Canada Grain Act review

Discussion document

Executive summary

The Canada Grain Act and its associated regulations provide the framework for Canada's grain quality assurance system and establish certain protections for grain farmers. The Canada Grain Act sets out the objectives and functions of the Canadian Grain Commission, which is responsible for regulating grain quality and handling in Canada to ensure a dependable commodity for domestic and export markets. The Canadian Grain Commission delivers programs and services to establish and maintain Canada's science-based grain grading system and provide various safeguards for grain farmers.

The Canada Grain Act and Canadian Grain Commission were established at a time when the Canadian grain sector looked much different than it does today. The way grain is bought, sold, delivered and handled at facilities has changed significantly, as have buyers' demands for grain quality. The Canada Grain Act has not been comprehensively updated in many years, and it is possible that some modernization is required to ensure the system is better aligned with current and future market realities.

The Government of Canada is undertaking a review of the Canada Grain Act and the Canadian Grain Commission. The review process will enable stakeholders to help collectively shape a vision for a world-class grain quality assurance system and producer protection framework that meets the needs of the sector, now and for the future. With this review, the Government of Canada aims to achieve an agile regulatory system that promotes innovation, evolves with the pace of industry change, safeguards grain farmers, enhances Canada's reputation for grain quality, and strengthens international competitiveness. We are open to your views and ideas on what a modernized, science-based regulatory body would look like within this context and what changes could be made to the Canada Grain Act and/or operations of the Canadian Grain Commission to achieve this vision.

To help initiate discussion, we have highlighted several issues that may be of particular interest:

• Access to binding determination of grade and dockage
  • Binding determination is intended to be an independent dispute resolution mechanism when a producer and buyer disagree on grade or dockage. Are there any gaps between the current system and what is needed?
• Producer payment protection
  • The program is intended to help ensure producers are protected against a buyer's failure to pay for grain, in a cost-effective manner that fairly allocates risk. Can the program be improved to better meet the needs of the sector?
• CGC licensing
  • The licensing system for elevators and grain dealers is designed as a framework for establishing and maintaining Canada's grain quality assurance system, while also safeguarding producers and enabling data collection. Does the existing licensing approach meet the sector's needs?
• Official inspection and weighing:
  • The system of inspection, weighing, and certification of grain for export is intended to help ensure there is dependable Canadian grain for domestic and export markets. Are there ways the system could better meet the sector's needs?

This is not a comprehensive list of Canadian Grain Commission functions; rather, it is intended to highlight practical areas that may be of interest to stakeholders. We encourage you to provide your comments on any subject related to the Canada Grain Act and the Canadian Grain Commission by email at aafc.cgareview.aac@agr.gc.ca.

1. Introduction

The Canada Grain Act (CGA) and its associated regulations provide the framework for Canada's grain^Footnote1 quality assurance system and establish certain protections for grain farmers. The CGA sets out the objectives and functions of the Canadian Grain Commission (CGC), which is responsible for regulating grain quality and handling in Canada, specifically for the 20 grains identified by regulation. The CGC is responsible for establishing and maintaining Canada's grain grading system, and for delivering programs that ensure the quality and quantity of Canadian grain exports and provide various safeguards for grain farmers. The CGC also maintains a grain research laboratory that supports the science-based grain grading system and generates scientific data to support market access.

Some targeted changes have been made to the CGA over time, but the last comprehensive amendment took place in 1971. Since then, several reviews^Footnote2 and bills^Footnote3 tabled in Parliament have proposed reforms. Since 2017, the CGC has been undertaking a comprehensive Grain Grading Modernization Initiative^Footnote4. The objective of this ongoing CGC-led initiative is to ensure that, where possible, grain grading is continually evaluated using more scientifically-based, effective, precise and user-friendly tools.

The Canadian grain sector has evolved since the last comprehensive changes to the CGA and the ways in which grain is bought, sold, delivered and handled have changed. Canadian grain production and exports have increased significantly over the past decade. For example, Canadian grain production was 69 million metric tonnes in 2010, compared to 93 million metric tonnes in 2020. Canadian grain exports from Canadian Grain Commission-licensed grain elevators totalled 30.8 million metric tonnes in crop year 2009-10, compared to 44.3 million metric tonnes in crop year 2019-20.

In recent years, the sector has also made significant infrastructure investments, including in rail and port infrastructure, such as new high capacity loop track primary elevators and upgraded terminal elevators, which have improved the speed and volume of grain shipments throughout the supply chain. For example, investments in the past 10 years have increased total western Canadian primary elevator storage capacity by over 40%. Structural changes have also affected the sector, such as reforms in wheat and barley marketing. Technological advancements and evolving grain buyer demands also continue to shape the sector and its capacity as one of the world's leading exporters of grain.

During the COVID-19 pandemic, Canada's grain supply chain demonstrated its resiliency, despite early concerns about potential disruptions. The sector and the CGC adapted procedures at grain handling facilities to ensure continued ability to deliver grain to domestic and international markets. The grain supply chain has also moved record volumes and produced a large volume of grain, meeting increased international demand and demonstrating Canada's role as a reliable supplier of grain. To respond to the evolving situation, the CGC adjusted how some of its programs and services were delivered so that mandated services could be safely provided during the COVID-19 pandemic. Both industry and government have had to adopt new approaches to ensure critical functions continue to be available to the sector.

2. Purpose of this discussion document

Agriculture and Agri-Food Canada (AAFC) is leading the review of the CGA, with support from the CGC. The review process will enable stakeholders to help collectively shape a vision for a world-class grain quality assurance system and producer protection framework that meets the needs of the sector, now and for the future. With this review, the Government of Canada aims to achieve an agile regulatory system that promotes innovation, evolves with the pace of industry change, safeguards grain farmers, enhances Canada's reputation for grain quality, and strengthens international competitiveness. We are open to your views and ideas on what a modernized, science-based regulatory body would look like within this context and what changes could be made to the Canada Grain Act and/or operations of the Canadian Grain Commission to achieve this vision.

The review will help to identify what changes may be needed to Canada's legislative and regulatory framework to meet the needs of the sector. AAFC is seeking your views as to what those changes might be, and the reasons why these changes are required.

This discussion document is designed to highlight several issues that may be of interest to stakeholders to help initiate overall discussion and engagement. All feedback that we receive will be considered during the review process. AAFC will compile the feedback and publish a summary of what we heard.

3. Providing your input

AAFC wants to hear your views. You are invited to submit input in the official language of your choice by: April 30, 2021. Questions are included throughout the document that can be used as a guide, but these questions should not limit your feedback. Including rationale and support for your views will assist decision-making on any potential changes to the CGA.

4. The Canadian grain value chain: Highlights of CGC functions

The CGC's core responsibility is to establish and maintain science-based standards for Canadian grain and regulate grain handling in Canada, to help ensure the integrity of grain transactions and that Canadian grain is dependable and safe.

As part of its role in maintaining Canada's grain quality assurance system, the CGC carries out a variety of functions in the commercial grain handling system. These include establishing and maintaining grain quality standards, conducting grain quality research, performing a mix of mandatory and voluntary inspection and analytical services, publishing information on grain quality and movement, and providing certain safeguards to grain farmers. Image A highlights some of the CGC's functions in the grain value chain. (Note: some of these functions vary depending on geographic area, as defined in the CGA).

As part of this review process, the Government is interested in hearing from stakeholders about their vision for the future of Canada's legislative and regulatory framework for grain quality assurance and producer protection. The review presents an opportunity to reflect upon any modernization that is required to maintain and strengthen Canada's reputation as a supplier of consistently safe and dependable quality grain, while providing an agile and innovative regulatory framework.

Description of the above image

Canadian Grain Commission throughout the supply chain

The supply chain comprises grain producers, primary elevators, terminal elevators, bulk exporters and overseas buyers.

Grain producers participate in the Harvest Sample Program, which provides information about the current harvest for the Canadian Grain Commission’s (CGC) grain research activities.

The CGC licensing program, including grade dispute resolution and producer security, supports grain producers. Primary elevators and terminal elevators are regulated under the Canada Grain Act (CGA) through CGC licensing requirements.

CGC certification activities include inspection and weighing as well as cargo analysis and monitoring. Terminal elevators must comply with grain certification requirements, which provides assurance on grain sold by bulk exporters and further supports grain research.

CGC licensing and certification activities are part of the official grain grading system, supported by CGC grain research activities.

Quality assurance and new crop data developed through grain research provides assurance to overseas buyers.

Questions for consideration - 4. The Canadian grain value chain: Highlights of CGC functions

• What are your views on the long term vision for the Canada Grain Act and the Canadian Grain Commission?
• What are the key elements of a modern grain quality and producer protection framework?

The remaining sections of this paper highlight several CGC functions as a means of initiating more detailed discussion about the CGA and the CGC. It is not meant to be a comprehensive list of issues that may be of interest in this review process.

4.1 Access to binding determination

When producers deliver grain to a licensed primary elevator, their grain is assessed by the receiving facility for grade and dockage, which are indicators of quality and cleanliness. If the producer disagrees with the facility's assessment, they can request that the sample be assessed by the CGC for an independent, binding decision. This is otherwise known as the 'subject to inspector's grade and dockage' service.

Given the evolution of grain production and marketing over the years, the share of shipments covered by this service has declined. For example:

• The service is available to producers who deliver grain to licensed primary elevators. The CGA does not provide for access to binding arbitration involving other license classes, such as process elevators (e.g., canola crushing facilities), which account for approximately 15% of deliveries.
• The service is available upon request when grain is being delivered, which may be difficult for producers who do not deliver grain themselves, and instead use commercial truckers or make other arrangements. The existing legislation does not consider that a producer may not be present at delivery.
• The existing service applies when there is disagreement on an official grading factor. However, a broader range of grain quality characteristics are becoming increasingly important to the sector and grain marketing. Often, grain buyers are using analytical tests to assess grain quality characteristics that are not official grain grading factors (e.g., Falling Number), as these may be required to meet an end-use customer's needs.

Questions for consideration - 4.1 Access to binding determination

• Is it important to provide more flexibility for CGC binding determining of grade or dockage to reflect changing delivery practices? Why or why not?
• Would extending binding determination of grade and dockage to all CGC licensees that receive grain from producers add value? Why or why not?
• Would extending access to the CGC binding determination service to a broader range of grain quality characteristics add value? Why or why not?

4.2 Producer payment protection

As part of its licensing system, the CGC administers a producer security program with the goal of protecting producers against a grain buyer's failure to pay. The CGA requires that licensed primary and process elevators and grain dealers provide security to cover outstanding liabilities to producers. Licensees tender security based on their monthly outstanding liabilities to producers. If a licensee fails to pay for the grain that they purchased, a producer can apply for compensation from the program, which uses the licensee's security to compensate eligible claims.

The security-based model has been successful in responding to claims. Between 1990 and 2019, 21 companies covered by the producer protection program defaulted on payment obligations to producers. Eligible producer claims to the CGC totalled over $26.0 million. Payout to eligible producers was approximately $23.5 million representing approximately 90% of eligible claims.

However, the model is expensive for both licensees and the CGC to administer. Additionally, because security is linked to an individual licensee's total liabilities, without reflecting their relative risk of default, the cost for some licensees may be disproportionate to risk and does not benefit from any pooling of risk. Timeliness and bankability of compensation to producers has been an issue, as it has depended on the type of security arrangement used.

Over the past decade, a number of alternative approaches to producer payment security have been explored. Amendments to the CGA in 2012 provided the CGC with the flexibility to use an insurance-based model. It was envisioned that such a model would take advantage of aggregated licensee risk exposure, through an umbrella insurance policy, to reduce the overall cost of payment protection coverage to the entire grain industry. A proposal for an insurance-based model was developed, but it was determined by the CGC that the costs would increase for a number of licensees, while other licensees would not be eligible for coverage. As a result, the CGC did not proceed with an insurance-based model.

In 2014, a bill was tabled in Parliament, but ultimately not passed, that included a proposal to provide the CGC with the authority to establish a producer compensation fund, which would serve as a pooled account held and managed by the CGC to address licensee failures. It was anticipated that such a fund could improve payment protection by pooling the individual licensees' risks. The entire value of the fund would be available to make timely payments to producers, subject to any prescribed limitations. Ongoing costs of the fund would be financed from licensee contributions, based on their expected risk of failure and volume of grain purchases, while administration costs would be financed by licensing fees. In addition to the fund, it was envisioned that the CGC would hold a re-insurance policy, which would be drawn upon in licensee failure situations where producer claims exceeded the amount of money held in the fund.

These past reform attempts had several common objectives for improving the producer payment security program:

• Maximize transparency and predictability, with an emphasis on minimizing risk of non-payment and improving the timeliness of payments to producers;
• Reduce costs and administrative requirements for licensees and the CGC; and
• Ensure costs to licensees are proportional to their non-payment risk.

They also included design considerations to ensure producers were encouraged to take appropriate steps to minimize the risk of non-payment for grain deliveries.

Questions for consideration - 4.2 Producer payment protection

• Does the CGC-administered producer payment protection program meet the sector's needs? Why or why not?
• If not, how could the transparency, predictability, timeliness and/or cost-effectiveness of the program be improved?

4.3 Licensing

The CGA requires that all elevators and grain dealers that purchase or handle grain from western Canadian producers be licensed. The objectives of the licensing system are to provide the framework for establishing and maintaining Canada's grain quality assurance system, safeguards for producers and data collection. The CGC licensing system establishes the standards and procedures for the handling, transportation and storage of grain and the facilities used for those purposes.

The CGA is prescriptive: it specifies four classes of licenses:

• (1) primary elevator;
• (2) terminal elevator;
• (3) process elevator and
• (4) grain dealer.

In addition to posting security for producer payment security purposes (as described above), each class of license is required to meet specific obligations, such as issuing cash purchase tickets for grain and reporting on grain handlings. The CGA also gives the Commission the authority to exempt any elevator or type of grain handling operation by regulation or order if the Commission is of the opinion that control is not essential for the maintenance of quality, safekeeping and orderly and efficient handling of grain in Canada.

Several concerns with CGC licensing have been raised in the past. The current set of classes reflect the types of facilities operating prior to the last comprehensive update to the CGAin 1971. Relatively modern additions to the grain handling and transportation system, such as container-loading facilities, are not licensed. Concerns have also been raised about the lack of uniformity of requirements for similar functions with different business structures, leading to inequitable treatment for certain facilities and compliance challenges.

Questions for consideration - 4.3 Licensing

• Does the current system of licensing meet the sector's needs? If not, what should be addressed, and why?
• Rather than legislating specific classes of licence according to the type of facility or business, would a regulatory approach that focuses on activities, functions or methods of handling provide a more agile, flexible approach to meeting the sector's needs?
• Are there methods of compliance and enforcement other than those currently specified in the CGA that should be considered?

4.4 Official inspection and weighing

Inspection, weighing, and certification play a role in facilitating efficient grain marketing by helping ensure that grain meets the contract specifications agreed to by the buyer and seller. The CGA requires that all grain discharged from terminal elevators be officially inspected and weighed to determine the quality and quantity of the grain. The CGC does not provide official inspection and weighing of shipments of grain destined by rail or truck to the United States or Mexico, or domestic vessel shipments along the St. Lawrence Seaway. It also does not conduct official inspection and weighing of grain exports shipped by container.

CGC inspectors provide on-site services at terminal elevators across Canada. CGC-approved automatic sampling systems deliver official samples to the CGC inspection office and to the terminal elevator operator. CGC inspectors monitor loading for various factors and provide inspection results in real-time to the terminal operator who may use that information to adjust vessel loading operations. In 2012, the CGC adopted an oversight model for official weighing at terminal elevators where instead of CGC personnel weighing shipments, terminal operators are required to weigh grain according to CGC published standards. At the completion of vessel loading, the CGC prepares an official sample that is retained as a representation of the cargo.

Once the official quality determination has been made and the official weight has been validated, the CGC issues an official inspection certification, referred to as the "Certificate Final", to the exporter. When requested to do so by the exporter, the CGC may also perform other analytical tests, and issue Letters of Analysis providing attestation that a shipment meets other specific quality factors. The CGC also conducts monitoring on a variety of grain quality and safety attributes and issues Statements of Assurance upon request, based on that monitoring.

Private sector quality assurance providers also support Canadian grain exporters at port by providing various services, including grain inspection, analytical testing, and certification. Contracts between buyers and sellers of grain stipulate many details, including quality, quantity, timing, and the entity, CGC or otherwise, that will assess quality and provide the certification required to execute the contract and meet any other requirements of the importing country. The CGC does not oversee third party inspection or certification services.

Canada's current grain quality assurance system is based on three fundamental elements:

• There are supporting standards of quality to facilitate trade (e.g., the official grading system that attests that official grade standards have been met);
• There are standardized processes to generate accuracy, consistency, and dependability. (e.g., standard sampling procedures used during vessel loading); and
• There is a framework that supports grain quality, grain safety and market information needs.

Any consideration of changes to service provision would need to determine what, if any, effect they would have on these elements of the overall system. Changes will also need to consider potential implications to CGC operational requirements and/or funding sources. The CGC charges fees for its services, including inspection and weighing. Currently, over 90% of CGC operating costs are funded from fees,^Footnote5 primarily from inspection and weighing services. This includes costs for CGC infrastructure, producer-oriented programming, and most of the grain quality research conducted by the CGC.

Questions for consideration - 4.4 Official inspection and weighing

• Are there ways that the official inspection and weighing system, which includes oversight and service delivery of inspection and weighing, should be reformed? If so, how and why?
• What are the best roles for the CGC and how can the inspection system maintain official Canadian grain grading standards while addressing the need for a cost-effective and responsive system?

4.5 Other issues

Other issues related to the CGA or CGC beyond those highlighted in this document that were raised in previous consultations include the CGC's involvement in grain quality research, statistical data collection and publication, and CGC corporate governance. Views are welcome on these and any other aspects of Canada's legislative and regulatory framework for grain quality and producer protection.

5. Next steps

Your input is important to ensure that AAFC hears from stakeholders across the value chain in conducting a broad and comprehensive review of the Canada Grain Act. We encourage you to identify any issue during this consultative process that may be relevant for the review.

AAFC will compile the feedback we receive from this consultation process as input to the review, and publish a summary of what we heard.