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PE- BRONZE: Sarah Hoffman

Sarah Hoffman won bronze for the O.R. Evans Award for her press editorial, Bring back the Western Canadian Deduction. To view the full article, please visit GrainsWest.


Bring back the Western Canadian Deduction

Ensuring producer funding for variety development is fair, transparent and market driven

I attended the value creation meeting in Edmonton on December 6, 2018. I went as a farmer, seed grower and a person deeply interested in the policies that shape the success of the cropping industry in Western Canada. As a professional writer, I am used to reporting what other people have to say about an issue, but I have given this topic a great deal of thought myself, and, because I am so personally invested, I wanted to share what I think. I have also provided a summary of the consultation process and some data on how plant breeding is funded in Western Canada in separate articles.

A Prairie farmer who pays provincial wheat and barley check-offs or ships grain by rail is already paying a de facto end point royalty (EPR) for variety development in Western Canada. This should be made clear to producers and included in the consideration of any new value capture model put forth by industry and government.

I may ruffle feathers by calling the provincial check-offs an EPR, but I call it that because a large portion of the research budgets of the Prairie cereal commissions have gone to variety development in the last five years and a lot more is set to funnel into plant breeding institutions over the next five years.

The Western Grains Research Foundation (WGRF) has also contributed heavily to variety development. WGRF’s endowment was established in 1981 with the transfer of $9 million of producer funds from the federal government. This endowment has grown to $120 million today and has been augmented by the Western Canadian Deduction, a check-off taken from wheat and barley sold in the three Prairie provinces between 2012 and 2017, and funds deemed in excess of the maximum revenue entitlements allowed for CP and CN rail. On December 31, the Canadian Transportation Agency ruled that CP and CN must pay another $2.7 million to the WGRF for revenues exceeding the maximum in the 2017-18 crop year. These various forms of producer dollars are used to fund variety development.

This is neither right nor wrong, but when I attended the value creation meeting in Edmonton, this information was not made clear and producers deserve to know how they are contributing. I believe we also deserve to have a system that is more transparent. If AAFC and the university breeding programs need X number of producer dollars to continue to develop good varieties for us to grow, then that number should move to breeding institutions in a way that is clear to everyone.

It is extremely difficult to determine exactly how many producer dollars flow into variety development every year, because there are so many channels through which it flows. Please read the side bar to get an idea of the myriad ways producers are currently funding variety development.

On top of that, under our current royalty regime, farmers who purchase certified seed pay, as part of that seed price, a seed royalty. Currently these farmers are contributing to variety development in both the form of their check-off dollar and their royalty dollar. There was a time I would have been on board with a farm-saved seed royalty where every farmer paid into the system regardless of whether they were buying certified seed or using their farm-saved seed, but this would just mean everyone paid twice. I now believe we should move to a system where there is one collective funnel for variety development money.

Setting up a new system

Any royalty system should be fair, transparent and market driven. I believe a check-off similar to the Western Canadian Deduction — but on all crops — and returned to breeding programs based on their share of reported crop insurance varieties would do this. The amount of the deduction would be determined by crop type, not variety, so all varieties of wheat would be charged the same amount, but there could be a different deduction for wheat versus flax, as an example.

Fairness would be achieved because every producer who delivers grain to a buyer that currently takes crop commission check-offs would also pay this deduction. Of course, this deduction would not be paid on grain that does not get sold to an elevator. Whether that is crops cut for forage or grain used on farm or sold to smaller feedlots that don’t remit check-off dollars, there will be some slippage. Overall the pie could be smaller than if a farm-saved seed royalty model is used where the payment is based on acres planted, rather than bushels harvested. However, by using provincial crop insurance data the slices of the pie can still be distributed proportionally to the acres planted. This would allow breeders of feed or forage grains to be remunerated even if most of the production of those varieties does not contribute to the EPR pot.

While not everyone takes part in crop insurance, it’s likely the best data we have access to short of mandatory self-reporting (which would have its own limitations). I believe there is little appetite for a farm-saved seed royalty amongst farmers and a system that will rely on self-reporting needs to have wide cultural buy-in to function effectively.

Fairness would also be achieved for breeders. If a private company brought a variety to market in Canada and producers planted it, they would receive a share of the royalty proportional to the acres that farmers chose to grow that variety on, just like a public institution would.

This system would allow for breeding organizations to have their own partnerships and flexibility. If a public breeding institution wanted to partner with a genetic trait development company and share the royalties with that company, they could still have that agreement.

A reinstatement of the Western Canadian Deduction (WCD) would not be a traditional EPR tied to specific varieties. This new deduction would function like the 2012-17 WCD and be applied to all grain in a crop type.

I believe an EPR system like Australia where there are different royalty rates for different varieties would be a non-starter in Canada. For one, elevators do not want the hassle of keeping track of different royalty rates for different varieties. For another, as long as there were varieties around that didn’t fall under the EPR structure because they weren’t registered under the most recent Plant Breeders’ Rights law in Canada, there would be a temptation amongst producers to report a variety that had no royalty.

Administering the fund

If this new deduction went to an entity like WGRF or a coalition of crop commissions it could become the single source of producer money going into variety development. As seen in the side bar, the current system is far too complicated. No single group intends to obfuscate the true producer contribution to variety development, but these rabbit trails of funding ultimately make it impossible for producers to know how much they are paying into the system. A single collection and distribution point for variety development funds would make it much more transparent. The administering organization could still leverage federal and provincial funds like the ones that were made available under the Growing Forward programs or the new Canadian Agriculture Partnership.

Because the royalties flow through a producer-managed organization, producers could also ensure that the royalties that return to public institutions are used strictly for breeding. In some cases, that is already happening. At CDC, 100 per cent of their royalties are reinvested in plant breeding. At AAFC, on the other hand, royalties flow back into the science and technology branch of AAFC which has many objectives besides plant breeding. This point was raised at the meeting I attended in Edmonton and Felicitas Katepa Mupondwa, director of research and development at AAFC in Saskatoon, implied that this should not be a concern since AAFC puts far more money into plant breeding than they receive in royalties. However, if the royalty regime changes and in five to 10 years they are receiving many millions more in royalty dollars, those funds will just slosh around in AAFC’s science and technology branch and there’s nothing to keep the government of the day from directing that money to their current pet project.

Whoever administers this end point royalty is merely passing the money through, so it is essentially non-political. A collection of commissions or even a single commission could theoretically administer the money for every crop type as they are obligated to pass the money on to each breeding programs based on its market share. WGRF could also be an option as they are already used to dealing with breeding programs of all crop types.

Finally, the process should be market driven and create a market reward. Producers vote with their air drills. The breeding programs that produce the varieties that farmers plant should be rewarded. CDC has an interesting model where for every dollar of royalty revenue that comes in, $0.65 goes to the program that developed that variety and $0.35 goes to a general fund to make sure that there is equipment and technical staff to do the work that every plant breeder needs regardless of the size of their program. In this way, there is a market reward for the successful programs, but large acre crops like wheat help subsidize smaller acre crops like flax. Similar terms could be implemented under this new structure or each institution could be allowed to determine how to best use their money.

Collective funding has worked well for western Canadian farmers when it comes to variety development. Saskatchewan Pulse Growers’ non-refundable levy acted as an end point royalty providing up-front funding to CDC, which advanced the pulse industry across the Prairies. Currently we are already providing collective funds to various public breeding institutions in the many millions of check-off dollars that flow into variety development. This system will level the playing field for private breeders interested in the Canadian market place, without selling out our public institutions. From various conversations I’ve had, most western Canadian farmers do not want to lose these public breeding institutions.

Let’s reinstate the Western Canadian Deduction, but apply it to cereals, pulses and oilseeds other than canola. It actually still exists for cereals, it’s simply been rolled into the provincial wheat and barley commission’s check-offs. The mechanism is already in place for collecting it. Commissions can stop trying to “pick the winners” by contributing millions of dollars to variety development projects and they can focus on other areas that make farmers more profitable, including agronomic research and extension, market development, and government and public relations.

If private breeding companies want to use other means such as contract law to extract more return from their investment in variety development, they are free to do so. Royalties could be reduced or dropped on certified seed, making it a more affordable option. Most of us will contribute, and the returns will mostly return in a proportional fashion to the innovators behind the varieties.