AGRI Committee Report

Government Response to the First Report of the Standing Committee on AGRICULTURE AND AGRI-FOOD

THE BEEF AND PORK SECTOR INCOME CRISIS

The Government of Canada is pleased to respond to the First Report of the House of Commons Standing Committee on Agriculture and Agri-Food on the beef and pork sector income crisis.  The Government agrees with the spirit of the report and shares the Committee's commitment to addressing the needs of the beef and pork sector facing serious pressures on its short-term liquidity and long-term competitiveness challenges.

The hog, cattle and calves sector experienced significant growth in the 1990s with farm cash receipts going from $6.1 billion in 1990 to $9.56 billion in 2007. Annual shipments from the meat and poultry industry are worth in excess of $20 billion, making it the largest sector of the Canadian food manufacturing industry. The meat and poultry industry places fourth among Canada's leading manufacturing industries.

A number of factors contributed to this expansion, including:  a depreciation of the Canadian dollar; the elimination of the cereals transport subsidy in the Prairies; improved market access in Asia, Mexico and Australia; and animal disease outbreaks in other meat exporting countries. However, the economic environment under which the sector is operating today has completely changed: the Canadian dollar has registered a strong and rapid appreciation; there has been a cyclical drop in hog prices; and feed, fuel and other input costs, including regulatory costs, have increased. In addition, other issues such as labour availability and wages, market access challenges resulting from lingering BSE impacts and other unresolved regulatory issues in export markets are also negatively affecting the income and viability of the livestock and meat processing sectors.

While there are challenges, there are also opportunities for the industry in the longer run. Canada has a quality robust resource base for livestock production and processing. The availability of land and water allows for cattle grazing and feed grain production. Canadian livestock genetics are world-class. Canada's meat inspection system ensures the production and processing of meat meets strict requirements in terms of food safety, plant construction and sanitation. This intensive control ensures the safest and highest standards of meat hygiene. Export opportunities exist in global and domestic markets, with the demand for animal protein forecast to increase. The OECD/FAO^[1] Agricultural Outlook forecasts from 2007 to 2016 a 15% expansion in world beef consumption and a 16% growth in world pork consumption. Canada is the world's 3rd largest pork exporter behind the United States and the European Union. Regarding beef, based on 2006 data, Canada ranks as the 7th largest beef exporter. However, prior to 2003 Canada was ranked the 4th largest beef exporter. 

Canada has proven to the world its ability to supply quality beef and pork products to satisfy importer requirements. Canada is a leading pork exporter, shipping almost 775,000 tonnes of fresh and cured pork in 2007 for a value of $2 billion to 75 countries. Beef exports in 2007 reached 325,000 tonnes for a value of $1.12 billion.

The Government is committed to working with the industry through this difficult period and to help them seize the opportunities that will ensure its long-term profitability and prosperity.

Detailed Responses to the Recommendations

Recommendations 1, 2 and 4

Business Risk Management

Recommendation 1

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada deploy, before the end of 2007, a special transitional measure that will provide cash-flow in the form of interest-free loans to be paid back over a period of three to five years, and bankable cash advances to hog and cattle producers.

Recommendation 2

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada, in partnership with the provinces and territories, payout the remaining percentage owed to producers under the CAIS Inventory Transition Initiative (CITI), and respect the federal-provincial funding agreement.

Recommendation 4

The Standing Committee on Agriculture and Agri-Food recommends that measures be taken to improve the responsiveness of BRM programs when a liquidity crunch arises in the farming sector. Examples of these measures include, but are not limited to:

1. allowing producers, for the purpose of reference margin calculations, to use the better of the Olympic average, the average of the last three years, or a five-year rolling average;
2. eliminating the viability test, which requires that producers show positive margins in two of the three years; and
3. increasing the annual contribution limit in the AgriInvest program;
4. fast-tracking the federal $600 million Kickstart program for producer accounts in the AgriInvest program, so that funds can start flowing earlier than initially planne

The Government recognizes the need to support industry in dealing with serious pressures, but is also conscious of the need to do so in ways that do not mask market signals and are consistent with our international trade obligations. In order to return to profitability, the beef and pork sectors will need to adjust to the realities of higher feed grain prices and a stronger dollar. The Government recognizes the need to assist the sector through this adjustment process.

In order to deal with the short-term liquidity issues and deal with immediate cash flow needs, on December 19, 2007 Ministers of Agriculture from Federal, Provincial and Territorial (FPT) governments announced the first stage in a national action plan to help with the serious pressures faced by Canada's cattle and hog producers. This first stage was developed after intensive discussions with industry and leverages the new suite of Business Risk Management (BRM) programs to provide faster assistance. The Government has accelerated cattle and hog producers' access to these programs and increased the availability of loans through the federal Advance Payments Program (APP).

Specifically, the Government has:

In response to the need for more credit under the APP for livestock farmers, the Government announced that changes would be implemented in early 2008 to permit AgriStability negative margin coverage as security under the APP. Industry continued to have concerns about the overall availability of advances to livestock producers under APP. The Government of Canada understood the concerns and responded accordingly.

On February 25, 2008, The Honourable Gerry Ritz, Minister of Agriculture and Agri-Food and Minister for the Canadian Wheat Board introduced proposed changes to the APP through amendments to the Agricultural Marketing Products Act (AMPA). These changes, which received Royal Assent on February 28, 2008, will give Canadian producers better access to cash advances as they make important business decisions.

The amendments to the APP will provide easier access to immediate cash flow by:

Taken together, the program improvements made in December 2007 and the changes to AMPA in February, 2008 represent significant changes to advance payments and will have addressed the sectors' request for a loan program to assist with their liquidity issues. Producers will have quicker access to cash advances and if all producers take advantage of the improved program, an estimated $3.3 billion in advance payments will be available. FPT Ministers continue to monitor the situation and work with industry on any gaps in the response.

On February 25, 2008, the Government also announced a new $50 million initiative with the Canadian Pork Council to deliver a Cull Breeding Swine Program (CBSP) that will assist the industry to restructure quickly to bring it in line with market realities. The CBSP, to be delivered by the Canadian Pork Council, will provide a payment to Canadian producers to reduce the supply of breeding stock in Canada. The payment will be based on a per head amount and reimbursement of costs of humane slaughter and carcass disposal. Producers must agree to empty at least one barn, and to not restock for a three year period. It is expected that the funding will support a 10 percent reduction of the Canadian swine breeding inventory.

The Government has looked at the other proposals made by industry. During discussions with the industry, the CAIS Inventory Transition Initiative (CITI) was raised as a potential means of providing additional assistance to producers. The CITI was a one-time federal government injection of $900 million that was critical to the transition to the new BRM suite. The initiative facilitated the introduction of the new methodology of inventory valuation under AgriStability that has improved the program's responsiveness and predictability during periods of declining prices, such as the current livestock situation.

Federal, provincial and territorial governments have also considered the recommended changes to the BRM suite. Many of these approaches are not new concepts and have been discussed throughout the evolution of the BRM suite.

The Government is confident that the new suite of BRM programs combined with the APP changes announced on February 25th will provide effective assistance to the livestock sector. Overall, from late 2007 through 2008, nearly $1.5 billion in cash payments is expected to flow to producers that derive most of their income from livestock operations through existing and new programs. The changes to the APP make available much needed liquidity to complement existing programs, thereby, providing assistance to the industry in a transparent and targeted fashion without masking long-term market signals needed to keep the industry competitive.

Although significant action has been taken, the Government will continue to work with the industry to identify gaps and any additional responses necessary, adhering to the following principles developed by FPT Ministers: responses should not mask market signals; any action must be fully consistent with Canada's trade obligations; actions will encourage sound business planning and practices towards a profitable future; and the short term response should be consistent with a long term competitiveness and profitability strategy.

Recommendation 3

Macroeconomic Context

The Standing Committee on Agriculture and Agri-Food recommends that Agriculture and Agri-Food Canada (AAFC) hold formal discussions with the Minister of Finance to show the impact of the strengthening Canadian dollar on the food producing and processing industry in Canada and to examine ways to relieve the pressure on the industry from the rising Canadian dollar. AAFC officials should report back to the Committee on the result of these discussions.

The Government recognizes the severe economic hardship facing the hog and cattle sectors as a result of the current economic and market conditions, as evidenced by the funding commitments in Budget 2008.

The appreciation of the Canadian dollar against the U.S. dollar is an important economic development given our close trade links with the United States. Stronger global economic growth and increased demand for commodities have driven part of the rise in the value of the Canadian dollar. Since Canada is a net exporter of commodities, our currency often rises against the U.S. dollar when global commodity prices increase. However, the appreciation of the Canadian dollar also reflects general U.S. dollar weakness. This weakness represents a response to persistent U.S. current account deficits (a measure of the flow of goods, services and investment income between the United States and the rest of the world).

The Government is aware that the extent to which Canadian dollar movements affect economic activity in different industries depends on the causes of exchange rate changes and on a number of other factors. When the currency rises because of strong global economic activity and an increase in commodity prices, this represents a positive development for Canadian resource industries. However, for exporting firms, the appreciation of the Canadian dollar reduces profits as sales in foreign currency lower revenue when converted to Canadian dollars. Firms can gradually adjust their costs and employment in response to lower profits. To the extent that the exchange rate appreciation also results in lower import prices in Canada, companies can take advantage of cheaper imported goods to boost their investment spending, which in turn raises productivity and allows them to remain competitive and profitable.

Canada's floating exchange rate regime helps our economy adjust to changes in domestic and external economic circumstances. While the Bank of Canada in principle can (on behalf of the Government of Canada) influence the exchange rate in the short-term by buying or selling foreign currencies, the effect of such intervention is very limited, in part because of the sheer size of daily foreign exchange transactions in international currency markets. In light of this, the Government and the Bank adopted a more restrictive approach to foreign exchange market intervention, and now would intervene only in the most exceptional of circumstances.

The Government recognizes the impact fluctuations in the exchange rate may have on its industries and acknowledges the very limited influence the Bank of Canada may have on influencing the exchange rate. With this in mind, AAFC's programs have been designed taking into consideration the many factors that may influence profitability including variations in the exchange rate.

Recommendation 5

Regulatory Environment

The Standing Committee on Agriculture and Agri-Food recommends that the Minister of Agriculture and Agri-Food conduct a complete review of regulatory measures susceptible to putting the Canadian meat industry at a competitive disadvantage vis-à-vis other countries, and that this information be shared with the Committee.

A joint Industry-Government Livestock Task Team was struck in October 2007 and worked to define the challenges, including regulatory ones, being faced by the beef and pork sectors.

In announcing the first stage of a national action plan on December 19, 2007, FPT Ministers committed governments to working with industry representatives on a range of measures to enhance longer term competitiveness, including enhancing market access efforts, reducing regulatory burden, and examining means to reduce the cost of the feed ban implementation.

The Government action plan, as it relates to regulatory issues and market access, revolved around the following three key areas:

The beef and pork sectors recognize that long term competitiveness will not be served by lowering regulatory standards, as the strength of Canada's regulatory system is a key driver in maintaining Canada's animal health status, the safety and confidence of Canadian consumers and improving market access. However, the CFIA also recognizes there is scope to improve both the design and responsiveness in the delivery of regulatory programs to help support market access and to meet long-term competitiveness objectives.

In response to issues identified in our consultations with the beef and pork sector, AAFC, Foreign Affairs and International Trade Canada and the CFIA are taking actions to intensify bilateral negotiations to address specific issues. In addition, an integrated approach across commodities and across the federal government will be developed. This strategy will be coordinated with industry, and with provincial governments, and will more effectively support enhanced export market access efforts and the long term competitiveness of the sector.

Accessing innovative inputs, including feed grains, feeds, fertilizers and veterinary biologics, in a timely manner has been identified by industry as a key area to enhancing the competitiveness of the sector. The CFIA is pursuing a multi-pronged, phased approach to make pre-market approvals for inputs more responsive to the pace of innovation without lowering the regulatory standards or compromising health and safety or international commitments. To that end, the CFIA will focus on the plant area to enhance access to new traits and varieties, including through eliminating Kernel Visual Distinguishability (KVD) requirements, modernizing variety registration, strengthening contract registration and revising the novelty policy. In the longer term, through constructive engagement with stakeholders, the CFIA proposes to streamline pre‑market requirements for key plant and livestock inputs to allow industry to seize market opportunities while maintaining the safety and high quality of Canadian products.

The CFIA is undertaking a review of its current user fees. It is documenting and describing all fees currently applied to Canadian industry, and wherever possible, comparing cost-recovery approaches with those of the United States. The draft report is focused on all CFIA user fees applied to the meat and livestock industry in 2006-2007, and also examines approaches taken by the U.S. and other international counterparts.  The Agency is also working with industry to determine where specific fee pressure points currently exist. A final report will be shared with the Standing Committee on Agriculture and Agri-Food.

Recommendation 6

SRM Removal

The Standing Committee on Agriculture and Agri-Food recommends that AAFC review program funding available to beef producers, processors and renderers to help them with the disposal and storage costs of ruminant specified risk material SRM)

As noted in the committee's report, the federal government provided 60% of the $127.5 million funding towards the development of the infrastructure required to dispose of Specified Risk Material (SRM), with the balance provided by provincial governments. Programs are in place in all provinces with the exception of Newfoundland and Labrador (NL). Discussions are underway with officials from NL and it is anticipated an agreement will be concluded in 2008.

The primary objectives of the program are to bring adequate disposal infrastructure, help industry meet the new SRM regulatory requirements and thereby maintain domestic and international confidence in the BSE risk mitigation measures Canada has undertaken, and invest in research to seek long term value-added uses for SRM.

The design and implementation of the program is managed by the provinces in order to provide funding to address specific regional needs. Some provinces implemented emergency short term disposal plans and are now focussing on developing long-term strategies, while others are more advanced and already implementing long-term strategies.

Funding is provided for a range of projects such as:

Investments are also going towards research initiatives in new emerging technologies and solutions for long term value added uses of SRM, which complement AAFC's research program. A further $2.25 million is being utilized to support a research program at AAFC's Lethbridge Research Station. The intent of the program is to develop a model system for assessing the stability and fate of prion proteins during the composting process. Composting is a practical method of reducing the volumes of waste material, but further work is required to understand if the process may be useful in reducing prion infectivity.

SRM segregation has generated higher volumes of waste than anticipated, which resulted in higher initial costs. Industry is seeking early action to minimize the costs of the implementation of the SRM management and disposal requirements.

The CFIA struck a joint CFIA-AAFC-Industry Working Group to review the enhanced feed ban  measures being applied by packers, the associated costs of these measures and their relative contribution to the overall effectiveness of the ban. Based on this review, the Working Group has tabled a series of recommendations identifying:  measures that can be immediately implemented based on adjustments to existing packer operating protocols; measures for which the scope of implementation is dependent upon acquisition and analysis of additional information over the medium-term; and, measures that will be implemented over the longer-term to assess the need for continued SRM management and disposal requirements.

The CFIA has begun implementing the first of these recommendations. The goal is to increase the efficiency with which Canadian beef processing establishments can implement Canada's enhanced feed ban. These activities are consistent with commitments made by federal, provincial and territorial Ministers of Agriculture to enhance industry profitability by streamlining regulations. Initial feed back from industry stakeholders is that, dependent on individual plant circumstance, savings between $0.50 - $1.50 per carcass have been realized after implementing the immediate measures recommended by the working group.

Given the complexity of the enhanced feed ban and the competitive environment of the beef industry, the joint industry-government working group will remain in effect for at least the next year to help guide implementation of its recommendations.

It is also understood that the United States Food and Drug Administration is continuing to pursue enhancements to its feed ban further to a proposed rule published by it on October 6, 2005. That proposal included the removal of certain tissues from the animal feed chain in the U.S.

It is anticipated that these initiatives will reduce the overall cost of segregating and disposing of SRM and result in a more harmonized Canada-U.S. regulatory environment. As more infrastructure comes on-line and the implementation policies are streamlined, costs will decline further.

[1]

OECD/FAO - Organisation for Economic Co-operation and Development/United Nation's Food and Agricultural Organization.