August 17, 2019

Ethanol – Energy Bill

Lauren Etter reported in today’s Wall Street Journal that, “Little over a year ago, ethanol was winning the hearts and wallets of both Main Street and Wall Street, with promises of greater U.S. energy independence, fewer greenhouse gases and help for the farm economy. Today, the corn-based biofuel is under siege.

“In the span of one growing season, ethanol has gone from panacea to pariah in the eyes of some. The critics, which include industries hurt when the price of corn rises, blame ethanol for pushing up food prices, question its environmental bona fides and dispute how much it really helps reduce the need for oil.”

The article explained that, “Ethanol’s problems have much to do with its past success. As profits and production soared in 2005 and 2006, so did the price of corn, gradually angering livestock farmers who need it for feed. They allied with food companies also stung by higher grain prices, and with oil companies that have long loathed subsidies for ethanol production.”

The Journal article noted that, “Ethanol prices peaked at about $5 a gallon in some markets in June 2006, according to Oil Price Information Service. The price soon began to slide as the limited market for gasoline containing 10% ethanol grew saturated. New plants kept coming online, increasing supply and dropping prices further. Today, the oil refiners that purchase ethanol to blend in need pay only about $1.85 a gallon for it.”

With respect to ethanol supply, the article stated that, “The low prices reflect soaring output. Global ethanol production has grown to a projected 13.4 billion gallons this year, from 10.9 billion gallons in 2006, according to the International Energy Agency. The U.S. production is more than half of that total, or about seven billion gallons this year, up 80% in two years. It equals less than 4% of U.S. gasoline consumption.

“Analysts expect U.S. production capacity to keep growing, encouraged both by high oil prices and by the hope that Congress will stiffen the mandate for refiners to use ethanol. Some observers regard the profit squeeze as part of an ordinary industry shakeout that will ultimately leave the best producers in a position to thrive. As ethanol prices were pushed lower and corn prices stayed high, ethanol profit margins dropped from $2.30 per gallon last year to less than 25 cents a gallon.”

After a detailed and interesting historic outline highlighting some of the key political developments with respect to ethanol, Ms. Etter indicated that, “But even though U.S. farmers this year planted their biggest crop since World War II, prices have stayed well above $3 a bushel, thanks to rising demand in developing countries and poor weather in some grain-growing nations. The price is expected to stay well above $3 next year as farmers shift some land from corn to two other crops whose prices have risen sharply, wheat and soybeans.”

Meanwhile, Richard Simon reported in today’s Los Angeles Times that, “With oil prices in record territory, presidential candidates stumping for votes in corn-centric Iowa, and congressional Democrats anxious to pass an energy bill to cut the nation’s dependence on Mideast oil, this should be the right moment for ethanol.

“But a plan to dramatically increase ethanol production has become a major sticking point in congressional negotiations to complete work on the bill. And it has created a challenge for House Speaker Nancy Pelosi, whose Democratic caucus has split over the issue.”

Mr. Simon went on to provide this analysis: “Pro-ethanol Democrats and farm groups want the bill to require a nearly fivefold increase by 2022 in the amount of home-grown alternative fuels that must be blended into gasoline. They say the mandate would reduce U.S. dependence on foreign oil and help America’s farmers.

“Democrats on the other side, joined by environmental and food-industry groups, think the mandate could raise the price of corn used for food; harm the environment by using more land to produce biofuels; and gouge taxpayers by expanding ethanol subsidies.

“Because of the provision’s popularity among farm-state lawmakers from both parties, it is seen as the glue holding together an energy bill that is expected to include the first significant increase in vehicle fuel-economy rules in decades.”

Later, the L.A. Times article pointed out that, “In 2005, when it drafted the last energy bill, Congress decided to require that 7.5 billion gallons of ethanol be added annually to U.S. gasoline supplies by 2012, an amount expected to be reached soon. California uses about a billion gallons of ethanol.

“At the heart of this year’s dispute on Capitol Hill is the Senate bill’s renewable fuel standard, which would mandate 36 billion gallons of alternative fuels by 2022 — up to 15 billion from corn-based ethanol. After 2016, an increasing portion would have to be advanced biofuels, including cellulosic ethanol produced from plant materials, such as switch grass and wood chips, thought to be easier on the environment than corn-based ethanol.

“The House version of the bill includes no such mandate. Instead, it offers tax incentives to promote research on cellulosic ethanol. A Pelosi spokesman said the San Francisco Democrat wanted an expansion of the renewable fuel standard that would include ‘a significant boost to the cellulosic ethanol industry.’”

And near the article’s conclusion, Mr. Simon noted that, “About 24% of the nation’s corn is expected to go to ethanol production this year, up from 13% in 2004, before Congress enacted the ethanol mandate.

“Even though corn production has increased, corn prices have shot up. A bushel sold for about $3.50 last week, up from about $2 two years ago.”

In other news coverage regarding the Energy Bill, John M. Broder reported in today’s New York Times that, “Congressional negotiators are nearing agreement on a measure to set significantly higher fuel economy standards for cars and light trucks, according to aides and lobbyists following the talks.

“A deal could come as early as Wednesday to require all passenger vehicles sold in the United States to reach a combined fleetwide average of 35 miles a gallon by 2020. If enacted into law, the measure would be the first major increase in vehicle fuel economy standards in two decades.”

Mr. Broder indicated that, “The House and Senate passed broad energy legislation earlier this year, but they have been unable to resolve differences between them. The fuel economy measure is considered among the most effective ways to reduce the consumption of oil — which is selling at near-record prices — and the production of greenhouse gases that contribute to the warming of the atmosphere.

“The House speaker, Representative Nancy Pelosi of California, said this week that she hoped to gain passage of an energy bill containing the new mileage rules by the middle of next week.”

The Times article also noted that, “A provision passed by the Senate but not the House would require the increased use of alternative fuels like ethanol and liquids produced from wood or municipal waste, with a goal of 36 billion gallons of such biofuels by 2022. A version of that measure is expected to survive, although negotiators are still working on complex formulas for different types of biofuels.”

DTN writer Chris Clayton reported yesterday that (link requires subscription), “The greatest danger to the ethanol industry is the divide in agriculture over the renewable fuel that truly came to the forefront in 2007, Sen. Charles Grassley said Tuesday.

“In his weekly call with agriculture reporters, Grassley, R-Iowa, said the short-term view on ethanol taken by livestock producers such as cattle feeders is dangerous, and is the first time that agriculture has not been united on ethanol production.

“‘I think there is a short-term view by some in agriculture that they are going to regret,’ Grassley said.”

The DTN article added that, “Grassley said senators will try to increase the RFS wherever they can, meaning possibly taking up an amendment by Sen. Pete Domenici, R-N.M., that would increase the RFS to 36 billion gallons by 2022. Reflecting the rift on increased ethanol from grain, the National Cattlemen’s Beef Association pegged Domenici’s proposal as one of the ‘harmful amendments’ to the farm bill.”

(To listen to Sen. Grassley’s radio news conference from yesterday, just click here).

In other news regarding biofuels, the Associated Press reported on Monday that, “A plant once called ‘Gold of Pleasure’ that flourished thousands of years ago in Europe could be a promising new crop – and source of energy – for farmers in the arid U.S. High Plains.

“A new project announced last week in Montana and a provision in the farm bill moving through the U.S. Senate could jump-start production of the crop, now called camelina.

“Recently thought of as a weed, politicians are now touting it as a hearty source of energy that will survive dry weather in states like Montana and North Dakota, and also as a way to reduce the country’s dependence on foreign oil.”

The AP article stated that, “The farm bill also includes a provision authored by Sen. Max Baucus, D-Mont., to extend renewable energy tax credits to camelina, along with other language that would include the crop in other farm programs.

“But not everyone is on board yet. Camelina is new enough that many people don’t even know what it is.

“It has been mocked by some politicians in Washington who don’t like the $286 billion farm bill, saying it’s too expensive and full of extra money to help lawmakers win re-election.

“Sen. Judd Gregg, R-N.H., one of the leading Republican critics of the legislation, mentioned camelina in a recent Senate floor speech excoriating the bill.”

The article indicated that, “Sen. Kent Conrad, D-N.D., an author of the farm bill, said his state is closely watching Montana’s progress with camelina. He said the farm bill incentives could spur rapid increases in production of the crop around the region.”

And Matthew L. Wald reported in today’s New York Times that, “A Portuguese oil company, Galp Energia, plans to announce today that it is building a 6,500-barrel-a-day plant to make diesel fuel from vegetable oils using a method akin to refining oil.

“The method, developed by UOP, a subsidiary of Honeywell, and Eni, the Italian energy company, adds hydrogen to oils derived from food crops to create a substitute that the companies describe as superior to ordinary diesel fuel.

“The long-term goal is to modify the process to use oil from algae or from jatropha, a hardy shrub from Central America whose oil has long been burned in lamps and used to make soap.”

Farm Bill- Extension Issues

The Congressional Research Service (CRS) recently updated a report entitled, “Possible Expiration of the 2002 Farm Bill,” which was written by Jasper Womach (Nov. 16).

In part, Mr. Womach explained that, “The mandatory commodity support programs authorized in the 2002 farm bill cover the 2007 crops. So, all subsidy obligations related to calendar year 2007 production are covered by the law. For commodity support programs, there is little reason to enact a farm bill before the end of the calendar year. In fact, past farm bills generally have been enacted late in the year, after the end of the fiscal year. The 1981 and 1985 farm bills were enacted in late December, and the 1990 farm bill was enacted in late November. What was expected to be the 1995 farm bill was not enacted until April 4, 1996, the most extreme case of belated action. Even in that case payments were made on the 1995 crops and farmers went ahead with planting operations for their 1996 crops.

“Policy officials and the agriculture community expect a 2007 farm bill to be enacted before the end of this calendar year. However, lack of new commodity support legislation before harvest in 2008 does little harm other than leaving producers of ‘covered commodities’ uncertain about the size of payments they might receive. This uncertainty about future policy could affect some farmers’ ability to acquire production loans from commercial lenders. Even if Congress deems a temporary extension necessary for the commodity support programs beyond the 2007 crop year, that action likely could wait until the end of 2007.”

The CRS report noted that, “If Congress takes no action on commodity support before the beginning of the 2008 harvest, then the non-expiring provisions of primarily the Agriculture Adjustment Act of 1938 and the Agriculture Act of 1949 take effect. Provisions of these permanent laws are temporarily superseded by each farm bill. So, absent any amendments before the 2008 harvest, the permanent authority will apply. However, the commodity support provisions of the permanent law are so radically different from current policy and inconsistent with today’s farming, marketing, and trade practices, as well as costly to the federal government, that Congress is unlikely to let permanent law take effect.”

EU “Economic Partnership Agreements”

Alan Beattie reported today at the Financial Times Online that, “The European Union has reached a trade deal with an east African bloc – its second success in persuading developing countries to sign such agreements before an end-of-year deadline.

The European Commission said it had agreed an interim deal with the East African Community – comprising Burundi, Kenya, Rwanda, Tanzania and Uganda – that would see 80 per cent of their tariffs against EU goods cut within 15 years.”

The article noted that, “The EU has been accused by development campaigners of coercing the African, Caribbean and Pacific group of nations into signing deals by the end of 2007, when current agreements expire.

“It has also come under fire for pressing them to open their economies too rapidly to EU imports.”

For more detail and background on this issue, see Sunday’s update, “EU ‘Economic Partnership Agreements’ Could Impact Some U.S. Ag Sectors.”

Brazil, Canada- WTO Case Regarding U.S. Subsidies

Reuters news reported yesterday that, “Brazil and Canada called on Tuesday for the World Trade Organization (WTO) to investigate U.S. farm subsidies, which they said break WTO rules.

“The United States rejected both calls, arguing that it was more important for the three big farm exporters to cooperate on securing a new deal in the long-running Doha trade talks, WTO officials said.”

The article explained that, “Under WTO rules, Brazil and Canada can now repeat their request for dispute panels at the next meeting of the WTO’s dispute settlement body on December 17 and they will be established.

“Countries that are the subject of a WTO dispute can object once to the establishment of a dispute panel, but cannot veto it the second time.

“If all three countries agree, the two disputes could be consolidated and handled by a single panel.

“Canada and Brazil said that U.S. farm subsidies had exceeded permitted levels in every year from 1999 to 2005, excluding 2003.”

For more background on this issue, see this update from November 9, “Canada Requests New WTO Panel on U.S. Agricultural Subsidies.”

USDA Chief Economist Dr. Keith Collins to Retire

A press release issued yesterday by USDA stated that, “Acting Agriculture Secretary Chuck Conner has announced the Jan 3, 2008 retirement of USDA Chief Economist Dr. Keith Collins and the appointment of Deputy Chief Economist Dr. Joseph Glauber as Acting Chief Economist. Glauber is currently on detail to the office of the U.S. Trade Representative and serving as Special Doha Agricultural Envoy. He is expected to assume the duties of Chief Economist full-time beginning in mid-December.”

The release added that, “Collins has served as USDA Chief Economist for the past 15 years overseeing USDA’s program of market forecasts and projections. Collins’ 32 years of federal service has included leadership with wide-ranging impact in the economic analysis of agricultural policy, energy and bioproducts, risk assessment and cost-benefit analysis, and global climate change. Collins has also served as Chairman of the Board of Directors of the Federal Crop Insurance Corporation for the past 7 years and Chairman and Vice Chairman of the USDA Graduate School. His key roles in USDA farm bill activities began with the 1985 farm bill and continued with frequent testimony on behalf of USDA in congressional hearings and briefings.

“Glauber, USDA Deputy Chief Economist, returns to USDA in December from temporary assignment to the office of the U.S. Trade Representative, and will retain his role as Special Doha Agricultural Envoy for the United States. Glauber has served as Deputy Chief Economist at USDA since 1992. In addition to his work in the Doha negotiations, he served as senior staff economist for agriculture, natural resources and trade at the President’s Council of Economic Advisers and as an economist at the USDA Economic Research Service. Glauber received his Ph.D. in agricultural economics from the University of Wisconsin in 1984 and holds an AB in anthropology from the University of Chicago.”

Keith Good

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