The Agricultural-Industrial Complex

It is a good time to be a farmer. Farm product prices rose 18% from 2006 to 2007. From the first quarter of 2007 to the first quarter of 2008, farm product prices went up 15% with crop prices jumping 20%.

Joseph Glauber, Chief Economist with the U.S. Department of Agriculture, testified before Congress last week on rising food prices. He recited a litany of factors influencing world food prices, including a string of poor wheat harvests in Australia, Canada and parts of the U.S., and growing demand for high quality food from rapidly-developing economies like China and India.

The price of wheat soared 56% to record levels in 2007 after rising 25% in 2006. The price of U.S. long grain rice was up 11% last year after a 24% price rise in 2006. More startling, prices skyrocketed 37% in the first quarter of this year. The world price of rice rose even faster—46% in the first quarter.

What is good for producers is typically bad for consumers, of course. While food price increases are troubling for U.S. consumers, they have been brutal for poor countries that import most of their food. The UN’s Food and Agriculture Organization estimates that the cost of food for importing countries rose by 25% during 2007. And for countries dependent on rice imports, the situation is grim.

Yet the United States continues to divert grain to the production of biofuels, principally ethanol. The Renewable Fuels Association reports that an additional five BILLION gallons of annual capacity is under construction, adding 60% to the 8.5 billion gallons per year already in production (see http://www.ethanolrfa.org/industry/locations/). New York State has one plant operating—a 50 million gallons per year (mgy) plant in Shelby, halfway between Rochester and Buffalo—and one planned—a 114 mgy plant in Volney, about 30 miles northwest of Syracuse. As is true of the existing capacity, nearly all of the new plants use corn as a feedstock. Already about one-quarter of the U.S. corn crop, 3.1 billion bushels, has been diverted from food to fuel (USDA).

In his testimony before Congress, USDA’s Joe Glauber downplayed the role of biofuels in the global run-up of food prices, arguing that the impact was principally on corn and soybeans with only a modest impact on wheat and rice prices. The Wall Street Journal reported that our own Senator Schumer challenged this assertion. Glauber’s prepared statement (available at http://www.usda.gov/oce/newsroom/congressional_testimony/FoodPriceTestimony.pdf) and his testimony focused attention principally on other factors.

But is the biofuel impact so small? From 2000 to 2007, acreage planted to corn increased by 14 million acres—an 18% expansion. Some of this expansion apparently came from uncultivated land but a portion surely came at the expense of wheat, sorghum, barley and oats. Acreage planted to these crops declined by six million acres over the period. Wheat excepted, as these are smaller crops the impact on total acreage was relatively large—a 31% decline for barley, 16% for oats and sorghum. Wheat acreage fell 3% over the period.

It strains credulity to conclude that shifting land from growing food to “growing” fuel has had little impact on the general level of food prices. While the trend has accelerated since 2006, prices have been moving steadily upward for the entire decade. Since 2000, barley prices nearly doubled. This was the smallest price rise of group—wheat prices in 2000 were 154% of the 2007 price. Assuming the same rate of corn utilization, the new plants will demand an additional 1.9 billion bushels of corn—at what cost in higher prices for other grains, livestock, dairy products and poultry?

That this is good for American agriculture is undeniable—biofuels may be the best thing to hit farming since the Morrill Act of 1862 created the land grant college system. Biofuels have contributed significantly to the incomes of farmers, powerful agribusiness firms such as giant Archer Daniels Midland (you know—“ADM, supermarket to the world”), and to a new class of biofuel investors, eager to earn profits from the nation’s enthusiastic embrace of biofuel production.

President Eisenhower warned us of the “military-industrial complex” in his farewell speech to the nation in 1961. Frankly, the “agricultural-industrial complex” predates it. And just as the Defense Department is a charter member of the military-industrial complex, USDA serves as combined cheerleader, financier and regulator of the ag industry. USDA’s reflex, reinforced by the power of members of Congress from farm states, is to side with farmers and agribusiness.

Nor should we forget the debatable net energy contribution of corn ethanol. Some authoritative voices (although not all) estimate that it takes more energy in the form of fossil fuel to “grow” ethanol from corn than we derive from ethanol when we burn it in our cars. Furthermore, the corn ethanol industry is built on subsidies from taxpayers like you and me. Blenders receive 51¢ for every gallon of ethanol they combine with gasoline. The subsidy totaled $2.5 billion in 2006.

Here are the facts: The net energy contribution of corn ethanol is debatable, the environmental consequences of devoting more land to corn are clearly negative, ethanol subsidies are draining the federal treasury during a period of fiscal distress AND we’re adding to the burdens of the world’s poor. Why do we persist? We need only look at agricultural-industrial complex to find the answer—agribusiness (which now includes biofuels investors in our own state), farmers (large and small), farm state voters and their representatives in Congress, and USDA are driving this policy. Consumers, both here and abroad, and taxpayers outside the farm belt are simply outgunned.

On a personal note, Joe Glauber, appointed Chief Economist at USDA in February, is an old classmate of mine. We both received our PhDs from the University of Wisconsin-Madison’s Department of Agricultural Economics (now “Ag & Applied Econ”) in 1984.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal May 9, 2008

Senator Jim Alesi pointed out that the NYS Legislature passed a biofuel production credit in 2006 that awards producers a subsidy of $.15/gallon. The text of the law follows.

Section 29 of the tax law of New York State, section 1 of part X of chapter 62 of the laws of 2006

(a) General. A taxpayer subject to tax under article nine, nine-A or twenty-two of this chapter shall be allowed a credit against such tax pursuant to the provisions referenced in subdivision (d) of this section. The credit (or pro rata share of earned credit in the case of a partnership) for each gallon of biofuel produced at a biofuel plant on or after January first, two thousand six shall equal fifteen cents per gallon, or forty cents gallon for the production of cellulosic ethanol, after the production of the first forty thousand gallons per year presented to market. The credit under this section shall be capped at two and one-half million dollars per taxpayer per taxable year for up to no more than four consecutive taxable years per biofuel plant.

(b) Definitions. For the purpose of this section, the following terms shall have the following meanings:

(1) “Biofuel” means a fuel which includes biodiesel and ethanol. The term “biodiesel” shall mean a fuel comprised exclusively of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats, designated B100, which meets the specifications of American Society of Testing and Materials designation D 6751-02. The term “ethanol” shall mean ethyl alcohol manufactured in the United States and its territories and sold (i) for fuel use and which has been rendered unfit for beverage use in a manner and which is produced at a facility approved by the federal bureau of alcohol, tobacco and firearms for the production of ethanol for fuel, or (ii) as denatured ethanol used by blenders and refiners which has been rendered unfit for beverage use. The term “biofuel” may also include any other standard approved by the New York state energy and research development authority.

(2) “Biofuel plant” means a commercial facility located in New York state at which one or more biofuels are produced. for the purposes of this section, any commercial facility where cellulosic ethanol is produced shall be considered a separate biofuel plant.

(3) “cellulosic ethanol” means the production of ethanol from lignocellulosic biomass feedstocks not used for food production that are altered through activities referenced in subparagraph five of paragraph (b) of subdivision one of section thirty-one hundred two-e of the public authorities law. such lignocellulosic biomass feedstocks may include, but are not necessarily limited to, switchgrasses or willows, agricultural and forestry residues, clean wood and wood wastes, pulp and paper mill wastes or extracts, and non-recyclable paper. any question as to whether any feedstock qualifies under this paragraph shall be determined by the president of the new york state energy and research development authority in consultation with the commissioners of environmental conservation and agriculture and markets. (c) reporting requirements. a taxpayer wishing to claim a credit under this section shall annually certify to the commissioner (i) that biofuel produced at the eligible biofuel plant meets all existing standards for biofuel and (ii) the amount of biofuel produced at the eligible biofuel plant during a taxable year.