USDA's Dorr has long-term view of food and fuel
July 01, 2008
by Susan Reidy
Looking beyond today’s hysteria over rising commodity and food prices, U.S. Department of Agriculture (USDA) Undersecretary Thomas Dorr takes a longer-term view in which these price pressures can spur innovation and grow rural economies.
"We had no significant pricing power from 1980 to 2005; the food and commodity industries were pretty flat," said Dorr, undersecretary for rural development, during a visit in early June with Sosland Publishing Co. staff. "Now we have pricing growth coming about because of demand that is likely to be sustained over a long period of time. We have to decide what we need to do to make our business models competitive again."
He suggested letting the markets work through the increases rather than making drastic policy decisions such as eliminating biofuels mandates or setting international sustainability standards.
"Right now, there is going to be some pain in this transition. Restricting things is not going to mitigate the linear demand growth curve," Dorr said. "The most important thing we can do is try to keep our eye on the ball and give the markets an opportunity to sort through this. We will come out better in the long run."
GOOD POLICIESDorr said the world has experienced price pressures on grain before — following World War II and in the 1970s. Following the war, the government stimulated growth and demand for quality food, causing the price of corn (maize) to double from 1945 to 1952.
In the 1970s, a sudden explosion in demand for grain in the export market took corn from 90 cents a bushel to $3.60, and what followed were some ill-advised policy decisions, Dorr said.
"Those dumb policies resulted in commodity prices going down the pipe," Dorr said. "Oil went from $40 a barrel to under $10. Corn was down to $1.25 a bushel. We just hammered it. Those policies were part of a bigger picture, but they didn’t enhance our ability to come through this."
Changing policies that are already in place will not improve today’s situation, he said. For example, taking the Renewable Fuels Standard (RFS) out of the picture, which has been suggested by some U.S. lawmakers and leaders overseas, is not going to have a significant impact on commodity prices, Dorr said. The U.S. has roughly 150 biorefineries online with another 50 under construction, he said.
"Many of the earlier plants are paid for and are not going to go away," he said. "On top of all that, the blender’s credit is less and less relevant the higher oil prices go. We’ve had the blender’s credit since the late 1970s, early 1980s. We didn’t produce a substantial quantity of ethanol until oil was more than $50 a barrel."
The RFS, which calls for using 36 billion gallons of renewable fuel by 2022, is equivalent to 1 billion barrels of crude oil.
"All of the available renewable sources are largely rural," Dorr said. "You displace a billion barrels of crude oil with a domestically developed product that, at today’s prices, is greater than net farm income. Another thing that is overlooked is that because of renewable energy, we’ve doubled the equity value of farmers’ and ranchers’ privately held assets from $1.1 trillion to $2.3 trillion."
Dorr is opposed to creating international sustainability standards as has been proposed by several international groups. Such standards, he said, accede to questions such as: Where it is acceptable to source feedstocks? What was the land previously used for? What are the impacts of growing that feedstock? He’d prefer science and technology benchmarks to guide the industry to sustainability. "Sustainability standards are essentially potential code words to trade restrictions," he said.
He equated such standards to the voluntary GMO standards from the Uruguay round of GATT negotiations that started in the late 1980s. Countries set their own standards that allowed preclusion of GMO products and created trade barriers. Dorr also said the root cause for the price pressures is not biofuels but the increasing demand for energy from 3 billion more people aspiring to a middle-class lifestyle.
"Nobody in the policy arena or private sector correctly anticipated the new demand for energy," Dorr said. "That new demand is leading to temporary pricing pressures. The increase in the price of food is minimally impacted by the amount of grain going into ethanol."
Dorr noted that there is an ample supply of corn for both food and fuel, and there’s more land available for planting. He said 25% of the Black Sea area that was in production under the Soviet Union is still not planted. Additionally, there are significant portions of land in Africa that can be brought back into production.
"It’s not a case of not having enough resources to generate feedstocks for feed and fuel," Dorr said. "It’s dependent on government’s imposing policies and getting people to deal with the fact that we don’t know of any loss of life from GMOs. It’s clearly time to start stepping up to the plate with the technology we have, mitigating trade issues and bringing a number of opportunities online. Globally, everybody has a responsibility to work with us and work through this."
Dorr said rising costs for commodities and energy will likely spur further innovation. He used the example of a group looking at new hog slaughter facilities that will substantially alter food safety issues and have huge energy savings. "I think what we’ll see as we continue to ramp up energy cost factors is people getting creative in ways to solve these problems," he said. "For 25 years, there has been no incentive to invest in the commodity business. In the long term, we will benefit greatly."
Developing nations, competitive nations and others must realize the price increases create significant opportunity for rural areas, Dorr said.
"There is a significant opportunity to gain economic power. Let’s recognize that by empowering people with information and tools, they can do dramatic and dynamic things," he said.
Looking to the future, if oil reaches a speculated $200 a barrel, Dorr said there will be some difficult discussions and some substantive adaptations.
"On the same token, who would have thought we’d have $130 barrel oil?" he said. "We’re clearly suffering some stresses, but it’s not brought us to our knees yet. I think if we have $200 barrel oil and $6-to-$7-per-bushel corn, we’re going to go down channels of new technology we’ve never thought of before. In the long run, we’ll be more efficient, but we also know there will be some people that will go by the wayside."
Dorr said he hopes biofuels producers have been wise enough to prepare for today’s market. "I know what it’s like to go through a famine, and I also know the tendency when you have a feast to start ramping up and not pay attention to the cash balance," he said. "Many of these plants, particularly the early ones, are well positioned. We are not going to shut the spigot off."
Dorr said some biodiesel plant operators have called looking for government assistance, saying they can’t afford to start production. His response: It’s not the government’s job to bail them out.
"They need to find the best restructuring plan they can and revalue the project in a way that makes it cost-effective," he said. "We have to be honest about this; some of these investments may not have been prudent."