Agriculture Committee on June 6th, 2006

[The Chair, Conservative, Gerry Ritz]

Thank you, Madam.

Mr. Boshcoff, five minutes, please.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Thank you, Mr. Chair.

To all the presenters, I think you've set a new record for enthusiasm and response, from all parties, to any witnesses who have ever appeared before any committee. You can tell that we're keen.

On the capacity, Mr. Passmore, is the hesitancy in Canada incentive driven or a fear that if we develop the industry it will be swamped by American capacity if they're building at such a pace?

[Jeff Passmore]

Are you talking about cellulose ethanol?

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Yes.

[Jeff Passmore]

The hesitancy has to do primarily with the size of the plant. In cellulose ethanol, we have the opposite situation compared to grain-based ethanol. Grain-based ethanol is low capital cost, higher operating cost. In cellulose ethanol, we have the reverse. We have high upfront capital cost, lower operating cost, because, of course, we're using an agricultural residue so the cost of operating is less. For the capital costs, you're looking at between $300 million and $400 million to build the first commercial plant.

So there's the issue of the quantum and then there's the issue of the mechanism. It's been made quite clear to us by the Department of Finance that they do not have any desire to issue loan guarantees to cover the debt portion of the plant.

The idea is that 100% of the project is financed in the private sector through a combination of equity and debt. We have the equity players at the table. On the debt, there's a fundamental lack of understanding in Canada, I think, of the problems associated with the commercialization of emerging technologies. This has nothing to do with cellulose ethanol; this is any emerging technologies. Lenders don't lend debt to technology that's never been proven at that scale before. So sure, we have a demonstration plant on Hunt Club Road, but they won't lend you the debt unless that debt is guaranteed by a strong credit rating, such as the government--hence, the U.S. government's loan guarantee program, which a Republic Senate and a Republican Congress and a Republican president passed.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Mr. Teneycke, when you talk about the end of oil and that some of the vehicles may have a capacity of 85% to use alternative fuels, right now we're looking at 5%, generally, but eventually in the long range do you see that 85% or even 100% will be a possibility?

[Kory Teneycke]

Not if we continue to drive the types of vehicles we drive today. Renewable fuels are not a solution to anything in isolation. Unless you're able to convince people that they don't need a four-wheel drive truck to drive their kids to soccer practice and you address things like fuel efficiency simultaneously, you're not going to have a sole solution.

I think we had a bit of criticism in the media on the announcement of the RFS, which is environmentally a very good story...not talking about the fact that in terms of that sustainability package, this is only one piece of a comprehensive solution. It's not reasonable for us to change all the vehicles we drive overnight, or anything like that, but to start positioning ourselves where we have more diversified, cleaner, renewable sources of fuel in vehicles that can use more of them and that are more fuel efficient, with lower emission profiles. I think everyone agrees that is the end goal.

I was just at the Windsor workshop, at a meeting of the auto industry in Canada, and that's what they're all talking about. It's not something that I think is revolutionary. This is one important step on that larger journey.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Mr. LaBelle, some small businesses have approached probably all members of Parliament here. They have been nervous that any incentives for research and development or for even getting into production...whatever is available gets snapped up by larger corporations, as opposed to smaller operations.

Do you have any feelings about that? Is that the experience in Saskatchewan?

[Lionel LaBelle]

I think clearly that's the experience. Jeff touches on it a lot, and then one of the concerns I have is there's a lot of new technology, whether it's biodigesters, whether it's a liquid fluid bed. With all due respect, community groups look at this--and I don't mean to be disrespectful--but they're somewhat naive in understanding some of these concepts. More importantly, they don't understand the bankers' position in all of this.

So our role within the Ethanol Development Council is to be quite articulate with community groups, and say, focus on template models; focus on models that we can replicate over and over again. I think we're having some success with that.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

This is a technical question that was asked to us today, and that is, on gas station liners, for their fuel supply tanks, as you add more ethanol, apparently the liner has to be changed because of the solubility. Is that one of those urban myths?

[Kory Teneycke]

We're working very closely with the Ontario government right now on looking at these issues. There are certain types of tanks. To give you an idea of the magnitude, there may be 30 to 40 in all of Ontario, which would have north of...3,000 or 4,000 tanks. So a very tiny percentage of tanks will have some softening as a result of ethanol being added. So that's not really a huge issue. The bigger issue is when you add ethanol. Because it's a solvent, it will pick up any grime that's in the tank. So you need to be very vigilant about having a clean tank when you add ethanol to your market, and vigilant for the first little while when changing the fuel filters in the pump.

Markets like California, which is larger than the entire Canadian market, went from virtually no ethanol to 5.75% ethanol in less than two years without any problems of vehicles or tanks. So it's a bit of a red herring, I think. I won't say that there isn't anything to address there, but it's easily addressed and it's been done in many different jurisdictions.

[The Chair, Conservative, Gerry Ritz]

Thank you, Kory.

Mr. Miller, you have five minutes, please.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

Thank you, Mr. Chairman.

I share your enthusiasm, gentlemen, and I think this is something society and government has to get behind so we can get to our targets as soon as possible.

I have three questions. I'll just give them all to you, and I'd like to hear various comments.

I'd like to know what the possible financial opportunities are for a combination plant for livestock by-products, which Mr. Wardrop can maybe answer, and things such as soya, canola, and wheat. Is there is potential for that, and what might the savings be? Now, I realize that transportation costs might override some of them, but I'd like to hear some comments on that to see if it's feasible.

Secondly, as far as the benefits of getting into the biofuel industry are concerned, we know there are going to be spinoffs for the environment and agriculture, those kinds of things. But what potential do any of you gentlemen see? If we get enough benefit for the agriculture sector, what, if any, long-term impact is that going to have on reducing the amount that government has to spend to support agriculture? So basically, I guess you're freeing up money to support this industry. I'd like to hear some comments on that.

And in reality, how fast can we actually expect to get to 25% or 50% here? Somebody said that Sweden is aiming for 100%. We're a long way from there, and we're just taking baby steps, but I'd like to hear some long-term thoughts on just how fast we can get there?

[Ron Wardrop]

I'll start with your first question.

The animal by-products have to be rendered, or they have to be processed in some way first, and once they become the fats and oils that turn into biodiesel, they're quite easily transported. In fact, our company, before we got into biodiesel, exported them around the world to places such as South America. So they do transport very well.

The thing to remember, though, is that there's a finite supply of animal by-products, because they're by-products of what we eat. So it is a low-cost input for biodiesel at the moment, but there is a limited supply. We are going to need the oilseed crops and the soybean and the canola oils to make this industry big. There will be plants that will use both products very successfully, and there's technology in Canada that works very well for that. In fact, one of the plants is being built in Hamilton.

What we need to remember, though, is that eventually we will run out of animal by-products and animal fats, and it is going to be very important to have primary producers, like the canola and soybean producers, involved as well.

[Larry Miller, Conservative, Bruce—Grey—Owen Sound, ON]

You're basically saying, Mr. Wardrop, that there's not a lot of benefit in building a combination plant to do the rendering and to transport it. It's easier and cheaper--

[Ron Wardrop]

Well, the rendering plants already exist. The by-products in Canada are already being processed. It's not as if there's a bunch of them that aren't going to be processed. So we're already turning them into the fats and oils. All we need to do is put the biodiesel plants close by to value-add to those products and have cost avoidance for cattle and livestock producers. It's not as if there's a bunch that aren't being processed now. It's just a matter of using them as products for biodiesel.

[Lionel LaBelle]

I'd like to comment on some of those questions.

I mentioned the cattle feedlot model as a really unique opportunity. This particular model--we're speaking of Poundmaker as an example--consumes two million bushels of grain a year, and there are hundreds of thousands of hectares of land for forage applications, and so on. Then at the end of the day, we have a manure application we can put back on the land that will reduce our fertilizer costs. So it's really a unique opportunity in those particular models.

In terms of benefits, in our model we've talked about 10% in this country. With Saskatchewan at 50% of the land mass, if we produce three billion litres, it would equate to 10,000 jobs in our rural economy. There's no government talking about creating 10,000 jobs in the rural economy, except us, with the renewable fuel opportunity.

Last is the build-up. I think, clearly, 20% is absolutely doable, and we can do it by the year 2020, and I think it should be our goal.

[Bliss Baker]

If I could address the second question as well, which is about benefits and reducing subsidies, etc., anecdotally, let me explain what happens in Quebec with the farmers who supply our plant.

Today, Quebec is an exporter of corn. Many farmers send their corn out of the province. It costs you between 20¢ and 40¢ a bushel to do that, depending on where you are and where the market is you're going to. So if you're selling your ethanol to our plant and you're nearby, you're saving that 20¢ to 40¢ a bushel, minus local transportation. But you're saving a quarter, at least.

Kory undersold it. He made reference to the 10¢. We know that in Chatham, corn goes up 10¢ a bushel in that local area because of the demand we draw on the marketplace. So you're talking about saving transportation costs in Quebec. You have an increased local price of at least 10¢ a bushel. Now you're up to 20¢, 30¢, to 45¢ a bushel that you're saving. Plus, we know that the U.S. Department of Agriculture is predicting that the local basis for corn on the Chicago Board of Trade is going to go up by about 20¢ to 25¢ a bushel, long term, permanently, because of ethanol demand. The 20-year average for corn on the Chicago Board of Trade is $2.40. They're predicting $2.65 as a floor for corn on the Chicago Board of Trade. You add the 20¢ plus the 10¢ plus the 25¢ in Chicago, and now you have real dollars in farmers' pockets as a result of ethanol demand.

[Jeff Passmore]

I have a quick answer to that question as well. Again, it's a little bit anecdotal.

In the Birch Hills area in Saskatchewan we have 32 rural municipalities. I mentioned that we have 600-odd farmers signed up, representing 32 rural municipalities. Earl Mickelson, who is kind of the lead farmer trying to get everybody all enthused about the project, says he can't walk down the main street of Birch Hills without people asking, “When is Iogen going to break ground? When's the shovel going to go in the ground? My son will be able to stay on the farm as a result of the increased income.”

It's a two-step process here. The first is, what's the average age of farmers in Saskatchewan? It's pushing 60. Fifty-nine is the average age of a Saskatchewan farmer. Where are all the young people going to come from when these guys all retire? So step one is, keep my son on the farm; keep the family farm going.

Step two is that once they've earned $10 an acre for selling their straw, a lot of them are going to start looking at growing dedicated grasses--switchgrasses and native prairie grass from back in the days when the buffalo roamed. The yields of those per acre are three, four, and five times what the straw yields are. Obviously they're going to have to do the basic arithmetic--lost income from grain versus supplanted income from dedicated grasses. They'll have an opportunity there to do those numbers and make even more money per acre.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Miller.

Mr. Merasty.

[Gary Merasty, Liberal, Desnethé—Missinippi—Churchill River, SK]

Thank you for the presentation. Most of the questions have been asked.

I'm trying to get to the nub of the issue with respect to the value chain. We've all talked about this and agreed that it is extremely worthwhile.

In one of the previous committee meetings a statement was made by one of our witnesses that within 12 to 18 months we could be shut out of this refinery game because of the increased activity in the States. I don't know if that's the truth or not. But one of the worries I have--coming from a Saskatchewan perspective and knowing the crisis we have with farmers--is what do we need to have happen now to begin movement?

We've had the announcement of the 5%. We know we need incentives for the farmers to participate in the refineries. We need incentives for the refineries to proceed. If what I heard in the last committee meeting is indeed true, that within 12 to 18 months there is a potential we'll be shut out of the refinery game, what needs to happen first, and how quickly do we need to make it happen before we potentially lose out?

[Kory Teneycke]

There is no time like the present. I actually think that the timelines agreed to on May 23 in Regina by federal ministers and provincial ministers responsible for our industry are a pretty good plan. They actually had a pretty good plan, a pretty aggressive plan and timeline for getting this done, basically by consulting with industry and governments over the course of the summer, with some sort of agreement on how to proceed in early fall. I think that's a pretty aggressive timeline. We certainly support it.

We think the main elements are there in terms of what the government's saying about wanting to have production here, which means being competitive as well a creating a market with a renewable fuel standard. All those elements are there.

Ron and many others alluded to the need to coordinate provincial policy as a part of this, so it's very important that the government is consulting with the provinces. That's always a slow process, but we are very supportive when you say you are going to do something this complicated over that short a period of time. We're even more enthusiastic because it is the same approach in policy that the Liberals were talking about in their platform and it's very similar to what was in the NDP platform. We have provincial governments of every political colour participating in this process and agreeing that this is the way to proceed. Provinces and the federal government agreeing, different political parties agreeing, farmers and agribusiness agreeing--this is a rare occasion in Canadian politics.

[Jeff Passmore]

I have a very short answer: tax policy, tax policy, tax policy. What instruments does the federal government have at its disposal? It has public education, so it can create some market demand by educating people about ethanol; it has its own procurement, through its own vehicle fleet and buildings and that sort of thing; and it has tax policy.

How did we create a small- and medium-cap oil and gas industry in Saskatchewan and Alberta? It was through flow-through shares to passive investors. Finance hated it then and they hate it now, so the problem isn't with the politicians in this room. The problem is with getting the system to actually deliver on the government's policy objectives, and the biggest single instrument the federal government has is tax policy.

How did we create a wind energy industry in this country? It was by flow-through shares for passive investors. Finance hated it then and they hate it now, but guess what? Suddenly wind farms are going up in Quebec and Alberta and everywhere else. The same thing is true of.... That's the only instrument you've got: tax policy.

[Lionel LaBelle]

I have just a quick comment on the 12- to 18-month shutout: absolutely not. That is just a bogus story. There is one piece in this puzzle we're not remembering, and that is the consumer. The consumer loves renewable fuel. This industry is on a growth curve that is exponential. The concept of being shut out is just not in the cards.

[The Chair, Conservative, Gerry Ritz]

Mr. Bellavance is next.