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“Every Member of Congress Now Has Discovered Ethanol”

I. Ethanol-Renewable Fuels
A. Politics and Economics
B. Ripple Impacts
1. Land Values
2. Corn on Corn Planting
3. Farm Policy
II. Oilseeds
III. Canadian Corn Case
IV. Doha
V. Freeze, Prices Up

I. Ethanol-Renewable Fuels
A. Politics and Economics

Brendan Murray and Tina Seeley of Bloomberg news, reported yesterday that, “Administration officials say Bush’s seventh annual address to Congress on Jan. 23 will reiterate his vow to cut Middle Eastern oil imports by 75 percent by 2025 and curb what he describes as a national ‘addiction’ to fossil fuels. Democrats and the White House are likely to agree to boost support for biofuels, increase federal funding for electric-powered vehicles and sweeten incentives for the use of solar and wind power, lobbyists and industry experts say.”

The article added that, “At the same time, a bipartisan group of senators –including Tom Harkin, a Democrat from corn-producing Iowa, Richard Lugar, an Indiana Republican, and Barack Obama, an Illinois Democrat — introduced legislation earlier this month to give tax credits for cars that can run on fuel that is mostly ethanol.

“‘Every member of Congress now has discovered ethanol,’’ Representative Collin Peterson, a Minnesota Democrat who heads the House Agriculture Committee, said in an interview. By mentioning biofuels such as switchgrass in his 2006 State of the Union address, Bush ‘really started people thinking,’ says Peterson, 62.”


Corn Harvest, Photo by the Associated Press

The Bloomberg writers also noted that, “Mark McMinimy, an analyst with Stanford Group in Washington, said in a note to his clients last week that ‘it is becoming increasingly apparent that the renewable fuels/ethanol juggernaut enjoys one of the most prized commodities in Washington: broad- based, bipartisan political momentum.’”

Associated Press Reuters writer Chris Baltimore reported yesterday that, “U.S. President George W. Bush’s annual speech to Congress next week is likely to call for a massive increase in how much fuel ethanol that U.S. refiners must mix with gasoline in coming years, sources familiar with White House plans said on Tuesday.

“Energy legislation signed into law last year would require refiners to use at least 7.5 billion gallons of renewable fuels annually by 2012.

“One source briefed by White House officials said Bush’s speech on January 23 could call for even more ethanol usage — over 60 billion gallons by 2030.

“‘I think it’s going to be a big number,’ the source said on condition of anonymity. ‘It’s in the ballpark of even above 60 billion (gallons) by 2030.’”

With that political background in mind, the A.P. Reuters story turned to some of the economic considerations of renewable fuels policy, pointing out that, “Some U.S. officials including some at the Energy Department worry that U.S. farmers won’t be able to grow enough corn to meet higher clean fuel targets.

“Thanks to the ethanol boom, the U.S. corn surplus will shrink to a precarious 752 million bushels — a three-week supply — before this year’s crop is ready for harvest, the U.S. Agriculture Department said last week.

“Explosive growth in the fuel ethanol industry has already driven corn prices to the highest level in a decade with no let-up in sight.”

To read more about the U.S.D.A production reports from last week, see this summary (“Corn Production Estimate is a Major Surprise”) from yesterday by University of Illinois Agricultural Economist Darrel Good.

After a recap of some of the specific U.S.D.A. estimates, Dr. Good noted that, “The sharp reduction in the U.S. stocks of corn occurring this year, along with the rapid expansion in ethanol production, implies that U.S. corn production needs to increase sharply in 2007….[M]uch of the increase will come from soybeans. Soybean prices have been following corn prices higher in an attempt to prevent too large a decline in acreage. With soybean consumption at the current level of 3.066 billion bushels per year, and with a 2007 average yield near that of the past two years, soybean acreage could decline by 10 million in 2007 without bringing 2007-08 marketing year ending stocks under 250 million bushels. In addition, if March 2008 soybean futures are maintained at the current level near $7.70, Brazil will likely make a significant increase in soybean plantings in the coming year.

“For now, expect corn and soybean prices to be well supported until planting intentions are known. Significant price volatility, particularly for corn, will be associated with the planting and growing season.”

Kevin Morrison, reporting in Monday’s Financial Times, provided this summary of recent developments in the commodity market, “Corn prices struck a10-year high on Friday, the day the US Department of Agriculture (USDA) lowered its estimate of US corn stockpiles at the end of the year to 752m bushels, which is equivalent to three-week’s supply. The previous estimate had been 935m bushels.”

The FT article explained that, “The price rise comes at an important time of the year for farmers who are deciding what seeds to plant in spring.

“Based on current prices, the amount of land used for corn growing will increase this year at the expense of soyabeans and wheat.

Last week, Keith Collins, chief economist at the USDA, told the US Senate Agriculture Committee that 2007-08 US corn demand to meet ethanol production was estimated to rise by 1bn bushels from 2.15bn this season, which ends in June.

“The ethanol industry will therefore account for about 30 per cent of demand of the US corn crop this year.

“Mr Collins told the committee the higher ethanol demand would require 6.5m more corn acres in 2007. A larger area for corn growing is likely to come at the expense of soyabeans, and to a lesser extent of wheat.”

Des Moines Register reporter Philip Brasher tied together some of the political and economic issues associated with ethanol production in yesterday’s paper (“Can market handle ethanol boom?”) where he noted that, “‘It’s a little worrisome that the industry might be overbuilding to their own detriment,’ said Ron Litterer of Greene, Ia., a leader of the National Corn Growers Association and an investor in the Midwest Grain Processors ethanol plant at Lakota.

“The nation now uses about 140 billion gallons of gasoline per year, and if all of it contained 10 percent ethanol, refiners would need 14 billion gallons of ethanol.

“The industry’s production capacity will reach 11.4 billion gallons per year once existing construction projects are completed. And numerous additional plants are being planned around the country, including four projects announced last week by agribusiness giant Cargill Inc.”

Mr. Brasher concluded his article with this quote, “‘We’re going to continue with incentives to produce, but we need incentives to use’ ethanol, said Jon Doggett, a lobbyist for the National Corn Growers Association.”

Robert McMahon, in an analysis piece posted yesterday at the Council on Foreign Relations webpage, also hit on political and economic themes of the renewable fuels issue, noting that, “Policy experts expect the most significant energy package to emerge from the agriculture committee as it undertakes talks on renewing the 2002 Farm Bill. The previous bill included a title on energy for the first time, with incentives for ethanol and other biofuels. Despite the overriding issue of farm supports and their implications for international trade in the new bill, some reports say energy is attracting the most attention (NYT) at this point.”

McMahon added that, “But all is not quiet on the farm. In the Senate, tensions over corn’s new role (Des Moines Register) as an energy source were apparent in the year’s first meeting of the agriculture committee. With many experts acknowledging the small share corn-based ethanol will have in replacing the country’s demand for fuel, more attention is shifting to research on cellulosic ethanol, derived from matter such as plant stalks and switchgrass. Sen. Tom Harkin (D-IA), who chairs the Senate Agriculture Committee, is emphasizing such non-food crops for fuel to help ease disputes over use of corn.”

Meanwhile, the Center for Agriculture and Rural Development (C.A.R.D.) at Iowa State University recently announced that, “Bruce Babcock, professor of economics and director of the Center for Agricultural and Rural Development (CARD), traveled to Washington December 22 for a briefing of Secretary of Agriculture Mike Johanns on issues surrounding biorenewable fuels. The meeting was attended by the deputy secretary, the under secretaries for Rural Development and Farm and Foreign Agricultural Services, and Chief Economist Keith Collins. Much of the discussion centered on increasing E-85 fuel supply and meeting ethanol, livestock, and export demands for corn.”

B. Ripple Impacts

The renewable fuels issue has also had ripple impacts into other parts of the agricultural economy; including, changes in land values, an increased likelihood of farmers implementing corn on corn planting rotations, and new recommendations regarding the future of U.S. farm policy.

1. Land Values

Bob Fenske, writing in today’s Forest City Summit (Iowa), reported that, “An Iowa State University Extension survey showed that farmland sold for an average of $3,204 an acre in 2006, up 10 percent from a year ago. In Winnebago County, land was valued at about $3,268 while, in Hancock County, land values were just under $3,600 an acre.

“ISU Extension Farm Economist Mike Duffy said the annual survey of real estate brokers, farm lenders and others pointed to a number of factors for the rise in farmland values – including good grain prices and yields, low interest rates, tax-free treatment of transactions involving land exchanges and bio-fuel demand.”

2. Corn on Corn Planting

Dan Davidson, an agronomist with DTN, indicated yesterday (link requires subscription) that, “With all the demand for corn coming from the ethanol industry, some estimates have farmers planting 4 million to 6 million acres more than year-ago levels, pushing production to 82 million to 84 million acres.

“Most of those acres will be diverted from soybean production and planted after a previous corn crop.

“For many years university specialists and private agronomists cautioned farmers against growing continuous corn for a host of reasons, including yield drag, increased production costs, stand establishment problems, disease problems, larger nitrogen requirements and a change in weed and insect spectrum. The loss in yield and the increase in cost made growing continuous corn difficult to justify.”

However, Davidson added that, “Yet over the years many farmers have switched to growing more corn than soybeans. Technology makes it possible to reduce or even eliminate yield drag, and the yield and price gains of corn have outpaced that of soybeans.”

Although beyond the parameters of Davidson’s article, there could be potential environmental factors associated with additional corn on corn production. These costs may receive additional attention if more producers plant corn after corn on a regular basis.

3. Farm Policy

As market prices continue to increase, particularly for corn, the likelihood of future loan deficiency payments and countercyclical payments will be greatly reduced. This prospect has been an impetus for some groups to take a fresh approach to Farm Bill safety net provisions.

Along these lines, Dori Meinert of the Copley News Service reported yesterday that, “As Congress prepares to rewrite the farm bill, officials with the Illinois Corn Growers Association are advocating a shift to a revenue-based safety net, policies that are more trade-friendly and a continued emphasis on biofuels.

“‘The majority of growers believe that federal farm policy shouldn’t guarantee producer profitability, but rather provide more of a reasonable financial safety net based on low income rather than low prices,’ association President Steve Ruh, of Sugar Grove, said Monday.

“The group announced its formal support for the revenue-based safety net concept last November, after surveying its members by mail and in listening sessions last fall.

“The idea is to replace price-based subsidies with subsidies that would be based on farm revenue, factoring in production, price and farm costs.”

To look at a summary of the listening sessions conducted by the Illinois Corn Growers, just click here.

II. Oilseeds

The U.S. Department of Agriculture’s Economic Research Service issued their monthly Oil Crops Outlook report yesterday.

In part, the E.R.S. report stated in part that, “Recent soybean prices have leveled off following a strong October-November rally. U.S. demand has slowed and prospects for foreign production are improved. The national average mid-December farm price for soybeans was $6.14 per bushel. Although farmers with soybeans left to sell could obtain cash prices last month ranging from $6.30 to $6.60 per bushel, the price average also includes marketings contracted prior to harvest (which were valued considerably less than current marketings). By the end of 2006, approximately half of the crop was marketed at a price averaging close to $5.70 per bushel. The range for the season-average price forecast was narrowed this month to $5.75-$6.45 per bushel (from the December range of $5.70-$6.50)” (page 2).

On page five of the report, E.R.S. noted that, “A better 2006/07 Argentine soybean crop is forecast to offset a smaller U.S. crop, raising global production to 226.9 million metric tons from last month’s forecast 226.8 million tons. Throughout the main farm belt of Argentina, abundant rainfall in late December provided for nearly ideal soil moisture, and much better than a year ago. The likely benefit to Argentine soybean yields raised the 2006/07 production forecast from 42.0 million to 42.5 million tons. As of mid-January, only about 5 percent of the country’s soybean area remains to be sown.”

III. Canadian Corn Case

Trade Policy Analyst Ross Korves took a closer look at Canada’s requested W.T.O. consultation regarding U.S. corn subsidies in an article from Friday (“Another Corn Trade Disagreement with Canada”).

In part, Mr. Korves stated that, “The Canadian arguments on corn are particularly weak. The press release on the request for consultations noted that in 2005/06 the U.S. accounted for 41 percent of world corn production and 68 percent of exports. That is about the same as 25 years ago when the U.S. had 45 percent of world production and 76 percent of world trade. The U.S. has croplands uniquely suited for corn production with or without farm programs. Canada has the opposite with most of its land too far north to grow corn, even though the corn growing area is moving north some with newer hybrids.

“The backgrounder attached to the press release noted that the U.S. corn crop increased from 256 million metric tons (mmt) in 2003/04 to a record 300 mmt in 2004/05 and 282 mmt in 05/06. After improved market prices for the 2002 and 2003 crops, U.S. corn farmers increased plantings for 2004 by 2.9 percent, but weather was ideal and per acre yields increased by 12.8 percent and resulted in a record large crop. In 2005 corn farmers responded to those higher yields by increasing acreage another 1.1 percent and were disappointed by a per acre yield decline of 7.8 percent. The Canadians conveniently failed to note that planted acreage was down 3.9 percent in 2006 and the crop was only 273 mmt, the smallest crop since 2003.

“Despite whatever influences farm program payments may have, in recent years U.S. corn farmers appear to have been responding to market prices and changes in yield per acre. U.S. planted corn acres are expected to be up sharply in 2007 in response to higher prices for the 2006 corn crop, but weather will still determine the final size of the crop.”

IV. Doha

Reuters writer Missy Ryan reported yesterday that, “The world has it backwards with demands the United States step up offers to reform controversial farm subsidies in order to salvage world trade talks, a top U.S. lawmaker said on Tuesday.

“‘They’ve all been saying we have to do more, but the reality is these other folks are going to have to do more before we do more. I think it’s backwards,’ Collin Peterson, chairman of the House Agriculture Committee, told Reuters.

“New signals of support from U.S. and European leaders have fanned hope that the Doha Round, which collapsed in July in an impasse over agricultural subsidies and tariffs, could be resurrected in coming weeks.”

Ms. Ryan added that, “Peterson warned the Bush administration’s negotiators against making offers that Congress wouldn’t be able to stomach.”

V. Freeze, Prices Up

Sharon Bernstein and Jerry Hirsch reported in today’s Los Angeles Times that, “With half of California’s navel orange crop destroyed by a cold snap, the wholesale price of the fruit soared Tuesday as agriculture officials warned that consumers will soon be paying more for other produce such as avocados, carrots and lettuce.

“Gov. Arnold Schwarzenegger declared a state of emergency Tuesday in the 10 counties hardest hit — even as state officials predicted that the frigid temperatures would continue in many agriculture zones through the weekend. Forecasters predict lows 7 to 10 degrees below normal this week, raising the specter of more crop damage.”

-Keith Good