Budgets, Biofuels and farm bill in play

By Mark Edelman and Barry Flinchbaugh

© Copyright Agri-Pulse Communications, Inc.

ME. Well Professor, it almost seems like ancient history, but the sequestration seemed to come and go without much impact.  I thought we were going to see meat shortages because the Meat Inspectors were going to be furloughed. What do you make of that?

BF.  Congress acted at the last minute to solve that problem and keep it out of headlines. In a world with instantaneous media and economic simulations, we have come to expect our economic impacts to be instantaneous.  Not so.  Most policy changes take about 6 months before the economic impacts are more fully realized and measured 

ME.  Maybe the impacts will be seen at the end of the fiscal year if funds run short?  The uncertainty over the policy direction had previously placed a cloud over the investment community in recent years. In contrast, Wall Street has now reached new record highs and some of the hedge fund managers are back to making big commissions.  Is this anything to do with the President's Budget announcements?

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BF.  No relationship. The President did propose a budget and made some news. The Administration's Budget is typically dead on arrival in Congress.  However White House media suggested the President was proposing $2 in spending reductions for every dollar of revenue enhancements.  The $1.8 trillion in deficit reduction over ten years proposed by the White House was estimated by the Office of Management and Budget to bring the deficit reduction total to $4.8 trillion over ten years when combined with the cuts and revenue increases already made since last year.  The impacts were enough to generate some protests from the left in the President's own party over the reduced increases for Social Security and Medicare - an area the Simpson-Bowles Deficit Reduction Commission suggested needed some attention.

ME. Secretary Vilsack defended USDA budget proposals as the Administration's attempt under fiscally austere circumstances to maintain a strong safety net, aggressive trade promotion, and increased research, while targeting conservation programs to higher priorities. Most of the proposed cuts for farmers would come from eliminating the direct payments to farmers, which most groups expected.  A couple of surprises were involved trimming subsidies for crop insurance and reconfiguration in foreign food aid. The largest dollar amount of cuts came in the food and nutrition programs by reducing the number of people on food assistance.

BF.  Actually, the President's Budget proposals for USDA may be somewhat in line with what the Ag Committees will likely do in the Farm Bill and Ag Appropriations.  Yes, we may even get some action on a new Farm Bill this year. The Farm Bureau came out with their 3-legged stool proposal to allow producers to select some of their own options with crop insurance and marketing loans, a STAX program based on county revenues and yields, and a target price option.  Congressional Ag Committee leaders are organizing for hearings to consider 2013 versions during the coming months.

ME. A new issue boiled over last week when Congressman Goodlatte's two proposals to eliminate the conventional biofuels mandate and to modify the Renewable Fuels Standard (RFS). I was at the BBI International Biomass Conference in Minneapolis last week and all of the biomass interests including cellulosic ethanol, algae producers, anaerobic digestion, wood pellets, biomass crops, power and thermal energy, and advanced biofuel interests were worried about their portion of the RFS becoming collateral damage in the battles between “Big Oil” and “First Generation Biofuels.”  I was amazed at the numbers of algae, wood pellet, and biomass producers for energy mapped out around the country.

BF.  It appears we are going to have an RFS debate in the House.  However the Senate and the President have too much politically invested to do away with the RFS.  I note that colleagues from the University of Illinois have suggested a freeze on the RFS.  But I think there will be a lot of scenarios evaluated before the debate is concluded.

ME.  A freeze would stifle R&D innovations in the advanced biofuel sectors just as they are coming into commercialization and finally ready ramp up. Those investors have been counting on the RFS mandate for 36bgy by 2022 remaining in effect. To make matters worse, the new found domestic availability of natural gas at low prices is creating competitive pressures for these emerging “clean energy” sectors-a point brought up several times at the Biomass Conference.  One participant suggested that if natural gas stays below $4 for the long term, wood chips and other biomass won't be able to compete.  However, an agricultural chemical representative claimed cheap natural gas was the major reason his company and industry was profitable this past year.

BF.  Sounds like some investors in next generation biofuels may experience heartburn over their changing bottom line expectations--that is precisely why stable long term policy is needed to foster renewable energy. The areas most likely to be economically sustainable will be where the niche markets provide a competitive seam due to some location factors or strategic alliance-like energy costs in locales beyond the pipeline terminal coupled with regions that naturally produce wood for paper and other industries.

ME. It appears that all three livestock sectors--beef, pork and chicken, food manufacturers and food retailers have joined with “Big Oil” interests to suggest that “renewable fuels should compete fairly in the open marketplace.” Well freezing or doing away with the RFS does not create markets with free and open market competition for renewable fuels.  Perhaps they should ponder why CBOT ethanol is $2.40 per gallon and national retail gasoline is $3.52.  To accomplish the open market goal requires an open fuel standard for vehicles and blender pumps at gas stations so consumers have real open market fuel choices.  Also the differential oil company tax incentives would need to be eliminated. 

BF. Well you may be right, but I would consider that scenario to be a long shot.


Edelman is a Professor of Economics at Iowa State University and Flinchbaugh is an Emeritus Professor of Agricultural Economics at Kansas State University.


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