Following the release of a study looking at the impact of a cap and trade bill (HR2454) passed by the House, the National Corn Growers Association board has passed a resolution opposing the legislation.
During a Jan. 20 conference call Darrin Ihnen, a South Dakota farmer and NCGA president, laid out the main reasons for the action:
• HR2454 will “definitely increase” corn growers’ cost of production.
• While it offers opportunities for carbon offsets and does give some growers in certain regions a chance for profits, the NCGA believes most areas of the country would be a net loser.
• If the legislation is adopted, there will be diversion of farmland into trees or high-energy crops.
Such diversion “won’t be to the extent claimed by the USDA’s model, but there will be some,” said Ihnen. “In a time when we’re talking about energy security — growing corn for food and fuel — diverting acres into aforestation or another crop would be a detriment to energy security.”
Further, “livestock production could move to other parts of the world.”
At the same time the NCGA opposes the House bill, the organization’s position “remains neutral on the Senate side (for more, see Cap and trade politics).
“If they’re going to take up this legislation, we want to be part of the process to make it better because it needs to be much better. So, overall, our position is neutral on the total idea of cap and trade. But we’re specifically opposing the House bill (HR2454).”
(For more on HR2454 and cap and trade, see http://deltafarmpress.com/legislative/climate-change-1221/index1.html and http://deltafarmpress.com/searchresults/?ord=d&terms=cap+and+trade)
While the NCGA hit an all-time membership record — just over 36,000 — at the end of September, Ihnen said the organization’s grassroots are expressing “a lot of frustration with the cap and trade process. … The grassroots have been comfortable with us being neutral up to this point because it’s allowed us to try and make (the legislation) better for agriculture. … At the same time that they’ve allowed the national (NCGA) to be neutral, they’ve raised questions in the state grower associations.”
In 2009, the NCGA hired Informa Economics out of Memphis, Tenn., to conduct a study titled “The Potential Impact of Cap and Trade Policy on U.S. Corn, Soybean and Wheat Producers.”
(For more, see http://www.ncga.com/files/pdf/InformaAnalysis.pdf)
The bottom line findings, according to Paul Bertels, NCGA director of economic analysis: there will be production cost implications resulting from increased energy prices that stem from cap and trade. Yet, there will also be “opportunities for some farmers — and I emphasize some farmers — to gain despite the cost increases by participating in carbon-offset activities.”
The study, said Bertels, provides an overview of HR2454 and “how we got to where we are with climate legislation and then goes into some key things. Based on a number of the studies I’ve read, I think the Informa study is far-and-away one of the best out there because of its in-depth nature. Particularly, they looked at cost and production increases, the ability of farmers to actually participate in offset programs. They also did a brief analysis on acreage diversion.”
Throughout the study, Informa “didn’t come up with its own energy cost increases. They did a literature review of about eight different studies” already available. The analysts also used speculative costs from the Department of Energy’s Energy Information Agency.
“For example, using the EIA’s basic numbers, in 2020 they assume a carbon price of $40.75 per ton. That would mean the diesel price would increase about 33 cents per gallon over normal baseline projections. Natural gas prices would increase almost $1.50 per 1,000 cubic feet.”
Under the House bill, who would get the much ballyhooed allowances?
“Specifically, we’re concerned about the ‘energy intensive trade-vulnerable enterprises,’” said Bertels. “In the bill, an example is given of nitrogen fertilizer manufacturers. Will U.S. nitrogen manufacturers get the allowances and at sufficient quantities to offset any increase in nitrogen costs? And these allowances are supposed to phase out starting around 2025.
“What we do know is, over time, the cost of fertilizer — a key component in corn production costs — will go up.”
In the bill’s early years, Bertels believes cost increases need scrutiny. “Assuming nitrogen manufacturers get all necessary allowances, use those and pass those savings on to growers, the cost of corn production would probably go up $2 or $2.50 per acre. If those allowances don’t come through, the cost of production increase will be closer to $10 per acre. So, that’s a fairly dramatic increase.”
As the proposed legislation reaches its “out years — particularly as the allowances to nitrogen manufacturers go away — the cost production of corn could go up to $50 per acre” by 2035.
And not only corn would be impacted under HR2454, warned Bertels. Cost of production for corn, soybeans and wheat “will rise for every grower.”
What about offset opportunities for growers to capture carbon and participate in a yet-to-be-defined market that would trade the carbon back to emitters? Offsets considered in the study included aforestation of cropland (basically putting current cropland and planting trees on it), going into continuous no-till production, improved fertilizer management and improved pasture management.
For the study, “Informa limited their analysis to the biggest, most likely (offsets) that most farms could participate in initially. That would be the changeover to continuous no-till cropping.
“One of the areas that sets the Informa study apart from the others” is it considers “how likely it is that farmers will be able to go to continuous no-till. That’s a key point: it’s continuous no-till not rotational no-till.”
Currently, many Midwest farmers plant corn under some sort of minimum tillage. The following year, they plant no-till soybeans. That would be considered “rotational no-till,” said Bertels. “‘Continuous no-till’ would be no-till every year for, probably, at least five years regardless of the crop planted.”
Another potential drain on farmer profits the Informa study found is “a yield drag in early years as farmers switch to continuous no-till. Since there is a yield drag, that would be considered a cost. In addition, there are areas where continuous no-till just doesn’t work as a (cropping) practice.”
Informa assumes that the maximum participation of “heartland — the center of the Corn Belt” farmers in continuous no-till would be about 60 percent. In some of the Southern and South-Atlantic areas, continuous no-till “works a bit better” and the percentage of participating farmers can be “bumped up to about 90 percent. Conversely, in the more northern climates — the Northern Great Plains or Northern Crescent: Wisconsin, Michigan, the northern part of Ohio across into New York and Pennsylvania — there is a much lower adoption rate of continuous no-till.”
During the week of Jan. 11, the NCGA held a policy and priority meeting in St. Louis. At the meeting, “We asked about 100 growers in attendance ‘at what price would you be willing to switch to continuous no-till?’”
Bertels said although it wasn’t a scientific survey, “the numbers support Informa’s assumption. When the price got up to about $100 per acre, about 70 percent of the growers would be willing to adopt continuous no-till. About 30 percent of the growers said, ‘I wouldn’t switch to continuous no-till at any cost.’ And I’m sure they base most of that off agronomic (realities) in their area.”
Net revenue/land diversion
To come up with your net revenue under HR2454, add together the potential increased cost of production with the possibility of selling offsets back. “What Informa noticed is growers who can adopt no-till more easily in the Southern areas tend to have a (more) positive net revenue impact from HR2454,” said Bertels. “More northern climates tend to see a negative net return.
“Looking at the average corn producer in the heartland area … there was a slightly positive net return from the bill. But we’re talking about something on the order of around $7 to $9 per acre for corn production. So, by and large, it wouldn’t be a major, decisive win for farmers. If growers in Michigan, Wisconsin and northern Ohio ever saw a net positive it would be around $1.”
The NCGA also asked Informa to look at acreage diversion.
“This has been a rather contentious topic. In December, the USDA said we’ll see 22 million acres of cropland in the Midwest — particularly in the heart of the Corn Belt — switch to trees. That was greeted with a great deal of skepticism.
“What Informa noticed was, in fact, there would be some land diversion but it wouldn’t be anywhere of the magnitude of USDA’s predictions. For instance, nationally, we see about 5 million to 9 million acres going into forests. We see another 10 million to 18 million acres going into perennial crops like switchgrass, miscanthus and things like that. These crops would be grown primarily for the carbon offset they’d produce.”
In the Corn Belt, the potential acreage switch “is much less than what USDA suggests. Probably less than 500,000 acres of corn ground in the Corn Belt would go to forests and less than 2 million would go into perennial grasses.”
Another thing that sets the Informa study apart, said Bertels, is the USDA model assumed that once “a farmer would make $1 more planting trees, he would. That doesn’t pass the reality test. Informa said farmers would have to make more than $20 per acre to switch to trees and more than $15 to switch to perennial grasses.”
That means, nationwide, the NCGA believes the House bill would cause “about 5 million to 9 million acres of corn ground” to be diverted “into ‘carbon crops.’ That represents about 6 to 10 percent of the corn acreage in 2035. … Still, that’s a decline in production.”