CHAIR'S REPORT
AGRICULTURE & RURAL DEVELOPMENT COMMITEE

TO:      Members of the Executive Committee

FR:      Senator Noble Ellington, Louisiana, Chair, SLC Agriculture and Rural Development Committee

RE:      Report of Activities of the Agriculture and Rural Development Committee at the 61^st Annual Meeting of the Southern Legislative Conference in Williamsburg, Virginia, July 14-18, 2007

            The SLC Agriculture and Rural Development Committee convened on Sunday, July 15, for a program session and on Monday, July 16, for a business session during the 61^st SLC Annual Meeting.  The following is a summary of the speaker presentations and Committee activities from each of these programs.  An attendance list is attached.

Program Session, July 15, 2007

I.          The 2007 Farm Bill

Will Snell, Ph.D,  Extension Professor, University of Kentucky, Moderator
Congressman Rodney Alexander, Louisiana
Dale Moore, Chief of Staff, U.S. Department of Agriculture, Washington, D.C.

Background
            The reauthorization of the Farm Bill is being undertaken at an unprecedented crossroads for American agriculture.  Difficult fiscal conditions, increased pressure from the global trading community on subsidies, expanded demands from consumers for environmental services, and declining profitability for the majority of farmers make this year’s discussion of federal farm policy critical to the future of American agriculture.

Dr. Snell’s Presentation

            The Farm Bill is the nation’s most comprehensive piece of legislation that covers farm programs, food assistance, agricultural trade, the environment, economic development and other issues that affect U.S. farmers and rural communities, Dr. Snell explained.  The Farm Bill usually covers a five to six year period, with the current Farm Bill set to expire on September 30, 2007. 

            Most of the attention for farmers in the legislation centers on provisions dealing with farm income and commodity price support, but the typical Farm Bill devotes attention to other related areas in order to garner the support of a much broader coalition of support. Furthermore, the economic and budget environment for the 2007 Farm Bill is very much different from what existed in writing the 2002 Farm Bill.  While prices for farm commodities were low when the last Farm Bill was written, they have rebounded in recent years, which, combined with high government payments, has pushed farm income up above the 10 year average.  A further significant positive factor affecting the Farm Bill, is that farm asset-to-debt ratios are at historic lows, reflecting a healthy farm economy. 

            Dr. Snell noted that a major factor affecting the Farm Bill is the budget.  When the 2002 Farm Bill was written, the federal budget was in surplus; today the federal budget is in deficit.  And while the total costs of farm programs have dropped, they remain above the long-term average.  Furthermore, with higher grain prices, the baseline for farm programs calculated by the Congressional Budget Office (the total amount Congress budgets for the Farm Bill), is down 30 percent for commodity programs, with a modest increase for conservation payments and a very large (47 percent) rise in food stamps outlays.  Considering this, the budget committees have agreed to a $20 billion increase in farm funding, but only if offsets can be found, Dr. Snell explained.  Another major pressure on the Farm Bill debate is the ongoing Doha Round negotiations of the World Trade Organization, although it is highly unlikely that there will be an agreement in the Doha Round until after the Farm Bill. 

            Dr. Snell noted that many farmers liked the structure of the 2002 Farm Bill, particularly the planting flexibility, the conservation programs, and the counter-cyclical payments.  The Bush Administration released a plan for the Farm Bill that maintains the same ‘safety net’ structure, with a revenue-based counter cyclical payment; revises marketing loan rates; raises some direct payments; tightens payment limits; increases funding but streamlines conservation programs; and increases funding for bioenergy programs.  There also have been proposals to “buy-out” farm programs and the Food and Agricultural Risk Management for the 21^st Century Act (FARM 21), a proposal put forward by Senator Lugar and Congressmen Kind, Flake, Crowley and Reichert, which would establish risk management accounts and revenue insurance products with savings allocated to conservation, nutrition and rural development. 

            This Farm Bill is being written at a time when issues of who gets farm program payments and how much those payments have been prominent in the press, Dr. Snell said.  This has led to renewed discussions of payment limitations which are seen as a mechanism for addressing the inequities across farms, crops and regions that exist in the current system, for reducing the impact of farm programs on land values, and to free up program funds for other needs, such as conservation, nutrition, energy and rural development.  Large farms, which are the principal target of payment caps, often counter that the current competitive market forces them to increase in size to benefit from economies of scale and they need a safety net to protect them when prices fall and costs of production escalate. 

            In addition to payment limitations, Dr. Snell outlined a number of new ideas that have surfaced in the preparations for the Farm Bill.  These include: establishing a revenue-based safety net program; increasing investment in research, market promotion and other programs for specialty crops; and reforming crop insurance and disaster programs.  Furthermore, the existing conservation, rural development, energy and nutrition titles all are being reviewed for possible reform.

            Dr. Snell noted at the time that the House of Representatives was in the midst of a mark-up on proposed legislation, with Chairman Colin Peterson offering two versions:  one an extension of the 2002 Farm Bill and the other a rewrite of the legislation (NOTE:  the House of Representatives approved revised Farm Bill legislation on July 27).  The Senate has been moving more slowly, he added, having conducted field hearings earlier in 2007, but has not yet released legislation.  The Senate is likely to move toward a reduction in commodity program spending to provide more money for conservation, renewable fuels and rural development, with a

possibly longer (six or seven year) lifespan.  Dr. Snell noted that while Congressional leadership has shifted from the South to the North, the Farm Bill tends to find alignments more along regional and commodity lines.  He observed that while the South no longer holds the chairs of the agriculture committees, no Farm Bill will pass without the support of the South.  He also observed that half of Southern agriculture (when measured by cash receipts) receives no direct support through the Farm Bill.  This having been said, Dr. Snell noted that since 2000, one in every four dollars of net farm income in the SLC states has originated from government farm payments.  With high-cost crops such as cotton and rice still a major component of parts of the agricultural economy in the South, the Farm Bill does indeed “matter” in the South.  With all the changing ideas that are out on the Farm Bill, Dr. Snell concluded by observing that the legislation was evolutionary, not revolutionary. 

Congressman Alexander’s Presentation

            Congressman Alexander opened his remarks by predicting that the 2002 Farm Bill would be extended, at least for one or two years.  The politics of Washington are so complicated currently, he explained, that bringing out a Farm Bill right now is extremely complex.  He reminded the Committee that farm issues are much more complicated than the average citizen realizes, which only adds to the difficulty in pulling together a coalition on the Farm Bill.  United States Secretary of Agriculture, Mike Johanns, does not want an extension of the current Farm Bill because he thinks that would send a signal to our trading partners that we are not willing to compromise. 

            In part, the complexity comes from how the government has used agriculture and agricultural products as tools in our trade relations with other nations.  Without subsidies for farmers, Congressman Alexander continued, the United States may not have farmers.  And while there are some who would argue that we could have this happen and have other countries raise our food, he observed, that this was not, to him, an acceptable option.  Concerns among some groups that U.S. farm programs disadvantage other countries only paint half the picture, he continued. 

            Congressman Alexander noted that House Agriculture Committee Chair Colin Peterson is facing a difficult position trying to get a Farm Bill through Congress.  Last year, when the Democrats were in the minority, Peterson was part of a coalition that sought an extension of the Farm Bill.  This year he is facing challenges from the current minority party who are interested in much the same idea.  This is complicated by the presence of a number of groups outside agriculture who are voicing strong opinions on the bill.  Among these groups, Congressman Alexander observed, a number are calling for the dismantling of farm programs and allowing U.S. farmers to float or sink on the world market.   To do so, he noted, would be unacceptable to most Americans, however. 

            Chairman Peterson’s proposed legislation would provide specialty crop producers some program participation for the first time, although it is complicated by having to be paid for either with offsets of new monies.  The Congress, because it is operating under pay-as-you-go rules, cannot expand any programs beyond an allowable baseline without finding offsets elsewhere.  The current proposal, he noted, pays for this expansion though essentially an accounting trick in which some commodity payments are delayed, but this is unlikely to muster sufficient support to pass.  In conclusion, the Congressman reiterated, the political complications of passing a Farm Bill out of both chambers this year makes the likelihood of an extension fairly good.

Mr. Moore’s Presentation

            Mr. Moore began by echoing part of what Congressman Alexander had indicated, that the process of getting the Farm Bill out of both chambers and through conference committee is very complicated and unpredictable.  He noted that the Farm Bill is much more than just farm programs, as it covers everything from food stamps, school lunch programs, research, and conservation, to name a few, in addition to commodity programs.

           In preparation for the 2007 Farm Bill, The USDA held 52 listening sessions around the country, Mr. Moore said.  From these, the Department confirmed that what people wanted from the Farm Bill was predictability and equity, with many voices seeking a more even distribution of farm payments.  There were also concerns from cotton farmers after the Brazil-WTO case that farm programs would be dismantled piecemeal. 

            In response to what the USDA heard, the Department put together the most comprehensive and detailed plans ever put forward, most of which have been well-received by Congress.  Mr. Moore noted that the USDA’s recommendations for payment limits have not had the positive response that other parts of the proposal have, but he acknowledged that Chairman Peterson was looking for politically palatable options to affect this. 

            Another item that the USDA is working on is disaster relief, Mr. Moore added.  The Southeast is in the midst of a very severe drought, while a little further West, they are suffering from catastrophic rains.  The USDA is very interested in looking at how to help farmers when times get tough.  The current counter-cyclical payments are not effective because prices are high—and often are following times of natural disasters—but many farmers do not have any production to sell.  In response to this, the USDA is interested in investigating a revenue insurance safety net to help farmers when they need assistance. 

            The USDA is working with Congress to find the middle ground and support for a host of programs to help agriculture, Mr. Moore emphasized.  The Department cannot support the Farm Bill in its current form.  Some changes recommended by the USDA have been included in the current legislation, he noted, but the changes to the Commodity Title essentially will dictate how much latitude there will be for new and expanded programs elsewhere, particularly for programs such as energy, new and young farmers, research and specialty crops.  He concluded by noting that the Farm Bill also will be different because of trade and budget pressures.  “There is nothing magic about the Farm Bill,” he said.  “It’s about math.”

Business Session, July 16, 2007

I.          New Developments in Biofuels

Maurice Hladik, Director of Marketing, Iogen Corporation, Ontario
John Ashworth, Team Leader, Biomass Partnership Development, National Renewable Laboratory, Colorado

Background
            Rising fuel prices and global energy demand along with growing concerns over instability in oil-producing regions of the world and the impacts of global climate change, have increased interest in renewable fuels.  The increased activity on biofuels across the country promises new opportunities for rural communities and agricultural producers.  The path to rural prosperity and energy independence through biobased energy is complex, however, and states all benefit from the experience of others.

            Corn-based ethanol has driven the price of corn above $4 a bushel, having a ripple effect on livestock operations.  Furthermore, as the Committee heard a few years ago, corn-based biofuels are difficult for the South to capitalize on fully.  But one thing the region does have, in abundance, is biomass.

Mr. Hladik’s Presentation

            Mr. Hladik has requested that any questions regarding his comments at the SLC Annual Meeting be directed to him through Iogen.  For assistance in contacting him, please contact the SLC Agriculture and Rural Development Committee staff liaison, Jonathan Watts Hull.

Mr. Ashworth’s Presentation

            Mr. Ashworth began by outlining biomass’ strengths as an alternative fuel stock, specifically its abundance and renewability.  Two things have changed recently to improve its status.  The first is that it is as close to carbon-neutral as a fuel source can get (regardless of process).  The second is that in terms of liquid fuels, it is a truly sustainable source of hydrocarbons.  Biomass can fill the gap between energy demand and petroleum availability in the near term and be a renewable source of hydrogen in the long term. 

            Mr. Ashworth added that of the total energy consumed in the United States, only about 6 percent is renewable, but of that amount, almost half is from biomass. Currently, most biomass production is for combined heat and power applications in the forest industry, but the opportunity is in the replacement of petroleum.  He noted further that while there is a mandate for the use of biofuels, the industry is growing so quickly that it will surpass the mandatory target well ahead of time. 

            Traditional biofuels, such as corn ethanol or biodiesel, have significant feedstock issues.  Since the price of the finished biofuel is tied to the price of petroleum fuel, and not the cost of the biofuel feedstock, as the prices for corn or soybeans rise, the costs of these alternative fuels exceed the costs of petroleum.  There also is a still unanswered question of how the industry can ramp up production without affecting food prices.  Thus, he said, if you want to make large amounts of ethanol, you’ll need to do it with something other than corn, which also will mean new infrastructure to move these new feedstocks to market. 

NREL’s research and development is focused on these new unit operations, particularly reducing costs and improving yields, which are the keys to success.

            In the early 1990s, it was widely recognized that this enzymatic hydolysis process would not be an option for breaking down cellulose into glucose without major cost reductions in the enzymes that are used to split the sugars off from the cellulose. The alternative technology, chemical hydolysis, is not able to achieve the yield of ethanol produced from a given amount of biomass, he explained.  In 2000, the U.S. Department of Energy solicited proposals for reducing the costs of enzymes, the result being a ten-fold reduction in costs of enzymes.  Improvements in the pretreatment processes for biomass have been realized over this time period as well, which also has helped to bring costs down for biomass ethanol as well as increased the yield of fuel from each ton.  

            Mr. Ashworth added that the near-term goal is to reduce the cost of cellulosic ethanol down to $1.07/gallon by 2012, where it is expected to be competitive with ethanol produced from corn. Longer term, he added, fundamental scientific advances in systems biology could conceivably reduce the cost of cellulosic ethanol down to $0.60/gallon and might be achieved by 2020 if sufficient research and development resources are allocated to this longer term objective.

            But, Mr. Ashworth observed, ethanol is just the first of many possible biofuels. Two very near term options are green diesel (in which fats and oils are processed in a traditional refinery) and fermentation products other than ethanol.  There also are numerous mid- and long-term options.  Some of these have potentials for very high yields but also are technologically complex and require considerable management.

            Just a few weeks ago, the Department of Energy announced the selection of six competitive awards for cost sharing within industry to build the first six commercial demonstration plants for making cellulosic ethanol, Mr. Ashworth said, including two in the South.  The total investment in these projects will exceed $1.2 billion, with $385 million coming from DOE.  When operating, these six plants will produce over 130 million gallons of ethanol from non-edible biomass resources.  This is part of a greater investment by the federal government to help bring down the costs of biomass fuel production, he concluded, including helping to reduce the costs of the microorganisms involved, conducting basic science, and providing cost-share funding for up to 10 plants to work out the kinks in biomass production.

II.        Election of Officers

            Representative Tom McKee, Kentucky, gave the report of the Nominating Committee.  Senator Noble Ellingon, Louisiana, was nominated for chair of the Committee, and Delegate Bobby Orrock, Virginia, was nominated for vice chair of the Committee.  The nominations were moved and seconded, and Senator Ellingon and Delegate Orrock were elected by acclamation.

Technical Tour, July 17, 2007
Virginia Biodiesel, LLC

Interested Committee members visited the Virginia Biodiesel LLC processing facility in West Point, Virginia.  In operation since 2003, Virginia Biodiesel produces 8 million gallons of biodiesel a year.  The tour included an overview of the process by which biodiesel is produced at the plant, principally from soybean oil, as well as a discussion of some of the challenges facing the industry as it expands and develops, including rising costs for soybean oil and marketing issues.

Southern Legislative Conference Fall Conference
San Antonio Texas, October 26-29, 2007

            The SLC will meet for its 2007 Fall Conference October 26-29 at the Westin Riverwalk, San Antonio, Texas, for discussions on how states are focusing their policies to encourage the development of existing businesses and foster the growth of new industries.  Members will share their experiences and hear from leading experts on how communities and regions succeed or fail, and learn about innovative ways to achieve collaborative success for economic development.  In keeping with the wishes of the SLC presiding officers, please note that meeting notification does not authorize travel.

SLC Staff Contact:   If you have any questions regarding this report or the 2007 SLC Fall Conference, please contact Jonathan R. Watts Hull in our Atlanta office at 404/633-1866 or jhull@csg.org.