Thank you very much, Mr. Chairman.
I am pleased to be here, coming from stormy Alberta to snowy Ottawa.
It was just over 18 months ago that the Canadian government signalled its intention to have 5% of Canada's transport fuel come from renewable sources by 2010. At that time just over 200 million litres of ethanol was being produced in Canada. At the end of December last year, production capacity in Canada had risen to over 760 million litres per year from ten operating ethanol plants. Six additional plants are under construction, and when completed they would more than double the existing production to about 1.6 billion litres per year. This would represent about half the production needed to satisfy the proposed 5% target of the renewable fuel strategy.
The principal reasons for promoting a biofuels industry through government policies are, first, to enhance and stabilize farm incomes through introduction of new markets for farm commodities, second, to promote rural development and economic diversification, third, to lower greenhouse gases, and fourth, to assist with energy security.
In the short time I have, I want to discuss how well a biofuels industry achieves the first two of these objectives, promotion of rural development and improvement of farmer incomes.
First, what about rural development? Many have claimed that the new jobs biofuel plants bring to rural areas boost local employment and economic activity. This is true. However, there has been some tendency, I think, among proponents of the biofuel industry to overstate the economic activity linked to biofuels. Research shows that only a small number of permanent jobs are created in the biofuel industry. In Iowa, new 190-million-litre-per-year ethanol plants employ, at most, 35 permanent workers. Husky Energy's new ethanol plant at Lloydminster, Saskatchewan, will employ just 26 full-time workers. Even this modest outcome is somewhat tempered, since this is the gross gain in employment, not the net gain, and the difference is important.
A new ethanol plant increases the local wages of labour. This places pressure on other nearby businesses to raise the wages they offer. In response to higher wages, other businesses have an incentive to reduce the number of hours or people they employ.
In response to rising feed grain prices, the profitability and size of the livestock sector may be reduced, thus reducing the livestock transportation and processing sectors. The gross benefits, then, in rural development are reduced by the losses in employment and income in other sectors. For this reason, net gains in employment generally are much smaller than the gross gains, and in fact could very well be negative in the prairie provinces.
Another driving reason behind attempts to establish a successful biofuels industry in Canada is to improve farmer incomes. In response to the increased use of cereals and oilseeds for production of biofuels, agricultural commodity prices have increased dramatically over the last year and a half. Corn, soybean, and canola prices have about doubled, while barley and wheat prices have increased by nearly 80%. An inevitable and undesirable result of the biofuels frenzy is the higher feed costs for livestock producers. The prices of feed grains have risen dramatically in the last year and a half, and cattle farmers and pig farmers have suffered massive losses. These are exciting times for grain and oilseed producers, but they have dealt a financial blow to the beef and pork sectors, which rely heavily on the availability of feed grains.
Given the massive expansion that currently is under way in ethanol production in both the United States and Canada, it appears that feed grain prices could increase even more. Huge losses in the livestock industry have been experienced in recent months and may continue if ethanol production continues to expand or if low yields are experienced in any of the major crop producing areas in the world this year. This will be continued good news for crop farmers, but not for the livestock industry.
Will a successful biofuel industry fix the perpetually low farm income problem in Canada? Unfortunately, higher grain and oilseed prices do not necessarily lead to higher net farm incomes. What is important is net income, not gross income. Net income is the gross income minus the total costs of production. Because of increased prices of grains and oilseeds, prices are also rising for all the other inputs necessary for corn production, such as fertilizer, equipment, and storage.
In anticipation of higher returns from corn, land prices and rents are rising rapidly in the United States. Due to the competitive market structure of the grains and oilseeds sector, higher commodity prices always result in higher prices for land, with little or no improvement in the net returns to agricultural labour. This means the winners of the biofuel boom are likely to be the present owners of farmland. Farm tenants and workers will receive little benefit, and new farmers will be faced with higher costs of entry due to the higher costs of the land resource.
Although there will be more money coming into agriculture, not everyone will gain, and certainly the persistence of low net farm incomes in agriculture will not be relieved. We have a lot of evidence already about the land prices increasing. I'll skip that part.
It should be pointed out to members of this committee that many important economic issues relating to establishment of a biofuels industry in Canada have not been thoroughly researched. The costs and benefits to Canadian society of establishing a biofuels industry through government initiatives still are largely unknown. There are very few economic studies done.
It is clear there will be negative impacts on Canada's livestock industries, particularly beef and pork producers. I am becoming worried about possible changes in the pattern and locations of production due to the much higher feed costs. We have experienced major changes in the location of production in the past as a result of relatively small but permanent changes in grain-meat price ratios.
For example, when the transportation of western grains was heavily subsidized, much of the hog industry and some of the beef feedlot industry moved to eastern Canada. With the introduction of Crow offset policies in the late 1980s, and finally the end of the WGTA subsidies in 1995, much of the livestock industry moved back west.
There are already some major changes happening in the location of dairy production in the midwestern United States. Now, I ask myself, is our pig industry, particularly in Manitoba, vulnerable? And what about our large beef industry in Alberta? Could much of it move south of the border, or might some of Colorado's and Nebraska's beef industry move to Canada?
The truth is that we don't really have a clue what might happen with regard to changes in location of production of livestock. Furthermore, we do not have anyone in Canada conducting research on this issue. We've not even built the types of economic models that are required to analyze this issue. Contrast this with the situation in the United States, where about a dozen economists at one university alone, Iowa State University, have been modelling and studying this problem for more than two years already. I have attached my research to the Iowa State research to try to get some handle on what's going to happen in Canada.
In conclusion, it is clear that biofuels have become a growth industry with rapid expansion of ethanol in the United States, Brazil, Canada, and other countries, and a quickening pace of biodiesel production in western Europe. Government interventions in many forms, including subsidies for building and operating biofuel facilities, mandated proportions of biofuel contents in liquid fuels, and new regulations that change taxing regimes, have greatly stimulated the worldwide production of biofuels during the last several years. Many of the consequences of the biofuel frenzy will be undesirable for Canadian agriculture, though certainly farmland owners will gain.
Finally, it should be kept in mind that the markets for commodities like corn, wheat, gasoline, and ethanol are global. The exportable supply of grains in the United States has a large influence on world prices. The ethanol frenzy in the United States is having greater economic impacts on the Canadian agricultural industry than any biofuel policies implemented by Canadian governments. Most of the biofuel plants likely will stay in production even if they become unprofitable, if oil prices drop. Once the biofuel plants are built, they need to cover only their variable costs to stay in production. That means that all the consequences of the removal of such a large quantity of grains and oilseeds from being available for food and feed are likely to result, even if oil prices recede.
Thank you.