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Farm Bill: Average Crop Revenue Election (ACRE) Could Be Expensive; Commodity Prices- Hearings on Volatility; Food Prices- Biofuels
Farm Bill
Dan Morgan reported in today’s Washington Post that, “A major new program in the recently enacted farm bill could increase taxpayer-financed payments to farmers by billions of dollars if high commodity prices decline to more typical levels, administration and congressional budget officials said yesterday.
“The potential costs came to light as administration officials pored over details of the 673-page, $307 billion legislation. President Bush has promised to veto the measure, which he called ‘bloated.’ The House and Senate passed the bill by bipartisan margins large enough to override him unless dozens of lawmakers switch sides.”
Mr. Morgan explained that, “The final details of the new program were approved at the end of four months of House-Senate negotiations over the legislation and received almost no attention during floor debate last week. The voluntary program guarantees farmers a subsidy if they suffer losses because of low prices or poor crops.
“Since the amount of the subsidy for 2009 is tied to recent record prices, farmers could reap a windfall if prices drop suddenly.
“‘I don’t think many people on the House side who voted for the farm bill realized there were $16 billion in potential higher costs in there,’ said Deputy Secretary of Agriculture Charles F. Conner. ‘The budget exposure is tremendous.’
“A blog item posted Monday by the agricultural magazine Pro Farmer described the new program, known as Average Crop Revenue Election (ACRE), as ‘lucrative beyond expectations,’ and said it is a ‘no brainer’ for farmers to sign up for it.
“The Agriculture Department estimates that subsidy payments to corn farmers alone could reach $10 billion a year if prices — which have been $5 to $6 a bushel — were to drop to $3.25 a bushel, a level seen as recently as last year. The $10 billion figure assumes most farmers would participate in the program, a view disputed by key lawmakers.”
The Post article indicated that, “Kate Cyrul, spokeswoman for Senate Agriculture Committee Chairman Tom Harkin (Iowa), the leading congressional champion of the program, called USDA’s projections a ‘doomsday scenario.’
“She noted that USDA’s forecasts of corn, wheat and soybean prices suggest that they will stay too high for farmers to qualify for any benefits.”
In conclusion, the today’s Post article stated that, “The new program insures a farmer’s revenue at close to the current high prices. USDA estimates that a farmer could draw a payment even with corn prices at $4.39 a bushel.
“‘They have taken a good idea and gone to an extreme in terms of creating an opportunity for revenue flows at the highest possible level,’ Conner said.”
Yesterday, the “Washington Insider” section of DTN (link requires subscription) indicated that, “A USDA analysis of the new, voluntary average crop revenue election (ACRE) program authorized by the 2008 farm bill indicates that the revenue insurance plan could cost billions more in farm payments to producers around the country than was anticipated, even if crop prices remain at historically high levels.
“Agriculture Deputy Secretary Chuck Conner says that since Congress approved the legislation last week, department analysts have delved deeply into ACRE’s provisions and were troubled by what they found. Assuming a high rate of participation in the program and national corn, wheat and soybean prices at $3.25, $5 and $7 per bushel, respectively, USDA could pay out around $16 billion to ACRE participants who produce those three crops in 2009 alone, says USDA.”
The DTN item explained that, “The assumption of a high participation rate is seen by many as unlikely, as is the assumption that crop prices could fall to the levels cited above any time soon. Signing up for ACRE would require producers to forego 20 percent of their direct payments and 30 percent of their loan rate every year. And, once enrolled in ACRE, producers would be required to remain in the program for the duration of the 2008 farm bill.
“Producers who believe crop prices are unlikely to fall to the levels cited above will take their chances with the program they know rather than with ACRE. For that reason, the liability to the Treasury suggested by USDA’s study is hypothetical at this point. The actual potential liability will not be known until after USDA conducts a signup for the program and has an accurate tally of the acres and crops enrolled.”
In addition, DTN’s “Washington Insider” added that, “Another concern about the ACRE program is its potential to push U.S. spending on trade-distorting agricultural subsidies beyond the amount to which the United States is committed under its World Trade Organization obligations. Because ACRE payments would be based on planted and considered planted acres and on an average of actual prices and yields, it is clear the payments would be counted in the WTO’s amber box category of farm subsidies.
“And, taking the case cited above as an example, with enough producer participation and crop prices at or below where they were just two or three years ago, USDA’s spending on ACRE easily could exceed its $19.1 billion WTO amber box limit.
“Overspending on amber box subsidies is one proven way to assure that the United States would be dragged before one WTO panel after another by trade competitors eager to ‘level the playing field’ with the Americans. But if virtually no one signs up for ACRE, the possibility of such a scenario recedes rapidly.”
The National Corn Growers Association and American Farmland Trust issued a joint statement yesterday, entitled, “NCGA, American Farmland Trust Set Record Straight on Farm Bill’s ACRE Program;” in part, this statement noted that, “The administration may have its reasons to veto the Farm Bill despite the overwhelmingly bipartisan support in the House and Senate. Should there be more reforms in the Farm Bill? Yes. Does ACRE go far enough? There is no question ACRE is moving U.S. farm policy in the right direction. It represents the future of U.S. commodity policy. The choice is whether to support the new 2008 Farm Bill or extend existing policy. Without the new bill we lose all the improvements represented by ACRE, and all the gains in nutrition, conservation and renewable energy.”
Commodity Prices- Hearings on Volatility
Recall that on Thursday (May 15), the House Agriculture Subcommittee on General Farm Commodities and Risk Management held a hearing to review the source of volatile price movements in agricultural and energy commodity markets.
A witness list and opening statements from last week’s hearing can be viewed at this House Ag Committee webpage.
Yesterday, the Senate Committee on Homeland Security and Governmental Affairs held a hearing entitled, “Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?”
Complete details regarding this hearing have been posted at this Senate webpage.
Elizabeth Douglass, Nicole Gaouette and Richard Simon reported in today’s Los Angeles Times that, “The record-shattering run-up in energy and food prices has put investors who buy and sell such things on the hot seat — so hot that some in Congress on Tuesday threatened action.
“‘The American people are about to take out pitchforks’ because of the cost of groceries and gasoline, Sen. Claire McCaskill (D-Mo.) said during a Senate hearing on whether commodities are being pushed higher by investors’ high-stakes bets that prices will keep going up. Given the uproar from consumers, McCaskill warned an official from the U.S. Commodity Futures Trading Commission, ‘if you don’t do something, Congress will.’”
The L.A. Times article stated that, “Much of the focus has been on the stunning rise in the cost of crude oil, which has rocketed up by more than $40 a barrel since early February and closed Tuesday at $129.07, up $2.02, in New York futures trading. But similarly spectacular jumps have hit the prices of gasoline, diesel, heating oil, corn, wheat and gold.
“The link between soaring prices and the vast sums of money flowing through commodity markets is controversial and hard to quantify.
“Economists, traders and regulators routinely dismiss the notion that excessive trading is the culprit instead of traditional market forces such as supply and demand. And they warn that increased regulation could interfere with trading programs used by airlines and others to blunt the negative effects of rising commodity prices.
“Jeffrey Harris, chief economist at the Commodity Futures Trading Commission, told lawmakers Tuesday that the high prices reflected increased demand from emerging markets and decreased supply because of bad weather or geopolitical events.
“Harris and others also pointed to broader economic factors such as the sinking value of the dollar, which has made commodities traded in the United States a relative bargain for foreign investors. Commodities also have recently offered more certain returns than the stock market.”
Food Prices- Biofuels
Associated Press writer Eileen Ng reported yesterday that, “A top World Bank official warned Tuesday that global poverty levels could surge over the next three years due to rising food costs and predicted no letdown in the price of rice.
“Already, rising food and fuel prices over the past two years have pushed some 100 million people back into poverty, living below $2 a day, said World Bank Managing Director Juan Jose Daboub.
“Food costs are on average more than 2 1/2 times higher now compared to early 2002, with no signs of relief in sight _ especially for rice, Asia’s staple food, which recently broke above a record $1,000 per metric ton, he said.”
The AP article added that, “Daboub blamed the spike in rice price on a combination of factors including growing demand, rising fuel prices, cuts in agriculture funding, increasing use of food crops for biofuels, distorting subsidies and trade barriers, financial speculation and bad weather.
“‘We believe this phenomena is here to stay, not a few weeks or a few months but it will be two to three years,’ he said at a lecture on the global food crisis in a Singapore university.”
A release posted yesterday at the University of Nebraska at Lincoln Online (“UNL Ag Economist: Ethanol Behind About 1.2 Percent of U.S. Food Price Hike”) stated that, “Ethanol’s increasing demand for corn is responsible for about 1.2 percent of the increase in U.S. food prices during the last two years, a University of Nebraska-Lincoln agricultural economist estimates.
“However, Richard Perrin said, in poorer parts of the world, ethanol’s impact on food prices likely is much higher – perhaps accounting for as much as 15 percent of rising prices.
“‘The food bill of poor people in poor countries is more sensitive to grain prices, simply because grain constitutes more of their food, and food takes more of their income,’ the Institute of Agriculture and Natural Resources economist said.
“Perrin outlined his findings in a new report titled ‘Ethanol and Food Prices – Preliminary Assessment’.
“Food prices in the U.S. and worldwide have risen dramatically in the last year, Perrin noted. Many have pointed to the corn ethanol industry as one culprit.
“Ethanol’s demand for corn is a factor, Perrin said.”
And Tom Sellen reported in today’s Wall Street Journal that, “Scientific research, funding and political support are all needed to help solve the global food crisis, and cooperation among them is essential as the world’s population grows, said Nobel Peace Prize laureate Norman Borlaug, professor of international agriculture at Texas A&M University in College Station.
“‘If we could get the technology we have available now put into production, and if we could get the political support, we could feed the people,’ said Dr. Borlaug, who is founder of the Green Revolution. ‘The ability to put all of the pieces together depends on the will of the people.’
“Efforts to solve the global food crisis are complex, but add the U.S. presidential race to the mix and it becomes even more difficult.”
The Journal article added that, “In the debate over using prime cropland for growing grain for food, feed and now fuel, Dr. Borlaug sees the greatest hope in making cellulosic ethanol from woody materials. ‘I’m very strong on doing the research that should have been continued over the last 30 years on finding how to break down that first step through cellulose woody tissues to sugar that can be fermented by the same or similar process being used now for grain,’ said Dr. Borlaug.
“There are many semi-arid areas in the U.S. that can grow small shrubs or trees, and the wood pulp from those sources could be used to make ethanol, but the technology of breaking down the cellulose hasn’t advanced enough for use in commercial application.
“Switchgrass is another material some experts say could be a potential feedstock for cellulosic ethanol, though he said much more research needs to be done.
“‘When you talk about switchgrass, how many tons per acre can you produce? And if you just go in blindly and start something like this, it would be a first-class disaster,’ said Dr. Borlaug.
“Producers need to know how much switchgrass can be produced under varying conditions such as different temperatures, soil moisture levels and rainfall patterns. If these things aren’t carefully calculated, the whole idea could be a ‘gamble on disappointment,’ he said.”
Keith Good
