April 22, 2018

Bigger Impact on Agriculture: Farm Bill or Energy Bill?

As attention focuses on House / Senate Farm Bill conference committee activity, and whether or not President Bush will ultimately sign or veto the final Farm Bill product generated by the joint members of Congress, some farm policy observers have implied that the legislation that could have the biggest impact on agricultural producers has already been passed and signed into law: The Energy Bill.

Recall that a recent White House Fact Sheet explained 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.”

Consider these isolated statements on the Energy Bill and the Farm Bill:

* Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University, quoted in “White House Hopefuls Love Iowa Ethanol,” by Amy Lorentzen, The Associated Press (August 30, 2007)- “‘Energy policy is arguably more important to Iowa farmers than commodity policy,’ Babcock said…[H]e adds that a pro-ethanol stance translates to farm support ‘because pro-ethanol means high prices for corn and soybeans here [in Iowa].’”

* Steven Mufson, Washington Post Staff Writer, “House Sends President An Energy Bill to Sign” (December 19, 2007)- “For farmers and agribusiness, it is a windfall, providing more support than perhaps even the farm bill.”

* Philip Brasher, Des Moines Register Reporter, Washington Bureau, “Who wins, who loses from energy bill” (December 23, 2007)- “Agriculture has never had a bigger year in Washington. But the gains had nothing to do with the farm bill.

“The biofuels mandate that President Bush has signed into law not only ensures strong commodity prices for years to come but also may change what farmers grow.”

And with respect to potential expenditures stemming from federal energy policy, recall that Steven Mufson and Dan Morgan noted in The Washington Post on June 8, 2007 (“Switching To Biofuels Could Cost Lots of Green,”) that, “[President] Bush and members of Congress stress energy independence and environmental benefits of federal requirements for a massive increase in the use of biofuels in motor vehicles. But so far they have muted discussion of the prosaic details of how to pay for the subsidies and other incentives seen as crucial for meeting the new biofuels targets.

“If the current tax credits, grants and loan guarantees are extended, the package would cost taxpayers $140 billion more over the next 15 years. New proposals under consideration in Congress could raise that tab to $205 billion.”

The Post article explained that, “The biggest single expense would be an extension of a 51-cent-a-gallon ethanol tax credit scheduled to expire in 2010. It would cost the federal government an extra $131 billion through 2022 under a fuel mandate that recently cleared the Senate Energy and Natural Resources Committee. (It would cost $18.36 billion in 2022 alone.)”

Last summer’s Post article also noted that, “Various proposals in Congress would add to those costs.

“Some lawmakers want to provide aid for ethanol infrastructure because ethanol is too corrosive to be transported through existing gasoline pipelines. [Senator Tom Harkin (D-Iowa)] wants to grant right of way along U.S. highways for new ethanol pipelines. Another bill would establish a Strategic Ethanol Reserve for years when corn harvests are reduced by droughts. Late last month, a House Agriculture subcommittee approved a proposed energy provision that would provide $2 billion in loan guarantees for new biomass plants and $1.5 billion for research into cellulosic ethanol technologies.

“Loan guarantees for cellulosic ethanol plants could cost $10.8 billion, Energy Department research and development programs could add $6.5 billion, an extension of the $1-a-gallon biodiesel tax credit (which expires in 2008) would cost $10.2 billion and ethanol-related corn subsidies could total $14 billion, according to estimates by a former Office of Management and Budget expert. Grants to help build infrastructure capable of handling such a large volume of ethanol could cost $3.35 billion.”

Meanwhile, as potential energy expenditures ratchet upwards, price-triggered Title I commodity program payments are expected to decline. The U.S. Department of Agriculture’s Economic Research Service estimates that, “Total direct payments by the U.S. government to U.S. farmers are expected to total $12.1 billion in 2007, down from the $15.8 billion paid out in 2006 (table 8). This would be nearly 26 percent below the previous 5-year average.”

Countercyclical payments are forecast to decrease from $4.0 billion in 2006 to $1.2 billion in 2007;” and, “Marketing loan benefits—including loan deficiency payments, marketing loan gains, and certificate exchange gains—are projected at $1 billion in 2007, down from $1.8 billion in 2006.”

And with respect to the longer-term, recall that ERS has noted in their agricultural baseline projections that, “Longrun developments for global agriculture reflect increased demand for biofuels, particularly in the United States and the European Union. U.S. agricultural projections reflect large increases in corn-based ethanol production, which affects production, use, and prices of farm commodities throughout the sector.”

ERS added that, “Combined with increases in domestic demand, particularly related to growth in ethanol production, the results are generally higher market prices and cash receipts. Rising production expenses and lower government payments offset some of the gains in cash receipts and other sources of farm income, but overall net farm income remains strong through the projections.”

Along these lines, David Gaffen reported in today’s Wall Street Journal that, “Most of the major world commodities have pulled back from dizzying heights earlier in the year. Not wheat, corn and soybeans.

“Droughts have caused a surge in prices of corn and wheat, and the steady increase in income and development in world economies will increase demand for meat. This is all exacerbated by the increased interest in ethanol as a fuel.

“This is good for commodities investors, less so for consumers and the companies that buy corn and wheat to produce their products.”

And in more detailed analysis regarding wheat, Tom Polansek reported in today’s Wall Street Journal that, “Low world supplies will keep wheat-futures markets volatile at least until spring, while traders and farmers gauge the health of the Northern Hemisphere crop.”

Mr. Polansek noted that, “Producers world-wide are thought to have seeded more winter wheat in response to record prices set in the fall, but the size of the increase will remain unclear until the Agriculture Department releases official estimates in mid-January.

“Even with the expected increase in plantings, since favorable weather isn’t guaranteed for 2008, fears about global supply will continue to provide underlying support to the markets, according to analysts.”

The article added that, “Production will have to rise to roughly 40 million tons more than consumption to bring stocks back to a comfortable level, said Dave Marshall, an independent commodities broker and analyst in Nashville, Ill.

“But output still depends on the weather, and it’s likely that it will take more than one year to replenish supplies, some analysts said. ‘I think a true comfort zone can’t be achieved in a one-year time frame, unless you’re just blessed universally with good growing conditions,’ said Greg Wagner, director of marketing and risk management for Horizon Ag Strategy in Chicago.

“Chicago Board of Trade July wheat, which represents the new crop, could fall to $6 a bushel or less during the summer if growers produce a solid winter-wheat crop globally, he said. The contract recently traded as high as $8.30, but has retreated a bit. CBOT July settled at $7.8950 Friday. The March wheat contract, which represents the old-crop contract, settled at $9.49 a bushel,” the Journal said.

But even $6 wheat is well above the current $2.75 loan rate and $3.92 target price for wheat, meaning that at the $6 level, no marketing loan payments or counter-cyclical payments would be made.

Brazil Cotton Case: An Interested Precedent Regarding Damages

Ken Cook, writing on Saturday at The Mulch Blog, pointed to a recent WTO case regarding Antigua that could have an important impact on the Brazil cotton case.

“In June 2005, Brazilian trade experts raised the prospect of an unusual form of trade retaliation if the United States failed to rectify aspects of its cotton subsidies found by the WTO to cause ‘serious prejudice’ against cotton farmers in Brazil and other countries. The idea was to allow retaliation not in goods, but through legalized infringement upon U.S. intellectual property rights. In other words, Brazil would fight back through WTO-sanctioned acts of piracy,” Mr. Cook noted.

The update indicated that, “As EWG wrote at the time:

“‘What if the U.S. does not comply with the WTO’s broad rulings and fails to reform its multi-billion dollar cotton subsidy programs to Brazil’s satisfaction? What retaliatory trade measures could Brazil possibly adopt that would force an economic giant like the United States to change a politically entrenched farm subsidy system?

“‘The beginnings of an answer may be unveiled in Brasilia today, at a congressional hearing convened to examine a novel trade retaliation strategy: At issue is how Brazil might compel cotton subsidy reforms here by suspending the intellectual property rights protection American companies now enjoy in Brazil for a wide array of knowledge-based products, from pharmaceuticals, computers, software, and biotechnology, to books, musical recordings and films.

“‘In other words, no reform by the U.S. in response to the WTO cotton decision might mean no patent or copyright protection in Brazil for targeted American drugs, computers, biotech crops, or the latest music CDs and DVD movies.’”

In recent developments on this point, Mr. Cook noted that, “Now the Times reports that Antigua has won just such a right of retaliation against the United States in an online gambling case at the WTO.”

In part, the Times article (“In Trade Ruling, Antigua Wins a Right to Piracy”) stated that, “In an unusual ruling on Friday at the World Trade Organization, the Caribbean nation of Antigua won the right to violate copyright protections on goods like films and music from the United States — an award worth up to $21 million — as part of a dispute between the countries over online gambling.”

Complete overview and analysis on this issue is available here.

Keith Good

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