Biofuels

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.

Picture this hypothetical situation.

It is early 2009 and corn prices edge up to near $7 a bushel as U.S. ethanol plants and Asian traders bid for grain that is scarcer than expected after a disappointing 2008 harvest.

Responding to protests from U.S. consumers, the livestock industry and Asian customers, the new administrator of the Environmental Protection Agency, a Democrat, takes decisive action.

Using her broad authority under the 2007 energy bill, she waives the requirement that gasoline blenders use 11.1 billion gallons of corn ethanol in 2009. Unpopular as the action is in the Midwest, it breaks the corn price and eases inflationary pressures that are playing havoc with the U.S. economy.

Granted, it’s unlikely. The political consequences would be far reaching. Midwest voters still haven’t forgotten, or forgiven, Jimmy Carter’s 1979 grain embargo. And such dramatic action would scare off Wall Street investors needed to underwrite Washington’s huge bet on “advanced” biodiesel fuels.

But it isn’t entirely implausible, either.

American agriculture still hasn’t fully grasped the extent to which the energy bill shifted power over the farm economy to a corner of the executive branch where “production agriculture” has limited influence. In a Democratic administration attuned to the concerns of poor urban consumers and environmental groups, moderating food prices and protecting soil, water and air could take priority over hitting the ambitious biofuels targets in the energy bill.

Most commentary on the energy bill has focused on the broad outlines of what it does to require more fuel-efficient cars and require gasoline makers to drastically increase the use of ethanol and biodiesel fuels by 2022.

But this is a bill in which the Devil is truly in the details, complex as they are.

The biofuels provisions, for example, give the EPA administrator broad authority to scrap the annual requirements for corn ethanol, biodiesel and cellulosic ethanol that now underpin high commodity prices and soaring land values across the farm belt.

“In consultation with” USDA and the Energy Department, the administrator can waive the yearly requirements if she determines they would “severely harm the economy of a state, region or the United States” or finds that domestic supplies are inadequate to hit the target.

Much of the language in the new law was proposed by the Natural Resources Defense Council, and it reflects environmental priorities as much as those of the farming community.

“The only reason the environmental community is interested in biofuels is as a way to address global warming,” said Franz Matzner, NRDC’s chief forest and public lands advocate. The result, he added, was a good bill that allows a dramatic expansion of biofuels – but only if the increase can be achieved without harming water, soil, wildlife habitat and the climate.

The law, for example, gives EPA the job of establishing, within one year, the greenhouse gas baseline against which all new biofuels will be measured. Ethanol from corn won’t count unless EPA determines that growing, transporting and refining it emits 20 percent less carbon dioxide than a like quantity of gasoline. EPA must also consider “indirect” effects, such as carbon releases from cultivating virgin land or forest to replace corn diverted to fuel.

The Renewable Fuels Association signed off on this because most corn ethanol plants won’t have to meet that standard. The energy bill “grandfathers” 143 existing refineries and 64 new plants or additions under construction. Those plants will have a yearly capacity of 13.4 billion gallons, just shy of the 15 billion gallon ceiling set in the energy law.

However, future coal-fired refineries now on the drawing board probably won’t qualify, according to congressional aides familiar with the energy law. And refineries producing a new generation of cellulosic biofuels could face a much tougher challenge reaching the law’s 16 billion gallon requirement by 2022, according to industry experts.

These plants will qualify for generous federal loan guarantees and credits, but their ethanol won’t count against the requirement unless EPA finds that it is reducing greenhouse gases by 60percent below the EPA baseline. (EPA can reduce that to 50 percent but no lower.)

Unless ethanol or other renewables count against the mandates in the energy law, refiners would have less incentive to purchase the product.

The details still have to be worked out, but all this gives EPA serious power over the farm economy, now heavily dependent on strong demand from the burgeoning biofuels industry. In effect, EPA now has principal responsibility for managing the demand for major crops. Indirectly, how it uses that authority will guide farmers’ decisions on plantings, a role once played by USDA.

A “crunch” could be coming sooner than we expect, according to Purdue University economist Wallace E. Tyner.

New ethanol refineries now rapidly coming on line guarantee an explosive growth in the demand for corn this year, he notes. He predicts production of at least 11 billion gallons of corn ethanol, up sharply from last year.

It will take some 25 million acres to grow enough corn to make that amount of ethanol, Tyner estimates. That is nearly 5 million more acres than were needed last year. But corn acreage this year is estimated to be down by three million acres. That explains why corn prices remain very high. How much higher they will go if the 2008 harvest is short is anybody’s guess.

Federal tinkering with the commodity markets seems out of the question in the next few months because EPA hasn’t yet written rules implementing the 2007 law—and this is an election year.

But with the ink on the new biofuels law signed in December still wet, it is already getting a second, closer look in Congress.

Sen. Jeff Bingaman (D-N.M.), chairman of the Energy and Natural Resources Committee, held a hearing in February to air concerns about the biofuels title which he said “some have suggested is flawed.”

Environmental lobbyists involved in writing the legislation made sure that biomass from public lands and national forests were put off limits to biofuel refineries that convert timber, brush and woodchips into cellulosic ethanol. Protecting public lands from raids by the biofuels industry was key to environmental support, said NRDC’s Matzner.

But Bingaman and Rep. Stephanie Herseth Sandlin (D-S.D.) want to reopen that issue. Herseth Sandlin’s congressional district encompasses the Black Hills National Forest.

Matzner said her bill would “remove all the safeguards that keep the energy bill from incentivizing the wholesale loss of our national forests…Her bill is saying we don’t want to have any safeguards.”

Congressional aides give Herseth Sandlin little chance of amending the energy bill anytime soon. It could only be done with the approval of Rep. John Dingell (D-Mich.), all-powerful chairman of the House Energy and Commerce Committee and czar of all clean air legislation.

But the conflict isn’t likely to go away as agriculture and forestry interests focus more closely on the extent to which Dingell, Bingaman and EPA now hold sway over their economic future.

By Dan Morgan

DTN writer Chris Clayton reported yesterday that, “Policymakers and groups that have sought to reshape farm policy are again calling on Congress to reconsider tax changes to fund the farm bill while also paying direct payments to producers during these times of soaring commodity prices.

“‘It has been somewhat disheartening and disappointing seeing where these negotiations are heading,’ said Rep. Ron Kind, D-Wis., who pushed a failed farm-bill proposal in Congress last year. ‘It’s as if the Congress is operating in a vacuum when it comes to formulating this next farm bill.’

“Those groups demanding reform in the farm bill such as Kind are taking another shot during farm-bill negotiations at questioning commodity payments. At the same time, crusaders for changing farm policy are crediting the Bush administration for demanding more fiscal responsibility in the farm bill. As negotiations continue, the Bush administration still holds a lot of leverage in talks on the farm bill if the president wants more reform, Kind said.”

In more detail regarding direct payments, Mr. Clayton explained that, “Most farm groups have defended direct payments as a safety net that would be there if hard times return. Others have noted that the payments, which are not tied to actual production, are compliant with World Trade Organization rules. The AmericanFarm Bureau backs keeping direct payments, and the National Association of Wheat Growers wanted an increase in direct payments because, in many cases, direct payments were the only safety net for wheat producers over the past farm bill.”

The DTN item noted that, “Kind and cohort Rep. Jeff Flake, R-Ariz., have sent a 10-point plan to House Speaker Nancy Pelosi, D-Calif., and other congressmen proposing to rollback any potential changes in target prices or loan rates, as well as reduce direct payments and establish tighter criteria for farmers to receive commodity payments. Given the current commodity markets, the Kind-Flake proposal particularly targets direct payments, which pay $5.2 billion annually to producers and are not tied to market conditions.

“‘It’s just unbelievable that, given the atmosphere that we are in, that we could not have done better here,’ Flake said.

“With the farm bill now relying on the tax-writing committees for money, Kind and Flake are questioning why the farm bill should need more revenue. Kind is a member of the Ways and Means Committee and doesn’t think there is a lot of support in the committee to use increased revenue for the farm bill. Flake, meanwhile, is one of Congress’ leading fiscal conservatives.”

With respect to the executive branch, the article indicated that, “While the Bush administration has trumpeted change to commodityprograms, the administration has not challenged direct payments. Direct payments, for now, remain compliant with the World Trade Organization and are not considered trade distorting. However, the WTO has ruled that for the U.S. to consider direct payments as non-distorting to trade, the U.S. needs to lift all planting restrictions on that land. Right now, land used to collect direct payments cannot be used to grow fruits and vegetables, for instance, which are not part of the commodity programs. The House and Senate farm bills did not address that restriction.

“Flake acknowledged the administration’s defense of direct payments, but added that ‘they may not have the luxury here,’ Flake said. ‘It’s either that or are the votes there for a tax increase? I don’t think so, and so they may not have the luxury of protecting direct payments and going above the baseline here.’

“Ken Cook, president of Environmental Working Group, said the Bush administration might be willing to consider changes in direct payments now given the market conditions. Shifting money to conservation also doesn’t address the questions in the WTO. Cook also gave credit for the administration’s role thus far in holding Congress accountable on the farm bill.”

For more perspective regarding this development, see this FarmPolicy.com audio podcast from yesterday (MP3) which features audio clips from Rep. Kind, Rep. Flake, President of the Grocery Manufacturers Association and former U.S. Rep. Cal Dooley, and Ken Cook. The FarmPolicy.com audio podcast lasts six minutes and is available here (MP3).

For a closer look at the distribution of federal direct payments, see this Environmental Working Group webpage.

In a related item, David Rogers reported yesterday at Politico.com that, “Amid rising food costs, commodity groups risk a political backlash for not embracing more change in a Farm Bill subsidy structure that continues to pay billions to producers at a time when crop prices have risen to record levels.”

Mr. Rogers added that, “At the same time, voters will be sensitive to the fact that the price of food jumped 4.9 percent in 2007— the largest increase since 1990 and twice the 2006 food inflation rate. And as House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid entered the Farm Bill talks Tuesday night, the annual cost of the direct payment program — about $5.2 billion — was hard for either political party to ignore.

“‘It’s absurd,’ says Professor Bruce Babcock, an Iowa State University economist who just locked in a $5.03 per bushel price for his own 2008 corn crop and would still share in a direct payment adding to his return. ‘It’s the 800-pound gorilla in the room, and it has to be faced,’ said Tom Buis, president of the National Farmers Union.

“Tuesday night’s meeting with Pelosi and Reid brought together House and Senate tax writers in an effort to resolve what additional revenues can be provided to help finance what is now anticipated to be $10 billion in additional Farm Bill costs, chiefly for conservation, nutrition and improved disaster aid over the next decade.”

Mr. Rogers also noted that, “But beyond the revenue offsets, direct payments could still be a target. Just a 10 percent reduction in the program would go a long way toward resolving some of the same budget hurdles facing lawmakers and the White House. And House Agriculture Committee Chairman Collin Peterson (D-Minn.) already is looking at a potential plan to use direct payments to help finance a novel disaster aid program that would help farmers cope with multiyear losses beyond crop insurance.

“‘When wheat is selling at $19.80 at the Minneapolis Exchange and we’re giving out direct payments, it’s kind of hard to explain,’ Peterson said. ‘Direct payments were supposed to be a temporary measure, but it goes on and on,’ said Senate Agriculture Committee Chairman Tom Harkin (D-Iowa). ‘Who doesn’t like free money?’ he added with sarcasm.

“The great irony of the situation is that the same direct payment program began as an effort to move Washington out of agriculture — not into more debt.”

The article also noted that, “‘Prices change, and you don’t write a Farm Bill for now but for years to come,’ says Mary Kay Thatcher, a senior lobbyist for the Farm Bureau. Altering direct payments, especially in the midst of trade talks, ‘doesn’t make sense.’”

Concluding, the Politico.com article stated that, “Watching it all is Sen. Pat Roberts (R-Kan.), who was an early architect of the Freedom to Farm reforms back in 1996 but now sees the same ‘transition’ payments as a more permanent safeguard for his home-state wheat growers plagued by bad weather. ‘Direct payments and crop insurance work together,’ he says. ‘This is the payment for the farmer who doesn’t get a crop.’

“And in a year when the crop is good and the prices high? ‘It’s hard to explain when prices are high,’ Roberts agrees. ‘Yes, there could be a backlash.’”

Meanwhile, Peter Shinn of Brownfield reported yesterday that, “All of a sudden, a farm bill deal looks close at hand. Lawmakers from both sides of the aisle confirm that Republican and Democratic Congressional leaders met Tuesday night and that the broad outlines of a farm bill agreement are coming together.

“The deal would reportedly spend just under $10 billion over the Congressional Budget Baseline for farm programs and would fund it without increasing taxes. Nebraska Democratic Senator Ben Nelson said Wednesday the agreement should clear the way to farm bill passage this spring, if the Bush administration buys into the deal.”

Mr. Shinn added that, “But that’s no sure thing. And South Dakota Republican Senator John Thune told Brownfield Wednesday, if there’s a deal in place that most in Congress can live with, a Presidential farm bill veto could become irrelevant.

“‘If they don’t agree to what the Senate and House are doing, then you’re right, you’re probably end up in a position of having to override a veto, which we will have the votes, I think, in the Senate to do,’ Thune said. ‘And the question would be if whether or not the House could get the votes to do that.’

“Nelson and Thune both suggested a House-Senate deal on the broad strokes of a farm bill could be announced as soon as Thursday. Thune added that the issue then becomes how quickly farm policy can be made to fit the available money, which he called ‘the hard part.’ That’s why Thune said he believes another one-month extension of the 2002 farm bill is likely, which would put a new farm bill in place by mid-April.”

Matt Kaye reported yesterday at Hoosier Ag Today Online that, “It took a meeting with house speaker Nancy Pelosi to jump start the stalled farm bill effort. But despite a deal to raise new money for the bill, many issues remain unsettled.

“Pelosi and senate democratic leader Harry Reid directed their sides to get the farm bill done, arranging an infusion of some 10-billion in new money that the tax writing chairs will come up with.

“Senate ag chair Tom Harkin says the tax chairs should have the final number by Friday but how much sensitive areas like permanent disaster aid get, will have to be worked out. ‘We made a good faith promise we’ll do something on disaster, they’re going to give us the money. Now how much, we don’t know.’”

Mr. Kaye noted that, “Some funding sources have raised veto threats by the white house. House ag chair Collin Peterson said, ‘we’re working with them. I had a good meeting with Chuck Conner just now and he knows what we’re talking about.’”

And in more detail regarding White House perspective on the Farm Bill, DTN Political Correspondent JerryHagstrom reported yesterday (link requires subscription) that, “The Bush administration still wants changes in the farm program if it is to support an increase in the farm bill budget over the current level of funding, Deputy Agriculture Secretary Chuck Conner said Wednesday.

“‘We have made it clear to Congress that we oppose any increase in spending without significant reform,’ Conner stated in an e-mail. ‘The President has said he will veto a tax and spend farm bill. So, this is not just about a dollar amount — it’s about real reform and no tax increases. Even $5 billion is too much if there is little or no reform and no spending offsets.’

“Conner was reacting to an announcement late Tuesday that Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Chairman Charles Rangel, D-N.Y., have agreed to finalize a 10-year budget over the baseline for the new farm bill and to state what revenue raisers they would use to pay for it by late Friday.”

***

A press release issued yesterday by the House Ag Committee stated that, “Today, the House Committee on Agriculture adopted the budget views and estimates letterwhich outlines the Committee’s budget recommendations for the federal agencies and programs under its jurisdiction. The letter will be submitted to House Budget Committee Chairman John Spratt of South Carolina, pursuant to section 301(d) of the Congressional Budget Act of 1974, as well as clause 4(f) of House Rule X.

“‘Our proposed views and estimates letter reinforces the message we sent to the Budget Committee last year in preparation of Farm Bill reauthorization: current farm policies are widely popular, save taxpayers billons, and are serving to enhance the well-being of our farmers, ranchers, needy citizens, and consumers by ensuring a safe, affordable food supply,’ Chairman Collin C. Peterson of Minnesota said. ‘We urge the Budget Committee to take these points into consideration while crafting a responsible budget resolution for the coming fiscal year.’”

The release stated that, “The Budget Views and Estimates letter passed today reflects Agriculture Committee priorities to the House Budget Committee in preparation of the Fiscal Year 2009 Budget Resolution. The chief priority of the committee continues to be the reauthorization of omnibus farm policy to succeed the 2002 Farm Bill.

“Despite a budget baseline that is $60 billion less than when the 2002 Farm Bill was written, the House Agriculture Committee passed a new Farm Bill on July 20, 2007, that continues the popular farmsafety net while including new investments in agriculturally-based renewable energy resources, specialty crops, nutrition, and agricultural conservation programs. The full House passed the bill a week later, the Senate version of the Farm Bill passed on December 14, 2007, and the two bills are in the process of being reconciled.”

Congressional Quarterly writer Leah Nylen reported yesterday on this developing, noting that, “The panel also requested that funding for the farm bill be included in the congressional budget resolution.

“In 2007, the budget resolution did not include funding for the farm bill. Instead, the resolution created a deficit-neutral reserve fund for the farm bill, which requires offsets for any resources beyond the budget baseline. Because the Agriculture Committee does not have jurisdiction over offsets, the panel requested that the Budget Committee reconsider the reserve fund framework.

“‘From this committee’s perspective, it is far easier to operate with budget certainty than it is to deal with the prospect that additional resources may or may not materialize in the future from other committees and with strings attached,’ Peterson said.

“Final passage of the farm bill has been complicated by the reserve fund. Committees in both chambers have been working from a five-year baseline of about $280 billion allotted to the bill under the budget resolution. Any spending beyond the baseline requires revenue-raising offsets such as tax increases.”

Biofuels

An item posted recently at the German Marshall Fund (GMF) Online noted that, “On February 22, GMF hosted a roundtable meeting on the European proposal for a new EU directive on the use of renewable energy and to assess the outcomes of the February 21 meeting of the U.S.-EU biofuels working group under the U.S.-EU Strategic Energy Cooperation. The speakers featured Alexandra Langenheld, a national expert on regulatory policy and promotion of renewable energy at the European Commission’s Directorate General for Energy and Transport, and Jeff Skeer from the office of policy and international affairs at the U.S. Department of Energy. Franz Matzner from the Land and Forests Program at the Natural Resources Defense Council provided comments. The meeting was moderated by GMF Transatlantic Fellow Tim Searchinger.”

A GMF podcast interview with Alexandra Langenheld, Jeff Skeer and Tim Searchinger is available here (MP3).

The GMF update added that, “Alexandra Langenheld laid out the key aspects of the new EU proposal. It would mandate member states to increase their shares of renewable energies to 20 percent by 2020 and would set a separatetarget to increase biofuels use to 10 percent of transport fuel consumption. The Commission’s text includes limitations for biofuels cultivation on biodiverse grasslands, wetlands, and peatlands, as well as specific requirements for overall greenhouse gas savings. It also includes limitations on direct land use change.”

“Jeff Skeer discussed current U.S. biofuels policies. He mentioned that the goal was to arrive at a mixed policy approach of producing cellulosic ethanol and importing sugarcane ethanol. He said that the United States was trying to, ‘do it the right way,’ but that land use change research was still at too early a stage to draw the right assumptions for biofuels production. He mentioned that one of the problems was coordinating the input and interests of different U.S. executive departments,” the GMF update said.

The update also pointed out that, “With regard to transatlantic cooperation on biofuels policies, Langenheld and Skeer agreed that the main topics were research and development, and potential agreements on standards and sustainability, especially life cycle greenhouse gas emissions assessments. One of the goals would be to come to an international agreement on land use.”

In other biofuels news, an update posted yesterday at AgWired.com included an audio replay containing portions of speech given by Undersecretary for Rural Development, Tom Dorr, which was delivered at the National Ethanol Conference.

And, an update posted yesterday at The Ethanol Report included an audio replay of a presentation delivered by Rick Tolman, CEO of the National Corn Growers Association, which was also delivered at the National Ethanol Conference; while an interview with Renewable Fuels Association President Bob Dinneen from yesterday at the conclusion of the Conference can be heard here.

Keith Good

The Associated Press reported yesterday that, “Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.”

The AP article added that, “Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.”

Meanwhile, AFP reported yesterday that, “World oil prices struck fresh record highs in New York and London in Tuesday trading amid fears of declining OPEC oil output ahead of the cartel’s looming meeting next week, traders said.

“New York’s main oil futures contract, light sweet crude for delivery in April, closed up 1.65 dollars at a record 100.88 dollars a barrel.

“Although the contract finished on a new high, it hit a record 101.32 dollars during intra-day trading on February 20.”

And Tom Petruno and Maura Reynolds reported in today’s Los Angeles Times that, “Vigorous economic growth abroad is lifting foreign consumers’ wealth and spending power. That is translating into greater demand for food, in particular for meat — which in turn drives up demand for grain to feed livestock.

“The cost of a bushel of soybeans rocketed above $14 this month, up from $10 in October and $8 a year ago.

“Wheat now costs nearly $12 a bushel, up from $9 at the start of the year.”

The L.A. Times indicated that, “Bad weather in some crop-producing nations has reduced grain supplies at a time of strong demand. The U.S. Department of Agriculture estimated this month that global wheat inventories would fall to 30-year lows this year.

“Another factor helping to drive up commodity costs: investors flooding into futures markets hoping to cash in on a sustained rise.

“‘There is clearly a speculative element in the market’ for commodities, said William O’Neill, an expert on the markets at Logic Advisors in Upper Saddle River, N.J.

“That raises the possibility that commodity markets are experiencing a bubble that is bound to pop as the economy weakens, driving down prices when it does.”

Petruno and Reynolds also stated that, “But at least for now, even though raw materials generally account for a small percentage of the retail prices of goods, the bite they are taking is becoming more noticeable.

“Kraft Foods Inc., maker of Nabisco crackers and Maxwell House coffee, said last week that it was facing ‘unprecedented input costs’ and had ‘redoubled efforts to reduce overhead and other costs.’”

Lauren Etter, writing in today’s Wall Street Journal, reported that, “The little-known Minneapolis Grain Exchange is suddenly one of the hottest spots in the global financial markets as the price of its flagship commodity — the wheat used to make bread and pizza crust — shatters records, enriching farmers and fueling fears about shortages.”

Ms. Etter indicated that, “Yesterday, wheat closed at $22.40 a bushel on the Minneapolis Grain Exchange, up from about $5 a year ago. Monday, the price of the hard red spring wheat that trades in Minneapolis closed at a record $24 a bushel, touching $25 during intraday trade.

“Ordinarily, the Chicago Board of Trade dominates the wheat market, but that changed in January when the U.S. Department of Agriculture said winter-wheat plantings were less than expected. That put pressure on the next wheat crop in the ground, the hard red spring wheat that trades on the 126-year-old Minneapolis exchange.

“So Minneapolis has become ground zero for the global wheat shortage, which has been caused by drought in Australia and poor weather in other grain-producing countries. Global stocks are projected to reach 30-year lows this year, while U.S. stocks will reach 60-year lows, according to figures from the Agriculture Department.

“In the trading pit, floor traders say they are in disbelief as records get tested daily.The worry among traders is that prices have gone up too far and the market could collapse.”

The Journal article noted that, “Higher prices are likely to entice farmers to plant more wheat, along with corn and soybeans. Prices for those commodities are up in part because of demand for biofuels, and those higher prices led to more planting. Already, farmers are ramping up acreage in all of the major crops. Corn, soybean and wheat combined will reach 225 million acres this year, the highest since 1984, according to the USDA.”

Ms. Etter explained that, “The rise in agricultural prices, combined with high oil prices (crude futures closed above $100 a barrel yesterday) have contributed to higher food inflation in the U.S. and around the world. Last year, U.S. food prices increased 4% from the year before level, the highest level since 1990.”

“Another byproduct of the rally by wheat and other grains is that food is becoming more politicized as countries dependent on food imports fear they will be left at the mercy of volatile markets and shrinking supplies. Such a development could exacerbate hunger while generating food riots or political problems at home…[F]ive of the world’s wheat-producing nations — Russia, Kazakhstan, Ukraine, Argentina and China — have taken some wheat off the world market to address supply shortfalls at home,” the article said.

Mark Thirlwell noted in a comment item at The Financial Times Online yesterday that, “This rise in prices is a consequence of both demand and supply trends. On the demand side, the key factor has been the strong consumption growth in emerging markets, which in turn has been powered by those countries’ impressive income gains. China, for example, has accounted for up to 40 per cent of the increase in global consumption of soyabeans and meat over the past decade. At the same time, a series of supply-side disruptions in key commodity markets ranging from drought to disease have been at work.

“Perhaps the most important drivers of price gains over the past year are developments in world energy markets. High oil prices have encouraged a policy focus on biofuels, including lashings of generous financial support. Production has responded quickly to these incentives: the World Bank reports that the US has used 20 per cent of its maize production for biofuels and the European Union 68 per cent of its vegetable oil production. This change in usage has boosted prices, reduced the supply of these crops available for food and encouraged the substitution of other agricultural land from food to biofuel production.”

The FT item noted that, “Most important, a period of protracted higher food prices will be bad news for many of the world’s poorest peopleand its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa. Those countries that are most vulnerable are the low-income net food importers. Higher food prices add more strain to import bills that have often already been stretched by higher energy prices. Several of the poorest economies fall into this category and are heavily dependent on food aid to meet their needs. But the worldwide volume of such aid has stagnated for the past two decades and, what is worse, the quantity of aid delivered tends to fall as prices rise, given that a large proportion comprises a fixed annual dollar amount.”

Fleming Meeks, writing yesterday at Barron’s Online, indicated that, “Corn prices are up 134% over the past two years, and soybeans are up 145%.

“That’s good news for farmers, who are raking in the biggest profits in a generation. But you don’t have to own a tractor to cash in on this boom, as shareholders in agribiotech giants like Monsanto and Syngenta know well. Shares of seed producer Monsanto have grown 174% over the past 24 months, and the American depositary receipts of Syngenta have sprouted 91% over the same period.”

The article added that, “Growing demand is driving corn and soybean prices higher. One reason: Emerging economies eat more meat, and it takes eight pounds of corn to produce one pound of beef. For pork, the ratio is five to one, and for chicken, it’s three to one.

“Ethanol, too, is driving up demand for corn, and Syngenta is seeking the U.S. Department of Agriculture’s approval for a new ‘amylase-enriched’ cord that can be processed more quickly by biorefiners and would produce higher volumes of ethanol per bushel.”

A more tempered assessment of the food inflation and commodity value relationship was noted in an AFP article from yesterday.

The article stated that, “Some of the food price rises seen in supermarkets in the European Union cannot be justified by increases in farm production costs, the European Commission said Tuesday.

“‘We have seen price increases in supermarkets,’ said E.U. spokesman on agriculture Michael Mann. ‘But if you see the price of a loaf of bread, you also have to see that the price of the cereal only adds up to about five per cent of the total price.

“‘Some of the price hikes we have seen are not justified by the price hike in the raw materials,’ he said.”

Also on this issue, Maggie Urry reported yesterday at The Financial Times Online that, “Sharp rises in commodity prices have been passed to customers by Associated British Foods, the large grocery and agribusiness group that owns Kingsmill bread, Silver Spoon sugar and Ovaltine and Twinings beverages.”

Closer Look at Ethanol

Several articles highlight the fact that biofuels production has been a variable in the run-up in the market price of some program crops, particularly corn.

Dow Jones news writer Bill Tomson reported last week that, “Rising corn yields and improved ethanol technology will, in the long-run, push U.S. production capacity for the fuel up above a commonly perceived ceiling of 15 billion gallons per year, National Corn Growers Association Chief Executive Rick Tolman said Friday.

“Tolman, in an interview with Dow Jones Newswires, said the commonly cited ceiling doesn’t really exist. By the year 2020, farmers could be getting corn yields of as much as 300 bushels per acre — about double what they are now –and refiners could be getting as much as 1,000 gallons of ethanol from an acre of corn — about double what is being taken now.

“With all that corn, Tolman said, refiners could push production to more than 20 billion gallons a year without depriving the livestock feed and food industries of the corn they need.”

Meanwhile, Economists at the Center for Agricultural and Rural Development (CARD) at Iowa State University recently published a paper entitled, “Crop-Based Biofuel Production under Acreage Constraints and Uncertainty,” which was written by Mindy L. Baker, Dermot J. Hayes and Bruce A. Babcock.

The Abstract of the paper stated that, “A myriad of policy issues and questions revolve around understanding the bioeconomy. To gain insight, we develop a stochastic and dynamic general equilibrium model and capture the uncertain nature of key variables such as crude oil prices and commodity yields. We also incorporate acreage limitations on key feedstocks such as corn, soybeans, and switchgrass. We make standard assumptions that investors are rational and engage in biofuel production only if returns exceed what they can expect to earn from alternative investments. The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022, with significant requirements for cellulosic biofuel and biodiesel production. We calculate the level of tax credits required to stimulate this level of production. Subsidies of nearly $2.50 per gallon to biodiesel and $1.86 per gallon to cellulosic biofuel were required, and long-run equilibrium commodity prices were high, with corn at $4.76 per bushel and soybeans at $13.01 per bushel. High commodity prices are due to intense competition for planted acres among the commodities.”

Stu Ellis, writing yesterday at The Farm Gate Blog (University of Illinois Extension), pointed to the CARD paper and provided this brief summary: “In one of the Iowa State theories, the corn ethanol industry expands until 18 billion gallons per year are produced, but only from corn and not from biomass products. That theory also suggests the soy biodiesel industry never gets off the ground without substantial subsidies. Their research also finds an equilibrium corn price of $4.76, soybeans at $13.01, and hay or switchgrass at $164.62 per ton, with 61% of acres dedicated to corn, 19% to beans, and 20% to hay or switchgrass.

“The researchers conclude that competition for land ensures that providing an incentive to just one crop will increase equilibrium prices of all. They also determine that neither biodiesel nor switchgrass ethanol is commercially viable in the long run, and for it to be viable, it must be subsidized at a $1.55 to $2.11 per gallon rate, compared to $0.22 to $0.78 per gallon for corn ethanol. They contend the result will be more pressure for corn-based ethanol because of the requirement for a lower subsidy and corn takes less land to produce than switchgrass.”

Meanwhile, DTN writer Todd Neeley reported yesterday (link requires subscription) that, “Renewable Fuels Association President and CEO Bob Dinneen challenged ethanol producers Tuesday to fight through the criticism of what has become a 7.9-billion-gallon industry in a few short years.

“Speaking at the RFA’s annual convention in Orlando, Fla., Dinneen said the state of the U.S. ethanol industry is sound, but faces new challenges.

“‘Change is hard,’ Dinneen said. ‘Change forces people to rethink, re-adjust. This past year we saw the emergence of the food-versus-fuel debate. The chattering class of naysayers avoids the fact that we produce food and fuel. Some seem to overlook the impact of energy costs on food costs.’”

The DTN item added that, “While the future is bright, Dineen said the industry had an impressive year in 2007 that included adding some $47 billion to the gross domestic product, employing 238,000 workers and cutting USDA subsidies by some $8 billion that otherwise would have been given to corn producers.”

To listen to an audio replay of Mr. Dineen’s comments yesterday, or to view a transcript of his remarks, see this update, which was posted yesterday at The Ethanol Report.

In other opinion regarding biofuels, the editorial board at The Washington Post opined today that, “As the United States searches for alternative ways to feed its addiction to petroleum, ethanol and other biofuels derived from organic material have been considered a miracle motor vehicle elixir. The energy bill signed by President Bush in December mandates that at least 36 billion gallons of biofuels a year be used by 2020. Yet separate studies released this month by Princeton University and the Nature Conservancy reveal that biofuels are not a silver bullet in the battle against global warming. In fact, they could make things worse.

“Corn and sugar cane are common sources of ethanol. Aside from emitting fewer greenhouse gases than coal or oil when burned as fuel, these biofuel crops remove carbon from the atmosphere while they are growing — thus making them nearly carbon-neutral. But the studies show that ethanol may be even more dangerous for the environment than fossil fuels are. As the Princeton study points out, clearing previously untouched land to grow biofuel crops releases long-sequestered carbon into the atmosphere. While planting corn and sugar cane in already tilled land is fine, a problem arises when farmers churn up new land to grow more fuel or the food and feed displaced bybiofuel crops.”

Concluding, the Post stated that, “An essay in the May-June 2007 issue of Foreign Affairs by two professors from the University of Minnesota highlighted still another problem: The biofuels craze could starve people. ‘By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world,’ they wrote. ‘If oil prices remain high — which is likely — the people most vulnerable to the price hikes brought on by the biofuel boom will be those in countries that both suffer food deficits and import petroleum.’

“The problems with corn-based ethanol, long regarded as a transitional fuel source, have been debated for years. One alternative is to squeeze ethanol out of cellulose from switch grass, cornhusks and other biomass sources. But because cellulosic ethanol remains experimental, it might be years before it makes it from the laboratory to the gas tank. It all adds up to another example that there is no quick, cheap and easy way to confront the menace of global warming.”

Farm Bill

DTN writer Chris Clayton reported yesterday (link requires subscription) that, “Congressional tax-writing committees will work to come to terms by the end of the week on provisions to add about $10 billion in spending to the farm bill, House Agriculture Committee Chairman Collin Peterson, D-Minn., said Tuesday evening.

“An agreement to bring this farm bill to conclusion was one of the main goals of a meeting between agriculture and tax-writing committee leaders and top Democratic Congressional leaders Tuesday night. Besides finding a cost figure that members of Congress could agree upon, lawmakers have to find a way to pay for added expense which appeals to the House and Senate, and then can be sold to the White House.

“‘The biggest thing that happened was a general agreement to try to have the offset done by Friday,’ said House Agriculture Committee Chairman Collin Peterson, D-Minn., in a phone interview Tuesday evening ‘The White House is getting involved in trying to define what the offset should be.’”

Mr. Clayton indicated that, “Right now, Peterson said he is confident negotiations will complete a farm bill with enough additional funding in conservation and nutrition to satisfy members of the House, while also keeping a permanent disaster program that was created in the Senate farm bill.

“Peterson and Harkin [Sen. Ag Committee Chairman Tom Harkin (D-Iowa)] said after the meeting that the general agreement would establish about $10 billion in additional spending over 10 years to the bill, which has a baseline of $597 billion in costs over that decade of spending. Peterson said he spoke with Deputy Agriculture Secretary Chuck Conner, who has led the Bush administration team on the farm bill, after the meeting.

“‘We have a number we are looking at and the White House knows what it is,’ Peterson said. ‘I wouldn’t say they are totally there yet, but they haven’t stormed off, so that’s a good sign.’”

Keith Good