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Cap-and-Trade
        Impacts of H.R.2454 on U.S.
                Agriculture




        Presented at the Commodity Classic
March             March 3, 2010
2010
GHG Emissions from Capped Sectors
                          (MMT CO2e)




           -
               1,000
                       2,000
                                                                          3,000
                                                                                  4,000
                                                                                                               5,000
                                                                                                                       6,000
                                                                                                                               7,000
                                                                                                                                                                                          8,000
    2012
    2013
    2014
    2015
    2016
    2017
    2018
    2019
    2020
    2021
    2022
    2023
    2024
    2025
    2026
    2027
    2028
    2029
    2030
    2031
                               Emissions with Cap-and-Trade = "The Cap"




    2032
    2033
                                                                                                                                       Emission Projections without Cap-and-Trade (EPA)




    2034
    2035
                                                                                                                                                                                                  Cap-and-Trade Overview




    2036
    2037
    2038
    2039
    2040
    2041
    2042
    2043
    2044
    2045
    2046
    2047
                                                                                          Emission Reduction




    2048
    2049
    2050
1
Costs
Cost Drivers for Agriculture
Basics
 Carbon Cap declines

 Carbon price increases (free today)

 Energy prices increase

 Fuel and fertilizer prices increase = Cost of
production increases
  Freely distributed allowances to fertilizer industry help offset
  fertilizer price increases until 2035




                                                                     3
Cost Drivers
Three BIG Questions
1. What is the carbon price?
   - Future energy demand
   - Alternative energy supply
   - Offset supply

2. What is the impact on energy prices?
      Cap and Trade Energy Price Impact
       (relative to reference case)
      (nominal $)                        EIA Base
                                    2020   2030       2035
      Carbon Price                 31.75   64.83     92.64
      Diesel (cents/gallon)        32.57   78.31    122.20
                              3
      Natural Gas ($/thous.ft. )    1.47    3.81      6.81

3. How does that impact cost of production?...

                                                             4
U.S. Wheat Production Cost Impacts –
(Avg. Farm)
Production Cost Impacts (relative to reference)




                                                   25.0
                                                          Added Fertilizer Impact - (zero allowances)
                                                          Fertilizer
                                                   20.0   Transport (Farm-Elevator/Processor)                                               $21.06 / 7.3%
                                                          Fuel,Lube, and Electricity


                                                   15.0
                  ($/acre)




                                                   10.0
                                                                                                                                            $9.52 / 4.1%


                                                    5.0
                                                                                                                      $3.64 / 1.9%
                                                                                                $2.67 / 1.6%
                                                                      $1.67 / 1.3%
                                                     -
                                                              2015                      2020                   2025                  2030                   2035
$ per Acre / % of Reference Case Variable
*Does not include fuel or fertilizer efficiency increases beyond that assumed in the reference case.
Source: Informa Economics, EIA and ERS

                                                  The cost of cap-and-trade to the average wheat
                                                  grower = $4/ac by 2025 and $21/ac by 2035.
  Key Policy Message: Fertilizer allowances are critical.

                                                                                                                                                                   5
Example: Prairie Gateway Wheat Farm
     Budget -2025
         350
                                                                                              Revenue

         300                                                                                Costs
                                                                                              Increase due to C&T

         250                                                                    Net
                          Net Revenue              Net Revenue                  Revenue       Other
                          $112/acre                $108/acre                    $105/acre
         200
$/Acre




                                                                                              Seed

         150
                                                                                              Repairs

         100
                                                                                              Fuel, lube, and
                                                                                              electricity
          50
                                                                                              Fertilizer

           0
               2025 Ref                 2025 C&T                  2025 C&T
                                                                    (no fert.
                                                                 allowances)


 Nominal$

                                                                                                                    6
Cost Impacts Relative to Corn and
Soybeans

         Fuel,Lube, and Electricity                          Fertilizer     Transport (Farm-Elevator/Processor)   Added Fertilizer Impact - (no offset assumption)
                                                 60
            Cost of Production Impacts, $/acre
               (cost above reference case)




                                                 50


                                                 40


                                                 30


                                                 20


                                                 10


                                                  -
                                                      Corn          Wheat       Soybeans      Corn       Wheat     Soybeans      Corn        Wheat      Soybeans
w/Fert. Offset Assumption     205 bu/acre 48 bu/acre = 53 bu/acre = 215 bu/acre 50 bu/acre = 56 bu/acre = 226 bu/acre 52 bu/acre = 59 bu/acre =
 Yield Scenario/$perBu Impact = $0.03/bu    $0.08/bu     $0.05/bu   = $0.09/bu    $0.19/bu     $0.1/bu    = $0.22/bu    $0.4/bu      $0.19/bu

  % Reference Variable Costs                          1.2%          1.9%          1.2%        3.7%       4.1%        2.1%        7.8%         7.3%        3.3%
                                                                    2025                                 2030                                 2035




                                                                                                                                                                     7
Conclusions
 Impact on wheat production costs is less than corn
but more than soybeans.
 Impacts are minimal in the short-term; up until 2025.
 Fertilizer allowance assumptions are critical.
 On a regional basis:
  Short-term: impacts are higher in the Prairie Gateway due to
  energy used for irrigation.
  Long-term: regions (e.g., Prairie Gateway and Northern Great
  Plains) and farmers with lower nitrogen based fertilizer usage will
  be at a distinct advantage.



                                                                        8
Benefits:
Carbon Offset Opportunities
Carbon Offset Credits – What are
they?
 C&T creates a tradable market for GHG emissions
 Agriculture is not a capped sector under C&T
 However, by reducing carbon, agriculture can sell a
carbon offset credit for every ton of GHG emissions
reduced.
 Sell these credits at the market carbon price to
capped sectors.
 Capped sectors use these credits just like
allowances.


                                                       10
How do I get carbon offset credits?
                                                                                                  Carbon Sequestration Rates - Mt CO2e/ac
                                                                                                           0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

                                                                           Afforestation of cropland /1
             CROPLAND:
              Land-Use
              Changes
                                                                Croplands shifted to perennial grasses
                                                                               Conservation Buffers/2
                                                                               Restoration of wetlands

                                                                             Conservation to No-Till /3
                  Pasture Grazing Production Practice




                                                        Improved crop rotations and winter cover crops
                                      Changes




                                                                          Elimination of summer fallow                Average   High   Maximun
                                                                           Improved fertilizer manager
                                                             Use of organic manure and byproducts /4
                                                                      Improved irrigation management

                                                                               Afforestation of pasture
                Management Land




                                                                              Rangeland management

                                                                             Improved use of fertilizers
                                                                                Use of organic manure
                                                                          Planting of improved species
                                                                                 Grazing management


         Source: USDA, CCX, DOE, Informa Economics

Key Policy Message: Methodology used to calculate SRs can have large impact on
   net farm revenues and potential cropland acreage shifts.

                                                                                                                                                     11
What is the Revenue Potential?
Practice                                          Sequestration Rate          2012    2015     2020       2025      2030    2035
                                                    Mt CO2e/ac                        Carbon Credit - $/Acre *
Afforestation of cropland /1                            1.90                     25       38        62        100     160     255
Croplands shifted to perennial grasses                  1.25                     19       25        41         66     105     167
Conservation Buffers/2                                  0.70                     11       14        23         37      59      93
Restoration of wetlands                                 0.37                      6        7        12         19      31      49

Conservation to No-Till /3                                0.66                   10       13        22        35       56      89
Improved crop rotations and winter cover crops            0.29                    4        6        10        15       25      39
Elimination of summer fallow                              0.15                    2        3         5         8       12      20
Improved fertilizer manager                               0.15                    2        3         5         8       12      20
Use of organic manure and byproducts /4                   1.28                   20       26        42        67      108     172
Improved irrigation management                            0.15                    2        3         5         8       12      20

Afforestation of pasture                                  1.48                   23       30        48        78      125     198
Rangeland management                                      0.37                    6        7        12        19       31      49

Improved use of fertilizers                               0.55                    8       11        18        29       46      74
Use of organic manure                                     1.28                   20       26        42        67      108     172
Planting of improved species                              0.73                   11       15        24        39       62      98
Grazing management                                        1.10                   17       22        36        58       92     147


Carbon Price (nominal$/CO2e)                                                     19       25        41        66      105     167
* Sequestration rates are discounted by 20% to reflect potential reversals.
Source: USDA, CXX, DOE, IEA, Informa Economics.


 Key Policy Messages: (1) Limitation on # of Re-enrollment periods will significantly
    impact potential revenues in the out years (2) Ability to stack carbon credits
    could add significantly to potential revenue opportunities

                                                                                                                                    12
Average No-Till Carbon Sequestration
Rate by Region and Major Crop


                                               Northern Great Plains
                                               Northern Great Plains
                                                                                                               Northern Crescent
                                                                                                               Northern Crescent




                             Basin and Range                              Heartland
                                                                          Heartland
                             Basin and Range



   Fruitful Rim
   Fruitful Rim                                                                             Eastern Uplands
                                                                                            Eastern Uplands


                                                                                                          Southern Seaboard
                                                                                                          Southern Seaboard




                                                Prairie Gateway
                                                Prairie Gateway
                                                                       Mississippi Portal
                                                                       Mississippi Portal
    No Till Sequestration Rates
    (CO2e Tonnes per Acre)
                    0.61




       Corn
       Soybeans
       Wheat
       Cotton

  © 2009 Informa Economics, Inc.




                                                                                                                                   13
Distinction between Continuous and
 Rotational No-Till
                        US
                                                                             Rice
      Northern Great Plains


         Northern Crescent
                                                                             Cotton
                 Heartland


          Basin and Range
                                                                             Wheat
               Fruitful Rim


          Eastern Uplands
                                                                             Soybeans
        Southern Seaboard


           Prairie Gateway
                                                                             Corn
         Mississippi Portal


                              0%   10%   20%   30%   40%   50%   60%   70%

Key Policy Message: Addressing additionality - Distinction btw continuous
  and rotational
                                                                                        14
Wheat
Net Impact: Benefits of no-till – Costs
                              60

                                                      Net Impact for Adopters (no adoption costs)
                              50

                                                      Net Impact for Non-Adopters
Net Revenue Impact ($/acre)




                              40

                              30

                              20

                              10

                                -

                              (10)

                              (20)

                              (30)
                                     2012

                                            2013

                                                   2014

                                                          2015

                                                                 2016

                                                                        2017

                                                                               2018

                                                                                      2019

                                                                                             2020

                                                                                                    2021

                                                                                                           2022

                                                                                                                  2023

                                                                                                                         2024

                                                                                                                                2025

                                                                                                                                       2026

                                                                                                                                              2027

                                                                                                                                                     2028

                                                                                                                                                            2029

                                                                                                                                                                   2030

                                                                                                                                                                          2031

                                                                                                                                                                                 2032

                                                                                                                                                                                        2033

                                                                                                                                                                                               2034

                                                                                                                                                                                                      2035
        Cost for non-adopter (no offset revenue): $4/ac by 2025 and
        $21/ac by 2035.
        Net Gain for no-till adopter (no adoption costs): $25/ac by 2025
        and $51/ac by 2035.
                                                                                                                                                                                                             15
Wheat
Net Impact: Benefits of no-till – Costs
                              60
                                                      Net Impact for Adopters (no adoption costs)
                              50
                                                      Net Impact for Non-Adopters
Net Revenue Impact ($/acre)




                              40                      Net Impact for Adopters (w/ est. no-till costs)


                              30

                              20

                              10

                                -

                              (10)

                              (20)

                              (30)
                                     2012

                                            2013

                                                   2014

                                                          2015

                                                                 2016

                                                                        2017

                                                                               2018

                                                                                      2019

                                                                                             2020

                                                                                                    2021

                                                                                                           2022

                                                                                                                  2023

                                                                                                                         2024

                                                                                                                                2025

                                                                                                                                       2026

                                                                                                                                              2027

                                                                                                                                                     2028

                                                                                                                                                            2029

                                                                                                                                                                   2030

                                                                                                                                                                          2031

                                                                                                                                                                                 2032

                                                                                                                                                                                        2033

                                                                                                                                                                                               2034

                                                                                                                                                                                                      2035
                 Adopting no-till does not come without a cost (e.g., yield drag,
                 equipment investment, risk).
                 Net Gain for no-till adopter (with/ est. adoption costs): $17/ac by
                 2025 and $47/ac by 2035.
                                                                                                                                                                                                             16
Wheat
Net Impact: Benefits of no-till – Costs
                              60

                                                          Net Impact for Adopters (no adoption costs)
                              50
                                                          Net Impact for Non-Adopters

                              40                          Net Impact for Adopters (w/ est. no-till costs)
Net Revenue Impact ($/acre)




                                                          Net Impact for All Wheat (w/ est. no-till costs)
                              30

                              20

                              10

                                -

                              (10)

                              (20)

                              (30)
                                     2012

                                            2013

                                                   2014

                                                             2015

                                                                    2016

                                                                           2017

                                                                                  2018

                                                                                         2019

                                                                                                2020

                                                                                                       2021

                                                                                                              2022

                                                                                                                     2023

                                                                                                                            2024

                                                                                                                                   2025

                                                                                                                                          2026

                                                                                                                                                 2027

                                                                                                                                                        2028

                                                                                                                                                               2029

                                                                                                                                                                      2030

                                                                                                                                                                             2031

                                                                                                                                                                                    2032

                                                                                                                                                                                           2033

                                                                                                                                                                                                  2034

                                                                                                                                                                                                         2035
    Not every wheat farmer will be able to practice no-till.
    Net Industry Gain (w/ no-till as only offset): $4/ac by 2025 and
    $35/ac by 2035.
                                                                                                                                                                                                                17
Example: Prairie Gateway Wheat Farm
   Budget
         350

                                                                       Carbon Credit
         300
                                                      Net
                                        Net Revenue   Revenue
         250                            $121/acre     $118/acre        Revenue
                          Net Revenue
                          $112/acre
                                                                     Costs
         200
$/Acre




                                                                       No-till Costs
         150


         100                                                           Increase due to C&T


          50
                                                                       Production Costs

           0
                          2025 Ref      2025 C&T       2025 C&T
                                                         (no fert.
                                                      allowances)



               Nominal$

                                                                                             18
Wheat
Net Impact: Benefits of no-till – Costs
Conclusions (no-till)
 Wheat has a larger potential gain than corn but
smaller than soybeans.
 On average, U.S. wheat producers could benefit by
approximately $35/acre from cap-and-trade by 2035.
  Some farmers/regions will not benefit to the same
degree as others --- benefit will primarily be driven by
the carbon SR.




                                                           19
There are opportunities other than no-till
Practice                                          Sequestration Rate          2012    2015     2020       2025      2030    2035
                                                    Mt CO2e/ac                        Carbon Credit - $/Acre *
Afforestation of cropland /1                            1.90                     25       38        62        100     160     255
Croplands shifted to perennial grasses                  1.25                     19       25        41         66     105     167
Conservation Buffers/2                                  0.70                     11       14        23         37      59      93
Restoration of wetlands                                 0.37                      6        7        12         19      31      49

Conservation to No-Till /3                                0.66                   10       13        22        35       56      89
Improved crop rotations and winter cover crops            0.29                    4        6        10        15       25      39
Elimination of summer fallow                              0.15                    2        3         5         8       12      20
Improved fertilizer manager                               0.15                    2        3         5         8       12      20
Use of organic manure and byproducts /4                   1.28                   20       26        42        67      108     172
Improved irrigation management                            0.15                    2        3         5         8       12      20

Afforestation of pasture                                  1.48                   23       30        48        78      125     198
Rangeland management                                      0.37                    6        7        12        19       31      49

Improved use of fertilizers                               0.55                    8       11        18        29       46      74
Use of organic manure                                     1.28                   20       26        42        67      108     172
Planting of improved species                              0.73                   11       15        24        39       62      98
Grazing management                                        1.10                   17       22        36        58       92     147


Carbon Price (nominal$/CO2e)                                                     19       25        41        66      105     167
* Sequestration rates are discounted by 20% to reflect potential reversals.
Source: USDA, CXX, DOE, IEA, Informa Economics.

   Fertilizer Management = + $20/ac by 2035
   Elimination of Summer Fallow = + 20/ac by 2035

                                                                                                                                    20
Examples of Other Offset
Opportunities
Elimination of Summer Fallow/Cover Crop
   Benefits
   $20/acre carbon payment (2035).
   Reduced erosion
   If using a cover crop,
       Reduction in weed, pest and disease pressures
       If cover crop is a legume, can help fix nitrogen in the soil
       $39/acre carbon payment if using a cover crop (2035)

  Costs
   Reduced moisture – summer fallow is often used to store water in
   soil prior to seeding
   Planting costs if using a cover crop

                                                                      21
Examples of Other Offset
Opportunities
Improved Fertilizer Management
   Benefits
   $20/acre carbon payment (2035).

  Costs

  Improved fertilizer management could include:
   Systems to better match supply and demand
   Sub-surface applications
   Use of ammonium nitrogen sources not mobile forms of nitrogen
   such as nitrate and urea
   Use of advanced fertilizers, examples:
      Slow release fertilizers
      Stabilized nitrogen fertilizers
      A nitrification inhibitor
                                                                   22
Conclusions – Carbon Offset
Opportunities
 There are a number of potential revenue
opportunities available to farmers under C&T.
 If structured properly, C&T could benefit a large
number of wheat farmers.
  However, not everyone will benefit to the same level.

 Legislation is not open or closed to additional
opportunities.




                                                          23
Top Policy Issues

 Allowances to fertilizer industry are critical in keeping
production cost impacts down
  Methodology used to calculate SRs can have large
impact on net farm revenues and potential cropland
acreage shifts.
 Clearly establish minimum set of offset practices.
The Bill should establish the current list of offset practices
as a minimum set – not as examples.
  Limiting the number of offset credit periods in which
a producer can re-enroll their offset practice will limit offset
credits available to farmers in later years when the cost
impact of cap-and-trade is greatest.

                                                                   24
Renewable
Electricity Standard
Renewable Electricity Standard (RES)

 C&T creates a federal RES, which requires 20% of
electricity by 2020 to be from renewable sources.

 Creates increased demand for wind, solar and
renewable energy crops.

 Potential to increase revenues, in certain
scenarios.

  Currently enacted state RESs mitigate demand
increase due to C&T.

                                                    26
Reference Scenario
(No Cap-and-Trade)
                                                       Reference Case Renewable Electricity Generation
                           900
                                    Wind
                           800      Solar
                                    Wood and Other Biomass
                                    Municipal Solid Waste
                           700
                                    Geothermal
Generation (billion kwh)




                                    Conventional Hydropower
                           600

                           500

                           400

                           300

                           200

                           100

                             0
                             2006   2008     2010     2012    2014    2016    2018    2020    2022       2024   2026   2028   2030


                             Source: EIA


                                                                                                                                     27
Biomass Contributes Largest Share of
                                 Increase under C&T
                                                                    Additional Renewable Energy Generation by Source (Basic - Reference)
                                                 250
Electricity Generation (billion kilowatthours)




                                                             Wind
                                                             Solar
                                                             Wood and Other Biomass
                                                 200         Municipal Solid Waste
                                                             Geothermal
                                                             Conventional Hydropower

                                                 150




                                                 100




                                                  50




                                                   0
                                                   2012   2013   2014   2015   2016   2017   2018   2019   2020   2021   2022   2023   2024   2025   2026   2027   2028   2029   2030
                                                                                                                                                                   Source: EIA
                                                 Infrastructural issues limit further wind expansion.
                     Other gov’t programs, such as BCAP improve biomass
                    economics
                                                                                                                                                                                        28
RES Impact on Agriculture
2020 Total Renewable Electricity Increase
  171 billion kwh

2020 Biomass
  161 billion kwh = 32 million tons;
  Electricity: $15.7 billion

Additional Energy Crop Acres
  1.6-4.8 million
 Scenario Assumptions:
      Energy crops account for 50-75% of biomass increase
      Energy crop yields of 5-10 dry tons/acre


                                                            29
Specific Case Study
Kansas Wheat – Switchgrass Example
                                        2011          2012       Year 3-10
      SWITCHGRASS CASH FLOW
      Yield                                  1.50         4.59        6.70
      FARMGATE COSTS (includes labor)
      Establishment Costs ($/acre)          52.40        13.44         -
         Establishment Costs              209.62         53.76         -
         BCAP                             157.21         40.32
      Production Costs ($/acre)             65.34       164.40      283.80
      Farmgate Costs ($/acre)             117.75        177.84      283.80
      GROWER REVENUE
      Grower Payment ($/acre)               39.40       110.27      250.68
         Grower Payment ($/ton)*            26.27        24.02       37.22
      BCAP Payments ($/acre)                39.40       110.27       36.26
         BCAP Matching Funds                39.40       110.27
         BCAP Annual Payment **                                      36.26
      Carbon Payment ($/acre)                 -          20.06       31.37
      Grower Revenue ($/acre)               78.80       240.61      318.31
      NET RETURNS
      Net Return ($/acre)                  (38.95)       62.77       34.52
      * Based on a delivered feedstock price of $50/ton
      ** Payments distributed through 2017

                                                                             30
Specific Case Study
Kansas Wheat – Switchgrass Example

                                                Average Annual
                                                Return ($/acre)    NPV 2011-2020
Prairie Gateway Wheat
 @ Avg. Yields                                            56.89            409.17
 @ Yields 20% below Avg.                                  11.94             87.70
Switchgrass
 Base Scenario (Delivered Feedstock =$50/ton)             30.00            221.50
 Delivered Feedstock =$60/ton                            111.82            799.09
 Delivered Feedstock =$40/ton                            (52.16)          (359.27)




                                                                                     31
Acreage Shift
Implications
Acreage Shift Assessment
1. Early on, the majority of the acreage shifts due to
   afforestation will likely come from pastureland.

2. Initially, the majority of cropland shifts will be to
   perennial crops, with the exception of certain
   regions where barriers to entry for forestry are
   lower.
      Increased demand for forage and energy crops (RES, RFS,
      and pasture shift)
      Less risk
      Additional income stream
      Lower start-up costs
      Cultural reasons – “Farming as a way of life”

                                                                33
Acreage Shift Assessment
3. As the carbon price increases, particularly in the years
   beyond 2035, more cropland can be expected to go into
   forestry.


4. Yet, even at higher carbon prices (up to 2035), prime
   cropland will not shift to forestry or perennial crop
   production.


5. Regions and crops with larger net returns can expect to see
   less acreage shifting to these alternative carbon crops than
   regions with lower net returns.
         Wheat acreage can be expected to decline the most
        relative to corn and soybeans


                                                                  34
Potential Carbon Revenue
Opportunities for Livestock
Enteric Fermentation
 Enteric fermentation emissions are twice as large a
market as GHGs from manure.
 Ruminant animals are the source for over 95% of
enteric fermentation emissions = Greater potential to
gain carbon credits for emission reductions.
 GHGs must be lowered through increased
efficiencies in production, changing feed rations, or
adding additives to the feed ration.
 Potential to reduce enteric fermentation via an
additive is approx. 25% .
 Feedlots that feed steers for 150 days would receive
$2.24 per head revenue by adding an additive.
 Cost of additive?
                                                        36
2007 CH4 Emissions from Enteric
Fermentation

                                             Dairy   Horses
                                             23%      3%


                      Beef
                      72%                            Sheep
                                                      1%
                                                     Swine
                                                      1%
                                                     Goats
                                                      0%
Source: USDA “Inventory of U.S. Greenhouse Gas
         Emissions and Sinks: 1990 –2007”
                                                              37
Manure Management
 Dairy and swine have the greatest opportunity to
reduce the GHG emissions through manure mgmt.
  Most feedlots and poultry operations are dry collection systems.
  Limited opportunity from runoff of dry systems.


The two main methods to reduce GHG off of manure:
  Methane digesters
     Large investment costs currently limit its adoption to large
    operations.
    Future energy prices will influence economics of methane
    digesters.
  Burning/flaring off the methane
    Less capital intensive
    Doesn’t generate energy byproduct.

                                                                     38
Industry Revenue Opportunities

 Dairy has the greatest opportunity to capture carbon
revenues via C&T legislation.
 Poultry operations have few opportunities
 Swine operations will have some opportunities to
benefit via manure mgmt changes.
 Feedlots will have some opportunities to benefit via
reductions in enteric fermentation emissions
 Cow/Calf sector – landowners have more options –
reduces supply to feedlots



                                                        39
EPA Regulated Scenario
EPA Regulated Scenario Background

 Under the Clean Air Act (CAA), any entity that has
 the potential to emit more than 100 tons of a
 regulated pollutant must obtain a permit to
 operate.
 In 2007, the Supreme Court, in Massachusetts v.
 EPA, ordered the EPA to determine whether heat-
 trapping gases harmed the environment and public
 health.
 On December 7, 2009, the EPA announced its
 determination that GHGs "threaten the public
 health and welfare of the American people,"


                                                      41
EPA Regulated vs. C&T Scenario
  Cap-and-Trade is more efficient than direct
  regulation = Higher production cost impacts.

  Direct Regulation does not offer agricultural
  producers additional revenue opportunities from
  carbon offsets.

  EPA regulations could result in the direct
  regulation of agricultural producers’ GHG
  emissions; whereas, current cap-and-trade
  legislation excludes agriculture from GHG
  emission regulations.

                                                    42
Wheat
                              Net Impact: Benefits of no-till – Costs
                              60

                                                      Net Impact for Adopters (no adoption costs)
                              50
Net Revenue Impact ($/acre)




                                                      Net Impact for Non-Adopters
                              40

                              30

                              20

                              10

                                -

                              (10)

                              (20)

                              (30)
                                     2012

                                            2013

                                                   2014

                                                          2015

                                                                 2016

                                                                        2017

                                                                               2018

                                                                                      2019

                                                                                             2020

                                                                                                    2021

                                                                                                           2022

                                                                                                                  2023

                                                                                                                         2024

                                                                                                                                2025

                                                                                                                                       2026

                                                                                                                                              2027

                                                                                                                                                     2028

                                                                                                                                                            2029

                                                                                                                                                                   2030

                                                                                                                                                                          2031

                                                                                                                                                                                 2032

                                                                                                                                                                                        2033

                                                                                                                                                                                               2034

                                                                                                                                                                                                      2035
                                                                                                                                                                                                             43
EPA Regulated Scenario Cost Impacts
2025 Example
 At minimum – impacts presented for cap-and-trade
  2025 = $3.64/acre increase
 Plus …
  No fertilizer allowances (adds $3.39/acre)
  No offsets to mitigate carbon price or as a revenue opportunity
  Inefficiency cost – direct reg. is less efficient than market based approach
  Direct ag regulation adds a cost of compliance


Production cost impacts could potentially be multiple times more
than that of cap-and-trade, with no offset revenue opportunity.


                                                                                 44
Final Thoughts and
Conclusions
For additional information, please contact :

Juan Sacoto
Senior Vice President; juan.sacoto@informaecon.com

Crystal Carpenter
Consultant; crystal.carpenter@informaecon.com
Cap-and-Trade
        Impacts of H.R.2454 on U.S.
                Agriculture




        Presented at the Commodity Classic
March             March 3, 2010
2010
48

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Cap and Trade: Impacts of H.R. 2454 on U.S. Agriculture

  • 1. Cap-and-Trade Impacts of H.R.2454 on U.S. Agriculture Presented at the Commodity Classic March March 3, 2010 2010
  • 2. GHG Emissions from Capped Sectors (MMT CO2e) - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Emissions with Cap-and-Trade = "The Cap" 2032 2033 Emission Projections without Cap-and-Trade (EPA) 2034 2035 Cap-and-Trade Overview 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 Emission Reduction 2048 2049 2050 1
  • 4. Cost Drivers for Agriculture Basics Carbon Cap declines Carbon price increases (free today) Energy prices increase Fuel and fertilizer prices increase = Cost of production increases Freely distributed allowances to fertilizer industry help offset fertilizer price increases until 2035 3
  • 5. Cost Drivers Three BIG Questions 1. What is the carbon price? - Future energy demand - Alternative energy supply - Offset supply 2. What is the impact on energy prices? Cap and Trade Energy Price Impact (relative to reference case) (nominal $) EIA Base 2020 2030 2035 Carbon Price 31.75 64.83 92.64 Diesel (cents/gallon) 32.57 78.31 122.20 3 Natural Gas ($/thous.ft. ) 1.47 3.81 6.81 3. How does that impact cost of production?... 4
  • 6. U.S. Wheat Production Cost Impacts – (Avg. Farm) Production Cost Impacts (relative to reference) 25.0 Added Fertilizer Impact - (zero allowances) Fertilizer 20.0 Transport (Farm-Elevator/Processor) $21.06 / 7.3% Fuel,Lube, and Electricity 15.0 ($/acre) 10.0 $9.52 / 4.1% 5.0 $3.64 / 1.9% $2.67 / 1.6% $1.67 / 1.3% - 2015 2020 2025 2030 2035 $ per Acre / % of Reference Case Variable *Does not include fuel or fertilizer efficiency increases beyond that assumed in the reference case. Source: Informa Economics, EIA and ERS The cost of cap-and-trade to the average wheat grower = $4/ac by 2025 and $21/ac by 2035. Key Policy Message: Fertilizer allowances are critical. 5
  • 7. Example: Prairie Gateway Wheat Farm Budget -2025 350 Revenue 300 Costs Increase due to C&T 250 Net Net Revenue Net Revenue Revenue Other $112/acre $108/acre $105/acre 200 $/Acre Seed 150 Repairs 100 Fuel, lube, and electricity 50 Fertilizer 0 2025 Ref 2025 C&T 2025 C&T (no fert. allowances) Nominal$ 6
  • 8. Cost Impacts Relative to Corn and Soybeans Fuel,Lube, and Electricity Fertilizer Transport (Farm-Elevator/Processor) Added Fertilizer Impact - (no offset assumption) 60 Cost of Production Impacts, $/acre (cost above reference case) 50 40 30 20 10 - Corn Wheat Soybeans Corn Wheat Soybeans Corn Wheat Soybeans w/Fert. Offset Assumption 205 bu/acre 48 bu/acre = 53 bu/acre = 215 bu/acre 50 bu/acre = 56 bu/acre = 226 bu/acre 52 bu/acre = 59 bu/acre = Yield Scenario/$perBu Impact = $0.03/bu $0.08/bu $0.05/bu = $0.09/bu $0.19/bu $0.1/bu = $0.22/bu $0.4/bu $0.19/bu % Reference Variable Costs 1.2% 1.9% 1.2% 3.7% 4.1% 2.1% 7.8% 7.3% 3.3% 2025 2030 2035 7
  • 9. Conclusions Impact on wheat production costs is less than corn but more than soybeans. Impacts are minimal in the short-term; up until 2025. Fertilizer allowance assumptions are critical. On a regional basis: Short-term: impacts are higher in the Prairie Gateway due to energy used for irrigation. Long-term: regions (e.g., Prairie Gateway and Northern Great Plains) and farmers with lower nitrogen based fertilizer usage will be at a distinct advantage. 8
  • 11. Carbon Offset Credits – What are they? C&T creates a tradable market for GHG emissions Agriculture is not a capped sector under C&T However, by reducing carbon, agriculture can sell a carbon offset credit for every ton of GHG emissions reduced. Sell these credits at the market carbon price to capped sectors. Capped sectors use these credits just like allowances. 10
  • 12. How do I get carbon offset credits? Carbon Sequestration Rates - Mt CO2e/ac 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Afforestation of cropland /1 CROPLAND: Land-Use Changes Croplands shifted to perennial grasses Conservation Buffers/2 Restoration of wetlands Conservation to No-Till /3 Pasture Grazing Production Practice Improved crop rotations and winter cover crops Changes Elimination of summer fallow Average High Maximun Improved fertilizer manager Use of organic manure and byproducts /4 Improved irrigation management Afforestation of pasture Management Land Rangeland management Improved use of fertilizers Use of organic manure Planting of improved species Grazing management Source: USDA, CCX, DOE, Informa Economics Key Policy Message: Methodology used to calculate SRs can have large impact on net farm revenues and potential cropland acreage shifts. 11
  • 13. What is the Revenue Potential? Practice Sequestration Rate 2012 2015 2020 2025 2030 2035 Mt CO2e/ac Carbon Credit - $/Acre * Afforestation of cropland /1 1.90 25 38 62 100 160 255 Croplands shifted to perennial grasses 1.25 19 25 41 66 105 167 Conservation Buffers/2 0.70 11 14 23 37 59 93 Restoration of wetlands 0.37 6 7 12 19 31 49 Conservation to No-Till /3 0.66 10 13 22 35 56 89 Improved crop rotations and winter cover crops 0.29 4 6 10 15 25 39 Elimination of summer fallow 0.15 2 3 5 8 12 20 Improved fertilizer manager 0.15 2 3 5 8 12 20 Use of organic manure and byproducts /4 1.28 20 26 42 67 108 172 Improved irrigation management 0.15 2 3 5 8 12 20 Afforestation of pasture 1.48 23 30 48 78 125 198 Rangeland management 0.37 6 7 12 19 31 49 Improved use of fertilizers 0.55 8 11 18 29 46 74 Use of organic manure 1.28 20 26 42 67 108 172 Planting of improved species 0.73 11 15 24 39 62 98 Grazing management 1.10 17 22 36 58 92 147 Carbon Price (nominal$/CO2e) 19 25 41 66 105 167 * Sequestration rates are discounted by 20% to reflect potential reversals. Source: USDA, CXX, DOE, IEA, Informa Economics. Key Policy Messages: (1) Limitation on # of Re-enrollment periods will significantly impact potential revenues in the out years (2) Ability to stack carbon credits could add significantly to potential revenue opportunities 12
  • 14. Average No-Till Carbon Sequestration Rate by Region and Major Crop Northern Great Plains Northern Great Plains Northern Crescent Northern Crescent Basin and Range Heartland Heartland Basin and Range Fruitful Rim Fruitful Rim Eastern Uplands Eastern Uplands Southern Seaboard Southern Seaboard Prairie Gateway Prairie Gateway Mississippi Portal Mississippi Portal No Till Sequestration Rates (CO2e Tonnes per Acre) 0.61 Corn Soybeans Wheat Cotton © 2009 Informa Economics, Inc. 13
  • 15. Distinction between Continuous and Rotational No-Till US Rice Northern Great Plains Northern Crescent Cotton Heartland Basin and Range Wheat Fruitful Rim Eastern Uplands Soybeans Southern Seaboard Prairie Gateway Corn Mississippi Portal 0% 10% 20% 30% 40% 50% 60% 70% Key Policy Message: Addressing additionality - Distinction btw continuous and rotational 14
  • 16. Wheat Net Impact: Benefits of no-till – Costs 60 Net Impact for Adopters (no adoption costs) 50 Net Impact for Non-Adopters Net Revenue Impact ($/acre) 40 30 20 10 - (10) (20) (30) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Cost for non-adopter (no offset revenue): $4/ac by 2025 and $21/ac by 2035. Net Gain for no-till adopter (no adoption costs): $25/ac by 2025 and $51/ac by 2035. 15
  • 17. Wheat Net Impact: Benefits of no-till – Costs 60 Net Impact for Adopters (no adoption costs) 50 Net Impact for Non-Adopters Net Revenue Impact ($/acre) 40 Net Impact for Adopters (w/ est. no-till costs) 30 20 10 - (10) (20) (30) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Adopting no-till does not come without a cost (e.g., yield drag, equipment investment, risk). Net Gain for no-till adopter (with/ est. adoption costs): $17/ac by 2025 and $47/ac by 2035. 16
  • 18. Wheat Net Impact: Benefits of no-till – Costs 60 Net Impact for Adopters (no adoption costs) 50 Net Impact for Non-Adopters 40 Net Impact for Adopters (w/ est. no-till costs) Net Revenue Impact ($/acre) Net Impact for All Wheat (w/ est. no-till costs) 30 20 10 - (10) (20) (30) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Not every wheat farmer will be able to practice no-till. Net Industry Gain (w/ no-till as only offset): $4/ac by 2025 and $35/ac by 2035. 17
  • 19. Example: Prairie Gateway Wheat Farm Budget 350 Carbon Credit 300 Net Net Revenue Revenue 250 $121/acre $118/acre Revenue Net Revenue $112/acre Costs 200 $/Acre No-till Costs 150 100 Increase due to C&T 50 Production Costs 0 2025 Ref 2025 C&T 2025 C&T (no fert. allowances) Nominal$ 18
  • 20. Wheat Net Impact: Benefits of no-till – Costs Conclusions (no-till) Wheat has a larger potential gain than corn but smaller than soybeans. On average, U.S. wheat producers could benefit by approximately $35/acre from cap-and-trade by 2035. Some farmers/regions will not benefit to the same degree as others --- benefit will primarily be driven by the carbon SR. 19
  • 21. There are opportunities other than no-till Practice Sequestration Rate 2012 2015 2020 2025 2030 2035 Mt CO2e/ac Carbon Credit - $/Acre * Afforestation of cropland /1 1.90 25 38 62 100 160 255 Croplands shifted to perennial grasses 1.25 19 25 41 66 105 167 Conservation Buffers/2 0.70 11 14 23 37 59 93 Restoration of wetlands 0.37 6 7 12 19 31 49 Conservation to No-Till /3 0.66 10 13 22 35 56 89 Improved crop rotations and winter cover crops 0.29 4 6 10 15 25 39 Elimination of summer fallow 0.15 2 3 5 8 12 20 Improved fertilizer manager 0.15 2 3 5 8 12 20 Use of organic manure and byproducts /4 1.28 20 26 42 67 108 172 Improved irrigation management 0.15 2 3 5 8 12 20 Afforestation of pasture 1.48 23 30 48 78 125 198 Rangeland management 0.37 6 7 12 19 31 49 Improved use of fertilizers 0.55 8 11 18 29 46 74 Use of organic manure 1.28 20 26 42 67 108 172 Planting of improved species 0.73 11 15 24 39 62 98 Grazing management 1.10 17 22 36 58 92 147 Carbon Price (nominal$/CO2e) 19 25 41 66 105 167 * Sequestration rates are discounted by 20% to reflect potential reversals. Source: USDA, CXX, DOE, IEA, Informa Economics. Fertilizer Management = + $20/ac by 2035 Elimination of Summer Fallow = + 20/ac by 2035 20
  • 22. Examples of Other Offset Opportunities Elimination of Summer Fallow/Cover Crop Benefits $20/acre carbon payment (2035). Reduced erosion If using a cover crop, Reduction in weed, pest and disease pressures If cover crop is a legume, can help fix nitrogen in the soil $39/acre carbon payment if using a cover crop (2035) Costs Reduced moisture – summer fallow is often used to store water in soil prior to seeding Planting costs if using a cover crop 21
  • 23. Examples of Other Offset Opportunities Improved Fertilizer Management Benefits $20/acre carbon payment (2035). Costs Improved fertilizer management could include: Systems to better match supply and demand Sub-surface applications Use of ammonium nitrogen sources not mobile forms of nitrogen such as nitrate and urea Use of advanced fertilizers, examples: Slow release fertilizers Stabilized nitrogen fertilizers A nitrification inhibitor 22
  • 24. Conclusions – Carbon Offset Opportunities There are a number of potential revenue opportunities available to farmers under C&T. If structured properly, C&T could benefit a large number of wheat farmers. However, not everyone will benefit to the same level. Legislation is not open or closed to additional opportunities. 23
  • 25. Top Policy Issues Allowances to fertilizer industry are critical in keeping production cost impacts down Methodology used to calculate SRs can have large impact on net farm revenues and potential cropland acreage shifts. Clearly establish minimum set of offset practices. The Bill should establish the current list of offset practices as a minimum set – not as examples. Limiting the number of offset credit periods in which a producer can re-enroll their offset practice will limit offset credits available to farmers in later years when the cost impact of cap-and-trade is greatest. 24
  • 27. Renewable Electricity Standard (RES) C&T creates a federal RES, which requires 20% of electricity by 2020 to be from renewable sources. Creates increased demand for wind, solar and renewable energy crops. Potential to increase revenues, in certain scenarios. Currently enacted state RESs mitigate demand increase due to C&T. 26
  • 28. Reference Scenario (No Cap-and-Trade) Reference Case Renewable Electricity Generation 900 Wind 800 Solar Wood and Other Biomass Municipal Solid Waste 700 Geothermal Generation (billion kwh) Conventional Hydropower 600 500 400 300 200 100 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Source: EIA 27
  • 29. Biomass Contributes Largest Share of Increase under C&T Additional Renewable Energy Generation by Source (Basic - Reference) 250 Electricity Generation (billion kilowatthours) Wind Solar Wood and Other Biomass 200 Municipal Solid Waste Geothermal Conventional Hydropower 150 100 50 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: EIA Infrastructural issues limit further wind expansion. Other gov’t programs, such as BCAP improve biomass economics 28
  • 30. RES Impact on Agriculture 2020 Total Renewable Electricity Increase 171 billion kwh 2020 Biomass 161 billion kwh = 32 million tons; Electricity: $15.7 billion Additional Energy Crop Acres 1.6-4.8 million Scenario Assumptions: Energy crops account for 50-75% of biomass increase Energy crop yields of 5-10 dry tons/acre 29
  • 31. Specific Case Study Kansas Wheat – Switchgrass Example 2011 2012 Year 3-10 SWITCHGRASS CASH FLOW Yield 1.50 4.59 6.70 FARMGATE COSTS (includes labor) Establishment Costs ($/acre) 52.40 13.44 - Establishment Costs 209.62 53.76 - BCAP 157.21 40.32 Production Costs ($/acre) 65.34 164.40 283.80 Farmgate Costs ($/acre) 117.75 177.84 283.80 GROWER REVENUE Grower Payment ($/acre) 39.40 110.27 250.68 Grower Payment ($/ton)* 26.27 24.02 37.22 BCAP Payments ($/acre) 39.40 110.27 36.26 BCAP Matching Funds 39.40 110.27 BCAP Annual Payment ** 36.26 Carbon Payment ($/acre) - 20.06 31.37 Grower Revenue ($/acre) 78.80 240.61 318.31 NET RETURNS Net Return ($/acre) (38.95) 62.77 34.52 * Based on a delivered feedstock price of $50/ton ** Payments distributed through 2017 30
  • 32. Specific Case Study Kansas Wheat – Switchgrass Example Average Annual Return ($/acre) NPV 2011-2020 Prairie Gateway Wheat @ Avg. Yields 56.89 409.17 @ Yields 20% below Avg. 11.94 87.70 Switchgrass Base Scenario (Delivered Feedstock =$50/ton) 30.00 221.50 Delivered Feedstock =$60/ton 111.82 799.09 Delivered Feedstock =$40/ton (52.16) (359.27) 31
  • 34. Acreage Shift Assessment 1. Early on, the majority of the acreage shifts due to afforestation will likely come from pastureland. 2. Initially, the majority of cropland shifts will be to perennial crops, with the exception of certain regions where barriers to entry for forestry are lower. Increased demand for forage and energy crops (RES, RFS, and pasture shift) Less risk Additional income stream Lower start-up costs Cultural reasons – “Farming as a way of life” 33
  • 35. Acreage Shift Assessment 3. As the carbon price increases, particularly in the years beyond 2035, more cropland can be expected to go into forestry. 4. Yet, even at higher carbon prices (up to 2035), prime cropland will not shift to forestry or perennial crop production. 5. Regions and crops with larger net returns can expect to see less acreage shifting to these alternative carbon crops than regions with lower net returns. Wheat acreage can be expected to decline the most relative to corn and soybeans 34
  • 37. Enteric Fermentation Enteric fermentation emissions are twice as large a market as GHGs from manure. Ruminant animals are the source for over 95% of enteric fermentation emissions = Greater potential to gain carbon credits for emission reductions. GHGs must be lowered through increased efficiencies in production, changing feed rations, or adding additives to the feed ration. Potential to reduce enteric fermentation via an additive is approx. 25% . Feedlots that feed steers for 150 days would receive $2.24 per head revenue by adding an additive. Cost of additive? 36
  • 38. 2007 CH4 Emissions from Enteric Fermentation Dairy Horses 23% 3% Beef 72% Sheep 1% Swine 1% Goats 0% Source: USDA “Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990 –2007” 37
  • 39. Manure Management Dairy and swine have the greatest opportunity to reduce the GHG emissions through manure mgmt. Most feedlots and poultry operations are dry collection systems. Limited opportunity from runoff of dry systems. The two main methods to reduce GHG off of manure: Methane digesters Large investment costs currently limit its adoption to large operations. Future energy prices will influence economics of methane digesters. Burning/flaring off the methane Less capital intensive Doesn’t generate energy byproduct. 38
  • 40. Industry Revenue Opportunities Dairy has the greatest opportunity to capture carbon revenues via C&T legislation. Poultry operations have few opportunities Swine operations will have some opportunities to benefit via manure mgmt changes. Feedlots will have some opportunities to benefit via reductions in enteric fermentation emissions Cow/Calf sector – landowners have more options – reduces supply to feedlots 39
  • 42. EPA Regulated Scenario Background Under the Clean Air Act (CAA), any entity that has the potential to emit more than 100 tons of a regulated pollutant must obtain a permit to operate. In 2007, the Supreme Court, in Massachusetts v. EPA, ordered the EPA to determine whether heat- trapping gases harmed the environment and public health. On December 7, 2009, the EPA announced its determination that GHGs "threaten the public health and welfare of the American people," 41
  • 43. EPA Regulated vs. C&T Scenario Cap-and-Trade is more efficient than direct regulation = Higher production cost impacts. Direct Regulation does not offer agricultural producers additional revenue opportunities from carbon offsets. EPA regulations could result in the direct regulation of agricultural producers’ GHG emissions; whereas, current cap-and-trade legislation excludes agriculture from GHG emission regulations. 42
  • 44. Wheat Net Impact: Benefits of no-till – Costs 60 Net Impact for Adopters (no adoption costs) 50 Net Revenue Impact ($/acre) Net Impact for Non-Adopters 40 30 20 10 - (10) (20) (30) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 43
  • 45. EPA Regulated Scenario Cost Impacts 2025 Example At minimum – impacts presented for cap-and-trade 2025 = $3.64/acre increase Plus … No fertilizer allowances (adds $3.39/acre) No offsets to mitigate carbon price or as a revenue opportunity Inefficiency cost – direct reg. is less efficient than market based approach Direct ag regulation adds a cost of compliance Production cost impacts could potentially be multiple times more than that of cap-and-trade, with no offset revenue opportunity. 44
  • 47. For additional information, please contact : Juan Sacoto Senior Vice President; juan.sacoto@informaecon.com Crystal Carpenter Consultant; crystal.carpenter@informaecon.com
  • 48. Cap-and-Trade Impacts of H.R.2454 on U.S. Agriculture Presented at the Commodity Classic March March 3, 2010 2010
  • 49. 48