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FAPRI Baseline Projections; Pres. Bush on Biofuels

Yesterday, the Food and Agricultural Policy Research Institute (FAPRI) released their U.S. Baseline Briefing Book: Projections for Agricultural and Biofuel Markets.

A related FAPRI press release explained that the 68-page 2008 FAPRI Baseline Briefing Book was delivered to the U.S. Congress and U.S. Department of Agriculture yesterday; and noted that, “The independent analysis which projects the agricultural economy for 10 years is requested annually by Congress.”

A FarmPolicy.com audio podcast from yesterday (MP3- about six minutes) provides a general overview of the report and includes comments from FAPRI Research Professor Scott Brown. The podcast also briefly highlights food price issues and includes audio clips from Scott Faber of the Grocery Manufactures Association and Economic Research Service Economist Ephraim Leibtag, which were made earlier this week at a Farm Foundation Forum regarding food price increases in the U.S.

The FAPRI press release explained that, “Since a farm bill has not passed Congress, the analysis assumes present 2002 farm bill is extended. Major parts of the outlook are influenced by the Energy Independence and Security Act passed in December 2007 which mandates increased use of ethanol and soydiesel.

“FAPRI assumes current biofuel mandates, taxes and tariffs remain in place. However, the economists assume cellulosic ethanol mandates will be waived as advances in technology remain slow.

“‘There’s no doubt but what the energy bill has greater influence on crop prices than a farm bill,’ [Pat Westhoff, co-director of MU FAPRI, Columbia, Mo.] said. ‘World energy demand drives the economy, which shifts U.S. domestic uses and world trade.’”

On page two, the FAPRI report stated that, “Prices for grains and oilseeds increased sharply in late 2006 and 2007.

“These higher prices increased crop producer revenue, reduced the cost of certain government farm programs, increased feed costs for livestock producers and contributed to higher consumer food prices.”

On page three, the report stated that, “The expectation of higher corn prices contributed to a 15 million acre increase in corn area in 2007, a 12 million acre reduction in soybean area, and a four million acre drop in upland cotton area.

“Sharply higher prices for soybeans and wheat will result in higher projected acreage for both crops in 2008. Corn and cotton acreage both decline.”

A related graph from the report regarding planted acreage for corn, soybean, wheat and cotton, is available here.

With respect to total acreage, the FAPRI press release stated that, “Plantings of 12 major crops are expected to increase 4 million acres in 2008, following a 3 million acre increase in 2007. Most new acres come from double-crop soybeans and wheat, reduced fallow ground and expiring contracts on Conservation Reserve Program acres.”

A graph from the report depicting long-term planted acreage projections for corn, wheat and soybeans is available here, while a graph regarding long-term acreage allocated to the 12 major crops can be viewed here.

A Reuters news article from yesterday (posted at DTN, link requires subscription), regarding the FAPRI report stated that, “U.S. farm income will top $89 billion in 2008, according to FAPRI. That would be up $1.5 billion from 2007, as a $20 billion increase in crop receipts more than offset increases in cash expenses and lower cash receipts in the livestock and dairy sectors.

“Higher crop prices will be supported by biofuel demand as well as export demand, which has remained strong in spite of high prices, said Scott Brown, market and policy research assistant professor at the University of Missouri.

“Looking at FAPRI’s acreage projections, which call for more corn acres and fewer wheat and soybean acres than USDA recently projected at its outlook forum, Brown said FAPRI’s projections were compiled in January. ‘The acreage mix will continue to make adjustments,’ Brown said. With prices so volatile, ‘the numbers could move substantially’ before planting is complete.”

The Reuters article also compared FAPRI’s projections for 2008 with USDA’s 2008 acreage outlook and noted the following planted acreage estimates: Corn (FAPRI-91.8, USDA- 90), Soybeans (FAPRI- 69.5, USDA- 71), Wheat (FAPRI- 61.7, USDA- 64) and Upland Cotton (FAPRI- 9.33, USDA- 9.5).

On page 56, the FAPRI report stated that, “Net CCC [Commodity Credit Corporation] outlays fell sharply in FY 2007, as higher commodity prices reduced spending on marketing loans and countercyclical payments.”

A graph from the report depicting long-term federal farm subsidy payments can be viewed here– note the dramatic reduction in price-triggered federal outlays.

These two graphs also illustrate the declining projections for government payments as net income simultaneously increases.

President Bush on Biofuels

Matthew L. Wald reported yesterday at the International Herald Tribune Online that, “President George W. Bush said Wednesday that the national drive toward ethanol production was also driving up the cost of corn and other foods, a problem he said needed to be addressed.

“The boom in alternative fuels, he said, was ‘beginning to affect the price of food. And so we got to do something about it.’”

(Note a full transcript of the President’s remarks, which were made yesterday in Washington at the International Renewable Energy Conference, can be viewed here. Here is the complete quote regarding ethanol and food prices from Pres. Bush: “Corn ethanol holds a lot of promise, but there’s a lot of challenges. If you’re a hog-raiser in the United States, you’re beginning to worry about the cost of corn to feed your animals. I’m beginning to hear complaints from our cattlemen about the high price of corn. The high price of corn is beginning to affect the price of food.

“And so we got to do something about it, and the best thing to do is not to retreat from our commitment to alternative fuels, but to spend research and development money on alternatives to ethanol made from other materials — for example, cellulosic ethanol holds a lot of promise. I’m sure there are people in the industry here that will tell you how far the industry has come in a very quick period of time.”)

The IHT article added that, “Corn now sells for over $5 a bushel, up from under $2 in 2006. The price is so high that it has even scared off some potential builders of ethanol factories.

“Ethanol is not only hard to make, but hard to use, because cars built to run on gasoline are currently limited to using a blend of no more than 10 percent ethanol mixed with regular unleaded.

“Separately on Wednesday, a pro-ethanol group released a study that said that those cars could use a blend of up to 20 percent. Burning more near places in the farm belt where it is produced would solve another problem, transportation; ethanol cannot be shipped through traditional pipelines for petroleum products like gasoline because it contains traces of water.”

With respect to the study on ethanol blends and cars, Conrad Wilson reported yesterday at the Minneapolis Star-Tribune Online that, “America’s drivers could be pumping more ethanol into their cars by 2013, if Gov. Tim Pawlenty has anything to say about it.

“The performance of vehicles using E20 — fuel that is 20 percent ethanol — is comparable to that of vehicles using the current standard blend of E10, according to a year-long study at two Minnesota universities.

“Armed with the new findings, the state and the Renewable Fuels Association will lobby the federal government to commission its own research in hopes of permitting the use of E20 nationwide. Proponents believe it would help move the nation toward energy independence.”

The Star Tribune article explained that, “The state contracted with the University of Minnesota and Minnesota State University Mankato to test the drivability and durability of several vehicles running on ordinary gasoline and E20.

“The results came back with ‘no showstoppers,’ said Gene Hugoson, commissioner of the Minnesota Department of Agriculture. According to the report, ‘… there are no issues that would prevent moving forward with the comprehensive testing required to certify E20 as a federally approved motor fuel.’

“The estimated cost of the study is $500,000, paid for by the state, the Renewable Fuels Association, the Council of Great Lakes Governors, and the Minnesota Corn Growers Association.”

Brownfield’s Peter Shinn also reported on the Washington International Renewable Energy Conference (WIREC) yesterday and indicated that, “And the food versus fuel debate is very much alive at WIREC. At a breakout session Wednesday morning featuring top agricultural officials from Brazil, Poland, the U.S. and the Philippines, Philippine Agriculture Secretary Arthur Yap told attendees the impact of commodity demand from the biofuels industry on food prices is a matter of life and death for his country.

“‘For some nations, the issue of biofuels and food may be compartmentalized into an economic context,’ Yap said. ‘For a nation such as ours, the issue is the very peace, stability and survival of a nation of 90 million people.’

“Deputy U.S. Ag Secretary Chuck Conner participated in the panel with Yap. He told Brownfield after the session that high-priced oil, not high corn prices as President Bush suggested, is the reason for high food costs.

“‘Energy prices are the key component to that increase, not the increase in the underlying commodity prices,’ Conner emphasized, ‘which supports the need for a renewable fuels sector.’”

Mr. Shinn also noted that, “U.S. Ag Secretary Ed Schafer, who addressed WIREC Tuesday, hosted a ministerial luncheon at the event Wednesday. He told Brownfield there is no inconsistency between the President’s remarks about the impact of corn demand from the ethanol industry on food prices and the long-held USDA position that higher energy prices play a greater role in food price inflation.

“‘Well, I think the President stated an obvious fact that everybody knows today that food prices are being challenged by fuel prices,’ Schafer said. ‘But really, this is a consistent administrative policy and direction, and I was pleased the President pointed out the fact that, though corn prices are under pressure right now, the pathway is to cellulosic ethanol.’”

With respect to oil prices, Guy Chazan and Neil King Jr. reported in today’s Wall Street Journal that, “Oil surged to another new high as the dollar continued its fall, OPEC left output unchanged and U.S. inventories posted a surprise drop.

“The price of oil finished above an inflation-adjusted high of $103.76 a barrel reached in April 1980 for the first time. The new high marks another headwind facing the U.S. economy.”

And regarding cellulosic biofuels production, Reuters writer Tom Doggett reported on Tuesday that, “The United States will not meet Congress’ mandate to produce more ethanol from waste products over the next 15 years, resulting in an overall shortfall in ethanol production requirements contained in a new energy law, a government forecaster said on Tuesday.

“The new energy law requires the United States to produce 36 billion gallons of biofuels a year by 2022 to help stretch gasoline supplies and reduce oil imports.

“But only 32.5 billion gallons of the renewable fuels standard (RFS) will be met by the target date, said Guy Caruso, who heads the U.S. Energy Information Administration.

“The shortfall will come from a smaller volume of ethanol made from cellulosic sources such as wood chips, switchgrass and other agricultural and forest waste than the law envisions, Caruso told the Senate Energy Committee.”

Mr. Doggett added that, “As result, he said the government will have to issue waivers on the mandate to ethanol producers in the years ahead.

“Most U.S. ethanol is made from corn. Many experts believe the increased demand for ethanol production is pushing up prices for grains and thus for the food consumers buy.

“‘While the situation is very uncertain at this early date, our current view is that available quantities of cellulosic biofuels prior to 2022 will be insufficient to meet the new RFS targets,’ said Caruso.”

Doha

Reuters writer Doug Palmer reported yesterday that, “There is still a ‘decent chance’ of reaching a new world trade deal this year, but only if major developing countries like India and Brazil agree to open their markets to more foreign goods, U.S. Trade Representative Susan Schwab said on Wednesday.

“‘The Doha round is coming down to the question of what contribution will the emerging markets, will the advanced developing countries, be prepared to make to support the global trading system,’ Schwab said in a speech.

“‘Here I’m talking about India and Brazil and South Africa’ and others like China, Argentina and Indonesia, she said.

“The United States is prepared to a make a ‘dramatic reduction of trade-distorting (farm) subsidies’ and to reduce its own barriers to trade, Schwab said.

“But it can only make those concessions if advanced developing countries offer meaningful tariff cuts that will open their markets to more imports, from both the United States and from developing countries, she said.”

Farm Bill

Dow Jones writer Bill Tomson reported yesterday that, “U.S. lawmakers have been preoccupied with how much money they can get to fund the 2008 farm bill, but U.S. Department of Agriculture Deputy Secretary Chuck Conner said Wednesday there isn’t enough being done to facilitate the subsidy reforms that the Bush administration has demanded.

“Most of the farm bill discussions on Capitol Hill lately have focused on ‘the money issues,’ Conner told Dow Jones Newswires. ‘There’s very little discussion of the underlying policy.’

The Bush administration offered on Friday to allow Congress to go $10 billion over budget in drafting the 2008 farm bill, up from a previous demand that lawmakers stick to $6 billion over. The offer was accompanied, though by fresh demands, that some farm subsidies be pared down.

“‘The fundamental issue is the reform that is behind the money,’ Conner said.”

Meanwhile, DTN Political Correspondent Jerry Hagstrom reported yesterday that, “Democratic and Republican members of the Senate Finance Committee who are also farm bill conferees have agreed on a $12 billion package of farm bill offsets to offer the House and the Bush administration, a key Senate source said Wednesday.

“The package would involve $8 billion in spending cuts and $4 billion in provisions that would increase revenue. House and Senate farm leaders and the Bush administration have agreed to a $10 billion increase over the farm bill baseline over 10 years and it is unclear how a $12 billion finance package would fit with that $10 billion plan.

“The Bush administration has reacted positively to the spending cuts, but negatively to the revenue raisers, the source said. House Ways and Means Committee Chairman Charles Rangel, D-N.Y., has been shown the package, but has not said whether he would support it, the source said. The package includes some of the offset proposals the Bush administration made in a letter to congressional farm bill leaders last weekend, but not the proposal to shorten the period that Medicare pays for oxygen equipment for seniors, the source said.”

Keith Good