Washington Insider -- Thursday

CBO Updates Its Updates

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

Oil Industry Not Yet Certain About Size of Ethanol Mandate for 2014

A top petroleum group is worried the Environmental Protection Agency will change its position on the proposed levels for the amount of ethanol and other biofuels refiners must blend into the nation's fuel supply. The proposed level, which was lower than anticipated, was applauded by oil companies when it was issued and cited as a move in the right direction. But the agency could go back on that proposal, said Charles Drevna, president of the American Fuel and Petrochemical Manufacturers.

Drevna said the EPA is thinking about increasing the volumes because the Energy Department's statistical department estimates there will be an increase in gasoline demand in the next year. His group, along with the oil industry, wants the proposal to stay as is.

Drevna said the AFPM recognizes EPA is under a good deal of political pressure, but is troubled by recent statements by agency Administrator Gina McCarthy and others that public comments they were receiving on the proposal in favor of increasing the RFS greatly outweighed the comments to keep the proposal's lower levels. Drevna said he didn't think that the quantity of comments received on the proposal should be a factor in the agency's decision.

***

U.S. Said to Agree to Japan's Continuing Tariffs on Wheat, Rice

Press reports quoting anonymous sources within the government of Japan indicate that U.S. trade negotiators have agreed to allow Japan to retain tariffs (but at lower levels) on rice and wheat under the Trans-Pacific Partnership free trade agreement under negotiation among 12 Pacific Rim countries.

In return for concessions to Japan, Washington is demanding that Tokyo introduce a system to increase imports of U.S. rice and Japan has decided to accept, the sources noted. In the TPP negotiations, the two sides are arranging to set up a special quota that would allow the United States to export more rice to Japan under private trading.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

The United States initially urged Japan to halt state trading of rice and wheat and abolish tariffs. But Washington dropped the demand as that would also lead to an increase of rice and wheat exports to Japan from Canada and Australia, which compete with the United States, they said.

It appears U.S. negotiators have accepted the fact that Japan would not agree to drop the protections it has set up for key agricultural sectors and that lower levels of protection for those products is the best that can be achieved at this time.

***

Washington Insider: CBO Updates Its Updates

To an important degree, the nonpartisan Congressional Budget Office defined the recent farm debate. Once congressional ag leaders concluded that they could no longer defend direct payments and their "rain or shine" payment guarantees based on historic production decisions, it was up to the commodity groups and a few others to squabble for relatively "free money." The nearly $50 billion freed up from direct payments was to be parceled out in ways that sort of pleased everybody -- to the point where they were willing to quit the fight.

And, not all the funds shifted came from direct payments. Both Agriculture committees gave the supplemental nutrition programs a cut -- even the program's friends in the Senate -- and, shoved much of that into beefier farmer safety net programs.

So, imagine the consternation among legislators and lobbyists, first over the fact that the savings from the nutrition cuts might not turn out to be as big as expected, and CBO's new vision that says, "Never mind, the costs of these programs now are seen as different and changing -- and for nutrition program, it is expected to be some $24 billion lower over the next decade." That change is apparently the result of changes in the economy.

Imagine that. The earlier "fight to the death" over nutrition was over the difference between the Senate's $4 billion cut over 10 years and the House proposal for a $40 billion cut -- a fight that ended in a deal focused on about $8 billion. So, the House initially voted for a $40 billion cut and lost but may end up getting one for $24 billion anyhow, if the "technical" adjustment buried in a report issued Monday is to be believed.

The news folk are emphasizing that the change amounts to a "just 3% change" for nutrition, but that takes us to the re-estimate of the Title I farm program costs and CBO seems to have gone pretty wobbly on that. In fact, some press reports emphasized that CBO went out of its way to say as little as possible about the rest of the farm bill's costs, even with the drop in grain prices.

That's because those programs have a large element of "farmer choice" built in, and thus their costs won't be known until those choices are known -- and, in some cases, until the weather and prices that define the insurance payouts are known, as well.

So, right now, program advocates are suggesting the revamped commodity title might save more, not less, than the amount CBO predicted in January. Others are more critical, and one suggested budget analysts are "going through withdrawal after living 18 years with the predictability of direct cash payments under prior farm bills." And until producers have made more choices later this year about the new programs, CBO is not putting its name next to those predictions.

Still, analysts can say with confidence that at least two things will affect the cost of the farm programs. The first of these is the worsening market conditions, assuming that trend continues. But, the second is the fact that CBO's April 2014 baseline factors in the effects of future budget sequestration cuts on the new commodity title in the farm bill. This seems to mean that even with the lower grain prices, the totals suggest greater savings under the new policies -- or perhaps more stability than many had expected.

In addition, there is yet another new wrinkle in fact that two program options are available. The first option is the Agriculture Risk Coverage, which promises temporary assistance to growers facing a downward cycle of prices.

Powerful corn and soybean lobbies backed this plan as an attractive cushion after the ethanol-driven boom since 2007 made prices high but fragile. Payments would be triggered once prices fall 14 percentage points below the prior five-year average. But the subsidy covers only a narrow 10-point band -- from 86% to 76% of revenues -- but will fade after several years if prices are persistently low.

The second, price loss coverage, fits the more classic countercyclical model of fixed, government-set target prices. PLC payments would typically be triggered later in a market downturn but then promise the farmer a more permanent floor to cover production costs. Critics note that this floor may well prevent necessary production adjustments to lower prices and lead to significant misallocations of resources.

Now, all eyes are on producers and their choices. Bets are being placed on the role of each in both producer risk management and government costs -- and for both, it is too early to tell.

So, the game of handicapping the newer programs and guessing which will attract more participation and cost the most is beginning in earnest -- and emphasizes the fact that while CBO provided the basis for "firm" legislative decisions on programs, those estimates disappear once the legislation is complete. And, so far, about all one can say about the costs of the new package is that even with the lower grain prices, program costs have not yet exploded as many feared -- although, all agree that a close eye should be kept on the sector as the participation numbers firm up, Washington Insider believes.


Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products, on the News Menu on Farm Dayta, and on the News and Analysis Menu of DTN's newest Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com.

If you have questions for DTN Washington Insider, please email edit@telventdtn.com

(ES)

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]
P[R1] D[300x250] M[300x250] OOP[F] ADUNIT[] T[]
P[R2] D[300x600] M[320x50] OOP[F] ADUNIT[] T[]