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Doha, Budget & Ethanol Impacting Policy Debate

I. Doha- EU and India
II. U.S. Issues- Cotton and Budget
III. Cellulosic Ethanol
IV. Stenholm

I. Doha- EU and India

Alan Beattie
, writing in today’s Financial Times, reported that, “Private conversations among leading countries in the so-called ‘Doha round’ of global trade talks have produced constructive engagement but no broad agreement yet, participants say.

“Top negotiators from some of the leading countries in the talks including the European Union, the US, India and Brazil met last week in London to continue a series of bilateral conversations, particularly about the highly sensitive farm talks. Talks have centred on different categories of exemptions to the cuts in agricultural tariffs that will be permitted to rich and poor countries.

Peter Mandelson, European trade commissioner, yesterday told the FT: ‘What came out of last week’s senior officials’ meetings is a clear turning point in the negotiations. We now have a better negotiating relationship between the majors.’”

Mr. Beattie added that, “One of the welcome innovations of the past few weeks, participants in the talks said, was the active participation of India in the web of bilateral contacts. India largely stood aside from the meetings that led to the full resumption of negotiations in Doha agreed at the World Economic Forum in Davos at the end of last month.”

An article posted on Sunday at The Financial Express indicated that, “[WTO Director General Pascal Lamy], of course, says US should reduce its farm subsidies and EU its farm tariffs. But by how much? If any cosmetic reduction is done, it would not prompt the developing world to open up their markets. [Indian agriculture minister Sharad Pawar], while suggesting an open export-import regime in farm goods, had said the developed countries’ subsidies should be reduced and that commerce minister Kamal Nath was trying his best for it.”

The article concluded by saying, “India has already suffered on opening up for imports of vegetable oils and cotton. Thus the developing world should move with caution on the issue of opening up of agriculture, till global trade is free from any distortion.”

Meanwhile, John Zarocostas reported in yesterday’s International Herald Tribune that, “Even as top trade negotiators were seeking ways to lower farm tariffs to help save global trade talks, the average duty on farm goods coming into the European Union rose in the past year, according to a report released Monday by the World Trade Organization.

“At the same time that Europe was trying to protect farmers, the WTO study found, the EU share of global manufacturing declined — largely because of relocation of production to lower-cost countries.

“The WTO economists highlighted the fact that in 2006, the average applied tariffs for agricultural goods were far greater than the duties levied on imports of manufactured goods.

“‘Agricultural products are the most tariff-protected,’ the report said, with an average duty of 18.6 percent in the EU, compared to an average of 4 percent for non-farm goods. This represented an increase in the agricultural duties from 16.5 percent in 2004, while tariff for industrials posted a slight decrease from 4.1 percent two years earlier, the report by the WTO secretariat noted.”

The WTO report can be downloaded by clicking here, where a press release regarding the report noted that, “The report also notes that the European Communities is the world’s leading exporter and the second-largest importer of goods, and its economy has continued to support global growth by maintaining its market open, but trade barriers remain in a few but important areas, notably agriculture. Indeed, the report states that despite an increase in the exposure of farmers to world markets due to the implementation of the 2003 Common Agricultural Policy (CAP), further reduction of export subsidies and tariffs on agriculture are needed.”

And the Associated Press reported yesterday that, “European restrictions on banana imports will face a new challenge at the World Trade Organization next month when Ecuador asks the group to restart a decade-old dispute over what Latin American countries and the United States have previously argued amounts to unfair trade discrimination, officials said Monday.

“The WTO has consistently ruled against how the European Union sets tariffs for bananas, forcing the bloc to overhaul a system that grants preferential conditions for producers from African and Caribbean countries, mainly former British and French colonies.”

II. U.S. Issues- Cotton and Budget

With respect to U.S. agricultural issues and the WTO, cotton subsidies continue to be a focal point.

Forrest Laws, reporting yesterday at the Delta Farm Press webpage, indicated that, “National Cotton Council leaders have looked at a schedule of upcoming WTO events and decided they do not bode well for U.S. cotton.

“The NCC says the WTO has slated a compliance panel to hear oral arguments in the Brazil-United States Cotton Compliance dispute Feb. 27-28. Hard on the heels of that will be a ‘high profile’ March session on cotton at the WTO headquarters in Geneva.

“The two meetings focus too much attention on U.S. cotton at a time when WTO leaders obviously are trying to restart the suspended Doha Round negotiations, according to Jay Hardwick, chairman of the American Cotton Producers, the producer arm of the NCC.

“The timing of the sessions is ‘an unfortunate turn of events that can severely undermine the credibility of the WTO dispute settlement process,’ says Hardwick, a cotton producer from Newellton, La.”

Mr. Laws went on to note that, “Oxfam has been a thorn in the side of the U.S. cotton industry almost from the beginning of the latest round of WTO trade agreement negotiations in Doha, Qatar, in 2001. Oxfam has repeatedly blamed the U.S. cotton program for ‘impoverishing African cotton farmers.’

“[Former NCC Chairman Woody Anderson], a NCC board advisor and producer from Colorado City, Texas, also took issue with comments by French President Jacques Chirac who recently made similar claims about the U.S. cotton program.”

In a broader look at U.S. farm policy and the 2007 Farm Bill, Secretary of Agriculture Mike Johanns delivered public comments yesterday to America’s Second Harvest Food Research and Action Center National Anti-Hunger Policy Conference in Washington, D.C.

According to a transcript of his remarks, Secretary Johanns stated that, “You know I think the term ‘farm bill’ actually is quite misleading, because this legislation deals with so much more than farms. As I said, there’s a perception among some people that since they aren’t farmers, this policy could not possibly impact them. But of course that’s simply not true. School lunches, international trade, environmental conservation, supermarket prices, ethanol production– all of these are directly or indirectly impacted by what we call the Farm Bill.

“That’s why I have to be able to defend our proposals in the big cities and at the smallest farms. In order to do that, we followed four basic principles as we created our proposals. First, we wanted to make sure that the programs we had were predictable for people….Secondly, we wanted to distribute our support more equitably…Third, we wanted our farm programs to be better able to withstand challenges in the international arena….Fourth, we wanted to make wise and effective use of our taxpayer dollars…”

Secretary Johanns also pointed out that, “When you examine the agricultural economy today, you’ll see strong commodity prices for most program crops as well as record rates of production in yield. The debt-to-asset ratio for agriculture has now fallen to about 11 percent. Let me explain the significance of that number. That’s the lowest number we have ever recorded at the United States Department of Agriculture. We expect crop receipts to set a new record of more than $133 billion this year, driven by the growing interest in ethanol and other renewable fuels.

“Prices for farmland and corn I might add are also setting records. It’s an incredibly strong economic picture, and it gives us a chance to look at our programs within the larger context of government spending. By focusing on the effectiveness and the efficiency of our programs, I believe we can provide much needed services to the American people and still maintain fiscal discipline.”

Positive indicators from the farm economy, such as high market prices for some program crops, are also having a profound impact on the federal budget picture with respect to projected farm spending.

The “Washington Insider” section of DTN provided a cogent analysis of the budget issue yesterday (link requires subscription), explaining that, “At this early stage in the farm bill debate, a key issue is how much money will be budgeted for the new bill.”

Noting that the Congressional Budget Office will release their latest baseline projections in March, “Washington Insider” stated that, “The final estimate will be released next month, but the early figures suggest the baseline will be more than 40 percent lower than it was in 2002, because of the outlook for smaller safety net payments.

“However, members of the Senate and House Agriculture committees say the numbers are misleading and that funding of the new bill should be at least as great as the 2002 Act, regardless of expected needs.”

The DTN item noted that, “Congress actually can decide to add funds beyond the baseline estimates, but whether it will do so remains to be seen.”

“Washington Insider” also reported that, “Clearly, the prospect of a veto threat for a farm bill, especially if one emerges with strong support in Congress, is not for the politically faint hearted. However, based on early statements, Congress and the administration are far, far apart on a broad range of agricultural policy issues including level of spending. And, while it is very early in the debate, the White House just may find it necessary to resort to strong measures if it seriously intends to impose budget and policy disciplines this time around, Washington Insider believes.”

The DTN item also made reference to a Government Accountability Office report that was released last week (“The Nation’s Long-Term Fiscal Outlook- January 2007 Update”); “In its report, GAO said it conducted two different simulations based on current law and on economic assumptions by the Congressional Budget Office and both found that the cost of meeting the existing long-term federal obligations would require severe tax increases or spending cuts. In fact, GAO said, closing the fiscal ‘gap’ would require an annual spending cut or tax increase of 3.6 to 7.5 percent of total U.S. output,” the DTN article said.

Along these lines, The Congressional Budget Office also released a recent report entitled, “Budget Options,” which as the title indicates, sets out some general options or changes in programs, and estimates how federal spending would be impacted based on these options.

With respect to federal farm spending, this CBO highlighted the Conservation Security Program on page 75, and the Conservation Reserve Program on page 77.

The discussion regarding general farm subsidy supports begins on page 81 of the report. There, CBO indicated that, “Spending for farm income-support programs, which extends through 2007 under the Farm Security and Rural Investment Act of 2002, is projected to decline from $18 billion in 2006 to $10 billion in 2007 because of higher crop prices caused by strong demand from abroad, increased demand for ethanol (a gasoline additive made from corn), and crop damage attributable to recent bad weather across the country. The decrease in spending for the farm income-support programs is partially offset by an increase in spending for the federal crop insurance program, as higher crop prices bolster the value of crops and insurance alike.”

Payment limitation issues are discussed on page 83, and an option to reduce payment acreage by one percent is discussed on page 85. Regarding this option, the CBO report explained that, “Direct and countercyclical payments to agricultural producers (described in Option 350-2) are expected to make up about 86 percent of the Commodity Credit Corporation’s (CCC’s) total spending for program commodities—wheat, feed grains, oilseeds, cotton, rice, and peanuts—over the next 10 years. Those payments are calculated as 85 percent of a producer’s base acreage times an assumed yield per acre times a payment rate per unit (bushel, pound, or hundredweight) of production. In general, a farm’s base acreage for each eligible crop is calculated as the average number of acres planted with that crop between 1998 and 2001. Direct and counter- cyclical payments are made regardless of what is currently produced on the farm; hence, those payments tend not to distort people’s decisions about production. Program participants may also receive benefits for those commodities through marketing-assistance loans, which are paid according to actual farm production.

“This option would reduce the eligible payment acreage for direct and countercyclical payments by 1 percentage point—from 85 percent to 84 percent. That change would lower the CCC’s outlays for farm programs by $13 million in 2008 and by $300 million over the 2008– 2012 period.”

In news regarding conservation program spending, Ben Shouse reported in today’s Argus Leader (South Dakota) that, “Clayton Dawson planted this farmland to grass 10 years ago, joining a government program designed to reduce erosion and build wildlife habitat.

“But next year, he expects that these 150 acres north of Hartford will again be planted to soybeans or corn.

“It’s part of a decline in the Conservation Reserve Program, which is losing 270,000 acres this year in South Dakota – 18 percent of the state total.

“Conservationists and state game officials worry about the effect on hunting and the environment.”

The article added that, “Recent changes in federal policy have made the decline of CRP acres inevitable. And as demand for biofuels pushes corn prices higher, it raises the possibility that ethanol will come increasingly from land once devoted to the state’s beloved hunting tradition.

“Some say President Bush’s latest proposals break his promise to expand the program. But farm groups say many CRP acres, such as Dawson’s, can be farmed with little negative effect.”

III. Cellulosic Ethanol

As ethanol use continues to impact market prices and the budget, much focus has turned to technological advancements in cellulosic ethanol production- where other feed stocks besides corn are used to generate ethanol.

The Energy Roundup Blog, which is a free blog published by The Wall Street Journal, noted yesterday (“Cellulosic Ethanol May Not Deliver”), that President Bush has been traveling the country touting the benefits of cellulosic ethanol, or biofuel made from switch grass and other non-corn plant material. But MIT’s Technology Review suggests in a new article that, ‘without loan guarantees and other incentives,’ the biofuels industry ‘will fail to emerge from the current demonstration phase to produce commercial-scale quantities of ethanol. And without that, it may be impossible to meet President Bush’s ambitious goal of producing 35 billion gallons of renewable fuels a year by 2017.’”

As noted above, a link to the MIT review article is available here and also notes that, “Cellulosic ethanol is attractive because the feedstock, which includes wheat straw, corn stover, grass, and wood chips, is cheap and abundant. Converting it into ethanol requires less fossil fuel, so it can have a bigger effect than corn ethanol on reducing greenhouse-gas emissions. Also, an acre of grasses or other crops grown specifically to make ethanol could produce more than two times the number of gallons of ethanol as an acre of corn, in part because the whole plant can be used instead of just the grain. That’s good news because many experts estimate that corn-ethanol producers will run out of land, in part because of competing demand for corn-based food, limiting the total production to about 15 billion gallons of fuel. (Already, corn-ethanol plants–existing and planned, combined–have a capacity of about 11 billion gallons.) The greater productivity of cellulosic sources should eventually allow them to produce as much as 150 billion gallons of ethanol by 2050, according to a report by the National Resources Defense Council (NRDC). That’s the equivalent of more than two-thirds of the current gasoline consumption in the United States.

“But it will take some time to reach these levels of production. Even producing enough cellulosic ethanol to meet the president’s 35-billion-gallon goal will be difficult. That will require that roughly 15 billion gallons would come from non-corn-grain sources such as cellulosic ethanol (about 5 billion gallons might come from biodiesel culled from oils in crops such as soybeans). And reaching 15 billion gallons by 2017 will be a challenge. Currently, according to the ethanol industry’s list of producers in the United States, none of the ethanol comes from cellulosic biomass.”

For a broader look at agriculture and energy production issues, see this Congressional Research Service report, “Agriculture-Based Renewable Energy Production,” which was written by Randy Schnepf and was published last month.

IV. Stenholm

Ian Swanson reported at The Hill webpage today that, “[Former Texas Congressman and Ag Committee Member Charles Stenholm’s] clients include the International Dairy Foods Association, the National Association of State Departments of Agriculture and a new client, the National Cattlemen’s Beef Association (NCBA), which represents cattle ranchers.

“‘The main thing that interested us about Charlie is, we know he understands our issues as well as anyone,’ the group’s vice president for government affairs, Jay Truitt, said. He describes Stenholm as a tactical thinker who will help NCBA look at policy issues affecting cattle producers in the short and long term.

“For example, a growing concern for NCBA is the cost of feed, which has been skyrocketing because of surging demand for ethanol. Stenholm is also representing oil producers, including the American Petroleum Institute and the Independent Petroleum Association of America, that are also worried about side effects of the ethanol boom.”

The Hill article added that, “Stenholm now finds himself lobbying on a farm bill with the man who chaired the committee when the last farm bill was approved in 2002. Former Rep. Larry Combest (R-Texas) is now a lobbyist for Combest, Sell and Associates.

“‘I would not be at all surprised if you were to see us working together on some issues sometime between now and the passage of the farm bill,’ said Stenholm, who described Combest as a good friend. When the two served as the top Democrat and Republican on the House Agriculture Committee, it was the first time one state had ever held those positions.”

-Keith Good