The FarmPolicy.com News Summary

News Articles Highlight Biofuels, Food Costs & Acreage Issue

Sue Kirchhoff http://www.usatoday.com/money/industries/energy/environment/2007-12-30-etha nol_N.htm  reported recently in the USA Today on the energy bill that was passed by Congress and signed by President Bush last month http://www.farmpolicy.com/?p=573 .  In part, Ms. Kirchhoff noted that, “But the ethanol mandate is drawing the most attention, and contention, as critics from the United Nations to U.S. livestock producers and food processors question whether it makes sense to devote about a third of the U.S. corn crop to fuel when world grain stocks are at a 30-year low and prices at historic highs.

“Wheat http://farmpolicy.typepad.com/farmpolicy/files/Decnasswheat.jpg and soybean prices http://farmpolicy.typepad.com/farmpolicy/files/Decnasssoybeans.jpg  have basically doubled, and livestock production costs have shot up as farmers increased corn production in the past year http://farmpolicy.typepad.com/farmpolicy/files/cornprodnov.jpg . Even non-food crops such as cotton http://farmpolicy.typepad.com/farmpolicy/files/Decnasscotton.jpg  are affected as U.S. growers switch into more lucrative grain crops.

“The commodity price and supply situation should remain volatile next year, when the energy law foresees 9 billion gallons of U.S. biofuel use, which will have to come largely from corn-based ethanol.”

The article noted that, “Bob Dineen, president of the Renewable Fuels Association, which represents the ethanol industry, says food manufacturers ‘accustomed to cheap corn’ are placing too much of the blame for food price increases on ethanol. He says they are ignoring factors such as drought in important exporting nations, rising worldwide demand for grain and high energy costs.

“He says the industry should have no problem meeting the mandates. ‘We’re already producing 7 billion gallons today, with another 7 billion (in capacity) that is under construction and will be online shortly. There’s little question we’ll be able to meet the needs.'”

However, the USA Today piece also added that, “But Chris Hurt, Purdue University agricultural economist, says that with production ramping up so quickly, the ethanol industry may not be able to acquire enough corn from the 2008 crop to run at full capacity.

“‘At the start of 2006, the ethanol industry had a production capacity of 4.3 billion gallons, and by the end of 2008, that could be up to 13.4 billion,’ Hurt says. ‘We had excess world (crop) production capacity that we could draw on at first. That is gone, and ethanol and other biofuels are growing by leaps and bounds.’

“The corn supply question partly hinges on export demand http://farmpolicy.typepad.com/farmpolicy/files/ersexports60.jpg  and whether the livestock industry can make more use of distillate grains, a byproduct of ethanol, for feed. Jesse Sevcik of the American Meat Institute says distillate grains have some feedstock value but not as much as touted. ‘There are definitely a number of factors coming into next year that could . make a bad situation worse for livestock and poultry.'”

Meanwhile, Chicago Tribune writer Mike Hughlett http://www.chicagotribune.com/business/chi-mon_outlook_fooddec31,0,462721,p rint.story?coll=chi-newslocal-hed  reported on Monday that, “Nowadays, [Gloria Ford is] keeping a sharper eye out for bargains on eggs — and anything else in the grocery aisles.

“That’s a good idea because U.S. food prices have risen this year at more than twice the rate of 2006, and at a pace not seen since 1990. The outlook isn’t any better. Many economists say this year’s estimated price increase of about 5 percent could be part of a trend that threatens to ratchet up food costs for years.

“That possibility is rooted partly in the rise of ethanol and partly in strong economic growth in developing nations.

“The ethanol industry’s voracious appetite for corn ripples through the food chain. Take eggs, for instance. Chickens eat corn, and corn prices have shot up as the ethanol business has blossomed.”

(See this related graph http://www.chicagotribune.com/business/chi071231cpi_gfx,0,7752697.graphic?c oll=chi-newslocal-hed  from the article regarding specific food price increases).

The Tribune also pointed out that, “Indeed, bad weather in Australia is a factor in record wheat prices set this year. Other cyclical issues are at work in the current price rise, particularly soaring energy costs. With oil at almost $100 per barrel, food producers face considerably higher costs to make and transport their goods.

“The ethanol expansion isn’t a short-term trend, and the industry is using about 25 percent of the U.S. corn crop.

“‘In the U.S., we’ve had the biggest corn crop we’ve had in years — rail cars are backing up — but we still have corn at over $4 a bushel,’ Senauer [Benjamin Senauer, co-director of the University of Minnesota’s Food Industry Center] said. That price rarely topped $3 per bushel over the last decade http://farmpolicy.typepad.com/farmpolicy/files/Decnasscorn.jpg until this year.”

The Tribune’s Mr. Hughlett stated that, “As corn prices rise, farmers have an incentive to switch to it from other crops, particularly soybeans. And as soybean acreage has declined this year, soybean prices have hit near-record highs, and soybeans are increasingly being used for biodiesel, another fuel.

“‘We have never used so much food for fuel,’ said Michael Swanson, an agricultural economist at Wells Fargo in Minneapolis.

“Energy needs will increasingly drive food prices, he said. ‘There’s been a sea change, as much at the ethanol people say it’s not true.'”

Indeed, later the article indicated that, “‘To blame ethanol for moderately rising food prices is disingenuous at best,’ said Matt Hartwig, a spokesman for the Renewable Fuels Association, the industry’s trade group. ‘It’s a terribly simplistic look at a complex issue.’

“Adding to that complexity is the growing global demand for food as incomes rise. China and India’s rapidly expanding economies get the most attention, but the last five years have been some of the best ever economically in developing nations across the globe, Senauer said.”

With respect to the future price level of corn, soybeans and wheat, Associated Press writer Stevenson Jacobs http://www.washingtonpost.com/wp-dyn/content/article/2007/12/31/AR200712310 0941_pf.html  reported on Monday that, “Soybeans for January delivery fell 8.75 cents to settle at $11.99 a bushel on the Chicago Board of Trade. Corn for March delivery rose 3.5 cents to settle at $4.555 a bushel. Wheat for March delivery traded flat to settle at $8.85 a bushel.”

As these prices remain high and issues associated with food costs garner more media attention, some have focused attention on the Conservation Reserve Program http://www.nrcs.usda.gov/programs/crp/  and the potential of administrative changes regarding acreage releases from the program.

On Monday, the “Washington Insider” section of DTN (link requires subscription http://www.dtn.com/forms/ag/try/dtnonline/ ) addressed this issue, noting in part that, “Corn, wheat and soybean users have been conducting a spirited bidding war through futures markets to convince farmers to plant additional acres for harvest in 2008 and beyond. And some analysts believe that the bidding could convince USDA to release some conservation reserve program participants from their contracts before those contracts are scheduled to expire, thus making more acres available for crop production.

“However, USDA sources say there still is little support for such a move. Acting Agriculture Secretary Chuck Conner said earlier that the department would continue to monitor the situation and that he would not hesitate to make adjustments to the program if that was needed ‘to achieve balance in the agricultural sector.’ But current supply and demand figures appear to favor USDA’s inclination against offering an early out option for CRP contract holders.

“The relatively high prices available through futures running as far out as 2010 are likely to entice farmers to choose to return more CRP acres to production as current contracts expire. If that becomes a wide-spread and accelerating trend, there will be increasing political pressure on USDA to increase CRP payment rates, thus bringing the government into the acreage bidding war.”

As the demand for acreage increases, media reports have also highlighted the potential ramifications of the energy bill’s impact on the environment.

Eric Berger http://www.chron.com/disp/story.mpl/front/5412577.html , writing on Monday at the Houston Chronicle Online, reported that, “The recent passage of the mammoth energy bill could have unintended consequences for the Gulf of Mexico that have nothing to do with oil and gas platforms.

“Under the law, production of ethanol is set to increase five-fold to 36 billion gallons a year by 2020.

“Some environmentalists are worried that the shift to ethanol – viewed as a home-grown alternative to foreign oil – could enlarge the northern Gulf’s ‘dead zone,’ an 8,000-square-mile area so devoid of oxygen that fish, shrimp and other sea life cannot survive.

“Already ethanol, by doubling corn prices since 2002, has driven corn production to its highest levels since World War II. Growing corn requires considerably more nitrogen-based fertilizer than most crops. When the fertilizer runs off fields in the Midwest, it drains into the Mississippi and eventually reaches the Gulf of Mexico.”

The Chronicle article did note that, “But not all scientists are ready to blame increased corn farming for that growth, at least not yet.

“‘It’s something we should be wary of and keep an eye on, but it’s not something we should jump to conclusions on,’ said Steven DiMarco, an assistant professor at Texas A&M University who specializes in dead zone research.

“‘It could be a number of years before the nitrate makes its way from the Midwest into the Gulf. And once there, it may make the dead zone bigger, or last longer. Or it may do nothing at all. We just don’t know yet.’

“Nitrates reaching the Gulf set into motion a chain of events to create a dead zone, DiMarco said.”

Swine Production

As grain and oilseed producers enjoy record high prices for some crops, some livestock producers could potentially have tough sledding in 2008.

Des Moines Register writer Jerry Perkins http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20071228/BUSINE SS01/712280361/1029/BUSINESS  reported on Friday that, “More hogs going to market and higher prices for corn and soybean meal to feed them will lead to losses for pork producers throughout most of next year, said John Lawrence, an Iowa State University Extension economist.

“Lawrence was reacting to a quarterly U.S. Department of Agriculture report released Thursday http://usda.mannlib.cornell.edu/usda/current/HogsPigs/HogsPigs-12-27-2007.pdf  that said the number of hogs and pigs on U.S. farms as of Dec. 1 totaled 65.1 million, 4 percent more than a year ago.”

The Register article added that, “After a record-breaking string of 35 months of profits, Iowa hog producers lost money in January this year, according to estimated returns compiled by Lawrence, who watches the livestock markets for ISU Extension.

“Iowa hog producers also lost money in October and November, Lawrence said, and the losses are expected to continue into most of 2008.

“‘We might see some black ink during the summer, but I see us in red ink most of the year,’ Lawrence said.

Farm Bill / Trade

Hank Shaw http://www.recordnet.com/apps/pbcs.dll/article?AID=/20071228/A_NEWS/7122803 13 , writing last week at the Recordnet.com, reported that, “Now comes the hard part for the federal Farm Bill: The legislation, which includes historic new funding for Central Valley fruit, nut and vegetable farmers, has passed the House and Senate, but the two chambers must now reconcile their differences and get approval from a skeptical Bush administration.

“‘The administration is very critical of a number of areas,’ said Rep. Dennis Cardoza, D-Atwater. Cardoza is expected to be one of the House’s key negotiators on the Farm Bill. ‘We have to be very diligent over the next two months.’

The item noted that, “The primary debate over the Farm Bill now shifts to funding.

“The House version pays for increased conservation payments and crop subsidies by either ‘closing a loophole on’ or ‘raising taxes on’ – depending on which side of the aisle is describing it – foreign oil companies that operate in the United States. The Senate does not have this provision.

“Bush says he may veto the legislation if it does not limit crop subsidies and if it preserves a cotton subsidy that the World Trade Organization says is illegal. Cardoza said the Pima cotton widely grown in the San Joaquin Valley is not at issue.”

The item concluded by stating that, “Agriculture Committee staffers are expected to return to work on the bill this week, and the committee chairmen, Rep. Collin Peterson, D-Minn., and Sen. Tom Harkin, D-Iowa, say they will return to Washington early for preliminary talks.

“Cardoza said the full conference committee is expected to start meeting in late January and last at least a month.

“‘There’s just a hundred things left to watch,’ Cardoza said. ‘There’s still a lot of moving parts to this.'”
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John W. Miller http://online.wsj.com/article/SB119906054517858493.html?mod=todays_us_page_ one  reported in Monday’s Wall Street Journal that, “On Thursday, some of the most avid observers of the U.S. presidential caucus in Iowa will be a group of trade officials from around the world, meeting 4,600 miles away in Switzerland.

“The ambassadors, economists and their staffs will be at the World Trade Organization’s headquarters in Geneva to kick off their seventh year of the so-called Doha round of trade talks. The goal is a new global deal to encourage free trade, but what happens in the U.S. elections, which begin formally in the Hawkeye State, may prove as important to a deal as anything negotiators in Geneva can do, according to trade officials involved in the talks.

“Already, the U.S. administration is using rising protectionist sentiment among the Democrat candidates for President George W. Bush’s position to pressure delegates from around the globe to cut deals fast, while Republicans still hold the White House.

“Peter Allgeier, U.S. ambassador to the WTO, ‘tells everybody, ‘You want to work with us, because look who might be coming next,” a WTO official said. Mr. Allgeier’s office didn’t return calls seeking comment.”

The Journal also reported that, “Brussels and Washington still don’t agree on how much to cut agriculture support. Trade experts say a Doha deal is unlikely in 2008 — or until there is a new U.S. president in place, capable of driving concessions through Congress.

“In Geneva, however, delegates to the WTO have gotten back to the bargaining table, discussing everything from tariffs on heavy machinery to who should administer food aid in crises. The two weeks of meetings that start Thursday will focus mainly on tariffs and subsidies for agricultural products.

“WTO officials said that besides negotiating, they have been closely tracking the U.S. campaign.”

 Keith Good President FarmPolicy.com, Inc.
Journalism Fellow German Marshall Fund of the United States
(t) 217.356.2269 Champaign, Illinois