June 16, 2019

President Bush Signs H.R. 6, The Energy Bill

Categories: Ethanol /Farm Bill

Peter Baker reported in today’s Washington Post that, “After a year of partisan combat and legislative stalemate, President Bush and Democratic congressional leaders came together yesterday for a holiday season consensus as they enacted legislation to promote energy efficiency and reduce greenhouse gas emissions.

“House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry M. Reid (D-Nev.) joined Bush for their first bill-signing ceremony with him since Democrats took over Congress in January, using the occasion to look past the disputes that marked a year of divided government.”

The article stated that, “The new law increases the fuel-efficiency standards for passenger vehicles for the first time since 1975, requiring new cars to average 35 miles per gallon by 2020 instead of the 25 mpg now required. It also requires fuel producers to use at least 36 billion gallons of ethanol and other biofuels by 2022, a fivefold increase over the current standard, to reduce the dependence on oil. And it includes new rules and incentives to encourage greater efficiency in light bulbs and buildings.”

In comments made at the signing ceremony, President Bush stated that, “The bill I sign today takes a significant step because it will require fuel producers to use at least 36 billion gallons of biofuel in 2022. This is nearly a fivefold increase over current levels. It will help us diversify our energy supplies and reduce our dependence on oil. It’s an important part of this legislation, and I thank the members of Congress for your wisdom.”

In addition, the White House issued a Fact Sheet highlighting more details of the new energy law, which stated in part that, “The Energy Independence and Security Act of 2007 will help reduce America’s dependence on oil by: Increasing the supply of alternative fuel sources by setting a mandatory Renewable Fuel Standard (RFS) requiring fuel producers to use at least 36 billion gallons of biofuel in 2022. Although the President proposed a more ambitious alternative fuels standard in his State of the Union Address, the RFS in the bill he signed today represents a nearly five-fold increase over current levels.”

Reuters writer Timothy Gardner reported yesterday that, “The U.S. energy bill signed into law by President George W. Bush on Wednesday should drive a billion-dollar domestic business for a low-emissions domestic ethanol made from sources other than corn — though it could take nearly a decade to go from the lab into car tanks.”

The article noted that, “‘This standard can be viewed as technology-forcing as there is no prospect of producing this much biofuel from corn in the United States,’ Marc Levinson, an analyst for JP Morgan in New York, said in a research note.

“Indeed, the bill mandates production of cellulosic ethanol, a fuel that can be made from the woody parts of the corn plant, rather than corn kernels that are the source of traditional U.S. ethanol. It can also be made from nonfood energy crops like poplar trees, switchgrass, or wood waste.

“The bill calls for U.S. ethanol to be at least 3 percent cellulosic by 2012 and at least 44 percent by 2022.”

Mr. Gardner added that, “Bill Caeser, an Atlanta-based partner at McKinsey, said the fuel could become commercially available by 2015 and costs could eventually slip below those for making corn ethanol.”

DTN writer Todd Neeley reported yesterday (link requires subscription) that, “Ethanol industry leaders are hopeful that the development of a cellulosic-ethanol industry will take the pressure off corn as a food, feed and ethanol feedstock, but an expert at Rabobank International said that won’t happen anytime soon.

“Speaking during Rabobank’s 2008 North American Food and Agribusiness Outlook, Michael Whitehead, a vice president at Rabobank Food and Agriculture Research Advisory, said Wednesday the U.S. ethanol industry’s appetite for corn will continue to open corn export opportunities for other nations as well.”

Mr. Neeley noted that, “‘A lot of cellulosic ethanol at the moment can be refined at around $6 a gallon,’ [Whitehead] said. ‘So it remains at uneconomic levels and will be so for the next 17 years or so. So corn will continue to be the main feedstock, around 97 percent of the feedstock for ethanol in the U.S.’”

While the U.S. government works to spawn increased ethanol production and new technologies regarding alternative feedstock sources, ethanol imports into the U.S. continue to be hampered.

Reuters news reported yesterday that, “European and U.S. protectionism made it more difficult for Brazil’s state-run energy company, Petrobras to export ethanol in 2007, a company official said on Wednesday.

“‘Certainly, sales were lower (than expected) because of (trade) barriers. Brazil’s government has been working hard (to open markets) but we don’t have any concrete result,’ Petrobras’ energy development executive manager, Mozart Schmitt de Queiroz, told journalists.

“Some scheduled shipments were canceled this year due to protectionist measures, Queiroz said, without elaborating.

“‘It’s been difficult to enter the United States and the European market with our ethanol. Both regions talk about trade liberalization, they want countries to open up their markets for industrial goods but the protectionism on basic goods is very strong,’ he said.”

Presumably the new alternative energy mandates contained in the new law will have some impact on the price of program crops, particularly corn.

Associated Press writer Jackie Farwell reported yesterday that, “March corn rose 2.75 cents to settle at $4.3475 a bushel, while March wheat advanced 21.5 cents to $9.7350 a bushel on the Chicago Board of Trade. January soybeans climbed 9.25 cents to close at $11.59 a bushel.”

The article stated that, “Higher prices for agricultural products will eventually trickle down to supermarket shelves, analysts say. Surging costs exceeded General Mills Inc.’s predictions for ingredient costs for the current fiscal year, the company said Wednesday in its report of second-quarter financial results. The food maker said profit edged up as higher sales helped to offset rising ingredient costs.

“The effects of an energy bill signed by President Bush on Wednesday, which calls for more fuel-efficient vehicles and wider use of ethanol, remain to be seen in commodities markets, said Jim Gerlach, president of AC Trading Co. in Fowler, Ind.

“The legislation requires automakers to increase fuel efficiency by 40 percent to an industry average of 35 miles per gallon by 2020. It also mandates that refiners increase the use of ethanol from 6 billion gallons this year to 36 billion gallons a year by 2022; the previous mandate required 7.5 billion gallons by 2012.

“‘Now it’s getting from point A to point Z that’s interesting,’ Gerlach said. ‘The mandate’s out there, but how do we make it happen?’

“Ethanol in the U.S. is largely made from corn. Increased production of the fuel has been a primary driver of higher corn prices,” the article said.

As the market price of some program crops, particularly corn, soybeans and wheat, remains strong, competition for acres is anticipated as producers prepare to make crop allocation decisions for spring planting.

Terry Francl, a Senior Economist at the American Farm Bureau Federation (AFBF) indicated in a market update from earlier this month that, “As previously discussed, the market is in a bidding war for crop acreage. Harvest time prices only dipped briefly this fall and then came roaring back for all the major crops, except cotton. As this article is being written 2008 corn futures prices are trading in the $4.20-4.50 per bushel range, soybeans at $11.50-11.80 and wheat from $9.50-11.00.

“The big battle shaping up is between corn and soybeans, although wheat is certainly a strong player compared to last year. The bottom line is how much can farmers make per acre given the respective crop prices, yields and production costs.”

According to Francl, “As of mid-December 2007, this is what the planted acreage for 2008 may look like for the four major crops: Corn- 88 million acres, Soybeans 69.5 (6.5 double crop), Wheat 64.5 and Cotton, 9.5” (complete table summary from the report is available here).

The AFBF report stated that, “The demand for wheat and corn remains strong, reflecting increased world demand and tight supplies. Such things as passage of the Energy Bill, currently being debated in Congress, could certainly have an impact on corn prices (ethanol) and soybean oil prices (biodiesel). Likewise, macroeconomic factors, like the value of the dollar and the price of crude oil, are also important variables that could affect prices and, ultimately, planting decisions.

“The outlook for cotton is a further decline in acreage. Of course if the drought in the Southeast should continue into the spring—all long range forecasts assume normal weather— then cotton, which is a more drought tolerant crop, may hold on to more acres in 2008. In 2007 many farmers who planted more corn and/or soybeans in that area experienced disappointing yields due to the drought. Yet if corn, soybean and cotton prices remain close to their current levels there will be a strong economic incentive to abandon more cotton acres.”

In more detailed analysis regarding corn and soybean returns, University of Illinois Economists Gary Schnitkey and Dale Lattz noted earlier this month that, “Significantly higher costs for corn production may cause some farmers to switch acres from corn to soybeans. In this paper, returns are projected for 2008. Corn returns minus soybean return, hereafter referred to as corn-minus-soybean-returns, indicate that corn production may have higher returns than soybean production on high-productivity farmland in 2008. However, returns will vary across farms. Projected 2008 corn-minus-soybean returns are roughly similar to averages observed from 2004 to 2007.”

The authors noted that, “Budgets indicate that corn production will be more profitable than soybean production in northern and central Illinois. Soybeans are projected more profitable in southern Illinois. Farms that have highly productive farmland may find corn-after-corn more profitable in 2007 than soybeans. Changes in commodity prices could change relative profitability.”

And as University of Illinois Agricultural Economist Darrel Good noted earlier this week, “Early projections for 2008 suggest that U.S. harvested acreage of corn, soybeans, and wheat all need to be larger than in 2007, by a total of about 7.4 million acres. With rising prices of other commodities and limited amounts of uncultivated acreage available, it is difficult to see how such an increase can occur. The crop markets have an interesting challenge ahead. With an increase in winter wheat acreage likely already in place, prices of corn and soybeans in particular may have to remain high relative to alternative crops in order to ensure sufficient acreage in 2008. In addition, average yields will have to remain high to generate sufficient production.”

As the new mandates in the energy bill take hold, and some program crop prices remain at robust levels, farm income has strengthened. And while price-triggered government payments are projected to decrease, the Farm Bills passed by the House and Senate generally keep much of the 2002 farm policy framework in place.

With respect to future pressure points impacting farm policy changes, Chris Clayton, writing yesterday at the DTN Ag Policy Blog, explained that, “The biggest threat to U.S. commodity programs and overall safety net apparently won’t occur domestically, but will stem from international pressure.

“U.S. farm programs took a couple of major blows this week with the language being released from a World Trade Organization ruling stating that the U.S. has not done enough to meet the obligations of the U.S. cotton case with Brazil. The ruling specifically pointed to two legs of the three-legged farm programs: marketing loans and counter-cyclical payments.”

Mr. Clayton added that, “What is interesting about the cotton case is the length of time it has taken. Brazil originally brought the case in 2002. Here we are rolling into 2008 and the WTO again reaffirms itself, the Bush administration is considering one final appeal of the ruling and the new farm bill, while close to being done, is not yet complete.

“Then we move on to the investigation now begun by the WTO on behalf of Brazil and Canada to simply challenge the total overall affect of U.S. farm subsidies that again would target the marketing-loan and counter-cyclical programs. Given the cotton ruling, the overriding issue would be if the U.S. can ride out another farm bill.”

Concluding, Mr. Clayton stated that, “Farm groups overall have been in denial about the cotton case and its ramifications. They certainly brought nothing to the table to completely overhaul commodity programs. Changes proposed by corn growers and others to overhaul the counter-cyclical program are being implemented as an optional programs. The most radical proposals to change farm programs were attached and resoundingly voted down in the House and Senate. In fact, just last week Acting Agriculture Secretary chuck Conner referred to the proposal by Sens. Richard Lugar and Frank Lautenberg as ‘draconian.’

“It will likely remain popular to denounce the WTO and the Doha negotiations, but as the farm programs keep getting picked apart and other sectors of the economy start getting penalized with higher tariffs because of the stubborn position on current farm programs, there is a greater potential that the 2008 farm bill will unlikely survive intact to 2013. Then, people may look at the efforts of Lugar, Lautenberg and U.S. Reps. Ron Kind and Jeff Flake not as draconian, but as the last viable option.”

Omnibus Spending Bill- Farm Bill Extension

Klaus Marre reported yesterday at The Hill Online that, “The House Wednesday afternoon wrapped up its work for the year, putting the finishing touches on a massive omnibus spending bill that includes funding for the wars in Iraq and Afghanistan.

“In its last vote of the session, the House backed an amendment that was passed earlier this week in the Senate. The measure adds $70 billion in funds for the Iraq war. It is attached to the omnibus spending bill that funds many government operations. The measure cleared the House by a vote of 272-142.”

The article noted that, “The White House has indicated that President Bush would sign the bill into law.”

The “Washington Insider” section of DTN indicated yesterday (link requires subscription) that, “The omnibus appropriations bill working its way through Congress includes an extension of the 2002 farm bill through March 15, 2008.

“Chairmen of the House and Senate Agriculture committees want the extension to enable House-Senate farm bill conferees to complete work on that measure in early 2008 without having to worry that the Congressional Budget Office could lower the baseline for farm spending in the middle of that process.”

Yesterday’s DTN analysis also noted that, “The Bush administration previously said it wanted the spending measure to be free of amendments that would set or re-set policies for federal programs, and the farm bill extension would do just that. However, as noted above, without such an extension, negotiators from the House, Senate and the Bush administration likely would find themselves in a problematic situation if CBO’s next budget baseline (usually issued in February) showed that there was substantially less money available for farm program spending than is contained in the current budget baseline.

“Currently high prices for most program crops almost certainly will result in estimated future program costs that are lower than in the past.

“Continuing farm programs for a couple of months at current spending levels is expected to have little or no effect on the overall budget picture.”

Keith Good

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