Congress is Again the Land of Lost Opportunities

By Steve Kopperud, Policy Directions, Inc.

As I write this in early 2012, there are only two real givens when it comes to the second session of the 112th Congress. First, all federal tax credits related to corn-based ethanol – the blender’s tax credit and the import tariff – have expired, not through enlightened congressional action, but because Congress did nothing with any of the biofuels tax supports. Second, when it comes to most major issues confronting Congress, the 535 members don’t seem to be able to find their backsides with both hands and a flashlight.

The reason the rest of the session is a crap shoot is because 2012 is an election year – big “E”, big “Y” – and not only do we get to elect the entire House of Representatives, but a third of the Senate and the president. If fear of voter backlash is the hallmark of an “off year,” then fear, timidity, and a jettisoned fight-or-flight instinct are the traits of the electioneering incumbent, whether congressional or presidential.

Having failed miserably with the whole “super committee” deficit/budget reduction thing, Congress nevertheless punted like a pro most of its responsibilities – and chances to show responsibility – into 2012. The lost opportunities included the payroll tax reduction battle along with most federal spending, debt limit, and tax reform issues, and President Barack Obama announced at Christmas he’d wait for some time in early January before sending up his formal request to increase the federal debt ceiling, along with what’s bound to be a very politicized fiscal year 2013 budget recommendation.

Congress must now catch up with what it should/could have done last year. This means all of those football issues are now tacked on to the agenda of what must be handled before the November 2012 elections. Here are some issues renderers care about and how they’re expected to consume Congress’ time and energy for the next several months.

Biofuels Tax Credits
Once again the $1 per gallon blender’s tax credit for biodiesel and renewable diesel, as well as the 50 cents per gallon alternative fuel tax mixture tax credit, have expired along with the ethanol supports and about 1,000 other tax credits, including the research/development credit for small business and child care credits. This is likely to be a replay of 2009, when the credits expired on December 31 of that year, and Congress didn’t get around to reinstating them until mid-2010, having to make them retroactive to January 1.

There’s an agreement of sorts circulating on Capitol Hill, a plan to reinstate the tax credits as part of broader federal tax reform, but because the underlying package couldn’t generate the excitement necessary to get it to the president’s desk, that agreement will be vetted along with other shifts in the federal tax code. There are also those who believe any federal support for any alternative fuel should be part of whatever solution Congress comes up with to the challenge of crafting a federal energy policy. The biodiesel industry is pushing to reinvent the biodiesel supports, turning the blender’s credit for fuel refiners into a biodiesel producer’s credit, with a four-year extension. The attacks on ethanol are not directed at biodiesel; while ethanol is now considered a mature industry with no need for federal supports, biodiesel is seen as an infant alternative fuel needing federal support to make it competitive with advanced biofuels.

Ethanol “Demand” Spending
With the disappearance of federal tax incentives for corn-based ethanol blending and an end to the import tariff, the ethanol industry is turning its attention to two priority issues. First, federal support of so-called “demand” spending, including federal loan guarantees for pipeline construction, flex-fuel pump installations – the U.S. Department of Agriculture (USDA) is using current program money to build these pumps across the country – and federal mandates on construction of flex-fuel cars and light trucks. The second is protection of the Renewable Fuel Standard (RFS2) as it’s currently written.

Growth Energy, a major association of ethanol companies, says its focus is on 15 percent fuel/ethanol blends, flex-fuel pumps, and flex-fuel cars, all designed to increase demand for primarily corn-based ethanol. Further, Growth Energy and the Renewable Fuels Association (RFA) say they will continue to push the Environmental Protection Agency (EPA) on the Growth Energy E15 petition – there are House and Senate bills designed to block any EPA action to increase the blend rate above the current 10 percent – and both are also working to protect the RFS2 driving through federal mandate a good chunk of domestic ethanol demand. Livestock and poultry groups want ag committee hearings on the impact of the RFS2 on the economy and food production.

“We expect the RFS2 to be a target as long as the RFS2 is in place,” RFA said just before Christmas, but the group is now trying to reinvent parts of the standard through rulemakings. Cleverly, the ethanol groups are trying to cash in on a section of the RFS2 designed to provide unique incentives for what are called advanced biofuels – effectively any feedstock not corn and not used to make ethanol – by pushing to have corn-based ethanol redefined as an advanced biofuel. This move would increase the standard’s blend mandate for corn ethanol to 21 billion gallons by 2022. However, the original law creating the RFS2 in 2007 specifically bans corn ethanol from benefiting from advanced biofuels incentives, and as of now, EPA sees other biofuels – including biodiesel – as the advanced biofuels that will meet the 2022 blend mandate.

This issue will either move as a stripped-down package of alternative energy incentives to businesses, along with retrofitting old buildings, and so forth, or become a catch-all for a number of parochial energy concerns, but could also pull in related alternative fuel tax issues. While Congress continues to wrestle with fashioning a comprehensive federal energy policy – which both parties, going into the election, contend is a “front-burner issue” – the need to find an alternative to failed cap and trade/greenhouse gas legislation remains paramount.

There needs to be a package into which such things as alternative energy incentives, research into biofuels, etc., can be tucked, say some in Congress, and this means expired tax incentives for biofuels – particularly biodiesel – and a possible rewrite of portions of the federal RFS2, the federal mandate on how much ethanol must be blended with gasoline on an annual basis, accused by production agriculture as market-distorting.

The Senate is looking to Senator Jeff Bingaman (D-NM), chair of the Energy and Natural Resources Committee, to fashion an energy package that will garner the 60 votes necessary to get chamber approval. The House will likely follow the Senate on overall energy policy, but Representative Bob Goodlatte (R-VA) has introduced two bills. The first would reduce the RFS2 mandate on corn-based ethanol based on USDA’s stocks-to-use ratio, and the second would kill the standard altogether.

Tax Reform
Over 1,000 federal tax credits for everything from small business research and development to child care to biodiesel lapsed at midnight on December 31, 2011, setting up another tug-of-war in getting some of them modified and all of them reauthorized. President George W. Bush’s tax cuts will also expire absent congressional action, and both the Senate Finance Committee and the House Ways and Means Committee conducted serious discussions during the super committee’s unsuccessful deliberations on tax reform as part of deficit reduction and budget control. Both committees are expected to float a comprehensive tax reform package early this year that will seek to close some corporate loopholes and deductions as offsets to pay for other reform measures.

Heavy debate will focus on reducing overall U.S. corporate tax and capital gains rates, now the second highest in the world and likely to capture that number one spot as Japan reworks its corporate tax rates. Reworking corporate tax rates is seen as a means to entice companies to bring off-shore investment and savings back to the United States. Restructuring of personal income rates as part of the debate over the Bush tax cuts is also expected.

Input Costs/Availability
Overarching several issues confronting agriculture is the cost and availability of everything from corn, soybeans, and other crop ingredients to inputs, including fertilizer and feed ingredients. Much of the concern is being driven by global factors, e.g., what will be the impact of a prolonged South American drought on U.S. corn exports? What will Iran do or not do in the Straits of Hormuz, and how does Venezuela play in the evolving drama of dictators who control oil production? What does Russian agriculture production look to be, particularly in the Black Sea region, and what will its import/export policies look like? What will China do in 2012, and will it continue to be the United States’ near-largest customer for corn and soybeans?

What’s Europe’s macroeconomic/currency future? What will the U.S. government do to rein in institutional investment that most claim distorts the ability of true risk hedgers to use futures markets? Some of this will be addressed in the farm bill, some in energy policy development, and some in tax and awaited Dodd-Frank/Commodity Futures Trading Commission rulemakings.

Farm Bill
Production agriculture is focused like a laser beam on how to rewrite federal farm program income supports in a time of high on-farm income and restricted federal spending. However, given the difficulty in moving comprehensive and expensive farm legislation in an election year already has some national groups, including the National Cattlemen’s Beef Association, predicting the farm bill will not be completed until 2013, though drafts will circulate throughout this year and one or both committees may actually approve final versions. This is a risk because holding together what are always delicately balanced agreements resulting from farm bill negotiations through an election year and into a new Congress is a major gamble.

The chief priority for most farmers and ranchers – who have generally agreed the days of federal check-writing are over – is preserving federally subsidized crop insurance and risk management programs, with several grain/oilseed/cotton/rice/sugar/dairy groups having reinvented their federal payment programs as income insurance protection programs. The American Farm Bureau Federation, which issued several warnings on various crop groups’ new ideas through deliberations by the super committee on deficit reduction, will revisit all of its farm program recommendations, affirming or rewriting over the next few months what most have called support for the status quo, albeit with lower spending.

A bill fashioned by Senator Debbie Stabenow (D-MI), chair of the Senate Agriculture Committee, and Representative Frank Lucas (R-OK), chair of the House ag panel, but never submitted to the deficit reduction super committee, may provide ideas for a new farm bill, but will not be the foundation for the comprehensive bill. Congress will also need to decide how it will handle export promotion programs, including the Market Access Program. Industry has successfully protected these programs in the last few appropriations battles, but the farm bill rewrite means all programs are possible candidates for reinvention as a means of cutting their costs and contributing to deficit reduction.

The World Trade Organization (WTO) formally nixed the U.S. country-of-origin labeling regulations, so 2012 will bring the administration decision on whether to appeal that ruling or not. With Congress having finally ratified the free trade agreements with Panama, Colombia, and Korea, attention now turns to the Trans-Pacific Partnership, with the immediate focus on bringing Japan, and perhaps Canada, into the negotiations. The participation of these two nations, along with Australia and New Zealand, increases the importance of these discussions for the U.S. livestock sector.

Also on deck is congressional ratification of permanent normal trade relations for Russia now that that nation has been accepted into the WTO. This will be a heated debate based on Russian embargoes on poultry and other U.S. exports over the last couple of years. Also being watched closely is how Europe will continue to deal with agriculture and food products derived through biotechnology. The European Parliament continues to insist it must have parochial policies on products of biotechnology, including plant varieties and cloned livestock, their offspring, and the sale of semen and embryos into the European Union (EU). This effort failed over the last two years, but will ramp up. The world’s five largest livestock producing nations – the United States, Canada, Brazil, Argentina, and Australia – sent a warning letter to the EU last year on any precipitous action on cloning or the offspring thereof.

Animal Rights
The loudest battle, but one which will most likely be won by broad animal agriculture, will be over the agreement between the United Egg Producers (UEP) and the Humane Society of the United States (HSUS) on “enriched” environments for caged layers. Never before has a U.S. producer group asked for federal regulation of its on-farm production practices, and the precedent-setting nature of the action pits UEP against all livestock and poultry production, including a number of input organizations.

UEP says it cut the deal with HSUS to get out from under state referenda financed by the animal rights group, and to bring consistency back to state laws governing egg layer housing. HSUS will also likely continue to pursue federal legislation to make horse slaughter illegal in the United States, stricter regulation of transport of animals to slaughter, including horses, as well as forcing all meat processors to kill all nonambulatory livestock – no matter the species or the reason – so that they do not enter the food supply.

The world’s largest animal rights group may try and reinvigorate legislation it’s pushed for the last two Congresses restricting federal food purchases – including school lunch/breakfast programs; women, infants, and children assistance; and Department of Defense – so that only farmers practicing HSUS’ definition of animal welfare could be federal suppliers. An assault on the use of primates in biomedical research is expected, as well as HSUS support of a proposed ban on antibiotic use on farms.

Immigration Reform
Both sides of the aisle on both sides of the hill dread the notion of trying to rewrite federal immigration laws during an election year to deal with what’s estimated to be about 12 million illegal immigrants residing in the United States.

The extremes range from those who would round up all illegal residents and ship them back to their country of birth no matter the impact on the U.S. economy, to those who create a “path to citizenship” or an amnesty program for illegals so that industries that rely upon immigrant labor, including agriculture, will not suffer economically.

Also on the table are proposals to rewrite the temporary worker visa rules to make it easier for illegals to obtain permission to remain in the United States, as well as a dedication by Senate Democrats to provide citizenship to the children of illegals born in this country as long as they enroll in college or join the military. This effort will start in the Senate, led by Senators from California, Florida, Texas, and Arizona, but at the onset, there is no agreement among those elected officials on where to start and where they’d like to finish.

This is also an issue the White House would like to dodge, but given the growing importance of the Hispanic vote in national elections, the Obama administration may not have that luxury.

February 2012 RENDER | back