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Politics, biofuels create uncertainties

Kendall Keith, president of the National Feed and Grain Dealers Association says politics and biofuels are impacting the present and future of U.S. grain growers more so than at any time in history.

Speaking at the recent Southeastern Feed and Grain Dealers Association, Keith says the agricultural industry, from top to bottom, is clearly in a different environment. In particular, he says, the U.S. House of Representatives is poised to generate bold new moves in all sectors, not just agriculture.

The U.S. Senate, Keith says, is a more stable environment for agriculture. Energy is a bi-partisan issue, but the opportunities for agriculture to come out ahead are better placed in the Senate, he contends.

The big question for agriculture is: will the democrats continue to expend their energy to campaign up until the presidential election in 2008? Or, will they stop their drive to reclaim the presidency long enough to pass some meaningful legislation in the next two years?

A key piece of legislation will be the 2007 farm bill. The best bet among those floating around is that there will be new legislation that looks a lot like the old farm bill. The worst bet is that there will be an extension of the 2002 farm bill, according to Keith.

The political environment between 2002 and 2007 is dramatically different, according to Keith. For one thing there is a budget deficit now, compared to a budget surplus in 2002. There are now more places at the table, but the pie can get no larger, because of budget restraints, so something has to give. How the pie is split up will constitute most of the changes in the 2007 farm bill.

Among the challenges to the 2007 farm bill, Keith says there are several primary factors that will significantly shape the new legislation:

• The Brazilian cotton case in the World Trade Organization.

• The whole arena of biofuels, from ethanol to biodiesel to other renewable fuels.

• The U.S. corn growers proposal to convert to a more profit-based system.

• Secretary of Agriculture Johann’s hard stance on dramatically changing the farm bill.

• A unified push for conservation.

• Impact of world hunger groups pushing for reduced use of grain for fuel.

• Lobbying by fruit and vegetable groups to get a bigger piece of the pie.

Overall, Keith contends 2007 is the worst year in history to write a new farm bill. The big, over-riding issue, he contends, is uncertainty over the price of grain for use in ethanol and biodiesel production.

Estimates from leading, but dramatically opposite factions of the agriculture industry, leave a gap of six billion gallons. On the low end, three-year growth in ethanol production from corn is estimated to be 12 billion gallons. On the high end, estimates are for 18 billion gallons. Both estimates come from reputable sources, but the six billion gallon gap will have a huge impact on American agriculture, Keith contends.

Short-term, market analysts from New York to Los Angeles are scurrying to try and figure out the stability of high corn prices and the impact of these prices on the stability of good soybean and wheat prices. The problem, Keith points out, is that we have never had the kind of external impact on grain markets that are currently being caused by the demand for grain to make fuel.

The Feed and Grain Chief says Republicans and Democrats agree on energy being a critical factor. However, they don’t agree on how to deal with the problem. The next two years, he says, will provide unprecedented opportunities for Congress to pass legislation. The question is whether it will be good or bad for agriculture.

Some proponents of increased use of agricultural land to produce raw materials for biofuels contend taking land out of the Conservation Reserve Program would provide a temporary stop-gap. While there may be as much as 15 million acres in the CRP program that is usable for grain production at current prices, Keith contends that number is more realistically in the 6 million to 7 million acre range in terms of producing anywhere close to the national average of 151 bushels of corn per acre.

Another unknown that has analysts scratching their heads, and grain buyers apprehensive, is how many acres of corn will be planted in 2007. It could go as high as 100 million acres, though most top estimates stop at 95 million. The best guess, and Keith stresses it is just a guess, is 88 million acres.

Perhaps the biggest long-term political impact on grain production in the U.S. is the Bush administration’s proposal to limit adjusted growth income (AGI) to $200,000 annually. “I don’t think this proposal will ever pass legislation, but it opens the doors to discussion that could impact all segments of agriculture significantly for a long time,” Keith says.

If the limit were to pass, a farmer with a gross adjusted income of $200,000 would qualify for zero support from the government. If his neighbor had a gross adjusted income of $199,999, that farmer would quality for $360,000 in government subsidies. If nothing else the energy required to fight off such legislation will detract agriculture from addressing other pressing problems.

The USDA contends the $200,000 limit proposed by the Bush Administration will not affect many farmers. Information released in late February contends the 38,000 tax filers who had an AGI of $200,000 or more and received farm program payments in 2004 includes both Schedule F filers and Form 4835 filers. Schedule F is filed by farm proprietors. Of all Schedule F filers, only 1.2 percent, or 25,000, had an AGI of $200,000 or more and received farm program payments.

The Administration's farm bill proposal also recommends repealing a provision of current law that waives the AGI limit if 75 percent or more of the AGI is derived from farming,

Adjusted Gross Income (AGI) is very different from gross income in that farm expenses and depreciation are subtracted from the total. Other deductions include the cost of self-employed health insurance, one-half of the self-employment tax and contributions to retirement accounts.

In total, the Schedule F form (farm proprietor tax form) contains 25 different categories of expenses that are deducted prior to the calculation of AGI. The Schedule F form also has six blank lines for farmers to deduct "Other Expenses." All of these are subtracted from gross income when calculating AGI.

Politics, fuel and farming all seem to point in different directions. To be sure agriculture gets a fair deal in upcoming legislation will require that farmers and the whole agriculture community stick together and work together. This is more critical than at any time in our history, the President of the National Feed and Grain Dealers Association says.


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