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Washington Post: “The Rising Tide of Corn.”

Reuters writer Doug Palmer reported yesterday that, “Months of behind-the-scenes work could lead to dramatic progress in world trade talks next week when top trade officials from the United States, European Union, Brazil and India meet in Potsdam, Germany, the chief U.S. negotiator said on Thursday…‘We’re really hoping we can move the ball forward and ideally move it forward dramatically,’ U.S. Trade Representative Susan Schwab told Reuters in an interview. ‘The United States is committed to doing our share and then some’ to reach a final deal in the talks, she said.”

I. Corn / Biofuels
II. Farm Bill Debate
III. Doha

I. Corn / Biofuels

Michael S. Rosenwald reported in today’s Washington Post that, “The nation’s unquenchable thirst for gasoline — and finding an alternative to what’s been called our addiction to oil — has produced an unintended consequence: The cost of the foods that fuel our bodies has jumped. (Picture at right from The Kansas City Star Online).

“Beef prices are up. So are the costs of milk, cereal, eggs, chicken and pork.

“And corn is getting the blame. President Bush’s call for the nation to cure its addiction to oil stoked a growing demand for ethanol, which is mostly made from corn. Greater demand for corn has inflated prices from a historically stable $2 per bushel to about $4.

“That means cattle ranchers have to pay more for animal feed that contains corn. Those costs are reflected in cattle prices, which have gone from about $82.50 per 100 pounds a year ago to $91.15 today.”

The article also noted that, “But now some economists and analysts say the corn price increase could combine with other factors — poor weather and soaring energy costs — to unsettle the food industry, since corn products are used not just to feed animals but also in high-fructose corn syrup, the sweetener of choice for such products as soft drinks and cookies.”

The article concluded by offering a couple of perspectives on the price outlook for corn; “The question now is: Are the new corn prices here to stay? Rick Tolman, chief executive of the National Corn Growers Association, predicts corn prices will level off, particularly because of a glut expected to hit the market this fall. Farmers have planted 90.5 million acres of corn, the most since 1945, according to the USDA.

“Tolman said, ‘Farmers have a way of, every time prices go high, they almost always overproduce until they drive down the price to the marginal level where they can’t make any money anymore.’ He said corn farmers are ‘price takers. You have to take what the market offers you. The market bids the price up or down depending on what it thinks the supply is.’

“Ergo, if buyers think the supplies are high, they can offer less per bushel.

“But Darin Newsom, a commodities analyst for DTN, an agriculture and energy research firm based in Omaha, isn’t so sure that supply increases will lead to lower prices.

“‘That’s an old economic rule,’ he said, ‘but it’s only true if we are in a supply-driven market. Right now we seem to be in a demand-driven market,’ meaning the sustained focus on ethanol could keep prices up.

“‘A demand-driven market will create a long-term change in price,’ he said.”

A related item published in today’s Post indicated that, “[A]s farmers increase acreage planted in corn, less is available for other high-value commodities such as soybeans, decreasing their supply and boosting their cost as well.”

John Schmeltzer, writing yesterday at the Chicago Tribune Online, reported that, “Milk, already hovering around $4 a gallon in the Chicago area, could cost as much as $4.25 a gallon to $4.50 a gallon by September.

“In Florida, milk is likely to rise to more than $5 a gallon, Bill Brooks, a dairy economist with Downes-O’Neill, one of the nation’s largest dairy product brokerage firms, said Thursday.

“‘We have a new competitor,’ Brooks told more than 100 people at a conference of producers and processors in Chicago. He said dairy farmers are paying higher prices to feed their cows as a result of ethanol production that depends on corn and other rough grains. ‘And the government is subsidizing this competitor.’”

Mr. Schmeltzer pointed out that, “Corn prices have surged 73 percent in the past year on higher ethanol demand, reaching a 10-year high of $4.5025 a bushel on Feb. 26. On Thursday, corn rose to a three-month high on the Chicago Board of Trade, closing at $4.095 per bushel.”

The Tribune article concluded by saying that, “On Thursday, Brian Hoops, an analyst with Midwest Market Solutions in Yankton, S.D., told Bloomberg News that farmers may liquidate hog herds to avoid paying higher feed costs. Hog prices are up 22 percent this year on export demand for pork and higher corn costs. Beef prices are only a little behind; they have risen 16 percent in the past year, reaching a record $1.02925 a pound on March 12.

“Congress is considering legislation that would require a 36 billion-gallon renewable-fuel standard, nearly four times higher than 7.5 billion-gallon standard required to be met by 2012. Most experts say that the standard will be met mainly with increased production of ethanol and biodiesel fuel.

“‘The problem with government mandates is that they are not responsive to market signals or problems like drought,’ said [David Ray, a spokesman for the American Meat Institute]. ‘In terms of food prices, near term, we see the problem getting worse, not better.’”

And with respect to the political temperament on biofuels in Congress, Steven Mufson noted in today’s Washington Post that, “The energy bill now under consideration in the Senate would bring that horizon a lot closer for the ethanol industry. The proposal includes requirements that the use of biofuels — part corn-based ethanol and part fuels made from other feedstocks — climb to 36 billion gallons by 2022, more than six times the capacity of the nation’s 115 ethanol refineries.

“While many other provisions of the energy package remain controversial, opposition to the biofuels mandate has all but evaporated in Congress, a situation that would have been almost unthinkable just a few years ago. And though environmental, industry and farming groups can point to numerous unresolved concerns about biofuels’ effects and feasibility, the ethanol lobby has never been stronger.

“Supporters of ethanol have capitalized largely on congressional concern that U.S. dependence on imported oil has compromised national security. Moreover, as ethanol plants have spread beyond a small portion of the Midwest, the industry has spread its influence among lawmakers. The early presidential season has helped, as Clinton, McCain and other candidates seek to bolster their positions in such ethanol strongholds as Iowa.

“‘There’s almost a gold rush in this sector at the moment,’ said Philip R. Sharp, who served in the House for 20 years and who is now president of Resources for the Future. The 7.5 billion-gallon ethanol mandate adopted in the 2005 Energy Policy Act, he said, was ‘the most surprising intervention in the marketplace almost since the days of the Carter energy bill.’ Yet this year’s legislation ‘is trying to take that to significantly greater levels.’”

Interestingly, the Post article pointed out that, “The climate in Congress has changed despite the fact that there are many reasons for opposition to boosting biofuels production.”

And Mr. Mufson noted that, “The renewable fuel also drives up the price of the corn used to make it, and that has earned it the enmity of beef producers, the poultry industry and grocers’ associations — giving some lawmakers from agricultural areas pause. [Robert Dinneen, president of the Renewable Fuels Association] argues that those groups have been used to ‘cheap corn’ and will adjust. And he says new biofuel makers will turn to other feedstocks.

“For now, however, farmers are expanding plantings to an extent that many environmentalists fear will encroach on areas set aside for conservation, worsen soil erosion and boost the use of harmful fertilizers and pesticides. Dinneen boasts that this year, American farmers are on pace to plant more grain than any year since 1945, including 90 million acres of corn, a 15 percent increase from last year. A World Resources Institute report warns that ‘an expanding market for ethanol from corn grain will exacerbate water and soil quality problems in the United States.’

“Such controversies have scarcely hindered the ethanol lobby.”

Steve Everly, reported earlier this week at the Kansas City Star webpage that, “A top official with the National Corn Growers Association said Tuesday he expected 15 billion gallons of ethanol to be produced annually in the United States much sooner than the group had once predicted.

“Ken McCauley, president of the association and a farmer near White Cloud, Kan., said the group had originally estimated it would not be until 2015 that 15 billion gallons of ethanol would be produced. He now believes it could possibly happen in 2011 or 2012 — and definitely before 2015.

“That reflects the growing confidence within the ethanol industry about its prospects in an era of expensive gasoline. But the association’s view is especially interesting in that additional production of corn, currently the main feedstock for ethanol, is crucial in meeting the rosier projections for ethanol.”

In other commodity news, Chris Flood reported in today’s Financial Times that, “Wheat prices in the US and Europe hit their highest levels in more than a decade yesterday as drought and floods continued to threaten harvests in grain-producing regions across the globe.

“The weather problems come at a time when global wheat stocks are expected to shrink to a 30-year low.”

II. Farm Bill Debate

A news release issued yesterday by the House Ag Committee stated that, “Today, the House Agriculture Subcommittee on Department Operations Oversight, Nutrition and Forestry approved proposals for the nutrition and forestry titles of the 2007 Farm Bill.”

The release indicated that, “The discussion draft on nutrition programs considered by the Subcommittee raises the allowable deductions to expand eligibility for the food stamp program, expands the Fresh Fruit and Vegetable Program for School Lunch programs to all 50 states and increases program funding, increases funding for the Emergency Assistance Food Program and the Seniors Farmers’ Market Nutrition Program, increases penalties for fraud violations, provides USDA additional flexibility to impose punitive fines for food stamp violations, completes the transfer from food stamp coupons to EBT cards nationwide, and reauthorizes the Food Distribution Program on Indian Reservations. The Committee draft supports working families by eliminating the limit on the deduction for child care expenses used when determining food stamp eligibility.”

On forestry, the release stated that, “The discussion draft on forestry programs considered by the Subcommittee extends many forest programs included in the 2002 Farm Bill and includes changes to improve the Cooperative Forestry Assistance Act and the Healthy Forest Reserve Program. It also authorizes a new program to increase diversity in forestry by providing grants to Hispanic serving institutions to train students in forestry and related professional fields.”

The Hosue Ag Committee also issued a publication notice yesterday, which stated that, “A preliminary discussion draft for the commodity section of the Farm Bill was released today.”

The Subcommittee on General Farm Commodities and Risk Management will consider this discussion draft on Tuesday, June 19th at 10:00 a.m

Philip Brasher, writing yesterday at The Des Moines Register’s Cash Crops blog, reported that, “Some House Republicans are worried that an increase in spending on food stamps will come at the expense of farm subsidies.

“Led by Rep. Randy Neugebauer, who represents a major cotton-producing region in Texas, GOP lawmakers tried Thursday to block a provision in the House farm bill that would tie a formula for food stamp eligibility to increases in inflation.

“That and other changes in the bill drafted by the Democratic-controlled House Agriculture Committee would boost spending on food stamps and other nutrition programs by an estimated $5.8 billion over the next five years.

“But Democrats haven’t disclosed how they are going to pay for the extra spending yet, and Virginia Rep. Bob Goodlatte, the committee’s ranking Republican, warned that the ‘money might be taken from other sectors of the farm bill.’”

DTN’s Chris Clayton reported yesterday (link requires subscription) that, “Republicans on the House Agriculture Committee are increasingly hammering home the point that much of the new spending for programs comes from the $20 billion reserve funds that don’t actually have any money yet.

“The criticism came into focus Thursday as a subcommittee approved a $6 billion increase over five years in spending on nutrition programs such as food stamps. Right on down the line, Republicans questioned how these increases would be funded. Rep. Jo Bonner, R-Ala., ranking member of the House Agriculture Subcommittee on Department Operations, Oversight, Nutrition and Forestry, said he was concerned the new spending was built on the reserve funds.

“‘We have not been given any indication when and where these magical funds will appear,’ Bonner said.”

Along these line, Congressional Quarterly writer Catharine Richert reported yesterday that, “After a series of meetings with House leadership, colleagues and the Bush administration, Rep. Collin C. Peterson says he is confident he will be able get extra cash for the 2007 farm bill.

“‘We are having more interest in [the bill] on the leadership levels and other levels in our caucus,’ said the Agriculture chairman, a Minnesota Democrat. Some popular subsidies may be cut in the process, he said.

“The leadership allocated Peterson’s panel $20 billion above the farm bill’s budget cap — about $225.6 billion — to spend on the legislation. But the $20 billion is only available if offsets are found. With a lot of uncertainty surrounding where this cash will come from, farm panel members have been hesitant to expand existing programs or create new ones.”

Meanwhile, in a speech yesterday to the National Council of Farmer Cooperatives, Agriculture Secretary Mike Johanns stated that, “We will continue to aggressively defend ourselves against all challenges, such as those we face today with Brazil from our cotton programs and most recently from Canada directed to all of our subsidy programs. But I believe it makes no sense to put a bull’s eye on the back of the American farmer. Trade and access to export markets is vital. It’s very important that we do everything we can to the Farm Bill that is less likely to be challenged.”

III. Doha

Reuters writer Doug Palmer reported yesterday that, “Months of behind-the-scenes work could lead to dramatic progress in world trade talks next week when top trade officials from the United States, European Union, Brazil and India meet in Potsdam, Germany, the chief U.S. negotiator said on Thursday.

“‘We’re really hoping we can move the ball forward and ideally move it forward dramatically,’ U.S. Trade Representative Susan Schwab told Reuters in an interview. ‘The United States is committed to doing our share and then some’ to reach a final deal in the talks, she said.”

Mr. Palmer went on to explain that, “WTO Director General Pascal Lamy suspended the WTO negotiations in July 2006 after major trading partners again failed to agree on how far to cut farm subsidies and tariffs.

“The United States has proposed cutting its maximum WTO allowance for trade-distorting domestic subsidies by 53 percent to $22.5 billion. Many countries complain that actually would allow it to boost spending from current levels since the United States does not meet its maximum.” (FarmPolicy Note: Recall that Canada’s recent WTO action, in part, accuses “the United States of spending more on farm subsidies than international trade rules allow.”- More details on the Canadian case here).

“The United States has pressed the EU and advanced developing countries to make deeper cuts in their farm tariffs, which it says is vital to generating new trade flows and achieving the development goals of the round.

“When the talks were suspended last year, Schwab said it was impossible for Washington to consider deeper farm subsidy cuts without having a much clearer idea of what new market access U.S. farmers could gain from the round.”

Keith Good