thoughts on that?
Dr. Heads: Yes, Mr. Chairman. I think the question of quality control has to be dealt with before there can be any diversion, because quite clearly we are expecting higher standards than the U.S.; we're cleaning grain and so forth. We have tended to take the view in the transport institute that these questions of quality control exist at the moment, but that they would be solved within the next few years. We tended to look at the question of possible diversion, assuming that the requirements of the Canadian Grain Commission were not impeding this.
I'm not implying any criticism of the Canadian Grain Commission in that comment. I think the standards are necessary.
I do not agree with Andrew Elliott that the diversion is likely to be as high as 10 million. If he said it was at risk, he might have meant conceivably it could be that high, but I don't think it is likely to happen at the moment.
In the study to which you alluded, we have examined the potential of diversion to U.S. west coast ports principally, although we did look at the other questions of diversion. At the moment, we believe that overall U.S. freight rates for equivalent mileages are quite competitive with Canadian freight rates for equivalent mileages. People look at the heavy freight rates that farmers have to pay in North Dakota and eastern Montana and point out, quite rightly, they're higher than you have to pay in Canada. But Burlington Northern Railway has a couple of shippers there and it's making a pretty good return out of that.
However, if Canadian railways charge the same as U.S. railroads for equivalent mileages, we are presently protected on the west coast by the fact that the mileages to get to U.S. west coast ports are considerably greater than the mileages to get to Vancouver and Prince Rupert.
.1140
Our feeling generally is that the diversion of grain to U.S. ports at the moment is not likely to be terribly great. We think our railways are fully competitive. There is of course a problem, which I'm told you're having addressed by the witnesses here, that elevator charges tend to be much higher in Canada than in the U.S.
The greater risk of diversion in our mind is down through New Orleans, not necessarily by water, but probably more likely by continuous rail movements that would be competitive in some ways with the water movement.
Our bottom line on this is that we don't see any great danger for Vancouver in the very near future, and we think the throughput in Vancouver will be maintained at the present 14 million tonnes or even increased. The question of what is going to happen at Prince Rupert is a little more debatable, because Prince Rupert is about to suffer from a loss of port parity with Vancouver, of which you're all extremely well aware.
I don't know whether this will materialize. It will materialize, obviously, in the maximum rate scale, but whether CN would offer some sort of competitive rate in order to encourage grain still to move to Prince Rupert or not, I don't know.
There is a bit of a threat to Prince Rupert. I don't think it's a drastic threat, but it's there. It could become drastic if you get increased throughput through Vancouver, particularly as a result of directed shipments of clean grain sent to that port, because it has been suggested that Vancouver could increase its throughput from 14 million tonnes to 17 million tonnes. This is on the basis of a study done by KPMG. It's not our study, but I think the suggestion is quite realistic that they could get that high.
So I think the major threat is obviously on grain going through the seaway and out through the east coast. We're all aware of that because that's not a threat, it's a reality. The grain throughput through the east has been very low for many years now and I think this will continue. Unfortunately, the east coast has become our residual grain outlet.
The Chairman: Thank you, Dr. Heads. I may, under letter, forward you another half-dozen questions, as we don't have the time here today.
Mr. Collins (Souris - Moose Mountain): I want to thank you for coming. I find it interesting that academics tend to be able to make an observation about how we dispose of rail cars at a cost to somebody else. I always think that when you get in the political world, you're much more careful in the observations you make about other people's money. Out west they're not happy with this kind of observation that the railways would get those rail cars. I can assure you of that. Certainly coming from Saskatchewan, they feel the last place they'd want it to be going is back to the railroads.
Let me just make some observations. From your background and knowing what it's like at Prince Rupert, what are your feelings about Roberts Bank? I suppose you have some insight into Roberts Bank. Do you see that as becoming a major player down the road in terms of unit trains and the movement of those unit trains out of the west?
What I'm also concerned about is when you make reference to...I think it was point 3 where you said railways have direct ownership and car allocation would not be a problem.
.1145
On the car allocation, as I see it now for other products, they don't have as many points to come to. You're talking about a lot of terminals in the west. There are a lot of points of collection. Within the car allocation system...and you people are coming from transport...last year we had to go through and hopefully help the railways and others. We found there were about seven or eight things like Port of Thunder Bay and the backhauling and the idea that we would assess the merge charges for improper movement of cars, and I'm afraid that maybe those kinds of things are going to be gone.
Would you like to respond to those questions - on the Roberts Bank, the suggestion about the car ownership and the seven or eight features that we gave to the agriculture minister with regard to the movement of grains?
Dr. Heads: I don't personally see the construction of grain export to facilities at Roberts Bank in the immediate future. At the moment, Roberts Bank is purely coal, but a container port is in the process of being constructed, and I think that for the foreseeable future the investment certainly in conventional-type elevators on the west coast would be a dubious economic proposition.
If we get changes to direct-hit, quicker exports and so forth, then I think both of the existing facilities could cope. The point you make, that with other commodities the number of origins that have to be served in the west is extremely small compared with agriculture, is obviously completely correct, and the existence of a large number of points originating grain for export does make the distribution system more difficult.
I would think in the future that the number of points from which grain is going to be exported would be very much reduced. There is certainly pressure towards high throughput elevators, and I was told during a paper earlier this week given by the provincial Deputy Minister of Agriculture in Saskatchewan that many communities were showing interest in the construction of high throughput elevators. Indeed, there was even concern in the province that too many might get constructed and that you might have an oversupply of high throughput elevators.
My basic feeling, however, is that if the railways have traffic that is profitable - and grain traffic has been profitable since 1983 - they will make every effort to service it efficiently, and, indeed, they have done so from a technical standpoint. It doesn't mean I'm saying that everything is rosy in the garden if the railways are left in control, because you still have the problems with the appropriate level of freight rates.
Mr. Collins: With regard to short lines, have you any thoughts about running rights specific to short lines? On the reverse onus provision on the cap, I wasn't too clear when you talked to Mrs. Cowling whether you felt the transport minister was moving in the right direction by removing that cap in 1999 or allowing it to stay in place with the reverse onus provision staying there as well.
Dr. Heads: The problem of giving running rights to short-line railways on the track of CN and CP, which I think is what you are implying, would take me quite some time to answer. It would raise a number of problems of coordination of traffic flows and so forth. I'm not implying that this is technically impossible; I'm just saying there are technical difficulties in it.
I'm not quite sure what the benefits would be. Presumably, the benefits would be that the short-line railway could then compete against CN along the CN track, so it's all part and parcel of this whole idea of having ownership of track infrastructure separate from ownership of the railways themselves.
It has merits. It also has problems. I don't really think I should get into this much longer, Madam Chairman, but I'm quite willing to try to respond later on that.
As far as the cap is concerned, you implied, but you're far too polite to say it, that I gave a perhaps slightly confused answer to Mrs. Cowling's question. I think this is a completely fair comment, Mr. Collins, because I don't know quite what the answer is.
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I don't think there's a problem of control of maximum rates until the year 2000. I think that in certain circumstances there could be after that. Whether you wish to address it now or leave it until the review in 1999 is up to the committee to decide.
Mr. Collins: We received some observations from the Auditor General. I wonder if you wouldn't mind commenting on some of them. The suggestion in here is that as little as one day of turnaround time improvement at peak periods could mean up to as much as $3 million annually for us in the grain business. Do you agree?
Dr. Heads: My immediate reaction to that figure was that it was probably a slight underestimate. I don't think I would quarrel that that could be attained. I haven't rechecked his calculations, but the statement is certainly not absurd.
However, coal cycles have not in fact shown very much improvement at all over the last ten years, as you know. I think if one could get a greater utilization of unit trains in the movement of grain, which would necessitate having high throughput elevators in order to accommodate this, the cycle could be reduced. Certainly, when you look at grain cycles compared to coal train cycles, it's the difference between night and day.
Mr. Collins: This is the last one for now. When you served, did you spend some time with National Transportation?
Dr. Heads: I was with the Canadian Transport Commission, and the senior staff of the Canadian Transport Commission were encouraged to leave when the National Transportation Agency took over.
Mr. Collins: They have a comment under 6.94. This is just an absolute gem; I would like to know who the writer is.
Dr. Heads: Of this report?
Mr. Collins: No, this one here. This is a beauty, this paragraph. They need to get a literary award for this one. It says in the opening:
- As the National Transportation Agency believed that a quantitative analysis was not feasible, it
assessed these criteria quantitatively. According to the agency, this was done by looking at the
positive impact of each investment proposal.
- The quality of the agency's documentation of its qualitative analysis of the effective
investments on an adequate, reliable and efficient grain transportation system was such that we
were not able to conclude as to whether or not the agency's opinion was warranted and should
be relied on by the minister.
Dr. Heads: The National Transportation Agency is required to determine that the proposed investments of the railways are adequate and the other nice words you used for grain transportation. This was a requirement that I think was put in the legislation at the last minute.
The problem is that an awful lot of railway investment in western Canada - not just for purposes of this discussion, but everywhere - is made to serve all sorts of traffic and not exclusively grain. I think that trying to determine whether or not an investment has been placed there to serve grain, coal, potash, or what have you is very much in the eye of the beholder.
The railway investment in the early to mid-1980s was extremely heavy, culminating of course in the CP tunnel. Railway investment levels generally have been lower since then because the railways have not had any money to invest.
I think at the time of the Western Grain Transportation Act there were provisions put in to make sure railway investment was adequate. There were provisions put in to make sure railway performance was adequate. I believe that overall the investment and provision of everything except cars at times of peak demand has been adequate.
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I think a lot of those requirements were put in the legislation because western farmers were quite rightly very leery, not only of charges, but of the quality of grain transport because of what they had experienced in previous years. I don't think one hears too many complaints about the quality of grain transport in the west now, compared to what one heard 15 years ago.
Mr. Collins: What the Auditor General said in the summary was a denial of that opinion.
Dr. Heads: I do not endorse the Auditor General's criticisms in this area. I think he was being somewhat harsh on the National Transportation Agency. He certainly didn't come out with suggestions as to how these various things could be measured quantitatively and objectively. I think the reason is that it is very difficult to do it.
Mr. Collins: You've been very kind. I appreciate your observations because different people come here and, of course, share different opinions. You're right that if you're going to put that down, I'd rather it be in constructive layman's terms than gobbledegook. This gets so layered here that no one seems to want to express an opinion. They just ramble and the rambling comes out in ``Who was right?'' It's not a question of being right. Let's get the right thing done here.
I just find that in the report there are some observations that I'm sure you'd have some input on for us. Do you agree that $10,000 is a reasonable figure for the abandonment costs for the line?
Dr. Heads: Before I answer Mr. Collins I would like to make just one statement to be sure I am being completely honest. I said I did not work for the National Transportation Agency and that is correct. However, I did administer the Western Grain Transportation Act provisions for the Canadian Transport Commission from 1984 to 1987. If I had still been doing that I would have been the object of the Auditor General's comments. I have not been there since 1988, but I felt I should make that statement quite clear in the interest of intellectual honesty.
It is very interesting that you raised the question of the $10,000. I do not agree with it; I think it is too low. At the moment the average line-related costs for the grain-dependent branch lines are approximately $14,000. The committee could get a precise figure from the NTA, but it's something of that order; it's under $10,000. In the past, if a branch line were abandoned the farmer got the full benefit of the $14,000 through the rate scale. The proposal now is to give him the benefit of only $10,000.
I'm not quite sure what the thinking behind this is, but the suggestion that this gives the railways greater incentive to abandon is only true very much at the margin. If a railway abandons a branch line, it saves the costs of that branch line of about $14,000 a mile. What then happens is the $14,000 a mile goes into the rate scale and the total amount of money paid to the railways is reduced by $14,000 a mile.
If CN abandons a line, however, it doesn't lose $14,000 a mile on the rate scale; it's split equally between CN and CP. When CN abandons a line it gets all the benefit from the abandonment, even if the farmer got the $14,000 a mile. The way the rate scale works, CP would bear $7,000 of the cost and CN $7,000. So CN already has an incentive to get rid of as many branch lines as it can, but at the same time it wants to see CP keep branch lines from that standpoint and vice versa.
The only disadvantage of that is if you get rid of too many branch lines, you save the costs but you may also lose the grain. I should modify that last statement by saying a company wants to get rid of branch lines, but only if it can be reasonably sure it can keep the grain on some of the branch lines that belong to it.
The Acting Chairman (Mrs. Cowling): On behalf of the committee, I would like to thank Dr. Heads for coming to Ottawa and for his most informative presentation.
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We'll move on now to Dr. Kraft.
Professor D. Kraft (Agricultural Economic Farm Management Department, University of Manitoba): Thank you, Madam Chairman.
On this particular area of transportation and prairie agriculture, since I've been a member at the University of Manitoba for 20-some years, I could suggest I have a revolving file on this particular topic. It has come up about every three or four years since I arrived at the university. At various times I've been asked to study or get involved in research commissions on this particular topic.
This time, when asked to make a presentation to your subcommittee, it involved revisiting that revolving file, and maybe within two to three years it should be archived as the subject-matter and what was relevant at that time will no longer be the case.
I prepared some brief speaking notes and you may want to put comments in the margin to keep me on topic. I'd like to put it in the context of this particular change in rail subsidies and supports and why we're really sitting here.
We could go back to papers I gave over a year ago, after seeing Canada sign the GATT agreement. At that time, knowing the nature of the Western Grain Transportation Act and how it financed the movement of grain, I knew there was no way the Canadian government could live up to its GATT commitment and continue this form of subsidy. Subsequently, it was not surprising when the intended revisions were announced in the budget.
In this context, I think we have to look at what really brought the change in the rail support and the rail subsidy. It's within the export subsidy commitment within GATT. So we're looking at a transportation subsidy change in an environment when everything else outside of Canada is changing as well.
We can't just focus on prairie agriculture with the change in the rail subsidy because the rail subsidy is tied to ``We will do this if other member nations in GATT will follow through with reductions in export subsidies''. As a brief refresher, those export subsidies are to be reduced in dollar amount by 36% by 2001, and the amount of product that can even qualify for support has to be reduced by 21%.
So the European Union and the United States, which are the major subsidizers of grain and oilseeds, will also be changing and the common agricultural policy has already changed. It changed prior to GATT in anticipation of it.
The United States farm bill, which you will be monitoring closely in its hearings, will also have some changes in it. So it's in this setting that we talk about the future of prairie agriculture and the adjustments. It's not just a change to a transportation subsidy, but to the world market as well.
In that context we then have to look at what is likely to happen to world prices of wheat, oilseeds and feed grains, basis Vancouver, basis Montreal, because of the GATT agreement. Most economists in their analyses agree there will be an increase in price as export subsidies are reduced. Again, most agree the increase in price world-wide won't be as much as the reduction in the subsidy. Therefore, if we're talking about a subsidy reduction in basic terms of $10 per tonne on wheat, the world price increase would be something less than that, maybe a $6- to $7-per-tonne increase as that export subsidy level is reduced.
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The difference of opinion among us ranges from something close to the subsidy level to 50% of the subsidy level. Generally, the literature suggests that the increase in prices will not match the reduction in subsidies.
From Canada's perspective, we have to take a look at the crops we're exporting and how much they were influenced by world subsidies before we can say how much the price received by the prairie farmers is going to increase.
I can begin with a crop like canola, where in fact, if our commercial grain trade encountered an export subsidy, they no longer sold to that market. In the case of canola, all our exports were to commercial markets. They receive no subsidies. Therefore, the price that farmers have received in western Canada for canola will be affected almost not at all by the agreement in GATT, because canola was not sold in subsidized markets. It just could not compete.
For feed grains and wheat - wheat being the most heavily subsidized grain, representing a total of close to two-thirds of our exports - in that particular context, we sell some wheat in exclusive commercial markets. They're not subsidized. We sell some wheat in moderately subsidized markets and some in heavily subsidized markets. The price farmers receive, because it's merchandised through a pooling system, is a blend of sales in all markets. To conclude how much our price is going to change, we really have to do an analysis of how much the export subsidy is going to be influenced market by market.
The paper I undertook with a colleague at the Canadian Wheat Board would suggest that by the end of the agreement the increase in the price of Canadian wheat - and the only thing that changes is the export subsidy - is probably going to be in the order of $6 to $10 per tonne. The only thing that changes is the export subsidy.
We know in this world market many other things change besides export subsidies. In that context, the Canadian government has effectively removed all of the export subsidy that prairie farmers have received, which would probably average somewhere around $15 per tonne. If all we're talking about is no changes other than export subsidies and the Canadian transportation subsidy reform, the net effect across these grains is likely to be a reduction in income to grains and oilseed production in the prairies.
Now, hopefully, other events will take over, world demand will increase and prices will rise to more than offset the loss in revenue provided through transportation subsidy. But my assessment is that the world market will not replace WGTA. Therefore, in that context, Canadian grains and oilseed production will have lower income - if those are the only things that change - over the next decade or for the duration of this agreement rather than without it.
In addition to that - and I'll quickly go through my notes on the second page - they are also changing in the Canadian Wheat Board pool accounts, which requires an adjustment in the Canadian Wheat Board Act. Currently the pool account payments are bases of grain delivered into Thunder Bay, Pacific ports and Churchill. Any added cost that the Canadian Wheat Board incurs for shipping grain to export that involves the St. Lawrence Seaway costs, direct shipment of rail to the U.S. or any cross-hauls - grain that moves from Saskatchewan and Manitoba that would normally be priced out of Thunder Bay, but goes to Vancouver. Right now, all those costs are shared by everybody in the pool.
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The proposal is to assign these marketing costs to the origin of that grain, and in that context this is not a subsidy throughout the whole prairies but a shifting of costs.
The reassignment of these shipping points and costs incurred to move grain from any specific origin will mean the costs will decrease from grain shipped out of the western portion of the prairies for wheat and barley. Those farmers will realize greater revenues. In the eastern prairies like Manitoba, the whole area will pay substantially higher - you draw a line about from Melfort, Saskatchewan straight south or just a little further west of Melfort.
So we're looking at two sorts of transportation policy changes. They are subsidized rail rates and a shifting of the costs through the Canadian Wheat Board pool accounts. Wheat and barley prices will drop more effectively at the farm gate or force these farmers to pick up more costs than the eastern half of the prairies, as well as pick up a higher level of costs from part of the grain - a railway cost per se.
There are those two changes together. Then we take a look at how this prairie agriculture is likely going to unfold. We turn to our third page of notes. I think we have to look at this on a short-term basis and then on a longer-term basis. Short run is two to three years, and the longer run is probably upwards of ten years as farmers take a longer time to change their decisions. Some things you can change quickly; others take some time.
Clearly, with these changes, and grain and oilseed producers having less income, they will look to alternatives for the use of that land. The land that will immediately be targeted to change will be the fragile lower-productivity land that has lower grain yields and that does not return the costs of putting in the crop.
In the short term, our judgment is that within the next two to three years you're likely to see maybe upwards of 2% to 3% less grain produced as farmers make that decision to seed some quarters, halves or sections to forages, whether they will go into pasture or will be used as a hay crop to overwinter animals.
In the longer term, even greater adjustments will occur, because then you have to justify all the line of equipment that you have involved in producing grain, all your overhead, and even your own time and effort as to whether it's worthwhile. In the longer term, we see maybe upwards of more than a 10% reduction in the prairie cereal grain and oilseed industry and, in exchange, an expansion in the livestock economy, primarily the beef cattle industry.
This impact is not uniform throughout the prairies. As you would expect, the eastern half will adjust most because of their cost structure and returns. Their costs are going up most and their returns are declining most. Manitoba, eastern parts of Saskatchewan and the former Palliser triangle will likely undergo the majority of the changes.
In response, we're likely to see potential major expansion in the beef cattle herd, whether it will be part of the breeding herd or, with the greater availability of forage, there will be greater backgrounding occurring. I have not suggested it. In fact, finishing of animals will occur and there will be an expansion in the meat processing industry. That's a possibility, but those particular opportunities don't come directly out of transport; they have to occur because of other factors.
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With regard to swine and the hog industry, I don't have quite the view of the growth sector here as I have in the beef, primarily because the beef can utilize the land that was no longer profitable to produce grains and oilseeds. The swine are going to depend upon a lower-cost feed grain.
I'm not convinced in the prairie provinces that barley prices are going to drop substantially below where they are now. In fact, I think barley is going to be a crop that is going to be produced for domestic consumption. Our barley exports may approach, other than malting barley, zero some years. It's going to be a crop to be grown for consumption utilization in the prairies, and in that context the livestock industry will have to forward contract its barley production so farmers won't grow canola or wheat.
Because barley has been heavily subsidized over the past 10 years, prices the livestock industry had paid for barley over the past 10 years have represented prices that farmers would not continue to sell at if they had not received subsidies world-wide; that's in the European Community, the United States, and Canada. As those world subsidies are withdrawn, world barley prices are going to rise, and it has to compete with corn.
Corn was not as heavily subsidized, so the issue in Canada's swine industry in western Canada then becomes, can the cost structure of barley as the primary feed ingredient compete with corn in the U.S.? I really have some misgivings at this time that in fact barley will be a low-cost feed source in the future that can be competitive with corn for the swine industry. So I think I have a big question mark in terms of the growth of the swine industry in the prairies, whereas for the beef population I would say substantially.
With regard to dairy and poultry, given the current structure within supply management in Canada, there is no growth potential unless you can convince the rest of your provincial colleagues that you are entitled to a higher market share, and that is not likely to occur.
As for exports, grain and oilseed exports at their very best, even with yield increases, will just be maintained and likely decline. What areas will export? It will be in the beef industry. If we wish to look at what's happening in western Canada trade with the U.S., since the CUSTA agreement we've expanded our beef exports to the U.S. by about $750 million over 5 years. So it's not that this industry hasn't been growing very rapidly; it has, and it will likely continue to expand as long as there is access to the U.S. market.
With regard to grain handling and transportation, I think there will be less grain shipped. This sector will have a lower volume of grain to handle because of the transportation changes and the inability of world prices to keep it profitable. Therefore, we have a system that's probably overbuilt now - overbuilt in warehouses that collect the grain and overbuilt in lines that haul the grain.
As well, as the volume declines there is some flexibility in rationalizing the system relative to costs and revenues. There'll be consolidation and a reduction in grain branch lines of which there are 6,000 now. They haul half of the grain. Clearly, there'll be some railway cost reduction, but as Professor Heads said, railways are also very concerned about the revenue reduction when they abandon a branch line. So a wholesale departure from branch lines is not likely to take place. It will only be in the context of a game. Hopefully, we can maintain or attract the same volume to our other line as that of the line we're giving up. So in this context there'll be some jockeying going on between the railways. They want cost savings but they don't want to give up any revenue.
So in forecasting ahead how many of those 6,000 lines will disappear, it is pretty difficult to look at in terms of knowing how much grain each line is going to attract. This won't be just based on cost. In that context, the railways in a less regulated environment will be looking at revenue.
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As for primary elevators, today there are over 1,200. The current elevators that are being constructed, given their size and the possible turnover of grain that could occur, could be 300 - and 300 is exactly the number if you take the projection of the reduction in primary elevators over the last 15 years and 15 years from now. That's what they will be.
So if we just follow our trend out, in 15 years' time the number of warehouses collecting grain will be far less than half. That's the number you arrive at in terms of the current ones that are being built today and their capability of handling.
So any way you look at it there's going to be a consolidation very rapidly by grain companies in terms of their collection facilities. Where they locate will be related to rail lines that can service those particular collection points at the lowest cost possible.
As for the issue of hopper cars, I don't want to dwell on it. Professor Heads spoke to it quite clearly. I think what's important in the hopper cars is not necessarily who owns them, but that private ownership be assigned. As long as they remain the domain of the Crown, there's a tendency for allocation decisions to be made by a committee. Not to demean a committee like yourself, but committees, when they sit around and decide which is the best way to assign a car to a grain company or to a crop, often are not the most efficient way in which these particular cars are assigned.
I don't really care who ownership is assigned to. It can be assigned to the Canadian Wheat Board, it can be assigned to the grain companies, it can be assigned to the railway, or they can be sold. The important thing is that assignment take place. Once that takes place, the allocation problem will be minimized because owners of those particularly valuable pieces of capital will find it in their vested interest to look after them in the best way possible, and their utilization and turnaround time and effectiveness, I'm sure, will improve upon the performance that has been registered over the past 10 years.
So I make no judgment as to who should be assigned or how they should be disposed of, but just urge you to effectively put them into private hands as rapidly as possible. One candidate could be the Canadian Wheat Board. They have 2,000 cars now. Adding to that fleet, putting it in their management hands, would be just as effective, if the public so wishes.
As for point five, compensation, the tenure issue - farmland and leasing land - has been a long-held tradition in the prairie provinces. Leases are negotiated every year, whether that term is one, two, three, four or five share-crop leases. The terms of those leases vary from tenant to landlord. They reflect the unique circumstances of the tenant, the landlord and the land. Having studied the farmland market since I've been at the University of Manitoba, I know it's a very efficient one. It's one that has worked out well without very much government meddling. The government has not foreseen the need to get in and interfere and have rental agreements for farmers. There's been no uproar about how we're not being treated right by our landlords. I don't think there should be any reason to suspect that will change if you put $1.6 million on the table.
Landlords recognize their tenants are going to pay higher costs August 1. They recognize the return on their land is going to go down. Leases have increased and decreased historically on the basis of the tenant's capability of paying. Clearly, that will be one other factor that will be taken into consideration. Given that the landlord is going to receive the money and the tenants' costs are going up, the likelihood is that the rental rate will come down over some period of time, two to three years, to recognize the benefit the landowners have received from the compensation. I've arbitrated in some cases where there have been difficult arrangements between landlords and tenants. In the end, they've generally come to recognize each other's position. I never had to arbitrate another case after there was a difference of opinion.
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So rental agreements can account for these sorts of changes, and I believe they will account for them.
In the future, the real estate market is one in which, when the earnings to farmland - that is, how much rent a landlord can receive - decline, it's no different from a bond and you clip a coupon. If you own farmland and have the title to that land, the coupon is that rental slip. If the rent goes down, the price of land will go down. If you don't believe me, the price of land in the prairie provinces is about half of what it was in 1982. So over a period of ten years, when returns to land diminish, the market adjusts.
With this particular change, if we're just talking about transportation reform and the reduced revenues to rental agreements and landowners, I believe we're looking at potentially, given how the land market has behaved in the past, up to a 20% reduction in the capital value of land. In that context, the $1.6 billion is quite a ways short in terms of meeting the total loss by landowners throughout the prairie provinces. It's an amount of compensation that only goes part way towards addressing their loss in wealth.
In that context, I guess I'm quite surprised that at the farm meetings I've spoken to, the debate on this particular bill is on how you divide up the pie, not on how large it is. I would suggest that sometime in the next two to three years there will be some second thoughts on this: gee, that $1.6 billion wasn't quite large enough. But right now, that's not being talked about. What's talked about is how we divided it up.
They were talking about changes in the world markets. The world prices will increase for grains more than the reduction in the transportation subsidy, we'll have more customers with more money, and subsequently no one will know the difference because the revenues are higher.
But with just these changes by themselves, if nothing else happens, the net effect is likely to be a reduction in land prices. That occurs, not over one or two years, but over four or five years. It takes a while for these things to work their way through. In the prairies this change alone - if you withdraw the money the prairie grain producers have benefited by, the major adjustment will be a loss of wealth across all landowners.
Mr. Collins: Thank you very much. I must say I did enjoy your presentation as you went through and took a look at the pay-out compensation package. The minister is of a mind now that it would be shared between the landowner and the cash renter. Of all the people who came and voiced a concern to me, I think the ratio would likely be 90:10 in terms of renters and cash arrangements. They wanted to have some assurance that they'd have some say in how that fund would be dispersed in their best interests.
Do you have any problem with what the minister has outlined here?
Prof. Kraft: I would anticipate that in most landlord-tenant agreements, with this change the adjustment in the lease will be voluntary and both parties will recognize each other's increased costs and revenues. Subsequently, those tenants have expressed a concern. I know their concern is that they believe if they upset their landlord, their landlord will offer his or her land to someone else in the neighbourhood.
The circumstances are that every other tenant faces the same situation of a higher rail cost, anywhere from $10 per tonne to $25 per tonne, if you're shipping canola to Vancouver, on August 1. There's a reduction in revenue.
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So a landlord who believes he or she can find a tenant who will pay the rate that existed prior to transport reform is fooling himself or herself. I think most of these arrangements will be voluntarily sorted out, although there certainly are some landlords and some tenants who are unreasonable.
In the context that you need a third party to arbitrate the distribution of these funds and for the rewriting or renegotiating of the contract, this is probably a reasonable safeguard. I would be surprised, however, if you ever see more than 1% to 2% of those involved with these leases coming forward to ask for some assistance and saying that they just can't agree. To effectively arbitrate that particular difference, however, 1% to 2% could be very time-consuming and financially draining on the minister's budget. It sometimes requires not one meeting, but two or three, and in that context I think it provides some safeguards. Hopefully, though, after one or two precedents are set by the arbitrator, everybody will be able to see how the decision was made and the others will proceed without going to further arbitration.
Mr. Collins: I know of individual cases in and around Estevan. In one, a fellow was renting from five different farmers. Now he has to enter into some pretty sticky negotiations. Sometimes, when it gets closer to relatives, one has a hell of a hard time dickering.
You mention here that land values moved down from 1982 onwards. What were some of the factors you identified? I see you think land values may drop as much as 20%.
Prof. Kraft: We recognize that many factors are affecting earnings for grain production. If only transportation is changed and nothing else changes, and if transportation is the only thing to change over the next five years, I would argue that given how the farmland market has behaved in the past, there is a potential for land that's used exclusively for the production of cereal grains to oils - we're not talking about pasture land or improved land - and the upper limit is 20%, yes.
Mr. Collins: I took a look at the last number of years. Historically, we've seen those land values dropping, and certainly other factors now impinge on that.
Prof. Kraft: The land values fell most rapidly from about 1982-83 to about 1986, and then a number of the safety net programs cut in. If those safety net programs had not been made available throughout the early 1990s, that market would have fallen much more. If we have no change in safety nets that will provide some source of revenue and transfer of income to prairie farmers, this particular change will offset that impact.
But I'm looking at this last budget and it suggests to me that the moneys that have been made available for safety nets over the last four or five years are in fact likely to diminish as well. So the floor that the safety net is put under is also moving away, transportation costs are moving away, and really the returns to producing wheat, feed grains and oilseeds in the prairie provinces are diminishing because of the smaller role of government.
Mr. Collins: Are you optimistic that we will go to agriculture and agrifood spin-offs so that we move away from long hauling and that we try to produce product here on the prairies?
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Prof. Kraft: The prairies will be an export-based economy. The question centres around which products are likely to penetrate those export markets as we move product beyond the prairies. Right now, the most immediate one that I can see is predicated by the successes we have seen over the past five years, and that's the beef industry. In the beef industry, we have expanded our exports of live animals, which means some more finishing is taking place on the farm, probably up to slaughtering. We've also seen a major expansion in exports of processed meat out of two plants in Alberta. If I were to bet whether these changes will lead to further expansion of that, meaning more capital facilities in the meat-processing industry and more animals being finished in the prairies, I would say it is likely to be the major growth sector for value added.
Value added in the grains and oilseeds is really going to hinge predominantly on the oilseed industry and the crushing of canola. That is again really tied to the U.S. market and how large a share of that market can be taken by vegetable oil crushed in Canada. Over the past seven or eight years, we have been very successful. If you continue to project those trends out, our existing crushing capacity is not adequate. More plants will have to be built. Whether those plants are built in the prairies or are built in the northern U.S. states to which the seeds are imported, the location of those plants is not.... It's more than transportation that influences them. So I find it difficult to make a judgment.
Mr. Collins: When I was over in Japan, one of the things I certainly was aware of in Tokyo was that the volume of fish being consumed on a daily basis six days a week cannot be sustained at the level they are taking it in at. My observation is that they are going to move into things like beef and pork as part of their diet. I'm not an economist, but I think it's an excellent market for us to be looking at in terms of where we're going to move with a product produced here on the prairies, and in terms of how quickly we can access it.
Prof. Kraft: Those markets are important, but one of the opportunities created in the U.S. market was that they expanded their exports of beef to Japan. So as more beef went from Colorado to Japan instead of to California, Alberta stepped in and filled the California market. For the investors in the beef packing plant in High River, all of their forecasted sales were for the Asian market. Very little went to the U.S. However, in terms of market development, I think they found it easier to develop and fill the California market after the U.S. had developed the Japanese market.
So we may not have direct access to the Asian markets, but as long as we continue to have reasonably good access to the U.S. markets and they export to Asia, it really doesn't matter who captures that additional export market.
It clearly would be in our interest to diversify and have more buyers than just the U.S., but there is an expansion in consumption of red meats, and the prairie provinces are in a position to take a share of that increased consumption world-wide.
Mr. Collins: I'm more concerned, though, that although we like to think we can deal because we're next door neighbours, there comes a point in time when people like Kantor, who in my opinion suffers from a little tunnel vision, isn't seeing the light turning on all that brightly as he looks north. One day we might be able to say, fine, that's our market. Then all of a sudden, as we're seeing with regard to the auto industry, you get a 100% tariff arrangement put on there. It certainly discourages sales into that market. I measure that as a very serious problem.
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Prof. Kraft: I agree it would be preferable to have a much more diversified group of buyers.
The Acting Chairman (Mrs. Cowling): I want to address the issue of equity and fairness. Being a parliamentarian representing a constituency of Manitoba, and being the furthest from any point of export, I want to know what you think is fair to Manitoba producers and eastern Saskatchewan, which is a constituency that my colleague represents. When we take a look at the compensation package for Manitoba, how many dollars out of that $300 million do you think should come to Manitoba?
Prof. Kraft: You're really talking about two statutory changes here. One is receiving a block of compensation, and $1.6 million has been targeted. On the other statutory change in the Canadian Wheat Board Act, to my knowledge no dollar has been attached to that particular change.
The increased costs predominantly to the wheat accounts are likely to be a net increase of somewhere in the area of $7 to $10 a tonne. That is what they are talking about now. Your rail costs are going up to probably about $12 in your area; over here, probably closer to $15. Relative to the payment on land that would probably average $25 an acre in your community, for a $12 increase per tonne of freight rates we're talking about a change in costs in the board accounts of at least $5, probably upwards of $10, so about half of that would be comparable, equitable compensation for one statutory change compared with the compensation offered for the other statutory change.
Over here we're probably talking about $15 and the increased cost is going to be somewhere between $9 and $10 in terms of the pool accounts. It's an even higher share for that dividing line that runs through Melfort on down. That area is going to have the highest cost increase.
In terms of the balance between two statutory changes, I'm not convinced that $300 million...it will be very close, and I think it will probably exhaust the whole pot.
The Acting Chairman (Mrs. Cowling): I'm pleased to have that on the record, Dr. Kraft.
You indicated several times in your presentation that you believe we may well be moving to livestock production. I just recently came back from a trade mission with a group of parliamentarians in Taiwan. One of the things I found interesting is that they are extremely interested in our pulse crops and the protein value of those crops. I'm wondering if you're using a specific model to determine why that livestock industry may be growing and that there are potential markets for it. What might this model be?
Prof. Kraft: We examined a particular piece of work we undertook this past summer. We went throughout the prairie provinces, quarter section by quarter section of land, assessed each of those quarters in terms of their capability of producing wheat, oilseeds and forages. We developed budgets and costs for producing those various crops throughout the prairies. On that basis, if there had been no change in transport policy, no change in safety net programs, no change in pooling, our analysis suggested that we continue to do the same, that it was profitable. In fact, we continued to export and handle about 34 million tonnes of grain a year. That was the right thing to do.
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As soon as you start removing some of those programs the land that would be categorized as more fragile, lower productivity...it makes a great deal more sense to seed it into grasses and legumes and have it as a perennial crop. We use very modest returns to the beef industry.
So not to overestimate it, but we see major shifts on some farms that happen to have some of that lower-quality land, and some large areas that would be in your constituency switching into grass production.
Without the support system that's been provided to the cereal grain and oilseed industry, farmers could not justify the returns on a lot of these lands if the support was changed immodestly, as we're doing here with the Transport Act. It makes more sense for them to take that quarter or half and put it into a pasture. This involves bringing livestock back onto the farm again.
We're likely to see quite a change in the prairies over the next ten years...certain locations where beef cattle will become part of a number of farms from which they had disappeared twenty years ago. They'll take a major component. The issue then becomes whether we can expand their herds, as our study would suggest. I went back in time and looked, and yes, we have expanded herds in the prairie provinces at least twice in previous ten-year intervals of the magnitude they were talking about.
It has occurred historically. The setting would be such that unless we get a major increase in world prices of wheat and oilseeds, that's likely to happen just by individuals choosing to do so. How can you facilitate it? I think all the government has to do is step aside and see if there are any obstacles that are preventing this from occurring that we can fix. It will happen without too much assistance. The farmers will make those decisions.
The Acting Chairman (Mrs. Cowling): In your study, Dr. Kraft, did you take a look at the Asian-Pacific Rim as well as the European market? You talked a lot about the U.S. market. Have you also taken a look at the east-west movement of this product?
Prof. Kraft: Yes. Specifically, we didn't do that bit of work but it was provided from an international firm who did an analysis of the pulse crops and the special markets. We factored that into a rotational return throughout the prairies. Yes, those crops continue to hold their share of area. The reductions occur in wheat and in barley.
The Acting Chairman (Mrs. Cowling): Thank you. I think our time is short and I want to thank you, Dr. Kraft, for coming to Ottawa. We found your presentation most informative.
Prof. Kraft: Thank you very much.
The Acting Chairman (Mrs. Cowling): The meeting is adjourned to the call of the chair.