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Cap-and-trade might profit farmers – if they stop tilling

By KEVIN WALKER
Michigan Correspondent

CHESTERFIELD, Mo. — The National Corn Growers Assoc. (NCGA) held a telephone conference last week highlighting a report analyzing the climate change bill in the U.S. House of Representatives, HR 2454.

The point man on the report, prepared for the NCGA by informa economics, was Paul Bertels, NCGA director of agricultural economic analysis and environmental impacts. Bertels said the bottom line of the report is, under HR 2454, production costs for growers will go up.

“Costs of production for corn, soybeans and wheat will go up for all growers under this program,” he said. “There will be production implications resulting from increased energy prices that stem from cap-and-trade and, specifically, HR 2454.

“Yet, there will also be opportunities for some farmers – and I emphasize, some farmers – to gain despite these increases by participating in offsets activity.”

Bertels went on to discuss a number of cost issues, providing as one example the question of nitrogen costs under HR 2454.
“Who’s going to get these allowances the bill speaks of?” he asked. “One of the key questions that comes up is, will nitrogen manufacturers in the U.S. get these allowances and will they get a sufficient quantity of allowances to offset any increase in nitrogen costs?

“What we do know is that over time, the costs of fertilizer will go up,” especially after allowances phase out beginning in 2025, he added. If allowances go through, he said, in the early years of the program production costs for an acre of corn will go up $2-$2.50; if allowances don’t come through, production costs will go up $10 an acre.

“It’s a fairly dramatic increase in the cost of production,” Bertels said.

As allowances go away between 2025 and 2050, the costs of production for an acre of corn could go up to $50, “in addition to what we’re seeing now,” by 2035. “Costs will go up for every grower” – corn, soybeans and wheat – “under the cap-and-trade program,” he said.

According to the report by informa, on page 5, “under the base scenario, the impact of cap-and-trade on corn production costs in the short-term is expected to be minimal. By 2020 the impact is estimated to be $3.81 an acre above reference case costs, accounting for only 1 percent of total variable costs.

“However, as the fertilizer allowances are phased out from 2025 to 2035, this impact increases substantially. By 2035, the impact is expected to be nearly $50 an acre above reference costs.”

Bertels, highlighting the report, stated although there will be several different kinds of offset opportunities for farmers, in theory, continuous no-till will be the main offset opportunity, practically speaking. In some situations, however, no-till will not be an option; further, in the changeover to no-till, there will be a “yield drag.”
He said these must be considered costs and accounted for. But according to the informa analysis, HR 2454 and other scenarios assume the adoption of no-till will be 100 percent.

According to the study, “the projected U.S. adoption rate of continuous no-till corn under a cap-and-trade scenario with a carbon payment reaches 63 percent by 2035. This means 37 percent of the land in corn will only experience higher energy prices.”

According to Bertels, growers who can adopt no-till more easily – those in the southern areas of the country – will tend to see some net revenue from HR 2454. Growers in northern climates, though, will tend to see a “net negative return” from the program.
“In Michigan, Wisconsin and northern Ohio, those growers, if they ever saw a net positive, it would probably be on the order of about a dollar,” Bertels said. “In some out areas, farmers could see as much as $7 to $9 an acre revenue gain.”

Under HR 2454, 6-10 percent of the acreage in year 2035, or 5-9 million acres, would be converted to carbon crops such as forests and prairie grasses.

“Some growers will be able to benefit from HR 2454 by participating in the offset market,” Bertels said. “The key thing is, that’s some growers, not all growers.”

1/27/2010