FarmPolicy

Fuel, Food Price Issues and Doha Developments

Marcia Zarley Taylor reported yesterday at DTN (link requires subscription) that, “Ethanol’s rapid expansion since 2006 has seriously exaggerated price increases in corn and jeopardized the domestic livestock industry, perhaps far more than the Bush administration has been willing to admit.

“So concluded a new analysis by former USDA Chief Economist Keith Collins, a fixture in farm policy for the past 30 years and an authority who is lending credence to the request by Texas Gov. Rick Perry, a Republican, for a partial waiver of the Renewable Fuels Standard mandate in that state. Collins’ white paper, commissioned by Kraft Foods, was part of the public comments submitted to the Environmental Protection Agency as it considers whether it should grant the exemption. The public comment period ends June 24, and EPA is expected to issue its decision, in consultation with USDA and the Department of Energy, next month.”

The DTN article added that, “Collins’ study has caused an uproar in agricultural circles. Reacting to the initial release of Collins’ conclusions on June 5, Agriculture Secretary Ed Schafer noted that Collins had been ‘an ethanol champion’ when he was at USDA. ‘We have to be careful of people who are getting paid to say things now and to adjust the outcomes to what a certain group or organization wants to hear,’ Schafer said.

“‘In a nutshell, I’ve been listening to people say how ethanol has had little impact on corn or food prices, and intuitively, that didn’t strike me as right, particularly for feed grains or soybeans,’ Collins told DTN in a phone interview.”

Later, the DTN article indicated that, “Some studies suggest that ‘ethanol could account for 60 percent of the expected increase in corn prices between 2006/07 and 2008/09’ when U.S. stocks are razor thin, a cheap dollar encourages exports and acreage is very constrained, Collins said. USDA has argued that ethanol has had a much more muted effect on prices, but it focused on a longer timeframe when ethanol production was much more inconsequential than it is today, he said.

“‘The increase in retail food prices due to biofuels is estimated to be 23 to 35 percent above the normal increase in food prices that would occur over two to three years,’ Collins said in the study. ‘Accordingly, biofuels are now becoming a significant factor in higher food prices.’ Collins suggested the government ‘could’ change its ethanol policies.

“That statement appears to be a direct contradiction to USDA’s position that biofuels has raised food prices only 2 to 3 percent.”

Meanwhile, Reuters writer Ayesha Rascoe reported yesterday that, “Texas Gov. Rick Perry on Tuesday urged the U.S. government to help consumers and businesses cope with record-high grain prices by granting his request to cut this year’s federal ethanol mandate by half.

“The Republican governor petitioned the Environmental Protection Agency in April to modify the corn-based ethanol mandate that requires blending 9 billion gallons of ethanol into the nation’s fuel supply this year.”

The article noted that, “‘Although ethanol and the Renewable Fuel Standard mandate may have looked good five years ago, it’s no longer a good idea,’ Perry told a news conference. ‘It’s hurting America. It’s hurting our families.’

“Opponents of the corn-based ethanol mandate say it has played a significant role in skyrocketing grain and food prices.”

With respect to food prices and flooding in the Midwest, Carrie Kahn reported on National Public Radio’s Morning Edition Program on Monday (“Midwest Flooding Raises Costs of Staple Crops”) that, “For farmers living along the Mississippi River in Iowa, the flooding has been financially devastating. Thousands of acres of farmland in the Midwest are still underwater. And it couldn’t have come at a worse time — prices for corn and soybeans are at record levels.”

Reuters writer Michael Conlon reported yesterday that, “Midwest governors pleaded with the White House on Tuesday for more help to counter billions of dollars in damages from floods that drowned parts of the U.S. farm heartland and drove thousands from their homes.

“The request came as the flood threat in a key region of the world’s biggest food and grains exporter continued to ease, though another levee in Missouri burst early on Tuesday sending the swollen Mississippi River into a relatively small, unpopulated area.

“In Indiana, Governor Mitch Daniels said the heavy rains that began at the end of May likely triggered ‘the worst agriculture disaster in state history,’ with one in every 10 acres of corn and soybeans lost at a cost of at least $800 million.

“Across the region up to 5 million acres of corn and soybeans may have been lost, fueling worries that world food inflation will worsen even as energy prices set records.”

With respect to key commodity prices, the Associated Press reported yesterday that, “Corn and soybean prices fell sharply Tuesday as investors cashed in profits from recent rallies and the government said crops were beginning to bounce back after devastating Midwest flooding.”

The AP article stated that, “Corn for December delivery fell 11.75 cents to settle at $7.475 a bushel on the Chicago Board of Trade, after earlier dipping as low as $7.44. The contract hit an all-time trading high of $7.915 a bushel on June 16.

“Corn prices have surged more than 80 percent in the past year amid sharp increases in global demand to feed people and livestock and make ethanol in the United States.

“Improved Midwest weather also pushed down soybeans Tuesday. Soybean futures for November delivery lost 11.5 cents to settle at $14.91 a bushel on the CBOT, after earlier falling to $14.81 a bushel.”

Ilan Brat, Joe Barrett and Anna Prior reported in today’s Wall Street Journal that, “As floodwaters begin to recede in some parts of the Midwest, federal and state officials are just beginning to tally an economic cost that is likely to be in the billions of dollars — but it could be months or even years until the full impact is known.”

The Journal added that, “Many farm fields remained underwater in Iowa and other states as rain continued to fall Tuesday in some parts of the Hawkeye State, with more expected this week. In Missouri, a Mississippi River levee was breached in St. Charles, about 20 miles west of St. Louis, flooding a sod farm and a soccer park.”

The Journal writers went on to explain that, “Crop damage is particularly hard to judge, since it still isn’t known how much land will be replanted and how successful the rest of the growing season will be. The return of some normal weather across the Midwest has stopped the deterioration of the region’s two biggest crops, corn and soybeans.

“Prices of these crops have slipped amid profit-taking by traders from the highs set last week. Analysts might begin to reverse some of the cuts they made to their harvest forecasts during the flooding if fields dry out in time for farmers to plant more soybeans and corn plants show signs of recovery. ‘We’re all done shaving our harvest forecasts,’ said Dan Basse, president of AgResource Co., a Chicago commodity-forecasting concern.”

The article stated that, “This week, USDA staffers began interviewing Midwestern farmers to determine how much of their land had been affected by the waters and what and how much they intend to replant, said Glen Keppy, associate administrator for programs at the USDA’s Farm Service Agency. A planted-acreage report due June 30 will be based on data collected before the flooding, Mr. Keppy said. The agency plans to release updated reports in the next couple of months.”

And in conclusion, today’s Journal item indicated that, “The clock is ticking for farmers who still want to plant crops this year, Mr. Schmitt [Virgil Schmitt, extension field agronomist with Iowa State University] said. Corn planted this week would be expected to yield about 50% of a normal crop in Iowa. For soybeans, the expected yield would be about 60%. Deadlines for insuring crops are approaching, too.”

These variables are impacting debate about acreage in the Conservation Reserve Program.

Dan Looker, writing yesterday at AgricultureOnline, reported that, “Being pulled in two directions may be part of the job description if you’re secretary of agriculture. Today, Agriculture Secretary Ed Schafer might feel a strong stretch as two powerful U.S. senators urge a different approach to dealing with the aftermath of flooding in their state of Iowa.

“Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee, is meeting this afternoon to urge Schafer to release all conservation reserve program land that is not highly erodible for cropping, without penalties normally charged for leaving the program before contracts have expired.

“Grassley said he has never recommended that before and that ‘it’s a suggestion that I’ve not made lightly.’”

Mr. Looker noted that, “Harkin [Sen. Ag Committee Chairman Tom Harkin (D-Iowa),] does, in fact, disagree. After meeting with a group of about 30 farmers in Iowa Saturday, he responded to the concerns of livestock producers who are already suffering from high feed costs by promising to discuss with Schafer the releasing of CRP land immediately for haying and grazing.

“But in a statement Monday from his office, Harkin opposed cropping on CRP land.

“‘Traveling through Iowa these past few weeks I have seen firsthand the devastation brought on Iowa agriculture by the flooding and excessive rainfall,’ Harkin said. ‘We need to find practical, workable solutions that will address the challenges. By putting land in the CRP, farmers reduce soil erosion, cut sedimentation in streams and lakes, improve water quality, establish wildlife habitat, and enhance forest and wetland resources. Recent heavy rainfall and flooding prove that CRP has done its job.

“‘As a practical matter, it seems doubtful that trying to plant soybeans or some other crop this late in the year on land that’s been in grass for years would be worthwhile — especially when the loss of conservation benefits is factored in,’ Harkin added. ‘Land that is in the CRP is generally highly erodible and less productive for row crops, so it seems more benefit to Iowa can be gained by making sure CRP is available for forage to the greatest extent possible consistent with sound conservation.’”

In a related item regarding ethanol and crop acreage, Hongli Feng and Bruce A. Babcock released a study this month entitled, “Impacts of Ethanol on Planted Acreage in Market Equilibrium.”

According to a summary of the report, which was posted at the Center for Agricultural and Rural Development (CARD) Online, “Land use impacts of biofuel expansion have attracted a tremendous amount of attention because of the implications for the climate, the environment, and the food supply. To examine these impacts, we set up an economic framework that links input use and land allocation decisions with ethanol and agricultural commodity markets. Crops can be substitutes or complements in supply depending on the relative magnitude of three effects of crop prices: total cropland effect, land share effect, and input use effect. We show that with unregulated free markets, total cropland area increases with corn prices whether crops are substitutes or complements in supply. Similarly, higher corn yields from exogenous technical changes lead to cropland expansion. The impacts of yield increases for other crops are ambiguous. With a quantity mandate for ethanol, higher mandates mean larger cropland area if corn and other crops are substitutes in demand. For a given mandate, yield improvement causes total cropland to expand if crop demand is elastic enough, or to contract under a very general condition if crop demand is sufficiently inelastic.”

In a broader look at biofuel issues, Yuka Hayashi reported in today’s Wall Street Journal that, “For decades, Yasuji Tsukada has meticulously tended his terraced rice paddies to grow top-quality rice for Japan’s demanding consumers.

“Now the 60-year-old farmer faces a new challenge: Grow a new type of rice but spend as little money and labor as possible and ignore its taste and appearance.

“Mr. Tsukada is among the 360 farmers in this renowned rice-growing region in central Japan who are on the forefront of an effort to develop a new type of biofuel. A group of Japanese farmer cooperatives, with some government funding, started a project last year to turn rice into ethanol, a fuel that can be mixed with gasoline to power automobiles. The cooperatives have asked farmers such as Mr. Tsukada to start growing cheap, high-yielding rice to be processed at what could be the world’s first rice-ethanol plant, to open early next year. The group hopes the experimental factory — half of whose cost is to be paid for by the government — will help it determine if rice ethanol is technically and financially feasible.”

And the Associated Press reported yesterday that, “Anti-poverty group Oxfam International on Tuesday urged the world’s poorest nations to think twice before jumping on a biofuel boom that could drive farmers off their land and hit food supplies.

“In a report, campaigners recommended that developing countries ‘move with extreme caution’ before embarking on any broad push to increase output of energy crops such as palm oil.

“It said biofuel exports to Europe and the United States may be lucrative but the potential economic, social and environmental costs are ‘severe.’

“Oxfam said governments need to set safeguards to make sure small farmers are not thrown off their land and that food crops continue to be grown.”

Doha

An AFP article from Geneva reported today that, “World Trade Organization head Pascal Lamy is to invite ministers from 30 leading countries to a meeting here on July 21 to try to broker a final deal in the Doha round of trade talks, a diplomatic source told AFP on Wednesday… Lamy said at the end of May that conditions to reach a final deal to complete the round, which began in 2001, had finally come together.”

In remarks regarding Doha, which were delivered on Monday, EU Trade Commissioner Peter Mandelson noted that, “The situation we face in the DDA is one of uncertainty – breakdown and breakthrough both remain equally feasible. This concerns us all, because the benefits of a DDA outcome – for the developing world, for the EU and for the world economy – would I believe be positive, and their loss would be profound.

“There are some who seem to believe that failure could be shrugged off. We should not delude ourselves that there is some safe status quo option where nothing changes if the negotiations collapse. Failure would open the door to greater protectionism. Instead of succeeding in consolidating the existing openness of the world economy, and creating new market access, we would be exposing ourselves to the risk of rising tariffs in the future, as governments in the developed and developing world give way to populist pressures. If Doha fails, the international trading system would be powerless to withstand this negative trend, which is already emerging.”

Commissioner Mandelson stated that, “There remain a number of very detailed points in agriculture which we must still secure:

“-Green Box language needs further work, as do the proposals on sub allocation of tariff rate quotas.

“-We are in intense discussions on tropical products with Latin American countries in particular, and will also need to find the right balance in terms of preference erosion for the ACP.

“-On cotton I hope the ACP will show understanding of the very significant reform efforts we have already made. We have gone a long way, and it is now clear that what residual subsidies we still have only affect the international market very marginally. The problem for cotton comes from other major trading partners, not from the EU. What I cannot do is alter accession commitments taken by the EU for certain of its Member States.

“There are also some big farm issues left on the table which will necessarily be for Ministers alone to solve. These include the US cap for trade distorting farm support – we having delivered ours; and the degree to which emerging economies will be granted flexibility to protect particular farm sectors (Special Products and SSM). The EU is not the main player in these discussions.

“Overall, the agricultural offer made by Europe is ambitious but balanced.”

Keith Good

Posted by Keith Good • June, 25, 2008 • 5:51 am