:
Thank you, Mr. Chairman.
Mr. Ritz and committee members, my name is Sinclair Harrison, and I'm president of the Farmer Rail Car Coalition.
This is Bob Barss, board member for the Alberta Association of Municipal Districts and Counties, which represents all municipalities and all counties in Alberta. Bob is one of 17 board members. We have 17 farm organizations from right across the prairies and represent well over 90% of farmers in western Canada.
This is Bernie Churko, the chief executive officer of the Farmer Rail Car Coalition.
I want to thank the committee for taking time to hear from the FRCC on our concerns respecting recent announcements by the federal government. In the announcement, western farmers were advised that the federal government planned to keep the hopper cars and lower the freight rate to reflect the fact that the FRCC discovered that farmers are grossly overpaying for maintenance.
The FRCC has said from the very beginning, which was over 10 years ago, that our overall objectives were three. The first objective is to ensure an adequate supply of hopper cars to be used as a first priority for transportation of western grain. The second priority is to ensure that the hopper car fleet is replaced as expeditiously as practical with modern, up-to-date cars that are of higher weight and higher cubic capacity than the current fleet, and that the cars be available at the lowest cost possible to farmers.
Based on the recent government announcement, we were very concerned that the farmers of western Canada were again going to be asked to pay a heavy price for a decision made with not all the facts being revealed. As indicated in our letter of May 15, which I have supplied to the clerk in both the English and French versions, there are three key questions that remained unanswered at the conclusion of the previous hearings before the agriculture and transport committees, which we appeared before last year.
I will speak to these briefly.
Concern number one is the cost of maintaining cars. During its business plan development, the FRCC wanted to ensure that cars would be properly maintained at the lowest possible cost. We researched maintenance models throughout North America and determined that the annual maintenance costs for hopper cars that haul non-corrosive products like grain, of comparable age, would be about $1,500 per car, per year. We also were convinced that western farmers were paying far too much under the revenue cap for the maintenance of these hopper cars. We asked Transport Canada to, first, determine the value in the revenue cap of maintaining the hopper cars, and, second, we asked Transport Canada to determine the actual expenditures being made by the railways.
While the numbers will vary from year to year because there's more grain hauled depending upon the size of the crop, on this particular year the Canadian Transportation Agency determined that in 2004 the component in the revenue cap attributed to maintaining the government fleet was $4,329 per car, per year. That's $4,329 per car, per year. Based on this information published by The Western Producer , the Canadian Transportation Agency determined that the railway's actual expenditure, including a 58% contribution for overhead, was $1,686 per car, per year.
This is the document Mr. Anderson tabled this morning. I assume now it becomes public since it has been tabled at this committee.
This means that in this one year farmers paid over $47 million more than they should have for the government fleet alone. When I speak about the government fleet, in legislation it is defined as the federal government cars, the Saskatchewan government cars, the Alberta government cars, and the Wheat Board cars. That was $47 million more than what the farmers of western Canada should have paid.
If one assumes that this ratio would apply to the approximately 8,000 railway-owned or leased cars provided for the grain service, we are talking about another $21 million. The government fleet makes up 18,000 cars and the railroads supply another 8,000 cars. These same numbers, we assume, apply to the railroad-supplied cars, so that's where the $21 million comes from. This has been going on for years. It is for this reason that the FRCC believes that the Auditor General should examine this issue, and we would ask for your support for that.
To its credit, the government heard this argument and in the announcement they made it clear that the overcharging would end, at least for the government cars, and that farmers could anticipate a reduction of approximately $2 a tonne in the revenue cap. We congratulate the government for proceeding with this legislative change.
The number two concern is program maintenance. A second question that remained unanswered was whether the proper maintenance was being performed. At the FRCC, we were constantly receiving information, particularly with respect to the gates and hatches--and for those of you who don't know, the gate is what lets the grain out in the bottom; it opens and closes.The hatch cover is the lid on top and is very important to the integrity of the load. Were they being properly maintained? We determined that this was not the case. In fact, one report, based on a sample of 458 cars, concluded that nearly 75% of the cars were not suitable for loading when they were spotted. This is a situation where elevator operators, farmers, when they're loading cars, use duct tape, silicon, whatever they can to try to seal up that car. That's unacceptable.
Our own observation led us to believe that this required program maintenance was not being carried out. In effect, a deferred maintenance program was in effect. At our request, Transport Canada commissioned a company called QGI, a consulting firm specializing in car inspections, to inspect approximately 1,000 of the 12,000 federal government cars, which is a representative sample. In our opinion, the confidential report prepared by QGI confirms FRCC's observation on the extent of programmed maintenance being deferred.
The dollar figure is in the report here and is in the hands of Transport Canada. Again, perhaps it should be released to this committee. The dollar figure put to the deficiencies in the cars, Transport Canada, and the FRCC agreed, was $35 million worth of work that has not been performed on these cars but was paid for.
With this in mind, why would the federal government reward the railroads with another maintenance contract after such a dismal performance? Folks, there are over 12 privately owned maintenance companies on the prairies that are capable of doing this work. It's very simple to set up repair tracks, like the ones set up in Ogema, Saskatchewan, and Rocanville, Saskatchewan, this year to repair cars. So we would ask that this be looked into.
The third concern was the impact of the FRCC plan on the revenue cap. A final concern raised at the hearings was whether the Farmer Rail Car Coalition plan would result in an increase in the revenue cap. It has been FRCC's contention that implementation of its plan would result in a slight decrease in the revenue cap. At our request, Transport Canada asked the Canadian Transportation Agency staff to develop a methodology to determine how a plan similar to the FRCC plan would affect the revenue cap, assuming Bill C-44 was enacted--and that was the transportation bill of the previous government.
This study was carried out in consultation with the railroads, the Western Grain Elevator Association, the Inland Terminal Association, and many farm organizations throughout western Canada, so everybody at the table was involved in this study. This confidential study was completed on October 28, 2005, and in our view confirms the FRCC contention. This report is here, it's in Transport Canada's hands, and again, we suggest that this report be tabled before this committee.
With regard to car replacement, our major concern with the government's recent announcement is the strategy for replacing the hopper cars. While the press release was silent on this issue, the press release attributed statements to Transport Canada indicating that the railways would be replacing the hopper cars on a timeline determined by the railroads.
By our estimates and the estimates of the railroads, farmers' freight costs would have to increase by $4 to $5 per tonne to pay for the new hopper cars. You'll recall that in the minister's statement, he's talking about bringing the revenue cap down $2. If we leave it to the railroads to replace the cars, it's $4 to $5. As a result, when you take into account the anticipated reduction for maintenance in the proposed legislation and the added cost of purchasing new cars, farmers would be paying anywhere from $2 to $3 a tonne more on their freight bills over the long term.
There would no longer be a fleet of cars dedicated to western grain movement. Once these become railroad cars, it's up to them where they dedicate them, and they may not dedicate them to western grain. This would recreate the very reason that cars were purchased by the government in 1972. It was unacceptable in 1972 and it will be unacceptable to farmers in the future.
Based on the above, we firmly believe the decision announced by the government was not in the best interests of farmers. It would not ensure the long-term supply of hopper cars committed to western grain movement, and it would result in increased costs to farmers in the long term. However, I will put a caveat on that; we were somewhat confused when we heard a report just this last Friday, on Regina radio station CJME, indicating that the government would be replacing the fleet. That is good news. If this were done in an expeditious timeframe, it would resolve our major concern with the recent decision.
So the replacement of the cars is the number one issue that we are concerned about. The investment of $1.1 billion to $1.3 billion in new modern hopper cars would be well received by farmers and would eliminate our concerns with the initial announcement.
Thank you for your time. We look forward to your questions.
:
Thanks very much for appearing, gentlemen.
I've been following this whole file for a little while. My party also supports having the Auditor General investigate this apparent misuse of funds, and hopefully that will happen and we'll get some answers.
Right here we're trying to see the best deal for farmers at a minimum cost to the taxpayer, if we can do this efficiently.
My question is this. I understand, according to your calculations, we can maintain these cars, if the FRCC was to take them over, for around $1,500 per car, per year. This would, in effect, strengthen our rural communities by providing contracts to different maintenance companies. I just wanted to clarify that.
My concern is that when your priority is the replacement of cars, that's the number one issue. If the government owns the cars, then obviously it's up to the government and the taxpayer to replace the cars. That's how I would understand it. If the cars are owned by the Railway Coalition, where is the money coming from to replace these cars? It's over $1 billion, and there's a timeline; you mentioned 2011 or something.
I agree with the idea that farmers are in the best position to control their destiny and the cars, and there will be good maintenance and we won't let the railway companies get away with cutting costs and making a profit. Who's going to pay to replace these cars? Is there going to be a lot of cost to the farmers? Those are my questions looking at this.
Those are the concerns. The investigation is important. Hopefully, if it is found this money has been misused, the railway companies will then reimburse the farmers for the millions of dollars they have been charged. I suspect that could also go to buying new cars, but the idea of the replacement I think is a key issue. Who's going to pay for this? I'll stop there.
:
Good morning, Mr. Chairman, committee members.
Thank you for providing me and agency counsel with the opportunity to speak before the committee on this very interesting topic--government hopper cars. The agency has been involved with this file for a number of years.
I would like to preface my presentation with some preliminary remarks. As noted, I am acting director of the rail economics directorate of the Canadian Transportation Agency and have occupied this position since the beginning of April. However, I have been a manager within the directorate for a number of years, and while I have not directly worked on this file until very recently, I have participated on an ongoing basis.
Yesterday afternoon I was requested to provide a presentation to this committee, which provided me with only a short time to prepare. Having said that, I will endeavour to answer all questions within the purview of the agency, either at this time or as soon as possible after the conclusion of the meeting, while respecting the confidentiality of any information that is requested.
I trust this meets with your satisfaction, Mr. Chairman.
While I was invited to make a presentation about hopper cars, I am a little uncertain as to the committee's specific interest. If I may, I think it is important to understand the context of the hopper cars as it relates to the agency's statutory responsibilities. The agency is a quasi-judicial body whose decisions have the full authority of a court of law. This is important to note, as the agency's roles and actions are bound by the Canada Transportation Act as passed by the Parliament of Canada.
One of the agency's primary responsibilities is the determination of the maximum grain revenue entitlement as prescribed in subsection 151(1) of the Canada Transportation Act and ensuring that railways do not exceed this entitlement. The act directs the agency to determine the amount of the maximum revenue entitlement for Canadian National and Canadian Pacific Railways for the movement of regulated grain during each crop year. This started in crop year 2000-01. I would like to emphasize that the agency's responsibility is to determine revenues, not costs.
Determining the revenues is done by applying a price index, determined by the agency, to the base year revenues as prescribed by the act after adjusting for differences, the tonnes moved, and the average length of haul between the base year and the crop year under review. Further, the agency conducts detailed audits to ensure that neither Canadian National nor Canadian Pacific exceed their prescribed entitlements. In the event that a railway exceeds its entitlement, the railway is obligated to pay the excess plus a penalty to the Western Grain Research Foundation.
As I mentioned, the price index is determined by the agency. As part of its determination, the price index is further directed by subsection 151(4) of the act to adjust for any leasing cost arising from the sale, lease, or other disposal or withdrawal from service of the government hopper cars. This was applied for the first time by the agency in its current determination of the price index for the upcoming 2006-07 crop year. The additional leasing cost added approximately 1.2% to the price index.
It is important to note that the maximum revenue of grain entitlement is designed to compensate the railways for their operating costs for the movement of regulated grain. This includes the cost of maintenance of the hopper cars. There are approximately 12,000 government hopper cars, 3,400 Canadian Wheat Board cars, 2,000 provincial cars, and 8,000 railway cars, for a total of 26,000 hopper cars.
This concludes my presentation, and I would be pleased to answer any questions you may have.
Thank you.
:
Thank you for inviting us to speak to you today.
I'd first like to express apologies from Bob Friesen and Marvin Shauf. They were unable to make it today, on short notice. I will be making the presentation in their stead.
We've circulated some documents--I hope they've gotten to you--that include the CFA policy brief on our position on biofuels and renewable fuels and on our desire to see a visionary strategy, a Canadian renewable fuels strategy, to build an industry within Canada.
I'm sure you're all aware of CFA's mission, which is for the continued development of a viable and vibrant agricultural industry in Canada. In biofuels and renewable fuels there is an incredible opportunity for Canada and for agriculture producers. Our objective today is to promote an integrated policy approach, to build a biofuels industry, to build strong primary producer capacity and involvement, and to build a vision of Canada as a world leader in renewable energy and environmental sustainability.
Biofuels are very much an opportunity, an incredible opportunity. Biofuels have great potential for creating a strong, new, innovative, value-added industry in Canada; for creating industries, jobs, and economic contributions in rural communities; for increasing regional tax bases; and for reducing Canada's greenhouse gases while improving air quality, reducing health care costs, and, most importantly for the CFA, contributing significantly to improving the grains and oilseeds producer incomes from the marketplace.
The key objective is improving farm incomes from the marketplace. As we all know, farm incomes are in a long-term decline. We're in a pretty bad situation right now. Net incomes are at critical levels. Global food and feed production continues to grow faster than demand. We need new non-food demands to suck up some of that production and create a new demand force, driving up prices and improving incomes from the marketplace.
Biofuels represent an opportunity to diversify beyond simple commodity production, to help create and meet that energy shortage that's around the world, to move into value-added opportunities for producers, and really to help build industries within rural Canada. We now have in Canada a handful of small programs, some provincial and some federal. We have some really good public research, some federal capital investment programs and some provincial ones, such as the ethanol expansion program, and some fuel tax incentives. But that's somewhat sporadic across provinces.
We would like to see a coordinated approach, much like that in the U.S. The U.S. created their Energy Policy Act of 2005. They have very many vast programs that support the entire value chain of production for biofuels, all the way from the bottom, from feedstocks, all way to the top, to retail. They have federal purchase requirements for their own domestic fleets. They have fuel tax incentives, and their excise taxes. They have a billion-dollar biofuel research program that's coordinated across the country. They even have property tax credits for establishing biofuel stations. They have regional bio-economy development grants. They even have grants and tax incentives for byproducts.
They have been very thorough in their production, and they've had a lot of success. There are many plants across the U.S. for biodiesel as well as bioethanol.
Within our presentation we have included a diagram of a U.S.-style value chain approach. Looking at it from the bottom to the top, you can see feedstocks, processing, distribution, retail, and consumer. The U.S. looked at that chain. They wanted to flow that product through as well as possible, so they created the renewable fuel standard on top of 5%; it depends on the state. That created the demand draw, to draw ethanol or biodiesel through the system.
If we put that in here in Canada, that would be only one part of a plan. It's very possible we could implement that here in Canada, and we would just import biodiesel and ethanol, but that's certainly not what we want. We want to build an industry in Canada. We want to help primary producers. We need a complete plan.
These are just some of the components the U.S. has built into theirs. They've had direct marketing. They have the fuel tax incentive. They have quality standards. They help build partnerships with distributors and processors, producers, and retail. They have capital investments, loan guarantees, and specifically for agricultural co-ops and producer groups, small business is building those capacities in rural communities.
They have a lot of research, and not only do they have research, but they build demonstration plants to prove it's a viable business to attract that capital investment and venture capital.
They have direct supports for domestic feedstocks, and of course they have support for cooperative development and business skill development, to always bring producers higher up in the value chain, to get them into that ownership, so they're not just providers of raw commodities.
There are many facets to U.S. success, and that's part of them--this whole value chain approach, technology treadmill, always trying to improve, innovate and improve that technology, and of course they have support through government regulation and supply chain linkages.
In Canada we have a long way to go. This is what the CFA would like to see. We don't have specific programs. We would like to work with all parties, all governments, with the minister, on building this plan in partnership with many of the other farm organizations, processing and retail and so on, to build this strategy from top to bottom, bottom to top.
This is an incredible opportunity. The window is closing in about 12 to 18 months. The U.S. is making its capital decisions now, and if we don't do that soon, we'll be out of the game. We will have many plants all along the Canadian-U.S. border and we will be providers of raw commodities for them to process, and we will repurchase their value-added product. We don't want to have that happen. We would like to keep that value within Canada, have producers as ownership components of that, so they can see some of those gains.
Thank you.
:
Thank you very much, Mr. Chairman, and thank you to the committee for giving us the opportunity to present to you today for an introductory discussion on a biofuel strategy. As I'm sure all of you know, this is an issue that is clearly close to the hearts and minds of many in the agricultural community. I'd say it's pretty difficult these days to go to an agricultural discussion and not hear words such as “renewable fuels”, “biofuels”, “biodiesel”, “ethanol”, one of those terms, in the discussion about how we can build on agriculture in the future.
What I'd like to do is take a step back and talk about the global context for biodiesel and what sort of impact that's going to have on canola. The reason why I'm talking about canola is it will be the major feedstock of choice for biodiesel in Canada. There are other feedstocks that can be used for this, such as rendered product from tallow and lard, and other sources, such as soybean oil or yellow grease from restaurants, those sorts of things, but the supply of those is limited in comparison to the supply of canola. So I think there will be a variety of sources that will be used for this feedstock at the end of the day.
As most of you know, the canola industry has just come off a very large production year. Unfortunately, that coincides with very low prices for canola. There are a variety of factors that have an impact on the net returns for the industry as a whole and notably the growers. What our organization and our industry try to do is have an effect on those factors that we have some control over. We often talk to elected officials about the importance of international trade to increase demand for canola products, but biodiesel, similarly, offers an opportunity to boost demand for our product.
Globally, over the last two years, we've seen some major capital commitments across the globe. The world's governments are responding to a variety of public policy objectives, whether they be environmental protection, energy security, or rural development, and this is going to have an impact on the overall vegetable oil complex, whether it's soybeans as a result of what the U.S. and South America do, or whether it's palm oil as a result of what's going on in Asia, and, quite frankly, what's happening to canola because of the EU in particular.
So this is going to have a positive impact on prices for oilseeds. We're already starting to see some of that in prices today, and you can see some of the excitement in places like the Chicago Board of Trade, where they're looking at indexes for biofuels, just to give you an example of the kind of excitement that's around there on prices.
So as the production comes on stream over the next 18 to 24 months, we'll see a rise in prices, and, quite frankly, the demand from biodiesel for oilseeds is something that is going to occur, or is occurring, overnight and is the likes of something we would never be able to see in the food market we have right now.
Now I'd like to turn to the global demand for canola in biodiesel. Most of the time, oilseed markets are driven by meal, so you're seeing a situation where soybean is the preferred oilseed to crush because it's 78% meal and the remainder comes in as oil. But in a biodiesel market, it turns that market into an oil-driven market, and it just so happens that canola, our little black seed, is 42% oil. So it's very competitively situated for an oil-driven market.
The other consideration is that there will be strong demand for canola as a feedstock to biodiesel in colder climates because it is the lowest in saturated fat of all available commercial oils. The same thing that doesn't clog your heart doesn't clog your engine. So there is going to be strong demand for canola worldwide.
Now I'd like to turn briefly to the context for canola in Canada in biodiesel. Obviously Canada fits the bill as a cold climate, so we're going to have strong demand for canola as a feedstock in biodiesel in Canada. What the renewable fuel standard of 5% means for biodiesel--if we translated that in the current diesel fuel pool, it would be about 1.3 billion litres of biodiesel in Canada. We think that given the supply of all the available feedstocks, canola would be at a minimum 60% to 70% of the feedstock used for this particular fuel.
Without a domestic production, obviously we're going to have to import that fuel. So the renewable fuel standard alone, while it's a good start, only addresses the demand side, and that demand can be met by imported product.
The final element, of which I would just like to make brief mention, is that canola will also gain some food market share as a result of biodiesel. You're seeing already in the United States a lot of soybean oil going into biodiesel. We think Canadian canola can have a share in backfilling some of that high-value food market as well.
So there are a number of angles as to why biodiesel is good for Canadian canola.
What do we need to actually build this out in Canada? Like Mr. To, I'd like to take two seconds to talk about the situation in the U.S.
They have substantial production incentives in place right now. They've invested in the industry, and canola, even Canadian canola, is feeling the impact right now. We've heard three major announcements made on the border just to the south of our Canadian provinces: one in North Dakota, one in Minnesota, and one in Washington state. They are all canola-based feedstock biodiesel plants, and the majority of their feedstock is coming from Canadian product.
Obviously, if the plant is located in the United States, Canadians aren't taking advantage of that value-added production, and in particular, Canadian growers aren't taking advantage of that value-added production.
We believe that in order to build out biodiesel production in Canada we require four policy responses. The first is the renewable fuel standard. We have to have the demand draw, as we already indicated.
For biodiesel, we'd like to see a floor in order to ensure that there is demand for biodiesel specifically. We're thinking that 2% by 2010 for biodiesel would be required, out of the overall 5% for renewable fuels. That leaves the flexibility for the petroleum industry and the blenders, but at the same time ensures that biodiesel is built out in Canada.
The other part is to address the supply, the actual domestic production. What we need roughly—and this is just in general terms—is parity with the U.S. government investment in biodiesel production. If we don't match or come close to what's on offer south of the border, we will continue to see, 20 to 50 miles from the border, large-scale capital investments made in value-added production that isn't situated in Canada. That's a massive missed opportunity for our industry to build on in the future.
The third criterion is quality standards or criteria for biodiesel. We have to have end-user acceptance; it's critical. We have to ensure that our product is reliable and that it can be easily brought into the Canadian fuel stream. It has to be performance-based and science-based to inspire confidence among end-users.
And finally, and the one I'm sure you're all interested in, we have to encourage grower participation in the value-added processing. It's an incredible opportunity for producers to get up the value chain, and we have to make sure we have the right measures in place to successfully build out the industry.
That's where I'm going to leave it for the moment. I look forward to the questions. Thank you very much for listening.
:
Thank you very much for appearing.
We had discussed this before. I think the climate is ripe, and as somebody mentioned, it is an exciting time. It's my understanding that the minister is behind this, that he's promoting this. Here's a chance for us to not only get this industry moving forward, but to assist in preserving our rural values and our communities. The potential is huge.
You have a lot of specifics. Specifically, how do you see the farmers, the producers, getting involved? As we know, they're the ones who are being hit the hardest in this whole chain of production. It's obviously important for them to see a gain here, so that will help them, apart from just selling the canola , in this case, or other crops.
Also, if you had the power to do whatever you could, what would be the first, second, or third steps you would take to really get this off the ground? We often have a tendency of talking a lot and discussing, and it's good on paper. But specifically, starting today, what should be done by the government, in cooperation with you, to really get something off the ground? That's what I would like to see.