Washington Insider -- Tuesday

More Biofuel Doubts

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

Brazil Postpones Filing WTO Case Until Later This Summer

Press reports surfaced over the weekend that Brazilian officials have decided against requesting the formation of a World Trade Organization panel this month to rule on U.S. cotton subsidies provided under the 2014 farm bill.

The publication Inside U.S. Trade reported that, "The government of Brazil will not request a World Trade Organization panel this month to challenge whether the United States has complied with a 2005 WTO ruling that faulted subsidies to U.S. cotton producers and agricultural exporters, according to an informed source, though it is still expected take such a step in the next few months."

The cotton subsidy dispute between Brazil and the United States has lingered since 2002 when Brazil first filed its complaint with the WTO. The WTO found in favor of Brazil, upheld the decision upon appeal and authorized Brazil to impose sanctions of about $830 million a year on U.S. imports, including around $270 million in "cross retaliation" against U.S. holders of patents, trademarks and copyrights.

The Congressional Research Service earlier this month issued a report saying that it expected the two sides to continue discussions aimed at averting the sanctions approved by the WTO. There has been speculation that Brazil's decision to postpone formal action at the WTO may indicate that negotiators are making progress in resolving the issue. However, after 12 years, it is difficult to remain optimistic that an unanticipated breakthrough will take place in the next month or two.

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Federal Reserve Turns Its Attention to Low Inflation, Deflation

Speaking in New York last week, Federal Reserve Chairwoman Janet Yellen said the current low inflation rate in the United States presents a larger threat to the economy than rising prices. The price index for personal consumption expenditures, the Fed's preferred measurement of inflation, has drifted from an annual rate of 2.4% in February 2012 to 0.9% in February 2014. This prompted the Fed's Federal Open Market Committee last month to issue a statement noting that persistently low inflation "could pose risks to economic performance."

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Very low inflation also effectively increases the burden of debt on households and businesses, placing a drag on economic activity, Yellen has pointed out. And lower inflation impedes the power of the Fed to stimulate the overall economy.

Just as an increase in interest rates is a tool to rein in rising inflation, low interest rates tend to help overcome low inflation or deflation. The problem for the Fed is that interest rates already are so low (0.033% for a 90-day Treasury bill) that it is difficult to go much lower. However, lenders are still buying Treasuries of all maturity lengths, apparently willing to trade high interest rates on other credit instruments for the safety of U.S.-government issued securities.

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Washington Insider: More Biofuel Doubts

U.S. biofuel policies have always been based on a central assumption, thought by many to prevent the food vs fuel wars from sinking the program. Renewable fuels were supported by both parties, in part based on the assumption that grain-based ethanol was an interim, transition product, to be replaced quickly by a more advanced fuel from non-food products, mainly cellulosics from plant waste.

Now, however, a new study is being reported in the journal Nature Climate Change that challenges the assumption that plant-waste feedstocks would mean more climate friendly biofuels. Not so, the study concludes — at least, not all the time. It says biofuels from corn residue release 7% more greenhouse gases in the early years compared with conventional gasoline.

In a bit of technical give and take, the study hedges its bets by finding that biofuels are better in the long run, but won't meet a standard set in a 2007 energy law to qualify as renewable fuel. How that works is a little hard to parse, but may become clearer in subsequent discussions.

The study is drawing attention because it targets the cellulosic biofuel subsector, which has been touted for more than a decade and received more than a billion dollars in federal support. At the same time, cellulosic operations have proved difficult to make commercially sound, and have fallen short of official volume targets since the law was passed.

As you might expect, the biofuel industry and administration officials are upset at this "battle of assumptions" and are hammering the Nebraska research as flawed. They are upset by the analysis of carbon loss from soil when stalk residue is removed for processing, and think the authors vastly overestimated how much residue farmers actually would remove.

Jan Koninckx, global business director for biorefineries at DuPont, says that the process assumed by the study would never be seen in practice because it would "ruin both the land and the long-term supply of feedstock."

His company is well on the way to opening a $200 million-plus facility in Nevada, Iowa, that will produce 30 million gallons of cellulosic ethanol using corn residue from nearby farms. A feasibility study projected earlier that the ethanol from that operation could be more than 100 percent better than gasoline in terms of greenhouse gas emissions.

The Nebraska study estimates the carbon loss for 12 Corn Belt states when stalks, leaves and cobs are removed rather than left to naturally replenish the soil. Lead author, assistant professor Adam Liska, a bioengineer at the University of Nebraska-Lincoln, said he knew the research would be contentions "but is amazed it has not come out more solidly until now."

Other analyses disagree with Liska. The Environmental Protection Agency thinks that only half of corn residue would be removed from fields and that cellulosic ethanol would meet the legal standard by releasing 60% less carbon pollution than gasoline. A peer-reviewed study performed at the Energy Department's Argonne National Laboratory in 2012 found that biofuels made with corn residue were 95% better than gasoline in greenhouse gas emissions, but that study also assumed some of the residue harvested would replace power produced from coal reducing greenhouse gas emissions, an assumption that has been criticized.

EPA spokeswoman Liz Purchia told the press that the Liska study "does not provide useful information relevant to the life cycle greenhouse gas emissions from corn stover ethanol," a position that emphasizes the confusion afflicting U.S. renewable fuel policies now with their national mandates that include, observers say, requirements to blend a larger share of renewables into the gasoline supply than the federal law allows. In addition, the law is now widely seen as creating hardships for livestock and dairy producers, especially in periods of bad weather when it tends to boost feed costs.

The Liska study, if it survives the storm of criticism it now faces, could mean a heavy blow to current U.S. energy policies which have been facing growing criticism in recent months. If cellulosic biofuels don't meet the environmental threshold, they would become even more difficult to make and sell commercially than they are now and make the 2007 energy policies increasingly vulnerable to significant reforms, Washington Insider believes.


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