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Ethanol & Energy Policy- Impact on Farm Bill?

Dan Morgan, writing in today’s Washington Post, reported that, “Corn farmer Jim Handsaker has found a slew of ways to ride the heartland boom in biofuels that is reshaping the economy of rural Iowa.

“He sold some of his 2006 crop this year for more than $4 a bushel, the highest price in a decade. His stake in two nearby ethanol plants brought in several thousand dollars more in dividends. Meanwhile, soaring farmland prices have pushed the value of the 400 acres he owns to around $2 million.

“Even so, come October he will get a subsidy check from the government, part of a $1.6 billion installment that the U.S. Department of Agriculture will send to corn farmers.”

Yesterday, USDA indicated that corn prices, although on a slight downward trend, remain relatively high by historic standards. Meanwhile, the graph below, from The Wall Street Journal Online, demonstrates that ethanol prices are heading in the opposite direction.

The Post article indicated that, “Those annual automatic payments to Handsaker and thousands of other prospering corn growers have long been controversial. But coming at a time when taxpayers are already subsidizing the ethanol industry to the tune of $3 billion a year, the double-barreled support system for those who grow corn and those who turn it into fuel has begun to draw fire in Congress.”

After stating that, “So far, Congress has shown little inclination to adjust the subsidies to account for the new energy-driven rural economy;” the article explained that, “A House-passed farm bill would give corn growers $10.5 billion over the next five years, even if prices stay high. These ‘direct payments,’ a kind of annual allowance, are set by formula and go out automatically, regardless of prices, profits, yields or weather.”

Later, with respect to direct payments, Mr. Morgan noted that, “Congress created the payments in 1996 as part of a plan to temporarily buttress farm incomes while other traditional subsidies were eliminated. They were supposed to be phased out. Instead, the 2002 farm bill continued them.

“‘It’s a bonus program, not a safety net,’ said Sen. Richard J. Durbin (D-Ill.). ‘Farmers I talk to know it’s not politically sustainable to ask taxpayers to make payments to them in highly profitable years.’

“Durbin plans to offer a farm bill amendment that would gradually replace the automatic payments with a program to compensate growers when statewide farm revenues fall below the norm. The National Corn Growers Association embraces a similar plan. This week, the Senate agriculture committee’s chairman, Tom Harkin (D-Iowa), circulated a proposal to cut direct payments by $4.5 billion over five years,” the article said.

More succinctly, the Post article included this quote near its conclusion: “‘A farmer’s best friend in Iowa is the energy bill,’ said Bruce Babcock, a professor of economics at Iowa State. ‘What do you need the direct payments for? It’s money for nothing.’”

Meanwhile, Associated Press writer Lauren Villagran reported yesterday that the future’s price of some program crops remain at historically robust levels; “Wheat, corn and soybean prices surged Thursday after the Agriculture Department said U.S. exports are well ahead of the average pace for this time of year –a reflection of strong worldwide demand and tight supplies.”

The AP article added that, “The USDA reported export sales of corn, wheat and soybeans rose sharply last week. Strong sales trends have the agriculture market increasingly nervous about supplies, so prices have risen sharply.

“Wheat reached an all-time high, and soybeans traded at their highest level in three years.”

More specifically, Ms. Villagran stated that, “December wheat jumped 15.75 cents to settle at $9.33 a bushel on the Chicago Board of Trade, after topping out at $9.465 earlier in the session. November soybeans gained 18.25 cents to close at $10.09 a bushel, while December corn added 11.75 cents to $3.8675 a bushel.”

Also yesterday, USDA’s National Agricultural Statistics Service (NASS) released their monthly Agricultural Prices report, which stated in part that for Food Grains, “The September index, at 227, is 23 percent above the previous month and 67 percent above a year ago. The September all wheat price, at $7.16 per bushel, is up $1.52 from August and $3.10 above September 2006. If realized this would be a record high price.”

The NASS report also included graphical depictions of prices received for wheat (click here), soybeans (click here) and corn (click here). Although corn prices have tapered off slightly recently, the current price is strong by historic standards.

With these current market conditions in mind, DTN Political Correspondent Jerry Hagstrom reported yesterday (link requires subscription) that, “Direct payments would be cut more than $4.5 billion over five years, but a new permanent disaster program would be created under a list of changes Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, said Thursday he would make in the 2007 farm bill.

“Harkin released a list that would increase spending on all programs in the bill by $18.18 billion, including the $5 billion in a permanent disaster relief program that would be provided through the Senate Finance Committee.

“Harkin’s proposal comes a day after Senate Budget Committee Chairman Kent Conrad, D-N.D., presented Harkin and other Democratic members of the Agriculture committee with a chart of three farm bill options that would cost less than Harkin’s current farm bill draft.”

The DTN item stated that, “In an email, a Harkin spokeswoman said Harkin’s proposal assumes that the Senate Finance Committee would provide the $5 billion for disaster program and another $3 billion through other actions. Direct payments to crop farmers would be cut by $4.5 billion over five years and there would be $5.68 billion in savings in current farm programs. The spokeswoman said the proposal assumes the Senate would agree to the $5.68 billion cut because the number is close to the cuts the House passed in its farm bill.

“In another twist, DTN has confirmed that Senate Finance Committee Chairman Max Baucus, D-Mont., is considering dipping into the Social Security Trust Fund to help pay for the farm bill by finding offsets through payroll taxes paid by temporary farm workers under the H-2A guest worker program. That could generate more than $7 billion, but would be controversial. Another controversial move being considered by Baucus would cut the 51-cent ethanol blenders’ credit once ethanol producers reach the 7.5-billion-gallon renewable fuels standard.”

With respect to renewable energy incentives, Dow Jones News writer Charles Roth reported yesterday that, “Brazilian President Luiz Inacio Lula da Silva renewed a pitch for shipping his country’s ethanol more freely into the U.S., and suggested President George W. Bush may be slowly coming around toward supporting better access.

“In an interview with Charlie Rose televised late Wednesday, Lula said he believes Bush is ‘still prepared to convince the corn farmers here in the U.S. to produce ethanol, but he’s not yet well prepared to reduce the tariff …[t]hat is put on Brazilian ethanol (imports).’

“But promoting Brazilian ethanol in the U.S. is ‘a process,’ he said, and added that Bush may be coming around.”

Also on the issue of ethanol exports, Jonathan Wheatley reported on Wednesday at The Financial Times Online that, “In January President George W. Bush announced a target of substituting renewable fuels for 15 per cent of US gasoline consumption – the equivalent of more than 130bn litres of ethanol a year, compared with world production of about 50bn litres.

“Infinity Bio-Energy is among those aiming to tap such demand. Sérgio Thompson-Flores, founding partner and CEO, says exports will account for 10 per cent of sales this year, 30 per cent next year and at least 50 per cent by 2009.

“Infinity recently announced acquisitions in Central America and the Caribbean as part of its planned supply chain to the US market. ‘We will ride the Brazilian wave to begin with,’ Mr Thompson-Flores says, ‘but our focus will quickly shift to the international market.’”

For more on the Central America / Caribbean supply chain issue, see this March 9, 2007 Wall Street Journal article, which noted in part that, “As President Bush meets Brazil’s president, Luiz Inácio Lula da Silva, today in São Paulo to promote a loose alliance to encourage more production of ethanol and other biofuels, the Caribbean ethanol industry illustrates how U.S. energy policy and trade policy can stand at odds.”

The Journal article explained that, “A top energy priority of Mr. Bush is to end a U.S. ‘addiction’ to foreign oil partly by encouraging alternative sources such as ethanol, which can be made from sugar, corn or other agricultural products. But the U.S. tariff [a 54-cents-a-gallon U.S. tariff on ethanol processed anywhere else], which Mr. da Silva has been lobbying unsuccessfully for Washington to remove, damps the supply in order to protect prices for U.S. corn growers in Farm Belt states.

“A tortured route around the tariff goes through the Caribbean Basin. There, two dozen small countries are exempted as part of a 24-year-old trade agreement from near the end of the Cold War, designed to combat communism by feeding the U.S. dollar into their poor economies.”

The Journal article included this helpful graphical depiction of how the exemption works.

Interestingly, even as the price of crude-oil futures remain high, as Mark Gongloff reported yesterday at The Wall Street Journal’s Energy Roundup Blog, “The front-month November light, sweet crude contract on the New York Mercantile Exchange was up $1.27, or 1.6%, at $81.57 a barrel,” some news items indicate that U.S. ethanol production could be heading for a market surplus and some large energy-producing firms are seeking to diversify their portfolio of fuel products beyond corn-based feedstock sources.

Lauren Etter, writing in today’s Wall Street Journal, reported that, “Ethanol titan Archer-Daniels-Midland Co. said it will join with ConocoPhillips to develop ‘biocrude,’ a crude-like substance made from crops, wood and switchgrass that can be turned into gasoline or diesel. The partnership highlights how oil companies are looking to increase their presence in the biofuels sphere, and how grain companies are looking to diversify beyond corn-based ethanol. Together, the companies plan to spend at least $5 million a year to develop the product.”

The Wall Street Journal article also included this helpful graphic of corn and ethanol prices.

Also, Nicholas Zeman, in an article published in this month’s Ethanol Producer Magazine (EPM), reported that, “A year ago, ethanol industry talk centered on shortages. Now the hot topic is a possible surplus and what needs to be done to amplify demand as the ominous E10 wall approaches.”

The article indicated that, “The construction boom and the rate at which gallons are coming on line has led some analysts and the mainstream media to forecast a possible ‘glut’ situation for the renewable fuel in the coming months and even years. Goss [Ernie Goss, chair of the economics department at Creighton University and head of the Creighton Economic Forecasting Group] tells EPM, however, that this is a mistaken consensus. ‘I wouldn’t say there is a glut of ethanol because the demand is out there,’ he says. ‘But there are transportation issues. That means large volumes of ethanol might sit for long periods of time because they just can’t move it.’”

The article noted that, “A simple solution to increase the infrastructure for renewable fuels might be the increased use of blender pumps. These pumps contain tanks of ethanol and gasoline and are essentially mixed on the spot by the consumer at a retail location. ‘This would allow ethanol producers to deliver directly to stations and avoid some of the handling costs by bypassing the petroleum fuel terminal,’ Northey [Iowa Secretary of Agriculture Bill Northey] says. However, consumers need to see a savings when they fill up with ethanol versus unleaded gasoline. Fuel alcohol has an energy equivalent to roughly two-thirds that of gasoline so the renewable fuel should reflect that in terms of pricing. ‘It’s just more expensive than it ought to be,’ Northey says. Does that mean the 51-cent blenders’ credit should be discontinued? ‘I think that would send the wrong message to investors,’ he says. ‘In the future, investors are going to want that in place if they’re going to be involved in some high-risk ventures like building cellulosic ethanol plants.’”

For more on transportation issues and ethanol, see this USDA publication from this month entitled, “Ethanol Transportation Backgrounder: Expansion of U.S. Corn-based Ethanol from the Agricultural Transportation Perspective.”

On page 13, the report noted that, “Several supply chain issues could inhibit growth in the ethanol industry. The efficiency of the ethanol transportation system may begin to depend on the ability of the blending market to accommodate additional quantities of ethanol.

“The supply and demand of ethanol may become temporarily out of balance because blenders require time and financial incentives to add blending capacity. These extra financial incentives, including cheaper ethanol, could be in addition to the current blender tax credit of $0.51 per gallon, which is in place through 2010. Blenders are watching Federal and State legislative processes carefully to assess the legislative risk to their capital investments.

“Grain markets may also be affected by ethanol supply chain issues. There is concern that grain storage shortages may occur as ethanol production capacity and corn crops continue to expand.”

The report indicated that, “Corn for ethanol is most frequently delivered to plants by trucks, typically from corn farms within a 50-mile radius. The truckload requirements just for corn to ethanol—if trucks are assumed to carry 98 percent of the corn delivered to ethanol plants—are expected to increase from 2.3 million in 2006 to 4.7 million truckload equivalents by 2016” (page 15).


WTO Litigation / Doha

With respect to WTO action and U.S. farm subsidies, a Congressional Research Report (CRS) from September 21 (“Brazil’s WTO Case Against U.S. Agricultural Support: A Brief Overview,” by Randy Schnepf) stated that, “Brazil — which has already won a series of WTO dispute settlement rulings against U.S. cotton programs — introduced a new challenge against U.S. farm programs in July 2007, when it requested consultations with the United States to discuss two issues related to U.S. farm programs. The request is nearly identical to a similar case being pursued by Canada against U.S. farm programs [related FarmPolicy link available here]. Both cases raise two concerns — that U.S. farm program outlays have exceeded their annual AMS limit in six out of seven years during the 1999-2005 period, and that the U.S. export credit program functions as an illegal export subsidy. However, Brazil’s AMS challenge appears to be more comprehensive than Canada’s WTO case in terms of the level of detail of program support activity that is alleged to have been incorrectly notified as exempt or excluded from the AMS spending limit.

“This report provides an overview of the current status of Brazil’s WTO case (DS365) against U.S. farm programs, along with a brief discussion of Brazil’s two charges and the potential role of Congress in responding to these charges.”

The CRS report also stated that, “In its official request for consultations, Brazil raised two charges against U.S. farm programs;” the first, that “U.S. Total Domestic Support Exceeds Its WTO Limit. In accordance with WTO commitments, all WTO members have agreed to submit annual notifications of their farm program outlays to the WTO, and these outlays are subject to specific limits. The total spending limit for U.S. non-exempt AMS programs (i.e., programs that are trade- and market-distorting) was $19.9 billion in 1999 and $19.1 billion in all subsequent years. To date, the United States has notified details of its farm program outlays through 2001. According to U.S. notification data, U.S. domestic support outlays have remained well within U.S. WTO spending commitments through 2001. However, Brazil argues that several U.S. program payments were either omitted from the notification data, or incorrectly notified either as green box or as non-product- specific AMS (where they would more easily qualify for exclusion from amber box limits under the non-product-specific de minimis exemption).

The report added that, “News reports suggest that Brazil also is considering the inclusion of ethanol production subsidies that indirectly increase corn demand and production.”

With respect to the second charge, the CRS report noted that, “Second Allegation: U.S. Export Credit Guarantees Act as Illegal Export Subsidies. Brazil argues that the U.S. export credit guarantee program operates as a WTO-illegal export subsidy. In the U.S.-Brazil cotton case, a WTO panel found that U.S. export credit guarantees effectively function as export subsidies because the financial benefits returned by these programs failed to cover their long-run operating costs. Furthermore, the panel found that this applies not just to cotton, but to all commodities that benefit from U.S. commodity support programs and receive export credit guarantees. As a result, export credit guarantees for any recipient commodity are subject to previously scheduled WTO spending limits.”

Taking up the issue of potential implications of the WTO action, the report stated that, “Many market analysts and the news media suggest that the two recent cases brought by Brazil and Canada are harbingers of future challenges to U.S. commodity programs. If either country were to successfully pursue its case, it could affect most U.S. program commodities, since the charges against the U.S. export credit guarantee program and AMS limit extend to all major program crops. Should any eventual changes in U.S. farm policy be needed to comply with a WTO ruling, Congress likely would be called upon to address this issue (including adjustment, if not full removal, of the planting restriction on base acres receiving direct payments).”

Meanwhile, Acting U.S. Secretary of Agriculture Chuck Conner delivered remarks yesterday on the issue of pending U.S. trade agreements (transcript available here).

After his opening comments Sec. Conner took questions from reporters. Reuters writer Missy Ryan inquired about the Doha talks; “I understand President Bush this week told President Lula that the United States would be willing to cut its overall trade distorting subsidies as low as $13 billion annually if it got the market access it’s looking for. For the farm groups here today, would that be acceptable even if the new market access that you’ve been looking for was provided, that level of subsidy?”

Sec. Conner replied; “[L]et me just say that as I have already publicly indicated, our trade negotiators have indicated that they want to proceed forward in the Doha round and maintain some flexibility and willingness to discuss these issues. They have been very, very clear however that any flexibility on the part of the U.S. position is predicated and remains predicated on the level of market access that we will be given. This has been the fundamental point since the beginning. This is what the U.S. has said from the beginning is that we’re willing to talk about our domestic supports but that talk is predicated on other countries’ willingness to engage us on market access.

“That position hasn’t changed. I maintain it’s not going to change going forward. So that remains where we are. We’ve had a trade team over there on technical issues for the last three weeks…[T]hat team has just returned. They have indicated that on some of the technical issues they are making some headway on that. But the fundamental point of market access, the flexibility on that market access in exchange for us being willing to talk about our domestic support, that remains a key point out there. We’ve indicated again that we are willing to talk about domestic supports but totally predicated on market access.”

Keith Good