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Biofuels and the Farm Bill
Iowa State University Extension Economist Robert Wisner noted earlier this month in the Iowa Farm Outlook that, “In the last two or three months, numerous articles in business and financial publications indicated the ethanol boom is about over. The rapid increase in corn processing for ethanol has been the major driving force pushing corn prices to levels not seen in years, and soybean prices to the highest level in 34 years. However, just when many business writers were pronouncing an end to the rapid ethanol expansion, crude oil prices moved up by $30 to $35 per barrel. High crude oil prices have been the primary driving force behind the ethanol expansion. The increased crude oil prices since late October have significantly improved ethanol processing margins after a period of depressed returns in September and October. For some plants during early fall, returns were negative.”
Dr. Wisner noted that, “A sharply increased Congressional mandate for annual ethanol production would provide further incentive to expand infrastructure capacities, along with the current $0.51 cent per gallon blending credit and the large discount of wholesale ethanol prices to unleaded gasoline. Within 18 to 28 months, it seems likely that infrastructure capacity will begin to catch up with production capacity. In the meantime, periods of depressed ethanol processing margins appear likely – due to downward pressure on ethanol prices and upward pressure on corn prices.”
After more detailed discussion regarding ethanol production, Dr. Wisner provided the following summary: “The rapid expansion of the ethanol industry in Iowa is being driven to a large extent by much higher crude petroleum prices than in the past. Ethanol for motor fuel has been produced in Iowa for more than 30 years, but the movement of crude oil prices into the $80 to $99 per barrel range, vs. $15 to $25 in the late 1990s, has converted corn (and to a lesser extent soybeans) into an energy crop. With at least 75 U.S. ethanol plants currently under construction, the ethanol expansion has not yet ended. Just the plants currently being built in the U.S., operating at rated capacity, will need the equivalent of about 60 to 66 percent of global corn exports. Most, if not all of these plants, should be operating within three years, and many will be in production before that. In addition, some portion of the 343 plants being planned but not yet under construction will likely start construction within the next three years. This rapid expansion of the industry is likely to put downward pressure on ethanol processing margins and will bring substantial changes throughout U.S. and global agriculture.”
And Reuters writer Karl Plume reported yesterday that, “Tight margins amid high corn and energy costs and weak ethanol prices will squeeze U.S. ethanol producers in 2008, but the industry will continue to expand, albeit at a slower rate than in recent years, industry experts said on Monday.
“A rapid expansion of U.S. ethanol output over the past year and the lack of comparable growth in the infrastructure necessary to get that fuel to market has produced a glut of the renewable fuel in the Midwest, where most of it is produced.”
The article added that, “U.S. ethanol production capacity has risen to nearly 7.3 billion gallons per year, up about 40 percent from a year ago, according to industry statistics.
“Corn is the primary feedstock for U.S. ethanol producers, who also use natural gas to run plants and dry the byproduct distillers grain, which is used as animal feed.
“Corn prices jumped to a 10-year high of $4.37-1/4 per bushel in February due to rising demand from ethanol producers and have remained above $3 ever since. Analysts expect strong demand for corn and the battle with soybeans for U.S. acreage to lift corn prices to $4.50 or $5.00 a bushel in 2008.”
The Reuters article concluded by saying that, “More government incentives, transportation improvements and blending of more ethanol into the gasoline supply will help bolster profitability in the longer term, analysts said.”
Meanwhile, University of Illinois Extension Economist Darrel Good indicated yesterday that, “Congress is considering energy legislation that would significantly increase biofuel mandates. While a cap on corn-based ethanol production may be included in that legislation, the cap would be well above current levels of production. A cap of 15 billion gallons, for example, would eventually require about 5.5 billion bushels of corn, compared to projected use for the current year of 3.2 billion bushels. Legislation being considered presumes heavily on the development of cellulosic ethanol technology that is economically competitive with corn-based ethanol. If that technology is slow in developing, corn-based ethanol demand will remain very strong as long as crude oil prices are high.”
After a closer look at issues impacting soybean and wheat prices, Dr. Good stated that, “At these lofty price levels, some temporary declines in prices might be expected, but there is little to suggest that prices will move significantly lower in the near term. More acreage of all three crops may be needed in the U.S. in 2008, and the prices of other crops are moving higher as well. In addition to more acreage, a favorable growing season is needed in 2008 to prevent another round of sharply higher prices. The persistence of high grain and oilseed prices will continue to put some upward pressure on retail food prices and intensify the debate about aggressive biofuel mandates.”
And with respect to biofuel mandates, Reuters writer Charles Abbott reported today that, “The new U.S. farm law would require use of 36 billion gallons of biofuels by 2022, five times more than this year’s output, under an amendment offered on Monday as a fallback in case an energy bill falters.
“Senate leaders hope to pass the five-year, $286 billion farm bill by the end of this week. Senators also are expected to vote this week on an energy bill, which also would set a 36 billion-gallon (137 billion-liter) ‘renewable fuels standard.’
“New Mexico Republican Pete Domenici said the new RFS would ‘reinvigorate’ the ethanol industry, encourage development of cellulose as a feedstock for ethanol and expand the volume of home-grown U.S. fuels.”
A FarmPolicy.com podcast from yesterday (MP3) included audio excerpts from Sen. Domenici while he was offering and explaining his amendment on the Senate floor. The podcast also includes some comments from Senator John Thune (R-SD) regarding the impact biofuels production has had on commodity prices and the resulting outlay of price-triggered federal farm payments under the 2002 Farm Bill. The FarmPolicy.com podcast lasts about nine minutes and can be heard by clicking here (MP3).
Mr. Abbott went on to explain that, “Under the language proposed by Domenici, production of corn-based ethanol would be encouraged to grow to 15 billion gallons. A mandate to use ‘advanced biofuels,’ such as biodiesel and cellulose-derived ethanol made from switchgrass, wood chips and other farm waste, would begin at 3 billion gallons in 2016 and reach 21 billion gallons in 2022.
“Colorado Democrat Ken Salazar and Republicans John Thune of South Dakota and Larry Craig of Idaho joined Domenici in calling for larger use of biofuels. Thune called the Domenici amendment ‘this marker in the farm bill’ and a safeguard for enactment of the 36 billion-gallon target.
“‘It is clear the energy bill has slowed down,’ said Domenici, noting White House objections to a House-passed bill.”
Also, Congressional Quarterly writer Catharine Richert reported yesterday that, “Concerned about the fate of this year’s energy bill, Republican Pete V. Domenici of New Mexico offered an amendment that would mandate that 36 billion gallons of ethanol and other biofuels be blended annually into gasoline by 2022.
“A similar provision was included in the version of the energy bill the House passed last week. But the measure has stalled in the Senate, and President Bush has threatened a veto over a $21.5 billion tax package and other provisions.
“‘It is clear that the energy bill has slowed down. . . . I wish we could do something different so we would not have to adopt this Domenici amendment here,’ Domenici said. Action on the energy bill was still possible this week, lobbyists said. [Sen. Majority Leader Harry Reid (D-Nev.)] was expected to file for cloture on the bill Tuesday.
“[Sen. John Thune], a cosponsor of Domenici’s amendment, said it could serve as a marker ‘in case something would happen that would not allow the energy bill to pass.’”
In a broader look at biofuels mandate issues, DTN Executive Editor Marcia Zarley Taylor reported yesterday (link requires subscription) that, “A major energy bill may be bogged down in Congress, but even if it fails, the Bush administration is forging ahead with a presidential promise to mandate 35 billion gallons of renewable fuels within 10 years, industry speakers told attendees at the National Grain and Feed Association meeting in Chicago Tuesday. The proposed regulations, which will be issued by the Environmental Protection Agency as early as January 1, are drafted and have only been sidelined until it’s clear how renewable fuels fare on Capitol Hill.
“‘People at EPA think it’s crazy to mandate such a large volume of renewable fuels,’ Mike Leister, fuels technology manager for Marathon Petroleum Co. in Findlay, Ohio, told DTN. ‘But they are under orders from the White House to go ahead.’
The DTN article noted that, “Alternatives like cellulosic fuels have yet to be proven, and even optimists within the corn industry believe the corn industry can supply only about 15 billion gallons of corn-based fuels. But by acting now, the administration could fulfill the president’s State of the Union promise to reduce reliance on imported oil. In addition, the U.S. Supreme Court ruled earlier this year that EPA must regulate carbon dioxide as a pollutant under the Clean Air Act. To comply, the Bush administration plans to promote low carbon transportation fuels to bring emissions into compliance. Traditional ethanol, produced with natural gas, reduces carbon emissions by about 13 percent to 20 percent compared to gasoline.
“‘EPA has tremendous authority when there’s a finding of endangerment (to public health),’ said ethanol consultant Marty Ruikka, president of PRX Geographic in Chelsea, Mich. ‘We could get a biofuels program and CAFE standards without a vote in Congress.’”
Payment Limits
In addition to action on bioufuels, Senate offered amendments to the Farm Bill have also dealt with issues associated with farm payment limits and income limits.
Associated Press writer Frederic J. Frommer reported yesterday that, “Sen. Amy Klobuchar conceded she faces a tall order in winning Senate approval of her proposal to bar farmers making more than $750,000 from receiving government payments – but said it was an effort that should be made.
“‘I think it could be kind of an uphill battle,’ the Minnesota Democrat said in an interview Monday. ‘But I still think it’s worth doing.’
“Klobuchar’s amendment would allow payments only to full-time farmers making less than $750,000 a year and part-time farmers making less than $250,000, after expenses. Klobuchar, who offered the amendment to the farm bill on Friday, is hoping Democrats accept it as one of their limited number of amendments.”
(For more on Senator Klobuchar’s amendment, click here).
And Philip Brasher reported in today’s Des Moines Register that, “The five senators running for president could provide important votes for a proposal to tighten limits on farm subsidies.
“The Senate, which is debating its farm bill this week, could vote as early as Wednesday on a proposal by Sen. Charles Grassley, R-Ia., to cap the amount of subsidies that any farm can receive at $250,000 per year. The measure also would tighten the rules to qualify for subsidies as the manager of a farm.
“The senators running for president – Democrats Hillary Clinton of New York, Barack Obama of Illinois, Joe Biden of Delaware and Chris Dodd of Connecticut and Republican John McCain of Arizona – all say they back the payment cap. Biden, Dodd and McCain voted against it in 2005, the last time the issue came up in the Senate. Clinton and Obama voted for the cap.”
The Register article noted that, “Ferd Hoefner, who follows the farm bill for the Sustainable Agriculture Coalition, said the presidential candidates’ votes could be important if a senator tries to filibuster the payment limit, a move that would require 60 votes to defeat. ”
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Now that the Senate is moving with speed on the Farm Bill, it is worth remembering that just a short time ago the outlook for progress on the legislative measure appeared bleak.
An item posted on Friday at the Minneapolis Star Tribune Online shed some light on developments that broke up the Senate logjam; reporting that, “Minnesota Sen. Norm Coleman, who broke with fellow Republicans last month in an effort to move the farm bill forward, said Friday he had encouraged fellow Republicans to drop their objections after the Democratic leadership agreed to allow a limited number of amendments.
“The ‘principled stand’ his colleagues were taking to stall the bill if they couldn’t offer amendments was no longer relevant, he said. ‘Folks understood that, agreed, and the thought was, ‘Let’s go to our leader, and let’s get this deal done,’’ he said. ‘And that happened.’
“‘We have a path forward.’”
The Star Tribune item indicated that, “Erin Hamm, a spokeswoman for the Agriculture Committee’s top Republican, Saxby Chambliss of Georgia, confirmed that Coleman urged the members to accept a deal, adding that he ‘was instrumental in helping the farm bill process get to this point.’ The agreement allows each party to offer 20 amendments.”
Farm Policy Opinion
The Wall Street Journal editorial board noted in today’s paper that, “So what is it about farm bills that turns Republicans into socialists and Democrats into defenders of welfare for the rich? One answer was offered by Ken Cook, president of the Environmental Working Group: ‘Democrats are so reliant on their ability to compete with Republicans for the farm vote that many are reluctant to push any income limits at all. It’s very hypocritical.’
“Democrats will get a chance to prove him wrong when the $290 billion farm bill comes to the Senate floor, perhaps this week. Minnesota Senator Amy Klobuchar wants a vote on her amendment to stop payments for farm households with incomes above $750,000. This is a far cry from the $200,000 cap proposed by Mr. Bush, whom Democrats decry as a ‘protector of the rich.’ Yet Ms. Klobuchar’s superrich income cap is still opposed by many Senators in both parties. Meanwhile, in the House, the farm bill passed with a $2 million income cap. It seems only yesterday that Speaker Nancy Pelosi said Democrats would end policies that benefit the rich over the middle class.
“Farm bills come around every five years, so this is the best chance in years for reforms that reserve farm payments for the truly needy. That this is proving so hard to accomplish tells us a lot about how this Congress puts politics over principle. About 65 cents of every farm payment dollar goes to the wealthiest 10% of farmers. Where is that Democratic devotion to class warfare when we really need it?” the Journal asked.
Keith Good
