Vilsack testifies that agriculture can benefit from climate change legislation

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The Senate began tackling climate change legislation today. And as part of the hearing, Secretary of Agriculture Tom Vilsack offered a glimmer of hope that agriculture stands to benefit from legislation if it contains a viable offset program.

During the House hearing, Vilsack was criticized for not doing a cost analysis on the costs and profit potential on cap and trade legislation. Vilsack announced the results of USDA's economic analysis showing that the economic benefits to agriculture from the cap and trade legislation will likely outweigh the costs in the short term, and that the economic benefits from offsets markets will easily outpace increased input costs over the long term.

Vilsack said USDA's analyzed the cost and benefits of the House-passed climate legislation for agriculture and found that the "economic opportunities for farmers and ranchers can potentially outpace - perhaps significantly - the costs from climate legislation."

Specifically Vilsack said he estimates funds for agricultural emissions reductions are estimated to range from about $75 million to $100 million annually from 2012-2016.

The offset market, essentially allowing farmers to get paid for steps taken to reduce emissions from those who release emissions, can increase annual net returns to farmers from about $1 billion per year in 2015-20 to almost $15-20 billion in 2040-50, not accounting for the costs of implementing offset practices.

"In the short term, the economic benefits to agriculture from cap and trade legislation will likely outweigh the costs. In the long term, the economic benefits from offsets markets easily trump increased input costs from cap and trade legislation," Vilsack said.

Vilsack noted these figures are conservative because USDA isn't able to model the types of technological change that are very likely to help farmers produce more crops and livestock with fewer inputs.

The analysis also doesn't take into account the higher commodity prices that farmers will very likely receive as a result of enhanced renewable energy markets and retirement of environmentally sensitive lands domestically and abroad, Vilsack said.

Individual cost increases

The analysis estimates a Northern Plains wheat producer, for example, might see an increase of $.80 per acre in costs of production by 2020 due to higher fuel prices. Based on a soil carbon sequestration rate of 0.4 tons per acre and a carbon price of $16 per ton, a producer could mitigate those expenses by adopting no-till practices and earning $6.40 per acre.

"So, this wheat farmer does better under the House passed climate legislation than without it. And, it's quite possible that this wheat farmer could do even better if technologies and markets progress in such a way that allows for the sale of wheat straw to make cellulosic ethanol," Vilsack testified.

The analysis notes potential impacts of higher energy costs on production costs are greatest for feed grains and wheat producers where energy costs account for over 50% of total operating costs Per-acre energy expenses for rice and cotton are generally higher than per acres expenses for corn and wheat, but as a proportion of total operating costs, they are typically lower. Per acre energy input costs are lowest for soybeans production, which account for 31% of total operating costs over 2004-08.

Energy costs vary regionally as well. In general, producers in regions more dependent on irrigation tend to spend more on direct fuel expenditures such as natural gas or electricity. Direct energy costs make up a small share of total operating costs on livestock operations, comprising less than 10% of total operating costs for hogs, dairy and cow-calf operations. However, these operations can experience higher energy costs indirectly through higher feed production costs. Feed costs make up roughly 60% of total livestock production costs.

The increases in energy prices cause the variable cost of production (COP) per acre to increase for all crops. The extent of the price increases above the baseline levels ranges from an average of 0.3% for upland cotton to 0.9% for sorghum.

Most of the impacts are felt through increased fuel costs. Thus, those crops where fuel costs are proportionately higher showed larger impacts (e.g., rice, sorghum.) The largest impacts in absolute terms were for rice producers with an average increase over 2012-18 of $3.09 per acre (an increase of 0.7% in total operating costs). Soybeans showed the smallest absolute increase ($0.45 per acre).

Total farm production expenses could rise by 0.3%, in the near term (table 3). Expenses for fuel, oil, and electricity are estimated to increase by about 6.4%. Over the near-term, total farm expenses could increase by $0.7 billion per year in real 2005 dollars, on average.

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