Vancouver

April 27, 1999

Preface

The National Farmers Union (NFU) welcomes this opportunity to present the views of Canadian farmers to the Standing Committee on Foreign Affairs and International Trade. The NFU is the only voluntary, direct-membership, national farm organization in Canada. It is also the only farm organization incorporated through an Act of Parliament (June 11, 1970). The NFU is non-partisan and works toward the development of economic and social policies that will maintain the family farm as the basic food-producing unit in Canada. To help realize this goal, the NFU and its members work to:

• create, expand, and safeguard orderly marketing and supply-management systems;
  
• develop and implement government programs which support farmers;
  
• ensure that Canadian food is safe, nutritious, and available to all who need it; and
  
• encourage farming practices that protect, enhance, and sustain the environment.

NFU members believe that individual farmers must work collectively and with government to realize the preceding goals.

The objective of this brief, and indeed of the NFU itself, is to help policy-makers, farmers, and Canadian citizens understand current agricultural and food issues and work in an informed and effective way toward positive outcomes.

Index

• Introduction
  
• Safety nets
  
• Supply management and orderly marketing
  
• Other laws and programs threatened by trade agreements
  
• Conclusion
  
• Footnotes

Vancouver

April 27, 1999

Introduction

Canadian agri-food exports have doubled since 1989: and farmers' net incomes have fallen 19%. Exports are 5= times higher than in 1975: and net farm income is 25% lower.⁽¹⁾ For farmers, increased trade resulting from the Canada-U.S. Trade Agreement (CUSTA), the North American Free Trade Agreement (NAFTA), and the World Trade Organization (WTO) agreement has yielded few, if any, measurable benefits.

While recent trade agreements have provided few benefits for farmers, such agreements have had several adverse effects. These agreements have embattled and weakened orderly marketing agencies-milk, poultry, and egg marketing boards; the Canadian Wheat Board (CWB), the Ontario Wheat Producers Marketing Board (OWPMB); and our few remaining hog marketing boards. These agreements severely restrict our ability to fashion agricultural safety nets which will effectively shield Canadian farmers from increasingly volatile world markets. These agreements also threaten Canadian laws which regulate foreign land ownership, laws which protect our environment, and laws currently under consideration which might inject competition into the western grain transportation system.

In the upcoming WTO and FTAA negotiations, Canadian governments and negotiators will wish to make some gains and they may be willing to make some sacrifices. This brief will attempt to illuminate the relative value of that which we are likely to gain and that which we will be pressured to sacrifice.

Safety nets

Canadian realized net farm income is projected at just $9,355 per farm in 1998 and $9,732 in '99.⁽²⁾ Adjusted for inflation, this is half the average level of the 1970s and 80s. Realized net farm income is calculated before any allowance is made for the value of farm labour or management, nor does it take into account principle payments on farm land.

The gravity of the current situation becomes clearer when one looks at one of the provinces severely hit by the current farm-income shortfall. Figure 1 shows that per-farm realized net farm income in Saskatchewan in 1999 is projected to reach the depression-era levels.

Figure 1: Sask. realized net farm income, per farm, adjusted for inflation: 1926-99

Sources: Calculated using Statistics Canada Catalog #21-603E, 93-358-XPB, and the Consumer Price Index

In the 1940s through '80s (with the exception of some unusually-high levels in the 1970s) realized net income, adjusted for inflation, ranged between $10,000 and $30,000 per Saskatchewan farm. It is projected at $6,419 in 1998 and just $1,064 in 1999. $1,064 is the lowest per-farm net income recorded since 1938. Out of that $1,064, farm families must pay themselves for labour and management and service debts averaging $94,579 per farm.

The situation is similar in several other provinces including Manitoba and P.E.I. In P.E.I., realized net farm income averaged $43 million annually from 1990 to 1996; it is projected to average just $29 million in the 1997-99 period. In Manitoba, realized net farm income will also drop dramatically to $151 million in 1998 and $90 million in 1999-$6,330 and $3,762 per farm respectively.

In some provinces, realized net farm income is projected to rise. In Quebec, net income will rise this year and next above its 5-year (1993-97) average. This rise, however, does not indicate that all Quebec farmers will fare well. Statistical data lumps together the winners and losers. In Quebec, for instance, it is likely that modest gains by producers in supply-managed sectors mask and offset significant losses by hog, grain, and oilseed producers.⁽³⁾ It is important to remember, when looking at provincial net income projections, that the current income shortfall is not merely a provincial or regional problem. Crop and livestock producers in all provinces will be hard hit.

Canadian farmers are facing a crisis. The ability of Canadian governments to help farmers deal with that crisis, however, is severely limited by current trade and investment agreements. The Agricultural Income Disaster Assistance (AIDA) program has been widely criticized, especially because it will fail to deliver adequate assistance to thousands of farmers who desperately need it. Part of the problem is under-funding on the part of the federal government.⁽⁴⁾ The balance of the problem, however, can be traced to the details of the AIDA program-details dictated by the WTO agreement.

Annex 2 of the Uruguay Agreement of the WTO lists the details of domestic support programs exempt from reduction commitments ("green box" programs). The design of the AIDA program is taken from that Annex which states:

7. Government financial participation in income insurance and income safety-net programs

(a) Eligibility for such payments shall be determined by an income loss, taking into account only income derived from agriculture, which exceeds 30 per cent of average gross income or the equivalent in net income terms (excluding any payments from the same or similar schemes) in the preceding three-year period or a three-year average based on the preceding five-year period, excluding the highest and lowest entry. Any producer meeting this condition shall be eligible to receive the payments.

Using three-year averages, as mandated by the WTO, will dramatically reduce aid to farmers who have had one or more poor crops over the last three years (1995-97). Farmers in the Peace River region of B.C. and Alberta, western Saskatchewan, Nova Scotia, and elsewhere may see little aid. 70% of a crop-failure-year and two average years is not enough to get a farm family through the current income crisis. Farmers in regions hard hit by poor crops in past years and now by the dramatic price and income downturn are telling the NFU that they will get nothing from AIDA and, as a result, face bankruptcy. If the design of AIDA is dictated by the WTO, then that agreement will be a direct contributor to the bankruptcy of many Canadian farm families.

The NAFTA and WTO agreements have increased trade and internationalized markets. They have also led to lower and more volatile prices. It is unacceptable that these agreements also limit Canada's ability to deal with those low and volatile prices through the design and implementation of effective safety net programs.

The federal government should target additional aid to farmers in regions which have had one or more crop failures over the last three years. Or they should base the AIDA program on seven or ten-year averages so as to "dilute" the effect of one or two bad years. Both of these practical and essential solutions are disallowed under the WTO. If trade agreements which the federal government signed are now preventing it from protecting farmers at risk, then farmers and the government should have a long and critical look at those agreements. And the government should not sign any new agreements unless they protect and expand its powers to deal with commodity price volatility.

The NFU recommends that in all negotiations, the Federal Government assert its sovereign right to design and implement the effective safety net programs necessary to safeguard Canada's farm families.

Supply management and orderly marketing

The 1999 round of WTO negotiations will take direct aim at "State Trading Enterprises." They will directly threaten the Canadian Wheat Board (CWB), the Ontario Wheat Producers Marketing Board (OWPMB), and, to a lesser extent, Canada's milk, poultry, and egg supply-management agencies. A more direct threat to supply-management agencies will be the focus of those negotiations on tariff reduction and market access.

The aim of the U.S. (and some other nations) is clear: use existing trade agreements and negotiations on new ones to eliminate all barriers to their corporations' freedoms to buy and sell anywhere in the world. The CWB, milk marketing board, and other orderly-marketing and supply-management agencies are such barriers.

In an April 19, 1999 speech in Ottawa, U.S. Secretary of Agriculture Dan Glickman enumerated the goals of the U.S. in the upcoming WTO round. He stated:

One key objective of the United States will be to rein in the trade distorting practices of agricultural State Trading Enterprises. We will seek more discipline and greater transparency in the monopoly activities that these government-run entities engage in.

Urging Canada to dismantle its "State Trading Enterprises", Glickman stated:

In the short run, change will be difficult, but for the long run it is this kind of concession and change that will contribute to true balance in the world trading system.

Canadian federal and provincial ministers of agriculture-emboldened by their success in doubling agri-food exports between 1989 and '97--declared in July, 1998 that they would redouble those exports by 2005. Doubling and redoubling exports requires expanded market access. When Canada goes looking for this market access in the upcoming WTO and FTAA negotiations, it will be asked to "put something on the table." It will be asked to provide more access to its markets. It will be asked to make sacrifices. There is little left to sacrifice in Canada except supply-management and marketing agencies such as the Canadian Wheat Board. Many farmers fear that when Canadian trade negotiators go looking for market access, the CWB or supply-management may be a price that they are willing to pay.

Thus farmers face intense pressure from the U.S. and others to dismantle orderly marketing and supply management agencies and have, as their allies, Canadian governments so focused on increasing exports and the market access necessary to achieve those increases that they may well sacrifice the CWB or supply management.

While trade agreements have provided few, if any, benefits to farmers, the orderly-marketing and supply-management agencies threatened by those agreements provide many. To illustrate the relative benefits of increased exports and trade versus the benefits of supply management and orderly-marketing, let us compare the plight of Canadian hog and dairy farmers.

Canadian pork exports continue to increase. Agriculture and Agri-Food Canada (AAFC) projects pork exports in 2000 to be 48% above 1998 levels.⁽⁵⁾ In its Medium Term Policy Baseline (April 1998), AAFC projects strong export growth to 2005. That publication also forecasts, however, that hog farmers' incomes will plummet over the same period. Figure 2, below, shows that a benchmark central Alberta farrow-to-finish hog farm with 140 sows and 640 acres (wheat, malt and feed barley, and canola) will see its net income drop steadily for the foreseeable future: declining from $83,000 in 1997 to $28,000 in 2005.

Figure 2. Alberta benchmark farrow-to-finish hog farm

Reprinted from Medium Term Policy Baseline, April 1998, (p. B-3.)

In stark contrast to the failing export-oriented hog experiment is Canada's continuing success in supply-managed agricultural sectors such as milk, eggs, and poultry. Turning again to Medium Term Policy Baseline, we see that Figure 3, below, projects steady growth in the incomes of dairy farmers throughout the projection period.

Figure 3. Quebec benchmark dairy farm

Reprinted from Medium Term Policy Baseline, April 1998 (p. B-2.)

Clearly, farmers who are serving the domestic market within a framework that prevents oversupply and pays them based on their costs-of-production, such as dairy farmers, have fared better than farmers who are in export-oriented sectors of the Canadian agricultural economy, such as hogs and cereals.

In the face of such evidence, it would be clearly fool-hardy to even consider weakening Canada's supply-management and orderly-marketing agencies in order to gain increased market access and increased exports.

It should be noted, however, that as a result of the NAFTA and other trade and investment agreements, we have already fundamentally weakened our ability vis-à-vis orderly-marketing and supply-management agencies.

MMT is a manganese-based gasoline additive made by the Ethyl Corporation. Canada banned the inter-provincial transport of MMT because of growing evidence that it causes Parkinson's-like symptoms, infertility, and aggression in humans and damages the emission controls of cars. Ethyl countered by suing the Canadian government under Article 1110 of the NAFTA for $251 million [$U.S.] claiming that the Canadian ban constituted the expropriation of its MMT production plant and its "good reputation." In July 1998, the Canadian government settled and agreed to pay $10 million in legal costs and lost profits in order to prevent an embarrassing defeat before a NAFTA trade-dispute panel. The principle enshrined by this case seems clear: under the terms of the NAFTA, if a government takes any action that diminishes the profitability of a company (except for certain health-protection-related actions) then the government must pay compensation.

The Ethyl case strongly suggests that private grain companies could sue the Canadian government if the government expanded the jurisdiction of the CWB to include other grains. This possibility would also apply to any attempt by the government and farmers to expand any existing orderly marketing or supply management institution or to create a new one. If, for instance, the government and farmers added canola to CWB jurisdiction, Cargill might be able to sue, arguing that this amounted to the partial expropriation of its elevator system because putting canola under CWB-jurisdiction would limit Cargill's ability to profit on canola sales and thereby limit Cargill's ability to utilize and profit from its investment.

Several points should be noted:

1. This requirement works in only one direction: while the government must pay companies if it adds a commodity to an agency's jurisdiction, companies need not pay the government when it removes a commodity.
   
2. This is a new requirement. There was no need to pay compensation when the government added oats to the CWB's jurisdiction in 1949-50.
   
3. While it is technically true that the NAFTA does not prevent us from adding grains to the CWB (or regulating MMT), the high cost of compensation would seem to make such actions completely unfeasible.

Thus, with the signing of the NAFTA, the Canadian government essentially agreed not to expand existing orderly-marketing and supply-management agencies or to create new ones. They created a ratchet effect wherein farmers' marketing agencies could be dismantled and diminished but cannot be created or expanded. Farmers wonder whether they did so inadvertently-they failed to realize the implications of the agreements which they were signing-or they did so intentionally.

In light of the preceding, it is with good reason that the NFU cautions that trade agreements threaten orderly marketing and supply management.

The National Farmers Union strongly recommends that the Government of Canada refrain from using Canada's orderly-marketing and supply-management agencies as bargaining chips in international trade negotiations.

Other laws and programs threatened by trade agreements

Agriculture credit policy

Canada currently has a federal Crown farm lender, the Farm Credit Corporation (FCC). Farmers' incomes are highly variable because they control neither the weather nor the prices they receive for their wheat, canola, cows, pigs, milk, fruit, or vegetables. This variability has caused hardship for farmers struggling to make loan payments on ever-more-expensive land and machinery. Viable farm operations sometimes, during a drought year for instance, find it very hard to make their payments.

A Crown farm lender such as the FCC could be of enormous benefit to farmers if it operated as a partner to the farm community. It could structure its business on a long-term break-even basis and take the cyclical nature of farming into account when demanding loan repayment. It could also go to extraordinary lengths to avoid evicting farmers from their land.

The FCC does not operate in this way. Its policies and operations with regard to farm loans are little different from those of Canada's chartered banks. Further, even if the federal government wanted FCC or some other Crown lender to extend loans to farmers with favourable, flexible terms, it is likely other lenders would claim unfair competition and that these lenders may have recourse to sue the government under the provisions of the NAFTA or one of the upcoming trade agreements.

Land ownership laws

Several Canadian provinces restrict agricultural land ownership to residents. It is a violation of the NAFTA, however, to treat foreign investors less favourably than domestic ones. To shield Canada's farmland ownership laws from the effects of the NAFTA, Canadian negotiators requested and received an exemption from the Agreement for those laws. There is every possibility that we will be unable to achieve similar exemptions under the FTAA or other future agreements.

Transportation policy

In the wake of the Estey Report, there is much talk of creating competition in grain transportation. The idea is to open up CN and CP tracks to other carriers. In light of the Ethyl case, there is some question whether the government of Canada has the ability to force CN and CP to allow other carriers onto their tracks unless the government first pays these American-owned railways compensation for lost profits.

The NFU recommends that the Government of Canada refrain from bargaining away its authority to make policies in the interest of Canadian farmers.

Conclusion

For farmers, the benefits of trade agreements and increased exports have yet to arrive. The costs-inadequate safety nets, weakened supply-management and orderly marketing agencies, and volatile prices-are already here. The 1999 WTO negotiations will implement further rules which further prevent nations from acting in the best interests of their farmers and consumers.

When faced with criticisms of the current agri-food trade system, supporters of that system often charge that the critics are "opposed to trade." The NFU supports trade and prosperity as long as the two are linked. For farmers, they currently are not. The current WTO-governed trade system is, by all measures, a failure. Moving further in the same direction in 1999 will only compound the damage already done. Farmers, governments, and citizens must work toward a system which better serves the interests of farmers, consumers, rural communities, and the public good.

As long as Canadian WTO negotiators remain within the narrow confines dictated by U.S.-negotiators, we are unlikely to make any progress in solving the problems which plague farmers around the world. As long as Canadian negotiators accept that the only valid topics of negotiation are domestic supports, export subsidies, market access, "state trading enterprises," export credits, and which programs are "green" box and which are "blue", we are unlikely to create an agricultural trade system which benefits farmers. The Canadian government must work to expand the terms of reference of the WTO negotiations. It must move beyond the mistaken conception of "trade-equals-prosperity-for-farmers" falsely-implied in the current WTO regime. And it must work with governments around the world to forge an international agreement on trade in agricultural products which supports farmers, the environment, and rural and urban economies.

The National Farmers Union recommends that Canadian WTO negotiators work with those from other countries to diminish the WTO's focus on export-acceleration, deregulation, and the destruction of institutions which support farmers.

Further, the NFU recommends that the Canadian negotiators work to expand the boundaries of discussion at the WTO and, thereby, make possible outcomes which support farmers around the world.

Footnotes