— One of President Obama’s goals as he entered office earlier this year was to address “global warming” and concerns over world climate change.
These issues have recently come into the forefront with the United Nations meetings on global climate change, which were held in Copenhagen, Denmark.
The U.S. Department of Agriculture recently released studies on “The Effects of Climate Change on U.S. Ecosystems” and a USDA economic analysis of how proposed climate change legislation would affect the U.S. agriculture industry.
In early December, the U.S. Environmental Protection Agency announced the determination that GHCs (greenhouse gases) “threaten the public health and welfare of the American people.”
This determination focused on the following six GHCs: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride, many of which have direct links to production agriculture. The EPA made this determination based on a 2007 U.S. Supreme Court ruling that allowed GHCs to be included under Clean Air Act regulations.
The U.S. House of Representatives passed a somewhat controversial climate change bill by a narrow margin in late June. HR-2454 would cap carbon emissions at 17 percent below 2005 levels by 2020, 42 percent below by 2030 and 83 percent below by 2050.
The bill also creates a so-called “cap and trade” system, through which a company or business could purchase carbon allowances (credits) from other businesses and industries that reduced carbon emissions through their normal operations. The legislation also calls for 15 percent of electrical energy in the United States to come from renewable sources by 2020, such as wind and solar.
The U.S. Senate has held committee hearings on the Senate version of legislation (S-1733), but has not reached consensus on a final climate change bill. Once a bill passes the Senate, the differences with the House version of the bill will have to be worked out in conference committee, before a final climate change bill can be considered for passage. The proposed climate change legislation, and the so-called carbon cap and trade aspects of the legislation, have become quite controversial in many areas of the United States, especially related to some specific industries, including the agriculture industry.
Not only has the proposed legislation divided members of Congress, it has also divided farmers, economists and university experts, as well as the general public.
The two major farm organizations in the United States disagree on enactment of climate change legislation. The American Farm Bureau Federation opposes current climate change proposals in Congress, including the bill passed by the U.S. House.
The AFBF cites concerns with potential increased costs to farmers, negative impacts on exports and a lack of sound science related to the issue of global warming and possible solutions, but does support incentives for improved farming practices and renewable energy to reduce carbon dioxide emissions in the future.
The National Farmers Union has supported HR-2454, after some additions to protect agriculture and renewable fuels were included in the legislation by Congressman Collin Peterson, U.S. House ag committee chair. The NFU feels the carbon cap and trade aspects of HR-2454 will be beneficial to agriculture, and that farmers will be compensated for any increased costs of production by the ability to sell carbon credits to other industries.
Conflicting university studies
There are conflicting studies from the same university, Texas A&M University, regarding the economic impacts of the proposed climate change legislation and carbon cap and trade provisions, on U.S. agriculture and farmers.
One Texas A&M Study, conducted in conjunction with Duke University, concludes that the ability of farmers to sell carbon credits would more than offset any potential increases in farm input costs, such as fertilizer and fuel. This study assumes that commodity prices will be stronger due to reduced crop acreage and greater grain demand, and that farmers would receive extra payments for no-till farming, improved management practices, and conversion of traditional crop acres to biomass production.
This study concludes that the impacts of global warming will dictate change regardless of the legislation, and that promoting initiatives, such as those in HR-2454, are the best economic opportunity for the future of the agriculture industry.
The other study from the Texas A&M Agriculture and Food Policy Center found much different results after running future farm economic simulations on sample farms of various sizes, enterprises and locations in the United States.
The study found that 71 out of 98 farm enterprises that were analyzed would have lower ending cash reserves under the provisions of HR-2454, as compared to baseline projections with no legislation. The study did find that Midwest corn and soybean producers and Great Plains wheat farmers were in the best position to capitalize on potential economic benefits from provisions in HR-2454, while farmers in other regions of the country, especially livestock producers, could face significant negative economic impacts.
The other concern raised in this study is that most economic benefits to farmers from carbon cap and trade initiatives are not fully realized for 10 to 15 years, and many farmers could realize economic hardships during the interim period.
USDA climate change study
The USDA study on “The Effects of Climate Change on U.S. Ecosystems” that was released at the Copenhagen climate change meetings in mid-December included the following findings.
USDA economic analysis
A few weeks ago, the USDA provided a U.S. House agriculture subcommittee with an overview of the projected economic impact on the U.S. ag industry that would likely result from the proposed climate change legislation.
Following are some of the highlights of the USDA economic analysis.
Production costs
The USDA is projecting the price and income impact to be relatively small due to higher production costs from 2012-25, as a result of potential rebates to fertilizer producers. On a longer term basis, farm income is expected to decline by 7.2 percent, excluding the economic benefit of any potential carbon “offsets.”
Carbon ‘offsets’
The carbon offsets would be paid for practices that sequester carbon production. Under the proposed climate change legislation most of the carbon offset benefits would be gained by converting current cropland and pasture land to tree plantings. Most of the projected carbon offset income would go to land owners who plant these trees.
By 2050, the USDA projects a total of approximately $30 billion for carbon offset income to agriculture, with about $24 billion going toward land conversions to tree plantings. Approximately only $3.8 billion in total carbon offsets are projected to be derived from crop production.
Land shift
The price of carbon credits will likely encourage land owners to convert cropland and pasture land to tree plantings. By 2015, the USDA estimates that the price of carbon credits will be $13 per ton and that 8 million acres will be converted to tree plantings. If the carbon credit price rises higher to $27 per ton in the coming years, the land conversion would likely total 27 million acres in short-run.
By 2050, it is estimated that the price of carbon credits will increase to $70 per ton and that as much as 60 million acres could be converted to tree plantings, with 36 million acres coming from crop production acres and 24 million from pasture land. Most of the shift in land use from cropland and pasture land to tree plantings is expected to occur in the Corn Belt, Lakes States, Rocky Mountains and South Central United States.
Crop production
The USDA expects total corn production to decline by 3.5 percent in 2013, 7 percent in 2030 and 22 percent by 2050. Soybean production is expected to decline by 1.4 percent in 2013, 9 percent in 2030 and 29 percent in 2050. Increased crop yields have been factored into these crop production estimates.
Livestock production
Due to the land shifts and higher input costs, livestock production is also expected to decline sharply. The USDA estimates total hog slaughter to drop by 7 percent in 2030, and by 23 percent in 2050. A 3 percent decline in beef slaughter is expected by 2030, and a 10 percent decline by 2050. Total U.S. milk production will likely decline 17 percent by 2050.
Consumer food prices
The USDA estimates that consumer food prices would increase only 0.1 to 0.2 percent in the short-term, as a result of the carbon offsets, and 1 to 2 percent or more on a long-term basis. This is only due to agriculture offsets, and does not include other cost add-ons.
Foreign agriculture
The USDA acknowledges that lower domestic production of crops and livestock, along with higher market prices, could encourage increases in agricultural production in foreign countries.
Farm income with offsets
The USDA estimates that total farm income would rise 12 percent by 2050, due to higher crop and livestock prices, and the value of the carbon offsets.
Key questions regarding proposed climate change legislation
Following are some key questions that need to be considered by Congress, the administration, farm organizations, environmental groups, universities and the general public as we consider the proposed climate change legislation, and a potential carbon cap and trade system.
As mentioned earlier, there are a lot of discrepancies in both the science and the economics that are being used to develop policies, or to oppose policies, relative to climate change. It would seem that some sound, trustworthy, high-quality research is needed to assure sound policies for the future.
There is wide variation in cost estimates for this legislation for agriculture, other industries and consumers. Most experts agree that the cost of energy and electricity will increase significantly, which will likely lead to increased expenses for most businesses and industries, and higher costs of food, energy and most other products for consumers. Some experts also point out the potential economic impact of not addressing global warming issues in the near future.
We are already seeing growth in the so-called “green” businesses and industries. There could likely be added opportunities in renewable energy, but possibly not from traditional biofuels produced from corn and soybeans. There will likely be economic opportunities for farmers who employ reduced tillage methods, improved fertilizer management and other conservation practices.
However, there may also be farms and other businesses that are discontinued due to the added costs of production, especially livestock producers, who are already facing serious economic challenges.
Many experts feel that it is extremely important for any efforts to manage global warming to be done universally by the major economic countries of the world. Otherwise, implementing strict climate change regulations in the United States with increasing costs and changes in land use could put the U.S. ag industry, and other industries, at an economic disadvantage.
Not only will the United States lose a portion of global crop and livestock production, the United States will also lose some of the positive trade balance that has been provided by exports of agricultural commodities in recent years.
The USDA estimates shown earlier indicated that as many as 60 million acres of cropland and pasture land could be converted to tree plantings by 2050 under carbon cap and trade incentives, which encourage farmers and landowners to take farmland out of row crop and pasture production, in order to sell carbon credits.
There will be financial opportunities for landowners; however, that may not necessarily transfer to added income for farmers, as two-thirds of the cropland in many areas of the Midwest is not owned by the farmer. The limited availability of cropland could actually drive land prices and land rental rates considerably higher in future years.
Some persons also question the ethics of significantly reducing food production in the coming years, when large increases in world hunger are also expected in the next few decades.
Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal. He may be reached at (507) 726-2137 or kent.thiesse@minnstarbank.com.
