Agriculture Committee on May 16th, 2006

[The Chair, Conservative, Gerry Ritz]

Thank you, gentlemen, for your input here today.

We will suspend this portion of the meeting and call our next witnesses up.

Thank you.

[The Chair, Conservative, Gerry Ritz]

Ladies and gentlemen, let's get back to work.

We're short some time, and we have to apologize, gentlemen, for the length of time we've run over in the first portion of our meeting, but we will try to make it up here now.

We have with us today Tyler Bjornson, with the Canola Council of Canada, and Mr. Justin To, with the Canadian Federation of Agriculture. Thank you, gentlemen.

Who would prefer to go first with their presentations?

Mr. To.

[Justin To, Analyst, Farm Policy, Canadian Federation of Agriculture]

Thank you for inviting us to speak to you today.

I'd first like to express apologies from Bob Friesen and Marvin Shauf. They were unable to make it today, on short notice. I will be making the presentation in their stead.

We've circulated some documents--I hope they've gotten to you--that include the CFA policy brief on our position on biofuels and renewable fuels and on our desire to see a visionary strategy, a Canadian renewable fuels strategy, to build an industry within Canada.

I'm sure you're all aware of CFA's mission, which is for the continued development of a viable and vibrant agricultural industry in Canada. In biofuels and renewable fuels there is an incredible opportunity for Canada and for agriculture producers. Our objective today is to promote an integrated policy approach, to build a biofuels industry, to build strong primary producer capacity and involvement, and to build a vision of Canada as a world leader in renewable energy and environmental sustainability.

Biofuels are very much an opportunity, an incredible opportunity. Biofuels have great potential for creating a strong, new, innovative, value-added industry in Canada; for creating industries, jobs, and economic contributions in rural communities; for increasing regional tax bases; and for reducing Canada's greenhouse gases while improving air quality, reducing health care costs, and, most importantly for the CFA, contributing significantly to improving the grains and oilseeds producer incomes from the marketplace.

The key objective is improving farm incomes from the marketplace. As we all know, farm incomes are in a long-term decline. We're in a pretty bad situation right now. Net incomes are at critical levels. Global food and feed production continues to grow faster than demand. We need new non-food demands to suck up some of that production and create a new demand force, driving up prices and improving incomes from the marketplace.

Biofuels represent an opportunity to diversify beyond simple commodity production, to help create and meet that energy shortage that's around the world, to move into value-added opportunities for producers, and really to help build industries within rural Canada. We now have in Canada a handful of small programs, some provincial and some federal. We have some really good public research, some federal capital investment programs and some provincial ones, such as the ethanol expansion program, and some fuel tax incentives. But that's somewhat sporadic across provinces.

We would like to see a coordinated approach, much like that in the U.S. The U.S. created their Energy Policy Act of 2005. They have very many vast programs that support the entire value chain of production for biofuels, all the way from the bottom, from feedstocks, all way to the top, to retail. They have federal purchase requirements for their own domestic fleets. They have fuel tax incentives, and their excise taxes. They have a billion-dollar biofuel research program that's coordinated across the country. They even have property tax credits for establishing biofuel stations. They have regional bio-economy development grants. They even have grants and tax incentives for byproducts.

They have been very thorough in their production, and they've had a lot of success. There are many plants across the U.S. for biodiesel as well as bioethanol.

Within our presentation we have included a diagram of a U.S.-style value chain approach. Looking at it from the bottom to the top, you can see feedstocks, processing, distribution, retail, and consumer. The U.S. looked at that chain. They wanted to flow that product through as well as possible, so they created the renewable fuel standard on top of 5%; it depends on the state. That created the demand draw, to draw ethanol or biodiesel through the system.

If we put that in here in Canada, that would be only one part of a plan. It's very possible we could implement that here in Canada, and we would just import biodiesel and ethanol, but that's certainly not what we want. We want to build an industry in Canada. We want to help primary producers. We need a complete plan.

These are just some of the components the U.S. has built into theirs. They've had direct marketing. They have the fuel tax incentive. They have quality standards. They help build partnerships with distributors and processors, producers, and retail. They have capital investments, loan guarantees, and specifically for agricultural co-ops and producer groups, small business is building those capacities in rural communities.

They have a lot of research, and not only do they have research, but they build demonstration plants to prove it's a viable business to attract that capital investment and venture capital.

They have direct supports for domestic feedstocks, and of course they have support for cooperative development and business skill development, to always bring producers higher up in the value chain, to get them into that ownership, so they're not just providers of raw commodities.

There are many facets to U.S. success, and that's part of them--this whole value chain approach, technology treadmill, always trying to improve, innovate and improve that technology, and of course they have support through government regulation and supply chain linkages.

In Canada we have a long way to go. This is what the CFA would like to see. We don't have specific programs. We would like to work with all parties, all governments, with the minister, on building this plan in partnership with many of the other farm organizations, processing and retail and so on, to build this strategy from top to bottom, bottom to top.

This is an incredible opportunity. The window is closing in about 12 to 18 months. The U.S. is making its capital decisions now, and if we don't do that soon, we'll be out of the game. We will have many plants all along the Canadian-U.S. border and we will be providers of raw commodities for them to process, and we will repurchase their value-added product. We don't want to have that happen. We would like to keep that value within Canada, have producers as ownership components of that, so they can see some of those gains.

Thank you.

[The Chair, Conservative, Gerry Ritz]

Mr. Bjornson.

[Tyler Bjornson, Vice-President, Canola Council of Canada]

Thank you very much, Mr. Chairman, and thank you to the committee for giving us the opportunity to present to you today for an introductory discussion on a biofuel strategy. As I'm sure all of you know, this is an issue that is clearly close to the hearts and minds of many in the agricultural community. I'd say it's pretty difficult these days to go to an agricultural discussion and not hear words such as “renewable fuels”, “biofuels”, “biodiesel”, “ethanol”, one of those terms, in the discussion about how we can build on agriculture in the future.

What I'd like to do is take a step back and talk about the global context for biodiesel and what sort of impact that's going to have on canola. The reason why I'm talking about canola is it will be the major feedstock of choice for biodiesel in Canada. There are other feedstocks that can be used for this, such as rendered product from tallow and lard, and other sources, such as soybean oil or yellow grease from restaurants, those sorts of things, but the supply of those is limited in comparison to the supply of canola. So I think there will be a variety of sources that will be used for this feedstock at the end of the day.

As most of you know, the canola industry has just come off a very large production year. Unfortunately, that coincides with very low prices for canola. There are a variety of factors that have an impact on the net returns for the industry as a whole and notably the growers. What our organization and our industry try to do is have an effect on those factors that we have some control over. We often talk to elected officials about the importance of international trade to increase demand for canola products, but biodiesel, similarly, offers an opportunity to boost demand for our product.

Globally, over the last two years, we've seen some major capital commitments across the globe. The world's governments are responding to a variety of public policy objectives, whether they be environmental protection, energy security, or rural development, and this is going to have an impact on the overall vegetable oil complex, whether it's soybeans as a result of what the U.S. and South America do, or whether it's palm oil as a result of what's going on in Asia, and, quite frankly, what's happening to canola because of the EU in particular.

So this is going to have a positive impact on prices for oilseeds. We're already starting to see some of that in prices today, and you can see some of the excitement in places like the Chicago Board of Trade, where they're looking at indexes for biofuels, just to give you an example of the kind of excitement that's around there on prices.

So as the production comes on stream over the next 18 to 24 months, we'll see a rise in prices, and, quite frankly, the demand from biodiesel for oilseeds is something that is going to occur, or is occurring, overnight and is the likes of something we would never be able to see in the food market we have right now.

Now I'd like to turn to the global demand for canola in biodiesel. Most of the time, oilseed markets are driven by meal, so you're seeing a situation where soybean is the preferred oilseed to crush because it's 78% meal and the remainder comes in as oil. But in a biodiesel market, it turns that market into an oil-driven market, and it just so happens that canola, our little black seed, is 42% oil. So it's very competitively situated for an oil-driven market.

The other consideration is that there will be strong demand for canola as a feedstock to biodiesel in colder climates because it is the lowest in saturated fat of all available commercial oils. The same thing that doesn't clog your heart doesn't clog your engine. So there is going to be strong demand for canola worldwide.

Now I'd like to turn briefly to the context for canola in Canada in biodiesel. Obviously Canada fits the bill as a cold climate, so we're going to have strong demand for canola as a feedstock in biodiesel in Canada. What the renewable fuel standard of 5% means for biodiesel--if we translated that in the current diesel fuel pool, it would be about 1.3 billion litres of biodiesel in Canada. We think that given the supply of all the available feedstocks, canola would be at a minimum 60% to 70% of the feedstock used for this particular fuel.

Without a domestic production, obviously we're going to have to import that fuel. So the renewable fuel standard alone, while it's a good start, only addresses the demand side, and that demand can be met by imported product.

The final element, of which I would just like to make brief mention, is that canola will also gain some food market share as a result of biodiesel. You're seeing already in the United States a lot of soybean oil going into biodiesel. We think Canadian canola can have a share in backfilling some of that high-value food market as well.

So there are a number of angles as to why biodiesel is good for Canadian canola.

What do we need to actually build this out in Canada? Like Mr. To, I'd like to take two seconds to talk about the situation in the U.S.

They have substantial production incentives in place right now. They've invested in the industry, and canola, even Canadian canola, is feeling the impact right now. We've heard three major announcements made on the border just to the south of our Canadian provinces: one in North Dakota, one in Minnesota, and one in Washington state. They are all canola-based feedstock biodiesel plants, and the majority of their feedstock is coming from Canadian product.

Obviously, if the plant is located in the United States, Canadians aren't taking advantage of that value-added production, and in particular, Canadian growers aren't taking advantage of that value-added production.

We believe that in order to build out biodiesel production in Canada we require four policy responses. The first is the renewable fuel standard. We have to have the demand draw, as we already indicated.

For biodiesel, we'd like to see a floor in order to ensure that there is demand for biodiesel specifically. We're thinking that 2% by 2010 for biodiesel would be required, out of the overall 5% for renewable fuels. That leaves the flexibility for the petroleum industry and the blenders, but at the same time ensures that biodiesel is built out in Canada.

The other part is to address the supply, the actual domestic production. What we need roughly—and this is just in general terms—is parity with the U.S. government investment in biodiesel production. If we don't match or come close to what's on offer south of the border, we will continue to see, 20 to 50 miles from the border, large-scale capital investments made in value-added production that isn't situated in Canada. That's a massive missed opportunity for our industry to build on in the future.

The third criterion is quality standards or criteria for biodiesel. We have to have end-user acceptance; it's critical. We have to ensure that our product is reliable and that it can be easily brought into the Canadian fuel stream. It has to be performance-based and science-based to inspire confidence among end-users.

And finally, and the one I'm sure you're all interested in, we have to encourage grower participation in the value-added processing. It's an incredible opportunity for producers to get up the value chain, and we have to make sure we have the right measures in place to successfully build out the industry.

That's where I'm going to leave it for the moment. I look forward to the questions. Thank you very much for listening.

[The Chair, Conservative, Gerry Ritz]

Thank you, gentlemen.

For the first round of questioning, Mr. Boshcoff will have five minutes.

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

Thank you very much.

This is very exciting stuff, and your enthusiasm is contagious. In my riding of Thunder Bay—Rainy River, and I'm sure everyone has the same situation, there are lots of small innovators and entrepreneurs and people who want to support the production side of it through implementation.

It seems from the initial rounds of comments that although there have been programs set up, a lot of the opportunity, incentives, and programs have been snapped up by bigger oil and larger companies.

Do you have any feeling on this? Is that your observation?

[Tyler Bjornson]

What our industry is trying to do is encourage partnerships along the value chain, because at the end of the day those industries actually form a critical function for Canadian agriculture. At the same time, we want to work at ways to improve farmer income at farm gate and elsewhere, if at all possible.

So we have to consider, when we're developing a national strategy, where the expertise is going to come from, where the business plan is going to come from, where the distribution is, and the marketing, and the ability to develop strategic plans with downstream partners such as big oil. Those are all things we have to consider before we lay out a plan for biofuels.

We think, as the Canadian canola industry, that the key is to build strong partnerships.

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

I have a couple of jurisdictional questions. Energy in many sectors is of course a provincial responsibility. A national program such as ours could either be supportive of or, depending on the government, competitive with--or maybe at cross-purposes with--some provincial jurisdictions. I'll ask that question first; you'll remember it.

Then you mentioned property tax credits in the United States. They are essentially a municipal domain. Can I have your comments on those orders of government?

[Tyler Bjornson]

On the question of jurisdiction, we agree that an interesting patchwork of potential measures could be put in place based on current jurisdiction. I think there are ways the federal government and provincial governments can work together to build a national strategy.

The key here is to build a national approach to avoid the complexity and confusion that could reign if we have individual responses across the board.

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

What about the municipal property taxes that American municipalities have the opportunity to grant?

[Justin To]

That was an example. I'm not too sure how Canada might want to address it. It was a particular response, giving tax exemptions to built biofuel fuelling stations and that kind of thing. Those are all incentives to facilitate the flow of productivity. There was a roadblock there. There weren't enough fuelling stations, so they gave an incentive to build them. If that happens here, certainly a partnership needs to be developed all through the chain, whether it is municipal, provincial, and federal governments or large companies, small companies, and that kind of thing.

To address your first comment on the small companies, that is an issue. The U.S. Energy Policy Act of 2005 has a specific line in one of the sections stating that one of the goals is to ensure small feedstock producers and small rural businesses are full participants in the development of the biofuel industry. It's explicit within their policy, language, and legislation. They have specific programs for extra fuel tax incentives, as well as federal grants and loan guarantees for small organizations, small farm groups, and small rural communities to invest and build with.

They've created with this energy act all the different programs and put together an investment in environment that is really solid. Venture capitalists or rural communities that want to invest feel confidence that there are going to be the proper incentives and the ability for them to be successful.

Right now it's a patchwork; no one really knows what's going on. They feel afraid to invest those dollars. Banks and venture capitalists aren't quite sure where and how and if it will be successful. We need to create that investment atmosphere.

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

In terms of the distribution side, it makes it rather difficult for someone who sets up a station and then has one of the big seven, or whatever, major oil companies set up next door.

[Justin To]

That would be a requirement, just as Mr. Bjornson said--building strategic partnerships and alliances with the oil distributors and the blenders and these kinds of things.

[The Chair, Conservative, Gerry Ritz]

You were right on time. Good job.

Mr. Bellavance.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Thank you for your testimony. At a time when things are rather dark for agriculture, it's nice to hear some good news.

Mr. Bjornson, I don't want to get into a debate, but with regard to provincial jurisdictions, the national standards put in place by the Canadian government are often behind conflicts. So we need to be extremely careful here.

However, even if Canada is a very minor player when it comes to the production of biofuels, a commitment is growing. One of the objectives of Quebec's energy policy, for example, is for gas to contain 5 p. 100 ethanol by 2012. Ontario is even more ambitious, it wants to achieve this level by 2007. My own municipality of Victoriaville has just created the Société de développement durable d'Arthabska, and the Municipality of Victoriaville intends to promote the use of renewable energy in its facilities and equipment. I am talking naturally about proven technologies such as geothermics but also biofuels. The idea is gaining popularity, but Canada is a very minor player compared to Brazil and the United States when it comes to ethanol, and compared to Europe when it comes to biofuels.

My question concerns food production and the substantial subsidies available in the United States, particularly for corn, and in Europe.

Can we compete with these countries, if we want to further develop the biofuel industry, when we are at a disadvantage with regard to the subsidies granted for food production? Are we prepared to deal with this challenge?

[Justin To]

Yes, we have considered that, and that's part of the reason why we've put targeted support for primary producers into our diagram.

Let's face it, we have to understand what we're competing with. Farmers and processors can be very competitive here in Canada, but we also need competitive policy. If we have biofuels production here in Canada while the U.S. continues to put very directed trade-distorting support toward corn, grains, and that kind of stuff, our domestic producers creating that raw product are going to be at a competitive disadvantage. We might as well just import it from the U.S., and that won't be any good either.

Canada has the ability to target amber support. Of course, we want to avoid countervail risk. But the great thing about the biofuel industry is that we have a lot of capacity to use domestic production to create domestic biofuels for domestic consumption, without having to distort trade.

Some supports could be...and I'm not advocating for any particular type, but if we are serious about developing a domestic industry and supporting domestic producers for it, we have the ability to target some of that support through a new generation co-op, or other strategic partnership structure, to directly benefit primary producers in their ownership of processing, as well as in production, which could make us competitive. It's not just about how much money we spend; it's about how smart we spend it. There's certainly an ability for us to do that. It might require us to not always be the boy scout in terms of rules, but to try to see how we can make the rules work for us.

[Tyler Bjornson]

If I could just add to that, I would encourage the committee to have a full and in-depth discussion about how trade barriers are hurting Canadian agriculture internationally. Regardless of what happens on biodiesel, we will absolutely have to deal with subsidies and trade barriers internationally.

On government investment in biofuels, the key is to incent the capital to locate in Canada for the value-added production. If we don't have a plan in place to do that, capital is going to move elsewhere, and we'll continue to have to send product abroad for value-added processing. That economic activity, those jobs, and that investment won't happen in Canada. So that's what we're focusing on today.

Thank you.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Can we become competitive? We have talked at length about canola because this is part of your field, Mr. Bjornson, however, in Quebec, we have focused on corn, canola, forestry product residues and agricultural product residues. Can we meet the domestic market demand? As for exports, which you mention in your document, does Canada have the capacity to produce enough biofuel?

[Justin To]

There have been studies by NRCan to show that we do have the ability to export, maybe not on the biodiesel side, but certainly if we move into cellulosic ethanol. We have a lot of wood residues, wheat and corn stover, and several other residue products that could be very successful.

We have some of the world's leading technology in cellulose ethanol production. If it can be harnessed, maybe we can work toward achieving licensing agreements to disseminate that and commercialize that technology. We're very good at coming up with a technology, but we're quite poor at commercializing it. The U.S. has created the strategy and environment for investment, and that's why some of our investments in research are going down south to build their first commercial plant.

I believe we have the capacity to develop an export market as well as a domestic one, but we have to get on the ball now.

[The Chair, Conservative, Gerry Ritz]

Thank you.

Mr. Miller is next for five minutes, please.

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

Thank you, and thanks, gentlemen, for coming. This is something that I think has a great future in Canada, particularly in agriculture.

You mentioned investment by government for infrastructure, basically to put the plants here. Exactly what would that take in dollars? Do you have an opinion on the share or percentage that government should be putting in there? We have to encourage the private sector as well.

I would just like to hear what you think.

[Tyler Bjornson]

Thank you very much for the question.

It's difficult at this time to say exactly how much it could potentially cost the Canadian government to invest in this industry. We have some benchmarks out there, and the major one is the $1 per gallon blender's tax credit that is on offer by the U.S. federal government for biodiesel. That translates into roughly 30¢ a litre here in Canada. If you consider the 5% mandate on the biodiesel front of 1.3 billion litres, I think you can come up with some figures on about how much it's going to cost.

Obviously there's going to be a build-out, so you're not going to immediately have 1.3 billion litres being produced in Canada. The target will be to make sure we're at that by 2015. On how much it's going to cost in the meantime, if Canada waits too long we might not have to worry about it, because nobody will build here.

[Justin To]

Just to add one point, I'm not certain we are advocating that the federal government build those plants with their dollars as well, but certainly provide the incentives for the private sector and farmers to invest in those plants. We can have loan guarantees.

There was a slaughter capacity program during the BSE crisis for equity matching to help create that incentive for primary producers to invest in those plants, provide support for cooperatives, and so on and so forth. You can have a co-op investment plan like they do in Quebec to really help with that as well--support for “new gen” co-ops--as well as other private and rural communities that would like to invest. They should provide the incentives rather than the federal government buying and creating the plant on its own.

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

I know we're behind other countries--the U.S., and Brazil, the one that announced recently that they're basically self-sufficient in energy. Now, of course, that's fossil fuels as well, but I understand that a large percentage of that is biofuels.

On, say, the same ratio as Brazil, how many years are we behind Brazil, or behind the U.S., in the development of this? Do you have any kind of estimate?