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Farm Bill, Food / Commodity Prices and Biofuels

Farm Bill

Jerry Hagstrom writing on Monday at AgWeek.com, reported that, “Congress left town March 14 for a two-week spring recess, but congressional leaders agreed to continue work on a bill that would add $10 billion over 10 years to a bill that already costs $597 billion. About 70 percent of the $597 billion would be spent on food stamps and other nutrition programs.

“House and Senate staff are trying to write a single bill from House and Senate bills that would raise target prices and loan rates for Northern crops, increase the sugar loan rate, and create a sugar to ethanol program. But the Bush administration has objected to all those provisions.”

Mr. Hagstrom also explained that, “Earlier in the week, frustrated congressional farm leaders talked about writing a bill with only the baseline funding, but on March 14, they backed away from that proposal. Peterson said that he and House Agriculture ranking member Bob Goodlatte, R-Va., who had earlier expressed more interest than the senators in writing a baseline bill, had decided to go along with work on the larger bill because Baucus and Conrad had assured Harkin that they would come up with the money. Peterson described this as ‘some glimmer of hope,’ but that Baucus and Conrad must also be brought into the negotiations on the bill. Harkin said that Senate leaders assured him that the money would be coming. Harkin also noted that Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., Baucus and House Ways and Means Committee Chairman Charles Rangel, D-N.Y. had agreed to reach agreement on a plan two weeks earlier.

“Conrad said in an e-mail that he had urged Baucus, Reid and other senators on the floor March 13 ‘that we write an allocation at $10 billion, because we have a commitment — without equivocation — from Leader Reid and Speaker Pelosi to that amount.’

“‘Show us the money,’ Goodlatte said March 14 after a meeting with Peterson, Harkin and Senate Agriculture Committee ranking member Saxby Chambliss, R-Ga.”

For more background on a potential “baseline” bill versus a $10 billion over baseline alternative, see this FarmPolicy.com audio podcast (MP3- 7:52) from Saturday, March 15.

With respect to how the negotiations have unfolded with respect to the current Farm Bill, Alex Daniels reported last week at the Arkansas Democrat-Gazette Online that, “Holding up progress, according to Arkansas’ U.S. Sen. Blanche Lincoln, a Democrat who is chairman of the Senate subcommittee that crafts policy on commodity crops, is the fact that House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat, has negotiated with the Bush administration directly, rather than waiting for the two chambers to come to an agreement on a single proposal.

“‘That’s not the best of form,’ she said. ‘It would have been better for him to have approached his colleagues on the Senate side. It would have given us better leverage with the administration.’”

Mr. Daniels, went on to note that, “[Sen] Lincoln said she has heard from Democrats and Republicans that it might be a good idea to simply wait until after the November elections to take up farm policy, a position she called ‘completely irresponsible.’ If Congress waits, and commodity prices continue to climb as they have in recent years, the baseline level of spending would decrease, potentially resulting in a farm bill less generous to farmers.

“Another reason for the delay, Lincoln said, is that her own party leadership in the Senate failed to act quickly after the Senate passed its version of the bill last December. ‘You go to caucus and bring it up,’ she said, ‘and people just roll their eyes. It’s just not glamorous enough.’ ‘My recommendation to leadership has been not to worry about the administration,’ she said. ‘We’ve bent over backwards for the administration. At every turn in the road, we’ve tried to address their concerns.’”

Food / Commodity Prices

Associated Press writer Betsy Blaney reported on Saturday that, “If you think the cost of gassing up your car is outrageous, wait until you need to restock your pantry.

“The price of wheat has more than tripled during the past 10 months, making Americans’ daily bread -and bagels and pizza and pasta -feel a little like luxury items. And baked goods aren’t the only ones getting more expensive: Experts expect some 80 percent of grocery prices will spike, too, and could remain steep for years because wheat and other grains are used to feed cattle, poultry and dairy cows.”

The AP article explained that, “Consumers pay an additional penny on wheat products for each dollar the price-per-bushel increases. ‘It’s a huge impact,’ said Steve Mercer, spokesman for U.S. Wheat Associates, an industry group.

“White bread cost an average of 85 cents a pound in 1998 and $1.03 in February 2006. The price rose to $1.32 a pound last month, according to federal data.”

Beyond the consumer impact, Ms. Blaney stated that, “Consumers can try to minimize costs by buying fewer wheat products, but the nation’s bakers, pizzerias and other flour-dependent industries don’t have that luxury.

“Panera Bread Company is paying more than double what it paid for wheat in 2007 -an additional $26.5 million this year, according to its latest earnings report.

“At Kraft Foods Inc., producer of Ritz crackers and Chips Ahoy cookies, the cost of commodities including wheat were up 9 percent last year, or about $1.3 billion. Spokeswoman Lisa Gibbons called that unprecedented and said the company doesn’t expect prices to ease anytime soon.”

And Jerry Hirsch reported in Sunday’s Los Angeles Times (“Our daily bread? It’s costing more”) that, “For now, there’s not much that bakeries can do about the soaring cost of wheat, said Chris Hurt, a Purdue University agricultural economist. They are small players, used to purchasing supplies as they use them, and they don’t have the clout or economic sophistication to compete with the giant foreign buyers and market speculators that are outbidding domestic users of American grain.

Wheat exports are 32% higher than one year ago, 33% of the U.S. soybean crop will be shipped abroad and corn exports this year are on pace to rise by 15% and break the 1979-80 record of 2.4 billion bushels, Hurt said.

“Normally, people start to cut back on items when prices soar. But bread and wheat products are such basic foodstuffs that few consumers are doing that at this point, Hurt said. ‘It has to get to a critical level before we see a change in consumption. There are not a lot of good substitutes for bread.’”

Meanwhile, an Associated Press article from Monday pointed out that, “Politicians and farmers say a ban on U.S. wheat exports would not be an effective way to deal with soaring domestic flour costs.

“Banning overseas sales would alienate foreign buyers and hurt U.S. wheat growers, and would be ‘a terrible mistake,’ said Belfield farmer Byron Richard, president of the North Dakota Grain Growers Association.”

The AP article indicated that, “Jim Peterson, marketing director for the state Wheat Commission, said the group empathizes with domestic bakers, but that stopping wheat exports would discourage farmers from planting wheat this spring, which would reduce supply and hurt bakers in the long run.

“A ban of U.S. wheat exports also would hurt years of effort in developing export markets, he said. North Dakota will export as much as $1.5 billion worth of wheat this year.

“Rep. Earl Pomeroy and Sen. Byron Dorgan, both D-N.D., said a wheat export ban is not in the cards.

“‘It has no credibility whatsoever. It won’t happen,’ Pomeroy said.”

Sam Blackwell, writing on Sunday at the Southeast Missourian Online, reported that, “Some economists worry that the instability of foreign oil is being replaced with another kind of instability — dependence on a crop increasingly in demand and subject to the vagaries of the weather. Part of the concern is over what could happen if a drought seriously hurt the Midwest corn crop, deepening the hunger for a commodity already planted on 80 million acres of America’s midsection.

“This is not doomsday speculation, though the primary concern of the moment in the Midwest is the potential for flooding. State climatologist Dr. Pat Guinan said the cold-water ocean phenomenon known as La Nina is expected to continue through autumn and cause dryer than normal conditions in the upper Midwest. Iowa, northwestern Illinois, all of Wisconsin and a good portion of Minnesota would be affected.

“‘There is a potential for drought over that part of the country,’ Guinan said.”

Mr. Blackwell noted that, “Some economists have predicted the May corn currently valued at $5.725 a bushel could jump to $8 a bushel in the event of a severe drought.”

Biofuels

The Chicago Tribune editorial board noted on Monday that, “The great hope in agricultural and energy circles in the U.S. over the last decade has been ethanol — specifically corn-based ethanol. For years, ag industry leaders have been telling us that corn ethanol is ‘green’ — nature’s fuel — and would decrease our dependence on foreign oil while supporting American farmers and creating more jobs.”

The Tribune stated that, “Now comes mounting evidence that ethanol production consumes a lot of freshwater. The American Coalition for Ethanol, an industry group, acknowledges that ethanol facilities typically use some three gallons of water to produce one gallon of ethanol. And some of that water cannot be cleansed for re-use. Petroleum refineries, by contrast, use considerably less water to produce a gallon of gasoline.

“The upshot: In areas already suffering from water shortages, ethanol production will only put more of a strain on freshwater availability. For example, the Mahomet Aquifer, which supplies drinking water for much of central and eastern Illinois, already supports eight ethanol facilities, and there is nascent public concern about the long-term health of the aquifer.”

With respect to non-corn-based ethanol, Bill Hord reported last Thursday at the Omaha World-Herald Online that, “Corn-based ethanol may not be long for this world, but farmers should feel good about what the future holds for renewable energy, a Nobel laureate in physics said Wednesday.

“‘Corn is not the right crop for biofuels,’ said Steven Chu, director of the Lawrence Berkeley National Laboratory in California. Chu won the Nobel Prize in physics in 1997 and is co-chairman of a study on sustainable energy by an international scientific council.

“Chu and his California team of researchers are trying to develop new fuels that will be dramatically more efficient to make than either corn-based ethanol or soybean-based biodiesel.”

The article stated that, “But within five to 10 years, Chu said, scientific discoveries and refining processes could improve enough to move grasses, woody substances and waste to the head of the line for making fuels. Some grasses could provide five times the amount of fuel from an acre as corn.

“Unlike corn, many of the feedstocks can be grown on marginal land not normally used for food crops.

“‘We should look at corn as a transitional crop,’ Chu said.”

And Holly Hubbard Preston reported last week at the International Herald-Tribune Online that, “‘Biofuels in this country are clearly supported by government policy and not economically viable on their own,’ said Marc Levinson, a senior commodities research analyst for JPMorgan. By support, Levinson is referring to the recently expanded U.S. Renewable Fuel Standard, which raised targets on biofuel consumption, including advanced biofuels – defined as cellulosic biofuels and biomass-based diesel – to 36 billion gallons by 2022.

“In Levinson’s view, there is ‘no way’ the U.S. biofuels industry will be able to meet the targets. Levinson said he believed that the U.S. biofuel industry would either need to find more efficient ways of converting existing feedstocks into biofuel or turn to outside sources like Brazil, which is rich in sugar-ethanol but faces heavy U.S. import tariffs.

“Brent Erickson, a former oil industry lobbyist and now an executive vice president of the Biotechnology Industry Organization, said he believed that the U.S. directive was not unrealistic: ‘It guarantees a market for biofuels’ and is a ‘big risk reduction’ for corporations and private equity that might want to invest. Erickson pointed to the Brazilian government, which adopted an aggressive biofuel policy mandate over 30 years ago. Today, some 40 percent of its total transport fuel comes from locally grown sugar cane turned into fuel for 75 percent of Brazil’s total automobile fleet.”

With respect to the future of corn-based ethanol production, Reuters writers Russell Blinch and Ayesha Rascoe reported last Thursday that, “With soaring food prices and mounting criticism, it might seem the nascent U.S. biofuel industry has seen its best days. But don’t underestimate the determination of Washington, the farm lobby and science to keep it alive…[T]he ethanol industry itself is struggling to maintain profitability in the face of record corn prices, while fighting to win back its street cred as producer of a miracle green fuel.”

The article noted that, “While many argue it is folly to use food for fuel with world food prices on the rise and millions threatened with starvation, ethanol proponents argue that using corn is only a first step in creating a green industry that will eventually include a variety of feedstocks.”

The Reuters article indicated that, “Besides cellulosic research, companies have also developed new enzymes that convert corn starch to sugar without using heat, which reduces energy costs and increases efficiency processing each bushel of corn.

“With these advances and more in the offing, Erickson [Brent Erickson, executive vice president of the Biotechnology Industry Organization in Washington] also sees the criticisms against the industry as misguided.

“‘I don’t know why people have chosen to pick on biofuels right now. But I guess with every technology you go through the honeymoon phase, and you go through the backlash phase. We’re kind of in the backlash phase right now.’”

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In more specific news regarding EU and U.S. biodiesel issues, Giles Clark reported last week at the Biofuel Review Online that, “Rafaello Garofalo, Secretary General of the European Biodiesel Board made it clear today that the trade dispute with the USA over the dumping of biodiesel will be pursued further. Speaking at the World Biofuels Markets event in Brussels Garofalo said; ‘The EU biodiesel industry is finalizing a legal complaint to the European Commission, which we hope to present in the next few weeks, if not days.

“In starting the legal ball rolling the EBB is hoping that it will clear the path for import duties to be imposed on the heavily subsidized B99 biodiesel blends that are coming into Europe. The problem with the imports, says the EBB, is that effectively they get a subsidy in the US and then get a second subsidy in Europe undercutting European biodiesel. What was meant to be an encouragement to produce biodiesel in the USA is now being misused as a cash cow.”

And Jill Treanor reported earlier this month at the Guardian Online that, “The US is flooding Europe with subsidised biofuels that threaten to destroy Europe’s domestic refining market, the head of the biofuel company D1 Oils warned today as its shares lost a third of their value.”

More recently, the Associated Press reported on Saturday that, “Biodiesel producers struggling to stay in business have found a new source of funding: Europe.

“As production costs soar, plants in Iowa and across the country are shipping more biodiesel to Europe, where they benefit from tax incentives and the relative weakness of the dollar against the euro.

“‘You have to look for every market you can find,’ said Bill Horan, chairman of Western Iowa Energy LLC, a Wall Lake biodiesel producer that lost $2.6 million last year.”

The AP article stated that, “Horan said the European market is providing ‘breathing room’ for producers until domestic sales increase.

“The United States shipped about 300 million gallons of biodiesel to Europe in 2007, a 10-fold increase from the year before, according to the European Commission. U.S. biodiesel production last year was estimated at 450 million gallons.

“The imported biodiesel represents 15 percent to 20 percent of the European biodiesel market.

“The boost of U.S. biodiesel has some European producers threatening to file an anti-dumping case against the imported products. They argue it is unfairly subsidized because of a $1-a-gallon U.S. tax credit. The case could result in new duties being imposed on U.S. biodiesel.

“‘What we are witnessing here is U.S. taxpayers effectively subsidizing European motorists to the tune of around $300 million last year,’ said John Bruton, the European Commission’s chief U.S. representative.”

Keith Good