Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 23 - Evidence - Meeting of October 18, 2012
OTTAWA, Thursday, October 18, 2012
The Standing Senate Committee on Agriculture and Forestry met this day at 8:05 a.m. to examine and report on research and innovation efforts in the agricultural sector (topics: importance and challenges of research and innovation in developing the international trade of agricultural and agri-food products; and market opportunities for renewable energy and their impact on innovation in agriculture).
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I want to take this opportunity to thank both witnesses for accepting our invitation. We will have a formal introduction later. I would like to ask senators to introduce themselves, and I will start. I am Percy Mockler, a senator from New Brunswick and chair of the Standing Senate Committee on Agriculture and Forestry. Senators, would you please introduce yourselves.
Senator Peterson: Bob Peterson, senator from Saskatchewan.
[Translation]
Senator Robichaud: Good morning. I am Fernand Robichaud, senator from Saint-Louis-de-Kent, New Brunswick.
[English]
Senator Merchant: Good morning. I am Pana Merchant from Saskatchewan.
Senator Mahovlich: Frank Mahovlich, Ontario.
Senator Plett: Good morning. I am Don Plett from Manitoba.
Senator Buth: JoAnne Buth, Manitoba.
[Translation]
Senator Maltais: Good morning. I am Ghislain Maltais, senator from Quebec.
Senator Rivard: Good morning. I am Michel Rivard, senator from the Laurentides, Quebec.
The Chair: Thank you very much, honourable senators. Today, we have two panels. The objective of the first panel is to study the importance of intellectual property rights for innovation in the agricultural and agri-food sector.
[English]
The focus of the second panel will be market opportunities for renewable energy and their impact on innovation in agriculture.
The Standing Senate Committee on Agriculture and Forestry was authorized to examine research and development efforts in the context of developing new markets for agricultural products domestically and internationally, enhancing agricultural sustainability and improving food diversity and security for Canadians and for international markets.
This morning we have the honour to have with us Richard Gray, Professor of Bioresource Policy, Business and Economics at the University of Saskatchewan. By video conference, we have John Cranfield, Professor, Department of Food, Agricultural and Resource Economics at the University of Guelph.
Professors, I want to take this opportunity on behalf of the Standing Senate Committee on Agriculture and Forestry to thank you for accepting our invitation to share with us your opinions, comments and vision on agriculture for Canadians going forward.
I now invite Mr. Gray to make his presentation.
Richard S. Gray, Professor, Bioresource Policy, Business and Economics, University of Saskatchewan: Mr. Chair, I would like to thank your committee very much for inviting me to present to you today. For much of the past 10 years, my research has focused on the funding and organization of agricultural research. Two years ago, I was on sabbatical at the OECD in France and in Australia studying agricultural innovation. This past July, I was fortunate enough to spend two weeks with a colleague interviewing 16 experts in the U.K. about their wheat innovation system.
Given the short time available this morning, I will confine my presentation to six points that define how I see agricultural innovation and three recommendations that I think would lead to a much stronger Canadian agricultural innovation system.
In the brief that I provided, there are several links to larger documents that provide background to some of the statements I will make today.
My first point is that agricultural productivity, which has been driven by agricultural research, has fundamentally changed agriculture. Western Canadian farmers produce roughly three times the amount of output per unit of input that they did in 1940, due to research. This contributes to income, wealth, economic growth and environmental sustainability, while contributing to a larger food supply.
Second, literally hundreds of studies have shown high rates of return for agricultural research. One study alone, by Alston et. al., compiled 292 different studies that showed an internal rate of return of 65 per cent per year, which is a very high rate of return. I have provided a table in my report highlighting several Canadian studies that also show high rates of return and high benefit-cost ratios, much higher than you would expect in a marketplace. Overall there is compelling evidence of high rates of return to agricultural research that have persisted over all sorts of markets and all sorts of studies. This implies a missed opportunity to invest more in this important source of economic growth.
Third, in Canada intellectual property rights are very weak for non-genetically-modified crops, open-pollinated crops, and need to be strengthened in order to attract private investment. Plant breeders do have the right to charge royalties on the sale of seed, but farmers have the right to replant saved seed. This farmers' privilege means that breeders have a limited ability to collect royalties and very little monetary incentive for research in some important crops, like wheat.
In the U.K. farmers must pay a royalty on farm-saved seed equal to 53 per cent of the last year's average royalty rate. While these intellectual property rights are an improvement over our system, the system in the U.K. has only generated enough revenue to support a small private breeding industry.
The Australian system of end-point royalties is far stronger and has far greater long-run potential for revenue generation, but notably, even this system with strong IPRs took 15 years before they got to the point that they could support a private industry.
Fourth, end-point royalties, which are used in Australia and France, have several advantages over seed-based royalty collection systems. The advantages include reduced producer risk, accommodation of farm-saved seed and low administration costs. The application of uniform end-point royalties to all varieties can generate immediate cash flow for breeders.
Fifth, in the absence of strong intellectual property rights and non-refundable check-offs, the funding for wheat in Western Canada is very low relative to the competition. The funding for wheat in Australia is at approximately $80 million a year and the funding for canola in Canada, at approximately $80 million a year, is four times the level of the funding for wheat research, about $20 million a year in Canada.
Pulses, which are not in Figure 2, also have high research intensity. It is funded by a 1 per cent non-refundable levy paid by producers.
Sixth, strong IPRs are not the complete solution to fund agricultural research. While they do stimulate research, and private investment is very important, they are less than perfect for a number of reasons. First, given the fixed costs of research and that once you have invested in research it can be used over and over again, the industry cannot be fully competitive. Industry will be naturally concentrated, which can lead to very high seed prices. Figure 2 shows that corn and canola producers pay about 10 per cent of their gross income for seed, but only about 10 per cent of seed company revenue is reinvested in research. This slippage reduces the benefit-cost ratios for producers.
Second, with strong intellectual property rights, knowledge sharing is often limited. This fragments research and duplicates effort.
Third, just across the border, or in crops where patents prevail, there is a problem of a ``patent thicket,'' meaning that there are a lot of legal requirements to determine whether you have the right to use a particular technology, and this increases the cost of research because lawyers do not breed wheat. It is just part of the system.
Finally, many types of knowledge, such as agronomic research, will never fit intellectual property rights. It will be impossible to use intellectual property rights to protect some types of knowledge and, as a result, they will continue to be underfunded in a fully private system.
After observing many international agricultural research and development systems and acknowledging the Canadian context, I have three recommendations to make that I think would vastly improve the underfunded crop research system in Canada.
First, government should work with industry to pass legislation that would create a 1 per cent levy on the sale of all crops that would be paid to variety owners regardless of whether they are private producers or public organizations. This would immediately provide a more adequate level of research funding and create an incentive for all breeders to develop better varieties. This could also make Canada compliant with UPOV 91.
My second recommendation is that the federal government should use its research mandate to create a non- refundable, industry-controlled check-off corporation similar to what Australia did with the Primary Industry and Energy Research and Development Act. These industry-controlled corporations would give industry a means to undertake substantial research investments of specific value to the industry. Given the ability of governments to free ride on this industry initiative, both federal and provincial government matching would be desirable.
Third, government should publicly support basic scientific research. This is a foundation for ongoing applied research, especially in this century of biology. The experience in the U.K. suggests that public researchers should also be given the incentive to include pre-breeding and applied research within their portfolios.
My final words of advice are that Canada needs to think big and bold. At a time when we are trying to find investments generally with any positive rate of return, agriculture investment has a proven high rate of return.
If these three recommendations were put in place, we would see a well-funded agriculture research and development system that would accelerate productivity growth leading to wealth generation and sustainability. I think the industry is ready for change. I am worried that if we think too small this underfunding could persist for a very long period of time.
That concludes my introductory remarks.
John Cranfield, Professor, Department of Food, Agricultural and Resource Economics, University of Guelph: Good morning. Thank you for inviting me to appear before you today. As you know, I am a professor of food, agricultural and resource economics at the University of Guelph. My research examines consumer demand for food and food products and innovation in the agri-food and biotechnology sectors. I am also a member of the Canadian Agricultural Innovation and Regulation Network, one of the five agricultural policy networks established under the Growing Forward framework.
My comments this morning are informed by my own research, the research of others, and interactions with my colleagues both at Guelph and at other institutions, as well as with those involved in the Canadian Agricultural Innovation and Regulation Network.
My innovation-related research uses firm level data collected by Statistics Canada to help build an understanding of the factors associated with innovative capacity firms in Canada's biotechnology functional food and natural health product and bioproduct sectors. Key aspects of this work involve understanding whether and how intellectual property and its protection affect innovation.
There are a number of key messages that I would like to relate today in addition to a couple of other points that I think relate to some of the issues raised by Professor Gray.
First, the empirical evidence suggests that patent protection has a more muted effect on fostering innovation than one might expect. Specifically, the use of patents has a weak relationship with the number of products either under development or on the market. To see why this might be the case, recognize that firms can chose to not patent new products or processes. Indeed, firms can choose to protect their intellectual property by using trade secrets or non- disclosure arrangements in employment contracts with key personnel. This is not to say that patents do not serve a useful purpose; rather, it reflects the choice by some firms to not use patents. Why a firm might choose to not use a patent is complex, varies with circumstances, and likely reflects both the firm's business model and intellectual property arrangements it might have with other firms with whom it is collaborating.
Second, while the use of patents has a muted effect on innovation and commercialization, the use of intellectual protection modalities generally speaking can affect firm performance. You will note that I am separating innovation from performance in this respect.
For instance, results from analysis using data from the Statistics Canada 2008 survey of functional food and natural health product producing firms shows that firms producing these products and who use intellectual property protection had higher sales revenue than firms that did not use intellectual property protection.
Moreover, the difference was about $2.3 million. While this is a result from one study and one sector, it does help to illustrate the importance of intellectual property protection in sectors that use outputs from Canada's agricultural sector.
Third, and perhaps of greater importance, is that innovation and commercialization have a strong and positive association with collaborative arrangements between firms. Collaboration allows firms to access intellectual property held by others that might be critical in the development of new products or processes. In this respect, research hubs and clusters become very important in that they allow firms to develop the networks and relationships needed to identify mutually beneficial collaborations.
A number of other issues are also important. Some have expressed concern that ``patent thickets'' act as an impediment to innovation. Patent thickets, as Dr. Gray mentioned, arise when firms must deal with overlapping intellectual property rights when they are trying to innovate. The notion here is that patents held by other firms make it difficult for another firm to innovate in a way that does not impinge upon an existing patent. This is a problem for some firms, especially small start-up firms with limited capital, as patent thickets can not only raise the cost of doing research but might also lower the chance of having a patent application approved or otherwise ``disincentivize'' innovation. In such circumstances, a lack of coordinated effort by innovating firms could limit the development of new products or processes.
Moreover, the role of collaboration becomes pivotal insofar as innovating firms might find it easier to deal with patent thickets via collaboration with firms holding patents related to the product that is being explored. In the same way, licensing arrangements between firms can serve a similar role.
Patent thickets become even more problematic when one begins to consider the role of the public sector. Throughout the mid to late 1990s and into the 2000s Canada has witnessed a reduction in public investment in research and development in agriculture, but an increase in public investment in food- and conservation-focused research. What is more, increases in private sector investment in agriculture and food have been such that the private sector now accounts for a larger share of total agricultural R&D investment. These changes have led some to ask whether government should invest in agri-food-related R&D or increase their investment in agri-food-related research and investment. The premise here is that the public sector R&D typically leads to innovations that are in the public domain and accessible to others and thus reducing the impact of patent thickets.
I would argue, and I am of the opinion, that scope exists for increased government investment in agri-food R&D but in a manner that depends on the context. Instances where I think enhanced public sector involvement is warranted include circumstances when dealing with what economists might call a public bad, such as environmental pollution or communicable plant and animal disease. As well, such involvement is warranted if the benefits of innovation cannot be captured by those who invest in R&D, such as private firms.
Other instances where government involvement perhaps is wanted include when the market is unwilling or unable to bear the risks associated with research and development investment.
Last, I think government involvement is warranted when there are cost economies in undertaking research activities; that is to say, the larger the research project, the lower the average cost or the increment cost associated with undertaking that research.
I do not mean to suggest that the government open the public purse to anyone, but what I do want to suggest is that scope exists for perhaps increased investment. It is also important to recognize that government involvement does not necessarily mean spending from the public purse. Indeed, the Farm Products Agencies Act provides the legislation that would enable creation of national farm agencies with the power to levy producer check-offs, with these check-off funds used to finance activities that could include research and development. In this respect, the role of government might be limited to that of providing facilitating legislation that producers would then act upon.
We have seen growth in government-based matching programs as well as matching requirements by non- government programs such as check-off programs. The idea here is that government might match industry funding in research and development grant programs. This is known as a public-private partnership. Such public-private partnering is viewed by some as a means to crowd in research, that is to say, to draw in new research dollars that otherwise would not be spent. The extent to which such partnerships crowd in new research dollars is not entirely clear.
More substantively is the issue that under such arrangements the public co-pays for innovations that could be appropriated by the private sector via intellectual property rights arrangements. While some might wonder whether there is value for money for taxpayers in such circumstances, others might say this is the trade-off that is needed to foster innovation in Canada.
Mr. Chair, thank you very much for allowing me to speak today. I look forward to answering questions of the committee this morning.
The Chair: Thank you very much, Dr. Cranfield.
Senator Buth: Dr. Gray, I would like to start with you with some questions.
Could you describe the difference between what has happened with canola versus wheat in terms of the public versus private breeding system? Clearly, some of the information you have shown shows tremendous difference between the investment in both.
Mr. Gray: Sure, I would be happy to. Going back to the very beginning of the canola sector, it used to be rapeseed and there were large public investments but organized under the Rapeseed Association of Canada at that time, which basically got public researchers to make rapeseed from an industrial crop into canola, which was an edible crop.
The investment in canola research up until the mid-1970s was largely a public activity, with a little bit of seed funds from the industry.
With the prospects of biotechnology and the ability to put particularly transgenics or genes into canola and be able to patent it, private firms became interested in investing in canola and they did that extensively starting mid-1980s through the mid-1990s just on the basis of being able to protect their intellectual property through patents. The first round of protection that canola got was from the ability to patent their property, if you like, and that caused a substantial increase in investment in canola.
Since that time, canola has become a hybrid crop, which even strengthens the intellectual property rights further. It is not worth it for a farmer to save hybrid seed, so each year the farmer plants a new hybrid variety, they have to buy new seed from the same companies. As a result, there is a very large revenue stream available for research in canola, roughly between $800 million and $1 billion a year that producers spend on new canola seed that can be reinvested in research by this private industry.
Wheat, on the other hand, is just protected under existing plant breeders' rights legislation, which contains this farmers' privilege, which means that once farmers purchase new seed and pay a royalty on the new seed, they are free to grow that crop on their farm, save the seed and replant it. What that does is reduce the amount they would be willing to pay or the quantity of new seed they would be willing the buy. If the price is very high, they tend to reproduce it themselves. That means there has been very little private incentive in the wheat sector, whereas canola was well protected through patents and hybrids, and there was a large private research incentive there.
Senator Buth: How do we get the investment into wheat, then, and also address the issue of farmers' privilege?
Mr. Gray: I think the best way to do that is, frankly, what the Australians have done with end-point royalties. In Australia, breeders retain the rights over harvested material until royalties are paid. That means that if an Australian farmer decides to replant his seed, at the time he delivers the grain, there is a royalty paid on his production or sales. That means with every tonne of variety X produced, there is a royalty paid on it and it goes back to the variety owner.
Actually, in Australia, they encourage farm-safe seed at the same time. With their droughts and other things, they think the seed supply is too vulnerable if it is left with a small select set of growers. It is much better if they could encourage farm-safe seed to be used. They can be compatible, but it requires the royalty to be paid not on the seed but on the production of product from the seed. It works very well in Australia, and France and the U.K. also have variations on that.
Senator Buth: You have talked about end-point royalties. Also in recommendation one, you suggest legislation to create a 1 per cent levy on the sale of all crops. Is that the same thing?
Mr. Gray: It is virtually the same thing, senator. What it would mean is that for every tonne that was sold, there would basically be revenue that would go back to the variety owner. It would be a very similar mechanism.
The reason I am proposing a 1 per cent start is that in Australia, these new varieties with end-point royalties had to compete directly against varieties that farmers could use for free. As a result, they could not charge much for new varieties, and it took 15 years for them to get a royalty rate high enough to support a private industry.
If we followed that route, then it would take 15 years for us to actually generate a lot of revenue with new, strong intellectual property rights. With my recommendation, I am suggesting we start everyone at 1 per cent, both new and old varieties, and that all goes back to variety owners. Then you are starting from a totally different level.
Senator Buth: What amount would that 1 per cent generate?
Mr. Gray: That 1 per cent would bring wheat in line with the competing crops, for example. If you take $10 billion worth of crop sales, that would be $100 million in revenue.
Senator Peterson: I would like clarification on one thing. Do intellectual property rights only pertain to genetically modified seeds and anything outside of that is not protected? Is that what you are saying here?
Mr. Gray: In crops, there are basically three types of protection. There are hybrids or ``vegetatively'' produced crops, of which you cannot replant the seed; they do not grow very well. Canola and corn fit into that category.
Then you have patent protection. The way the courts interpret the Patent Act is you can patent life forms as long as there has been a change at the sub-cellular level, which includes all genetically modified events. Genetic modification goes along very well with patent protection; those two go together well.
For non-genetically modified crops, they are subject to plant breeders' rights, where farmers have the right to self- seed. You do not have patent protection in that form. Plant breeders' rights are a weak form of protection, patents are somewhat stronger and hybrids are the strongest.
Senator Peterson: Have you had a chance to look at the current legislation going through on intellectual property rights, whether it will help or hinder the agriculture industry?
Mr. Gray: I have not reviewed that legislation, no.
Senator Peterson: There are a lot of mergers and concentration in the biotech industry. How is this impacting research and innovation?
Mr. Gray: There is always a trade-off. There are economies of scale in research. Basically, the larger you are, the more research you can do for a given number of dollars. You can use the same machine for different things and the same knowledge over and over again within a large firm. Large firms can perhaps do more research more efficiently. However, if you only have a small number of firms selling in an industry, you will also have the ability to charge a high price for your product; you have some market power. That is the trade-off.
Ideally, we would want new technologies available at a low price to accelerate adoption of the technologies. Obviously, the firms also need some revenue to make the investments, and they get that because it becomes a concentrated industry.
Senator Peterson: Mr. Cranfield, do you have any comments on these issues?
Mr. Cranfield: On the concentration issue, Mr. Gray has raised a number of important issues. Something else that I think is important to recognize is that patents are a way for government to get firms to reveal their discoveries, and the trade-off is that they give those firms monopoly rights. A patent gives a firm the right to be the sole producer of a particular good or to licence someone else to do that. Inherently in that is the notion that you have some firms that do have a lot of market power, and that is the trade-off you face.
The flip side of that argument is that the biotechnology sector is, I would argue, a very dynamic sector. There are a lot of mergers and acquisitions. We often see small start-up firms being spun off from innovations at universities that establish a new technology, like a process or a new product, and it is not unusual to see those small start-up firms then be acquired by larger firms who see buying that start-up firm as the easier way of trying to get access to a new innovation. The system in its inherent structure is set up in a way that that concentration is almost the necessary evil in order to get those kinds of innovations to actually lead to new products and processes.
Senator Plett: Mr. Cranfield, parliamentarians appreciate anytime someone that is presenting says they are not necessarily after public money, so I appreciate those comments.
However, along with that you talked about a check-off program. I would like you to explain the check-off program, if you would, and what your idea of that program would be.
Further to that, you mentioned public-private partnerships, which are still using the public purse. They may not be using as much, but they are still using the public purse.
Would you talk a bit about the check-off program and how you see that working?
Mr. Cranfield: I would be happy to. Under existing legislation, there is the opportunity for producers of a particular commodity to establish national farm agencies that would have the authority to levy the sales of agricultural commodities as a check-off. The check-offs that Mr. Gray was speaking about in canola are an example of that, which is not necessarily done under existing federal legislation but under the authority of the producer group. Those check- off funds could then be used for a variety of different activities.
To illustrate this, I would look at the beef industry. In the early 1990s the legislation was modified to allow creation of an agency such as the beef cattle check-off, and then in the late 1990s the beef industry in Canada had a vote. The majority of producers in the country voted to establish such an agency. We now have such an agency. It levies a check- off on the sale of any bovine animal that is sold. Those check-offs are then collected by the national agency and allocated to domestic market expansion activities, export market promotion or research and development.
It is really up to the producers to lead that charge if they want a national agency to do that. It does not necessarily have to occur at a national level. Many different provinces have check-offs for all sorts of different commodities. Supply managed sectors are no exception where just about every supply managed sector has some kind of a check-off levy that is either used to fund advertising — generic advertising programs for milk, for instance — or primary production research.
The notion is that you do not need a federal or a national agency to do that; it can be undertaken at a provincial level. One issue I see with the provincial level approach is it may not necessarily generate the funds that are needed to actually finance large-scale research and development programs.
I know that in the beef industry the rates of return to the existing check-off on R&D are quite high, and there is interest to try to see an expansion of research and development as a way of coming up with new products or new processes that would lower the cost of production for producers.
On the public-private partnership issue, yes, the public purse is still involved. As you say, it is at a lower level. As I mentioned in my comments, one of my concerns is that public funds are being used for the development of either new products or processes of which private firms may then be a substantial beneficiary. It is not necessarily the case that there is a large payoff to the public purse from such partnering. I do worry that the system of intellectual property rights we have means that those firms involved in those types of arrangements may be able to be the sole beneficiary of any benefits that arise from a new product, for instance. I hope that answered your question.
Senator Plett: Yes, it does. Thank you very much. I appreciate that.
Dr. Gray, in recommendation 1 you are talking about creating the 1 per cent levy. Would that be something similar to this, and who would that levy be on?
Mr. Gray: In the first recommendation I was referring to a levy that would go back to variety owners. In that case, it was much more like an end-point royalty. In the second recommendation, this industry council that would be funded by a levy is much more like what we were talking about.
These non-refundable levies are used extensively in Australia. The Grains Research & Development Corporation in Australia has agricultural producers that are appointed to that board, and they invest over $100 million a year in grains-related research on behalf of producers. In Australia they match that 1 per cent non-refundable levy with half a per cent contribution from government. There is some public matching involved, but the expenditure on grains is very much directed by producers for the grain industry rather than being directed by government for perhaps other purposes.
Senator Merchant: I am asking this question of both or either of you. Is Roundup Ready the highest used genetically modified trait in the world? That patent must be nearing its expiry. Do you when it expires and what effect is expected then?
Mr. Gray: I am not sure about this answer, but I would speculate it is probably the genetically modified trait with the largest use in the world. That is probably a good observation.
The patent expiry differs by country. In Canada, I understand that when the Roundup Read patent was applied for, the Patent Act gave the firms 16 years from the time the patent was actually granted, not from the time it was applied for. It took many, many years from the time it was applied for to the time it was granted. That moves the expiry date for the Roundup Ready patent a few years from now. I do not remember the exact year.
It is not quite as simple as when the patent expires everybody can use Roundup Ready traits. Each firm out there with hybrid canola has many other patents involved in the processes. If you free up one patent, it does not mean you can use, for example, Monsanto's germplasm because it is protected by several other patents at the same time. It does mean you could start your own program to introduce Roundup Ready trait in that, but you would have to do it in a way that did not conflict with other patents.
That is the way I understand it. Perhaps Mr. Cranfield can add to this.
Mr. Cranfield: I am as equally unknowledgeable as Mr. Gray about when the patent will expire. I do recognize that country by country there are differences in the patent life. The one thing that I think is important to recognize is that we talking about Roundup Ready as a trademark name or the active ingredient glyphosate, because we see glyphosate, the active ingredient, in different generic versions of herbicides that are available. Therefore, it is not just Roundup Ready but glyphosate.
I agree it is probably the highest use transgenic line in the world, and I use the word ``transgenic'' because there are some clear differences between what is deemed genetic modification and genetically engineered. Genetically engineered is when you bring one species' DNA into another species' DNA. Genetic modification happens when there is some kind of human involvement, like when a plant breeder cross-pollinates two lines of canola or two lines of potato. That is an important distinction. I would agree that Roundup or glyphosate-resistant seeds are probably one of the most prevalent in the world.
Senator Merchant: My second question is related to this. Can you refer us to some sources or just tell us, if you have studied this, whether the production in the long term is better or worse after long-term use of organic farming or if production is lowered with the long-term use of Roundup Ready?
Mr. Cranfield: I have no knowledge of whether the use of Roundup Ready lowers productivity or not. It is certainly the case that those types of herbicides are designed to enhance the productivity of the producer in that there is less activity needed to take care of unwanted plants, weeds. On organic, there is all sorts of mixed evidence on what impact organic has and whether it is good or bad. One needs to be careful to differentiate the domain in which one is talking about this: Is it good or bad for human health? Is it good or bad for the environment?
Most organic production systems do involve restrictions on the use of synthetic pesticides, if not outright bans. From that perspective, it might contribute less to environmental pollutants in the environment. There is mixed evidence concerning whether it is good or bad for human health, and in fact there is a recent study out of Stanford that pointed to really no nutritional difference between conventionally produced and organically produced food products. From that perspective, it is really about the environment and the impact of production on the environment.
Mr. Gray: I will comment on the Roundup Ready. My understanding is that some weeds are showing up that are Roundup Ready resistant, which may increase costs somewhat in the future. However, it has taken a very long time for the Roundup Ready resistance to develop, much longer than perhaps what people expected or feared initially.
Second, it seems that Roundup Ready resistance can be easily accommodated with the rotation of other herbicides. There is a technical solution that seems to be quite straightforward. When it comes to insect-resistant technologies or GM traits, they seem to be having more difficulty sustaining that in the long run. However, when it comes to Roundup Ready, few weeds have developed it, and they seem to be able to easily take care of those in rotations. There is nothing on the horizon that would suggest that that technology will go away quickly or that it is causing a lot of harm. Right now, it is just lowering costs and increasing productivity.
[Translation]
Senator Rivard: Last Tuesday, we met with people from your sector — bioenergetics, biofuels and so on. We know that Canada imposes a 5-per-cent maximum for a blend of that kind of fuel with traditional fuel. In the United States, the standard is 10 per cent, and it could even go up to 15 per cent. I was surprised at the answer given by a witness, who said that 5 per cent resulted in an immediate 20-cents-per-litre drop. So an increase to 15 per cent seems like an attractive prospect for taxpayers.
The government imposes rules, but it is always ready to listen to all the stakeholders. Are you doing anything to convince governments to allow, first of all, the percentage to be increased to 10 per cent — as is the case in the United States — or, even better, to go up to 15 per cent? In addition, based on the statistics, do you believe that there is an impact of 20 cents per litre on every 5 per cent?
[English]
Mr. Gray: Maybe Mr. Cranfield can take a crack at this. I want to think about it a bit.
Mr. Cranfield: Biofuels is not necessarily an area in which I have a lot of expertise, so I am a bit hesitant to answer the question. The one issue I will raise is that while the U.S. has a blending regulation of 15 per cent, my understanding is that those regulations have been highly politicized and highly influenced by the biofuel lobby in the United States.
I am also of the opinion that such a high level of mixing regulation reflects budgetary pressures in the United States, and that is with respect to the farm bill in the U.S. The farm bill — and, in particular, payments to corn producers — historically has been very significant in the United States because of how they have structured their support program. My view is that the federal government in the United States saw biofuels and a high blending requirement as a way of shifting that support away from the public purse on to the backs of those who drive cars, so really it was a budgetary issue.
Whether or not that 5 per cent equates to a 20-cent-per-litre drop in the price of fuel is not something I can speak to. That would be something where you would need expertise from the petroleum industry, I would think.
[Translation]
Senator Rivard: A number of people from the agriculture and agri-food industry told us that, if the government provided no assistance for biofuel production, we would not be talking about it at all. The production of biofuels is profitable because of government assistance. Is there reason to hope that, in the medium term, the biofuels industry will be profitable enough that the government will no longer have to provide assistance for biofuel production?
[English]
Mr. Gray: I have looked at this for a period of time, and one of the issues we have is that it is impossible to separate the current price of grains from the U.S. biofuel policy. If, for example, you have $100-a-barrel oil and $4 corn, you can profitably make biofuel. However, with $7 corn, which is the current price, you could not do it without government mandates. If you took away the government mandates, you would see two things: You would see lower grain prices and a reduced amount of grain being converted into ethanol. If grain prices got too low, then the ethanol industry would start up again and actually process more biofuel.
I would say the mandates are keeping the demand for grain higher than what it is and the ethanol industry bigger than what it would normally be. If you took it away at this point, now that they have the capacity, whenever grain prices got low relative to the price of oil, you would see some corn-based ethanol being produced.
Senator Mahovlich: With all these patents and regulations, are the farmers well represented by the lawyers in this business? Are they all well represented, and is there some help to farmers who cannot afford it?
Mr. Gray: If you are talking about patent disputes or the use of patents on farm, my understanding is that is generally just a private matter between the producer and the firm that is claiming patent infringement. There would be some non-profits that would probably help the producer. I also understand that very few of those types of disputes go on. Basically, farmers respect the property rights of the firms to a large extent and there is little infringement going on in the first place. I do not think the legal costs are a big part of the patent issue.
Senator Mahovlich: Are there not that many disputes over patents?
Mr. Gray: At the farm level, for the use of patents, my understanding is that there are not that many cases.
The Chair: I would like to follow up on this important question by Senator Mahovlich. However, we do see more and more questions vis-à-vis intellectual property, be it in agriculture or other sectors of the economy. To link with what Senator Mahovlich asked, let us take the case with big industry, for example, without naming the industries. In big industry, we see inquiries by the United States vis-à-vis antitrust. Would you have any comments on that?
Mr. Gray: Certainly. As I discussed earlier, because there are large economies of scale and size in research, there is a natural tendency for a concentrated industry. If you take any particular industry, let us say the corn industry, and you go to a particular place, you will probably only have two or three major sellers. With the canola industry in Western Canada, you would probably have four or five major players. When you get down to firms less than five in an industry, antitrust becomes a bigger possibility.
One of the things that has occurred in the last five years is, for example, Bayer CropScience in Monsanto kept their technologies very separate, which meant you could not get a Roundup Ready trait built into an InVigor variety. They did not share those. Since that time, there have been cross-licensing agreements between these firms. With respect to these agreements, it is hard to argue that the firms are acting entirely independently from one another. My understanding is that those are some of the subjects being discussed in the anti-trust.
The Chair: Any comments, Dr. Cranfield?
Mr. Cranfield: I would agree with Mr. Gray that the structure of the industry is such that it is just inherent in what they are doing that you tend to see a small number of firms engaged in what one might think of as ``big science.''
The issue of cross-licensing is a reflection, I think, of some of my comments on collaboration as well, that in some ways if concerns over antitrust arise over either collaboration or licensing arrangements, the trade-off is perhaps we will get innovations that solve problems that are endemic in agricultural production, be they crop disease or disease of livestock, so it is a clear trade-off.
It is important to recognize that while these are big companies, I am of the opinion that they keep their cards pretty close to their chest, so I do not necessarily think it is an issue of collusion but one of there being a small number of firms. That makes it very transparent as to who will price a new product, at what level and what kind of response that generates from another firm.
Senator Robichaud: Mr. Gray, in your second recommendation you talk about industry-controlled, check-off funded corporations, and then you say given the ability of governments to free ride on this industry initiative, both federal and provincial should do some matching. Would that not dry out the funds that would go to public researchers, which you mentioned in your third recommendation?
Mr. Gray: My view of the world is that there are three types of research that really are important.
Public should be doing research that is of broad interest to the public that goes beyond any particular industry, and that includes big science, basic genomics, et cetera.
There is other research that goes well beyond an individual firm but resides in industry. For example, understanding how lentils fit into a crop rotation may be of interest to all the producers in an area. That is industry-based research.
Finally, there are private-based research initiatives which clearly can be done within private firms, and the intellectual property allows them to capture returns from that.
All three of these make up a good innovation system, and you need all three.
Really, when they talk about public-private partnerships, they should be public-producer-private partnerships so there is an industry fund that covers off the research that is of interest to the industry but not of interest to the public as a whole.
I think that second recommendation was to bring more research funds to the industry level so that they could make that piece of research larger. Currently, governments undertake some of those activities right now. In Australia, they found that the matching got the industry interested in actually taking on some of that responsibility, knowing that they were not just replacing taxpayer dollars; in fact, they were getting a buy-in from taxpayers as they moved in that direction.
Senator Robichaud: There is a lot of competition for those public funds.
Mr. Gray: Yes, and I think we cannot lose sight of the fact that what we really need to do is increase the amount of research that is there through private producer and public funding. If we are not doing enough, we cannot capture those high rates of return to research.
Senator Robichaud: Mr. Cranfield, how difficult is it for a person looking at doing some innovative research and having to navigate through all those patents and all the protection that exists for what is there actually in agriculture? Is that a disincentive for them?
Mr. Cranfield: I think the simple answer is, yes, there is some disincentive. The more complex answer is that it will depend on the organizational structure and the size of the organization that that person has behind them.
For a small start-up firm that spun off from, for instance, a university research project, this can be complicated task for them to do, and they will have to hire lawyers to help them, which is costly.
For larger firms such as the Monsantos of the world where they have legal departments and expertise, they have people dedicated to that task.
I think to get those small start-up firms in a position to navigate that, those firms need to have either deep pockets or someone accessible to them that can help them navigate through the system. It is difficult to untangle the system to say maybe we need it to be simpler for small firms and not as simple for larger firms because then you are not treating them in an equal manner. The notion that everyone is being treated the same way is important in that regard.
Senator Buth: How important is it for the government to recognize UPOV 91 in terms of moving forward with innovation?
Mr. Gray: I would say it is very important that governments recognize UPOV 91, especially for those crops that are not afforded patent protection because they are non-GM or for crops that are not hybrid. It is important to move forward and make some of the property rights stronger than they currently are. I am a little worried that if UPOV 91 is addressed, the assumption will be the underfunding of these crops will be addressed, but that is a long-term solution unless there are some more aggressive short-run moves made as well. However, certainly we need to pass UPOV 91.
Mr. Cranfield: I think strengthening intellectual property rights is very important in the sense that it can incentivize doing research. From that perspective, I think Mr. Gray has hit the nail on the head that it will be an important issue to pass.
The Chair: For the record, UPOV is the International Union for the Protection of New Varieties of Plants.
Thank you, doctors, for your presentations. It was enlightening and very informative.
I would like to advise honourable senators that the meeting will close at five to ten, and the chair will reserve five minutes for comments from honourable senators to the committee.
We now have with us Mr. Len Coad, Director of Energy, Environment and Technology Policy from the Conference Board of Canada.
Mr. Coad, thank you for accepting our invitation and sharing with us your comments and opinions in what we call the challenging times in agriculture and looking at agriculture and innovation going forward. You have an interesting topic to share with us. Please make your presentation, to be followed by questions from the senators.
Len Coad, Director, Energy, Environment and Technology Policy, Conference Board of Canada: Thank you for including the Conference Board of Canada in your investigations. Ethanol is certainly an interesting question and topic.
We were engaged almost three years ago now by the Canadian Renewable Fuels Association — we always disclose the source of our funding when we do studies like this — to take a careful and independent look at ethanol. We reviewed well over 100 published studies, most of them from refereed journals and reliable sources, and we considered a number of questions related to the benefits and costs of ethanol production and consumption, primarily in Canada but of course in North America. It was interesting to see the range of views that are out there and the way the views have evolved, particularly in the last 10 years.
We looked at themes of economic impacts where, based on the evidence, we found about $1.2 billion a year of GDP generated by ethanol production and use and approximately 1,000 full-time jobs.
We looked at input versus output energy, which used to be a big issue for ethanol. Does it contain more energy than it takes to produce it? We looked at greenhouse gas emissions. Does use of ethanol reduce greenhouse gas emissions? Fortunately, with the advancement of life cycle analysis and offset protocols that have been developed in Alberta and elsewhere, those questions are easier to answer today than they were 15 years ago. Ethanol contains something between 2.3 and some higher number times the energy that it takes to produce it. Greenhouse gas emissions, on a life cycle basis, are reduced by something between 40 and 60 per cent using ethanol rather than gasoline.
Senator Robichaud: I am sorry, 40 to 60 per cent?
Mr. Coad: Yes. The variation is even greater than that, and it typically relates to the farming practices and the production practices related to ethanol and the source of crude oil you are talking about as the comparator.
We looked at health impacts, and there the evidence is still ambiguous. What it comes down is the vehicles that we drive today are so good at filtering out the pollutants that are in the fuel that it is a matter of different pollutants from ethanol than you have from gasoline, and the net health impacts are very minimal in terms of the transition from one to the other.
On land use and food for fuel, we focused more on direct land use and less on the indirect question, which is a much softer and more challenging issue. On the direct side, it is abundantly clear from the cropping data over the last 20 years for both the United States and Canada that corn and wheat produced for ethanol use have placed very little pressure on land use. The corn used for ethanol, in fact the corn used for the entire market, is being produced from the same or marginally larger acreage than the corn that was used before ethanol became a real issue. That is primarily because of yields. Yields have been increasing fast enough to offset the incremental demand.
We looked briefly at technology and its evolution because you have to do that to complete a study of this scope. We are not a technical organization, so we only looked at that.
With regard to policies, we did a survey of the development of ethanol policies in both Canada and the U.S. and, in our conclusions, raised a few questions around policy.
Finally, energy security is one of the fundamental arguments that comes forward for ethanol. In the Canadian context, that is really energy security for Ontario and Quebec, where most of the corn-based ethanol is produced in Canada. It is a situation where there are a number of steps that would be required to make ethanol a significant contributor to our energy security.
With that, I will close my introductory remarks and look forward to your questions.
Senator Plett: In light of the time, I will be very brief in asking two questions.
Clearly, there have been agricultural price increases. Do you think that the agricultural price increases are more a result of oil price increases from 2006 to 2008 than of ethanol production?
Mr. Coad: The studies that we encountered suggest somewhere between 30 and 50 cents a bushel higher corn prices because of ethanol demand in North America, 30 cents being the more common number. There were a number of studies that attributed very high percentages of the increase in that period — and the increase in agricultural prices generally — to ethanol. When we looked at those studies, one of the challenges was that they do not control for the impact of rising oil prices, and, of course, diesel fuel is a major farm input cost. We found only one study, done by the International Energy Agency in Paris, that attempted to separate those two impacts. Of course, they did the study in the early 2000s and had much lower oil prices, but they found about a 5 per cent to 7 per cent increase in farm prices as a result of biofuels demand globally. They found, when they did oil price shocks in $20-a-barrel increments, that they were getting 20 per cent and above increases in farm prices. Clearly, the more important factor is the price of the farm inputs.
Senator Plett: Governments are offering incentives on different products all the time. They have also offered incentives on ethanol fuel blends. Why are we not seeing service stations cropping up all over the country offering 85 per cent fuel/ethanol blends? Is it because the oil companies are bucking that trend? Are they opposing ethanol?
Mr. Coad: I would not say that that is necessarily the case. Of course, our research did not consider the attitudes of the oil industry toward ethanol production.
What I would say is that meeting the current blend requirement in Canada requires all of the ethanol produced in the country plus a little bit more. The expense, although it would probably be less than 5 cents a litre, to make E85 high blend infrastructure available across the country, means that the incentive to do that, when you do not really have the supply of ethanol to make it work, is limited. There are an increasing number of flex-fuel vehicles that can handle more than a 10 per cent blend on the road, but it really is a momentum issue. There is no infrastructure, so I do not have an incentive to look for E85 because it is not there. I do not have an incentive to purchase a high-blend capable, flex-fuel vehicle, and there is not enough production to make it worth the investment at the service station to convert the facilities. Also, there is no program in place in Canada to provide any kind of support for the infrastructure that would be required.
Senator Plett: If I see a pump that has 85 per cent, I should not be pulling in with my car and just filling up?
Mr. Coad: You will not be able to unless it is a flex-fuel vehicle.
Senator Peterson: Is the 40 to 60 per cent reduction in GHG based on 5 per cent ethanol added?
Mr. Coad: That is a very good question. They typically do those calculations based on actual performance in a 10 per cent blend because that is what the vehicles can accommodate without modification, and then they adjust the savings up to a 100 per cent blend. If you were running pure ethanol in your vehicle, the GHG emissions would be, according to the Canadian evidence, 62 per cent lower than they would be on straight gasoline. The key source of the savings is the fact that the GHGs that are embodied in the fuel, because it is a biofuel, are not counted in the emissions because they came out of the atmosphere into the crop and are going out of the crop back to the atmosphere. It is a net zero.
Senator Peterson: Where are we on cellulosic biofuel?
Mr. Coad: That is a good question, and I am probably not the best person to answer it. There is the Iogen demonstration plant. It is not cellulosic biofuel, but Enerchem has a thermochemical plant in Edmonton that is using municipal waste. There are those we encountered who suggest that the next generation is there and just needs to be scaled up and commercialized. There are those who say that it has been many years coming and is still not there. However, that is a technical question that I would not express a view on.
Senator Buth: I would like to go back to something you said. You said that you did an analysis between Canada and the U.S in terms of policies and programs. You saw some differences there. Can you elaborate?
Mr. Coad: The U.S. approach has been much more aggressive than the Canadian approach. The Renewable Fuel Standard, RFS2, mandate is approximately 15 billion gallons a year of ethanol from corn and first generation technologies, and that is very close to being met. The next 15 billion gallons a year is to come from next generation or advanced biofuel technologies.
Senator Buth: This is in the U.S.?
Mr. Coad: Yes. There is a lot of money going into it, addressing the question of how quickly you can commercialize and get those biofuels on the market.
Here in Canada, there have been government incentives at the provincial and federal levels. Currently, the federal incentives are capped. By 2017, there will not be federal financial participation in ethanol production. Again, going back to the next generation, it is an open question whether there will be any government programs and what they will look like to support that technology development and commercialization going forward. SDTC has their NextGen Biofuels Fund, and they are active. However, from a broad policy point of view, there does not appear to be anything in existence or on the horizon in the near term.
Senator Merchant: Is a litre of ethanol the equivalent of a litre of high-test gasoline? If not, how much less energy is there in a litre of ethanol?
Mr. Coad: Equivalent in what sense, just the energy content?
Senator Merchant: Yes.
Mr. Coad: I believe that is about a 70 per cent equivalency, depending on what the particular gasoline is and what the additives in the gasoline are. On an energy basis, it is about 70 per cent.
Senator Merchant: The studies that you have been looking at take the cost of producing ethanol related to the amount of energy. When you do these comparisons, it is hard to understand how they arrive at these figures.
Mr. Coad: The comparisons are not typically cost-based. In the comparison for energy in ethanol, you are looking at all of the energy inputs required to produce the corn, the machinery that goes into it and the energy requirements to transform the corn into ethanol.
Senator Merchant: The fertilizers, all the energy that it takes.
Mr. Coad: Fertilizers, irrigation, the whole range of inputs. You net out the energy that would have been required to produce the distillers grains that are a by-product, and then you look at the total energy in that litre of ethanol and compare that to the energy required to produce a gallon of gasoline and net that out of what is in the gasoline and do the comparisons on that basis.
For ethanol energy content basis, you are typically focussing on the inputs for ethanol, so it is a percentage or a ratio. The actual dimension disappears when you calculate the ratio. It is 2.3 times the energy in the ethanol as compared to all of the inputs that are required to produce that ethanol, whatever its energy content.
Senator Merchant: Is burning food impacting on higher food costs? If so, do you know by how much?
Mr. Coad: The studies we encountered suggested that grain prices around the world would be something in the order of 5 per cent lower if there were no biofuels demand at all. It is impossible to accurately separate the impact for Canada because Canada is such a small portion of the world.
When you look at the land use and the demand for corn, there are studies that have attempted to do that, but typically they start with assumptions like we will shut off all imports of corn to Canada, so already you have an impact other than biofuels, or they do not adjust for the impact of oil price changes, so you have another extraneous factor. They then come up with a number and say that is the impact of biofuels, which is not entirely accurate.
[Translation]
Senator Maltais: Mr. Coad, I am curious about one question. Are the grains used to produce ethanol — either wheat or corn — of first grade, or can they be of second or third grade?
[English]
Mr. Coad: That is a fascinating question. The ethanol producers will tell you that they are looking for grains that have a very high starch content. In wheat, that tends to be the lower quality grains. In corn, I am not so sure. They are looking for the starch that is in the plant because that is what is easiest to convert to sugar, and then alcohols. The by- product that comes out is very high in protein, which is what the cattle feeders are typically looking for. There is a win- win in there where the ethanol producer will look for the high content of starch, and that is typically not the highest value grain in the market, and they will return a product that is whatever protein was in the grain.
[Translation]
Senator Maltais: Your answer is clear, but one question remains unanswered. Canada depends very little on modified grains — GMOs. On our Canadian farmland, are genetically modified grains better for ethanol production than regular grains?
[English]
Mr. Coad: We would need a chemical engineer to answer that question. My layman's answer would be that if they are modified to increase the starch content, then that could make them more attractive to the ethanol market. If they are modified to increase the protein content to make them a better feeding grain, then that would reduce their attractiveness to an ethanol producer.
[Translation]
Senator Maltais: It is said that, in Mexico — a country that produces huge quantities of corn — there is practically no more farmland that produces regular corn because genetically modified grains have taken over. Is that good or bad for the population? Are genetically modified products more suitable for ethanol production than for the production of regular food?
[English]
Mr. Coad: I do not think I can give you a very good answer to your question. We focused on ethanol production in particular, and Mexico is not a significant producer of ethanol on the world scale. We did not look at Mexico in terms of corn trade between the U.S., which is a very large ethanol producer, and Mexico. We did not find evidence. The U.S. is very close to self-sufficient in terms of its corn ethanol requirements. The genetic modification is a dimension we did not examine.
[Translation]
Senator Maltais: Is the European Community a major ethanol producer?
[English]
Mr. Coad: No. There is a graphic in the report. They are actually quite small. They are larger than Canada as a whole, but diesel consumption is much more prevalent, even in light duty vehicles, in Europe than it is here. When you speak of biofuels in Europe, you are talking more about biodiesel than ethanol. There is not the land area in Europe that can be farmed to produce significant amounts of corn for ethanol production. It is a very different market in Europe than here.
[Translation]
Senator Maltais: That could be a new market for Canada.
[English]
Mr. Coad: For exports of ethanol, were we to have the capacity to produce ethanol in volumes that would allow us to export, ethanol production would be close enough to tide water to get there quite cheaply.
Senator Mahovlich: The United States has 10 per cent ethanol in their gasoline and we are at 5 per cent. I do not quite understand why we cannot produce more ethanol with the amount of land we have in this country. It seems to me that we should be able to have 10 per cent ethanol. Brazil has 40 per cent ethanol in their gasoline, but they are into sugar cane. It might be worth our while to have sugar cane greenhouses. I know we have tomato houses in Quebec, but if we changed that to sugar cane, it may be worth our while.
Mr. Coad: Thirty years ago, I used to work in a greenhouse. I am not certain what the technical or economic constraints would be to growing sugar cane that way.
Back to the initial question about why we do not have enough ethanol supply to enable 10 per cent blending, that is really an investment question. Certainly the technology is there.
Senator Mahovlich: Do we blame the government? It would not be the oil companies.
Mr. Coad: Well, it might be. Certainly Husky Energy is one of the largest producers of ethanol in Canada. I believe Suncor is now the largest, with their recent expansions. Greenfield would be second, I would expect, in terms of capacity and production.
It is a matter of why there is not enough investment to make that happen. Twenty years ago, or maybe even fifteen years ago, ethanol production only happened with government support. Today, government support is less of an issue and trending down. It is conceivable that ethanol production would be economic, and again it depends on the spread between the feedstock cost and the price of gasoline at the pump and on relative taxation of the two products. However, it is really whether there is enough investment in capacity and whether there is enough supply of the feedstock to make that happen. The 5 per cent versus 10 per cent blend is really a policy choice between the two governments. A 10 per cent blend is a little more achievable in the U.S. than it is in Canada.
Senator Mahovlich: However, it is renewable. That is a positive thing to look at for the future. All this corn, and so on, is renewable.
Mr. Coad: Yes, and you bring in a bit of the energy security issue there as well, where there is a much less imperative for Canada than for the United States. With recent developments in horizontal drilling, fracturing and shale oil production in the U.S., they are now talking about doubling their production of oil within a reasonable time frame. The policy balance may shift in the U.S. and may continue to shift in Canada. However, we are now getting into some fairly speculative areas.
The Chair: Before we go to Senator Robichaud, Senator Plett had a supplementary.
Senator Plett: First, I like my tomatoes, so let us not change greenhouses into places that grow sugar cane.
In relation to Senator Mahovlich's question, I would like to clarify for the record that if we were to subsidize the ethanol program and use more corn for ethanol, it would hurt the agricultural industry because it would drive the price of corn up for them, would it not?
Mr. Coad: That depends very much on the rate of expansion in the ethanol demand for corn. Historically that expansion has happened at a pace that has been accommodated, enabled by growth increase in yield. Yields in Canada are lower than U.S. in corn in part because we use less chemical fertilizer. As long as the biofuels demand for corn rises at a pace that does not significantly exceed the improvements in yield, then there may not be much of an impact at all on the farm industry. If we were to attempt to double in 10 years, or double in a shorter period, then one would expect that there would be an impact as you describe.
Senator Plett: The better yields in the United States have nothing do with climate?
Mr. Coad: Certainly.
[Translation]
Senator Robichaud: Mr. Coad, everything you said during your very interesting presentation was positive. Are there any aspects that may not be as positive you would like to discuss? I am not looking for problems. All the better if everything is going well.
[English]
Mr. Coad: Based on the research we did, there are a couple of areas that might fit into the category you describe. There is a dynamic between biofuels demand for corn or wheat and cattle feeding operations and that crowding out effect for the cattle feed. As a result of biofuels demand, there is a reduced requirement for soybeans. There is a whole dynamic there that is not particularly well researched and well understood. The academic work that we encountered was done mostly using linear programming techniques, which have a tendency to find what ought to be in a perfect rather than what is likely to be in an imperfect world. There probably is a need for more investigation in that area.
We have already addressed the most challenging question, and that is the balance between ethanol supply, ethanol infrastructure, and any contribution ethanol might make to our transportation sector as a fuel. Without the infrastructure it really does not get beyond the 5 per cent to 10 per cent blending level and the incentive to put the infrastructure in place is limited.
That is the challenge, along with the next generation technology. Will it be there and when? If it is not there, then ethanol is a 5 per cent to 10 per cent blending fuel and it is a gasoline extender, not a gasoline alternative. The efforts that are going there are relatively meagre in Canada.
[Translation]
Senator Robichaud: You anticipated my second question. Regarding second-generation technology, you say that it is uncertain how long it will take or what it will take to develop a plan. Should we include some incentives in our recommendations so as to accelerate the process?
[English]
Mr. Coad: That is the most fundamental question in ethanol today, namely, does the technology work? Yes. There is a thermochemical path and a fermentation path that both work, and there are plants in Canada — one being constructed in Edmonton; one in operation here in Ottawa — that demonstrate both plants. It is not a question of technical feasibility but of commercial feasibility and cost. This is a fundamental question in Canada since before I knew that it was a fundamental question. That fundamental question is we are particularly good at innovation when it comes to finding an idea, testing the idea and demonstrating that it works. However, other nations seem to be much better than us at taking that idea from ``we know it works'' to ``we have a commercial product that is profitable.'' That is the question in ethanol.
We are leaders in the world of that next generation of technologies. Will we do better in turning the technology into a product so that we can sell it to the world? It certainly is an attractive option.
Today the national round table released its final report and dealt with innovation in a low carbon world. We have the opportunity to complete that innovation cycle and retain a leadership in a direction that will be profitable and attractive in a low carbon future. Whether we have the ability to do that is beyond my ability to see.
[Translation]
Senator Robichaud: What could we do to retain that leadership role in the development of second-generation technology?
[English]
Mr. Coad: The courage to invest. It is a partnership between the private sector, governments at all levels and academics. It is a partnership that involves already firms from outside of Canada who have expertise in various elements of the process that are required. It is just the courage to do it and make it happen.
[Translation]
Senator Robichaud: You mentioned three stakeholders. Often, they are co-dependent, and someone must eventually get the ball rolling. Is that the government's role in this case?
[English]
Mr. Coad: I would suggest, based on our research, that it is the role of government to be a willing and active partner.
Senator Plett: That is a good political answer.
[Translation]
Senator Maltais: I knew my colleague Senator Robichaud would come back to the idea that it is up to the government to be a leader in this area.
Mr. Coad, I have a question I would like to ask you, but I want you to be comfortable with answering it.
In Canada, and especially in Quebec, there is an anti-ethanol lobby. There is a claim that land is being taken away that could be used to feed hundreds, even millions of people, if grains were produced to be sent to South America. Those grains could be sent to all developing countries, in places like Africa and so on.
Honestly, is the fact that ethanol is being produced at home — on our farmland — to reduce CO2 emissions, depriving anyone of food?
[English]
Mr. Coad: The evidence that we encountered for North America is abundantly clear. We are not diverting land from other uses, and we are not impacting the quantity of grains available to food markets in Canada. However, the argument is more subtle than that. The suggestion is that because world prices for grains are higher and because corn prices are higher in North America, that puts upward pressure on world prices and encourages people to destroy forests around the world to convert them to corn or sugar cane production to produce ethanol. That is a tenuous argument. There are multiple studies from credible universities in the United States that support that argument. There are multiple studies from credible universities that refute that argument.
What I looked for and what I relied on in doing this report was that some of those studies were done pre-2005 and predicted certain price increases and land use changes in the U.S. market, in the 2005 to 2015 period. Our work only went through 2009, and we did not see evidence that those predicted changes were actually happening. These studies were based on modelling approaches. We also looked at studies that go beyond agriculture and include forestry in the predictions, and the predictions are much softer in terms of land use impacts.
On balance, our conclusion was that the indirect land use arguments are difficult at this stage, based on the current understanding of world cropping dynamics, to support.
Senator Peterson: Could the development and utilization of natural gas in vehicles have a negative impact on the ethanol industry?
Mr. Coad: The two have coexisted for several decades now. They are very different technologies. For natural gas, because it is a gas, you need special handling capacities, and you are talking about very high operating pressures. It is a more challenging technology to implement. There is very low energy density in the natural gas. It has been a real struggle to make that market go. I guess the best answer that I could give is that the two could easily coexist in the context that they have in the past as niche fuels.
We did not look at that directly. I think there ought to be a role for both of them in the market, based on historical performance.
Senator Peterson: I think natural gas is concentrating on the trucking industry now.
Mr. Coad: In liquefied form, yes. Robert Transport and Westport Innovations have their technology going. That looks like a market that is set to expand. We have published on that recently as well.
The Chair: Thank you, Mr. Coad, for sharing your thoughts and your vision. For the record, there is an extensive report from the Conference Board of Canada. Thank you for this brick of information, sir.
Before we adjourn, senators have asked to recognize one of our parliamentarians, Senator Peterson. For the record of the committee, it will be made public.
Senator Plett: Thank you, chair. I, at least in part, did this yesterday in my remarks in the chamber, but I do want to do it here for the record.
It has been a pleasure, for me personally, to have worked with Senator Peterson on two pieces of legislation that have gone through the Senate. As I said yesterday, it would have been a pleasure for me to have served with Senator Peterson on this committee on a full-time basis. I have always thought that the other side was missing something by not having Senator Peterson on this committee. Not that they do not have good representation here, but you would certainly have added something, senator.
It has been a pleasure for me to have worked with you in the chamber for the last three years and a little bit. That is how long I have been here. I want to simply acknowledge that I believe that you are the type of parliamentarian and the type of individual that this Senate needs. You work in a non-partisan way. You are passionate about what you do. I want to wish you well in whatever endeavours you take on in the future, and I know that you are not going to be retiring. You are leaving this chamber, but you will remain active, I am sure. I wish you health and happiness in whatever you do.
Thank you very much for having spent some time with this committee on a couple of pieces of legislation.
[Translation]
Senator Rivard: I want to begin by thanking you, Mr. Chair, for allowing us to do what we do and for keeping the interpretation services. As my first language is French, although my English is constantly improving, it is nevertheless preferable for us to be able to choose our words to express what we feel, and to have someone translate that.
Senator Peterson, I have been a senator for three and a half years and have been lucky to sit across from you in the Senate. I have always been impressed with the quality of your questions, your knowledge of topics and, especially, the respect you have shown for the answers you receive. You know, as a parliamentarian — this is not your first experience in politics, be it in provincial legislative assemblies or the Senate — that when questions are asked by the opposition, we do not necessarily obtain the answers we are hoping for. I have always been impressed with the way you accept the answers.
I have also had the pleasure to get to know another side of you. We had only one mission together — for the OSCE in Vienna — over two years ago, and I was introduced to the human side of your personality. I see you as a very cultured and affable man.
Over the course of the year, there are many theme days. I see that Senator Robichaud is wearing a badge in support of the fight against poverty. Some days are dedicated to the fight against cancer. Every week or every two weeks, there are themes for which we wear symbols. Today, I decided to wear a tie in the colour of your party to pay tribute to you. Believe me, this is not a coincidence. I knew you would be here today, and as it is your last day, I decided to use this opportunity to honour you.
Tomorrow will be the first day of your new life. If you decide to retire, I know that you will live comfortably and happily, and I hope you will get to spend as much time as you like with those you love.
I wish you all the best in your new life with your loved ones. You will be missed.
[English]
The Chair: Before we adjourn, I would ask Senator Peterson if he has a few words to say.
Senator Peterson: Yes, and thank you very much.
When I first came here I was on the Agriculture Committee for three years and the Aboriginal Peoples Committee, and I enjoyed it very much. They then asked me to go on the Energy Committee, and unfortunately it conflicted: It was at the same time as the Agriculture Committee. It was a tough decision. I was here and the agriculture people said, ``You have to stay here.'' The energy people said, ``You go back and tell them you are coming over to our place.'' Anyway, I did wind up over there.
It was good, but being able to come back for these last issues has been great. It has been interesting and challenging, and obviously it is of great importance to my part of the world. I have certainly enjoyed working with this committee. It has always been a pleasure. It has been good, with forthright, good debate and good discussion. You win some, you lose some, but that is life.
In general, it has been good and I thank you very much and I am very appreciative of your kind words. Thank you so much. I am just about retired, in a few more hours. I am trying desperately. People keep saying, ``When is he going to leave?'' ``How come he is still here?''
The Chair: Thank you, Senator Peterson.
[Translation]
Senator Robichaud: Mr. Chair, you know that I never give praise or pay tribute in the Senate Chamber, but I think that here, in committee, I will make an exception for no reason other than to recognize the role Senator Peterson has played in this committee.
Senator Peterson certainly made my task easier when he dealt with bills studied by this committee, and he did so with incredible tact. While working together with government senators, he would move amendments and would always accept the committee's decision. He has my sincere thanks.
Honourable senators, I am checking his birth certificate to make sure that no error has been made and that he could not stay with us a little while longer.
Senator Maltais: Good idea.
Senator Robichaud: And finally, to follow up on the comment by Senator Rivard, perhaps he could lend his red tie to Senator Plett in recognition of Senator Peterson's contribution to this committee. Thank you.
[English]
The Chair: Honourable senators, I wanted to ensure that we put this on the record for Canadians who have been watching and following this committee, especially on agriculture.
I would like to conclude by saying, Senator Peterson, that no one can say that you were not dedicated. No one can say that you did not participate in the debate. No one can say that you have not been devoted to Canadians. Your trademark, in my mind, has always been — watching you and your performance — to be very respectful of the democratic process, and that is who we are as Canadians.
On this, I will say may God bless you and your family for many years to come.
To the witness, Mr. Coad, you have witnessed camaraderie and that we, as senators, have the same objective: to have a better quality of life for all Canadians.
Honourable senators, I declare the meeting adjourned.
(The committee adjourned.)