Joe Barrett, writing in today’s Wall Street Journal, reported that, “Everywhere farmers grow corn, water is becoming a major concern as ethanol plants ramp up production at a startling rate and the threat of drought is ever-present. Rushing to help meet President Bush’s call to cut gasoline use by 20% over the next 10 years, the ethanol industry has projects under way that would nearly double capacity from the current 6.8 billion gallons of ethanol a year.

“A 50-million gallon ethanol plant might use about 150 million gallons of water to make fuel. That’s more water than some small towns use, raising some local battles over placement of the plants. But farmers in Mr. Clements’s district alone pumped 62.6 billion gallons of water from underground in 2005. That’s why many water experts are more concerned about farmers growing more thirsty corn to meet the extra demand from ethanol than they are about the water used by the distilleries themselves."

The Journal added that, “Nowhere is the mix of water and ethanol more volatile than in Nebraska. It is the nation’s No. 3 corn producer after Iowa and Illinois — even though the state is in the so-called rain shadow of the Rocky Mountains, depriving the state of moisture from the Pacific Ocean. Large-scale agriculture is possible here chiefly because farmers have learned to tap the Ogallala Aquifer — an enormous complex of underground water formations, some dating to the last ice age — that stretches beneath parts of eight states. In some areas, overpumping has lowered the level of the Ogallala, something the state has vowed to stop."

Concluding, the Journal stated that, “One recent morning, a team developing an ethanol plant outside Alma dropped by Mr. Clements’s [Mike Clements, head of the Lower Republican Natural Resources District] brightly lit office in a converted lumberyard. They discussed various options for securing water for the plant. But a bigger issue loomed.

“‘I guess my question is, will the farmers get enough water?’ asked Justin Kent, president of Olympus Energy Group, developer of the planned 55-million-gallon plant. ‘I know we’ll get enough water for our one plant, but if farmers don’t get enough water that’s a big problem.’

“‘That’s the million-dollar question,’ Mr. Clements said."

Meanwhile, Philip Brasher reported in yesterday’s Des Moines Register that, “Congress returns to work this week with unfinished business important to some growing sectors of Iowa’s economy - fuel ethanol and wind energy."

Mr. Brasher noted that, “The House and Senate each passed energy bills this summer but with sharply differing provisions. A House-Senate conference committee will have to work out differences between the two bills and write a final version.

“The Senate-passed bill would require the nation to use 15 billion gallons of ethanol a year by 2015 - double the current mandate - and 36 billion gallons by 2022.

“‘That’s going to propel growth,’ said Monte Shaw, executive director of the Iowa Renewable Fuels Association.

“The provision is intended to guarantee a growing market for corn ethanol as well to encourage commercialization of second-generation biofuels, made from crop residue and other sources of plant cellulose. The House-passed legislation omits the biofuel mandate but does contain a special 50-cent-per-gallon tax credit targeted to cellulosic ethanol.

“For farmers, the ethanol mandate would ensure that prices for corn and other commodities stay relatively high, said Bruce Babcock, director of Iowa State University’s Center for Agricultural and Rural Development.

“‘It’s hugely important,’ he said."

And Steven Mufson reported in today’s Washington Post that, “Congress looks set to tackle energy legislation — again.

“Galvanized by a combination of $70-a-barrel crude oil prices, $3-a-gallon gasoline, war in the oil-rich Middle East and growing anxiety about climate change, House and Senate leaders have pushed through separate energy bills."

The Post article indicated that, “Energy legislation remains a priority for Senate Majority Leader Harry M. Reid (D-Nev.), who is fighting to stop the construction of new coal plants in his home state, and for House Speaker Nancy Pelosi (D-Calif.), who has vowed to pass legislation that would help the environment and promote what she has called ‘energy independence.’

“‘It’s one of her priorities,’ said Drew Hamill, a Pelosi spokesman.

“But some lobbyists wonder whether energy will get drowned out by debates on Iraq and appropriations.

“‘I think it’s a priority for the Democrats and for the president. They all talk about energy,’ said Bob Dinneen, president of the Renewable Fuels Association, which represents the ethanol industry. ‘But this is a political town and a political season, and who knows?’"

And with respect to bio-diesel production, University of Illinois Agricultural Economist Darrel Good noted in a report yesterday that, “Much of the strength in soybean prices since the fall of 2006 has been provided by soybean oil prices, even though U.S. soybean oil stocks have been record large. The strength in soybean oil prices has been associated with rising world bio-diesel production.

“The cash price of soybeans in central Illinois averaged $7.82 during August 2007. That price is 42 percent higher than the average during September 2006 when a record U.S. crop was being harvested. The average price of soybean oil and soybean meal at central Illinois processing plants increased by 48 percent and 28 percent, respectively, over that same period. The higher soybean oil prices came in the face of record large soybean oil inventories being held at U.S. processing plants."

In addition, yesterday’s report stated that, “The use of soybean oil to support bio-diesel production will remain sensitive to the price of soybean oil and the price of diesel fuel, but further increases are expected. Use was very large during July 2007 when the average soybean oil price was nearly 10 cents higher than the average in July 2006 and only slightly below the record average monthly price in May 1983. As the production of distillers grain increases and as South America expands soybean production, soybean oil demand will become increasingly important in determining the magnitude of the domestic soybean crush. Currently, the crush is still being determined by the demand for soybean meal. If the size of the crush in the future is determined by soybean oil demand, meal could be in surplus. Since soybean meal is not easily stored, the surplus would have to be consumed, potentially driving soybean meal prices lower.

“The rate of growth in U.S. bio-diesel production, and the related consumption of soybean oil, will be heavily dependent on U.S. energy policy. Even though bio-diesel production continues to grow, profit margins are narrow and production would not be profitable at all without the current large subsidies."

As the demand for biofuels continues to impact the market price of some key program crops such as corn, soybeans and wheat, other related issues have been the focus of recent news items.

Reuters writer Missy Ryan reported this morning that, “Food donations to the world’s hungry have fallen to their lowest level since 1973 as surging grain and shipping prices outpace the aid budgets of rich nations.

“The United Nations has cut food rations in places like Uganda and Cambodia, and the situation has raised alarm among aid groups, who worry aid will come up short for the world’s 850 million hungry people.

“The United States, the largest donor of food aid, which spends about $2 billion a year on donations to Ethiopia, Sudan, Afghanistan and other vulnerable nations, is watching as soaring costs eat into aid budgets.

“In 2004, the United States paid an average of $363 to buy a tonne of food aid and ship it to the developing world, officials say. This year, delivering that same tonne of aid abroad will cost an estimated $611, an increase of 68 percent."

The article stated that, “Part of the story behind that jump is growing demand for corn-based ethanol, an alternative to gasoline, which helped push spot maize prices to a 10-year high earlier this year."

Also, Ronald Steenblik, writing in the August edition of Bridges (page nine), stated that, “Despite the inability of most countries to drop tariffs on imported ethanol, biofuels have been heralded as the keys to unlock the negotiations on agriculture in the Doha Round of multilateral trade negotiations. Last September, at the WTO’s Public Forum, Ted Turner, US media mogul and benefactor of the UN Foundation, hailed biofuels as ushering in a brave new world in which low commodity prices would be a thing of the past. He recommended that ‘Developed countries should agree to phase out tariffs and reduce their subsidies for food and fibre crops and replace them with support for biofuels.’ (author’s emphasis)

“US Ambassador to the EU, C. Boyden Gray, has expressed similar sentiments. ‘I am very confident that we are going to get a [Doha Round] deal,’ he told reporters in January. ‘This whole alternative energy revolution is taking hold. This will take the whole issue of agriculture off the table as a sticking point’ between the US and the EU, Gray said.

“The theory that, thanks to biofuels, the end of agricultural subsidies is nigh is appealing but untested. In private discussions with government officials, I have yet to find any who would admit that they have in fact changed their negotiating positions on agriculture in light of the current high prices for crops. Generally, either they regard the rise in commodity prices as temporary, or they know that commodities in their own countries will always be more costly to produce than imports.

“Admittedly, that does not constitute a scientific survey. But it does suggest that a gap may exist between the wishful thinking of biofuel enthusiasts and the hard realities of trade negotiations.

“Perhaps countries which rely more on subsidies than on tariffs to support their arable farmers may be under less pressure to hold the line on cuts in commodity payments. But taxpayers should not break out the champagne just yet. Witness the version of the Farm Bill passed in July by the U.S. House of Representatives: despite hopes that high commodity prices would enable reforms, lawmakers voted overwhelmingly to preserve the status quo."

II. Doha

With respect to Doha, the Associated Press reported yesterday that, “At first glance, things are looking good again for the World Trade Organization.

“Delegates, back from a monthlong summer break, say they are ready to intensify their work toward a new global commerce deal. Pacific Rim countries such as China and the United States want talks to enter the ‘final stage.’ And the WTO’s chief farm negotiator has declared himself pleased that the organization’s 151 member states are prepared to ‘roll their sleeves up and get to work.’"

The AP article stated that, “The latest push, three weeks of ‘intensive’ agriculture talks aimed at bridging differences between rich and poor nations over proposed subsidy and tariff cuts, got off to a mixed start this week.

“Falconer [Crawford Falconer, the New Zealand ambassador who chairs the WTO’s agriculture talks] said he was pleased that diplomats refrained from repeating their entrenched positions for the umpteenth time — a sentiment shared by many others. But a Tuesday meeting of the entire body was canceled at Brazil’s request and diplomats doubted the first week would contain any serious negotiations. ‘Stocktaking’ was a word some delegates used."

In conclusion, the AP item noted that, “Still, trade officials said they are optimistic that chief U.S. trade negotiator Susan Schwab will deliver a one-shot ‘silver bullet’ offer on cutting American farm subsidies before Bush’s term ends in 2009.

“Schwab, in an interview Monday with The Associated Press, called on rich and poor countries to seriously consider the new WTO proposals, which the U.S. has embraced as a basis for work while insisting that they fail to create enough market opportunities for American manufacturers and are too easy on major developing countries.

“But she refused to say if the U.S. would even consider Falconer’s proposed range of US$13 billion (€9.6 billion) to US$16.4 billion (€12.1 billion) for annual U.S. farm subsidy limits. Washington spent only US$11 billion on trade-distorting subsidies last year, but the Bush administration wants flexibility in the event that greater assistance to farmers is needed because of a decline in world agricultural prices.

“‘Given the American electoral cycle we are running out of time and we are therefore looking failure in the face,’ Mandelson [EU Trade Commissioner Peter Mandelson] said. ‘I think that the United States has to pitch its offer within that range for it to be sellable to the other negotiators in this round. I think they can do that economically. I think they can get away with it politically. But if they don’t, I think I can only see the stalemate continuing and the talks facing collapse.’"

And Reuters writer Missy Ryan reported yesterday that, “U.S. farm groups bristled this week at calls for deeper cuts to American agriculture subsidies, just as trade negotiators urged the United States to do more to break a stubborn stalemate in world trade talks.

“Dave Salmonsen, who follows trade at the American Farm Bureau Federation, the largest U.S. agriculture group, said trading partners were wrong to place the onus on the United States for moving the World Trade Organization’s Doha round closer to a long-elusive agreement.

“‘It’s up to everyone else to come up with some market access to make this happen,’ he said."

Ms. Ryan added that, “On Tuesday, European Union trade chief Peter Mandelson said the United States ‘holds the key’ to breaking an impasse in the round, which has made only fitful progress since its 2001 launch. Australia said the United States would send a powerful signal if it took steps toward reducing farm subsidies."

In addition, the article stated that, “‘It’s unfair to expect that the United States would just unilaterally offer to reduce subsidies’ without reciprocal reductions in tariffs, said David Coia, a spokesman for the USA Rice Federation, one of the many industry groups saying their support for the round hinges on, in Coia’s words, ‘market access, market access, market access.’

“The United States already has offered to cut its overall subsidy cap by 53 percent to $22.5 billion a year. Support for even deeper cuts have been reported, but U.S. officials have dismissed a recent proposal to go as low as $13 billion.

“In general, U.S. farm groups appear wary at this stage."

III. Farm Bill

A Reuters news article from yesterday (via DTN, link requires subscription), reported that, “Congress will have to enact ‘some kind of extension’ of the soon-to-expire 2002 farm law because its successor will not be ready in time, the Republican leader of the U.S. Senate said on Tuesday.

“Minority Leader Mitch McConnell of Kentucky is the first congressional leader to support a stopgap renewal of the 2002 law. Most officials have said there will be no problems if there is a short interval between the Sept. 30 expiration of current law and enactment of the new farm bill.

“This would not be the first time Congress has failed to enact a new farm bill by the time a previous law expired. Both the 2002 and 1996 farm laws were passed a year later than planned."

The article indicated that, “‘The farm bill actually expires at the end of this month, so we’ll have to do some kind of extension,’ McConnell said during a news conference in which he listed a heavy load of work for Congress to complete this year. Leaders plan to end this year’s session in mid-November.

“Senate Agriculture Committee Chairman Tom Harkin does not believe an extension is necessary, said a spokeswoman for the Iowa Democrat.

“Saxby Chambliss of Georgia, the senior Republican on the committee, is working for approval of a new farm bill before the 2002 law expires, an aide said. If time runs out, she said, lawmakers may consider a stopgap bill."

Keith Good