Ethanol not to blame

A SECOND LOOK AT ETHANOL AND THE PORK INDUSTRY

SEVERAL REPORTS PUBLISHED over the past three years by the George Morris Centre postulate that the ethanol industry in Canada has a negative impact on the pork industry. These reports, published in November 2007, January 2009 and August 2009 have all had the same negative view of the ethanol industry.

The report from November 2009, authored by Al Mussell, Graeme Hedley and Douglas Hedley of the George Morris Centre, persuades feed grain producers to “back away from support of grain-based ethanol” as it is against their own long-term best interest.

The August 2007 report, by Al Mussell and Larry Martin, attack the policy objectives of the Canadian government’s mandate to support ethanol production.

The Ontario Corn Producers’ Association, a key player in the development of ethanol production in Ontario since 1984, eyed these reports with serious concern.

“We are very sympathetic with hog producers. They are going through a really tough time right now and we can relate; corn producers have been subject to severe low prices in the past. But, OCPA has serious concerns about the findings of the George Morris Centre reports,” says Don Kenny, 1st vice president of the organization and chair of the Grain Trade and Market Development committee.

In an effort to better understand the George Morris Centre reports, the OCPA requested a third party review of the first two reports from November 2007 and January 2009. Victor Aideyan, Senior Consultant of HISGRAIIN Commodities reviewed the two reports, analyzing the conclusions of each report. A review of the third report is currently underway.

UNDERSTANDING THE ONTARIO CORN BASIS
From Aideyan’s report, the most striking finding is his conclusions about the corn basis. The George Morris Centre claims that a strengthening basis, the relative price of grain in an area compared to a benchmark price, usually the Chicago price, is harming pork producers through increasing feed costs.

However, Aideyan’s analysis of the reports and the data show that “since 2000, we see that the basis is moving in a direction opposite to what their argument has claimed. Since we have seen ethanol develop in Ontario, we have seen basis for corn weaken.

”Historical data shows that Chatham, Ontario average annual corn basis has gone from +0.50 in 2002 to just over 0.00 in 2008. During this same timeframe, ethanol production in Ontario has risen dramatically with a current estimated production capacity of 201 million gallons per year.

A weakening basis benefits users of corn, including livestock and meat producers. “There is no evidence of Ontario moving to an import basis during 2002 to 2008. The George Morris Centre implies that such a process has occurred and has hurt livestock producers,” explains Aideyan.

THEORY VERSUS REALITY
Theoretically, the claims put forth through the George Morris Centre reports regarding basis make sense. “If everything else was static, the theory argues that this is what should be happening,” says Aideyan, referring to increased ethanol production causing a strengthening basis.

However, the reports from the George Morris Centre are excluding two very instrumental market factors. The first factor, the exchange rate, “has most certainly helped weaken the basis.” Aideyan’s report goes on to explain that “if a country’s currency is strengthening we expect that country’s basis to weaken – all else being constant.” With the Canadian dollar increasing in value, it is clear this has a negative impact on the Ontario corn basis.

“The second factor is the increase of corn production,” says Aideyan. According to Statistics Canada, grain corn production in Ontario has increased from 180 million bushels in 2000 to nearly 270 million in 2008. As basis reflects ‘surplus’ or ‘deficit’ commodity status; the volume of production is a major determining factor. Aideyan’s report concludes that increased grain corn production in Ontario is very likely to have been a factor in weakening grain corn basis.

“Apparently these two factors, the exchange rate and increasing production, have overwhelmed any other factor that may or may not have been strengthening basis,” concludes Aideyan.

Ultimately, blaming a strengthening basis for the difficulties being faced by Ontario’s non-supply managed livestock industry, as purported the George Morris reports, does not stand up against the actual data from 2002 to 2008.

ACTUAL FACTORS
“We can certainly sympathize with pork producers,” reiterates Kenny. “In previous years, corn producers were struggling with the same issues: corn prices were too low to support production.”

Aideyan confirms Kenny’s sentiment explaining that “the reduction in revenue because of lower prices is the real reason why the livestock industry in Ontario has been losing money and shrinking over the last few years.”

Specifically, Ontario pork producers have suffered at the hands of the exchange rate – the same exchange rate that has resulted in a weakening basis and lower prices for corn producers.

“On average, Ontario pork producers have lost about $33 per head since 2005, strictly because of the strengthening Canadian dollar,” says Aideyan.

This average loss, due to actual exchange rates during 2005 to early 2009 and the real Ontario hog prices, is a striking number. This loss does not even begin to take into account the possible loss pork producers have experienced as a result of the H1N1 virus. In the most recent report, the George Morris Centre validates the figure of $40 per head that has been claimed in the media as the loss experienced by pork producers due to H1N1.

“It is obvious that pork producers are suffering from market conditions out of their individual control. As much as we can identify with their current situation, it is not the result of increased ethanol production as the George Morris Centre would have you believe,” says Kenny.

To read Aideyan’s full report, including his response to the George Morris Centre’s statements on ethanol’s environmental benefits, please see our website www.gfo.ca or contact Claire Cowan at ccowan@ontariocorn.org. •