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Biofuels Policy Draws Focus; U.S. Farm Debt

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, penned an item that was posted today at The Financial Times Online (“A global approach is required to tackle high food prices”).

In part, the item noted that, “Experts expect short-term commodity prices (including oil and food) to rise even further. The result would be a devastating blow for the world’s poorest, who often spend more than half of their income on food.

“We must not stand idly by. Unless we act now, the world faces a downward spiral of trade restrictions, higher prices for staples and starvation. The World Food Programme urgently needs additional funds and supporting its well-run programmes to feed the poor is a moral and economic imperative.

“Although aid is the first step, we must be bolder in tackling the long-term challenges of food supply.”

Strauss-Kahn indicated that, “Many farmers are not increasing output because they are not equipped to gear up production or because market distortions mean they do not benefit from higher food prices. So, just waiting for the market to self-correct is not a satisfactory option.

“We must not lose sight of longer-term solutions. This calls for a more global approach to policies. Agricultural policies must change. Higher food prices over the past few years in part reflect well-intentioned, yet misguided policies in advanced economies, which attempt to stimulate biofuels made from foodstuffs through subsidies and protectionist measures.

“High food prices also reflect imprudent agricultural pricing policies in some developing countries, and these too need to be improved.

“No one should forget that all countries rely on open trade to feed their populations. But we are already seeing actions at the national level, such as curbs on food exports, that have a damaging global impact. Completing the Doha round would play a critically helpful role in this regard, as it would reduce trade barriers and distortions and encourage agricultural trade.”

Meanwhile, Bloomberg writer Emily Bowers reported yesterday that, “United Nations Secretary-General Ban Ki-moon said he will form a task force to address the global food shortages and rising prices that have sparked riots in poor nations.

“The group will be ‘high-powered’ and include ‘eminent experts and leading policy authorities,’ Ban said in a speech at the opening ceremony of the United Nations Conference on Trade and Development in Ghana’s capital, Accra, today. He didn’t give further details.”

And more specifically with respect to biofuels and food price issues, Associated Press writer Gillian Wong reported this morning that, “Developed nations should stop paying agricultural subsidies to encourage biofuel production because the payments are making staple foods more expensive, the Asian Development Bank said Monday.

“Biofuels should also be re-examined by governments around the world as it is increasingly unclear how environmentally friendly they are, ADB Managing Director General Rajat Nag said in an interview with The Associated Press. The production of biofuel leads to forests being destroyed and reduced land area for growing crops for food, he said.

“‘We feel that the developed countries should seriously rethink the whole issue of biofuel, particularly the biofuel subsidies,’ Nag said. ‘Giving subsidies for biofuels … basically acts as an implicit tax on staple foods.’”

Also today, an editorial item from The Wall Street Journal Europe Online noted that, “Poverty, famine and violence are among the supposed products of global warming in the future. Yet these calamities are with us today thanks to a key element of ‘green’ policy, biofuels. This feel-good measure is becoming a real-world disaster.”

The Journal item stated that, “It’s no coincidence that the U.S. and the EU, which are leading the biofuel charge, both have powerful ag lobbies that see this latest eco-craze as a new way to milk taxpayers. U.S. and EU promotion of biofuels represent a trifecta of bad regulation: arbitrary production targets to juice demand, subsidies that encourage inefficient use of crops as fuel rather than food, and tariffs that stifle foreign competition. If only Third World consumers had the same influence as rich-world farmers.

“The link between biofuel mandates and food shortages has become so clear that the European Environment Agency this month recommended that Brussels drop its target of getting 10% of its fuel for road transportation from crops and biomass by 2020. But so far, EU policy makers aren’t budging. The only movement from Environment Commissioner Stavros Dimas has been to make a tautological call for ‘sustainability criteria’ for this supposedly ‘sustainable’ policy.

“The U.S. isn’t any better. As these columns noted in February, the White House and Congress had scarcely mandated 36 billion gallons of biofuel production by 2022 – five times 2006 levels – when scientific studies debunking the environmental benefits of ethanol, et al. began piling up. So far, there’s no sign of any serious rethink going on in Washington.”

On the other hand, American Farm Bureau president Bob Stallman indicated in a commentary piece posted yesterday at The Harford Courant Online that, “The popular misconception that increased usage of corn for ethanol production is the only factor driving higher food prices is just that — a misconception.

“Ethanol production has added and will continue to add to corn demand, but other factors also are playing major roles in higher food prices.

“Global demand for U.S. agricultural products has increased significantly over the past several years. China and India are but two examples where growing affluence is leading to changes in diet and overall food demand. Helping add to export demand is the devaluation of the dollar. This makes corn, soybeans, wheat and other commodities produced in the U.S. particularly attractive to overseas buyers.

“Even though corn prices for the current marketing year are up $1 per bushel from last, corn exports are projected to increase by 200 million bushels. Rising exports in the face of rising prices is an indicator of very strong demand.”

Later, Mr. Stallman added that, “But corn-based ethanol already is providing half a million gallons of motor fuel a day and will approach a million barrels a day when the renewable fuels standard for corn-based ethanol is fully implemented. Francisco Blanch of Merrill Lynch has been reported in The Wall Street Journal as saying biofuels are lowering the price of oil and gasoline by 15 percent.

“Contrary to some press reports, numerous studies clearly demonstrate that corn-derived ethanol has a positive energy balance — that we get more energy out of the product than we put into the entire process, going all the way back to the energy used to build the tractors and combines.”

In other food price related news, Andrew Pollack reported in today’s New York Times that, “Soaring food prices and global grain shortages are bringing new pressures on governments, food companies and consumers to relax their longstanding resistance to genetically engineered crops.

“In Japan and South Korea, some manufacturers for the first time have begun buying genetically engineered corn for use in soft drinks, snacks and other foods. Until now, to avoid consumer backlash, the companies have paid extra to buy conventionally grown corn. But with prices having tripled in two years, it has become too expensive to be so finicky.

“‘We cannot afford it,’ said a corn buyer at Kato Kagaku, a Japanese maker of corn starch and corn syrup.”

And with respect commodity production, biofuels and the U.S. growing season, Chicago Tribune writer Greg Burns noted on Friday that, “As he’s done every spring for 20 years, agricultural meteorologist Elwynn Taylor spent the past week barricaded inside his office at Iowa State University, poring over weather patterns to answer a crucial question: Will a drought strike the Midwest’s corn and soybean crops?

“After studying conditions from the Arctic Circle to Bermuda, the flow of air from the Gulf of Mexico to Hudson Bay, the surface temperatures in the Pacific Ocean and the historical record dating back a century, Taylor on Thursday delivered some bad news. He pegs the odds of a major drought at 1 in 3, about double the usual risk.

“‘There is a significant chance of drought,’ he said.”

The Tribune article added that, “Taylor’s forecast comes amid high stakes for global agricultural markets. Rising food costs have sparked protests around the world. A severe dry spell in America’s breadbasket, notwithstanding the wet spring, would send prices higher still, leaving more of the poor hungry. It also would put a squeeze on businesses that depend on affordable grain, such as livestock producers and grocery manufacturers.

“That, in turn, stands to fan a backlash against U.S. and European policies promoting ethanol and biodiesel, which convert foodstuffs into motor fuel. Speaking to the Tribune’s editorial board this week, Agriculture Secretary Ed Schafer said that in the event of a drought, the Bush administration would consider suspending the mandate for blending renewable fuel into gasoline, a step that he said would not require a vote by Congress.”

Mr. Burns indicated that, “Such a move would undermine a biofuel industry that enjoys bipartisan support in an election year. Schafer’s willingness to even consider it underscores the potential for severe weather to upset the global outlook for food supplies.

“A drought could lead to other policy steps as well, such as allowing the cultivation of land from federally funded conservation reserve programs where it now is kept fallow, analysts say.”

For more on the Conservation Reserve Program, see this paper by Bruce A. Babcock and Chad E. Hart (“Options for the Conservation Reserve Program”), which was published in the spring edition of the Iowa Ag Review Online.

Farm Bill

An item posted on Saturday at Minnesota Public Radio Online stated that, “Congressman Tim Walz said he believes lawmakers can work out their differences on the farm bill by the end of next week.

“The U.S. House on Thursday extended the current bill for one week, after negotiations stalled over tax breaks in the Senate version.

“Walz said he thinks a one week extension is enough time to finish the bill.

“‘There’s still kinks to be worked out. Pretty big difference between the House version, especially on spending, and the Senate version,’ Walz said. ‘But, I think as planting season’s here, and our producers need to get some stability in what’s going on, the desire to get this thing done will override some of those hurdles that have been put out there.’”


And in a more general look a the U.S. agricultural economy, Associated Press writers David Pitt and Henry C. Jackson reported today that, “At a time of record agricultural profits, concerns are mounting that American farmers could be edging toward a financial crisis not seen since the 1980s farm-economy collapse.

“Soaring land values, increasing debt and a reliance on government subsidies for ethanol production have prompted economists to warn that what some describe as a golden age of agriculture could come to a sudden end. At risk are the livelihoods of thousands of farmers, the health of hundreds of banks and the vitality of an agricultural industry that has been one of the nation’s few economic bright spots in recent months.

“‘We’re in a very risky time, and yet we don’t seem concerned about that risk nearly as much as we should be,’ said Barry L. Flinchbaugh, an agricultural economist at Kansas State University.”

The AP article indicated that, “The potential problem, economists said, is that strong demand for corn and other grains has caused prices to reach historic highs. That has led to record farmland values and steadily increasing debt as farmers borrow money to buy more land, finance the higher costs of fertilizer and seed and upgrade their equipment.

“As long as the demand remains, good times for farmers should continue. But if demand falls, they could find themselves in a situation reminiscent of the early 1980s when the farm economy largely crumbled.

“Among factors that could affect demand would be a change in the federal government’s policy on ethanol subsidies, now estimated at about $6 billion a year, revisions in the farm bill that would lower support payments or an increase in the dollar’s value, which would hurt exports.

“Farm economists question whether the federal backing for ethanol will continue in the face of complaints that soaring corn prices are increasing food costs. Corn is used in most animal feed and is a key ingredient in myriad other products.”

The AP article also noted that, “According to the U.S. Department of Agriculture, farm business debt is expected to reach $228 billion by the end of this year, an $8 billion increase from last year and a new record for the fourth consecutive year.

“The government said much of the debt is driven by the need for new machinery, equipment and grain storage, as farmers strive to keep up with the increasing demand for grain.

“Debt for land is expected to rise to nearly $121 billion this year, a 2.8 percent increase.

“And the USDA said from the beginning of 2003 to the end of 2008, total farm debt will have increased by about $52.8 billion, or more than 30 percent.”

Keith Good