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The Market for Saskatchewan Produced Ethanol

The Saskatchewan government has suggested that our ethanol industry be export-based. The recommendation is 400 million litres per year of ethanol production with 65% of that production exported to other provinces or the United States.

Local Demand

Provincial domestic demand for ethanol will be about 130 million litres per year once all gasoline in the province contains 10% ethanol. If ethanol is also blended with diesel fuel, the provincial demand will be about 400 million litres.

Export Markets

Some have suggested that the existence of reliable export markets for Saskatchewan ethanol is questionable. Given the nature of government involvement in ethanol production, there are substantial obstacles to exporting ethanol from Saskatchewan.

The North American ethanol industry is dependent on government policy, primarily through incentives and tax exemptions, to ensure its economic viability . In some jurisdictions, direct subsidies are used to promote the capital investment necessary for increased ethanol production.

Ethanol production has become an economic investment tool used by governments in the U.S. to stimulate rural economies and provide economic benefits directly to farmers through "environmentally friendly, value-added" industry. U.S. ethanol production is increasingly being viewed as a way to reduce producer dependence on direct government agriculture subsidies and provide direct economic benefit to farmers through ownership of "value-added" enterprises. The industry is essentially becoming integrated with primary agricultural production, and agricultural, energy, and environmental policy.

The US agricultural subsidies which have depressed the prices for grain are currently blamed for much of the economic hardship in Saskatchewan's rural communities. US ethanol subsidies are likely to have a similar result on Saskatchewan ethanol.

Given the protectionist attitude in the U.S. toward agriculture, it is highly unlikely that even a perceived threat from foreign ethanol would be tolerated, notwithstanding the provisions of NAFTA. The report done for the Saskatchewan government briefly mentions this issue as a "market barrier" to U.S. exports, even after recommending an export based industry with the U.S. being the primary market.

Given that federal incentives (as well as state incentives) are used to promote ethanol production and use in the U.S., inter-state trade of surplus ethanol is a likely result. The existence of inter-state trade in ethanol does not automatically imply a ready-made export market for Saskatchewan produced ethanol.

Choosing a development model for Saskatchewan's ethanol industry based on uncertain export markets brings into question the sustainability of the industry. As noted above, it appears that U.S. production will meet and likely exceed domestic demand by 2005. With an adequate supply of domestically produced ethanol, a mature ethanol industry, policies promoting fairly rapid expansion, and a protectionist attitude toward the agriculture sector, it is unlikely that the U.S. will be a reliable, long term export market for Saskatchewan ethanol.

In anticipation of California's future demand for ethanol, U.S. production has been steadily increasing, causing a slight weakening of the American domestic ethanol market. This will make penetrating the U.S. ethanol market in the short term extremely difficult, as domestic producers will be extremely sensitive to foreign imports.

In addition, Ontario's ethanol industry is well established and growing. Most of the Canadian technological expertise and research into ethanol production is located there. If Ontario experiences increased demand for ethanol, it is most likely that tax dollars will be spent on developing the existing industry as opposed to supporting out of province producers.

Manitoba's incentives apply only to ethanol produced in that province. It is unlikely that incentives will be extended to Saskatchewan ethanol for an extended period of time, as Manitoba is planning to develop its own industry.

The assumption that Saskatchewan will have easy and long-term access into well-established ethanol producing markets is questionable, given that many of the potential "markets"seem to have the capacity to meet demand.

Government Incentives

Export into other jurisdictions will require the subsidization of Saskatchewan ethanol by the importers' tax dollars. Convincing other governments to provide economic incentives to Saskatchewan ethanol will be very difficult, especially if those jurisdictions already have established ethanol industries.

Saskatchewan ethanol is eligible for tax incentives in Alberta, Ontario, and the U.S.

Eligibility is not a guarantee, howver, and the concerns over U.S. trade protectionism are noted above.

Ethanol can enter the U.S. duty free, and is eligible for U.S. tax incentives under NAFTA, but the likelihood of protectionist measures against ethanol imports is quite high given the protectionist attitude toward agriculture in the U.S.

The U.S. ethanol industry is well established and tied closely to the agricultural sector. Government incentives provide direct economic benefits to rural communities such as production subsidies and loan guarantees to promote local investment. The incentives also result in indirect economic benefits such as "spin-off" economic activity and higher corn prices due to increased demand.

It is illogical to assume that state governments will extend their incentives to outside producers when their own ethanol industries are more established than Saskatchewan's, are capable of meeting future demand, and are substantially improving their local and state economies.

Ontario has entered into agreements with its ethanol producers guaranteeing that the provincial tax incentive will stay in place for a stated period of time after a plant becomes operational.

The expectation that Ontario will extend tax incentives (an economic cost to governments) to outside producers is very optimistic. Any tax dollars spent on ethanol production would likely be directed at the established industry in that province.

Given that Ontario would receive no economic benefits from ethanol produced in Saskatchewan, the report given to the Saskatchewan government states that a "strong environmental argument would have to be made for the Ontario government to extend the guarantee" to out of province producers.

While Saskatchewan ethanol is currently eligible for Ontario's ethanol fuel tax incentives, there is no guarantee that this will remain the case in the future.

Manitoba's incentives apply only to ethanol produced in that province.