FarmPolicy.com

Farm Bill Financing Mechanisms a Key Concern

On Wednesday, Acting U.S. Secretary of Agriculture Chuck Conner delivered remarks to the Agribusiness Club in Washington, D.C.

According to a transcript of his speech, Sec. Conner stated that, “The bill that came out of the Senate last week we believe sadly falls far, far short of where we need to be. The versions of the bill passed by the House and the Senate we believe are both fundamentally flawed. Neither one provides the kind of reforms that we believe represent forward-looking farm policy at a time of record strength in our farm economy. If you don’t know the numbers, get hold of those numbers. I won’t recount all of them, but they are remarkable.

“Congress is proposing to raise taxes in order to increase the scope of our farm bill. That’s something we haven’t done, haven’t done since 1933. I can’t imagine a time when we have $85 billion of net farm income to be talking about this being a good time to somehow raise taxes, to increase the scope of our farm bill.

“Market prices are at or near record levels for virtually all of our major commodity crops. In fact, some economists are estimating net cash farm income this year will exceed the $85 billion figure I just mentioned, which that number is $18 billion higher than what we had last year.”

Sec. Conner then noted that, “If we can’t help agriculture become more market-driven and competitive now, when farmers are enjoying the kind of economic times we have today, we really do fundamentally have to ask the question: Is there ever a time? And I think the time is now for these types of fundamental reforms.

“That’s why I’m disappointed that in a time of such strength the Senate did propose to increase our taxes by $15 billion in order to pay for the farm bill programs. It contains of course $22 billion of unfunded commitments and budget gimmicks.”

And with respect to the House passed version of the Farm Bill, Sec. Conner stated that, “The House bill also relied upon tax increases of $7 billion to fund certain farm bill priorities while claiming an additional $5 billion of illusionary savings by changing the timing of payments. And of course all of these illusionary savings do not change one dollar of federal government obligations.”

Beyond financing concerns, Sec. Conner noted that, “I’m also concerned that the House and Senate bill increases the loan rates and the target prices on nearly half a dozen crops. Simply put, that is trade-distorting, further trade-distorting, and we are going to hear about it from our WTO trading partners. Is there anyone in this room who thinks we will not – not – pay an enormous price internationally for this action? Anyone here think we will not pay an enormous price for that? And all because a few farm groups who have long-standing policies favoring higher loan rates, those policies dating back to the days of parity prices, and make this case ‘I’m in, I’m out.’ And the simple fact is, we are going to pay a heavy price.

“In fact, just the other day the WTO as you know did agree to investigate a very broad complaint about our current subsidy program that had been brought forward.”

Later in his remarks, Sec. Conner reiterated that, “So for these reasons and a lot more, the President’s senior advisors — folks, as you know — are recommending that he veto the farm bill as it now stands coming out of the House and the Senate;” and added that, “Please do not make the mistake of believing that the Administration’s concerns with these farm bills can simply be made to go away without making some fundamental changes to this bill.”

For more background information and detail regarding the financing aspects of the House and Senate Farm Bills, see, “Farm Legislation and Taxes in 2007,” a Congressional Research Report (CRS) from November 9 that was written by David L. Brumbaugh.

A summary of the CRS report stated that, “On July 27, 2007, the House passed its version of the omnibus 2007 farm bill (H.R. 2419). The bill’s spending provisions are estimated to increase federal spending on agriculture policy above the baseline level allowed by the FY2008 budget resolution. In order to comply with House pay-as-you-go budget rules, the bill included several revenue-raising provisions, the bulk of which would be produced by a proposal to restrict the use of tax-treaty benefits by foreign firms not actually resident in a treaty country. In October, the Senate Finance Committee approved S. 2242, a bill containing a number of agriculture-related tax provisions, but also containing energy and conservation measures along with a revenue-raising proposal designed to curtail tax shelters (codification of the ‘economic substance’ doctrine). The Senate Finance Committee bill is estimated to be approximately ‘revenue neutral,’ gaining as much new tax revenue as it loses. However, it also contains an optional new tax credit that is estimated to have the effect of reducing outlays under an existing U.S. Department of Agriculture program by $3.0 billion over five years, thus providing room for new spending in the Senate version of the farm bill without violating Senate budget rules.”

Recall also that back on December 10, House Agriculture Committee Chairman Collin Peterson expressed concern about reconciling the way the two legislative chambers financed their respective Farm Bills.

In part, Chairman Peterson stated that, “Frankly we are not that far apart on the policy issues, I don’t think there is going to be too difficult a time working out the policy issues, but financing is going to be the big problem. And, the White House figures into that– not sure exactly how– but they are going to have something to say about that and that is going to be our biggest problem is trying to figure out how to finance this and keep the President on board and keep the Republicans on board and end up with a bill that has got bi-partisan support.” (quoted from this MP3 FarmPolicy podcast from the 6:20 to 7:00 minute mark).

So not only is there friction between the legislative and executive branch regarding Farm Bill financing, but the issue appears to be a key factor within the legislative conference committee work as well.

(For more background on Farm Bill budget issues, see this paper from May, “The Impact of Renewable Energy on the U.S. Farm Policy Debate,” which addressed how variables such as biofuel production have positively impacted the market price of key program crops; the paper then explored how the corresponding decrease in projected federal budgetary outlays could impact the Farm Bill debate).

Meanwhile, DTN Political Correspondent Jerry Hagstrom reported on Sec. Conner’s speech yesterday morning (link requires subscription) and noted that, “Conner also told reporters the administration still stands behind its proposal to increase the $5.2 billion in direct payments that farmers get whether prices are high or low, even though members of Congress and reform groups have said farmers don’t need that money when prices are high and the program should be cut and the money spent on nutrition and conservation.”

(Note: for more detail on direct payments, see pages 14 and 15 of the administration’s Farm Bill proposal; also, a related graph on direct payment distributions by commodity is available here).

“Conner said the administration still likes the direct payments program better than other subsidies because the payments are made on a regular basis and can be classified in the WTO green box of non-trade distorting subsidies. Conner discounted a WTO case filed by Canada and other countries that contends the U.S. direct payments program is not green box compatible because a WTO panel noted that a prohibition on planting fruits and vegetables on land that gets subsidies means that farmers cannot switch from program crops such as cotton to fruits and vegetables. He noted the United States has classified direct payments as green box in its WTO filings and said he believes that position can still be defended because there has not been a formal WTO ruling about their green box eligibility.”

Also yesterday, Mr. Hagstrom reported that, “House and Senate Agriculture committee staffers held their first meeting on the farm bill conference Tuesday and will continue to meet throughout the congressional break, a spokeswoman for Senate Agriculture Committee Chairman Tom Harkin told DTN late Wednesday.

“Harkin, D-Iowa, will chair the conference between members of the House and Senate agriculture committees, but conferees will not be named until January, the spokeswoman said. The chairmanship of the farm bill conference rotates between the House and the Senate. In 2002, then-House Agriculture Committee Chairman Larry Combest, R-Texas, chaired the conference. This time it’s the Senate’s turn.”

This DTN article also noted that, “Congress wrapped up its business and left Washington late Wednesday and is not scheduled to return until the week of January 14. No formal meetings among members will take place until then.

“House Agriculture Chairman Collin Peterson, D-Minn., plans to spend part of the recess in Washington working with the staff on the farm bill, his spokeswoman said in an e-mail Wednesday.”

***

In recent news regarding biofuels, Reuters writer Charles Abbott reported yesterday that, “U.S. farmers will win the race to grow enough corn, wheat and soybeans to satisfy food, feed and biofuel needs although 2008 will be ‘very dicey,’ said acting Agriculture Secretary Chuck Conner on Thursday.

“‘I would never bet against our farmers on this issue,’ Conner said in looking ahead to 2008 crops. For the second year in a row, zooming demand for U.S. crops will require a huge harvest to avoid shortfalls. ‘We have said it is going to be very dicey.’”

Mr. Abbott indicated that, “‘I think we can march that (corn) production figure right up,’ said Conner, with the help of biotech seeds and improved cropping practices.

“Farmers shifted land into corn in order to reap a record 13.168 billion bushels this year. High yields will be needed in 2008 to help meet demand for U.S. crops, says Darrel Good, University of Illinois economist. Good says high prices will encourage larger soybean and wheat plantings while corn sowings remain large, a difficult combination.”

The Reuters article noted that, “Conner also said: ‘We’re watching very, very closely’ to see if cropland should be released without penalty from the long-term Conservation Reserve. About 36.8 million acres are idled in the reserve. Contracts on 2.5 million acres, much of it in wheat country, expired this fall.”

Philip Brasher, writing yesterday at The Des Moines Register Online, reported that, “Charles Conner, the acting agriculture secretary, says that there is ample acreage under cultivation to produce the ethanol and biodiesel that will be required by the new energy bill.

“By 2015, refiners will be required to use more than twice as much ethanol and biodiesel as they’re consuming this year.

“But Conner said Thursday that he’s confident that corn yields will increase sufficiently. Farmers produced 13.2 billion bushels of corn this year.”

At a press conference yesterday, President Bush also addressed energy policy and biofuels, in part, Pres. Bush stated that, “And one of the key components, by the way, to be successful on reformulated fuel standards is to spend research and development money on cellulosic ethanol, new ways to manufacture ethanol. We can’t rely only on corn in order to meet these standards. And I understand a lot of people in the farm belt are getting concerned — unless, of course, you’re a corn grower. But if you’re feeding cattle or feeding hogs, the cost of business has gone up. And that’s one of the tradeoffs you have to make. So what I want to assure people out there is that we’re spending a lot of taxpayers’ money in a way to figure out how to use wood chips or switchgrass in order to make ethanol. But this is a real national plan.”

The Wall Street Journal editorial board took a dim view of the recent energy bill in an item published in today’s paper, stating that, “The Renewable Fuel Standard requires fuel producers to use at least 36 billion gallons of ‘biofuels’ by 2022, a fivefold increase over the existing mandate, created just two years ago. The current supply comes almost exclusively from corn ethanol, and the new laws will continue that trend with specific, year-by-year usage requirements. Ethanol production will double, with plenty of pork, subsidies and tax preferences to grease the way.

“All this while even many hard-core environmentalists are backing away from ethanol. Cultivating row crops like corn is highly energy intensive, often requiring a gallon of fossil fuels to produce a gallon of ethanol. The mania clears more land for agriculture while draining aquifers and increasing fertilizer runoff. Then there are the market distortions, not least higher food and commodity prices.

“The evidence is convincing enough that it may even have filtered through to Congress. While there are plenty of handouts for ethanol in the short term, per-year production is capped at 15 billion gallons around 2016. Everyone agrees that this is the ‘practical limit,’ meaning that it’s hard to achieve a greater yield without plowing over most of the Midwest. Rather than learn a lesson and move on, though, Washington decided to throw a similar subsidyfest for other ‘alternatives.’ The balance of the 36 billion gallon quota is made up by biodiesel and fuels derived from cellulosic sources like switchgrass or wood chips.

“The problem is that these technologies remain speculative. At best, there are a few pilot programs outside of the laboratory — but nothing on a commercial or cost-effective scale. The bill will prop up these boutique fuels in hopes of a breakthrough, but essentially it is legislating the creation of a new industry from scratch. No doubt Vinod Khosla and the other California venture ‘capitalists’ are happy to join Big Corn at the federal subsidy trough.”

In other news regarding ethanol, Reuters writer Timothy Gardner reported yesterday that, “The burgeoning U.S. ethanol industry is looking longingly at existing oil product pipelines for transporting the alternative fuel, an idea almost unthinkable a few years ago because of contamination fears.

“‘As volumes increase, the economics for pipeline transport of ethanol will make a lot of sense,’ Mark Stowers a research and development vice president at private company POET, the largest U.S. ethanol producer, told reporters in a teleconference on Wednesday.

“Pipeline owners have feared that ethanol’s tendency to absorb water and to act as a solvent could corrode the lines and contaminate other fuels sent up the ducts.
But pipelines that have been researching ways to solve that problem believe they are closing in on an answer.”

Mr. Gardner indicated that, “Pipelines are the cheapest way to transport any motor fuel. But ethanol producers have been limited to trucks and trains to send fuel from Midwest production areas to the high-demand coasts.

“Baker [Steve Baker, a spokesman for the Colonial Pipeline, the country's largest oil products pipeline] said Colonial, which transports oil products from the Gulf coast to the U.S. Northeast, hopes to begin research work with university Georgia Tech on ways to carry renewable fuels on existing and dedicated pipelines.

“Oil companies are cautiously optimistic that breakthroughs could be made.”

And in news regarding food prices, Dow Jones News writer Gerald Jeffris reported yesterday that, “Brazilian inflation has seen pressure in recent months from rising prices brought by growing global demand for food products, Brazilian Central Bank President Henrique Meirelles said Thursday.

“Meirelles said in a hearing before the country’s senate economic affairs committee that the pressure reflected growing employment and an improved standard of living in several countries around the world, as well as growing use of agricultural products for production of fuels such as ethanol.”

The article stated that, “Brazil’s IBGE statistics institute on Thursday reported that mid-December IPCA consumer price inflation rose 0.7% compared with a 0.2% rise in mid-November, with food prices increases accounting for more than half of the mid-December increase.”

And Dow Jones News writer Carolyn Henson reported yesterday that, “The European Union agreed Thursday to suspend import duties on all cereals except oats, buckwheat and millet until June 30, 2008.

“The decision reflects poor supply in the cereals market and record price levels.

“‘Suspending import duties will facilitate cereals imports from outside the E.U. and take some of the pressure off European grain markets,’ said Mariann Fischer Boel, commissioner for agriculture and rural development.

“‘We have now had two low European harvests in a row and prices are high both at home and on world markets,’ she said.”

Keith Good

 Email This Post Posted by Keith Good • December, 21, 2007 • 5:47 am