Washington Insider - Tuesday

By DTN's Washington Insider

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Transportation Planners Searching for New Sources of Funding

The American public is slowly moving toward more fuel-efficient automobiles as well as to electric cars and greater use of public mass transportation. In some cities, more commuters than ever are even getting to their jobs on bicycles.

These trends provide good news on a number of fronts, but not to the people who have the job of maintaining the country's interstates, highways, streets and bridges. For them, the new emphasis on "greener" transportation is resulting is less "green" in government coffers for building and maintaining transportation infrastructure. This is because taxes on gasoline provide the single largest influx of money to the government earmarked for transportation. In one state, Illinois, gas tax receipts are down 24% since 2007, largely due to a decline gasoline use.

With much of current public policy focused on encouraging the public to move away from petroleum –– or at least to use less of it –– it is clear that funding based on a gasoline tax will be inadequate to meet transportation needs even in the medium-term. What new source –– or sources –– of funding will be found remains to be seen. But over the next few years, transportation experts are expected to become increasingly creative in tapping into new revenue streams.

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Proposals to Re-Authorize Energy Tax Credits Likely This Fall

Senate Majority Leader Harry Reid, D-Nev., says he plans to take up a package of tax extenders that would retroactively extend more than 50 expired tax credits, including the wind production tax credit and several credits for alternative fuels. Those credits lapsed earlier and Reid told attendees at a Clean Energy Summit in Las Vegas that failing to resurrect them "is not an option." And, he added, "I'll bring them to the floor before of this year for a vote."

The measure to which Reid was referring would cost the government $84 billion in lost revenue and has already passed the House. Among other things, the legislation would retroactively extend nearly $3.7 billion in credits for alternative fuels and vehicles, such as a $1-per-gallon credit for biodiesel.

It is expected that his pledge to hold a vote on the package of tax credits will not be carried out this month, meaning debate and final action would take place in a lame duck session in November or December. The fate of the bill could hinge on whether the November elections give Democrats or Republicans a majority of seats in the Senate.

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Washington Insider: Ag Product Shift

There is more than a little angst now, especially among the trend-scouts who make a living by claiming early, early trends and who say they are queasy about the decline of crop returns predicted for this year. There is even talk is of the "end of an era" as some prices retreat from their recent stratospheric levels. For example, Bloomberg noted that for the first time since 2005, U.S. farmers this year will make more money from livestock than crops.

Without meaning to do so, some of these pundits are revitalizing the hoary food vs fuel debate by suggesting that Congress made corn king for almost a decade after the Renewable Fuels Standard was created to supported use of corn-based ethanol. That policy, some argue, has driven up crop prices and made livestock and dairy production dependent on more-expensive grain.

Now, they say, the RFS is nearly topped out for corn and the ethanol mandate itself is under attack. They see fewer markets for ever-larger corn crops, "making it hard to imagine where excess crop production will go." Beef production, by contrast, is frequently seen as "poised to expand after years of declines," and demand is booming for hogs.

As a result, a University of Missouri agriculture economist is cited as concluding that not only will the changes "require major shifts in assumptions of how farm economics may work" but also that low prices may become a bigger threat to profits than natural disasters.

Well, there is a need here to keep a number of things in perspective, observers note. The global demand for raw ingredients for food has expanded rapidly in recent years, largely in response to growth in developing economies' demand for more and better food products. This is a trend expected to continue apace through mid-century, and one that many tend to ignore, especially since the government no longer locks up "surplus" stocks, thus allowing markets to clear relatively quickly.

In addition, while the demand for ag resources has been enhanced by the demands for industrial use, that likely will continue although the pace of growth may diminish as policy support is reduced and as new sources of fossil fuel make North American fuels more competitive fuel prices.

Third, even for those who focus mainly on prices, it is necessary to note that U.S. crop production was severely damaged by drought in 2012 — and, that the modern, less elastic demand structure led to sharp increases in prices and revenues that never were expected to be sustained over the longer term. It also should be kept in mind that much of the recent decline in crop prices are simply adjustments to more normal market conditions.

It is true that the recent feed price increases along with persistent drought in some areas damaged returns for dairy and crop producers, and that more normal feed prices now is reversing that prospect. But, does all this really threaten the structure of U.S. agriculture as some predict? Probably not. The abnormal crop returns in 2012 were more than twice the level of 2003, and probably were not heavily built into producers' longer term expectations.

So, producers will have some pencil sharpening to do as they decide on future investment plans, and livestock and dairy production may well loom as more attractive to some than in the past. However, farming operations now are much more specialized than they were, and most do not contract in size without incurring capital loss, or expand readily after one or a few years of changed outlook.

There is yet another reason for caution in projecting major changes in sector structure. Many producers suggest they can make money at much lower prices than they have seen for the past couple of years, suggesting that the outlook for the sector likely will depend on where markets stabilize and how much costs can be controlled, as it always has. And, it will depend increasingly on access to growing markets at home and abroad, as well as large new investment in infrastructure to allow efficient product delivery over the longer term. These all are trends producers should watch carefully as they emerge, Washington Insider believes.

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