Grains Oilseeds

[Tackler]

Ethanol craze raises concerns

NEAR MELBOURNE, ON–In the deep cold of the too-long winter here, ice pools in the fields just outside Larry Cowan's two-level backsplit, creating a worrying, if not unfamiliar, predicament.

"We get concerned about that," says Cowan, squinting, as he guides his truck along the salty blacktop that quilts the tilled earth here into tidy packages of farmland. "That's got to disappear real quick."

It's nothing Cowan hasn't seen before; 32 years spent on his own 728 hectares here at Chimo Farms, growing corn, wheat and soybeans, don't leave a lot of room for surprise. Out here in the fields, at least.

Back inside is a different story, courtesy of an unlikely source: The business report on CNN.

"The head of one of the big investment firms in New York City was talking about gold going to $1,000 an ounce," Cowan recalls, his eyes wrinkling with a pinched smile. "And then he talked about Chicago corn going to $6. And that is the first time I ever, in 32 years, have ever, ever heard a stock broker talk about corn in the same breath as gold. So there's some frenzy in the marketplace, yes."

Cowan, laconic and soft-spoken, carries with him a certain world-weariness that is the farmer's right. Things are never easy in the world of agriculture, and Cowan, like most of his kind, tends to temper any enthusiasm with a strong dose of common sense, if not outright pessimism.

IN THE '80S, with interest skyrocketing and commodity prices bottoming out, it was all Cowan could do to stay afloat. "We almost went bankrupt," he grins. "But we managed to rejig and survive."

Cowan can be forgiven a touch of skepticism. But at the same time, in the corn patch, this is an historic moment. It is the stuff of pure paradox: An agricultural boom. Corn prices have soared in the past year, both here and especially in the U.S., where the industry standard Chicago Exchange pegged it around $5.75 (U.S.) a bushel. As recently as November, it was hovering around $3.50, and a year before that, under $3. And it has dragged soybeans and wheat up along with it, both of them up more than 50 per cent in the past year.

Cowan has seen prices jump before. In 1997, corn leapt briefly to $7, due largely to a drought that crippled supply, before it crashed back down. "That's what history teaches us," Cowan sighs.

This time, there is no drought, no blight, no yield disaster making corn stocks much coveted in the face of scant supply. Some point to a growing appetite in China and India, and they do play their part. But that would be ignoring the elephant in the room, growing fatter by the day.

Ethanol, the corn-derived alcohol now being used as a gasoline additive by most big retailers, has already drastically altered the economic reality of the American heartland. In 2005, the Bush administration introduced incentives for the ethanol industry meant to stimulate its growth and throw the country's quest for renewable fuel and decreased dependence on foreign oil into fast forward.

It's a tantalizing hypothesis, and in Brazil, it's already been achieved. Already the world's biggest ethanol producer – from sugar cane – 85 per cent of the cars sold there are "flex" vehicles, which can run on either ethanol or gas. Brazil, once a voracious consumer of foreign oil, now imports not a drop. (The U.S. heavily taxes Brazilian ethanol imports to protect its own industry.)

In the U.S., the Bush plan has been working, largely to the benefit of midwestern farmers and agricultural giants like Cargill and Archer Daniels Midland, who act as middlemen between farmers and the ethanol plants, which have been coming online as fast as they can be built.

In 2002, there were 61 plants in the U.S. Today, there are 134, producing 7.2 million gallons of ethanol a year, prompting U.S. farmers last spring to plant their largest corn crop since World War II. With 77 more under construction, and Federal production goals set at 36 billion gallons by 2022, there's no end in sight.

Canada and Ontario have been a little slower to the ethanol craze, but they're making up for lost time. Last year, the federal government introduced a $200 million grant program for new biofuel projects, through 2011. At the same time, the McGuinty government introduced a mandate for all gasoline sold in the province to contain at least 5 per cent ethanol. That's due to increase to 10 per cent by 2010 – the highest content a conventional engine can use without modification.

It was enough incentive for Suncor, one of the founding giants of Northern Alberta's oil sands, to set up shop on the cusp of Ontario corn country in Sarnia last year with an ethanol plant of its own. "Basically, the market is growing, and that's because of the government mandate," said Jason Vaillant, a manager at the Sarnia facility. "It made more sense for us to make it ourselves than buy it from someone else."

Suncor's Sarnia plant produces 200 million litres of ethanol a year, consuming 20 million bushels of Ontario corn in the process. Vaillant estimates that the plant consumes about 10 per cent of the province's annual corn production all by itself. When it reaches full capacity, those numbers will double. The other operating plants in the province collectively produce another 250 million litres – and consume another 12 per cent of the crop.

BUT, AS INCENTIVES lure more investors into the ethanol business, Ontario's corn supply starts looking increasingly short. Six more plants are either planned or under construction. If they all reach capacity, the province's ethanol production would jump by another 1.63 billion litres, to more than 2.2 billion, total.

Quick math tells a potentially troublesome tale: At a ratio of 10 litres per bushel, the proposed ethanol production in Ontario would consume virtually all of the province's corn production of 250 million bushels a year. "That was a real question when we were building," Vaillant says. "Where are we going to get all the corn?"

The ethanol industry isn't the only one asking that question. Among all the crops humans grow, corn is perhaps the most essential. Of all the things in your local supermarket – more than 45,000, says Michael Pollan in The Omnivore's Dilemma – about a quarter of them contain corn.

It is the ultimate staple in the broadest sense: It's in processed foods like cereals. Its starch is used in sauces as thickener, its sugar in soft drinks as sweetener. It's a binding agent, a colourant, the alcohol in your beer. It's in coffee whitener, ketchup, candies, canned fruit and condiments.

Go to the meat counter and you'll find beef and pork fattened by corn feed, chickens and turkeys raised on kernels. Your eggs are laid by corn-fed hens. Commercial fish feed is largely corn-based, and even the carnivores among them, like salmon, have been sufficiently genetically engineered to be raised on a corn-based diet.

And forget about just the things you eat: Corn is in toothpaste and lipstick, eyeshadow and batteries, diapers, cleaners, plastic products, paper and cardboard. Touch the grubby drywall at your local super-grocer, smudged with the fingers of a thousand errant children, and you'll be in direct contact with it: Corn is a binding agent in plaster products, too.

Ancient civilizations, like the Mayans, were built on its nourishment, and Third World countries remain dependent on it. This is the ugly side of the corn boom: Food and fuel economies are intertwining, and the market is revealing an unpalatable truth about which one the markets deem to be more essential.

Rising corn prices to feed the ethanol industry invariably impact food prices, too. And the entire chain can be disrupted.

Hog and beef producers are suffering badly due to the high price of corn-based feed. Last week U.S. Pilgrim's Pride, one of the country's biggest poultry producers, cut 1,100 jobs and closed one of its massive processing plants and half its distribution centres. Its justification: "Unprecedented increases" in feed costs.

And this is relatively comfortable First World suffering at the hands of the corn boom. In Mexico, where corn is a revered component of an ancient diet – until recently, it was considered sacrilege to feed it to animals – large-scale protests about the cost of tortillas, a Mexican diet staple made from corn flour, have become commonplace, touched off when 75,000 took to the streets of Mexico City last year when tortillas quadrupled in price in just a few months. Once again, the voracious U.S. ethanol industry was cited as the culprit.

IT ALL SERVES as something of a cautionary tale to Ontario's still-nascent ethanol industry. Ontario corn, by its own description, is "basically an in-house operation," Cowan says. Very little is exported; almost none is imported. But in an ethanol-fuelled future, that will have to change.

"If we had a below-average yield one year, where would it all come from?" asks Bill Deen, a professor in the plant agriculture department at the University of Guelph.

Deen, who studies cropping systems and agronomy in the province, doesn't see a solution. "Virtually all the farmable land base in the province is in use," he says. "What we're using is pretty much it."

That means increasing demand would mean stealing it from other crops, upsetting rotations and potentially damaging yields. And current prices provide a potent incentive.

How times change. Two years ago, Deen was recruited by the Ministry of Agriculture to give a series of talks to farmers about the importantance of keeping up their corn production.

"The price was so low, growers were looking at a loss," he recalls. "They couldn't possibly make money."

A year later, with prices spiking alongside the U.S. ethanol boom, Deen had a new message: "I had to tell them 'don't grow too much corn – you need to maintain a rotation to keep your crops healthy,'" he says.

The lure is certainly there. For Rick McCracken, who farms his 769 hectares with his wife Betty just outside Melbourne, boom times have spread the wealth around. In the buoyant corn economy, everyone prospers.

"If you want to buy a tractor or a combine, you're going to have to wait until next year to see it," he says. McCracken, who's also a seed dealer, shares Cowan's leavened optimism. "It's an exciting time," he says. But the disaster years of the '80s, when high interest rates drove over-leveraged farmers into bankruptcy by the dozens, are never far from mind.

"We're only a few months into this. We don't want to get too optimistic and see it happen again."

One thing they don't have to worry about is the crop itself. A remarkably adaptable, hearty crop that spread from Mexico into Ontario long before the arrival of Columbus, corn has natural genetic variability that allows it to grow and flourish in almost every climate imagineable. In the agricultural world, corn is relatively reliable, thanks to genetic engineering, drought and disease are no longer major concerns.

BUT OVER-GROWTH has consequences, Deen says, and not just because of basic agronomy. Crops are rotated – beans one year, corn the next – to keep one or the other from depleting the soil of the different nutrients they require.

Corn-based ethanol , to those who follow the industry, contains a central paradox: Among the crops grown here, corn is the most machine intensive and demanding, spewing exhaust into the air to collect the very material meant to deliver us into a carbon-neutral fuel future. Corn also cries out for more herbicides and nitrogen fertilizer than any other crop, and erodes soil more quickly than any other as well.

For all the hype, the future of corn-based ethanol is less than assured. Research is pouring into deriving ethanol from less intensive, non-food crops like prairie grass, and even crop waste.

"That, at least, makes sense," says Ann Slater, the president of the Ecological Farmers' Association of Ontario. "I haven't seen anything that leads me to believe that corn-based ethanol is in any way sustainable, here or anywhere else."

Cowan has seen too much, been here too long, to buy into hype. He's rotating his crop as per usual this year, reducing corn acres and increasing beans. Despite the frenzy, most responsible farmers will do the same, he says.

"All it takes is a stroke of the pen from a new U.S. president to lower that tariff on Brazilian ethanol, and it's over," he says.

Jitters reverberate through the market. Earlier this month, buyers, wary of betting too much on corn's upswing, pulled their bids for 2009/2010, fearing overpayment and a drop in a price that, by all accounts, seems only to be going up. "It's volatile," Cowan shrugs. "I guess they're getting a little nervous."

Under a slate-grey March sky, Cowan pulls his truck into his storage area, where corrugated metal silos store last year's grain. Birds wheel overhead, dropping earthward to light on the frozen ground to peck at the kernels scattered in the muck.

Here, surrounded by the fruits of his long labours, Cowan allows the unshakeable pragmatism he has cultivated for the past 32 years to soften. Slightly, at least.

"Optimistic? I don't know if I'd say that," Cowan allows. His eyes wrinkle again with that smile. "Let's call it optimism, with a side note note of caution."