Title: Competing and Succeeding in the 21st Century: New American Markets for Agriculture

Industry sector: Biofuels, Wind

America’s farmers and ranchers face unprecedented challenges and opportunities in the decades
ahead. Globalization, technological change, trade issues,
federal budget constraints, global warming, high energy costs,
land-development pressures, and increasing environmental and
food safety concerns are all likely to have a profound impact
on rural communities and on future prospects for sustaining
a prosperous and vibrant farm economy. At the same time,
new markets are opening to farmers that already are paying
enormous dividends. Investments in biofuels projects and wind
farms, as well as the generation of carbon credits, are providing
farmers and ranchers with new sources of income that are
transforming the rural American economy.
The 21st Century Agriculture Policy Project was motivated by a recognition that
this rapidly changing landscape calls for a more expansive and creative approach
to national farm policy. Sponsored by the Bipartisan Policy Center and chaired
by the two of us, who together have eight decades of experience at the forefront
of federal engagement with agriculture issues, the Project was launched in March
2006. Its aim has been to work directly with farmers, ranchers, and other stakeholders
to forge bipartisan consensus around a new agenda for U.S. farm policy in
the 21st century. It is our intent to put forward a series of recommendations that,
taken together, can be implemented at a net savings to the federal government
compared with the current Farm Bill. Specifically, our recommendations assume
that increased demand for biofuels under an expanded renewable fuel standard
will produce substantial savings in existing agriculture support programs, including
elimination of the direct payment program, less reliance on countercyclical and
loan deficiency payments, and more reliance on the marketplace.
Programs to sustain the nation’s agricultural sector must necessarily evolve to reflect
emerging budget pressures and new economic realities, while also being responsive
to the larger concerns and interests of American taxpayers, consumers, andutility ratepayers. Indeed, as taxpayers, consumers,
and ratepayers themselves, farmers and ranchers are
best served by well-designed policies that achieve equitable
outcomes, do so in a fiscally responsible manner,
and are carefully targeted to achieve maximum societal
benefits at the lowest possible cost. Fortunately,
the input gathered through this project from farmers
and researchers points to promising opportunities for
reforming current policies in ways that are responsive
to broader public-interest objectives without in any
sense diminishing the federal government’s longstanding
commitment to an economically secure agricultural
base. The recommendations advanced here reflect the
view that strategic investments in developing new market
opportunities and in helping agricultural producers
gain a larger stake in high-value-added enterprises can
reduce farmers’ need for current safety net programs
in ways that are less susceptible to political uncertainty
and international trade rules and that are revenueneutral,
in terms of overall federal spending. Four
overarching themes connect these recommendations:
b Securing a robust, economically vibrant future for American
agriculture in the 21st century requires a more expansive and
creative approach to farm policy. A continued federal
commitment to the financial security and stability
of the nation’s farm community is essential at a time
when globalization, technological change, environmental
concerns, high energy costs, international
pressure to cut traditional subsidies, and continued
urbanization all pose new challenges for agriculture.
To help farmers respond effectively while continuing
to undergird U.S. competitiveness, federal policy
must evolve to encompass a broader set of issues and
successfully leverage multiple synergies.
b An emphasis on new markets and on increasing farmers’
equity share in value-added enterprises provides the best
foundation for expanding opportunity in rural communities.
Biofuels, renewable energy like wind power, carbon
sequestration, and habitat preservation for recreation
and hunting are just some examples of agriculturerelated
activities that can significantly augment and
diversify future sources of income for America’s farm
families. Targeted policies are needed to increase
farmers’ stakes in the new wealth generated by these
emerging markets.
b Increasing the role of America’s farms in energy production
can be achieved at a net savings to the federal budget because
increased demand for corn and other crops to serve the rapidly
growing alternative-fuels market will naturally reduce outlays
for traditional “safety net” programs. New economic
research suggests that explosive growth in ethanol
production will lead to higher prices not only for
corn, but also for soybeans and wheat, as acreage
now in these crops is shifted to corn. These market
shifts are expected to dramatically reduce countercyclical
and loan deficiency payments for certain crops,
potentially freeing billions of dollars each year for
farm programs that have broad political support and
that generate promising, and ultimately more selfsustaining,
economic opportunities in the long run.
b Federal action to establish a mandatory program to limit
greenhouse gas emissions is sensible and will provide agricultural
producers with significant new market opportunities.
The agriculture sector is in a unique position to
lead in—and benefit from—efforts to address climate
change. Expanded demand for biofuels is an
obvious example, but ranch and farm lands are also
well-suited for future development of renewable
electricity sources (e.g., wind and solar power) and
carbon sequestration.
Summary of Recommendations
Continue to provide economic stability through
existing countercyclical programs, while investing
in market-based opportunities for agriculture
and addressing new sources of financial insecurity
through a permanent disaster program:
b First, the core of the federal farm program must be
a strong countercyclical program based on the two
countercyclical elements of the current farm bill:
(1) a robust marketing loan program that treats all producers
equally and (2) a partially decoupled countercyclical
program. Individual farm benefits should be capped
at $250,000 per year and eligibility to obtain benefits
through more than one entity should be eliminated.
b Second, Congress should eliminate the direct payment
program and redirect funds for this program—
along with savings generated by reduced
countercyclical and LDP payments for corn, wheat,
and soybeans—to permanent disaster assistance and
promoting new income-generating opportunities
for farmers in markets such as biofuels, renewable
electricity, carbon sequestration, and conservation.
b Third, Congress should establish a Value-Added
Equity Creation Program to provide farmers and
ranchers with no-interest revolving loans so that they
can participate in high-value agriculture-related business
opportunities, such as biofuels plants and wind
projects. Producers should be eligible to participate
if their primary occupation is farming and should be
able to receive up to $100,000 in interest-free loans
for equity investments in qualifying value-added
enterprises (as certified by the U.S. Department of
Agriculture (USDA)).
b Finally, in recent years, Congress has frequently
passed annual emergency spending bills to provide
agricultural producers with disaster assistance. While
these measures have provided important relief to
farmers and ranchers, they have been ad hoc in
nature and off budget. As a result, Congress may
decide to establish a permanent disaster assistance
program, administered by USDA, to provide ranchers
and farmers with assistance for clearly defined
disaster conditions. If so, we recommend that Congress
replace the current system of ad hoc off-budget
emergency supplemental spending bills, make the
permanent disaster assistance program on-budget as
part of the Farm Bill, and include a reasonable benefit
cap of $250,000 per farm or ranch in any single
year. If a reasonable benefits cap is imposed, net federal
outlays for disaster assistance should be reduced
compared with the current off-budget approach.
To promote biomass-based alternative
liquid fuels, Congress should:
b Expand and extend the recently-adopted renewable fuels standard
(RFS) to reach at least 10 billion gallons per year
by 2010, 30 billion gallons per year by 2020, and
60 billion gallons per year by 2030, as proposed in
bipartisan legislation introduced in the U.S. Senate.
This step would lead to expansion of biofuels markets
beyond the E-10 market and spur new investment
in the next generation of advanced biofuels
technologies, such as cellulosic ethanol.
b Promote the use of higher blends of ethanol in the existing
fleet of automobiles by instructing the Environmental
Protection Agency to conduct analysis of the
viability of using higher blends of ethanol (including
E-15, E-20, E-30, and E-40) in the existing fleet of
automobiles by January 1, 2009.
b Extend the existing volumetric ethanol excise tax credit (VEETC)
to 2020 while simultaneously restructuring this program in ways
that account for expected growth in corn ethanol production
under an expanded national RFS. After the current tax
incentive authorization expires in 2010, Congress
should look for ways to ensure that the cost of the
tax credit—in the context of other policies and
expected ethanol production volumes—remains
acceptable, while ensuring that new and innovative
biofuels project are provided the support they need
to be successful. Among the criteria that Congress
should use to design the post-2010 biofuels tax
credits are:
1. Limiting the overall cost of the tax incentives to
the government;
2. Encouraging expansion of the industry by ensuring
that investments in new plants and recentlybuilt
plants can be fully amortized;
3. Rewarding energy-efficient and low-carbon
emitting technologies;
4. Ensuring that pioneering processes, such as those
that convert cellulosic feedstocks like corn stover
and switchgrass to ethanol, are economically
competitive with fossil fuels;
5. Encouraging farmer ownership of ethanol plants;
6. Balancing domestic tax credits with an import
duty of similar size, so that U.S. taxpayers do not
subsidize ethanol imports to the detriment of
American producers.
b Extend the small producer renewable fuels tax credit beyond
2008 for plants that are at least 40 percent locally-owned and
for cellulosic ethanol plants.
b Consolidate all cellulosic biofuels loan guarantee programs into
a single program at USDA and establish an energy security trust
fund to provide consistent funding for that program. Successfully
commercializing the production of ethanol
and other fuels from cellulosic (i.e., woody or
fibrous) plant materials would dramatically expand
the potential contribution of biofuels in terms of
displacing current petroleum use and associated
carbon emissions. Implementing many existing loan
guarantee programs through three separate federal
agencies makes little sense. USDA has considerable
experience in implementing loan guarantee programs
and expertise in evaluating biofuels projects
through its Office of Energy. Therefore, Congress
should consolidate all federal biofuels grant and
loan guarantee programs at USDA and establish a
national energy security trust fund to provide at least
$1 billion per year in loan guarantees and grants to
promote necessary advances in production technology
and bio-science.
b Establish a demonstration cellulosic biofuels feedstock
program. Congress should establish a new set-aside
program to demonstrate how the cultivation
and harvesting of cellulosic feedstocks could be
accomplished in an economically attractive manner.
Following the model of several existing programs,
the 2007 Farm Bill should provide a modest payment
to landowners who convert existing cropland
to grow cellulosic biofuel feedstocks for nearby cellulosic
biofuels plants in ways that improve wildlife
habitat, reduce soil erosion, and protect water quality.
New lands to be set aside under such a program
should be capped at 500,000 acres for the duration
of the 2007 Farm Bill.
b Establish policies to encourage a rapid increase in the number
of flexible fuel vehicles sold in the United States and the installation
of E-85 pumps and blender pumps at gasoline stations.
For example, we recommend extending the existing
tax credit for installing E-85 refueling stations and
redesigning it to provide relatively greater benefits in
the near-term to encourage more rapid deployment
of E-85 infrastructure. We also recommend clarifying
that blender pumps be eligible for the tax credit,
since in the long run it will make more sense to install
blender pumps that are capable of dispensing a
range of ethanol blended fuels. Congress also should
consider more attractive expensing and accelerated
depreciation options to encourage installation of
E-85 and blender pumps in lieu of tax credits.