We're all good. We'll distribute them, and again, they have been sent to translation.
I'll introduce our witnesses.
From API Labs, we have Mr. Glen Metzler, chief executive officer, and Mr. Ryan Mercer, a board member. Welcome.
From EIO Diagnostics, we have Damir Wallener, chief executive officer. Welcome, Mr. Wallener.
From Maple Leaf Foods Inc., we have Mr. Rory McAlpine, senior vice-president, government and industry relations. Welcome.
Would you like to start, Mr. Wallener? You have up to seven minutes for your opening statement.
Thank you so much for indulging my presentation. This is my first time at a committee like this. I did not fully appreciate the procedural aspects, so thank you for that indulgence.
I am the founder and CEO of EIO Diagnostics, a company from the west coast, on Vancouver Island. We do early detection of illnesses in the udders of dairy animals, primarily mastitis. This is a $10-billion annual production loss for the global dairy industry.
What I think is interesting about our story is that we are now coming up on our 10-month anniversary as a company. We are very well funded through the private sector and we are engaged with large and small companies across the globe, essentially, at this point.
Turning to the slides, “2017: Origins” provides a little rundown on the timeline. The reason I'm sharing the timeline is that in my experience in building and starting companies, it is not always apparent to regulatory agencies where the actual challenges are in bootstrapping from nothing to an idea that generates jobs and exports.
Our story started in August with a proof of concept that was literally built on my kitchen table. The founders paid for that out of our own pockets, which is normal. Within one week of sharing a 90-second video of that proof of concept, we received an investment offer from an investment fund in the city of New York that specializes in food and ag tech. As part of that deal, they had us come to New York for three and a half months where, in addition to the investment, they opened up their network—particularly in CPG, consumer packaged goods, basically anything you buy in a grocery store that's not in the produce section—and introduced us to a whole series of investors in this space. That program was called Food-X.
At this point we still had no product and no revenue. It was just a proof of concept. In October we started our first commercial test at a dairy close to us on Vancouver Island, Balme Ayr Farm. At that point the Ministry of Agriculture in B.C. was kind enough to give us an innovation grant in the amount of $70,000.
I'm being particular about the numbers because it's important to the story. That $70,000—and we'll come back to this later—which is such a small amount in the big scheme of things, is the amount that kept EIO a Canadian company at that point. At that point we were already receiving additional investment offers from the U.S. The New York City Economic Development Corporation offered our entire founding team residency visas to move the company to New York. We received a long list of offers that we were able to push back on because we had a little bit of runway from our provincial government.
In November and December we made additional technological progress, and in December we had our coming-out party at a large event in New York, in Manhattan, hosted by Food-X. From there we developed all the relationships that we needed to get the company to the next level.
On the next slide there are some photos. The photo on the upper left shows our device in action at Gracemar Farms, a large dairy operation in the Fraser Valley.
We've also extended and are now working in Africa. In one of the images I am teaching a class to Namibian veterinary students, which I think is really funny because I just have a bachelor's degree and I'm not supposed to be teaching a university class anywhere.
As illustrated at the upper right, we were part of a survey to determine, as part of the social policy development in Namibia, how many of their dairy and meat goats are getting sick. Our tool is very portable, very inexpensive, and it goes out into the field. What isn't shown in that image is that shortly afterwards we ended up with heat stroke and dehydration. The whole thing was just a fantastic story that is too long to share in its entirety here.
At the bottom right is a photo of us in Kenya. The young woman holding the device is a veterinarian, recently graduated. After I showed her how this device is used to detect illnesses in animals, she immediately took it out of my hands and would not give it back at the end of the day unless we promised to come back. We are, in fact, going back in September, funded by both NGOs and by large and small producers in Kenya.
In 2018 the company has continued to grow. In Q2 we closed a substantial seed round.
Again I want to point out that we still did not actually have a product at this point. This was still more hope than reality. That is important, because every single one of our investment dollars was from the U.S. In our experience, Canadian private sector investors tend to be fairly risk-averse, while our international colleagues are risk-seeking.
At this point as well, we received our first federal assistance through NRC's IRAP, which is an absolutely fantastic program. We love this program. It, Mitacs, and a couple of the NSERC ones are fantastic. I cannot speak highly enough of them, and we are very grateful for that support. The IRAP support was instrumental to us while we were raising money to be able to push back and say yes, we will take your money, but no, we are not moving to Silicon Valley.
Later this year we will be actually at revenue and selling a product, but we have ongoing pilots with companies as large as Cargill, which is just a behemoth, down to individual farms in the western United States, which tend to be a little bit larger than Canadian farms.
In the next slide, at this point we are engaged on four separate continents, which is pretty amazing, because we're eight people at this point. Even that is kind of amazing, because in January we were two people, essentially unpaid. We were a start-up. We're in agriculture, but we're a tech start-up. Now we have eight people. Average salaries are basically six figures, so we are creating jobs and we are creating value. Investment dollars are flowing from the U.S. to our company and being spent in Canada. This is a good story.
We were lucky. It's not my first company, so I knew where some of the challenges would be. The next slide, with the big red box, indicates where a lot of other companies run into trouble. The real challenge for starting a business here is in that initial stage, in that $500 to $100,000 kind of investment. Most federal support and provincial support comes much later in the process, and by that point companies are already engaged overseas or in the U.S. and many of them have already moved.
The four pillars of being able to foster young companies are capital, talent, advisory services, and markets.
We're really good at the talent part. We produce many high-quality graduates in all the STEM fields. We're not very good at the capital side. It comes from the relatively risk-averse nature of Canadian investors, so most capital comes from outside the country. On markets, we're an exporting nation, so it's kind of built into our fabric to seek outside—
I appreciate the invitation to speak to you.
Your topics of innovation, competitiveness, and trade are very important to Maple Leaf. In fact, the viability of our business really lives in that interconnectedness between those topics every day.
I want to share a perspective, and it's rooted in perhaps three credentials, three facts, about our business recently.
The first is that in the past six years, Maple Leaf has invested more than $1.5 billion in capital upgrades for productivity and competitiveness gap closure in food processing in Canada. This is more investment than any other in our space, and it gives us a front-row seat to the challenges of the business case for investing in Canada.
In doing so, in fact, we bet the farm: we bet the equivalent of our market capitalization, which at the time was certainly more risk than most would take.
Second, though we're now looking at an additional $1 billion of investment in similar projects with similar objectives, unfortunately our board is struggling with this choice simply because the return on the Canadian investment can't offset the risk to the required capital. In this case it might be closer to 20% to 25% of our latest market capitalization. Of course, very few manufacturing companies in Canada are stepping up to that degree.
The third fact is that we have been involved in the government's agri-food economic strategy table, the food processing industry round table, and many other groups. In each of these groups we've achieved insight as to what other industry participants believe and what they're feeling in their businesses, and we are clearly in alignment with them. Our overarching observation is that productivity investments in this country, the ones that make a difference to our competitiveness, are really just a business case with a numerator, a denominator, and a risk profile. They are alternative uses to capital that our board has to weigh.
Let me be clear what they are not, in our experience.
They are not a function of corporate taxes, at least not until recently. Of course, there have been some changes south of the border on corporate taxes, but the evidence shows that perhaps not even now is that really an inhibiting factor.
They are not a willingness to take a well-calculated risk. As I mentioned, we are a good example of betting significant amounts of our market capitalization.
They're not a function of R and D spending or insights. In fact, we know precisely where the technology is around the world and we know how to apply it.
As well, they're not a talent issue. As my colleague said, we have great people with the skills to execute projects.
Our business case challenges continue to be rooted in the core fundamentals of that numerator and the denominator, i.e., the return on investment, as follows.
The first challenge is one of living in a sub-scale country. I say that while obviously recognizing that investments like this are scale equations. The latest technology in our industry is super-expensive capital, requiring large global-scale operations and market share to justify, and that's simply more challenging in a country of only 35 million people. Adding to this has been a Canadian history of an economic policy that often seeks to limit scale or perhaps equalize scale, other than in our primary resource sectors, where products are more easily exportable as commodities.
Second, construction costs are at least 25% higher in Canada. This is a hard reality. It's demonstrated repeatedly. Excess construction costs undermine the denominator relative to a similar investment in the United States in a material way. There are numerous drivers of this, and we could call on many operators of large-scale food operations on both sides of the border to corroborate this. We also work with U.S. construction and engineering firms that can explain why this is the case.
Third, the Canadian operating environment impairs performance of manufacturers of consumer packaged goods. This is a result of the cumulative effect of many factors, none of which moves the needle on its own, but all of which together make a clear difference. They include an uncompetitive regulatory environment with a gap that is widening recently; the effect of uncompetitive labour laws in some provinces, and not just minimum wage competitiveness; energy costs that are not in line with those in key U.S. jurisdictions; environmental requirements, which add relative cost; and a personal tax environment that makes it more challenging to attract top talent. Adding to this unfavourable environment is the investor anxiety around NAFTA at the moment.
Fourth, we note that U.S. jurisdictions are generally more willing to open their subsidy and tax wallets for large capital projects. While programs to attract investments certainly exist in Canada, our direct and rather frustrating experience is that the bias of federal and provincial governments is strongly in favour of foreign companies and disruptive innovation instead of scale plants—unless, of course, it's an auto plant—and applied technologies that are the first order of business for most manufacturing companies trying to close the competitiveness and productivity gap that I noted.
The program landscape is fragmented, confusing, and in our experience ill suited to mitigating the costs and risks that deter advanced food plant manufacturing investment in Canada.
In conclusion, I realize I may be disappointing the committee by challenging the assumption of your study that there's a direct line from innovation enabled by government strategies and programs and more aggressive corporate R and D to export growth for Canada's agrifood industry. From Maple Leaf's perspective as a long-established Canadian food manufacturing company, having a clear plan to address the drivers of the business case for investment would have more value than focusing on the elements that are at best incidental, such as, as I mentioned, corporate tax rates, innovation spending, or talent and skills acquisition.
For the Canadian food industry, solving this issue is vital to defending our home market share, let alone restoring our global market share, especially if the Canadian dollar returns to strength.
Thank you, and I welcome your questions.
Thank you, Mr. Chairman.
Honourable members of the committee, good afternoon. My name is Glen Metzler and I am the CEO of API Labs, a company based in Lethbridge, Alberta, whose bold mission is to establish a fully fledged commercial poppy industry for Canada. I'm joined by Mr. Ryan Mercer of Mercer Seeds. He is an Alberta farmer, past president of the Alberta Seed Growers Association, and a board member for API Labs.
Forty years ago the canola industry was non-existent in Canada. Through Canadian innovation, we are now responsible for 25% of all farm gate sales and contribute nearly $27 billion to the Canadian economy. We would like to repeat this success with new crops like poppy seed production in Canada. This would offer diversification to the existing crop rotation, create export and economic opportunities, and further our collective mission to lead the world in agricultural practice. Here is how.
As a food crop, the value of poppy resides in the oil-rich seeds, which have a long tradition in a number of global cuisines. Today poppies are only commercially cultivated in a few countries, rendering them an import commodity for every other country on the globe. Canada and all of North America import 100% of their culinary poppy seeds. These seeds come from a number of sources. The integrity of the supply chain from seed to crop to packaged product is always a critical aspect of food safety.
Supporting commercially viable domestic poppy seed cultivation as a food crop would ensure our supply chain in Canada and present opportunities for export. Although poppy seeds are mainly processed as a condiment, additional novel uses, such as high-quality food grade oil, animal feed supplements, biofuel, and cosmetic and industrial applications may also be developed. Annual global exports for poppy seed are approximately 250,000 tonnes with an average price of $3,300 per tonne. Our company has already received opening orders for up to 10,000 tonnes per year, but we cannot get products to foreign markets without Health Canada approval. More on that in a minute.
For its part, Canada is the only G7 country that does not commercially produce or process poppies. The opportunity to move into new crops and sectors is synonymous with economic growth and is aligned with the federal partnership strategy and the innovation strategy. Countries such as the U.K., Portugal, France, and Australia have all established commercial poppy cultivation. Surely we can match and compete with the success seen in these countries.
The economic benefits of poppy cultivation are clear: job creation, capital expenditure projects, value-added processing, and a positive economic multiplier effect. Commercial poppy cultivation represents an untapped potential for crop diversification, for economic growth, and for harnessing the power of agriculture innovation to increase Canadian exports.
Since 2007, API Labs has been working towards the goal of commercializing poppy cultivation in Canada. We have built an excellent R and D program, and since 2015 we've been on the cusp of commercializing our technology for the benefit of Albertans and Canadians—but here is our central challenge. The federal government is encouraging innovation with one hand, but with the other hand, in our experience, it has blocked our ability to commercialize our innovation.
For example, API Labs has received over $2 million in investment and loans from the federal government, including a repayable loan under the Canadian agriculture adaptation program that cannot be paid back without a commercial revenue stream.
We have also raised several times that amount from investors and farmers from the prairies who are eager to add poppy seed to their crop rotation, but since 2015 we've been struggling to get the necessary regulatory approvals from Health Canada for the commercialization of poppy seed cultivation. Health Canada has given us approval to conduct research and development in this sector for the last several years, but they continue to delay and deny approval for us to commercialize. Our current application is only for eight hectares, as a basis to eventually scale up our production.
We're really frustrated and disappointed at the lack of progress. Surely this government and all parties want to recognize the value of agricultural innovation to help include our small, medium, and large producers as champions in a global marketplace. Let us get the right policy mix here at home for our farmers and businesses and all Canadians.
To achieve a thriving domestic poppy seed industry in Canada, we would respectfully make the following three policy recommendations for your consideration in your report.
First, we need to encourage private sector partnerships with academic institutions.
Second, we should also introduce more innovative financing mechanisms for small and medium-sized enterprises to raise private capital—for example, flow-through shares.
Third and most importantly, we must create a clear and transparent approvals system for agricultural products that are covered by the Health Canada jurisdiction.
Thank you for your time. I look forward to your questions.
I guess the first point I would make is that the critical ability to move to that factory of the future and apply the industry 4.0 technologies is to have competitive-scale plants. We do, in the case of our Brandon slaughter plant, as an example. Meat processors such as Cargill and Olymel also have fairly large plants. In our case, in our Brandon plant we've begun a whole project of application of IoT, the Internet of things, such as putting in sensors to better monitor yields and even water and energy use and that sort of thing.
There is a limit, though, because at the end of the day, at least with current technology and robotics, there is only so much you can do with a live animal through to ground meat. A lot of hands-on labour is required. We've applied more of that at the front end, but the fine trimming and the deboning in meat processing is really where the value comes in. The more you can portion, cut, trim, and cut something to spec, now you have real value.
At the moment, our biggest challenge in getting there is labour. Yes, we'd like to automate more, but in those functions, at least with current technology, it is very hard. The problem is that you apply the labour and the technology as you can at the front end, and you leave undone that value-adding in the latter stage of the process, which is where the profit most often can be found. There are a number of challenges in that. As I say, it's a question of adapting technology, but it's also about making sure we have adequate labour. That's the trouble.
Thank you, Chair, and thank you to all of the witnesses.
I want to start with a comment for Mr. Wallener, who comes from the Cowichan Valley and whose success story many of us have been watching very closely. It's putting the little Cowichan Valley on the map. I remember that when we were in Guelph talking to Bioenterprise, I started with a description of your company, and they said, “Yes, that's one of our clients.”
I think this idea came to me when considering you as a witness. We hear a lot about these organizations that do take government and private sector funding, but we hadn't heard from the companies that are actually taking this journey, as you are. You quite rightly pointed out that it's really in the incubation and validation stage that we're starting to lose companies. I wonder if you could expand a little more on that.
We have heard a lot from Bioenterprise. Given the way that organizations like Bioenterprise are currently working, we ultimately want to make a very clear recommendation to the government, so in the context of how it's already operating, can you expand a bit on what more we should be doing specifically?
I would be delighted to.
We first met with Bioenterprise in about March. You can see in our timeline that we were already essentially funded at that point. The interesting thing with Bioenterprise is that we came to that meeting with a deeper and broader network in ag-tech and food-tech and the investment community than they had. This is not to say that they're not good or anything like that. I mean, they have constraints that they must work within.
We commonly in Canada refer to organizations such as Bioenterprise as “accelerators”. This is a non-standard use of the term. An accelerator provides funding, and Bioenterprise does not. Also, Wavefront—recently departed—does not. Essentially, in terms of our entire federally supported accelerator network scheme, they're not actually accelerators.
When we are approached by an accelerator in the U.S., they not only introduce us to their network, but they give us money. As soon as you give somebody money, it creates a subtle or not-so-subtle obligation and pressure. As well, money leads to more money. We have offers on the table for matching funds from organizations in the States that are like Bioenterprise—basically, organizations supported by local and regional governments that will match dollar for dollar everything we raise in the private sector.
Now, we have not taken those, because I'm really good at bluffing and getting them to give us what we want without giving them what they want, but the reality is that there are Canadians all over the U.S. We are everywhere, especially in technology, and in anything to do with agriculture as well. That happens because there isn't enough to hold companies here long enough to set that taproot. All our customers are going to be in the U.S. in the first wave, but we can stay here because, number one, we have the money, and, number two, we were able to get our core team built in Vancouver Island to a kind of critical mass that it now becomes difficult to move. The support and all the other stuff can happen and will inevitably happen, some of it in the U.S., but that core team is now rooted.
The problem is that if you can't get that root tapped, they're going to go. It's like when you send a kid away to college. If you're from a small town, unless you have that taproot, that kid is probably not coming back until they're 40 and they have their own kids, right? You want to get them at that growth stage, because that's where the big bang for the buck is.
Thank you very much, Mr. Chair.
I want to thank the witnesses for being here today.
I have a more general question.
The Canadian Agricultural Partnership has a $690-million budget to support growth in innovation and the environment in the agriculture and agri-food sector.
I would like your opinion on something I consider quite important: cooperation between industry, government, and academia.
All aspects of research and development lead to innovation and can increase exports. We are here in part to work with industry to increase our exports to reach $75 billion by 2025.
Tell me about that cooperation, which could be promising. We want to hear from experts like you as part of our study.
Perhaps you can answer one at a time.
Let's begin with you, Mr. Wallener.
Sure. Someone once said that a mosquito is the most powerful weapon in the world because all it has to do is sit there by your ear and buzz and eventually you will go nuts. It's not just the number of zeroes in a number. It's the timing. In that case, at that point in time, we were at a really delicate point. We'd had strong offers: “Please come here and stay here”, and because we had that $70,000, we could say no. We knew we had that backstop, and by being able to say no.... This is a roomful of politicians, and you know that sometimes your strongest tool in a negotiation is the willingness to walk away.
We would not actually have walked away. I do have a tendency to bluff, but we said no, and by saying no, in our industry there is something called FOMO, fear of missing out, so we started creating this impression that, “Wow, they're able to say no. We have to be part of this”. Therefore, that $70,000, while it is a small number, cascaded. When IRAP came in—and we have an additional relationship with the Ministry of Agriculture in B.C., which I'm not quite at liberty to talk about—that gave us, at the next stage of our evolution, another means to say no. We could say that it would our terms, or no.
We were able to leverage all of that into private investment with minimal strings attached, though there are never no strings attached.
Thank you very much, Mr. Chair.
Thank you to our witnesses today. Certainly we have the start-ups, as well as companies that are already established but are just waiting their turn on the Health Canada regulations, and that have certainly been around for a long time and are innovative, like Maple Leaf Foods. It's great to have this type of cross-section in the agricultural community.
I want to talk more about the competitiveness theme. Some of the discussions have focused on how much research dollars are available that we can match, and how we have this problem of Canadians actually investing on their own. Having gone to Germany a year or so ago, one thing they talked about was the fact that Canadians, as far as taxpayers are concerned, have allocated the same amount in terms of GDP per capita as Germany has done, but that we can't get others to invest with us. That is sort of the discussion, Mr. Wallener, that you were talking about: how do we get Canadians there—and we do see folks coming in from the U.S. taking a look.
I've mentioned at other times where I think this is coming from and the reasons for it. Part of it is that sometimes in Canada we have companies that say, “If we can bump this up to $4 million or $10 million, then maybe we'll take a look at some of the offers we have from other countries”. You mentioned, Mr. Wallener, that this becomes one of those issues of concern, that you'll go out there and get investors who will come in to be part of it, and then all of a sudden there is that added pressure.
How do you feel that we can address this? How can we ensure that we have more Canadian content in this, and is there some sort of protection that would be important for small start-up Canadian companies?
We've applied for an exemption, so technically an exemption would be outside the regulations. The minister may, under the terms and conditions the minister deems necessary, exempt any person or class of persons if it's for the growth of poppies for.... Sorry, I forgot the regulation. I had it memorized at one point.
Basically, if it's for scientific, health, or otherwise in the public good, that's the way the exemption request is made under section 56 of the Controlled Drugs and Substances Act. Based on that, we're basically saying that this is under the public good, because food is not included in that so this would be saying that food is obviously part of the public good discussion.
As far as the regulatory side is concerned and trying to break that out right now, that discussion has never gone forward. It's something we could consider, but I think then you're probably looking a several years before that would happen and we've already been at this long enough that we need to see some movement forward in this direction on the commercialization.
If they were to grant the exemption, then typically once you have enough interest from that perspective, they do put regulations through once the industry is established. That's how they did it with the hemp industry, for example. It started out with an exemption and then the regulations were added.
It certainly is problematic, not least in terms of timing.
Bear in mind what this is. It's very much a technical trade issue, a barrier that actually will disproportionately affect packaged U.S. consumer goods sold in Canada. That's many billions of dollars. At a time when we're of course trying to salvage NAFTA and are on the verge of a trade war, we should not, in my view, be doing things—at least at this point in 2018—that could create further friction in the trade relationship.
But I think there's an important point here. While nobody in industry would dispute at all the importance of the healthy eating strategy of Health Canada, the goals, and what was up till recently a multi-year history of partnership with Health Canada in promoting nutrition literacy.... We led the world in a collaborative way to put nutrition facts tables on food in Canada. We have been a driver of the best nutrition guidance in the world. Somehow we let this get away from us, to where we have now a suite of regulatory actions that do seem to be out of step with that collaborative approach.
As you point out, just as we're launching this ambitious export goal for the industry.... We've embraced agrifood, the strategic innovation fund, and the mandate of ISED, and we have all the recommendations from the Barton report around growing the industry, but we seem to have a disconnect and a lot of friction around this among departments in Ottawa, frankly, which I think we do need to solve, because it's making it very difficult to understand where we should be investing in that situation.