AGRI Committee Report

INTRODUCTION

The occurrence on 20 May 2003, of a single case of bovine spongiform encephalopathy (BSE) in Alberta set off a chain reaction, the consequences of which were then unknown. It quickly became apparent, however, that it would have political, economic, trade and social repercussions on the agriculture and agri-food sector in Canada, in the Western provinces especially, for many months to come. The Standing Committee took immediate action and held its first special information session on 27 May with officials from the Canadian Food Inspection Agency (CFIA) and Agriculture and Agri-Food Canada (AAFC). Standing Committee members subsequently participated in various telephone conferences and, although Parliament had adjourned for the summer, they decided to assemble in Ottawa in order to meet with stakeholders in the various sectors of the cattle industry. These special meetings made it possible to follow the CFIA investigation and to discuss with government officials and stakeholders the measures taken by the government regarding compensation and diplomatic relations with Canada’s trading partners, in the context of what may now be called the “mad cow crisis.”

This report is not intended to describe or summarize the crisis, since this type of information has been widely publicized. However, certain relevant and important points were raised at the meetings and deserve special attention. Three major themes pertaining to the control of the mad cow crisis came up regularly in the Standing Committee’s hearings. They are what could be called “tests,” which the government and the domestic market had to pass. And, like all tests, some were handled better than others.

EPIDEMIOLOGICAL INVESTIGATION BY THE CANADIAN FOOD INSPECTION AGENCY: AN EXEMPLARY APPROACH

The CFIA had to face the first test imposed by the mad cow crisis, which was to conduct a concerted epidemiological investigation into the discovery of a BSE case and its immediate control. The various stakeholders who appeared before the Standing Committee commended the CFIA for its exceptional work following the discovery of a case in Alberta. Standing Committee members can also attest to the transparency and openness that the CFIA has shown since the crisis began.

Recognition of the CFIA’s excellent scientific work came as well from the group of international experts who had examined Canada’s actions following the detection of an indigenous case of BSE:

The team wishes to clearly acknowledge the openness, full disclosure and access to personnel provided by the Canadian authorities to our team, the international community and the public. The approach to sharing of information and communication demonstrated by Canada is a model to be emulated.

[…] The team is impressed with the comprehensive scope, level of analysis and thoroughness of the investigation to date. In a very short time Canadian experts have collected and assessed a level of information that exceeds the investigations done in most other BSE-affected countries. This serves as a testament to the competence, capacity and dedication of effort of Canadian officials.¹

Standing Committee members feel that this passage alone of the expert group’s report sends a strong message to all of Canada’s trading partners on the quality of the CFIA investigation and, therefore, on the fact that Canadian beef products reaching the market are absolutely safe. Furthermore, the federal government’s swift implementation of certain recommendations in the report — within two weeks of its release — was another message likely to increase the confidence of our trading partners. For instance, on 18 July 2003, the Government of Canada announced a new Specified Risk Materials (SRM) policy jointly developed by the CFIA and Health Canada, which requires the removal of the brain, spinal cord and other tissues from carcasses of cattle older than 30 months.² A portion of the small intestine will also be removed from carcasses of all animals. This approach is entirely consistent with international standards. Other countries, notably in the European Union, have adopted even more stringent measures, not necessarily based on science, but rather because of socio-economic and logistic reasons, notably to prevent possible cross-contamination. This presumably explains why the group of international experts recommended that “Measures to ensure that SRM are not included in human food and animal feed should be implemented, enforced and audited for compliance.”³ In the present context, the Standing Committee considers that going beyond “making an already very safe system even safer” might be a good strategy that could eliminate all trade barriers. Therefore:

RECOMMENDATION 1

The Standing Committee recommends that measures to ensure that Specified Risk Materials are not included in animal feed be implemented, enforced and audited for compliance.

The Standing Committee was also pleased to see that the group of international experts had highlighted in its report the importance of a good veterinary infrastructure for surveillance systems to be effective. This was the subject of a recommendation in an earlier report by the Standing Committee,⁴ on which the government acted by injecting additional funds into faculties of veterinary medicine in Canada.

With regard to the value of surveillance systems, the Standing Committee acknowledges that Canada already has in place a very well-established inspection and animal identification system that is recognized worldwide for its effectiveness. Despite this, the fact that our agricultural sectors are diversifying and becoming more integrated, both domestically and internationally, means that the potential risk of future instances of serious communicable diseases being introduced into the domestic animal populations is increasing exponentially. On 20 May 2003, when news of Canada’s BSE case became public, the CFIA undertook immediately to trace the cause of the BSE to the source farm. While this was done with considerable speed, the Standing Committee believes that the use of new technologies could have substantially reduced the time required to complete this process. The Standing Committee believes, therefore, that special attention should be given to implementing a program that would facilitate the immediate trace-back of animal history and lineage in instances of serious communicable diseases. In doing this, all efforts should be made to ensure that any proposed national system incorporates existing regional and national practices along with new technologies and animal health procedures. Furthermore, when devising such a national traceability system, the government should be mindful that all Canadians would benefit from effective tracking of animals, and program costs should be distributed accordingly. Such a system would provide economic and health benefits, and be a mechanism to promote and demonstrate superior food security both to Canadians and to our trading partners abroad. Therefore:

RECOMMENDATION 2

The Standing Committee recommends that the federal government work, in cooperation with the CFIA, the industry and provinces, to enhance the existing Canadian Cattle Identification Program by establishing a comprehensive and cost-effective national traceability system, as rapidly as possible.

OPENING OF EXPORT MARKETS AND THE BSE RECOVERY PROGRAM: A HESITANT APPROACH

The second test involved the federal government, which had to react quickly in order to mitigate the devastating economic and trade effects that resulted from the closing of the continental and international markets to Canadian beef and cattle exports. The Canadian cattle industry exports approximately 60% of its production, and its extensive integration with the American market results in the United States absorbing 80% of Canadian beef exports and almost 100% of cattle exports. When an industry’s viability depends largely on annual exports totalling approximately $4 billion, and this viability is jeopardized because trade has been stopped for reasons other than scientific and/or health concerns, it is the federal government’s responsibility to ensure that export markets are rapidly re-established by making all of the appropriate diplomatic efforts. Its role, in collaboration with the provinces and industry, is also to try to maintain the industry’s production capacity so that it may become viable again.

A.      Opening of Export Markets

In a crisis, everyone seeks an immediate solution that would curb any incidental effects — often negative — that in the long run could turn into an unresolvable debate or an economic impasse. Unfortunately, in the area of international trade, examples of ongoing economic impasses are not lacking, as evidenced by the European ban on imports of hormone-treated beef, and the Canada–United States trade in softwood lumber.

International trade does not involve issues of market access only; the negotiation process, which allows for discussion, must be seen as fair and transparent and, understandably, it must take into account trading partners’ sensitivities. Likely with this in mind, witnesses who appeared before the Standing Committee were very critical of the diplomatic approach taken by the federal government to inform its trading partners about the ongoing investigation. Some witnesses felt that Canada’s diplomatic approach was perhaps coloured by its heavy dependence on the American market, which might have blinded it to the fact that trade depends on a global market and that all trading partners, even those with less economic clout, must be treated equally.

In Japan, […] for the first three and a half weeks of this crisis, during the time when Japan slowly and continually hardened its positions on Canadian beef, […] during that first three and a half weeks, Canada did not engage with regulators in Japan.

Twice during that period, Japan asked to send their technical teams to Canada, and twice they were rejected. Only after it appeared that Canada and the United States had great momentum to an early marketing opening between the two markets, yet no engagement, no information, no interaction with Japan had been achieved, only then did Japan take steps, because of the absence of information. There was no science. So in that position, they said “If Canada and the United States are going to cut a private deal and Canadian beef is going to go into the United States in an undifferentiated fashion, we need to protect ourselves until our own scientists can review the situation.” They only returned home less than a week ago.

Mr. Ted Haney of the Canada Beef Export Federation, Standing Committee on Agriculture and Agri-Food, Evidence, Meeting No. 40 — 11:00 a.m., 37th Parliament, 2nd Session, Ottawa, 10 July 2003.

However, in a previous meeting, officials from the Department of Foreign Affairs and International Trade (DFAIT) had contended that every effort to reassure Japan was already being made:

Discussions at the scientific level are continuing. As you are aware, Japan is a particular key in light of U.S. concerns about their exports to Japan. That’s why we sent the mission yesterday to Japan. The Japanese mission was in Canada last week. We’re there to provide the reassurances the Japanese need so that they do not impose measures on the U.S. based on the U.S. understanding that we’re operating a continental market.

The Japanese initial thoughts were to impose restrictions that sought to somehow segregate Canadian beef from U.S. beef. That is very difficult to manage. That’s why we are in Japan, to explain to the Japanese and to provide comfort to them.

Mr. Claudio Valle of DFAIT, Standing Committee on Agriculture and Agri-Food, Evidence, Meeting No. 39 — 10:30 a.m., 37th Parliament, 2nd Session, Ottawa, 30 June 2003.

According to CFIA and DFAIT officials, even if Japan had shown interest in visiting Canada while the investigation was under way, they felt it would be better to wait until the investigation was closed so that the results of the scientific investigation could be shared.

Actually, we made an intervention with them and reminded them of the circumstances they had when they were dealing with BSE. They quickly realized that what they really wanted to see was the results of the investigation. We told them at that point in time that we would invite them as soon as the investigation was coming to a close. And in fact that’s what happened.

Mr. Robert Carberry of CFIA, Standing Committee on Agriculture and Agri-Food, Evidence, Meeting No. 39 — 11:00 a.m., 37th Parliament, 2nd Session, Ottawa, 30 June, 2003.

A delegation from Japan visited Canada during the week of 23 June, and Canada’s Chief Veterinarian went to Japan on 30 June, and then on to Korea, to continue discussions and share first hand the results of the investigation in special meetings with appropriate authorities. Some witnesses mentioned to the Standing Committee that a united diplomatic effort by the government and industry would have provided greater reassurance to our partners.

Many believe that Canada wrongly evaluated the potential effects of its decisions, and therefore see Canada’s approach as a diplomatic faux pas that exacerbated the effects of the crisis, especially its effects on the closing of export markets. While such a conclusion may be true, we will perhaps never know whether it was well founded. However, it is well known that at one point the Canadian cattle industry was losing $11 million a day. At this rate, an industry’s production chain deteriorates rapidly, to the point that it may, over the longer term, reach a point of no return to its past production capacity.

Canada’s so-called faux pas may have had a destabilizing effect that made it lose sight of the fact that the real solution to the mad cow crisis must first address the international recognition of its new country status as “non BSE-free.” Before May 20, 2003, Canada qualified as “provisionally free of BSE risk and was scheduled to attain free status following two additional years of the meat and bone meal feed ban introduced in July 1997.”⁵ Canada’s status is no longer the same as it was before May 20, it is now “minimal BSE risk.” On the basis of the new status, our trading partners can make a decision about their trade with Canada, and Canada, in turn, will be able to establish whether any countries are blocking Canadian exports without a valid reason.

There is, however, a void in terms of internationally accepted trade-related measures that can be taken following the discovery of the disease in a particular country. For this reason, Canada, the United States and Mexico have jointly requested that the Organisation internationale des épizooties (OIE) “begin the dialogue necessary to develop more current practical, science-based guidelines relevant to BSE risk management.”⁶ The effects of the mad cow crisis on Canada’s capacity to trade freely may well last for months. Accordingly:

RECOMMENDATION 3

The Standing Committee recommends the establishment of an industry/government task force that would focus specifically on the trade issues involved in the full restoration of export markets for livestock and its related meat products.

Moreover, at its meeting on 11 August, the Standing Committee unanimously approved a motion asking the Prime Minister to intensify diplomatic efforts to facilitate the opening of the United States border to pre-May 20 levels.⁷ At subsequent meetings, it was mentioned that trade missions to various countries were in fact conducted by government officials, but neither the industry nor Committee members were informed of such missions. Therefore,

RECOMMENDATION 4

The Standing Committee recommends that the livestock industry and Parliament be kept informed on a regular basis of diplomatic efforts and trade missions conducted to improve Canada’s livestock trade situation.

Finally, fully opening export markets will entail changes in practices, such as those already announced by Canada on the removal of specified risk materials from cattle at slaughter, or increasing the number of BSE tests on slaughtered animals. An increase in direct and indirect costs throughout the production chain is to be expected. Consequently:

RECOMMENDATION 5

In order to ensure that the increased costs resulting from changes made to inspection, rendering practices and traceability systems are not borne solely by livestock producers, the Standing Committee recommends that the Minister of Agriculture and Agri-Food increase the budget of the Canadian Food Inspection Agency.

Furthermore, the Committee recommends that the Minister name an auditor to ensure that any additional costs be kept to a minimum and shared equitably among all stakeholders in the livestock sector.

B.      The BSE Recovery Program

On 18 June, federal, provincial and territorial agriculture ministers announced a program to provide $460 million in temporary assistance, $276 million of which was to come from the federal government, so that the Canadian cattle industry could continue to operate despite having lost 60% of its export market. The recovery program in response to BSE was twofold: a slaughter compensation program with a budget of $420 million, and an inventory and pricing incentive component with a budget of $30 million. On 12 August, the Minister of Agriculture and Agri-Food granted extension funding of $36 million to the program. Funding for the recovery program was limited, and so it ended in August when expenditures reached the ceiling, even though the border was still not completely open to exports of all cattle and beef products.

The slaughter compensation program aimed to increase the number of Canadian cattle slaughtered in order to reduce the accumulation of calves and cattle for slaughter, to regulate the flow of cattle when the border reopens and to increase the cattle industry’s liquid assets. The primary goal of the program was to increase the number of cattle slaughtered each week to some 50,000 head. Before 20 May, 70,000 head were being slaughtered for the Canadian market and the beef export market, and another 20,000 live animals were intended for the cattle export market. In the weeks following the closing of the export markets, the average weekly slaughter was around 30,000 head. Producers raising and selling cattle in Canada were eligible to receive compensation based on a reference price and a sliding scale, which allowed market signals to be felt.

The inventory and pricing incentive program was designed to provide assistance to meat packers to help them move beef products that were in lower demand and to encourage them to offer higher prices for the cattle they purchased.

While the government and industry had worked together closely to develop the recovery program, it appears that the program as announced by the government was changed and fell short of producers’ expectations.

Over the next two weeks, we met intensively with federal officials and developed a program that we thought would be sustainable. Unfortunately, prior to the implementation, several key actions were either ignored or modified from the original proposal, rendering many of the positive outcomes ineffective. The two most significant were changing the end date of the program from 30 days after the reopening of international markets to live cattle sales to immediately upon reopening of markets to muscle-cuts; and a significant change to the format and conditions of the diminishing market adjustment formulas.

These changes resulted in several damaging outcomes as predicted by the industry in advance of the announcement, particularly excess selling of slaughter cattle, the collapse of finished-cattle markets, and increased anxiety of cattlemen about the future.

Mr. Brad Wildeman of the Canadian Cattlemen’s Association, Standing Committee on Agriculture and Agri-Food, Evidence, Meeting No. 39 — 11:15 a.m., 37th Parliament, 2nd Session, Ottawa, 30 June , 2003.

Nonetheless, the program did meet some of the industry’s expectations, primarily by allowing for more animals to be slaughtered and on a more regular basis. By the end of the program in August, 72,631 head were slaughtered during the last week — 8.5% more than the previous week and the corresponding week in 2002. The cattle sector must now regain the fluid and functional production it had before, but probably with a lower slaughter level.

We have to attempt to get to a supply-demand balance. All the things that are wrong are just that. We have an incredible oversupply and we can’t expect our domestic marketplace to do that. I think everybody in this room will agree that the Canadian consumer has been tremendous in response to us. We could not ask for a better response than what they’ve given us. But the reality of the situation is that you can’t eat it all.

Mr. Brian Nilsson, Co-Chief Executive Officer, Nilsson Brothers, Standing Committee on Agriculture and Agri-Food, Evidence, Meeting No. 41 — 11:20 a.m., 37th Parliament, 2nd Session, Ottawa, 11 August, 2003.

 A new approach would create a structured marketing that would prevent the sector from possibly having to confront a shortage. Suggestions made to the Committee included:

One frequently mentioned suggestion involved an action plan for a national livestock culling program aimed at animals older than 30 months. The lack of any markets for these cattle means they have low value, while their costs to breeders are increasing. The Beef Industry Roundtable comprising both industry stakeholders and government representatives is looking into market opportunities for these animals. Even though Canada’s top priority must remain the complete re-opening of export markets, the way in which our new minimal BSE risk status is limiting our export capacity forces us to re-examine our production chain for beef products, and tailor it to suit current supply and demand conditions. Accordingly:

RECOMMENDATION 6

The Standing Committee recommends a compensation plan for a culling program, which would include dairy cull cows, that should be conducted according to an attrition rate that would allow the industry to better balance supply and demand.

Furthermore, since such a program will require the development of meat products with greater value added, the Committee recommends that the government support the industry through a special assistance fund for the development of new market opportunities.

Lastly, the business risk management (BRM) component of the Agricultural Policy Framework (APF) was discussed many times during meetings of the Standing Committee over the summer. But the capacity of the BRM to respond to the financial difficulties of Canadian cattle producers is in dispute, especially with regard to provinces that have not yet signed this APF component. Agriculture and Agri-food officials told members of the Standing Committee that the APF could well help the cattle producers:

We do believe that the APF and the BRM component as it is could be of significant assistance to producers, in particular the cow-calf producers and the backgrounders. The production margin, compared to what was there before, offers excellent protection for them.

Mr. Gilles Lavoie, Senior Director General, Operations, Market and Industry Services Branch, Agriculture and Agri-Food Canada, Standing Committee on Agriculture and Agri-Food, Evidence, Meeting No. 41 — 1:45 p.m., 37th Parliament, 2nd Session, Ottawa, 11 August 2003.

While producers are in immediate need of new funds, some members of the Committee are sceptical about the APF’s capacity to generate quickly the financial assistance necessary to keep the Canadian cattle industry viable and/or until there is a return of the market conditions that existed prior to 20 May 2003.

PRICE TRANSMISSION ALONG THE BEEF PROCESSING CHAIN: AN UNCLEAR MECHANISM

The third test concerned the domestic market and how prices for beef products are determined. While the closing of export markets brought a significant drop in the prices paid to cattle farmers, retail prices did not follow suit. However, consumers have handled the crisis well, maintaining or even increasing their consumption of beef. The Committee is pleased to recognize the support consumers have shown by not abandoning the beef market.

The maintenance of high retail prices has, however, made many stakeholders angry, especially since the various governments injected $30 million under the inventory and pricing incentive program to help meat packers, who are seen as primarily responsible for maintaining elevated retail prices. During Committee meetings, various representatives from the beef processing sector explained the mechanism that determines the price of beef and its products and pointed out that meat packers have fixed costs oriented around the slaughter of 65,000 head a week. Consequently, their operations and profit margins have been largely disrupted because the rest of the cattle production chain has slowed down. Moreover, the best cuts, which are usually in high demand, account for only 13% of a carcass. Export markets are necessary to make entire carcasses profitable and to establish competitive domestic prices. The prices of certain cuts, in particular those corresponding to the imported products, eventually came down, but on the whole prices have not dropped to the levels expected by consumers and analysts.

Many of these arguments failed to sway the Committee, which believes that a specific beef processing sector should not profit unduly from a crisis that is seriously affecting Canadian cattle farmers, especially when the entire sector is receiving government aid. Therefore:

RECOMMENDATION 7

The Standing Committee recommends that the Competition Bureau conduct an investigation into the pricing of beef at the processing and retail levels. To this end, the Committee Chair and five other members will send an official written request to the Bureau.