Follow us on twitter
Site Feed
Podcast
Email Updates
Diverse Issues Impacting Farm Policy Debate
On Wednesday, the Associated Press reported that, “European Union subsidies to encourage farmers to grow biofuel crops have reached their annual limit, the European Commission said Wednesday…EU Agriculture Commissioner Mariann Fischer Boel questioned if they were still needed. ‘This payment has been very useful in stimulating the European biofuels sector,’ she said…‘But … next month we will have to ask whether it is still necessary. We now have a binding target for biofuels and a blossoming marketplace.’”
I. Agricultural Economy
II. Farm Bill
III. Energy Issues- Energy Bill, B99, EU Biofuels Incentives
I. Agricultural Economy
A news release issued yesterday by the House Ag Committee stated that, “Today, the House Agriculture Committee held a hearing to review the structural changes taking place in agriculture and their impacts on the farm economy.
“The committee heard testimony from a panel of three economic analysts about recent developments in the farm economy, examining both short- and long-term trends in prices and farm output. The committee also discussed rising input costs from energy prices, rising land and labor costs, and the effects of new product development like biofuels.”
The opening statements of the panel witnesses (Dr. Keith Collins, Chief Economist, U.S. Department of Agriculture; Dr. Howard Gruenspecht, Deputy Administrator, Energy Information Administration, U.S. Department of Energy; and Dr. Pat Westhoff, Research Associate Professor, Food and Agricultural Policy Research Institute (FAPRI)) can be viewed by clicking here.
In part, Dr. Collins stated that, “Cash receipts for producers are forecast at a record $276 billion in 2007, up $37 billion from 2006 and $60 billion from 2003. Cash production expenses are forecast to be a record $222 billion in 2007, up $17 billion from 2006 and $45 billion from 2003. With receipts rising faster than expenses, net cash farm income is forecast at $86 billion this year, up sharply from last year and 4 years ago. The three highest farm income years ever have occurred during the past 4 years. While some states on the East Coast, in the Southeast, and in the Mountain region faced drought this year, production losses were not enough to significantly affect national income measures.
“For most field crops, 2007 cash receipts are forecast to be a record high. For example, cash receipts for wheat, corn, soybeans, and rice are all expected to rise to all-time highs. In contrast, cash receipts for cotton and fruits and nuts are expected to decline this year due to large cotton supplies and weather problems for tree fruits like peaches, pears and oranges…Government payments to producers in 2007 are expected to total nearly $14 billion, down only $2 billion from 2006. In 2007, producers are forecast to receive $5.3 billion in direct payments, $3.1 billion in conservation payments, $2 billion in disaster payments, and $1 billion in tobacco transition program payments. In addition, producers are forecast to receive $2.2 billion in counter-cyclical payments and marketing loan assistance benefits, with upland cotton accounting for nearly all of these payments.”
Later, Dr. Collins stated that, “The recent declines in ethanol prices have sharply reduced profitability for ethanol producers. This year’s record corn production is bringing some relief to declining ethanol producer margins. However, despite the expected record corn harvest, corn prices remain strong supported by strong demand, record-high wheat prices, and strong soybean prices. We estimate that a 40 million gallon Midwest ethanol plant, receiving the late September price of $1.52 per gallon for ethanol and paying $3.00 per bushel of corn, was earning 17 cents per gallon above variable costs of production and 3 cents below total variable plus capital costs of production. In the current price environment, the 51 cents-per-gallon ethanol tax credit is important in sustaining ethanol demand and prices at levels that are forestalling some plant shut-downs.”
Meanwhile, Dr. Pat Westhoff noted that, “However, events of recent months remind us that we still have a lot to learn about biofuel markets and the impacts of biofuels on agricultural markets. Furthermore, we’ve been reminded that factors unrelated to biofuels continue to have major impacts on the farm economy.
“Ethanol prices that exceeded $3.00 per gallon in the summer of 2006 have dropped below $2.00 per gallon. On October 11, ethanol futures traded on the Chicago Board of Trade closed at or below $1.60 per gallon for all 2007 and 2008 contracts.
“This drop in ethanol prices has occurred in spite of petroleum prices around $80 per barrel this fall and NYMEX futures prices that remain above $70 per barrel as far as the eye can see. Earlier this year most of us would have thought that $80 petroleum should imply ethanol prices well above $1.60 per gallon.
“These lower ethanol prices have squeezed ethanol plant profit margins. By our estimate, net returns over operating costs averaged $1.56 per gallon in 2005/06 and $0.95 per gallon in 2006/07. With those kinds of returns, a plant built in 2005 could be fully paid for today. Current futures, in contrast, suggest a return over operating costs of just a few cents per gallon, and that’s before considering capital costs.
“As a result, the future of the ethanol industry is now much less certain than it seemed just a few months ago. We expect plants under construction to be completed. However, it is less certain whether they will all operate at full capacity, and the pace of new investment seems sure to slow dramatically.”
Near the end of his testimony, Dr. Westhoff stated that, “Prices for grains, oilseeds and many other agricultural products are above their historical average levels. Growing biofuel production is much of the reason, but the weather and a variety of other factors also play important roles.
“FAPRI’s projections suggest that average prices for many agricultural products are likely to remain above the average levels that prevailed prior to 2006. But, it would be premature to conclude that we are in a new world and that there is no chance that we will ever see $2.00 per bushel corn again.”
II. Farm Bill
Reuters writer Charles Abbott reported yesterday that, “Too many members of the Senate Agriculture Committee oppose tighter limits on U.S. farm subsidies to include stringent reforms in an overhaul of the farm program, the panel’s chairman said on Thursday.
“Because of the need for wide support for the farm bill, ‘I can’t say that I will be fully satisfied with what is in the bill on payment limitations,’ said chairman Tom Harkin, Iowa Democrat, in a statement.
“One committee member, Republican Charles Grassley of Iowa, has proposed a ‘hard’ cap of $250,000 a year per farmer and requiring at least 1,000 hours of labor or management a year to qualify for payments.”
Robert Pore, writing yesterday at the Grand Island Independent (Nebraska) Online, reported that, “Sen. Ben Nelson, D-Neb., is supporting a call by a coalition of 18 rural groups, including the Center for Rural Affairs, for a strong payment limitation provision in the Farm Bill.
“‘I don’t think that farm payments should go to mega-farmers,’ Nelson said Wednesday, during a telephone conference with Nebraska reporters.
“Nelson said he is supporting a comprehensive payment limitation reform proposal introduced by Senators Byron Dorgan, D-N.D., and Charles Grassley, R-Iowa.
“[T]he Dorgan-Grassley proposal, pending for Senate floor action, would cap direct payments at $40,000, counter-cyclical payments at $60,000, and marketing loan payments at $150,000, for a hard total cap of $250,000.”
Philip Brasher, writing yesterday at the Des Moines Register’s Cash Crops Blog, noted that, “The farm bill that the Senate Agriculture Committee will vote out next week will likely have a means test similar to what the House passed this July, Sen. Tom Harkin says.
“However, Harkin says that the full Senate is likely to pass a cap on individual farm subsidies similar to what fellow Iowan Charles Grassley has been pushing. Grassley has proposed a $250,000 cap on the amount of subsidies that any one farm can collect.
“The House-passed farm bill actually loosens the limits on farm payments while lowering the income threshold somewhat for collecting subsidies.
“Under the House bill, wealthy individuals with more than $1 million in adjusted gross income would be disqualified from getting farm subsidies. The current limit is $2.5 million.
“The Bush administration wants to set the limit at $200,000.”
In other farm policy news, DTN writer Chris Clayton reported yesterday (link requires subscription) that, “As U.S. senators work on potential programs for young and beginning farmers, a government report released Thursday shows USDA cannot demonstrate the effectiveness of its young and beginning farmer programs.
“According to the Government Accountability Office report, USDA does not measure outcomes or performance of the beginning farmers the department assists or the money provided to those producers. Without knowing outcomes or developing a department-wide strategy, USDA runs the risk that its beginning-farmer efforts are not ‘mutually reinforcing or coordinated.’”
Chairman Harkin noted in a news release issued yesterday that, “‘This study shows that policies Congress has passed over the past few decades are helping beginning farmers get better access to credit and conservation programs,’ said Harkin. ‘But I’m concerned that USDA cannot track the success of these programs. In the 2007 farm bill I intend to strengthen our commitment to beginning farmers and ranchers by increasing set asides in the FSA loan program, continued bonus incentives in conservation and efforts to encourage land sales to beginning farmers and ranchers. Congress will do its part, but I call on the USDA to uphold its responsibility by putting in place mechanisms that can effectively monitor and ensure the benefits beginning farmers are gaining from these initiatives.’”
In a separate aspect of the current Farm Bill debate, a Congressional Research Service (CRS) report from Monday provided an excellent background on crop insurance and disaster assistance issues (“Crop Insurance and Disaster Assistance: 2007
Farm Bill Issues,” by Ralph M. Chite (October 15, 2007)).
In part, the CRS report stated that, “The federal government has relied primarily on two policy tools in recent years to help mitigate the financial losses experienced by crop farmers as a result of natural disasters — a federal crop insurance program and congressionally mandated ad-hoc crop disaster payments. Congress has made several modifications to the crop insurance program since the 1980s, in an effort to forestall the demand for supplemental disaster payments. Although the scope of the crop insurance program has widened significantly over the past 25 years, the anticipated goal of crop insurance replacing disaster payments has not been achieved.”
With respect to the general views on this issue from the executive branch, House and Senate, the report provided this background: “The Administration’s farm bill proposal [pages 149-164] contains several crop insurance recommendations that it claims will enhance participation; address issues of waste, fraud and abuse; reduce costs; and reduce the need for emergency supplemental disaster payments. The Administration is opposed to a permanent disaster payment program, and contends that its proposed supplemental crop insurance coverage for the deductible portion of a policy would help preclude the need for supplemental disaster payments.
“The House-passed version of the farm bill (H.R. 2419) contains several revisions to the crop insurance program, most of which are cost-saving measures. Farmers would be required to pay higher fees for catastrophic coverage and participating insurance companies would see smaller reimbursements for their operating expenses and would be required to share more of their potential underwriting gains with the government.
“To date, the Senate Agriculture Committee has not yet marked up its version of the 2007 farm bill. Meanwhile, the Senate Finance Committee approved legislation that, among its many provisions, would authorize a permanent trust fund to make agricultural disaster payments available on an ongoing basis over the life of the next farm bill. According to CBO, the program would cost $5.1 billion over five years, which is approximately equal to the annual average amount of ad-hoc disaster payments that have been provided by Congress over the past 20 years.”
III. Energy Issues- Energy Bill, B99, EU Biofuels Incentives
Manu Raju reported at The Hill Online on Wednesday that, “A senior Senate Democrat on Tuesday said bicameral negotiations over some of the most contentious issues in the pending energy bill would be left to his party’s leadership — rather than the Democratic committee chairmen who helped write the legislation.
“Senate Majority Whip Dick Durbin (D-Ill.) said that it would be easier to broker a deal if negotiations over an increase in automotive efficiency standards and renewable energy requirements for power plants were left to the leadership, rather than the slew of House committee chairmen and several Senate chairmen who would be involved in those discussions.”
In a related article, Reuters writer Chris Baltimore reported today that, “Citing delays in reconciling energy legislation passed by both chambers of Congress earlier this year, two Democratic senators on Thursday unveiled a stand-alone bill to require 18 billion gallons of renewable fuels to be blended with U.S. gasoline supply by 2016.
“Sen. Barack Obama, Illinois Democrat and 2008 presidential candidate, and Sen. Tom Harkin, Iowa Democrat and chairman of the Senate Agriculture Committee, offered a bill that would raise the U.S. renewable fuel standard to 18 billion gallons by 2016, including 3 billion gallons from advanced biofuels like cellulosic ethanol.
“Corn prices are at record levels mostly due to stellar growth in demand for ethanol. Iowa and Illinois lead the nation in corn production.”
***
Recall that yesterday’s FarmPolicy.com update included this recap: Reuters news reported earlier this week that, “European biodiesel makers said on Tuesday they may take a legal action against what they see as unfair subsidies for U.S. biofuel which threaten their business.
“Biodiesel makers in many European Union countries have come under pressure from growing sales of cheap U.S. biodiesel made with the help of subsidies, the industry association European Biodiesel Board (EBB) said in a statement [available here].
“Price competition has eroded margins for EU producers, forcing some out of business and would lead to stagnation or even decline in EU biodiesel output this year, the EBB said.”
With respect to the EBB press release cited above, on Wednesday, the National Biodiesel Board (U.S.) issued a letter to the Secretary General of the EBB which noted in part that, “As you are aware from our previous conversations and correspondence, the National Biodiesel Board (NBB) is opposed to any sort of activity that would undermine the integrity or intent of the U.S. biodiesel excise tax credit. Accordingly, our industry has worked with both Congress and the Executive Branch to eliminate ‘splash and dash’ transactions where biodiesel produced outside the U.S. is transshipped through the U.S. for the sole purpose of claiming the biodiesel excise tax credit.”
The letter was less clear with respect to biodiesel produced and subsidized in the U.S. and then exported to Europe.
***
On Wednesday, the Associated Press reported that, “European Union subsidies to encourage farmers to grow biofuel crops have reached their annual limit, the European Commission said Wednesday.
“EU Agriculture Commissioner Mariann Fischer Boel questioned if they were still needed. ‘This payment has been very useful in stimulating the European biofuels sector,’ she said.
“‘But … next month we will have to ask whether it is still necessary. We now have a binding target for biofuels and a blossoming marketplace.’”
Also on Wednesday, Reuters news indicated that, “The European Union has reduced the subsidy amount payable to farmers in 2007 to help them grow more biofuel feedstock crops after plantings increased more than expected, the European Commission said on Wednesday.”
***
And on the issue of alternative feedstock sources for ethanol production, Dow Jones News writers Laksme Khorana and Prasenjit Bhattacharya reported today that, “Asia’s efforts to adopt biofuels are faltering as the surge in food prices forces governments to scramble for crops other than corn and palm oil with which to make the fuels.
“Unlikely plants such as cassava and sweet sorghum are emerging alongside the better-known jatropha as alternatives, illustrating the pressure on fast-growing emerging economies to cut crude-oil consumption and pollutants while keeping food prices low.
“If successful, the shift to marginal, low-maintenance crops as feedstock could yield the policy push that is necessary for the growth of the Asian biofuels industry, experts say. The crop switch also could benefit the region’s land-rich, populous countries by unlocking the value of less-fertile areas where plants such as jatropha, a hardy shrub whose seeds are pressed to yield biodiesel, and cassava are easily grown.
“Aware of the potential to create jobs and lift incomes in poor regions, governments are pushing ahead with investment in refineries and with other initiatives such as loans to farmers.”
And with respect to “second generation” developments in the EU, Philip Brasher reported in yesterday’s Des Moines Register that, “Take elephant dung and wheat straw, and a century-old Dutch distiller thinks it could have the motor fuel of the future.
“Royal Nedalco wants to make alcohol for fuel out of plant cellulose, the cheap and plentiful stuff that makes up crop residue, as well as wheat straw, wood and grasses. The problem is finding a cheap, effective way to extract and then ferment the sugars found in cellulose. Nedalco officials say they’ve found a key to fermenting the sugar – a yeast taken from elephant dung.
“The European Union needs projects like this to work if it will meet a proposed mandate to fill 10 percent of its transportation energy needs with biofuels by 2020. Europe lags behind the United States and Brazil in ethanol, but production of biodiesel has soared, reflecting Europeans’ preference for fuel-efficient diesel cars.”
Keith Good
