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USDA study claims increased use of biofuels could benefit economy

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Willmar, 56201
Willmar Minnesota 2208 Trott Ave. SW / P.O. Box 839 56201

WILLMAR -- The Energy Independence and Security Act of 2007 mandates a Renewable Fuel Standard, often referred to as RFS-2, under which the United States will annually produce 36 billion gallons of biofuels, primarily ethanol, by 2022.

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Reducing dependence on foreign energy by expanding domestic renewable fuels can have a major impact on the overall U.S. economy. In the past, increasing energy independence would generally be expected to place a greater burden on the U.S. economy because of the higher domestic cost of producing alternative energy to replace relatively inexpensive foreign petroleum.

However, according to the U.S. Department of Energy, petroleum prices are likely to continue rising, in the long term, relative to the cost of producing domestic biofuels.

Also at issue is the fact that the biofuels mandate is accompanied by incentives in the form of tax credits to ethanol blenders, which could result in additional cost to taxpayers and place a greater burden on the economy.

A recently released study from the U.S. Department of Agriculture examined the potential effects of the mandate on the U.S. economy, as measured by gross domestic product, household income and consumption, price and quantity of fuels, agricultural production and trade.

After accounting for all these factors, the researchers then simply compared the overall impact on the U.S. economy in 2022, with and without the Renewable Fuel Standard.

The overall conclusion of the study was that if biofuel production technology advances and petroleum prices continue to rise as projected, the Renewable Fuel Standard could benefit the U.S. economy. But let's narrow our focus to what this study concluded in terms of the impact that the Renewable Fuel Standard could have on energy, agricultural production and trade in 2022.

The United States is the largest importer of crude oil, with imports accounting for about two-thirds of the total U.S. supply.

The study claims that the expansion of domestic biofuel production would reduce petroleum demand, thereby reducing the quantity of crude oil imported into the U.S. by 16 to 17 percent in 2022.

Reduced U.S. demand for petroleum would lower the price of crude oil. As a result of lower demand and a decline in the import price, the total cost for imported crude oil would decline by $61 billion to $68 billion.

With fewer dollars spent on imported crude oil, the U.S. dollar would appreciate, which would reduce the cost of importing other goods, including agricultural commodities. However, a stronger dollar would also reduce export volume because of the increased price that foreign countries would have to pay to purchase U.S. goods and products.

The study also found that with the greater demand for both energy crop production and all other agricultural uses, meeting the billion would reduce U.S. agricultural commodity exports and increase the demand for agricultural imports as crops compete for limited land use availability.

While the study does not predict the future, it does address the question of what would be the likely impacts on the U.S. economy should the biofuels mandate be met under different price and policy scenarios. The researchers also acknowledge the uncertainty that exists in meeting the 2022 mandate.

To view the entire findings of this study, which was conducted by Mark Gehlhar, Ashley Wintson and Agapi Somwaru, visit USDA's Economic Research Service website at: ww.ers.usda.

gov/publications/err102.

Net farm income to increase 24 percent

Economists from the U.S. Department of Agriculture are forecasting that net farm income will increase to $77.1 billion in 2010, up $14.9 billion or 24 percent from 2009.

The 2010 forecast is $12.3 billion above the previous 10-year net farm income average of $64.8 billion, and would be the fourth largest amount ever.

Cash receipts are expected to increase by 6.5 percent, due mainly to higher receipts from livestock.

Farm business equity is expected to rise by 3.5 percent, largely due to the combination of an expected 2.9 percent increase in the value of farm business real estate, and a 4.2 percent decline in farm business debt.

Officials from USDA's Economic Research Service also expect that average family farm household income in 2010 will increase by 5.8 percent, to $81,670. However, a vast majority of that household income will continue to come from off-farm sources.

In 2010, the average family farm is forecast to receive 11.1 percent of its household income from farm sources, with the rest coming from earned and unearned off-farm income.

Wes Nelson is executive director of the USDA Farm Service Agency in Kandiyohi County.

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