KEEPING AN EYE ON WASHINGTON

Ontario agriculture, especially the grains and oilseed sector, operates in a business environment dominated by policy initiatives south of the border. There are currently two such items moving through the U.S. Congress that will have a lasting impact here: the Fiscal Year 2006 U.S. Budget Resolution; and the Energy Bill.

A comprehensive U.S. Energy Bill has been years in the making. Progress was made towards passage of legislation two years ago when oil companies, environmentalists, and U.S. corn growers agreed to a compromise which exempted petroleum companies from litigation surrounding Methyl Tertiary Butyl Ether (MTBE: a carcinogenic oxygenate additive to gasoline) contamination of water sources. But the MTBE litigation exemption became a stumbling block in a Democratic Senate. Now, with Chinese demand for petroleum escalating rapidly and crude oil prices 40% higher than one year ago, another Energy Bill is making its way through Congress.

Ethanol and other renewable fuels stand to benefit from proposed targets, incentives, and assistance. The original Energy Bill target was 5 billion gallons of ethanol by 2010. But since the U.S. has already surged well over 3.3 billion gallons of annual usage and will surpass the 5 billion mark ahead of schedule, one proposed target calls for 6 billion gallons by 2007, and 10 billion by 2012.

However, one contentious feature of this version, in addition to the MTBE litigation exemption, is the opening of the Arctic National Wildlife Refuge in Alaska to exploratory drilling. Environmentalists, and of course Democrats, are appropriately outraged, but additional reserves and supply under U.S. control are a vital security issue. A Republican controlled House, Senate, and White House will eventually force an Energy Bill through and include drilling in the reserve as well as a plan to encourage building refineries at closed military bases. Locating on government land will simplify and speed-up the complex and political permitting process, which, along with a lack of suitable building sites, has supposedly discouraged oil companies from building new capacity.

Under any new Energy Bill legislation, ethanol production in the U.S. will continue to be subsidized and expanded. How does that impact Ontario corn producers? Expanded exports of U.S. ethanol to meet a Renewable Fuel Standard in Ontario are a distinct probability. That's why the appropriate incentive package must be implemented in Ontario to ensure ethanol plants are built here using as much Ontario corn as possible to maximize rural economic development benefits.

The Fiscal Year 2006 Budget Resolution is important because the U.S. must find a way to reduce government deficits that have ballooned with military commitments overseas and the efforts to combat terrorism at home. To bring deficits under control, President Bush called for reductions in virtually all aspects of government spending, including agriculture.

The President proposed to slice a modest 5% from USDA spending over 5 years targeted at cuts in USDA programs classified as "mandatory" meaning outside the annual budgetary appropriations process. Programs authorized under the 2002 Food Security and Rural Investment Act (the U.S. Farm Bill) such as the new Counter-cyclical Payment program or the pre-existing Loan Deficiency Payment program are mandatory meaning the USDA must make, and Congress must fund, all payments when triggered by program regulations. These programs are therefore outside the control of the annual budget process. Since such mandatory program spending accounts for about 75% of all USDA spending, the only way to meet the reductions targeted by U.S. President George Bush was to propose changes in these mandated programs. The bulk of the USDA's mandatory spending are the farm commodity price and income support programs, the food stamp program and most child nutrition programs. Proposals to reduce U.S. spending on farm subsidies that hammer commodity prices artificially lower are of course of interest to Ontario grain and oilseed farmers.

Proposing cuts to U.S. farm commodity price and income support programs, however modest, is one thing; actually making them stick is something else altogether. The House of Representatives proposed slicing US$5 billion over 5 years from USDA mandatory program spending; but the Senate strongly rejected that level of reduction. Instead, the Senate proposed a mere US$3 billion in cuts over 5 years and seems to have won the day. In late April, Congressional budget resolution negotiators agreed on details calling for US$3 billion in cuts mostly from mandatory program spending.

Details are sparse, but the cuts will be achieved primarily through lowering of the cap on the support any one participant could garner. The proposal appears to reduce the maximum amount an individual participant can receive from all programs combined from US$375,000 down to US$250,000. However, the proposal appears to retain the "3-entity" rule meaning a farm enterprise can be split into a maximum of 3 shareholdings each attracting the maximum US$250,000.

Canadian and Ontario government officials, unwilling to do anything to offset the injury caused by U.S. subsidies to Ontario grain and oilseed producers, pointed to the proposed 5% cut in USDA spending as a sign of good things to come. They didn't have to do anything to help us, the U.S. would reduce subsidies by itself, and all we had to do was wait. However, the upshot of the FY06 budget resolution is that rather than lower the loan rate, or reduce the target price, or cut direct payment amounts, any of which would have benefited Ontario producers through reduced U.S. subsidies, not much meaningful will transpire.

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