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Potential Economic Opportunities for Agriculture of Climate

and Energy Policy

Minnesota Ag, Climate and Energy ForumJune 28, 2010

AFT’s Mission

Stop the loss of farmland and protect it for future generations

Help farmers and ranchers produce a cleaner environment

Maintain economically sustainable agriculture sector

Agriculture & Environment Initiative

Helping farmers and ranchers to improve water quality and combat climate change while expanding their sources of revenue

AFT’s New Campaign

April 2010

AFT & NAWG Conduct Study to Understand Economic Impacts

•Study presented at the 2010 Commodity Classic, Anaheim, CA

Informa Study Conclusions

• Cap & trade has potential to provide significant long-term benefits, if properly structured

• But there are policy designs that can be harmful

• Production cost increases modest• Opportunity for farmers to gain more income

from offsets, renewable energy• EPA regulation would be worse for farmers

Additional findings

• Land use shifts regional impacts; but marginal not prime land switches first

• Not all farmers able to participate in offset markets

• Not all about offsets; additional revenue via energy policies such Renewable Electricity Standard (RES)

Key Conclusion

To benefit from policies, agriculture must be actively engaged in developing those policies, working with others and Members of Congress

Carbon Price Drives Costs for Farmers

• Carbon cap will decline• Carbon price increases• Energy price increases

• The cost of fuel and fertilizer = increase in production costs

• Significant allowances to fertilizer industry will help offset costs

until 2035

Increasing fuel and fertilizer costs will raise cost of production only “moderately”

-

10

20

30

40

50

60

Corn Wheat Soybeans Corn Wheat Soybeans Corn Wheat Soybeans

205 bu/acre= $0.03/bu

48 bu/acre =$0.08/bu

53 bu/acre =$0.05/bu

215 bu/acre= $0.09/bu

50 bu/acre =$0.19/bu

56 bu/acre =$0.1/bu

226 bu/acre= $0.22/bu

52 bu/acre =$0.4/bu

59 bu/acre =$0.19/bu

1.2% 1.9% 1.2% 3.7% 4.1% 2.1% 7.8% 7.3% 3.3%

2025 2030 2035

Cos

t of P

rodu

ctio

n Im

pact

s, $

/acr

e (c

ost a

bove

refe

renc

e ca

se)

Fuel,Lube, and Electricity Fertilizer Transport (Farm-Elevator/Processor) Added Fertilizer Impact - (no offset assumption)

w/Fert. Offset Assumption

Yield Scenario/$perBu Impact

% Reference Variable Costs

% chg costs 1.2% 1.9% 1.2% 3.7% 4.1% 2.1% 7.8% 7.3% 3.3%

Carbon Markets Provide RevenueOpportunities for Agriculture

• Agriculture is not a capped sector

• Agriculture, including livestock, has opportunities to sell offsets

• No-till is potentially the most widely adopted carbon sequestration practice

• Other activities can be implemented to “farm carbon” and increase farmer revenues

• Most other industries do not have offset alternatives

Variety of activities can generate offsets

0 50 100 150 200 250 300

Afforestation of cropland SR = 1.52

Cropland to perennial SR = 1

Conservation Buffers SR = 0.56

Conservation to NO-TILL SR = 0.53

Improved crop rotations SR = 0.23

Fertilizer management SR = 0.12

Use organic manure SR = 1.03

Improved irrigation SR = 0.12

Afforestation of pasture SR = 1.19

Rangeland management SR = 0.29

Use of organic manure SR = 1.03

Planting of improved species SR = 0.59

Grazing management SR = 0.88

Carbon Credit in $/Acre - Nominal Prices

2015 2035

SR = Sequestration Rate in $ per Mt of CO2e/ac

Adoption of No-Till Economically Sound

(60)

(40)

(20)

-

20

40

60

80

100

Corn Soybeans Wheat Corn Soybeans Wheat

2025 2035

Ne

t Im

pac

t ($

/acr

e)

Non-Adopter

No-Till Adopter (w/ est. adoption costs)

Industry Weighted Net Impact

Additional Opportunities for Farmers thru Renewable Energy Production

• Target 20% of electricity by 2020 to be from renewable sources

• EIA projects renewable sources to account for ~15% of electricity by 2020 without cap-and-trade

• Biomass (e.g., crop biomass, energy crops,

forest residues) expected to contribute the bulk

• Implications by 2020: more biomass, more land in energy crops, more revenue for farmers

Land Use Shifts Affects Marginal Land

• Pastureland will shift to forests before cropland

• Marginal acres may shift to forage

• South has a competitive advantage in biomass

• Even at higher carbon prices, prime cropland will not shift to forestry or perennials

Livestock Offset Revenue Opportunities

Two General Practices to Sequester Carbon 1. Enteric Fermentation

2. Manure Management

Dairy - greatest opportunity Poultry - few opportunities Swine - some opportunities via manure

management Feedlots - some opportunities via enteric

fermentation

Climate Bill Better Than EPA Regulation

• Cap-and-Trade is more efficient than direct EPA oversight• EPA Regulation = Higher production cost impacts

• EPA Regulation would not provide revenue opportunities for agriculture

• EPA Regulated case could include agricultural and livestock producers – C&T does not.

• Production cost impacts could potentially be multiple times more than that of cap-and-trade

Policies that Matter to Agriculture

• Fertilizer allowances (and ensuring they are passed on to farmers)

• Maximizing number of domestic offsets• USDA manages ag offset program• Specific list of approved ag offsets• Opportunity to add new offset practices• Involvement in methodologies and

protocols to calculate impact on GHG• Treatment of early actors

Informa’s Bottom Line

• Gains are expected to exceed costs within agriculture sector as a whole, if policy structured correctly

• Cost of production impacts are relatively small

• Numerous potential revenue opportunities available to farmers

• If structured properly, C&T could benefit a large number of farmers but not all

• Cap-and-trade approach is significantly better than an EPA regulated system

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