APCA Economic Synergism Between Agricultural and Energy Policies Daniel G. De La Torre Ugarte Agricultural Policy Analysis Center University of Tennessee Presented at the 2003 National Public Policy Education Conference, September 23, Salt Lake City, Utah

APCAAcknowledgements U.S. Department of Energy – Oak Ridge National Laboratory, Bio- Feedstock Development Program U.S. Department of Agriculture –Office of Energy Policy and New Uses

APCAIntroduction Agricultural Policy Overview Role of Bioenergy / Energy Policy What if… Traditional vs. Dedicated Crop Conclusions

APCA Agricultural Policy Background Longstanding publicly supported research and consequent expansion in productive capacity Implementation of policy mechanisms to manage productive capacity and compensate farmers as consumers accrued benefits of productivity gains

APCA Critical Changes in U.S. Policy Since 1985 “policy makers” believed that to allow exports to drive agricultural growth, markets should be allowed to work This finally materialized in the 1996 FAIR Act: –Elimination of supply control instrument: set aside program –Elimination of non-recourse loan as support price mechanism

APCA Where is Agriculture Now? US commodity prices have plummeted Lower US prices triggered low prices in international ag commodity markets Accusations of US dumping Countries in the South unable to neutralize impacts of low prices Failure of progress in WTO negotiations

APCA US Six Cereals and FAO Cereals Price Indices After 1996 US prices plummeted World prices followed US Six Cereal Price Index FAO Cereals Price Index Adoption of 1996 Farm Bill

APCA US Net Farm Income and Government Payments Total Government Payments Net Farm Income Billion Dollars Since 1996 US Government payments are up over 100% Net Farm Income declined anyway

APCA Net Cash Income for 8 Major Crops

APCA Result of Low Prices: High Government Payments

APCA Exports and Government Payments Index: 1979=100 US Export of 8 Major Crops* US Government Payments *Adjusted for grain exported in meat Billion Dollars After skyrocketing government payments following the adoption of the 1996 Farm Bill US export volume for 8 major crops remained on flat trend Simple Correlation:

APCA US Net Export Acreage for 8 Major Crops Million Acres Average Average Average 27 million fewer acres are currently used for eight major crop exports than in the period

APCA Exports Did Not Deliver Index of US Population, US Demand* for 8 Crops and US Exports* of 8 Crops 1979=100 US Population US Exports US Domestic Demand *Adjusted for grain exported in meat Exports down to flat for last two decades Domestic demand increases steadily Since 1979, exports have NOT been the driving force in US crop markets

APCA Acreage Response to Lower Prices? Index (1996=100) Eight Crop Acreage Eight Crop Price Since 1996 US Eight major crops maintain acreage Eight-crop price drops by 36%

APCA Acreage Response to Lower Prices? Index (1996=100) Four Crop Acreage Four Crop Price Adjusted for Coupled and Decoupled Payments Four Crop Price Adjusted for Coupled Payments Four Crop Price Since 1996 Aggregate US corn, wheat, soybean, and cotton acreage changed little While “prices” (take your pick) dropped by 40, 30 or 22%

APCA The Bioenergy Connection Too many acres in crops to generate adequate market incomes Farmers do not like to set aside land; they like to farm Bioenergy Alternative: Transfer some land to a dedicated bioenergy crop

APCA Linking Agriculture with Energy Sector 3 ways: –Crop residues: Increase revenues for a specific crop –Energy use of traditional crops: Increase demand for a specific commodity –Energy dedicated crops: Increase demand for Cropland

APCA Increasing Crop Revenues (crop residues) Pros: –Generates additional income for farmers growing the crop –Already available on the ground Cons: –Environmental concerns and regulations limit availability –Limited agricultural wide impact

APCA Increasing Crop Demand (corn, soybeans) Pros: –Increases farm price and farm income, reduce government expenditures –If corn-ethanol, industry already developed Cons: –Direct competition with traditional uses –May not have a positive agricultural wide impact (by-products) –Limited crop and geographic impact

APCA Increasing Demand for Cropland (switchgrass, poplars, willows) Pros: –Price and income benefits across crops –Alternative use of cropland –Wider geographic impact –Indirect competition with traditional uses Cons: –Industry is not developed / uncertain business environment –Institutional inertia

APCA Developing the Synergism Increase demand for use of traditional crop (corn) and increase demand for cropland (dedicated crop) offer larger possibilities. Use of residues, while generates additional farm income, has a limited sector wide impact.

APCA What If…? Bioenergy dedicated crops would have been a central part of 1996 Farm Bill Counterfactual analysis of 1996 – 2000 period Considered farm gate prices at $30 and $40 per dry ton Selected Switchgrass for geographic coverage

APCA Specific Questions Could a bioenergy crop “buy” acreage away from traditional crops? If so, could agricultural prices and market returns be significantly enhanced? If so, could saved government farm payments be used instead to make the bioenergy crop a cost-effective fuel for utilities?

APCA Dedicated Crops Scenario $30 / dt : Acres Planted to Switchgrass, 2000

APCA Dedicated Crops Scenario $40 / dt : Acres Planted to Switchgrass, 2000

APCA cottoncotton wheatwheat corncorn soybeanssoybeans Historical Price Price w $30/dt Switchgrass Price w $40/dt Switchgrass Dedicated Crops Changes In Crop Prices

APCA Dedicated Crop Comparing Actual vs. What If Annual Average Actual Switchgrass $30/dt Scenario $40/dt Switchgrass Acreage mil. acres Market Returns mil. $ 21,54722,57925,102 Loan Deficiency Payments mil. $ 1, Emergency Payments mil. $ 3,903 Total Returns mil. $ 27,33827,43429,211

APCA Dedicated Crop Bottom Line Annual Average Bioenergy $30 / dt Scenario $ 40 / dt Government Savings mil. $ 9361,682 Change in Total Returns mil. $ (96)1,873 Potential Switchgrass Subsidy $ / dt

APCA Cost of Producing Ethanol $ x gallon Corn 2.44 $/bu Corn 2.86 $/bu 2.86 $/bu Switchgrass 50 $/dt Switchgrass 40 $/dt Feedstock Processing By-Products credit Feedstock “subsidy” Production Cost K. Ibsen, A. McAloon, F. Taylor, R. Wooley, and W. Yee, Determining the Cost of Producing Ethanol from Corn Starch and Lignocellulosic Feedstocks, NREL/TP , Golden, CO: U.S. Department of Energy, National Renewable Energy Laboratory, 2000.

APCA Corn or Dedicated Crop? Pursued higher ethanol production for the period. Hypothetical Target: by billion gallons. Two alternative strategies: –Based on Corn –Based on Dedicated Crop ( Switchgrass)

APCA Corn Price Actual vs. Simulated

APCA Soybeans Price Actual vs. Simulated

APCA Wheat Price Actual vs. Simulated

APCA Corn Strategy Change in Market Returns (million $)

APCA Dedicated Crop Strategy Change in Market Returns (million $)

APCA Dedicated Crop vs. Corn Change in Market Returns (million $)

APCA Concluding Remarks Farmers’ adoption of dedicated crop Agricultural Impacts Consumer Impacts Synergism Research Agenda –Price variability –Environmental impacts –Logistics/institutional arrangements –Limits of agriculture as source of feedstock

APCA