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  • Buying Off the Farmers or Causing Farmers to “Buy the Farm”?

    Farming is very energy-intensive. Farmers use a lot of electricity, a lot of diesel fuel, and a lot of natural gas-derived chemicals and fertilizers to grow crops and maintain their farm. So it shouldn’t be surprising a cap and trade program that artificially drives up the cost of energy will unfavorably affect farmers. What may be surprising is how unfavorable these effects are, causing expected farm income (or the amount left over after paying all expenses) to drop $8 billion in 2012, $25 billion in 2024, and over $50 billion in 2035. These are decreases of 28%, 60% and 94%, respectively. And some Members of Congress believe they can convince farmers to give up this lost income for $2.1 billion in return.

    To convince farmers the cap and trade energy tax is a good idea, politicians are using offsets as a revenue opportunity for farmers. Generically, offsets work like this: If a company is emitting carbon dioxide and cannot meet the reduction targets, the company can pay someone else to change their behavior to do something that may have otherwise done. That is, you can pay a logger not cut down trees or you can pay someone to grow trees. If it sounds silly and fraught with fraud, it is. It’s difficult to monitor and regulate. It’s also very easy to manipulate. A country can build a cleaner coal plant saying they were going to build a dirtier one. So the plan to save the planet that will cost Americans $4,300 on average in higher energy prices is relying heavily on counterfactuals, what-ifs and hypotheticals?

    What does this have to do with farmers? Everything:

    “Rex Woollen grows corn and soybeans. In 2007, the Wilcox, Nebraska, farmer started cultivating a new commodity: carbon. By not tilling his 800 acres, Woollen by some estimates keeps 470 tons of carbon per year in the ground and out of the atmosphere. Because of that, Woollen gets carbon credits he can sell on the Chicago Climate Exchange. At first, neighboring farmers were skeptical.

    ‘They called me a tree-hugger,’ Woollen said. ‘Then I showed them my first check.’

    Woollen gets about $3,000 a year from the climate exchange’s carbon-trading pilot program. While it isn’t much, to Woollen it hints at bigger potential profit as Congress considers mandatory, nationwide greenhouse-gas limits.”

    Let’s forget for now that less soybeans and corn drive up the price of these goods. There may be potential for bigger profits; there may not be. The EPA, for instance, is projecting that most of the domestic offsets will come from forestry and growing trees. Check out page 60 of the EPA analysis of the Waxman-Markey cap and trade bill. The little bit for “other ag” may add up to 15 million tons per year by 2035. The Heritage Foundation’s Center for Data Analysis estimate that the allowance price (in 2009 dollars) will be just under $140/ton in 2035 (our last year of the model). So if “other ag” and “animal waste” add up to 15 million tons per year and the allowance price is $140, then the total offset revenue going to farmers is $2.1 billion—and that’s assuming no cost of creating the offset. Compare $2.1 billion in offset revenue to $29 billion of lost farm income (again after adjusting for inflation to 2009 dollars). Just this component of lost farm income is over ten times the offset revenue.

    Heritage Senior Policy Analyst David Kreutzer put it like this:

    “Politicians have been watching too many episodes of the Beverly Hillbillies if they think farmers will buy this deal.”

    Posted in Energy [slideshow_deploy]

    2 Responses to Buying Off the Farmers or Causing Farmers to “Buy the Farm”?

    1. Pingback: » Financial News Update - 06/11/09 NoisyRoom.net: “Extremism in the defense of liberty is no vice. Moderation in the face of tyranny is no virtue.” Barry Goldwater

    2. David Kalynowski says:

      Again the farmer is going to be saddled with the extra cost.

      Farmers are under paid for their produce. In Canada we can get about $5.00 for a bushel of top grade wheat but it is sold to the buyer at about $10.00 per bushel and I need to subtract the cost of growing that wheat.

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