AGRI Committee Meeting

STANDING COMMITTEE ON AGRICULTURE AND AGRI-FOOD

COMITÉ PERMANENT DE L'AGRICULTURE ET DE L'AGROALIMENTAIRE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 18, 1998

• 1605

[English]

The Chairman (Mr. John Harvard (Charleswood St. James—Assiniboia, Lib.)): Colleagues, let's bring this meeting to order.

For a change, we're not going to be talking WTO or the farm crisis at one of our meetings. Today we're going to deal with “Food for Our Future”—at least that's the title that has been put together.

This is a commitment that was made to the Canadian Fertilizer Institute before my reign, but under this reign we honour our commitments even if they're made by somebody else, so for the next hour or so we're going to have the pleasure of hearing from several members of the Canadian Fertilizer Institute, and then we'll have some time to interrogate them.

I understand that we're going to hear from three people, Mr. Larson.

Mr. Roger L. Larson (President, Canadian Fertilizer Institute): Yes.

The Chairman: We'll be hearing from Mr. Larson, who is the president of the institute, Mike Chorlton, who is the chair and CEO of Saskferco Products Inc., and Don Smith, vice-chairman and general manager of Terra International (Canada) Inc.

Mr. Larson, I understand that part of your presentation is a slide presentation.

Mr. Roger Larson: Yes.

The Chairman: Can we lower the lights, please? Usually around here we're looking for more illumination. Today we're going to try a little less. Some people would say that we have a diet of less illumination almost always.

Some hon. members: Oh, oh.

The Chairman: Why don't you start, Mr. Larson?

Mr. Roger Larson: Mr. Chairman, thank you very much for your introduction.

I'd like to express the fertilizer industry's appreciation for the opportunity to come and meet with the standing committee this afternoon. It has been a couple of years since we've appeared before the Standing Committee on Agriculture and Agri-Food. I think it's essential that we work to maintain a better dialogue with the agricultural industry overall, in particular with those legislators who are primarily focused on the agricultural industry.

We at the CFI see ourselves as a significant and important part of the agriculture industry in Canada, and that's a bit of what our presentation, “Food for Our Future”, is about.

And I promise that I will get to talk a little about WTO and APEC in our presentations.

You have already introduced Don Smith. Beside him is Mike Chorlton. Don and Mike will be participating in our presentation. Beside Mike is John Malinowski, general manager of Simplot Canada in Brandon, and beside John is Donald Côté, head of the Quebec Fertilizer Manufacturers' Association. They are also available to answer any questions members may have.

We have prepared a special presentation which will serve as an introduction for our industry. We'd like to touch on some of the key issues we are working on these days and also provide a look at some of the future opportunities and challenges that we consider to be of importance to Canada's agricultural community.

Many of these issues are topical, some are controversial, and certainly they have great importance for our industry, for Canada's farmers and for the country at large.

Here are a few important facts about the fertilizer industry. Fertilizer manufacturing, retailing, distribution and farm supply provide approximately 12,000 direct jobs annually, in addition to many indirect jobs.

• 1610

We have annual sales to Canada's agricultural community of approximately $2.1 billion. Our exports total $3 billion in potash and nitrogen fertilizers.

By way of comparison, the fertilizer industry ships about 23 million metric tonnes by rail versus 30 million tonnes shipped by the grain industry and about 40 million tonnes by the coal industry.

The Canadian fertilizer industry supplies 12% of the world's total supply of fertilizer materials. There is this map, which unfortunately we can't see too well... I had hoped that by this point the lights would be down a little.

The Chairman: I know the lights can come down because we had a caucus meeting here this morning and the lights came down.

Voices: Oh, oh.

Mr. Joe McGuire (Egmont, Lib.): Everything else came down too.

The Chairman: We're going to carry on.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): And at that time, we saw the light.

Some hon. members: Oh, oh.

Mr. Roger Larson: This map would identify the location of our members' potash and nitrogen plants and phosphate and sulphate plants if we could see it. I will summarize by saying that the bulk of our operations are centred in Alberta and Saskatchewan, close to the mineral and natural gas resources on which they depend. There will be one more addition to the list when a new phosphate mine is put into place in Kapuskasing, Ontario, in the next year or so.

In addition to these production facilities, there are approximately 1,500 retail operations and distribution centres across Canada.

Our association has been in place for more than 50 years. We're based in Ottawa. We represent 42 manufacturers and major retail distributors. The slide shows a list of our members. Looking over this membership list, you get a better sense of the pan-Canadian nature of our industry. For example, there are McCain Fertilizers and Island Fertilizers in Atlantic Canada, Coopérative fédérée and Hydro Agri in Quebec, Terra Canada and GROWMARK in Ontario.

And many of our international players are based in western Canada. For example, Agrium and PCS, two of the five largest fertilizer companies in the world, have head offices in Canada. Major fertilizer organizations such as IMC Kalium, Saskferco and Simplot are also based in western Canada. We've developed a close working relationship with our affiliated organizations, such as the Potash and Phosphate Institute of Canada and the Saskatchewan Potash Producers Association.

In addition, we have a tremendous degree of co-operation with our affiliated retail organizations, the Association des fabricants d'engrais du Québec, the Atlantic Fertilizer Institute, the Canadian Association of Agri-Retailers and the Fertilizer Institute of Ontario.

Like many Ottawa-based industry associations today, we rely on the active participation of senior company executives in our policy development. Our organization chart, which is illustrated in this slide, shows our board of directors, our member organizations and our staff. Those are the three main components of our structure.

Our industry volunteers serve on our committees, which design and implement our programs. Some of our major committees are: agronomy-environment, safety and training, manufacturing, government and public affairs, economics and information, transportation, and our distributor and agriculture retail committee.

I'd like to provide a quick thumbnail sketch of some of our key issues. I'm not going to get tied up in the details of these issues, but am certainly willing to answer questions, either right after this presentation or in the future. These are the things that we would like to talk about to our government and our MPs in the future.

One of the key issues is APEC's early voluntary sector liberalization for fertilizer and 14 other industry sectors, which was on APEC's agenda this past week. Canada's leadership and the support of our industry put fertilizers forward as one of the industry sectors to be considered for EVSL and we have strongly supported that. News from APEC's meetings in Malaysia has not been positive on this front. We sincerely hope that APEC can move ahead in 1999.

While tariffs on fertilizers are actually quite low, I believe that this issue is of paramount importance to Canada's agricultural sector and national economy. We will continue to work with the federal government in advancing fertilizer further along the road to freer trade, whether it's under APEC or whether it's through the WTO discussions.

• 1615

Sustainable agriculture is one of our key issues. Nutrient management is necessary for producing food as well as for protecting the environment. In the long term, it is absolutely essentially that we focus on the health of our soil and not allow food production to simply harvest soil nutrients today at the expense of the future.

Franklin Delano Roosevelt had something to say about sustainable agriculture in the 1930s. He said, “A nation that destroys its soil destroys itself.” Soil mining is an unsustainable practice; fertilizers are the only way this can be prevented and reversed.

CEPA supports strong and effective environmental legislation, and we have developed three key yardsticks by which we would like to measure the Canadian Environmental Protection Act. Our watchwords would be “clear” and “predictable”. Specifically, we would like to ensure greater clarity in subclause 2(2) with respect to the Minister of Agriculture and the Fertilizers Act superseding CEPA when it comes to questions of regulation of plant nutrients and agriculture.

The second issue is harmonized federal and provincial statutes. We encourage and support the federal-provincial harmonization accord on the environment and hope that the federal and provincial governments continue their dialogue to ensure minimization of duplication and overlap between jurisdictions.

Enforceability is our third key watchword. The federal government should be able to enforce this legislation without resorting to citizens and civil lawsuits. We have put considerable effort into CFI's contribution to this legislative discussion, and if members of this committee have not seen our brief, we would be very pleased to pass on a copy of it.

Climate change, quite frankly, is an issue of much greater importance to our industry than many people might imagine. The fact is that the production of plant nutrients is a very energy-intensive business. We are one of the country's most significant consumers of natural gas. We are also one of the world's most energy-efficient industries. From a global standpoint, we would strongly underline the fact that neither Canadian workers nor environmental activists would have anything to gain by climate change tactics and rules that might shift production from Canada to countries with older, less effective and more polluting production centres or, simply, countries that are not part of the OECD.

On the plus side with climate change, the fertilizer industry and agriculture can play a very positive role. We have always argued that better soil nutrient management contributes to sustainable agriculture. It is also true that better soil nutrient management can help Canada achieve its climate change obligations by sequestering carbon in agricultural soils.

We would like to support an early review of the Canada Transportation Act. As the third-largest users of Canada's railways, we have monitored very closely the impact of this new legislation and we believe that major improvements can and should be made at the earliest opportunity, perhaps in conjunction with the grain review. Three key issues from our standpoint are: deletion of “substantial commercial harm”, the introduction of regulated competitive line rates, and expanded running rights.

With that, I would like to conclude my remarks and ask Don Smith to talk about some of the CFI's initiatives.

Mr. Don Smith (Vice-chairman, Canadian Fertilizer Institute): Roger's review of these key issues points to the need for the CFI to do more to inform Canadians about our concerns, our perspective and our solutions.

The education initiatives we have put in place touch on some very complex and challenging issues, such as food production, global population growth and sustainable agriculture. We recognize that our efforts to date have been modest, but we're proud of the start that we've made and the base from which we can continue to build.

The KEY foundation provides students and teachers with the most current information and resources about our environment. Each summer the program offers teachers innovative and effective learning resources that can bring agricultural issues to the classroom.

• 1620

Young Canadians have a wonderful fascination with how things grow, and this investment in our teachers through the KEY foundation gives students a chance to learn about fertilizers and the environment in which they can be used and managed.

CFI is supporting agriculture in the classroom by funding our “Lunch Kit for Growing Plants Project”, and we have a couple of those lunch kits here today if anybody is interested in having a look at them. This project is still in its early days, but we're very excited about the potential and the interest we've had from other countries in this Canadian initiative. Students, especially urban students, are introduced to the fundamentals of plant nutrition with a hands-on demonstration of the effect of fertilizers on growing plants.

We have 1,500 retail locations working with farmers across Canada and it falls to many of those retail workers to help farmers find the right match of plant nutrients and the right application methods to ensure a healthy crop and a clean environment. The certified crop adviser program was brought to Canada by CFI and it assures a high standard of knowledge for anyone who provides crop management information to farmers.

We're going to need more food to feed more people in the next century—it's that simple—and much of it will come from Canada.

In May of this year we launched our latest initiative, “Food for Our Future”, an awareness campaign. In a similar vein, we were delighted by the recent Canadian government announcement detailing the action plan for food security. Meeting the growing demand for food is a daunting task and an opportunity for Canadians. This is certainly one area where opportunities exist for industry and government to unite their efforts to contribute to food security at home and around the world.

Canadians are familiar with the importance of our grain exports to the world, but they might be surprised to learn that 12% of the world's fertilizer production comes from Canada. Canadian achievements and their responsible production and use of fertilizer have been recognized around the world.

Now Mike Chorlton will address three of our major objectives.

Mr. Mike Chorlton (Member of the Executive Committee, Canadian Fertilizer Institute): Thanks, Don.

We have three broad objectives that speak to the leadership roles for our industry and for Canada. Number one is very much a CFI priority: promoting the responsible production and use of fertilizers, with safe transportation, storage and handling. Now, when 23 million metric tonnes are shipped each year, proper storage and handling clearly has to be a priority. Of those 23 million tonnes, 2 million tonnes are anhydrous ammonia, a potentially hazardous pressurized liquid. CFI and its member companies have been very active in ammonia pressure vessel research, as well as training and guidelines for its storage and handling.

In regard to best practices in manufacturing, the key reason for our success internationally has been efficient use of energy inputs. Many of our plants are among the most energy-efficient in the world. Since 1993, we've recorded a 10% decrease in NPRI—National Pollutant Release Inventory—emissions per unit of production. In fact, my own company in Belle Plaine, Saskatchewan, is the only known plant in the world with zero waste-water discharge.

Getting the right balance is the answer to our second objective—to nourish the soil by promoting sustainable agriculture. Sustainability starts with full use of available nutrients, and this includes manures and crop rotations. Commercial fertilizers are needed to replenish the nutrients lost with crop production. They're an effective and economic means of ensuring soil fertility and, in fact, the rebuilding of depleted soils.

In regard to new technologies, precision agriculture, which uses global positioning and improved application equipment, allows farmers to be much more effective in placing the right amounts of nutrients in the right portions of their fields—in other words, varying the prescription within the fields.

• 1625

CFI fully supports education initiatives that help farmers utilize the most efficient and environmentally responsible application of fertilizers, and our retail members are very active in promoting this concept.

Finally, our third objective. The big picture is clear to us: it's a world where the global population will reach 8 billion by the year 2020. We need to feed a growing world through research and education. CFI and its member companies are very active in research. We have access to natural resources, the needed mineral and energy inputs, and the most efficient production operations in the world.

But to stay competitive, we always need to find ways to improve. Our education initiatives for students and teachers have to continue, and working with retailers through the certified crop adviser program is really making a difference.

In closing, I want to say we're really proud of our industry. We're excited about our future prospects. Canada is a major world player in a critical global business.

That concludes our prepared presentation. We'd be delighted to answer any questions you might want to direct our way.

The Chairman: Thank you very much, Mr. Chorlton. I'm sure that our members will have questions to ask. as usual, we'll start with a representative from the official opposition, Mr. Hoeppner, followed by Madame Alarie.

Mr. Jake E. Hoeppner (Portage—Lisgar, Ref.): Thank you, Mr. Chairman.

Welcome, gentlemen. It's a pleasure to see the people that make the stuff I've put on my farm for 35 or 40 years, knowing what it can do.

As you know, on the farm today there's a real cost-price squeeze. Farmers are not faring too well, especially in grain production. Special crops are a little different. Is there anything government could do to reduce your costs in manufacturing these products so costs could be reduced? We're looking at all kinds of programs. One thing that we feel has to come down is the cost of production—if we can't get grain prices up.

Mr. Mike Chorlton: I'd have to say we're not exposed to a much greater tax bite than other industries. There are royalties in natural gas, though I don't know that it would change the price of natural gas even if the royalties were eliminated. That's the only raw material you use for nitrogen fertilizer. There are royalties involved in potash, so that would be one area, but it's more in the provincial domain, I guess.

The price of fertilizer, while we can't talk about it prospectively or going forward because here we have a group of competitors in the room and we don't talk about price—

Voices: Oh, oh.

Mr. Mike Chorlton: We have with us the latest Ag Canada statistics, from the latest statistics in 1998 back to 1992. Their indices, which are based on 1986 as sort of the “100” year, show that for nitrogen, prices peaked in 1996 and moved down substantially from $1.38 to $1.14 today on an index basis. So you can see that prices—in a cyclical commodity business—have come down. There's a similar pattern for phosphate and a more stable pattern for potash, although potash has the smallest usage of the three major nutrients so it's not really nearly so much a factor.

Mr. Jake Hoeppner: Have you any idea of what percentage of your costs are taxes? When we look at fuel taxes, we know pretty well what is happening there. Have you done any analysis in that area?

Mr. Mike Chorlton: I can't give you that number, but I'd say, measured to fertilizer, my guess is that you'd be looking at 10% or 15% or something like that. You have to carry it through, starting with natural gas royalties. That would be the first one that would have a significant impact. Then you have all the fuel taxes for the railways and for the truckers. That would be the second one.

• 1630

So the two biggest costs that we face are raw materials, which is natural gas, and transportation. I would imagine that anything that can be done to reduce transportation costs would have a very direct and relevant impact on the farm community. Of course, we pay every other tax, like provincial sales taxes on our plant equipment and all manner of taxes that might be related to payrolls and capital and so forth.

Mr. Jake Hoeppner: Well, as you know, when farmers get squeezed, they cut back, whether it's on the cost of the product or whether it's that they just don't use it, and you probably will notice that next year very substantially.

The other thing I was interested in was that you said you had decreased your pollutants by 10%. Are the Brazil and the Japanese agreements on the environment going to affect you quite drastically, or is that still in the questioning period?

Mr. Mike Chorlton: We hope it's not drastic, but it's one of these things you don't really know because it's not all spelled out. Our production of fertilizers has increased very substantially since 1990. For instance, my company has the world's largest single-train urea plant. We're the most energy-efficient. I think we're the most environmentally sensitive plant in the world, but we were built in 1992.

So if you look at a 1990 base for greenhouse emissions, our base was zero. How will we be treated? I don't know. If we can't produce and you have to run an old plant in the former Soviet Union, their consumption of natural gas per tonne of product would be 50% higher than ours. If you shut us down and run them, you'll hurt the environment.

There are a lot of questions we don't know the answers to, which we're very concerned about. We're trying to be actively involved in the issue tables in order to discuss those.

Mr. Jake Hoeppner: That brings up another question. You're mostly in the production of nitrogen and potash, probably. The phosphates are imported, right? A trucker phoned me about a year or 18 months ago about bringing in Russian fertilizer from Minneapolis, which had come up the Mississippi. Are we in a bind here that we don't have our own phosphate or was it just a cost factor that this was happening?

Mr. Mike Chorlton: There are two issues on that. First of all, we do produce phosphate fertilizer. One of our members, Agrium, has a pretty large plant in Fort Saskatchewan, Alberta. Currently, they import phosphate rock from west Africa, from Togo. They're building a mine in Kapuskasing, Ontario, so that the phosphate rock will come from Canada. Their other raw materials are sulphur, which of course is local, and ammonia, which is produced from natural gas.

There is free trade in fertilizer, so product will come up through Minneapolis up the river system; it could be American product, it could be Russian product, it could be the product of anybody competitive in the world. It's a global business. In eastern Canada, my guess is that it's exclusively product supplied by imports. Those could come from U.S., from Morocco, from Russia, from basically anywhere that's most competitive in the world. And they come in tariff-free.

A voice:

[Inaudible—Editor] very much to promote free trade.

The Chairman: Half a minute, please.

Mr. Jake Hoeppner: Are you developing futures markets so that the farmers could protect their input costs? I know you started it, but I haven't seen it being that well used—or at least the information isn't out.

Mr. Mike Chorlton: I didn't understand the question. What sort of futures...?

Mr. Jake Hoeppner: Are you developing futures market so farmers could protect themselves on certain products?

Mr. Mike Chorlton: It was tried in fertilizer for diammonium phosphate and for ammonia. It's never been very successful.

Mr. Jake Hoeppner: Why not?

Mr. Mike Chorlton: Nobody used it. You'd trade five contracts and nobody would... It wasn't a liquid market. There was just not enough interest in it.

The Chairman: Madame Alarie, you have seven minutes.

[Translation]

Ms. Hélène Alarie (Louis-Hébert, BQ): You talked about education, new technologies, sustainable development and the environment. New technologies include, for example, satellite image mapping, land grids with multiple soil samples and so forth. Is that included in the education you give your producers? Do you do any work in that area?

• 1635

Mr. Donald Côté (President, Association des fabricants d'engrais du Québec): Ms. Alarie, the technology you are talking about has passed the education stage. It is now in place. There are several distributors in Quebec—we're really talking about the Quebec market—that already have large-scale sampling systems to make what are called geo-referenced soil maps, with satellite positioning. That technology is in place, works very, very well and has its advantages.

We are really at the beginning of this technological approach. The same thing is happening elsewhere in Canada. These are competitive advantages that distributors will acquire according to their market development strategies. So, the technology is well established and well appreciated by farmers. It's very beneficial for agriculture and particularly for the environment.

Ms. Hélène Alarie: In this area, do distributors and producers have some sort of support? The equipment is extremely expensive, both for the producer and you. With this equipment, you put the right amount of fertilizer in the right places. Perhaps you're the loser in all that. Have you done any studies on the subject?

Mr. Donald Côté: Thank you for being concerned about the industry but everything is done through individual initiatives and differentiation strategies among competitors, mainly to the advantage of agriculture and farmers. Everything is done on a competitive basis. As far as I know, no government help has been given to anybody to put these technologies in place.

On the other hand, we get excellent cooperation from universities, other government groups and the Ministries of Agriculture of different provinces who help us promote this technology.

In Quebec—I can't talk for the rest of Canada—the Régie des assurances agricoles uses this technology to reference maps for producers. For the Régie des assurances agricoles, it's a lot simpler to work with satellite geo-referenced maps. That also improves the system. However, there is no direct assistance. It's done on a competitive basis. Yes, there are advantages for farmers and distributors. It's by reducing their costs that they recoup their investments.

Ms. Hélène Alarie: We're very concerned about sustainable development and, from what I understand about these experiments, there is no waste.

Mr. Donald Côté: That is correct.

Ms. Hélène Alarie: Are you ready to promote it or are you already promoting it?

Mr. Donald Côté: In all industry documents...

Ms. Hélène Alarie: If I talk to competitors, that's even better.

Mr. Donald Côté: In all documents produced by the industry, of which you saw some examples a while ago, we publicize this new technology. Such promotion is very advantageous for everybody. We try to publicize this technology to show that it exists, first of all, and that it works and is very beneficial for agriculture and particularly for the environment.

Ms. Hélène Alarie: Very good. Thank you.

[English]

The Chairman: Thank you very much, Madame Alarie. Now we'll go to Mr. Calder.

Mr. Murray Calder: Thank you very much, Mr. Chairman.

One of the things I would like to talk about is the CTA, the revision, which you mentioned and which will happen in the year 2001. You wanted to see some changes in it. What changes?

We're looking at CN right now and the St. Clair tunnel; it is looking at the purchase of Illinois Central, which is going to take them right down to New Orleans. They already have a couple of railways in Mexico, and whatever they do in Panama... CP is looking at driving a new line through to Norfolk Southern.

So obviously you're going to be looking at a lot of north-south traffic that will be more efficient than it has been in the past—instead of east-west. I'm wondering what you're looking at for changes in the CTA when the revision starts in 2001.

• 1640

Mr. Roger Larson: I suppose one of the reasons they are investing in those north-south lines is that the fertilizer industry is such a major customer of those railways and they want to find more efficient ways of transporting that product.

The railways-fertilizer industry partnership is an important partnership for us. It's not just a matter of “how” we would do business if we didn't have the railways: we wouldn't do business if we didn't have the railways.

Mr. Murray Calder: That's right.

Mr. Roger Larson: We would not be competitive if we did not have a rail transportation system that could get our products to Vancouver or into the United States. Incidentally, about two-thirds of our exports are to the U.S. and about one-third are offshore.

Specifically what changes do we want? We are in a business partnership with the railways. We are an industry of competitors, and each company makes its own business decisions and competes actively on a number of bases like service, price packages, etc. The railway industry is by nature a duopoly and, in essence in many ways, has been described as a north-south franchise, particularly when you're looking at western Canada. And in that sense, it's not that different, perhaps, from the structure we were looking at with the telecommunications industry before the CRTC brought in long-distance competition in telephones.

My point here is that in a natural duopoly or monopoly situation we need to find ways of introducing competition into the railway transportation industry. It's one of the stated objectives of the Canada Transportation Act—that it would promote competition—and it's one of the stated government objectives in terms of promoting Canadian competitiveness for our export industries—that we will find ways of improving their competitiveness.

We would like to see subsections 27(2) and 27(3), about substantial commercial harm, removed from the act. It was introduced into the act in 1996 over our strongest objections and urgings that it not be added to the legislation. We were concerned that it would provide an opportunity for legalistic manoeuvres and delays and arguments back and forth that would delay the opportunity for a shipper to essentially receive justice.

What has happened since the introduction of that clause is that extended inter-switching has disappeared as a competitive access tool. Nobody has applied for a single competitive access provision since that section on substantial commercial harm was added to the legislation. It has had a very detrimental effect on promoting a more competitive railway environment.

We would like to see the introduction of what we call a regulated competitive line rate. Competitive line rates already exist; however, in order to get a competitive line rate today, a second railway has to apply to the agency for a rate.

The costs of rail transportation are pretty much known on a revenue per tonne mile and there's absolutely no reason why, in the same way that we have regulated inter-switching, we could not have a regulated CLR for the cost of moving the traffic to the interchange, to the terminal, where the traffic could be switched to another railway. Having that short haul on a regulated price basis would allow competition on the long haul, and that is something that we believe would substantially improve the possibility of competition taking place between the railways—keeping in mind that we're still talking about two Canadian rail lines.

So we're not talking about the kind of competitive environment where you have free entry and exit of competitors, where you could have a new company building a railway tomorrow or five new companies entering the business. The reality of the world is that we're probably looking at relatively limited opportunities to create strong railway competition. Our concern is that we don't even have that opportunity today with the current 1996 CTA.

The third thing we would like to see is running rights and the introduction of—

Mr. Murray Calder: Common running rights?

Mr. Roger Larson: Common running rights: the ability of a short-line railway to move traffic over a class 1 rail line so that, again, the shipper can get to a terminal where a competitive situation may be created.

• 1645

Mr. Murray Calder: You're getting into a whole litany of problems there, with maintenance and everything else, and I've been down this road before on common running rights, but when you talk about competitive rates in the duopoly... All of you across the front represent the fertilizer industry here today. But you're also competitors, right? Do you tell each other what you pay for your rail fees?

Mr. Roger Larson: Absolutely not.

And incidentally, everybody here is not a competitor. Donald is a representative of an association and I am a representative of an association. I could not tell you what the rates of our members are. They're under confidential contract. I have never heard them disclose their rates to anyone. It's an area of absolute confidentiality.

Mr. Murray Calder: Which really kind of defeats your argument in the first place, because if you're not saying what each one of you pays for a freight fee, then the railways are basically saying, “Hey, this is great.” You're complaining about the high rate of moving stuff by freight, but at the same time, you're not talking to each other about what each person pays, so you've kind of defeated your argument there, haven't you?

Mr. Roger Larson: I don't think so.

Mike, go ahead.

Mr. Murray Calder: And I'm a farmer, too.

Mr. Mike Chorlton: When you have competition, competition works. We have CN and CP access to our plant. In that case we don't need inter-switching because we built our plant at a crossover point. When they can compete, they do compete. More competition drives the rates down. I came from another company, so I know a bit about two companies' rates, and I'll tell you, it works, the competition works.

Mr. Murray Calder: As long as you're within the 30-kilometre radius you can do inter-switching.

Mr. Roger Larson: Yes, and that needs to be extended. Something like a regulated competitive line rate would extend that to shippers who are beyond the 30-kilometre radius.

The Chairman: Thank you very much. Mr. Borotsik.

Mr. Rick Borotsik (Brandon—Souris, PC): Thank you, Mr. Chairman.

It's nice to see the CFI appear before the committee and I'm glad we had the opportunity of accommodating you.

I have a couple of points, and I will, very briefly, put a couple of issues out here. I understand that you have $3 billion in exports, two-thirds of which goes to the United States and another third which goes offshore—the offshore obviously into APEC countries, I suspect.

One of your issues was APEC. You've told me that you're effectively tariff-free on a free-trade commodity, yet you have some concerns with the market in APEC. Could you just expand on that?

Mr. Mike Chorlton: Tariff-free means no tariffs in Canada, but some of the APEC nations have tariffs.

Mr. Rick Borotsik: Okay. Needless to say, with the negotiations right now and WTO and APEC, that's one of your concerns. Can you expand on that a bit and tell me what kind of roadblocks you're finding now in trying to get into that offshore market? By the way, you have a billion dollars of sales into that offshore market now and you want to expand that and I appreciate it, but what kind of barriers are you finding now in those marketplaces?

Mr. Roger Larson: The tariffs are relatively low on fertilizers. Most of the APEC countries are fertilizer importers because they need to try to produce a lot of food to feed some of the world's largest populations. We see tariffs of maybe up to 6.4% or so. But there are various trade-limiting rules, like preferential trade policies and non-tariff trade barriers—

Mr. Rick Borotsik: Can you expand on that, Roger? Can you give me some examples?

Mr. Mike Chorlton: To import to China, you have to have licenses. Typically you have to go through SINOCHEM, which is the—

Mr. Rick Borotsik: Their purchasing agent.

Mr. Mike Chorlton: That's the state purchasing agency. The price of urea is at a certain point in China—down—and the world price is a different point—up.

Mr. Roger Larson: There are some relatively uncompetitive urea manufacturing facilities in China that are being kept open, not because—

Mr. Rick Borotsik: Artificially.

Mr. Roger Larson: —they're competitive, but artificially because of the inability of a producer or an exporter such as Saskferco being able to get a permit to market in China. That's the kind of non-tariff trade barriers that we would like to see addressed, and I think the first step is the EVSL.

• 1650

That's not the end of free or global trade, but we have to start somewhere, and if we can find a way to have fertilizers identified as a priority product, then it will allow for freer trade in a large number of other industries that can build on the success.

And fertilizer should be a relatively easy one to sell. It's tied to food production, it's tied to feeding the world. Politically on the world's agenda, it should be a fairly easy one to talk about early tariff elimination for.

Mr. Rick Borotsik: Tariffs really aren't the issue, though, as I understand it here—the 6.4%. If in fact there's an artificial level of urea you can compete with that, even with 6.4%, so it's the non-tariff barriers that you're more concerned about, with respect to the Asian market in particular.

Mr. Roger Larson: We do have some issues with fertilizer tariffs in the European Community. That's one of the reasons why fertilizer was not included in the last WTO round. The APEC nations have something like 70% to 80% of the world's fertilizer consumption; if you look at the global population, it makes sense. If we can be successful in APEC, it makes WTO that much easier, and we can address those issues with the EC—not to name anybody.

Mr. Rick Borotsik: Plus, it's a huge market. The Asian market or the APEC market is huge, so if you have access to that probably all your capacity would be utilized.

Mr. Roger Larson: Yes.

Mr. Rick Borotsik: I have one other question, Mr. Chairman, about another issue—the environment, Kyoto. Has your organization or your industry had any consultation with the government on this particular issue?

And you're right, the 10% reduction is on emissions. With respect to increased capacity and decreased emissions, have you had any open, honest consultation with government as to how it's going to affect your industry?

Mr. Roger Larson: Yes. We've done everything we can to encourage a positive discussion. We met with Minister Stewart yesterday and talked to her about a number of environmental issues. And certainly climate change was the one that we probably spent as much time on as anything.

And we've taken a number of other initiatives. We are participating on an active basis in two of the issue tables on climate change. A member of our industry, an expert, is participating in the agriculture table and on the sinks table. The sinks table is particularly important; it's a Canadian initiative to include agricultural soils as a potential sink for carbon, and we congratulate the Canadian government on getting international approval of agricultural soils as a potential sink to help address the climate change issue.

Incidentally, we in Canada have a huge objective, I think. We're looking at something between a 25% and a 27% reduction in greenhouse gas emissions—and over current levels, which is a much larger target than over 1990 levels. Our industry is a good case in point as to just how large that challenge is going to be: when you're looking at an industry that is already probably the most energy-efficient nitrogen fertilizer industry in the world, how do we become better than best?

The Chairman: We're out of time for this round, but we may have time again, Mr. Borotsik.

Just before we go to Mr. Hoeppner, I have a question arising from your concerns relative to rail transportation. From time to time, as you know, prairie farmers face some severe rail-car allocation problems. I rarely hear problems of that kind from your industry. Maybe that just reflects my own ignorance. I don't know. But if you don't have those problems, is it because the nature of your industry is so different from that of farming or does it have to do with the fact that you have binding contracts with the railways that include performance demands or conditions that must be met by the railways?

Mr. Mike Chorlton: I guess I'm the best one to take that question because we probably ship the most by rail, although Simplot is in a similar situation.

First of all, we were short of cars.

The Chairman: Pardon me?

Mr. Mike Chorlton: We were short of cars when we had the bad winter two years ago. There were problems. We were months behind in our shipping, but we didn't act it out in public. We have contracts with our shippers, but they're not so strong that we can just sort of demand all the cars we could possibly want.

• 1655

But we sat down with the railways, we talked about priorities and we talked about the most efficient way to utilize the car supply that was available and, in a good supplier-customer relationship, we worked out the best solutions that we could find to the problem.

But we were behind. We were probably equally disadvantaged. Certainly my company was. We don't lease rail cars. Now, in the case of potash producers, a lot of them have their own rail cars, so perhaps they were in a somewhat different situation with their own company cars. So we have contracts and we work these things out, but I don't think you'll ever see it nearly as publicly because the business relationship is different. It's kind of supplier-customer and “let's work together, let's achieve what needs to be achieved”.

The Chairman: Not so fraught with politics.

Mr. Mike Chorlton: Well—

Voices: Oh, oh.

A voice: I said that, Mr. Chairman.

Mr. Mike Chorlton: I did not say that.

Voices: Oh, oh.

Mr. Mike Chorlton: But you know that when you have six or eight parties at the table it's harder than when you only have two. And in my case, it's my company and the railway company working together. It's easier.

Mr. John Malinowski (Secretary Treasurer, Canadian Fertilizer Institute): I think the other point on that, too, is that in regard to leased cars and cars owned by companies—either the customer or the supplier—in the case of anhydrous ammonia they would be all leased cars, leased by one or the other, and in the case of solution fertilizers they would be leased. They're all specialty cars and have to be leased by the shipper. Any supply issues are the company's own issues. A large part of it fits into that.

The Chairman: Thank you.

Mr. Hoeppner, five minutes.

Mr. Jake Hoeppner: Thank you.

I want to go back to the competitive line rate. You won't tell us what your costs are, so I want to expand a bit on what Mr. Calder said. How do you know that you're not getting a competitive line rate if you're not telling the railways or each other? And if you feel very strongly that you don't have a competitive line rate, what is the difference between your freight in the U.S. and in Canada when it comes to shipping fertilizer?

Mr. Mike Chorlton: It's always a question. Is a rate competitive? You never have enough information to know if a rate is competitive. The best way to know if a rate is competitive is to have a competitive option.

If I'm selling fertilizer, you can come and buy it from me or you can go to my competitor and buy it from him—or you can buy it from another competitor. There are four, five or six companies producing ammonia or urea in western Canada, and a dealer can buy from any one of them. They have a lot of options.

Rail, by its very nature, is different. You have these fixed rail lines and a very high cost to duplicate these things. What we're saying is that competition is what works. You don't have to calculate everything. What you need to do is induce a form of competition. And by prescribing a rate on a short length of railway, you can get competition on the long length of railway. That's really the test. If the two are competing, they'll both want your business. That's the way we think our economic system works best.

Mr. Jake Hoeppner: Well, as you know, the railways are pretty well at our door every other day, too, trying to make their case—

Mr. Mike Chorlton: Of course.

Mr. Jake Hoeppner: —especially on the running rights, and you know how competitive they already are. Sometimes when I look at the railways and I see some of the stats as far as grain movement is concerned, I feel it's probably not the rates that are not competitive but the efficiencies of the railways. That's why they cannot give you a proper rate. Am I correct in saying that the American rail system is a lot more efficient and that you can move more product for the same price?

Mr. Mike Chorlton: The Americans have some specific things in their system that are more effective. Their taxes tend to be more favourable to railways in terms of depreciation rates and fuel taxes and so forth. They have some inherent advantages in that. They have probably a greater density of traffic in many cases and that would be an advantage.

The other thing you have in the U.S. that's a huge advantage and is not available to us is an inland river system that branches out right through the Midwest. Barge-competitive rail rates are a huge issue. So if you don't have rail-to-rail competition where you have barge competition, the rates are lower. And where you don't have competition, if you're going across the Great Plains or somewhere where there's no river, the rates tend to be higher. It's competition that drives it.

• 1700

There's a cost issue. We totally support helping the railways drive their costs down so they can serve their customers better. Why wouldn't we support that? But there's also this other element, the competitive balance between shippers and railways. And we think that in the last revision to the NTA the CTA went too far towards the railways, and we're asking you to restore some of that balance and go back the other way. That's the judgment we think should be applied.

Mr. Jake Hoeppner: As you know, the cost squeeze on the farm today is almost prohibitive. Right now, the way it looks to me, the only grain farmers who are really showing some black are the organic growers who don't use fertilizer. Now, how will you counteract that? Maybe we should be summer-fallowing a third to become more competitive against the fertilizer companies.

Mr. Mike Chorlton: I don't think you'll find the economics would demonstrate that. A farmer should do what a farmer should do, but fertilizer is a profitable investment for a farmer and we think that the numbers will sustain that.

The Chairman: I think Mr. Côté wants to say something.

Mr. Donald Côté: Yes. I'd like to add that we've just finished conducting a study of the price of fertilizer relative to the price or the cost of growing, let's say, one acre of corn. This study has been substantiated by the crop stabilization insurance plan program. It reveals—I'm talking about eastern Canada and Quebec—that the cost of fertilizer compared to the rest of the input of an acre of corn is 10% to 12% of the total cost of one acre. Machinery costs are higher than that. If you look at specialty crops—like vegetables and orchards and fruits—that cost is minimal.

So if you really put it into the perspective of costs of production, fertilizer, compared to other inputs, is way down there. We shouldn't get too hooked on that. Organic farming is a different attitude; it's a different approach altogether. But if we're talking competitive farming, the published Statistics Canada price of fertilizer ranged between 10% to 15% maximum, including wheat. I'm not talking about the rest of Canada. Those figures are from last month and are based on the crop insurance stabilization plan.

Mr. Roger Larson: Every economic analysis that's been done on the payback on fertilizer shows that the economics are extremely positive; it's a return on investment in the order of four to ten times the cost of adding it as a input.

The Chairman: Thank you.

Mr. Hoeppner is not as concerned about the current rates as he is about inefficiencies. I'm just wondering whether, if he's right about inefficiencies, the fault may lie in a lack of competition.

Mr. Roger Larson: Sorry. I missed that.

The Chairman: Well, if you have a lack of competition, it could lead to some flabbiness on the part of the railway, to some complacency, and that could translate into inefficiencies.

Mr. Roger Larson: I think if we look at the railways prior to 1996 they certainly had a valid complaint. They were limited by regulation and legislation from being able to free up, operate their business and reduce their costs. If we look at the 1996 act, I think we see that they gained substantially all of the flexibility they needed in order to manage their own businesses and reduce their costs.

There's a rumour being discussed that the rate cap, which was intended to provide something like a 20% return to capital on grain rates, is now yielding something in the order of a 40% return to capital because cost reductions have not been met by rate reductions. This is the kind of thing we're talking about. In a competitive environment, these cost reductions will ultimately flow through to customers, whether they're grain shippers or fertilizer shippers.

The Chairman: Mrs. Ur and then Mr. Borotsik.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): Do you gentlemen have any stats as to the dollar value spent on fertilizers, nutrients or whatever in farming, versus the dollar value spent on fertilizers put on lawns in urban centres?

• 1705

I was a farmer in my previous life and farmers are always blamed for being the worst abusers of the soil, but I read in a newspaper that actually, if people such as yourselves would put out the information, we may not be the world's “dirty deed” people, like we're pegged.

Do you have information as to the amount of retail sales for private home application?

Mr. Roger Larson: We don't have solid statistics on retail sales. We do have some ballpark estimates. Agricultural sales are about $2.1 billion in Canada. That represents about 5 million tonnes of fertilizer; that's roughly 2.5 million tonnes of plant nutrients. Retail sales would probably be in the order of 3% of that; it would be a very small fraction.

When you look at the dollar value of retail fertilizer, the vast majority of the cost is in the handling and distribution. When you pay $20 at Ritchie Seed and Feed or Canadian Tire or wherever for a bag of fertilizer, most of the cost is in the retailing, handling and distribution of that retail lawn and garden fertilizer; it's not in the fertilizer content itself. Agricultural fertilizers are nowhere near that cost level.

I don't know if that answers part of your question. When you look at the consumption of fertilizers, it is a fact that Canada is probably the last OECD country to reach what we would call a sustainable level of plant nutrient replacement. We are removing more nutrients from the farm than we are replacing with all the available supplies and nutrients, starting with manure, crop rotation, legumes, and mineral fertilizer applications. The result of that has been a decline in the organic matter level in Canadian soils for a number of years. Things like summer-fallowing, which is a totally unsustainable practice, whether it's done by an organic farmer or not...it's destruction of the soil of the country.

Mrs. Rose-Marie Ur: On another point, I found it very interesting sitting here this afternoon listening to your presentations with regard to your transportation costs, which had the Eaton's-Simpsons attitude—Eaton's doesn't tell Simpsons what it's doing. I find it hard, as a businessperson and farmer, to see how you feel you're getting the best price when you don't know what the best price is. I guess you're just taking the word of the railway people that you indeed are getting the best value.

Mr. Roger Larson: No, I—

Mrs. Rose-Marie Ur: When no one is sharing that information, how do you know?

Mr. Roger Larson: —think it's more a matter of faith in the marketplace. If you have a competitive marketplace, you have the opportunity as a business to go and negotiate your best price. It's a belief that where there are competitive conditions, you will create competition.

There are probably some specific benchmarks. I'm sure shippers can get a rate up the Mississippi River system and then they can evaluate the rail rate in comparison to that, which gives them a benchmark on a revenue per tonne mile that they would use to measure their other shipments. They might look at a shipment where they're captive to a particular rail line and notice that their rate on that particular haul might be $20 a tonne more than it is on a haul where they have the competition of another railway or the competition of another mode of transportation such as water.

The marketplace does deliver competition. You don't need to know what your competitors' costs are, although I'm sure they would love to find out in various cases.

Mrs. Rose-Marie Ur: I don't know. I was in farming and I think it's an advantage or a help to know just exactly what is going into your competitors' pricing versus your own pricing in order to be more cost-effective. You're saying you're getting the best bang for your bucks, but you really don't know.

Mr. Mike Chorlton: One thing all of us have is the ability to calculate the railways' costs. There are any number of consultants out there who will sell you railway costing models which are reasonably accurate. You can compare the rates that you got from one point to some other points. There is data available to help you know if you're getting a reasonable rate or not.

• 1710

And it's a bit of a negotiating game. That's part of the free market. We negotiate, we work in a competitive environment, we learn, and we do better. We're very comfortable in that competitive environment. Our experience is that from the time we started having competition after regulation, the cost went down.

The Chairman: Thank you.

Mr. Borotsik, five minutes.

Mr. Rick Borotsik: Mr. Chairman, first of all I must be a little parochial here, okay? Bear with me, please. I would like to welcome John Malinowski here. He comes from Brandon, Manitoba. He works with one of the largest fertilizer firms, which has just put a $250 million expansion into the city of Brandon. They did so because it's a very friendly business environment.

Some hon. members: Oh, oh.

Mr. Rick Borotsik: I will also say that Simplot Canada is without question one of the best corporate citizens that I've ever had the opportunity of being exposed to.

John, I really appreciate you coming to Ottawa so you can take this all back to this new $250 million expanded plant.

Mrs. Rose-Marie Ur: Votes, votes, votes.

Mr. Rick Borotsik: Are you kidding? Absolutely!

The Chairman: All kinds of fertilizer here, guys—another brand of fertilizer...

Some hon. members: Oh, oh.

Mr. Rick Borotsik: As I understand it, Mr. Larson, the three obvious issues were greenhouse gas emissions, transportation, and international trade, the WTO. I'm going to put you a little on the spot here. There's another issue we obviously have have in agriculture.

You and your members and the organization are directly related to this particular issue: commodity prices and the problems that we're now finding with revenue in the farm economy. Has your organization taken any position on how you feel we as government, I guess, or we as members of Parliament, should deal with the agriculture problems we face today?

Those problems, as you know, are because of world economies or because of commodity crises in agriculture. Have you come up with any suggestions to put forward on behalf of your customers, the farmers and the producers? Have you taken any of those positions?

Now, Jake would say that if all the taxes were cut in your production it would save all of the farming production that we have in western Canada. I don't quite buy into that. He didn't touch on property tax, by the way, and if you got rid of property tax that would also be a big favour for farmers.

Has your organization taken a position?

Mr. Roger Larson: No. As an organization we have not taken a position or made a formal statement on concerns about the farm economy today with what has happened with livestock prices, hog prices and grain prices. Obviously as an industry we're concerned. These are our customers. Certainly their success is our success and we certainly look to support any government initiatives that are going to better the economics and the competitiveness of the farmers in Canada. We will support those.

Mr. Rick Borotsik: He should have been a politician, Mr. Chairman.

Some hon. members: Oh, oh.

Mr. Rick Borotsik: I appreciate the non-answer on that one.

Does anybody else wish to make any comment on that?

Mr. Mike Chorlton: I'd just like to say that we are very concerned and very supportive. Certainly it affects us. We haven't felt that we are the kind of association that should be taking the lead role. There are federations of agriculture and all sorts of other groups that are probably better at making those specific suggestions on policies.

Mr. Rick Borotsik: All right. I appreciate that.

I just have one last comment, Mr. Chairman. It's nice to know now that Jake Hoeppner is going to become an organic farmer. I'm very pleased that he made that announcement here today and I look forward to looking at his fields next spring and see all that summer-fallow and all that organic farming.

Voices: Oh, oh.

Mr. Rick Borotsik: I'm sure the committee would love to visit your farm in that state, Mr. Hoeppner.

The Chairman: Mr. Calder, do you have something to say?

Mr. Murray Calder: Sure. One of the things I was curious about, though, to go back to the issue of the railways and common running rates, is that you have to understand that with the railways themselves, if you're going to allow a short-line operator to go over top of the class 1 railways... Because the class 1 railways go from coast-to-coast in this country, they obviously operate underneath federal jurisdiction and safety regulations and everything, while a short-line operator operates basically on a provincial basis, or, if he is working interprovincially, by the standards of those two provinces and/or the province that he is operating under.

• 1715

So obviously the provincial standards are less than the federal standards. That will be one problem you're going to have address with common running rights.

Next, who pays for the maintenance of the track which these trains are going to be rolling over? How are you going to address that?

Finally, there is the aspect of the class 1 railways. How are they going to work out scheduling between their trains running on the lines and a short-line operator's trains running on the lines?

How would you address those problems?

Mr. Roger Larson: I think those are all very fair questions.

First of all, not all short-line railways are provincially regulated. If a short-line crosses a provincial boundary it must be federally regulated—

Mr. Murray Calder: That's right.

Mr. Roger Larson: —and they can be federally regulated even within a province. We have federal-provincial agreements on a large number of things and I don't see why it wouldn't be in everyone's interest to have one on this.

Mr. Murray Calder: Just to interject there for a minute, what percentage out of the total of short-line operators in the country would do interprovincial?

Mr. Roger Larson: I couldn't give you an answer to that today.

Mr. Murray Calder: I think you'd probably find that it's very small.

Mr. Roger Larson: The number of short-lines today, I think, is very small, compared to what it might be in the future.

Mr. Murray Calder: Yes.

Mr. Roger Larson: I could try to get an answer for you, but I don't have it today.

To answer your second question, certainly any time you provide a regulated requirement for one company to provide access to another rail company on their trackage you have to look at issues of compensation. It has to be fair and equitable, and there has to be a reasonable level of compensation to the class 1 railway for providing that access.

I'm not sure you'd find that many short-line railways with the locomotives or the car supply to run coast-to-coast, so I think when we're looking at running rights that we're quite likely looking at something that would operate over a much shorter distance, something in excess of 30 kilometres but something less than—to pick a number—a couple of hundred miles.

Because what you'd be looking at, more than likely, would be a short-line that might perhaps provide service from a plant or a grain elevator or whatever to, say, a Burlington Northern in Winnipeg which might be 125 miles away. That might be the kind of short-line operation. And that short-line operator would probably use BN cars in order to go into the shipper's location, pick up the product and deliver it too.

That's the kind of running rights scenario you would be looking at. I don't think anybody would conceive of a wholesale coast-to-coast running on somebody else's lines.

Third, in terms of co-ordination, if we said that we could not operate an airline industry in Canada unless we gave one airline a monopoly service on the airport because to allow two airlines into an airport would be impossible to co-ordinate, then we'd be saying the same kind of thing if we asked how you could have co-ordination between the short-line and the railway. If the telephone companies can do it and the airlines can do it, I'm sure the railways can do it.

Mr. Murray Calder: The thing is, if we're going to compare apples and oranges, which is basically what you're comparing when you compare the airline industry and the rail industry, the rail industry is working with a fixed piece of equipment, their track, which isn't going to move, whereas the airline routes do move and can be relocated. I would agree with you, but seeing that it's not apples and oranges, then, I can't agree with you on your analogy.

The other aspect of it, too, is that when you start dealing with a short-line operation, in Ontario the average size runs anywhere from 5 miles to 105 miles. Track speed over is usually about 10 mph, and your class 1 operator is leasing cars out or running cars into whatever businesses that they used to. Your short-line operator is working with a GP-9 locomotive and is happy and doing quite well with what he's doing because he's not dealing with the union contracts that the class 1s do deal with. So in that situation, for him to try to upgrade his locomotive power to pull the leased cars of the class 1 quite frankly doesn't make a lot of sense in the first place.

Mr. Roger Larson: I agree with you.

Mr. Murray Calder: So in that situation, the way it's being set up now, where you have a short-line branch going into the main line switching yard and being switched over to the main line's locomotive power and a way out, and it's a rolling stock anyway, which is being done by a federal standard...doesn't that make a lot of sense?

• 1720

Mr. Roger Larson: I think the application of running rights would be on a very limited basis, and you would find a lot of conditions and cases where the short-line operator simply wouldn't be interested.

But I also think you might find that the ability to bring in a short-line operator, the threat of competition, may often be enough to deliver a competitive rate. If you don't have the ability to introduce competition into something, then it's pretty hard to argue for a more competitive rate.

However, if there's the possibility that competition might take place, the possibility that one of our members or a grain company could set up a short-line haul in order to get to a competitive railway, maybe just the simple threat and potential of that will be enough to deliver a more competitive rail rate.

The Chairman: Thank you.

We'll end this with a short question from Madame Alarie.

[Translation]

Ms. Hélène Alarie: I have heard talk about organic farming and chemical fertilizers that reminded me of my childhood. That was a long time ago. When I was a student at university, 35 years ago, people who were into organic farming absolutely never spoke to people who were studying chemical fertilizers. They lived in two different worlds.

In your presentation, you said that we must take care of the land. I would like to know whether, at the Institute, things have evolved or changed.

[English]

Mr. Roger Larson: I think the discussion on organic farming or organic agriculture or organic plant nutrients is a social movement, not a scientific one. When you look at the reality of science, phosphate fertilizer supplies come from phosphate mines, which are essentially old dinosaur bones. We dig them out of the ground, process them, purify them, put them into a form that's available to the plant and supply them to farmers. That is what our industry does.

The potash mines in Saskatchewan are ancient seabeds from something like 50 million or 200 million years ago, and these are organic deposits from sea life at that time. We're mining those, purifying them and selling them.

Nitrogen fertilizer, essentially the natural gas that Mike talked about, is an energy source, certainly, and also a source of hydrogen. But the nitrogen comes from the air and it's just as natural as any other nitrogen molecule that you'll find in the air. We have compressors to remove that inert N₂ from the air, react it with the hydrogen and create a product called anhydrous ammonia, which is then made into other nitrogen fertilizers. But as our grade 9 science teaches us, matter essentially cannot be created or destroyed. The periodic table is a periodic table, and everything in this world is a chemical, including you and me, so—

Ms. Hélène Alarie:

[Inaudible—Editor]

The Chairman: In grade 9, something said that nature abhors a vacuum, so we'll let Mr. Hoeppner in here.

Voices: Oh, oh.

Mr. Jake Hoeppner: Gentlemen, just for your information, Mr. Borotsik doesn't just like the production of fertilizer, he likes to be involved in spreading it too.

Voices: Oh, oh.

The Chairman: Is that—

Mr. Jake Hoeppner: No, I wanted to ask you this. If the production of fertilizer wasn't profitable, have you ever cut back production?

Mr. Mike Chorlton: The answer is yes.

Mr. Jake Hoeppner: Yes, and just for Mr. Borotsik's information, my whole farm is sown to fall rye, without an ounce of fertilizer. There will be hardly any chemical used next year and my wheat is staying in the bin until I can recoup the cost of the fertilizer in it.

That's why I'm saying you can only hit farmers with so much. And I'll tell you, 25¢ a pound for nitrogen at 60 pounds is $15 an acre, plus your phosphate. Fertilizer costs have been at least 25% of our total production costs, so the 10% and 12% doesn't hold true for western Canada. And I think you have to take that into consideration or you guys will go out of business, just like the farmers.

Is that warning enough?

Voices: Oh, oh.

Mr. Roger Larson: Obviously we rely on the economic success of our customers, the farmers. Otherwise there would be no attractive reason to purchase fertilizers.

• 1725

Certainly if we go back to the late 1980s there was a period there in the last down cycle in agriculture where our industry lost something like $220 million in 1987. We had older and less efficient plants that closed and most of those have never reopened. That's competition and that's the reality of the marketplace. We've lost money and there were years that we made money.

Mr. Jake Hoeppner: I appreciate those comments.

The Chairman: Thank you very much. On behalf of the members, I think I can safely say that yours was a very good presentation and we all appreciated it very much. I hope we can do this again at some time in the future.

This meeting is adjourned.