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 23,2003 - Salt Lake City, Utah
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Acknowledgements
U.S. Department of Energy
– Oak Ridge National Laboratory, BioFeedstock Development Program
• U.S. Department of Agriculture
– Office of Energy Policy and New Uses
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Introduction
• Agricultural Policy Overview
• Role of Bioenergy / Energy Policy
• What if…
• Traditional vs. Dedicated Crop
• Conclusions
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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
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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
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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
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US Six Cereals and FAO
Cereals Price Indices
130
Adoption of
1996 Farm Bill
FAO Cereals
Price Index
110
90
70
US Six Cereal Price Index
50
1980
1985
After 1996
• US prices plummeted
• World prices followed
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1990
1995
2000
US Net Farm Income and
Government Payments
Billion Dollars
60
Net Farm Income
50
40
30
Total Government Payments
20
10
0
1990
1992
1994
1996
1998
Since 1996 US
• Government payments are up over 100%
• Net Farm Income declined anyway
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2000
Net Cash Income for 8
Major Crops
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Result of Low Prices:
High Government Payments
million dollars
25,000
20,000
15,000
10,000
5,000
0
1990
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1992
1994
1996
1998
2000
Deficiency
Direct
LDP & MLG
Emergency
Conservation
Other
Exports and Government
Payments
25
1.6
US Export of 8 Major Crops*
20
1.2
1
15
0.8
10
0.6
US Government Payments
0.4
0.2
1979
5
Simple Correlation: - 0.27
0
1983
1987
1991
1995
1999
After skyrocketing government payments following the
adoption of the 1996 Farm Bill
• US export volume for 8 major crops remained on flat trend
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*Adjusted for grain exported in meat
Billion Dollars
Index: 1979=100
1.4
US Net Export Acreage
for 8 Major Crops
140
Million Acres
120
100
80
103.6
76-85 Average
60
86.8
86-95 Average
40
77.0
96-02 Average
20
27 million fewer acres are currently used for eight major crop exports
than in the 1976-1985 period
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2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
0
Exports Did Not Deliver
Index of US Population, US Demand* for 8 Crops and US
Exports* of 8 Crops 1979=100
1.6
1.4
US Domestic Demand
1.2
US Population
1
0.8
0.6
US Exports
0.4
*Adjusted for grain exported in meat
0.2
1961
•
•
•
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
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
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Acreage Response to
Lower Prices?
120
Index (1996=100)
Eight Crop Acreage
100
80
60
Eight Crop Price
40
1996
1997
1998
1999
Since 1996 US
• Eight major crops maintain acreage
• Eight-crop price drops by 36%
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2000
2001
Acreage Response to
Lower Prices?
120
Index (1996=100)
Four Crop Acreage
100
Four Crop Price Adjusted for
Coupled and Decoupled Payments
80
60
Four Crop Price Adjusted
for Coupled Payments
Four Crop Price
40
1996
1997
1998
1999
2000
Since 1996
• Aggregate US corn, wheat, soybean, and cotton acreage changed little
• While “prices” (take your pick) dropped by 40, 30 or 22%
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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
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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
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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
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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
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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
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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.
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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
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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?
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Dedicated Crops
Scenario $30 / dt : Acres Planted to
Switchgrass, 2000
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Dedicated Crops
Scenario $40 / dt : Acres Planted to
Switchgrass, 2000
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Dedicated Crops
Changes In Crop Prices
4.5
3
4
2.5
c
o
r
n
w
h
e
a
t
2
1.5
`
1
0.5
3.5
3
2.5
2
1.5
1
0.5
0
1996
s
o
y
b
e
a
n
s
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1997
1998
1999
0
2000
1996
1997
1998
1999
2000
1996
1997
1998
1999
2000
0.8
8
7
c
o
t
t
o
n
6
5
4
3
2
1
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1996
1997
Historical Price
1998
1999
2000
Price w $30/dt Switchgrass
0
Price w $40/dt Switchgrass
Dedicated Crop
Comparing Actual vs. What If
Annual Average 1996 -2000
Switchgrass Scenario
$30/dt
$40/dt
Actual
Switchgrass Acreage
mil.
acres
-
9.42
22.23
Market Returns
mil. $
21,547
22,579
25,102
Loan Deficiency
Payments
mil. $
1,888
952
206
Emergency Payments
mil. $
3,903
3,903
3,903
Total Returns
mil. $
27,338
27,434
29,211
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Dedicated Crop
Bottom Line
Annual Average 1996 -2000
Bioenergy Scenario
$30 / dt $ 40 / dt
Government Savings
mil. $
936
1,682
Change in Total Returns
mil. $
(96)
1,873
Potential Switchgrass
Subsidy
$ / dt
56.5
50.6
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Cost of Producing Ethanol
$ x gallon
Corn
Corn
2.44 $/bu
Feedstock
2.86 $/bu
Switchgrass
50 $/dt
Switchgrass
40 $/dt
0.86
1.00
0.64
0.53
Processing
0.49
0.49
1.12
1.12
By-Products
credit
-0.25
-0.25
-0.11
-0.11
Feedstock
“subsidy”
0
0
-0.64
-0.53
Production
Cost
1.10
1.24
1.01
1.01
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-580-28893, Golden, CO: U.S. Department of Energy,
National Renewable Energy Laboratory, 2000.
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Corn or Dedicated Crop?
• Pursued higher ethanol production for the
1996-2000 period.
• Hypothetical Target: by 2000 7.6 billion
gallons.
• Two alternative strategies:
– Based on Corn
– Based on Dedicated Crop ( Switchgrass)
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Corn Price
Actual vs. Simulated
3.1
2.9
2.7
2.5
2.3
2.1
1.9
1.7
1.5
1996
1997
Actual
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1998
Corn Based
1999
Dedicated Crop Based
2000
Soybeans Price
Actual vs. Simulated
8
7.5
7
6.5
6
5.5
5
4.5
4
3.5
1996
1997
Actual
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1998
Corn Based
1999
Dedicated Crop Based
2000
Wheat Price
Actual vs. Simulated
5
4.5
4
3.5
3
2.5
2
1996
1997
Actual
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1998
Corn Based
1999
Dedicated Crop Based
2000
Corn Strategy
Change in Market Returns
1996-2000
(million $)
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0
1 - 24
25 - 49
50 -99
100 - 149
150 - 299
300 and above
Dedicated Crop Strategy
Change in Market Returns
1996-2000
(million $)
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0
1 - 24
25 - 49
50 - 99
100 - 149
150 - 299
300 and above
Dedicated Crop vs. Corn
Change in Market Returns
1996-2000
(million $)
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-170 - -50
-49 - -3
-2 - 2
3 - 49
50 - 99
100 - 199
200 and above
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
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Agricultural Policy Analysis Center
The University of Tennessee
310 Morgan Hall
2621 Morgan Circle
Knoxville, TN 37996-4519
www.agpolicy.org
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