Agriculture Committee on April 30th, 2009

[Gordon Quaiattini]

Yes. In terms of current production right now, we are at about 1.3 billion litres of ethanol production in Canada. On the biodiesel side, that number is about 120 million litres in a mandated market, which would see, on the ethanol side, a demand of two billion litres, and on the biodiesel side a demand of between 500 million and 600 million litres.

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

I was not thinking of any particular industry more than another. Overall, have profits gone down, as they did in the United States between 2007 and 2008?

[Gordon Quaiattini]

The issues happening within the renewable fuel sector in the United States are not quite happening in the same dynamic here in Canada. As you know, there has been a series of bankruptcies and plant slowdowns in the United States. In part, that was driven by the fact that the industry grew at a pace that exceeded the mandated market within the United States.

For example, in 2009 the ethanol mandate, the requirement on the ethanol side in the United States, will be 9 billion gallons. In 2010 that number will grow to 10.5 billion. But in a world in which production capacity had been built to almost 12 billion.... Actually, it was probably about 11 billion or 11.5 billion, so their production build-out in fact exceeded that.

When the price of oil hit the range of $140 or $150 a barrel, ethanol was trading considerably more cheaply than gasoline, so what you ended up having in the U.S. dynamic was a lot more discretionary blending beyond the current mandates in the United States, because there was a price advantage. There was a margin advantage for oil producers in the United States to in fact do that.

With current demand overall coming down, the realities of that overproduction capacity, and the diminishing discretionary blending taking place, you have the current problems in the United States until the further mandate targets kick in.

In Canada, we don't have that issue. We haven't built out yet to our mandated targets. That's why we have argued, quite frankly, that we think we have a very balanced and measured approach in terms of developing the industry here in Canada, so we're not in a situation in which we have plants that are being challenged economically and are threatened with closure right now.

Are the economies tighter right now? Of course they are, but that, quite frankly, you could apply to every sector across the economy. We would be no different in this environment.

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

Would you agree that, without subsidies, the industry would have a hard time being viable? I look at what is happening in the United States and I am very surprised to see that companies there are very heavily subsidized. I understand the reasons as you have explained them: some companies in the United States have gone bankrupt.

When do you expect to reach a point when subsidies to the biofuel industry can be discontinued and it can become viable and start making profits on its own? Have you forecast when that tipping point will be?

[Gordon Quaiattini]

I don't use the word “subsidy”; I use the word “investment”. When you look at government policy and the reason the federal government brought in the $1.5 billion ecoENERGY for biofuels program, it was driven in part not to subsidize the industry, but to create a competitive environment in which we could attract the necessary capital to build the production here. We could just as easily have moved ahead in a mandated market in Canada and have the biofuel find its way from Brazil and the United States and elsewhere, and not have the value-added production that rural communities are now experiencing with the plants that are operating, and those planned to go ahead in the near term. The government saw the need and wanted to create a level playing field, a competitive environment in which that private capital could find its way into the marketplace.

As I alluded to in my presentation, you're looking at between $1.5 billion and $2 billion of private investment in the industry beyond the federal program that exists, which will sunset in the next eight years. It's a one-time program; it has a nine-year shelf life, of which seven years of payment to qualified projects will exist, and then that program will sunset.

When you look at the economic return on that industry, when it's built to its fruition of $600 million a year, I think one would argue that's a good return on the taxpayers' investment in our industry, which we will provide going forward.

And again, over time, what is most important to the industry is the issue of market access. The mandate over time creates that opportunity for us that ultimately is more valuable to the industry over the long term.

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

In your presentation, you mentioned the importance of moving to second generation biofuels. On this committee, we have often heard testimony from yourself, from biorefinery operators, from researchers and scientists about second generation biofuels. We hear that they are in an early stage of development, the pilot project stage. Just this week, I was reading something about that.

I would like to know about the progress being made in this area; I would like to hear that we can now say when we will be able to produce second generation biofuels on a commercial scale. Perhaps you find it impossible to give me a very precise idea, but what forecasts have you made and what does the future look like? Can the use of cellulosic ethanol be profitable in the short or medium term? We hear about biomass from forest products and agricultural waste. Do you feel that that could be profitable any time soon?

[The Chair, Conservative, Larry Miller]

Very briefly. The time has expired.

[Jeff Passmore, Executive Vice-President, Iogen Corporation, Canadian Renewable Fuels Association]

Thank you for the question.

I could be brief and just say court à moyen terme, but I think the model for commercialization of next-generation cellulosic ethanol technology is large corporations collaborating with governments. I don't think you're going to see this technology commercialized through venture capital.

Canada is in the process of proceeding with that model of large government involved through Sustainable Development Technology Canada, the program Gord referred to that put in $1.5 billion for first generation, and put in $500 million for second-generation renewable fuels. That, combined with the technology company and our partner, Shell, will see this technology commercialized in the next two to three years, I hope, and the first commercial plant built.

[The Chair, Conservative, Larry Miller]

Thank you very much.

Mr. Allen, for seven minutes, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

Thank you, gentlemen, for being here.

I'll go back to Mr. Bellavance's question and bring some more clarity to it.

When we talk about second-generation biofuels and where we might be headed in the sense of the need, in some eyes, to move away from the first generation--which leads to the debate you tried to clarify about the issue of whether it affects food prices, because that is the debate--clearly you've articulated your position. But there are some on the other side of that equation, of course, who will articulate it from a different perspective, because the second generation obviously takes that argument away, in the sense that it wouldn't necessarily be easy to say that it increased the price of food when really what we are using is the byproduct of the food production, whether it be biomass, whether it be cellulosic, or whether it be the use of other materials that farmers have used. And farmers are ingenious folks who manage to be able to use the things they have, whether they're selling them to someone else or not.

Perhaps you could comment briefly as to where you see that headed in a more wholesome way, besides the fact that you're suggesting, Mr. Passmore, that some sort of government funding is needed to take us forward on that.

[Jeff Passmore]

First of all, let me distinguish between position and facts. It's not the CRFA's position that first-generation ethanol was not responsible for food prices going up. I think the facts bear that out. If you have any doubt about that, ask yourself why the price of rice went up, the same as the price of corn did, and not a single grain of rice is used to make first-generation ethanol.

The reason food prices went up was $100-a-barrel oil, commodity speculation, and droughts in the Ukraine and Australia. I think the USDA argued that corn ethanol in the U.S. was probably responsible for about 4% of the reason for food prices going up.

The other thing is, for Heaven's sake, let's let farmers earn a decent income for a change.

[A voice]

Hear, hear!

[Jeff Passmore]

To the extent that ethanol is being derived from corn and allowing farmers to earn more money, that's a good thing. Take that nine billion gallons out of the market in the U.S. and replace it with gasoline, and suddenly there will be nine billion gallons worth of corn ethanol and corn product that these farmers don't have to sell.

Those are the facts on the issue of food versus fuel.

With respect to evolving to the next generation, it's important also to recognize that next-generation ethanol is going to build on the foundation that has been established by first-generation biofuels. We, meaning cellulose ethanol and second generation, don't have to convince car companies to warrant 10% ethanol. We don't have to convince oil companies to blend ethanol and sell it to consumers, and we don't have to convince consumers that they can pull up to the pump and confidently fill up with E10 blends of ethanol product. In other words, car companies, oil companies, and consumers all feel comfortable using the ethanol molecule. The molecule that we'll make in second generation is identical to the molecule we make in first generation.

However, to your question about the non-food portion, yes, we use agricultural residues rather than the food portion of the crop to derive our ethanol. The technology is complicated; it's not taking as short a time as we might like to get this product rolled out, but we're working together with government to help meet the government's objectives of commercialization of second-generation ethanol.

[Malcolm Allen, NDP, Welland, ON]

I appreciate that.

Let me be clear: I'm not suggesting that drove the price of food up. I would suggest it was more the $140 barrel of oil than anything else that brings things to market.

I don't think you'll find anybody here who would argue that we don't believe farmers should start to make a few more dollars than what they're entitled to. Most of us represent farmers and have farmers as neighbours or friends or family, in which case we're looking to continue that.

Perhaps we can keep focusing in on this aspect of second generation. Brazil is seen to be somewhat of a leader in the world when it comes to cellulosic ethanol, or that's the perception. It doesn't necessarily make it so. Again, it boils back to the perception about the food piece, which is the perception and not necessarily the reality, and you've articulated that quite well, Mr. Passmore.

Folks point to Brazil and say, “Why don't you just do it like they do it?” Perhaps I could get comment from anyone who wants to lead off on whether they truly are, or whether we are simply being asked to chase something. It's like a dog chasing its tail sometimes. Are we really doing that, or should we be doing something altogether different?

[Gordon Quaiattini]

Thank you, Mr. Allen, for the question.

There's been an attempt to look at Brazil. Brazil simply uses sugar cane as their feedstock. They're no further ahead—with respect to my colleagues in Brazil, with whom we work very closely—with regard to development of second-generation biofuel. They're simply using what is natural to their agriculture base as their feedstock.

In Canada, quite frankly, we're using what we're best at, which is corn and wheat on the ethanol side, and we use canola and soybeans here on the biodiesel side. I don't know that any one jurisdiction is ahead of the other with respect to the capacity to develop.

We have certainly made headway, even in first-generation fuels. Based again on the International Energy Agency report I made reference to, we have come a long way in innovation within even the first-generation technology of making ethanol. It's not a complicated process; it's a fermentation process. We've been making alcohol for a hundred years and longer.

We have the capacity on a commercial-scale side to take efficiencies out of these plants: recycling water, which we do very well in the production of ethanol; development of a secondary market out of ethanol production in distillers' grains, which is valued by the feed sector within Canada and elsewhere. We've certainly taken the model of first-generation ethanol and moved it along quite considerably in the last 20 or 25 years. We still have more to do.

As I said, based on this report, we're looking at that 55% greenhouse gas reduction benefit from first-generation ethanol being achieved in the next two to three years, because of the innovation just in first-generation; then as we transition, as Jeff said, we're looking to second-generation development, all of which provides a value-added opportunity for our farmers.

I don't envision a world in which we would completely replace the first-generation ethanol production that we have with second-generation. I think we would see further development take place that continues to provide farmers in this country the choice of the feedstock they can provide, both on the food side, absolutely, and certainly on the feed side with respect to the relationship with our livestock sector, and then ultimately on the renewable fuel side. We think that's a balanced and proper approach that we can take and that offers farmers these opportunities.

[The Chair, Conservative, Larry Miller]

Thank you.

Mr. Hoback, you have seven minutes.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Mr. Chair.

First of all, gentlemen, thank you all for coming today and for giving your information and testifying. It's always exciting to see this industry come forward. As a farmer, I get really excited when we start talking about the prospects of renewable fuels, and then biotechnology and alternative uses for my crops.

One thing is that as a farmer I always have to get my mindset changed. I've gone from the days when we were growing food to the days when we're growing starch, protein, and other raw ingredients for all sorts of products; it's not just food anymore. That's really positive for farmers and for the next generation of farmers, because all of a sudden we're going to see revenue being generated from different streams outside the food stream.

When we see surpluses such as we've seen, for example, in the U.S., where they had huge surpluses of corn and were dumping them around the world.... That just killed my farm. It killed a lot of young farmers and erected a big barrier for farmers coming into this industry. If we can do other things with product and utilize it, it's a win-win for everybody in the agricultural sector and for rural Canada.

One thing I am disappointed with, and it may be because of my excitement that I'm disappointed, is that it seems to take so long. In 2006, we were thinking that this is coming. We had seen what was going on in the U.S., and everybody was excited with the plants being built here. But it seems that in Canada it is taking forever.

Why does it take such a long time? I'm sure there are probably good reasons, but maybe you could help us understand why it's taking so long, especially in both levels.

[Tim Haig, President and Chief Executive Officer, Biox Corporation, Canadian Renewable Fuels Association]

As the largest producer of biodiesel in Canada and people who wants to invest a great deal more into this economy in doing biodiesel, we are a non-food-inputs—i.e. second-generation—producer. It's a question of economic certainty. Investors have a really hard time getting their heads around what's going to happen.

To go back to the important part, as I see it as a producer Bill C-33 is when we can actually, to get to the earlier point, stop this—the word “investment” is the right word, while the word “subsidy” is the one that upsets me—stop this investment, because it starts to be that demand will drive the price, and we would be priced off the feedstock.

When we go back to Brazil, there's an interesting point. They have a 25% mandate in every litre of gasoline sold. Guess what: ethanol and biodiesel have de-coupled, and they have set up the price. Now the pricing is priced off the feedstock. The feedstock happens to be sugar, which they had a lot of. The farmer gets the benefit exactly, and then your farmer's not jammed by the fact that we're priced off the petroleum end; we're priced off the feedstock. It has actually brought down the complex of energy.

This is the really important part about this: we have to separate the biofuels from the petroleum fuels aspect of things. Yes, we're selling liquid BTUs, but they have completely different inputs. It would be in everybody's interest, the petroleum producers' and everyone's, for the feedstock to be the driver of price. Then we might see a driving down of the prices. True, sometimes we might see them going up; however, it is really important for your constituents that mandatory inclusion to be driving the market price. That's when investors will come back to the table. Investors aren't anywhere right now, let's face it. But investors will come back to the renewable fuels table.

[Gordon Quaiattini]

Just very quickly to reiterate, as Tim said it's market access: that is the single biggest question mark that exists, to address your question about how much faster we can go. Let's be clear. We are building and opening plants. We are about to commission two new ethanol plants in Canada in the next 60 days. So the construction is happening; the investment continues to happen even, as Tim said, in a very difficult market.

To see the true potential to build out, ultimately it is a question of market access. It is securing the regulatory framework to implement the RFS. Both CPPI and the CRFA would agree that this work simply has not progressed in the timeframe we would have liked. Thus, one of our calls to action and hopefully the voice coming out of this committee directed toward the government is to see the process accelerated. As Peter has suggested, we are part of demonstration initiatives together, we have been part of consultations with key departments together; now it's just time to get the work done and create market certainty to have investment continue to take place.

[Peter Boag]

I'm certainly glad to hear my colleagues use the term “certainty”, because that's the call to action and the cry that our component of the industry has been desperate to see over the last number of months, going back to that 2006 notice of intent whereby we agreed at the time—Gord, your organization and ours—on the requirement for three years of regulatory certainty in order to be able to get moving and deliver an implementation approach and a schedule that was a win for government in their policy of objectives, a win for the biofuels producers, a win for refiners of petroleum products, and most importantly a win for consumers. We just haven't seen that certainty.

We've been sitting waiting for the call at CPPI for more than two years now to get down to some detailed regulatory design that would enable refiners to make the kinds of implementation decisions, the compliance path they're going to do, and ultimately make the investments they need to make in order to deliver on that investment. It just hasn't happened in that absence of regulatory certainty.

[Randy Hoback, Conservative, Prince Albert, SK]

Peter, I guess my question on that is that you knew in 2006 that 2010 was the year. That was pretty solid. I think everybody understood that 2010 was the year that these things were going to happen. Why does it take you guys so long to ramp up?

[Peter Boag]

We knew of the government's general intent for 2010 as indicated in the notice of intent, but much of the compliance path determination by individual companies really depends on the details of regulatory design as they design and develop their own compliance path in order to meet that mandate.

I guess it's the cliché: the devil is in the details. Firms are not going to be able to make the kinds of investments and cannot make the decision to lay out scarce investment dollars, particularly in this environment, without a higher level of regulatory certainty than was included in the notice of intent. To do otherwise runs the risk of stranding investments that guess regulatory outcomes. That's the answer.

[Tony Macerollo, Vice-President, Public and Government Relations, Canadian Petroleum Products Institute]

If I may add, I'll give you a very practical example of information we're only finding out about now.

We've recently been informed by Environment Canada that if you are a refiner who has a marketing presence in another province but not significant enough that you would be contracting out your blending to another provider, the refiner who is obligated doesn't get the credit for that. It's a pretty significant piece of information in terms of the kinds of investment decisions you're going to take when in fact you're regulating under a law that is founded upon the criminal powers of the federal government, where you're either guilty or innocent, not simply a regulatory deviation.

So these details are very important. It has a different impact on refiners with a national imprint versus a regional imprint, and the devil in the details that my president is referring to is very significant. I'm giving you one example of something that we've only found out in the last 30 days.

[The Chair, Conservative, Larry Miller]

Thank you very much.

Mr. Easter for five minutes.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you, Mr. Chair.

I really appreciate the fact that you came with presentations translated. You're doing a heck of a lot better than the minister. With three weeks' notice, he couldn't come before a parliamentary committee with translated documents.