Dan Morgan, writing in today’s Washington Post, reported that, “Corn farmer Jim Handsaker has found a slew of ways to ride the heartland boom in biofuels that is reshaping the economy of rural Iowa.

“He sold some of his 2006 crop this year for more than $4 a bushel, the highest price in a decade. His stake in two nearby ethanol plants brought in several thousand dollars more in dividends. Meanwhile, soaring farmland prices have pushed the value of the 400 acres he owns to around $2 million.

“Even so, come October he will get a subsidy check from the government, part of a $1.6 billion installment that the U.S. Department of Agriculture will send to corn farmers.”

Yesterday, USDA indicated that corn prices, although on a slight downward trend, remain relatively high by historic standards. Meanwhile, the graph below, from The Wall Street Journal Online, demonstrates that ethanol prices are heading in the opposite direction.

The Post article indicated that, “Those annual automatic payments to Handsaker and thousands of other prospering corn growers have long been controversial. But coming at a time when taxpayers are already subsidizing the ethanol industry to the tune of $3 billion a year, the double-barreled support system for those who grow corn and those who turn it into fuel has begun to draw fire in Congress.”

After stating that, “So far, Congress has shown little inclination to adjust the subsidies to account for the new energy-driven rural economy;” the article explained that, “A House-passed farm bill would give corn growers $10.5 billion over the next five years, even if prices stay high. These ‘direct payments,’ a kind of annual allowance, are set by formula and go out automatically, regardless of prices, profits, yields or weather.”

Later, with respect to direct payments, Mr. Morgan noted that, “Congress created the payments in 1996 as part of a plan to temporarily buttress farm incomes while other traditional subsidies were eliminated. They were supposed to be phased out. Instead, the 2002 farm bill continued them.

“‘It’s a bonus program, not a safety net,’ said Sen. Richard J. Durbin (D-Ill.). ‘Farmers I talk to know it’s not politically sustainable to ask taxpayers to make payments to them in highly profitable years.’

“Durbin plans to offer a farm bill amendment that would gradually replace the automatic payments with a program to compensate growers when statewide farm revenues fall below the norm. The National Corn Growers Association embraces a similar plan. This week, the Senate agriculture committee’s chairman, Tom Harkin (D-Iowa), circulated a proposal to cut direct payments by $4.5 billion over five years,” the article said.

More succinctly, the Post article included this quote near its conclusion: “‘A farmer’s best friend in Iowa is the energy bill,’ said Bruce Babcock, a professor of economics at Iowa State. ‘What do you need the direct payments for? It’s money for nothing.’”

Meanwhile, Associated Press writer Lauren Villagran reported yesterday that the future’s price of some program crops remain at historically robust levels; “Wheat, corn and soybean prices surged Thursday after the Agriculture Department said U.S. exports are well ahead of the average pace for this time of year –a reflection of strong worldwide demand and tight supplies.”

The AP article added that, “The USDA reported export sales of corn, wheat and soybeans rose sharply last week. Strong sales trends have the agriculture market increasinglynervous about supplies, so prices have risen sharply.

“Wheat reached an all-time high, and soybeans traded at their highest level in three years.”

More specifically, Ms. Villagran stated that, “December wheat jumped 15.75 cents to settle at $9.33 a bushel on the Chicago Board of Trade, after topping out at $9.465 earlier in the session. November soybeans gained 18.25 cents to close at $10.09 a bushel, while December corn added 11.75 cents to $3.8675 a bushel.”

Also yesterday, USDA’s National Agricultural Statistics Service (NASS) released their monthly Agricultural Prices report, which stated in part that for Food Grains, “The September index, at 227, is 23 percent above the previous month and 67 percent above a year ago. The September all wheat price, at $7.16 per bushel, is up $1.52 from August and $3.10 above September 2006. If realized this would be a record high price.”

The NASS report also included graphical depictions of prices received for wheat (click here), soybeans (click here) and corn (click here). Although corn prices have tapered off slightly recently,the current price is strong by historic standards.

With these current market conditions in mind, DTN Political Correspondent Jerry Hagstrom reported yesterday (link requires subscription) that, “Direct payments would be cut more than $4.5 billion over five years, but a new permanent disaster program would be created under a list of changes Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, said Thursday he would make in the 2007 farm bill.

“Harkin released a list that would increase spending on all programs in the bill by $18.18 billion, including the $5 billion in a permanent disaster relief program that would be provided through the Senate Finance Committee.

“Harkin’s proposal comes a day after Senate Budget Committee Chairman Kent Conrad, D-N.D., presented Harkin and other Democratic members of the Agriculture committee with a chart of three farm bill options that would cost less than Harkin’s current farm bill draft.”

The DTN item stated that, “In an email, a Harkin spokeswoman said Harkin’s proposal assumes that the Senate Finance Committee would provide the $5 billion for disaster program and another $3 billion through other actions. Direct payments to crop farmers would be cut by $4.5 billion over five years and there would be $5.68 billion in savings in current farm programs. The spokeswoman said the proposal assumes the Senate would agree to the $5.68 billion cut because the number is close to the cuts the House passed in its farm bill.

“In another twist, DTN has confirmed that Senate Finance Committee Chairman Max Baucus, D-Mont., is considering dipping into the Social Security Trust Fund to help pay for the farm bill by finding offsets through payroll taxes paid by temporary farm workers under the H-2A guest worker program. That could generate more than $7 billion, but would be controversial. Another controversial move being considered by Baucus would cut the 51-cent ethanol blenders’ credit once ethanol producers reach the 7.5-billion-gallon renewable fuels standard.”

With respect to renewable energy incentives, Dow Jones News writer Charles Roth reported yesterday that, “Brazilian President Luiz Inacio Lula da Silva renewed a pitch for shipping his country’s ethanol more freely into the U.S., and suggested President George W. Bush may be slowly coming around toward supporting better access.

“In an interview with Charlie Rose televised late Wednesday, Lula said he believes Bush is ‘still prepared to convince the corn farmers here in the U.S. to produce ethanol, but he’s not yet well prepared to reduce the tariff …[t]hat is put on Brazilian ethanol (imports).’

“But promoting Brazilian ethanol in the U.S. is ‘a process,’ he said, and added that Bush may be coming around.”

Also on the issue of ethanol exports, Jonathan Wheatley reported on Wednesday at The Financial Times Online that, “In January President George W. Bush announced a target of substituting renewable fuels for 15 per cent of US gasoline consumption - the equivalent of more than 130bn litres of ethanol a year, compared with world production of about 50bn litres.

“Infinity Bio-Energy is among those aiming to tap such demand. Sérgio Thompson-Flores, founding partner and CEO, says exports will account for 10 per cent of sales this year, 30 per cent next year and at least 50 per cent by 2009.

“Infinity recently announced acquisitions in Central America and the Caribbean as part of its planned supply chain to the US market. ‘We will ride the Brazilian wave to begin with,’ Mr Thompson-Flores says, ‘but our focus will quickly shift to the international market.’”

For more on the Central America / Caribbean supply chain issue, see this March 9, 2007 Wall Street Journal article, which noted in part that, “As President Bush meets Brazil’s president, Luiz Inácio Lula da Silva, today in São Paulo to promote a loose alliance to encourage more production of ethanol and other biofuels, the Caribbean ethanol industry illustrates how U.S. energy policy and trade policy can stand at odds.”

The Journal article explained that, “A top energy priority of Mr. Bush is to end a U.S. ‘addiction’ to foreign oil partly by encouraging alternative sources such as ethanol, which can be made from sugar, corn or other agricultural products. But the U.S. tariff [a 54-cents-a-gallon U.S. tariff on ethanol processed anywhere else], which Mr. da Silva has been lobbying unsuccessfully for Washington to remove, damps the supply in order to protect prices for U.S. corn growers in Farm Belt states.

“A tortured route around the tariff goes through the Caribbean Basin. There, two dozen small countries are exempted as part of a 24-year-old trade agreement from near the end of the Cold War, designed to combat communism by feeding the U.S. dollar into their poor economies.”

The Journal article included this helpful graphical depiction of how the exemption works.

Interestingly, even as the price of crude-oil futures remain high, as Mark Gongloff reported yesterday at The Wall Street Journal’s Energy Roundup Blog, “The front-month November light, sweet crude contract on the New York Mercantile Exchange was up $1.27, or 1.6%, at $81.57 a barrel,” some news items indicate that U.S. ethanol production could be heading for a market surplus and some large energy-producing firms are seeking to diversify their portfolio of fuel products beyond corn-based feedstock sources.

Lauren Etter, writing in today’s Wall Street Journal, reported that, “Ethanol titan Archer-Daniels-Midland Co. said it will join with ConocoPhillips to develop ‘biocrude,’ a crude-like substance made from crops, wood and switchgrass that can be turned into gasoline or diesel. The partnership highlights how oil companies are looking to increase their presence in the biofuels sphere, and how grain companies are looking to diversify beyond corn-based ethanol. Together, the companies plan to spend at least $5 million a year to develop the product.”

The Wall Street Journal article also included this helpful graphic of corn and ethanol prices.

Also, Nicholas Zeman, in an article published in this month’s Ethanol Producer Magazine (EPM), reported that, “A year ago, ethanol industry talk centered on shortages. Now the hot topic is a possible surplus and what needs to be done to amplify demand as the ominous E10 wall approaches.”

The article indicated that, “The construction boom and the rate at which gallons are coming on line has led some analysts and the mainstream media to forecast a possible ‘glut’ situation for the renewable fuel in the coming months and even years. Goss [Ernie Goss, chair of the economics department at Creighton University and head of the Creighton Economic Forecasting Group] tells EPM, however, that this is a mistaken consensus. ‘I wouldn’t say there is a glut of ethanol because the demand is out there,’ he says. ‘But there are transportation issues. That means large volumes of ethanol might sit for long periods of time because they just can’t move it.’”

The article noted that, “A simple solution to increase the infrastructure for renewable fuels might be the increased use of blender pumps. These pumps contain tanks of ethanol and gasoline and are essentially mixed on the spot by the consumer at a retail location. ‘This would allow ethanol producers to deliver directly to stations and avoid some of the handling costs by bypassing the petroleum fuel terminal,’ Northey [Iowa Secretary of Agriculture Bill Northey] says. However, consumers need to see a savings when they fill up with ethanol versus unleaded gasoline. Fuel alcohol has anenergy equivalent to roughly two-thirds that of gasoline so the renewable fuel should reflect that in terms of pricing. ‘It’s just more expensive than it ought to be,’ Northey says. Does that mean the 51-cent blenders’ credit should be discontinued? ‘I think that would send the wrong message to investors,’ he says. ‘In the future, investors are going to want that in place if they’re going to be involved in some high-risk ventures like building cellulosic ethanol plants.’”

For more on transportation issues and ethanol, see this USDA publication from this month entitled, “Ethanol Transportation Backgrounder: Expansion of U.S. Corn-based Ethanol from the Agricultural Transportation Perspective.”

On page 13, the report noted that, “Several supply chain issues could inhibit growth in the ethanol industry. The efficiency of the ethanol transportation system may begin to depend on the ability of the blending market to accommodate additional quantities of ethanol.

“The supply and demand of ethanol may become temporarily out of balance because blenders require time and financial incentives to add blending capacity. These extra financial incentives, including cheaper ethanol, could be in addition to the current blender tax credit of $0.51 per gallon, which is in place through 2010.Blenders are watching Federal and State legislative processes carefully to assess the legislative risk to their capital investments.

“Grain markets may also be affected by ethanol supply chain issues. There is concern that grain storage shortages may occur as ethanol production capacity and corn crops continue to expand.”

The report indicated that, “Corn for ethanol is most frequently delivered to plants by trucks, typically from corn farms within a 50-mile radius. The truckload requirements just for corn to ethanol—if trucks are assumed to carry 98 percent of the corn delivered to ethanol plants—are expected to increase from 2.3 million in 2006 to 4.7 million truckload equivalents by 2016” (page 15).

***

WTO Litigation / Doha

With respect to WTO action and U.S. farm subsidies, a Congressional Research Report (CRS) from September 21 (“Brazil’s WTO Case Against U.S. Agricultural Support: A Brief Overview,” by Randy Schnepf) stated that, “Brazil — which has already won a series of WTO dispute settlement rulings against U.S. cotton programs — introduced a new challenge against U.S. farm programs in July 2007, when it requested consultations with the United States to discuss two issues related to U.S. farm programs. The request is nearly identical to a similar case being pursued by Canada against U.S. farm programs [related FarmPolicy link available here]. Both cases raise two concerns — that U.S. farm program outlays have exceeded their annual AMS limit in six out of seven years during the 1999-2005 period, and that the U.S. export credit program functions as an illegal export subsidy. However, Brazil’s AMS challenge appears to be more comprehensive than Canada’s WTO case in terms of the level of detail of program support activity that is alleged to have been incorrectly notified as exempt or excluded from the AMS spending limit.

“This report provides an overview of the current status of Brazil’s WTO case (DS365) against U.S. farm programs, along with a brief discussion of Brazil’s two charges and the potential role of Congress in responding to these charges.”

The CRS report also stated that, “In its official request for consultations, Brazil raised two charges against U.S. farm programs;” the first, that “U.S. Total Domestic Support Exceeds Its WTO Limit. In accordance with WTO commitments, all WTO members have agreed to submit annual notifications of their farm program outlays to the WTO, and these outlays are subject to specific limits. The total spending limit for U.S. non-exempt AMS programs (i.e., programs that are trade- and market-distorting) was $19.9 billion in 1999 and $19.1 billion in all subsequent years. To date, the United States has notified details of its farm program outlays through 2001. According to U.S. notification data, U.S. domestic support outlays have remained well within U.S. WTO spending commitments through 2001. However, Brazil argues that several U.S. program payments were either omitted from the notification data, or incorrectly notified either as green box or as non-product- specific AMS (where they would more easily qualify for exclusion from amber box limits under the non-product-specific de minimis exemption).

The report added that, “News reports suggest that Brazil also is considering the inclusion of ethanol production subsidies that indirectly increase corn demand and production.”

With respect to the second charge, the CRS report noted that, “Second Allegation: U.S. Export Credit Guarantees Act as Illegal Export Subsidies. Brazil argues that the U.S. export credit guarantee program operates as a WTO-illegal export subsidy. In the U.S.-Brazil cotton case, a WTO panel found that U.S. export credit guarantees effectively function as export subsidies because the financial benefits returned by these programs failed to cover their long-run operating costs. Furthermore, the panel found that this applies not just to cotton, but to all commodities that benefit from U.S. commodity support programs and receive export credit guarantees. As a result, export credit guarantees for any recipient commodity are subject to previously scheduled WTO spending limits.”

Taking up the issue of potential implications of the WTO action, the report stated that, “Many market analysts and the news media suggest that the two recent cases brought by Brazil and Canada are harbingers of future challenges to U.S. commodity programs. If either country were to successfully pursue its case, it could affect most U.S. program commodities, since the charges against the U.S. export credit guarantee program and AMS limit extend to all major program crops. Should any eventual changes in U.S. farm policy be needed to comply with a WTO ruling, Congress likely would be called upon to address this issue (including adjustment, if not full removal, of the planting restriction on base acres receiving direct payments).”

Meanwhile, Acting U.S. Secretary of Agriculture Chuck Conner delivered remarks yesterday on the issue of pending U.S. trade agreements (transcript available here).

After his opening comments Sec. Conner took questions from reporters. Reuters writer Missy Ryan inquired about the Doha talks; “I understand President Bush this week told President Lula that the United States would be willing to cut its overall trade distorting subsidies as low as $13 billion annually if it got the market access it’s looking for. For the farm groups here today, would that be acceptable even if the new market access that you’ve been looking for was provided, that level of subsidy?”

Sec. Conner replied; “[L]et me just say that as I have already publicly indicated, our trade negotiators have indicated that they want to proceed forward in the Doha round and maintain some flexibility and willingness to discuss these issues. They have been very, very clear however that any flexibility on the part of the U.S. position is predicated and remains predicated on the level of market access that we will be given. This has been the fundamental point since the beginning. This is what the U.S. has said from the beginning is that we’re willing to talk about our domestic supports but that talk is predicated on other countries’ willingness to engage us on market access.

“That position hasn’t changed. I maintain it’s not going to change going forward. So that remains where we are. We’ve had a trade team over there on technical issues for the last three weeks…[T]hat team has just returned. They have indicated that on some of the technical issues they are making some headway on that. But the fundamental point of market access, the flexibility on that market access in exchange for us being willing to talk about our domestic support, that remains a key point out there. We’ve indicated again that we are willing to talk about domestic supports but totally predicated on market access.”

Keith Good

Reuters writers Walter Brandimarte and Missy Ryan reported earlier this week that, “World leaders signaled on Tuesday that a long-awaited global trade deal could soon be within reach, reviving some hopes that the Doha trade talks may finally move beyond years of deadlock and discord.”

“Strong words of support from [Brazilian President Luiz Inacio Lula da Silva], U.S. President George W. Bush and Indian Trade Minister Kamal Nath — some of the leading players in the World Trade Organization talks — came as negotiators report slow, steady progress in efforts to reach a real breakthrough,” the article said.

Brandimarte and Ryan indicated that, “But India and Brazil show few signs of backing down on demands to bring U.S farm subsidy limits far lower than its official offer of $22.5 billion a year.

“The mood has brightened recently after reports Washington would be willing to discuss capping subsidies as low as $13 billion, provided other countries make their own concessions.

“Another top Indian official, Commerce Secretary Gopal Pillai, pressed the United States to go even farther and lower its subsidy cap below $11 billion — where spending has been in the past year or so. He also said the talks needed to devote more attention to other trade issues, like services.

“But a reduction of that order could threaten to torpedo a deal in the U.S. Congress, where agriculture holds wide sway,” the authors noted.”

For additional context on U.S. agricultural payment levels, click here; see also this graphical depiction of government payments from 1997 through a 2007 estimate.

Reuters writer Daniel Bases provided more detail with respect to India’s perspective on the Doha talks in an article from yesterday; where he reported that, “Commerce and Industry Minister is optimistic there will be a successful conclusion to the Doha Round of world trade talks, after meetings in New York this week as part of the U.S.-India Trade Policy Forum.

“‘There will be a conclusion, I am optimistic,’ Commerce and Industry Minister, Kamal Nath, told reporters in New York.”

The article noted that, “Washington has signaled willingness to move further on farm subsidies, but says that action depends on advanced developing countries like India and Brazil opening their markets to more foreign farm and manufactured goods.”

With respect to the EU, Dow Jones News writer Carolyn Henson reported on Tuesday that, “Failure to reach a new global trade deal would put the World Trade Organization’s multilateral trading system at risk, a top European Union official said Tuesday.

“‘One of the risks if we don’t get a deal is that a proliferation of (trade dispute) cases will put the World Trade Organization’s dispute settlement mechanism under considerable strain,’ said David O’Sullivan, the European Commission’s Director-General for Trade.

“‘This is the jewel in the crown of the WTO system. We cannot expect the dispute settlement mechanism to solve all the problems that Doha wasn’t able to. The systemic risk of failing to agree is the single greatest fear we have at the moment.’”

Meanwhile, Dow Jones News writer Laurence Norman reported earlier this week that, [Canadian Prime Minister Stephen Harper speaking on Tuesday at the Council on Foreign Relations in New York] also sounded less than optimistic on the prospects of the Doha round of World Trade Organization talks. He said ‘Canada wants to see a successful and ambitious outcome’ to the talks. He said many other world leaders are guardedly optimistic about negotiations. ‘I may be a little less (optimistic) than that,’ Harper said.

“He said the best solution for the WTO is for everyone to be “more ambitious,” that way the winners in the process will be more plainly in view and raise support for the process.

“‘Clearly it’s struggling,’ he said, referring to the Doha round.”

An item posted yesterday at the DTN Ag Policy Blog provided a look at how some of these recent trade developments in agriculture could potentially impact U.S. farm policy.

The item reminded readers that political pressure from other segments of the economy, such as manufacturing, could potentially play a role in the outcome.

Before making that point, the DTN item began with this background, “A number of trade observers have expressed at least mild surprise that trade developments have not generated more attention in the farm bill debate, for several reasons. For one thing, the World Trade Organization cotton case decision is working its way through the bureaucracy, but it is already well known that the panel findings are adverse to the U.S. program, and could lead to the imposition of very substantial countervailing duties on U.S. exports.

“In addition, a number of new cases are being prepared by Brazil, Canada and others against U.S. farm programs alleging far-reaching violations of the Uruguay Round agreement [related link]. While these are many months from completion, legal experts suggest that they will be extremely difficult to defend, especially since they build in part on findings already made by the WTO cotton panel. Still, there hasbeen almost no mention of these trade obligations and problems in the farm bill debate so far, and until last week, none seemed to be on the horizon.

“However, that has changed now, a shift that could have far-reaching implications. The setting was a draft on agriculture developed by WTO Agriculture Negotiating Chairman Crawford Falconer last July. Among many other proposals, the draft included a U.S. agreement to cap its trade-distorting subsidies between $12.6 billion and $16.8 billion — down from the current $23 billion proposal. In addition, it included a U.S. agreement that cotton be treated separately from other commodities and subject to deeper subsidy cuts because of its importance to impoverished West African farmers.”

The DTN item concluded by noting that, “However, there are soon likely to be new players in that debate — including producers and manufacturers who find themselves in the cross-hairs of the soon-to-come countervailing duties aimed at cotton. Dealing with those interests is likely to be a serious problem for agricultural advocates interested in continuing traditional commodity supports and protections, and that debate appears likely to begin sooner than earlier expected, Washington Insider believes.”

With respect to these other players in the debate, recall that back on July 16, the Grocery Manufacturers of America issued a press release stating that, “In a letter to Senate and House leaders, Cal Dooley, president and CEO of the Grocery Manufacturers Association (GMA), today joined leading business groups in calling on Congress to reform federal farm policy.

“‘It is time for Congress to reform our outdated farm policy to better serve the needs of rural America and the entire U.S. economy,’ said Dooley. ‘That is why GMA and this broad coalition of business leaders, who represent tens of millions of U.S. workers, are calling on Congress to approve a farm bill that reduces subsidies and fosters an environment more conducive to eliminating trade barriers to U.S. products.’”

The news release added that, “The letter was signed by GMA, the U.S. Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers, the National Retail Federation, the Information Technology Industry Council and the Retail Industry Leaders Association. It outlined three major farm-reform policy goals:

“A reduction in excessive subsidies, the elimination of substantial domestic and international agricultural market distortions, the protection of basic U.S. farm policies from unwarranted World Trade Organization (WTO) attacks.”

Along these lines, an article posted yesterday at The Financial Express Online stated that, “In an important development, business leaders of India and the US have agreed to formulate a common position on the Doha Round issues and urge their governments to conclude the round at the earliest.”

A more comprehensive look at the implications of WTO issues on domestic agricultural policy was made available earlier this month in a paper authored by David Blandford (Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University) and Tim Josling (Freeman Spogli Institute for International Studies, Stanford University), entitled, “Meeting Future WTO Commitments on Domestic Support: The Implications of Ambassador Falconer’s July 2007 Proposals for the European Union and the United States.”

Specifically, the paper indicated that, “The nature of future commitments on domestic support for agriculture continues to be a major sticking point in the negotiations on a new international trade agreement under the Doha Development Round of the World Trade Organization (WTO). On July 17, 2007, Ambassador Crawford Falconer, the chair of the WTO’s Committee on Agriculture, released a set of draft modalities for agriculture that included detailed proposals for future disciplines on domestic support (WTO, 2007) [related link]. This short paper examines the likely implications of these proposals for the level of domestic support in the European Union (EU) and the United States.”

After a detailed discussion, the authors noted on page nine of the paper that, “The latest proposals for disciplines on domestic support released by Ambassador Falconer on July 17, 2007 could largely be satisfied by the European Union and the United States without major additional changes in domestic agricultural policies.

“A ‘glass half empty’ view of this situation would lead to the conclusion that little would be achieved as a result of the conclusion of the Doha Round. But that ignores the significance of WTO rules in preventing reversions in policy toward more trade-distorting measures. So, a ‘glass half full’ view would be that the imposition of the lower ceilings on domestic support would exert pressure on both the European Union and the United States to continue to reduce trade-distorting support. The Falconer proposals would go a long way to eliminating the ‘water’ in domestic support commitments in both countries. Even Falconer’s more modest parameters would constrain domestic support in the EU and the U.S. by the year 2013. This seems to be a prize for which countries that are most concerned about domestic support should be willing to make negotiating concessions to win.”

***

In more specific U.S. Farm Bill developments, Philip Brasher indicated on Tuesday at the Cash Crops Blog (The Des Moines Register) that, “The money search continues. The Senate Agriculture Committee was going to vote on a farm bill before Columbus Day, but today chairman Tom Harkin was hedging on that.

“‘With the budget as tight as it is this is difficult work to try to get everyone together on this and on board. Hopefully, we’ll have something soon,’ he said.”

Mr. Brasher added that, “Harkin also talked in his weekly conference call about his plan to tie direct payments to commodity prices. The payments would be reduced when commodity prices are relatively high and the savings put into other programs. Tying direct payments to commodity prices goes against the original purpose of the payments, which was to decouple subsidies from prices. But then again, the payments were supposed to be phased out.”

DTN writer Chris Clayton flushed out a bit more detail on the direct payment issue in an article from Tuesday (link requires subscription); where he reported that, “Another proposal still in the mix would, Harkin said, make some changes in the direct payment program. The program would be restructured to trigger based on price of commodities. Corn, soybeans and wheat farmers would get more counter-cyclical payments under lower commodity prices, but they would give up more direct payments under higher commodity prices, he said.

“‘Quite frankly, I don’t know if we are going to be able to do that or not,’ Harkin said. ‘Again, it’s the art of the possible.’

“Pegging direct payments to a price trigger would officially redefine the payments under World Trade Organization rules as a trade-distorting program. Harkin pointed out the current WTO agreement allows $19.1 billion in trade-distorting subsidies, and direct payments add up to about $5.1 billion a year. Under the higher commodity prices, the U.S. would likely not top that amount.”

With respect to reaction on the direct payment issue, Reuters writer Charles Abbott reported yesterday that, “Senators will weaken the U.S. farm safety net if they trim so-called direct payments totaling $5.2 billion a year to pay for land stewardship or a stand-by disaster relief program, the largest U.S. farm group said on Wednesday.

“‘We are extremely concerned about ongoing discussions to reduce direct payments to producers,’ said the 6 million-member American Farm Bureau Federation [AFBF]. It said it opposed ‘a reduction in fixed payments to pay for other programs.’”

Mr. Abbott went on to explain that; “Direct payments are made annually based on a farm’s record of growing grains, cotton or soybeans in the past. They are one element of the three-part crop subsidy system. The others are price supports that effectively set a minimum prices and counter-cyclical payments made when returns are below targets set by law.

“AFBF advised against shifting direct-payment money to the other programs or making the payments contingent on market prices. Either idea could put direct payments in peril under world trade rules, it said.”

Also yesterday, an item posted at the CattleNetwork.com stated that, “U.S. Senators Pat Roberts (R-KS), Chuck Grassley (R-IA), John Thune (R-SD), Mike Crapo (R-ID), and Thad Cochran (R-MS) sent the following letter to Senate Agriculture Chairman Tom Harkin (D-IA) and Ranking Member Saxby Chambliss (R-GA):

“‘We write to express our concerns with Farm Bill proposals that would weaken the safety-net for producers with significant crop losses, or no crop to harvest, during an individual crop year.

“‘During the five years since the 2002 Farm Bill was enacted, many producers have suffered complete crop losses, often in multiple years, due to a host of weather calamities. This year, many areas of the south, west, plains states and upper Midwest have suffered significant crop losses due to drought, flooding, or freezes. Producers without crops to harvest will likely receive no benefits from the loan or counter-cyclical programs due to high prices. However, they will receive benefits from direct payments. Under these circumstances, why would we want to cut direct payments?

“‘Although we have seen no draft proposals from the Committee, we are concerned with news reports indicating that direct payments could be cut or placed on a triggered, sliding scale in order to pay for other programs in the bill. Cuts to direct payments, while raising target prices and loan rates, makes absolutely no sense for those producers without crops to harvest. If target prices and loan rates are increased in proposals brought before the Committee, we believe that direct payments should undergo a similar increase.

“‘In addition, direct payments are currently the most World Trade Organization (WTO) compliant section of the Farm Bill. We are especially concerned that any effort to couple direct payments to current year prices from this point forward will ensure a violation of our WTO obligations and increase the risk of further internationalchallenges to our farm program. This will not benefit any United States producers.’”

In a separate issue regarding agriculture and funding, Dow Jones News writer Siobhan Hughes reported yesterday that, “The U.S. Senate has enough votes to eliminate some tax breaks currently enjoyed by oil companies and apply the money to the development of wind, solar, and other renewable sources of energy, a Democratic senator said on Wednesday.

“Republican senators in June blocked an amendment that would have provided $32.1 billion in tax incentives over 10 years to producers of alternative energy, with the impact blunted by removing tax breaks and raising revenue collected from oil and gas companies. Supporters fell two votes short of the 60 needed to stave off a parliamentary maneuver known as a filibuster.”

The article stated that, “Klobuchar [Sen. Amy Klobuchar, a Minnesota Democrat who sits on the Senate Environment and Public Works Committee] said she is hoping that some of the financing provisions will be included in a bill to encourage farmers and ranchers to grow crops used to make ethanol, biodiesel, and cellulosic biofuels. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, earlier this month said he would revisit the tax incentives in his agriculture tax package.

“‘We’re hopeful that maybe some of that will get on the agriculture bill and then we will vote hopefully to get other pieces of this financing package on other things,’ Klobuchar said.”

Keith Good

Senate Debate

By Dan Morgan- Dan is a special correspondent of The Washington Post and a Transatlantic Fellow at the German Marshall Fund of the United States. “Analysis from Washington” is posted exclusively at FarmPolicy.com.

Senate Agriculture Committee Tom Harkin (D-Iowa) is a nice guy. A liberal populist, he fights for good causes and often wins battles on behalf of the disabled, women, workers and the hungry.

But is he too nice to get what he wants from the bruising struggle taking place behind the scenes in the Senate over the next farm bill?

In 2001 and 2002, when Harkin also chaired the committee, Majority Leader Tom Daschle (D-S.D.) and Kent Conrad (D-N.D.) grabbed control of the legislation and put their stamp on it.

Conrad often acted as if he was chairman, meeting with House Agriculture Committee chief Larry Combest (R-Texas) and cutting deals.

This time around, Conrad is once again a blur of activity, working with the committee’s ranking Republican, Saxby Chambliss (Ga.), and with Senate Finance Committee Chairman Max Baucus (D-Mont.) to line up support for a farm bill title setting aside big money for farmers hit with crop failures or weather-related disasters.

Harkin doesn’t like Conrad’s proposal, which is aimed especially (though not exclusively) at North Dakota farmers who get an average of less than 20 inches of rainfall annually and—predictably enough—repeatedly lose crops and pastureland due to drought.

Harkin wants a broader safety net that would help farmers when farm income in a state falls below the norm for whatever reason—bad weather, weak markets, a collapse in the ethanol boom. His plan, he argues, would help more farmers than Conrad’s, even in the parched northern plains.

But Conrad is a relentless political operator who never quits. And that’s the pity. Harkin is an idea man with a progressive vision of where U.S. agriculture is going and what the farm bill should look like. But as the weeks drag on and Senate work on the farm bill is delayed, he seems increasingly hemmed in by Conrad’s aggressive tactics and the real politik of Senate dealing making.

He acknowledged as much Tuesday in one of his regular teleconferences with reporters. While he still held out hopes for what he said would be “very modest” reforms of the basic subsidy programs, he twice noted that he was limited by “the art of the possible,” i.e., he can’t move a bill out of his committee without votes from hardline advocates of traditional subsidies.

Harkin’s subdued tone contrasts with his excitement and energy as he embarked on the farm bill process earlier this year. Then he suggested it was “an ideal time to do some reform and reorganize our priorities.” The farm bill passed in July by the House continued existing subsidies for another five years. “A very narrow view of agricultural policy,” was Harkin’s description of it.

That was then. This is now, after many closed-door sessions on Capitol Hill with lobbyists for commodity groups and farm organizations. Rough drafts of Harkin’s legislation don’t look that different from the House bill.

Harkin has often said that the money budgeted for the farm bill is insufficient to finance the innovative conservation, nutrition, energy and research programs that are his top priority.

But that is only because one very large pot, the $25 billion set aside for “direct payments” to growers of program crops over the next five years, is politically untouchable.

Direct payments are an entitlement that goes to farmers regardless of prices, yields, weather or incomes. They were a key piece of the 1996 “Freedom to Farm” law, billed as a “transition” to a more market-oriented agriculture.

It’s been a long transition. The House bill would keep direct payments at the same level for another five years. Corn growers, prospering in the corn ethanol boom, would receive $10.5 billion. (Government budget analysts predict that strong corn prices will continue; ethanol plants are currently offering more than $3 a bushel for the 2008 corn crop.)

Harkin has never been a fan of direct payments and would like to steer the money to conservation programs or a redesigned safety net that would be deployed in low-income years. Direct payments, he recognizes, are not a safety net (farmers get them when their returns are high or low). And since the payments are predictable from year to year, landlords “capture” them in the rentsthey charge for farmland.

When I reached Harkin in Iowa last week, the day after his annual “steak fry,” he told me: “How in heck can you justify direct payments when they’re making so much money? You can’t. With all the demands to plant corn for ethanol year after year, the need for conservation is greater than ever. There’s a greater need for bumper strips and soil conserving practices and crop rotation. That’s a better use of the money. I think the support for direct payments is dwindling–but you can’t just pull the rug out.”

Key Midwest senators in both parties, including Dick Durbin (D-Ill.) and Richard Lugar (R-Ind.), favor phasing out or scrapping direct payments. Durbin said in an interview he would support shifting some of the funds to a revamped safety net plan. Lugar would terminate traditional farm programs altogether. The proposals might find considerable Senate support, but first the bill has to get to the floor.

But in the committee, Harkin faces the political power of southern crops benefiting substantially from the direct payment system. Rice “base” pays about $100 an acre, peanuts $45 and cotton $35. That compares to $25 for corn, $15 for wheat and $7 for canola.

So Harkin finds himself wedged between Conrad, who wants the disaster provision, and Chambliss, advocate for southern agriculture. Unable to tap into direct payments to finance his priorities, he can only hope that the Finance Committee—where Conrad is the number three Democrat—can steer some cash toward him.

Harkin won’t criticize Conrad for his single-minded push for the disaster provision. “The Conrad staff has consistently met with mine,” he said. “The problem is how to squeeze a size 12 foot into a size 10 shoe. Kent’s as frustrated as I am.”

That’s what makes the Iowa senator such a nice guy.

By Dan Morgan