Agriculture Committee on Feb. 14th, 2008

[JoAnne Buth, President, Canola Council of Canada]

Good morning, Mr. Chairman and members of the committee.

As already mentioned, I am JoAnne Buth, and I'm president of the Canola Council of Canada. The Canola Council is the trade association of the canola value chain, including growers, seed developers, processors, and exporters. Our organization strongly supports a vibrant canola-based biodiesel industry that involves a made-in-Canada solution to benefit canola growers and all Canadians.

This legislation that will make provisions for the regulation of the renewable fuel content in diesel, coupled with the new $1.5 billion federal ecoEnergy for biofuels program, is key for the development of the biodiesel industry in Canada.

I know the time here is short, so I'd like to start with three conclusions: canola biodiesel is good for the environment, good for farmers, and good for the economy; canola is grown in abundance in a sustainable manner across the prairies, with additional acres in Ontario; and canola biodiesel has superior cold-weather properties that are clearly needed for the Canadian climate.

I'd like to spend a few minutes now expanding on some of those key points.

First of all, on the environment, there's a lot of talk about climate change and the impact that the use of fossil fuels has on the environment, but I have not heard of many practical solutions, especially for a country that relies so heavily on fossil fuels for both transportation and heating. Bill C-33 offers a practical solution and a step in the right direction.

The use of biodiesel can reduce greenhouse gas emissions and alleviate health and pollution concerns, which have been raised because we're on this treadmill of ever-increasing production and use of non-renewable petroleum resources. According to a Canadian study done at the University of British Columbia, the reduction of greenhouse gas emissions from canola biodiesel is 85%, relative to fossil diesel. Reduced tillage practices that are commonly used in canola production also means less carbon released. In addition, using biodiesel can reduce carbon monoxide, unburned hydrocarbons, and smog-producing particulates.

I have a few comments on the impact to farmers and the economy. We currently export 75% of the canola produced in Canada. This renewable fuel standard will provide fundamental long-term support for the rural Canadian agricultural sectors by creating inelastic demand that's needed in our trade-dependent commodity. We are so very vulnerable to borders shutting because of tariffs and non-tariff trade barriers. Made-at-home canola biodiesel will stabilize demand and help increase the value-added industry that is already expanding in Canada in anticipation of increased use in North America.

The positive impact of a canola-based biodiesel industry will be seen quickly. Construction of biodiesel-producing plants can be completed in 18 to 24 months. Economic analysis shows that every dollar invested in biodiesel infrastructure returns two dollars of economic activity in construction and supporting industries. Predictable supplies of biodiesel production co-products will also provide additional economic activity. The meal from canola crushing is a high-protein livestock feed that can replace more expensive imported protein meal in dairy and hog rations. The bottom line is that every $100 million in additional demand for canola generates 730 jobs in value-added industries, $83 million in GDP, and $5.2 million in tax revenues.

Specifically on canola biodiesel supply and quality, we have no doubt that the Canadian canola growers can produce the seed needed for a 2% inclusion rate and for a 5% inclusion rate. The amount of canola needed for 2% would be 1.3 million tonnes if we took the entire biodiesel industry. In 2007 we produced just under nine million tonnes, meaning that biodiesel production would have used 14% of the crop.

The 2015 canola industry production target is 15 million tonnes, and that's for total production. We have already proven that we can grow more than enough canola to fill the mandate. The carry-over of canola seed was over 1.3 million tonnes for the last three years.

Canola biodiesel means quality. As you know, canola oil is the best heart-healthy oil for consumers because of its low saturated fat content. Low in saturated fat means clean arteries for people and clean fuel filters for diesel engines, resulting in superior cold weather performance.

Canola biodiesel is already proven and is used extensively in Europe. In Canada it's currently being demonstrated under cold weather conditions in Alberta, and at minus 51 degrees Celsius, trust me, it's a true test of Canadian cold weather. We are a clean way to power diesel automobiles, trucks, tractors, heavy equipment, and marine vessels. And diesel engines do not require any modification to use biodiesel.

To summarize, Bill C-33 is the first step towards creating a Canadian canola biodiesel industry. We urge you to act quickly to assure a long-term, viable Canadian renewable diesel industry. The time to move is now.

Canadian farmers stand ready to grow and deliver the high-quality, sustainable, and renewable feedstocks our industrial entrepreneurs will use to produce world-class renewable fuels here in Canada. We have a made-in-Canada crop that offers a made-in-Canada solution.

Thank you for creating the opportunity for Canadian farmers, processors, and the economy.

[The Chair, Conservative, James Bezan]

Thank you.

Dr. Klein, the floor is yours.

[Dr. Kurt Klein, Professor, Department of Economics, University of Lethbridge]

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.

[The Chair, Conservative, James Bezan]

Thank you.

Joining us from the Canadian Cattlemen's Association is Travis Toews.

Welcome, Travis. I ask that you keep your opening comments to ten minutes or less.

[Travis Toews, Director and Vice-Chair, Domestic Agricultural Policy, Canadian Cattlemen's Association]

Thank you, Mr. Chairman, for holding this hearing on Bill C-33 and for inviting us to advise the committee on the policy views of the Canadian Cattlemen's Association, an organization that represents over 90,000 cattle producers.

I am an elected director of the Canadian Cattlemen's Association. I serve as vice-chair of the foreign trade committee and I also chair the CCA biofuels task force. My family and I ranch west of Grand Prairie, Alberta, and operate a cow-calf backgrounding and yearling operation.

The biofuels industry in North America has recently experienced significant growth. Proponents of a biofuels industry speak of the increased prices farmers are receiving for their grains, a cleaner environment, revitalized rural areas, and a reduced reliance on fossil fuels. Opponents generally talk about higher prices for food and the uncertainties around measuring the environmental footprint of biofuels relative to petroleum-based fuels.

Today I want to advise you on the potential effect on one of Canada's largest current customers for Canadian grain: the cattle feeding sector.

For every calf fed to finish, approximately 1.25 tonnes is required. As a result, profitability in the Canadian cattle industry is significantly affected by the availability and price of feed grains. The rapid growth in the biofuels industry in North America in the last few years has been encouraged by policies of production subsidization and mandated demand. This phenomenon, coupled with increased demand from developing countries, has left global grain inventories very low, and grain prices at record levels.

While we expect that both Canadian and global grain production will rise as a response to higher prices, we are concerned that the extremely robust growth and demand encouraged by North American biofuels policies may outstrip supply in the short and intermediate terms. In the event a crop shortage is experienced in any of the major growing areas of North America in the upcoming year or two, the cattle industry and its infrastructure could be devastated. During a year of shortage, the cattle industry would be hard-pressed to compete for feedstuffs with a competitor that has the advantage of a demand mandate.

I'm not here today on behalf of CCA to suggest that we're opposed to biofuels or profitable returns for Canada's grain producers. I'm here to be a voice of caution regarding the potential unintended consequences of this bill and to speak in favour of a transition to a market-based approach to the biofuels business in Canada.

Last year I chaired the CCA biofuels task force. This committee consisted of cattle producers from across Canada. We met with researchers, plant breeders, and ethanol producers. In the end, we came out with four recommendations, which the CCA board subsequently adopted as CCA policy. I will share these with you.

First is that the CCA endorse a clearly defined and expeditious transition to a market-based approach to the production of renewable energy that re-establishes a competitive balance between sectors.

Second is that the CCA support the elimination of tariffs on imported biofuels.

Third is that the CCA emphasize that any further encouragement of the biofuels sector should focus on the production of biofuels from sources that do not impact the availability of livestock feed.

Fourth is that the CCA formally request that the government incorporate safeguard measures in the event of crop shortages. These may include the elimination of any remaining tariffs, a reduction in mandates, and/or a reduction in incentives.

While we recognize the government's desire to help kick-start the biofuels industry in Canada, we suggest that ultimately, the marketplace, free of government-mandated demand, is the best method for determining the usage equilibrium for feed grains. A biofuels industry built on real market fundamentals will grow at a manageable pace and will be far more sustainable in the long run. The resulting growth will also be at a pace at which demand for feedstuffs is less likely to dangerously outstrip supply.

In closing, we would hope that the members of this committee would take steps to ensure that the biofuels and livestock industries can compete and coexist on a level playing field and thereby ensure that we will not simply replace one value-added industry with another.

Thank you for the opportunity to speak to this important issue.

[The Chair, Conservative, James Bezan]

Thank you, Mr. Toews.

We're going to kick it off with seven-minute rounds. Leading us off is Mr. St. Amand.

[Lloyd St. Amand, Liberal, Brant, ON]

Thank you, Mr. Chair.

Thank you, Ms. Buth and gentlemen, for being here.

I'll be splitting my time, Mr. Chair, with my distinguished colleague for Huron—Bruce.

I have a couple of points for you, Ms. Buth.

In wind energy and solar energy, we are behind the Europeans for sure. You make the same point with respect to the use of canola biodiesel, which I understand is being used extensively in Europe. Can you quantify how far behind Europe we are and how the gap will be narrowed if Bill C-33 is passed?

[JoAnne Buth]

Europe's biodiesel industry was launched four or five years ago. They've had numerous discussions about the impact of biofuels. In Europe it's primarily biodiesel, because most of their cars are diesel. It's a different dynamic from North America.

They have recently been reviewing their mandates, and they are looking at a mandate of 10%. I can't remember the date, but they have had a mandate in place for a while. They also have an incentive program that is slowly declining as well. There are many places in Europe where 100% canola biodiesel is being used.

[Lloyd St. Amand, Liberal, Brant, ON]

Thank you.

I'd like to ask any of you about Senator Barack Obama's musings on NAFTA. I believe the suggestion is that if he were to be elected president he would adopt an even more protectionist stance than is currently the case. I understand that the U.S. biofuel industry is currently highly protectionist. I was wondering, with respect to NAFTA and NAFTA's preferential access, what is the treatment of biofuel under NAFTA? Are you familiar with it?

[JoAnne Buth]

The issue for us is the incentive program for biodiesel in the U.S., under which they have a dollar per gallon incentive. That works out to about 30¢ a litre for Canada. If there were a mandate adopted in Canada without an incentive program, we would find most biodiesel coming in from the U.S.

Will there be exports of canola biodiesel into the U.S.? The plants would likely be built in the U.S., as they are today. Right now, canola is going to one of the large biodiesel plants on the U.S. west coast.

I don't think there are many biodiesel issues having to do with border crossing. The issue is the difference in incentive programs.

[Lloyd St. Amand, Liberal, Brant, ON]

I'll defer to you.

[Paul Steckle, Liberal, Huron—Bruce, ON]

I want to move to a series of questions, but I don't think I'm going to get them all in.

I see competing forces at work between the beef industry and the high-priced grain industry. I know where both of you are coming from. We can't continue to have low prices on the grain side, and we cannot afford to sell beef at the price we're selling it at today. We can't argue for open borders and then turn around and ask for tariffs. I know you would like to see some tariffs removed on some of the incoming product, but this is going to cause some other industry problems.

The canola industry is looking to the biodiesel industry to be a large user of their product. I'm wondering if the science that developed canola in the first place, the technology and seed stock, is being taken on by Americans. Are they going to start growing a lot of canola and undermine our industry, or bring the prices in line with what you see as fair and competitive? Have no other countries taken on this challenge?

I would also like someone to comment on the SRNs, which are now being required to be removed. This represents a cost to your industry, Mr. Toews. Is there not a payback for those SRNs, which can and should be used? I believe they will be used in the rendering process for the biodiesel industry. But is there not an offsetting mechanism that would reduce your costs and allow the biodiesel industry to pick up on that? We're still in the early goings, but surely there's been some thought given to this.

Please address whether other countries are competing for this canola market.

[JoAnne Buth]

As I mentioned, we export 75% of our canola. We actually work quite closely with the U.S. canola industry. When you look at demand for canola oil, you see it's increasing. We have quite an extensive promotion program trying to increase use of canola oil in the U.S. in the foods area, and that is expanding quite a bit.

We don't see the U.S. ever being a threat to canola production, partly because canola's grown in temperate areas, so North Dakota and Minnesota are the primary production areas--North Dakota primarily. There are also some opportunities for winter canola in the southern U.S., but I don't see that ever overtaking something like soybeans.

It will be interesting if we resolve the WTO issue and start to see declining domestic support in the U.S. Right now canola is discriminated against, so the acres in the U.S. are actually going to be down this year. That's another factor that comes into play in terms of domestic support for different crops in the U.S. So we don't see the U.S. as being an issue.

Canola's extensively produced in Europe. Obviously, it's being used there. In China they produce rapeseed, which doesn't have the same profile as canola, although they're moving towards that. If you look at issues in China right now with the need for increased oil production for food use, we don't see that as being an issue either.

[The Chair, Conservative, James Bezan]

Thank you. Your time has expired.

Monsieur Bellavance.

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

I will speak in French.

Thank you for your testimony. Dr. Klein and Mr. Toews, you talked about the consequences of expansion of the biodiesel, biofuel and ethanol market in Canada and the domino effect this would have.

Let's assume that Canada decides to do nothing and not worry about setting up programs to have more renewable energy than today. Obviously our neighbour to the south, the United States, is moving full steam ahead on this and in any event it is right next door to us. Do you think that the consequences on rising grain prices for our livestock producers would be just as problematic?

We can decide to do nothing and say to ourselves that in any case we are stuck with it. We can also try to reduce our own dependence on oil, but maybe by adopting strategies and approaches that we could use at least to mitigate those harmful consequences.

Do you have any ideas or opinions about what I have said?

[Dr. Kurt Klein]

Thank you very much for the question.

Certainly I mentioned it in my comments, and I've written it in several papers as well, that from consequences from the United States a huge expansion in ethanol is what's driving the grain prices around the world. The U.S. policies and actions are having far more influence than anything we're doing here in Canada. In Canada new ethanol plants create a few local effects, but in fact we would have pretty much the same grain prices whether we had ethanol plants or not.

The U.S. is spending an awful lot for this policy, and they're going to continue to spend a lot. They've made that clear. They're in quite a different situation from what we are. They're mired in Middle East conflicts, and this is a big attraction for them to reduce their dependence on oil. Of course they're not going to be able to reduce their dependence on import oil to any significant extent. About 3% of their gasoline consumption comes from renewable sources. President Bush has the 20-in-10 plan in the 2007 state of the union message, which would require almost five times the level of ethanol production as there is today, but I don't believe they can reach that level. Even if they do, they'll only get to 15% of their gasoline consumption. Agriculture will be completely changed if they ever get to that level.

As for your question about whether Canada should do this or not, just because the United States is doing it, I think we have to ask ourselves why we are doing that. We are not dependent on foreign energy supplies. In fact we're large net exporters of most forms of energy, including oil, gas, coal, hydro power, and many forms of energy. This is going to be costly for Canada to do this policy. I believe it will make the effects more difficult for some of the value-added processing industries in Canada.

I think it's something Canada should have looked at more carefully before it went down this path. I think we don't have the same urgencies as some of the other countries, and I'm not sure whether we want to continue to bankroll it. This industry is going to become very expensive; I have no doubt about that. Because of the high price of corn and feedstocks, even the ethanol industry in the United States is becoming close to unprofitable now. Our construction costs are significantly higher than they are in the United States. We tend to build smaller plants that don't have the economies of scale. In fact in several provinces there are numerous programs to try to help farmers invest in very small plants. These are going to become very high-cost plants that are going to have all kinds of financial fallout and require continued government support as we go forward.

It's an expensive policy. We can do it, but I think we should have taken a better look at it first.

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

Mr. Toews, I would like to hear what you have to say about this.

I might remind you of some things you have said. You have suggested that tariffs on imported biofuels be eliminated. Is that because you believe there would be fewer consequences for beef producers if we import our biofuels rather than making them ourselves? I want to be sure I understand you.

[Travis Toews]

Thank you for that question.

I would agree that in Canada the rise in grain prices has been largely due to the expanded growth of the U.S. biofuels industry. Our real concern is related to a year of shortage. We know that in North America we will experience drought conditions or years of shortage in major grain-growing areas from time to time.

Our concern is that if we have mandated demand and existing tariffs, as well, on imported product, in the event we experience a year of crop shortage in Canada, the cattle industry will be unable to compete with the biofuels industry for feedstuffs.

That's the rationale behind suggesting that we consider elimination of tariffs, particularly in a year when a crop shortage would exist and there's a shortage of feedstuffs.

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

I am finding it somewhat difficult to understand why it is preferable to your mind for Canada to import its biofuels. I know you have explained, but I still don't understand. It is my impression that it is preferable to encourage our own renewable energy rather than importing it.

[The Chair, Conservative, James Bezan]

Please keep your response very brief, Mr. Toews, because time has expired.

[Travis Toews]

In the event that we have a mandated demand in Canada and a crop shortage in Canada so there is not enough feedstuff for both the biofuels industry and the cattle industry, if we didn't have tariffs that prevented product from flowing into Canada the mandate could be met without putting extra stress on the supply of feed grains in Canada.

[The Chair, Conservative, James Bezan]

Mr. Storseth, the floor is yours.

[Brian Storseth, Conservative, Westlock—St. Paul, AB]

Thank you very much, Mr. Chair.

I want to start out today by thanking each one of the witnesses for coming forward. I know it's a long flight from Alberta. I've experienced that a few times. And what better winter to see the minus 51 degree weather than out in Alberta right now.

I have several questions. Maybe I'll start with a comment to Mr. Toews.

Wouldn't you agree, especially in our area of northern Alberta and the Peace River country, where you're from, that one of the biggest inhibitors to increased planting of wheat and barley for many of our producers in a lot of cases is the Canadian Wheat Board, which they choose to stay away from?

[Travis Toews]

I wouldn't disagree with that comment.

[Brian Storseth, Conservative, Westlock—St. Paul, AB]

Thank you.

Ms. Buth, I'd like to get some timeframes from you. How important do you feel it is that we move forward on this with an expedited process? Do you have any specific timeframes your industry would like to see?