Canadian Grocer

Ten questions

 

Ontario Agri-Food Technologies

Dr. Gord Surgeoner

 

Canadian food retailers have been forced to answer tough questions regarding rising food prices. Many blame this on crop production being increasingly diverted to non-food uses. Dr. Gord Surgeoner, president of Ontario Agri-Food Technologies, argues that this trend will likely continue and that farmers are not to blame.

 

(1) Canadian farmers have been increasingly tailoring their crops toward non-food uses such as health products, industrial feedstock and particularly for fuel production. Why is that?

 

Canadian farmers are under incredible pressure. Their costs are rising. Yet their share of food production dollar is small relative to other sectors of the value chain such as distribution, storage and transportation. Three years ago we had tractors driving round Toronto protesting because farmers were being paid less for each ton of corn they produced than the city was paying to get rid of its garbage.

 

In short, we need to ensure that farmers get fair return for their labour and investment. The problem is that many public sector officials just donít seem to understand farming. As a result, they often implement that have adverse effects. Take third world hunger; we naturally need to help out poorer countries in times of great need. But if we do too much, we destroy their domestic farmersí incentives, because their produce is competing against what is essentially ďfree food.Ē The question is where do you draw the line?

 

(2) Is the diversion of farm production to non-food uses a trend that will continue?

 

Yes. I strongly believe that it will. The Stone Age did not end because we ran out of stone. It ended because human beings came up with new and better technologies. Take ethanol demand; much regarding the speed at which the current transition toward increased ethanol use will occur depends on the price of oil relative to the price of corn, which is used in ethanol production.

 

The higher that ratio rises, the more inclined people will be to turn to ethanol-related energy solutions. Lately, the ratio has been rising steadily. For example during the 1980s, a barrel of oil cost ten times as much as a bushel of corn. During the 1990s that ratio was fifteen times. These days the ratio borders on twenty times. The result has been that the carbon and hydrogen that we are now extracting from corn, now costs half of what used to relative to oil.

 

(3) You have been a big advocate of ethanol production. Can you tell me a bit about this process and whether it is a positive development for the economy?

 

Ethanol is an idea that has been around for some time. Henry Ford produced cars that ran on corn-based fuel almost 100 years ago. However oil was so cheap back then that gasoline became the dominant fuel source for cars. To properly assess the consequences of corn use in ethanol production you need to analyse the total package. You have to remember that in addition to the ethanol that is produced, the corn used also yields other by-products. One of these is carbon dioxide which is then condensed and pumped into greenhouses where converted to cucumbers, eggplant and a lot of other vegetables. Each bushel of corn also yields 8.9 kilograms of dried distillerís grain, which goes to feed livestock. The protein concentration of that feedstock is actually higher than what was in the corn initially.

 

It also pays to separate what is going on in the U.S. from what is happening in Canada. For one, corn production here is less attractive due to our climate. On the other hand, right now about 25% of U.S. corn crop is going to ethanol. In Canada the mandates are smaller. Only about 5% of all gasoline in Ontario has to be ethanol based. Also it pays to remember that the U.S. is pushing forward ethanol production in large part for energy self-sufficiency reasons. Remember they spend millions of dollars each a day in Iraq and a lot of that is spent in order to guarantee their oil supply.

 

(4) Canadian agriculture products are also being used in a variety of other new ways as well. Examples that you have cited include as car liners, in T-shirts and as plastic substitutes. How important are these other uses?

 

Very important.  The chemical industry, for example, has innovated in several ways. Companies are now taking soybean oil and converting it to foam which is used in car seats. In fact 20% or car seat foam is now produced in this manner. In addition, many of the resins used in paint and ink production, now come from corn starch. Companies are now also converting feedstock such as soya beans and corn into lactates used in paint strippers, cleaners and glue. This new process has the added benefit that it the cuts volatile organic compounds (VOC) emissions that occur during the production process.

 

(5) What are your thoughts regarding the genetic manipulation of plants? Have criticisms been overblown?

 

You need to look at each technology individually. We now have a 12-year history on genetic use in several areas, which for the most part have been problem-free. For example right now 80% of all canola, 90% of all soy beans and 60% of all corn produced, comes from genetically modified sources.  Many varieties of wheat that we now grow have similar characteristics. Companies are also doing a lot more by using their sheer knowledge of gene technology, without necessarily having to manipulate them, through a process they call marker-assisted breeding. As a result they are far better able to tailor solutions to what the market needs.

 

(6) What effect is all this resource transfer having on Canadian food prices?

 

There is a lot of argument in that area. I have seen estimates of the effects ranging from 1.5% to 75%. But my guess would be far at the lower end. For one, it really depends on how you calculate. For example as we discussed before, a lot of the corn used in ethanol production ends up going right back into the food chain. All ethanol producers really do is remove the starch and sugar. The rest is recycled into the system. Many estimates leave this fact out.

 

We also often forget the effects the increased ethanol production has had on gas prices. People donít just eat, they drive too. So you have to net out the costs of the shifts in the value chain. It has been estimated that gas prices have been kept down between four and 10 cents a litre because of the supply of ethanol. People donít realize this, because gas prices have risen so much anyway. But it could have been a lot worse.

 

Most people also donít realize that the commodity portion of the consumerís food dollar is only 19% of the total cost. The rest of the money goes to labour, processing, transportation, storage. In other words, even if you doubled the prices of all the underlying commodities, consumersí food prices would only rise by 19%.

 

(7) However you say that those arenít the only reason that food prices have been rising. What are some of the other key factors?

 

A host of influences are now putting incredible pressure on global food demand. For one, the earthís population is growing by three people per second. These people need to eat. On top of that, many people who have only had subsistence diets in the past are now eating better. For example 1.5 people per second are now moving into the middle class. That is leading to rising demand for beef, eggs and other more nutritious foods

 

However as I said before, it is not just the costs of the underlying commodities that are rising. All prices seem to be on the upswing. Energy costs are skyrocketing, which means that the price that businesses pay to transport, store and keep food cool are also rising. Labour costs are going up too. Fore example in Ontario, the minimum wage for transient workers has just been increased by 25%. People forget that those costs get passed along to the consumer. And lastly, speculation has been a big influence too. The rough markets in stocks and real estate means that there are few good places for investors to put their money. Many have turned to commodities as a refuge.

 

(8) You have also cited protectionism as an increasing worry. Why so?

 

As a result of the rising prices, an increasing number of countries have capped food exports. When practiced by individuals, this used to be called ďhoarding,Ē because it exacerbates food shortages down the line which inevitably leads to higher prices. Thailand, Argentina and as many as two dozen or so other countries have been named. However it is a catch-22 situation because these countries want to make sure that they have enough food left to feed their own populations.

 

(9) What will be the effects on Canadian retailers?

 

Retailers have it a bit tougher because they are the ones that have to look customers directly in the face to explain why prices are on the upswing. The challenge is that those higher prices are not really all their fault. For example the price of corn is set by the Chicago Board of Trade. And when the minimum wage in Ontario increased, many grocers were affected with that too. If you really think about it, we are all in it together. You canít blame it all on farmers, retailers or distributors. All of them are being hit by higher costs.

 

(10) Do you have any final thoughts?

 

Right now the question that is on everyoneís mind is ethanol use. I think that we need to be careful about not turning that issue into a food-versus-fuel debate. We need both. I believe that we are at peak oil production right now and that we are using oil twice as fact as we are discovering it. So that problem wonít go away. We also have to reduce our environmental foot print if we are to maintain the quality of life that we have today. Those are the things we need to focus on.

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is Canadian Grocerís Quebec correspondent.

 

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