USDA's Energy and Agriculture Theme Paper, Part II (post-State of the Union Address)
Posted by: Phillip Fraas
January 28, 2007

As expected, the President, in his annual State of the Union Address delivered last Tuesday, highlighted energy independence as one of the most important issues his administration would work on this year.

This posting discusses what the President said on energy and agriculture; notes developments since the speech; and reviews the options USDA put on the table in its energy and agriculture theme paper in the context of the State of the Union positions.

THE STATE OF THE UNION ADDRESS:

In his discussion of energy independence, the President set three goals that affect agriculture and the farm bill: (1) Expansion of the use of biodiesel fuel; (2) increased production of ethanol from new sources, and (3) a higher Renewable Fuel Standard. Here's what he said:

• "We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean-diesel vehicles and biodiesel fuels. We must continue investing in new methods of producing ethanol, using everything from wood chips, to grasses, to agricultural wastes."
• "To reach this goal [of cutting imports of oil], we must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017. And that is nearly five times the current target."

What these goals mean for the 2007 farm bill is it should include more research and development funding for biodiesel and cellulosic-based ethanol, and it might include some mechanism to prevent the higher Renewable Fuels Standard from disrupting the markets for corn, by far the most important feedstock for ethanol production today.

FOLLOW-ON DEVELOPMENTS:

The day after the State of the Union Address, USDA announced plans for $1.6 billion in new spending for renewable energy development projects to be included in its farm bill proposal, with a focus on cellulosic energy research and production. Also, USDA said that the President's new Renewable Fuels Standard will contain an automatic "safety valve" to protect against unforeseen increases in the prices of the alternative fuels or their feedstocks. See USDA press release no. 0012-07, January 24, 2007. The safety valve in the new Standard might itself be sufficient to protect corn markets; but it can be anticipated that Congress will take its own steps to ensure that any safety valve meets the needs of traditonal users of corn worried about escalating prices as more corn goes to ethanol production.

That same day, the President also proposed more money for the Energy Department's Advanced Energy Initiative, which does research on ethanol derived from plant residues. He said he would increase 2008 funding for the program to $2.7 billion, roughly 53% more than what was budgeted in 2006. Congress will have to coordinate USDA's request for $1.6 billion in farm bill spending for energy development with this slated increase.

USDA'S THEME PAPER OPTIONS: What the President proposed in the State of the Union and what was announced the next day both are consistent with the options in USDA's theme paper on energy and agriculture. However, the theme paper contains several other ideas that Congress might also consider in drafting the energy title of the new farm bill. Following are the options USDA sketched out in its theme paper:

• Raise the Renewable Fuel Standard.
• Expand support for research on cellulosic ethanol production.
  
• Extend renewable energy tax credits; provide accelerated depreciation on renewable energy equipment and facility development; and provide a depreciation allowance on land dedicated to renewable energy projects. None of these tax proposals are within the jurisdiction of the congressional agriculture committees and would not be included in the farm bill. Also, under the new pay-as-you-go system of legislating the Congress adopted earlier this month, how to pay for these tax breaks is critical. We should see what the President's budget proposal (to come out in early February) allocates for these items, if anything; then wait and see if Congress puts anything in its own budget resolution (scheduled to be approved in April) for them.
• Open up Conservation Reserve Program (CRP) land for biomass harvesting and wind energy. Shouldn't be a major cost item.
  
• Refocus the CCC Bioenergy Program to support use of cellulosic ethanol feedstocks. While funding for the items listed in the State of the Union is almost a given, finding the money for this and some of the other initiatives listed below not in the State of the Union could be difficult. And, money will be the key to whether they end up in the farm bill. Again, one should see what the President's budget and then Congress's budget resolution give the agriculture committees for use in drafting the energy title of the farm bill.
• Provide equity financing for first-generation renewable energy plants that use new technology.
• Fund development, demonstration, and pre-commercial activities that bridge the gap between basic research into new sources of renewable energy and industry-funded applied research and development to get such new sources into production.
• Expand education and outreach for biofuels.
• Provide loan financing for new electric power generation and transmission infrastructure needed to accommodate energy produced from renewable resources, such as wind generators.

At this point, it looks very likely that Congress will spend a lot of time and effort drafting the energy title of the new farm bill, and future postings on this blog will report on developments in that drafting.

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USDA's Energy and Agriculture Theme Paper, Part I (pre-State of the Union Address)
Posted by: Phillip Fraas
January 22, 2007

In August 2006, Agriculture Secretary Mike Johanns released an energy and agriculture theme paper for use in preparing for the 2007 farm bill debate. The text of the energy and agriculture paper can be located at www.usda.gov/documents/Farmbill07energy.pdf.

Today is a particularly good time to discuss this, the fourth of USDA's five farm bill theme papers. Rumors have been flying in recent days that energy independence will be one of the main themes in the President's 2007 State of the Union address scheduled to be delivered tomorrow night before a joint session of Congress. Some expect the President to propose a dramatic new initiative to substantially increase the production of biomass fuels--and biomass fuel is one of the main focuses of USDA's energy theme paper. 

Further, members of Congress have already been talking about including energy provisions in the new farm legislation (the 2002 farm bill was the first to have an energy title). So, if the President does endorse the idea of a major push for biomass-based energy development, the momentum for a major energy title in the new farm bill could be almost unstoppable.

It would be most productive to tell you about the theme paper options for biomass energy that the President discusses in his speech tomorrow, which obviously I can't do today. So, this pre-speech posting, Part I of the energy theme paper posting, consists of excerpts from the theme paper that discuss the situation on the ground today. Part II, which will follow next week, will look to the future and discuss the theme paper's options in light of the President's State of the Union proposals.

So, here are some tidbits from the theme paper that, I hope, provide some context for what the President might talk about tomorrow evening.

--Including hydropower, renewable energy accounted for six percent of U.S. energy consumption in 2004, with energy from biomass contributing almost half of that total. Biomass energy is primarily produced from wood (70 percent) followed by waste (20 percent) and alcohol fuels (10 percent). While wood has provided most of the biomass energy over the years, ethanol has been the fastest growing renewable energy source over the the past 10 years. Page 2 of the theme paper, citation omitted.

--Biodiesel, which is just beginning to establish a market in the United States, is a biofuel substitute from petroleum diesel. Biodiesel is most commonly blended with diesel fuel at levels of 20 percent or lower. The majority of the 91 million gallons of biodiesel produced in 2005 came from soybean oil, although it can also be made from other oilseed crops, animal fats, and grease. Id at 3, citation omitted. 

--About 14 percent of the U.S. corn crop was used for ethanol in 2005/06 and USDA projects 20 percent of U.S. corn production will be converted into ethanol in 2006/07. Id. at 5.   

--Much of the growth in corn ethanol production can be attributed to government incentive programs that began in the 1970s. The Energy Tax Act of 1978 authorized the motor fuel excise tax exemption for ethanol blends, providing ethanol blends of at least 10 percent ethanol by volume a $0.40 per gallon exemption from the Federal motor fuels tax. Since then, several statutes have extended the tax exemption for ethanol. Currently, Federal law suthorizes a tax credit of $0.51 per gallon for ethanol through 2010. Legislation has also been passed to give income tax credits and loan guarantees to small ethanol producers. Id.

--The American Jobs Creation Act of 2004 granted biodiesel blenders a tax credit of $1.00 per gallon of biodiesel made from oil crops and animal fats and a $0.50 per gallon tax credit for biodiesel made from recycled fats and oils. Id. at 6.

--The Energy Policy Act (EPACT) of 2005 included several provisions to help diversify domestic energy production through the development of renewable fuels. EPACT mandates a renewable fuel phase-in called the renewable fuels standard (RFS), requiring U.S. fuel production to include a minimum amount of renewable fuel each year, starting at 4 billion gallons in 2006 and reaching 7.5 billion gallons in 2012. EPACT also created the Cellulosic Biomass Program to encourage the production of cellulosic ethanol and fund research on conversion technology. Under this program, every one gallon of ethanol made from biomass, such as switchgrass, crop residues, and tree crops, counts as 2.5 gallons towards satisfying the RFS. EPACT also extended the biodiesel fuel excise tax credit through 2008 and authorized a $0.10 per gallon income tax credit to small biodiesel producers. Id.

--Agricultural policy has only recently been directed at energy conservation and renewable energy production. USDA's FY 2000 Appropriations Act authorized the establishment of pilot projects for harvesting biomass on lands enrolled in the Conservation Reserve Program (CRP). In 2000, USDA also initiated the Commodity Credit Corporation (CCC) Bioenergy Program to alleviate crop surpluses and stimulate production of biofuels. The Agricultural Risk Protection Act of 2000 included the Biomass Research and Development Act, which directed the USDA and DOE to cooperate and coordinate policies to promote research and development leading to the production of bioproducts. . . The 2002 Farm Bill energy title authorized a range of programs through 2007 to promote bioenergy and bioproduct production and consumption. Key provisions include the Federal Biobased Products Preferred Procurement Act (FB4P), which requires Federal agencies to procure biobased products. Another program, the Biodiesel Fuel Education Program, awards competitive grants to educate government and private entities with vehicle fleets about the benefits of biodiesel fuel use. The Renewable Energy Systems and Energy Efficiency Improvements Program authorizes loans, loan guarantees, and grants to assist eligible farmers, ranchers, and rural small businesses in purchasing renewable energy systems and making energy efficiency improvements. The Value Added Grant Program (VAGP) was amended to make funds available to farm families and rural businesses to help them develop new value-added products, such as ethanol and biodiesel. The 2002 Farm Bill extended the CCC Bioenergy Program through FY 2006, expanded the CRP pilot biomass authority to a nationwide general authority, and authorized placement of wind turbines on land enrolled in CRP. Id. at 6-7.

 That's it for now; stay tuned next week for more about what the farm bill might include in the way of biomass energy programs, based on what the President says tomorrow and the options USDA has already sketched out.

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USDA's Conservation and Environment Theme Paper
Posted by: Phillip Fraas
October 03, 2006

USDA's Conservation and the Environment theme paper is its second in a series of five papers on key issues that likely will be at the forefront when Congress drafts a new Farm Bill next year.

This theme paper serves a valuable purpose simply by explaining the existing patchwork of conservation programs USDA administers. For anyone trying learn about USDA's conservation programs and stymied by the blizzard of acronyms involved and the numerous instances of program overlap, this theme paper's user-friendly description of the programs is a godsend.

Beyond that, the theme paper also offers some interesting suggestions about what might go into the conservation title of the 2007 Farm Bill. For a glimpse at the theme paper, released last June, you can find it posted at the USDA Farm Bill web site: www.usda.gov/farmbill.

Conservation is a serious, well-funded part of USDA's Farm Bill programs   

USDA got into the conservation program business in a big way during the Great Depression, when there was a clear need to address the soil erosion problems generated by years of over-farming fragile soils (think "Dust Bowl").

 In more modern times, conservation's status at USDA was elevated considerably in the 1985 Farm Bill, which instituted the Highly-Erodible Land Conservation Program ("sodbuster") and Wetland Conservation Program ("swampbuster"), both designed discourage crop production on environmentally-sensitive lands, and the Conservation Reserve Program ("CRP"), which has spent billions of dollars since 1985 to take millions of acres of highly-erodible lands out of production. All these programs have been successful, and unquestionably will be continued in the 2007 Farm Bill.

 Then, in the 2002 Farm Bill, the USDA commitment to conservation programs was strengthened even more--primarily by authorizations of substantially increased funding for farm and ranch conservation efforts. To give you a sense of the magnitude of conservation program funding under the 2002 Farm Bill, table 3 in the appendix to the theme paper lists conservation program payments by state in calendar 2005. It shows the total amount of conservation payments for the entire country in that year was $2,832,975,000. And looking at payments to individual farms, of commercial farms with less than $250,000 in annual receipts, 16% received conservation payments in 2004, averaging $6,497 per farm. For larger commercial farms ($250,000 or more in annual receipts), 24% received conservation payments, averaging $6,904 per farm. See pages 10 and 11 of the theme paper.  

The theme paper discusses four conservation alternatives for the new Farm Bill

Alternative 1: Improve existing programs. Since the theme paper notes (on page 23) that stakeholders generally are satisfied with existing conservation programs, look for Congress to extend current programs with as much funding as a tighter budget than in 2002 will allow.

 Alternative 2: Provide "green payments".  This approach would provide farmers with income support through conservation payments rather than the traditional price and production support mechanisms. Along with Alternative 3, this should be considered a bold new approach that more likely Congress will be unwilling to endorse fully in the 2007 Farm BIll. But, one might see a little movement toward both alternatives as a way of Congress dipping its toe in the water.

Alternative 3: Foster private sector markets for environmental services. Many might like this new approach because it uses market forces to generate conservation benefits--by allowing the private sale of environmental credits produced by USDA's conservation programs, and by reshaping the USDA programs to give farmers incentives to market the credit. To the extent farmers are paid by the market for their conservation efforts, less USDA outlays are needed.

 Alternative 4: Toughen conservation compliance requirement. This alternative would be considered the son of sodbuster/swampbuster, and would be considered for the 2007 Farm Bill if, but (in my view) only if, a persuasive case were made that more regulation is needed.

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USDA's Risk Management Theme Paper
Posted by: Phillip Fraas
September 14, 2006

Short commentary on USDA's risk management theme paper.

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