Ethanol Subsidy Market Distortions

Iowa State takes a different look at the impact of ethanol.

Ethanol: A Welfare-Increasing Market Distortion?

Xiaodong Du, Dermot J. Hayes, Mindy L. BakerOctober 2008 [08-WP 480]

This study estimates the welfare changes for consumers and producers resulting from ethanol production and related support polices in 2007. The results suggest a positive welfare gain from the support policies; this is possible because ethanol subsidies effectively replaced a market distortion that had a larger deadweight loss. Previous farm subsidies created overproduction, which then depressed market prices and increased the cost of maintaining target-price supports. Ethanol polices resulted in additional ethanol production, but because this additional ethanol was sold in price elastic energy markets, the price depressing impact of the government supports was less than before. This resulted in lower government spending and a net welfare gain of $2.65 billion for given market parameters. The results are...(complete news release and link to study here).

Farm Aid Cuts on the WTO Table

This represents a real cut over the decade average but last year the subsidies were only about $7 billion.

U.S. says ready to cut farm aid to $15 billion

GENEVA (Reuters) - The United States is ready to cut its ceiling for trade-distorting farm subsidies to $15 billion a year to help unblock talks for a global trade deal, U.S. Trade Representative Susan Schwab said on Tuesday.

The long-awaited offer was...(complete article here).

Impact of Farm Bill on Conservation Funding

How does the new Farm Bill affect Conservation Funds?

Germination of Conservation Fortunes in the New Farm Bill Remains Uncertain

After months of negotiations and several extensions of the 2002 legislation, Congress was finally able to craft a 2008 Farm Bill that garnered enough support on Capitol Hill to override the veto issued by the White House. As with most legislation similarly comprehensive, there are good points, and others not so good from a wildlife conservation perspective, according to the Wildlife Management Institute.

Among the more disappointing...(complete article here).

WTO Backlash to U.S. Farm Bill

Agricultural supports are an issue throughout the globe. They have a profound effect on international trade and thus on country budgets. Because of our size, what the U.S. does on farm price supports impacts the globe.

Farm bill attracts criticism at WTO talks

GENEVA (Reuters) - Several countries at the World Trade Organization (WTO) criticized the new U.S. farm bill on Monday for raising farm support when the WTO is trying to reach a deal to cut agricultural subsidies.

"A few of them had...(complete article here).

EU Farm Subsidy Reforms

I find it interesting that the EU is attempting to dismantle farm subsidies at the same time the U.S. is attempting the same. (Does One World Order come to mind?)

EU shake-up on farming subsidies

The EU has unveiled a plan for reform of its Common Agricultural Policy, the rural payments system that costs more than 40bn euros (£32bn) a year.

The proposals are aimed at making farmers more responsive to...(complete article here).

Senator Cornyn Statement on Farm Bill

It still has to cross the President's desk but with enough votes for a veto override, it is likely this Farm Bill will become law.

Cornyn: Final Farm Bill Good For Texas Agriculture Community

Says Texas Farmers & Ranchers Will Benefit from Carefully-Crafted Compromise

Thursday, May 15, 2008WASHINGTON—U.S. Sen. John Cornyn expressed his support today for final Senate passage of The Food and Energy Security Act of 2007, H.R. 2419, more popularly known as the “Farm Bill.” With today’s approval vote by the Senate, and yesterday’s passage of this bill in the House, the legislation will now be sent to the President’s desk.

“Passage of this bill is an important and long-overdue step for Texas farmers and ranchers, providing them a stable policy moving forward. It’s not perfect but it represents a carefully-crafted compromise that will protect Texas agriculture, including family farms, strengthen key nutrition programs, and fight childhood obesity.

“One in every seven Texans can trace their employment to agriculture. In...(complete news release here).

Farm Bill Likely to be Vetoed

We need a Farm Bill but I agree that this is probably not the bill that we need. It would be great if we could split this thing up into all of its component parts that are not really farming related and approach each one separately. Then maybe we could get some common sense back into it.

Fact Sheet: Congress' Farm Bill Is Bad for American Taxpayers

Congress Should Propose Real Reform, As President Bush Did, Or Extend Current Law For At Least One Year

Today, Congressional negotiators announced the completion of a farm bill that fails to include much-needed farm program reforms proposed by President Bush and increases spending by nearly $20 billion. At a time of record farm income, Congress chose to further increase farm subsidy rates, require the American taxpayers to subsidize the incomes of married farmers already earning up to $1.5 million per year, and expand government control over farm programs. This bill also adds...(complete news release here).

House Farm Bill Conferees

It's about time....


House Agriculture Committee Chairman Announces Farm Bill Conferees

WASHINGTON, DC – Agriculture Committee Chairman Collin Peterson today announced the list of Representatives appointed by the Speaker of the House of Representatives to participate in the conference committee that will negotiate the 2008 Farm Bill.

“The Members serving on this conference committee have...(complete news release here).

Corn/Oil Price Linkages and Farm Decision-making

OK. This one is a bit complex and certainly, at least for a non-economist, difficult to follow. Essentially, it discusses the linkage between the ethanol subsidy, the price of oil, and the amount of ethanol produced -- as well as the cost of that subsidy to the consumer at various oil price levels. Corn prices and oil prices are now closely correlated whereas prior to the ethanol mandates, that was not necessarily the case. In the future, a corn farmer may decide how much corn to plant based on projected oil prices, not loan rates, defficiency payments, export markets, etc.

Policies key as ethanol 'revolution' links agriculture, energy sectors

WEST LAFAYETTE, Ind. - The recent boom in production of ethanol from corn grain has tightly linked the agriculture and energy sectors in an unprecedented fashion.

Purdue University researchers developed a model, based on a range of possible oil prices, that predicts impacts of federal economic policies on future consumer and government costs, ethanol production and many other aspects of the two sectors.

"We are living through a...(complete article here).

More on the Farm Bill

From Ag Observatory...

Veto threat seen lever for farm-subsidy reform

Reuters
February 6, 2008
By Charles Abbott

Thanks to a White House veto threat, Congress is on the path to an overall tightening of farm subsidy rules, said a staunch Senate advocate of payment limit reform on Tuesday.

Sen. Charles Grassley said...(completely article here).

Analysis of Farm Bill Situation

This analysis of the current Farm Bill political situation is from Ag Observatory which is produced by the Institute for Agriculture and Trade Policy.

Analysis from Washington

Dan Morgan
February 4, 2008

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.

Democratic Sen. Kent Conrad (D-N.D.) was in a hurry to get millionaire businessman and former North Dakota Gov. Ed Schafer sworn into office Monday in time to bask in the pomp of sitting with the Cabinet at the State of the Union address. It wasn’t just the close family ties. (Schafer is Conrad’s former brother-in-law and Schafer’s dad once offered to help Conrad with his college costs.) Conrad’s helping hand—resulting in Schafer’s hurry-up Senate confirmation by “unanimous consent” rather than by roll-call vote following debate—was political and strategic.

Farm bloc lawmakers urgently need...(complete article here).

One thing not mentioned here is that the direct payments to farmers include such things as the Conservation Reserve Program which is a favorite of environmentalists.

Farm Bill Funding Politics

How do you fund all of the conservation and energy provisions in the new Farm Bill? Cut the part out that actually goes to farmers.

Bush Digs In On Farm Bill Funds As Harkin Urges A Deal

National Journal's CongressDaily
January 31, 2008
By Jerry Hagstrom


Senate Agriculture Chairman Harkin said today if the administration does not agree soon to revenue raisers to increase farm bill spending above the current baseline, Congress might have to pass the bill with the expectation that President Bush will veto it. "If an overwhelming majority of the Congress says close some loopholes to get us some funding, the president is going to have to bend on that or I guess we are headed for a veto," Harkin said. Noting that 79 senators voted for the Senate version in December, Harkin said a veto override is probable if the final version looks like the Senate bill.

Harkin noted that...(complete article here).

Why Biofuel Subsidies?

The research project referenced below from Iowa State University indicates that the likely objective of the U.S. Biofuels subsidies was to transfer payment to the farming sector. With the historic pressure to remove farm subsidies which were designed to ensure a secure and cheap food supply, this strategy makes sense. However, the consequences of the strategy in its impact on the livestock feeding sector somewhat negates the gains in the farming sector.

Implied Objectives of U.S. Biofuel Subsidies

Ofir D. Rubin, Miguel Carriquiry, Dermot J. HayesFebruary 2008 [08-WP 459]

Biofuel subsidies in the United States have been justified on the following grounds: energy independence, a reduction in greenhouse gas emissions, improvements in rural development related to biofuel plants, and farm income support. The 2007 energy act emphasizes the first two objectives. In this study, we quantify the costs and benefits that different biofuels provide.

We consider...(complete article here) [Be sure to go to the .pdf of the entire article]

The 2008 Farm Bill

I must admit that I have been avoiding the 2008 Farm Bill like the plague. The floor-passed Senate version is 1,876 pages long (it can be viewed on the Internet at http://agriculture.senate.gov/). The complexity of the various provisions requires a law degree to decipher. It is no wonder that it takes our representatives more than a year to come up with a bill that can be passed by both houses of Congress and that would be acceptable to signature by the President. That hasn’t happened yet, but we are finally getting close. Hopefully, there will be a Farm Bill by the end of March.

Most people think of the Farm Bill as providing for price supports to farmers. Such provisions remain a part of the bill but only a small part. The price supports are designed to influence planted acres of various crops in order to provide adequate income to farmers while maintaining “cheap” food prices to the consumer and some level of food security for our nation. Most consumers think of crop price supports as “welfare” for farmers. They usually don’t realize that they are designed to allow market forces to maintain a “cheap” food supply for our country.

Over the years many sections have been added to the farm bill. Some of these sections regulate agricultural markets. Others are oriented more toward conservation practices. Each of these sections has grown with each successive farm bill until they are now quite large. Some of the newest sections in the farm bill are related to energy.

The Energy Independence and Security Act of 2007 had a profound impact on the 2008 Farm Bill. It raised the standard for the production of renewable fuels to 9 billion gallons for this year and gradually increases the standard so that by 2022, the U.S. should be producing 36 billion gallons of renewable fuels. In 2022, the amount of renewable fuels should include advanced bio-fuels, such as cellulosic ethanol, in the amount of 21 billion gallons. The balance of that will likely remain corn-based ethanol.

Decades ago Congress created the Commodity Credit Corporation (CCC) within the Department of Agriculture. The CCC was created and given authority to take money directly from the U.S. Treasury for farm programs. This measure was authorized to provide security of income to farmers so that they were not dependent on annual budget appropriations for funding of mandated farm programs. This provision makes the 2008 Farm Bill attractive to legislators as a means of funding their pet bio-fuels projects without the necessity of going through the normal appropriations process. The result is that the Farm Bill has become a political football.

Further complicating the passage of a Farm Bill is the fact that this is a Presidential election year. Each of the political parties sees the bill as a way to potentially manipulate support for their party’s candidate. Because the bill has grown to include so many features and provisions, the potential political leverage has grown to include almost all interest groups. Agriculture generally, and farmers in particular, have effectively lost their ability to have much influence on the process because of the broad range of issues now included.

Some of the new provisions that are related to energy are: 1) The renewable energy and energy efficiency improvements program, 2) Biomass research and development, 3) The Bio-energy program which makes incentive payments to bio-energy producers, 4) The Biomass energy reserve program, 5) Forest bio-energy research and 6) The Sun grant program which focuses on solar power. All of these programs are designed to meet the mandates of the Energy Independence and Security Act of 2007 through the use of the CCC as a funding mechanism so that the programs do not require line-item funding through the appropriations bill.

Hopefully, we will eventually see a Farm Bill passed that will continue to provide a safety net for our nation’s food supply system. If we are to continue to benefit as a nation from a “cheap” and abundant food supply, we must have a strong farm bill. Let your Congressmen know your feelings.

WTO Fishing Subsidies

Fishing in many ways is a form of agriculture. In many countries it is a primary source of income to the poor. It is also an industry that in some areas is on the tipping point of disaster.

WTO proposal limits fisheries subsidies

GENEVA (Reuters) - New negotiating proposals at the World Trade Organization (WTO) on Friday impose tough limits on subsidies on fisheries, a move that delighted environmentalists concerned about overfishing.

The proposals, from Uruguay's WTO ambassador Guillermo Valles Galmes, who is chairing WTO negotiations on "rules" -- dumping, subsidies and fisheries subsidies -- do not propose a blanket ban on all subsidies to fisheries.

But they list a large number of subsidies, including those for...(complete article here).

Subsidies to commercial fishing enterprises make sense in many cases. Just like in agriculture on the land, fishing can be crucial to national security because of its niche in the food supply and it can be a source of significant economic stimulus. Subsidies can be utilized to help regulate fishing as an industry. They should be tied closely to compliance with good resource management practices such as limited take and seasonal harvests.

EU Farm Subsidy Reform

Any time that a body of lawmakers starts tinkering with farm programs I cringe. I am not a big fan of subsidies, however, the subsidy tools in place in most countries are necessary for a number of reasons: 1) food security - price supports are sometimes necessary to insure that farmers survive and can produce, 2) national security - a country that imports all of its food is at the mercy of the nations from which it imports and 3) land use - influencing land use for sustainability and environmental stewardship can be done through subsidies.


EU to reform its farm subsidies

By Dominic Laurie Europe
business reporter, BBC News, Brussels

The EU Commission has proposed reforms to the Common Agricultural Policy (CAP), which eats up 40% of its 106bn euro ($157bn; £76bn) annual budget.

Agriculture Commissioner Mariann Fischer Boel says the changes will make it fit for an enlarged 27-state EU.

The biggest change would be to reduce subsides above 100,000 euros by 10%, above 200,000 euros by 20% and above 300,000 euros by 45%.

The amount of land a farmer has...(complete article here).

It appears that the policy changes suggested will continue to benefit the largest producers and will eliminate the micro-farmers from the program. This is somewhat counter to what I perceive is a trend in modern agriculture. I foresee a bi-modal model in which there are large corporate-type farms that produce commodity crops for fuel and feed and then there are micro-farms that are focused more on fruits and vegetables and other specialty crops. Both need to be encouraged, supported and "influenced" through subsides rather than regulation. It is the "carrot" rather than the "stick."

Environmental Farm Subsidies

The U.S. farm bill contains provisions aimed at protecting the environment.

Paying farmers to protect the environment?

FAO publishes The State of Food and Agriculture 2007

15 November 2007, Rome - Carefully targeted payments to farmers could serve as an approach to protect the environment and to address growing concerns about climate change, biodiversity loss and water supply, FAO said today in its annual publication The State of Food and Agriculture.

The report however cautions that payments for environmental services are not the best solution in all situations, and that significant implementation challenges remain.

“Agriculture employs more people and uses more land and water than any other human activity,” said FAO Director-General Jacques Diouf in...(complete article here).

Crafting subsidies that balance the competing demands on agriculture is difficult. Food security, fuels, and the environment compete with each other for resources. Subsidy structures must balance the needs of each of these segments.

In the article it mentions the carbon sequestration role of agriculture. I wonder how large of a negative impact our push toward cellulosic based bio-fuels will have on this role? If we take corn stover and other plant biomass that would have been plowed back into the soil and instead convert it to fuel that will be burned, how much carbon is that removing from the soil?

Falling Subsidies

Farm subsidies are falling worldwide.

Rich pickings

Nov 7th 2007
From Economist.com

THE rich world generously subsidises its farmers. Between 2004 and 2006, OECD countries spent an average...(article here).

Farm subsidies are necessary for national security and for cheap food policies.

Net Farm Income, Subsidies and the Consumer

The following summaries from the Economic Research Service of the USDA provide a snapshot of estimated 2007 Farm Income at both the macro and the household level.


2007 Net Farm Income Is Forecast To Be $66.6 Billion

In 2007, net farm income is forecast to be $66.6 billion in 2007, up $6 billion from 2006 and $9 billion above its average for the previous 10 years. Market prices for corn, wheat, and soybeans are forecast to remain above 2006 levels. In addition, prices for sorghum and hay are projected to be higher in 2007 as higher prices for corn result in increased demand for these commodities as feed substitutes. The farm income forecast reflects an expected increase in the production of corn and declines in the production of soybeans and sorghum as high corn prices encourage farmers to switch production to corn. The value of livestock production is forecast to be $125.7 billion, up $3.1 billion from 2006. Government payments to farmers are expected to total $12.4 billion in 2007, down from the $16.3 billion paid out in 2006.

Get the full farm sector income forecast.

Farm Operator Households' Income Up in 2007

In 2007, average farm operator household income (farm and off-farm earnings) is projected to be $81,588, up 2.2 percent from the income level forecast for 2006, and 8.1 percent above the 5-year average for 2002-06f. On the farm, increases in crop cash receipts, livestock cash receipts, and other farm income are projected to be partially offset by declines in government payments. When higher farm expenses are factored in, average net cash farm income is projected to be $17,271 in 2007, up 2.1 percent from the 2006 forecast. However, not all this income is realized by the primary operator as household income. Income from any farm may be shared by other households. With adjustment for depreciation and additional earnings to the household from other farms, average operator household income from farm sources is projected at $11,488. Income from farm sources, projected at 3.4 percent above the 2006 forecast, would be 11.7 percent above the prior 5-year average. Average household income from off-farm sources is projected at $70,101, a 2-percent increase above the 2006 forecast and 7.6 percent above the prior 5-year average. Income from off-farm sources is expected to be 85.9 percent of household income in 2007.

Get the forecast for farm household income.

The significant projected increase in Total Farm Income of $6 billion is a reflection of the market impact of ethanol production on corn prices. This approximately 10% increase in income created a 24% decrease in Farm Subsidy payments. That's the positive side. The increased demand and consequent higher prices for corn have resulted in a ripple effect throughout the feed crops market that has impacted livestock operations. Higher feed costs have forced a market adjustment that also results in higher livestock prices. These higher livestock prices enhance revenue projections at the farm level but have eroded feeding margins at the feedlot level. The resulting market dynamics will continue to place upward pressure on food prices at the retail level.

Note that the decrease in Farm Subsidy payments will be offset in the energy sector through price incentives for alternative energy production. Specifically a 51 cent per gallon tax credit for each gallon of ethanol blended with gasoline. With 4.9 billion gallons of ethanol produced in 2006 this translates to a cost to the taxpayer of approximately $2.5 billion to offset the savings in Farm Subsidy payments of $3.9 billion. The net savings to the taxpayer is approximately $1.4 billion. This seems like a good trade off to me on the surface. However, when you factor in the net increase in food prices, the consumer loses. The ERS projects a 3.5-4.5% increase in food prices for 2007. U.S. food expenditures for 2006 were $1,082.5 billion. Using a 4% figure, that translates to a $43.4 billion impact to the consumer. Suddenly it doesn't look like such a good trade off to me.