[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000
THE HIGH PRICE OF NATURAL GAS AND ITS IMPACT ON SMALL BUSINESSES:
ISSUES AND SHORT TERM SOLUTIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & TECHNOLOGY
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, MARCH 17, 2005
__________
Serial No. 109-6
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
______
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
SAM GRAVES, Missouri DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire ED CASE, Hawaii
STEVE KING, Iowa MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan RAUL GRIJALVA, Arizona
RIC KELLER, Florida MICHAEL MICHAUD, Maine
TED POE, Texas LINDA SANCHEZ, California
MICHAEL SODREL, Indiana JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
J. Matthew Szymanski, Chief of Staff
Phil Eskeland, Deputy Chief of Staff/Policy Director
Michael Day, Minority Staff Director
SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY
SAM GRAVES, Missouri, Chairman JOHN BARROW, Georia
STEVE KING, Iowa TOM UDALL, New Mexico
ROSCOE BARTLETT, Maryland MICHAEL MICHAUD, Maine
MICHAEL SODREL, Indiana ED CASE, Hawaii
JEFF FORTENBERRY, Nebraska RAUL GRIJALVA, Arizona
MARILYN MUSGRAVE, Colorado
Piper Largent, Professional Staff
(ii)
?
C O N T E N T S
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Witnesses
Page
Terry, Hon. Lee (NE-02), Congressman, U.S. House of
Representatives................................................ 4
Kruse, Mr. Charlie, President, Missouri Farm Bureau, Jefferson
City, MO....................................................... 6
Hilgedick, Mr. Terry, Chairman, Missouri Corn Merchandising
Council, Hartsburg, MO......................................... 8
Pirkle, Mr. J. Billy, Managing Director, Environment Health and
Safety, Agricultural Retailers Association/The Fertilizer
Institute, Collinsville, IL.................................... 11
Duesterberg, Mr. Thomas J., Ph.D., President and CEO,
Manufacturers Alliance/MAPI.................................... 13
Cicio, Mr. Paul, Executive Director, Industrial Energy Consumers
of America..................................................... 14
Jones, Mr. Peter, President, Wexco Corporation, Lynchburg, VA.... 16
Boyd, Mr. Ben, Farmer, Sylvania, GA.............................. 18
Appendix
Opening statements:
Graves, Hon. Sam............................................. 26
Prepared statements:
Terry, Hon. Lee (NE-02), Congressman, U.S. House of
Representatives............................................ 27
Kruse, Mr. Charlie, President, Missouri Farm Bureau,
Jefferson City, MO......................................... 32
Hilgedick, Mr. Terry, Chairman, Missouri Corn Merchandising
Council, Hartsburg, MO..................................... 35
Pirkle, Mr. J. Billy, Managing Director, Environment Health
and Safety, Agricultural Retailers Association/The
Fertilizer Institute, Collinsville, IL..................... 39
Duesterberg, Mr. Thomas J., Ph.D., President and CEO,
Manufacturers Alliance/MAPI................................ 43
Cicio, Mr. Paul, Executive Director, Industrial Energy
Consumers of America....................................... 50
Jones, Mr. Peter, President, Wexco Corporation, Lynchburg, VA 55
Boyd, Mr. Ben, Farmer, Sylvania, GA.......................... 73
Additional Material:
Frisby, Mr. Bradford, Associate General Counsel, National
Mining Association......................................... 75
American Chemistry Council................................... 81
(iii)
THE HIGH PRICE OF NATURAL GAS AND ITS IMPACT ON SMALL BUSINESSES:
ISSUES AND SHORT TERM SOLUTIONS
----------
THURSDAY, MARCH 17, 2005
House of Representatives
Subcommittee on Rural Enterprises, Agriculture and
Technology
Committee on Small Business
Washington, DC
The Subcommittee met, pursuant to call, at 10:07 a.m. in
Room 2360, Rayburn House Office Building, Hon. Sam Graves
[Chairman of the Subcommittee] presiding.
Present: Representatives Graves, Barrow.
Chairman Graves. We will call this hearing to order. I want
to thank everybody for coming today and say good morning.
Welcome to the Small Business Subcommittee on Rural
Enterprise, Agriculture and Technology. I am glad to see that
not everybody attended the steroid hearing downstairs. The good
news is maybe we can study steroid use and natural gas
somewhere along the process. It is quite a show down there.
Today we are going to focus on something a little bit more
serious in my opinion, and that is the high cost of natural
gas. The outrageously high cost of natural gas and the impact
that it is having on manufacturers, on small businesses and on
farmers. We are going to look at maybe some of the short-term
solutions that are out there too.
Natural gas is a very important issue because of its
diverse applications. Natural gas is used to create
electricity, produce fertilizer, feed our crops and drive our
vehicles, among many other things. In fact, natural gas is the
preferred fuel to heat and cool our homes today totaling over
50 percent of the residential energy consumption, and it is
still growing.
Natural gas has been increasing at a dramatic pace in an
industrial capacity. In 2000, 95 percent of all new electricity
generated was generated from natural gas, and this growth is
expected to continue well into the future.
Natural gas is the primary feedstock used in producing
nitrogen fertilizer, which is used on farms throughout this
country. Lastly, natural gas is being used more in the
transportation sector all the time.
My point is that natural gas is popular, and its use is
going to continue to grow. Demand is expected to increase 30 to
40 percent by the year 2025. Recent studies show that our
recoverable natural gas reserves are sufficient to meet the
demand for years to come, but we are facing obstacles in
securing these resources and reserves.
On top of that, prices are now more than double what they
were during the 1990s, and consumers, manufacturers and farmers
are the ones that are paying that price. To be clear, I am
supportive of domestic exploration of production, but current
proposals will yield results 10 years from now. We need to
discuss short term solutions that can address the high cost of
natural gas in the present.
One idea is to examine natural gas trading. Natural gas,
the pricing is obviously volatile by nature, but that does not
explain to me the drastic increase in price over the last five
years. Since 2000 and the passage of the Commodities Futures
Modernization Act, natural gas has been trading at prices more
than double what it was throughout the 1990s. This price
increase hits the consumer hard.
Consumers are seeing record high energy bills through the
cold winter months and hot summer days. Farmers and
manufacturers are experiencing increased expenses of operation.
These folks need some relief. We are going to be looking to
legislation that will prevent market manipulation, increase
transparency in the market and provide for accurate disclosure
of storage data so consumers of natural gas will not be at the
whim of a volatile market caused by manipulation and fraudulent
action.
[Chairman Graves' opening statement may be found in the
appendix.]
I am going to now turn it over to our new Minority Member,
Representative Barrow for an opening statement. I want to
welcome you to the Committee, and I look forward to working
with you in the future.
Mr. Barrow. Thank you, Mr. Chairman. It is good to be here.
As the new congressman from Georgia's 12th District, I have
the honor of representing a large number of family farmers
across a large rural portion of our state. I have been up here
in Washington for just three months now, but I am starting to
realize something. Folks up here often times do not realize
that family farms are small businesses too. They are one and
the same, and they should be viewed that way. To protect our
farmers, we have to protect the business of farming.
I have lived in Georgia virtually all my life, and I have
grown up with farmers. Georgia farmers are some of the most
committed and hardworking folks you will find anywhere. The
hard work of family farmers in Georgia's 12th is seen in the
strength of our state's economy. My district has over 3,000
family farms and produces more than $206 million in
agricultural products.
What is true is true across the country. Family farmers are
a powerful force in the U.S. economy. With family farmers
playing such a strong role in our communities and our economy,
we cannot ignore the challenges they are facing today. While
production is great, the costs are going through the roof.
Natural gas supplies one of the main energy sources for
family farmers to run their farms and operate their equipment.
It is also the key ingredient and major cost component in the
production of pesticides and fertilizers, up to 95 percent of
the total cost for most fertilizers. Farmers need fertilizer,
plain and simple.
Nationwide, farmers use nearly 11 million metric tons of
nitrogen fertilizer each year. High natural gas prices mean
high fertilizer prices, and that means a whole lot of farmers
spending a whole lot more than they should have to in order to
grow crops the rest of the country depends on.
At the same time the rest of the country's demand for
natural gas is going way up for a variety of reasons. It is
used much more in residential housing nowadays, and more and
more electric plants have switched to natural gas. As demand
increases in these other industries, the prices of natural gas
jumps higher and higher, and this hurts farmers. When farmers
suffer, that affects the rest of us.
As the United States supply of natural gas is slowly tapped
out, there are other areas of the world that have ample
reserves available. That explains why we are importing more and
more of our fertilizer from foreign sources. A 2004
Congressional Research Services report shows that over 50
percent of U.S. nitrogen fertilizer comes from imports since
1998.
According to officials in the fertilizer industry, higher
natural gas prices and a glut of imports are having a negative
impact on the U.S. fertilizer industry. Right now, 45 percent
of the domestic fertilizer industry is in shutdown mode due to
high natural gas prices.
To help our family farmers in Georgia and across the
nation, we need to hear what is really going on out there. That
is why I have asked Georgia farmer Ben Boyd to come up and
testify this morning. Mr. Boyd is from the town of Poor Robin,
Georgia, which is located near the Georgia/South Carolina state
line in Screven County.
Along with his father and his brother, Mr. Boyd farms 3,500
acres of cotton, peanuts, soybeans, corn, watermelon, small
grain, and he also raises cattle, so he has seen firsthand how
the rising cost of fertilizer affects family farmers.
Farming has been in Mr. Boyd's family for many generations.
As the chairman of the American Farm Bureau's Young Farmer
Committee, he is committed to providing the next generation of
family farmers with the skills they will need to succeed as
both farmers and businessmen.
I am proud to have Mr. Boyd and the rest of the witnesses
up here today, and I hope we will listen carefully to what they
have to say. What is happening to Mr. Boyd is what is happening
to the rest of the country, and by listening to him I trust we
will agree that Congress has to start coming together to find
some common sense solutions to the problems.
Thank you, Mr. Chairman.
Chairman Graves. Thank you, Mr. Barrow.
We are going to start. We have two panels today. The first
panel we are going to have Congressman Lee Terry speak to us.
Congressman Terry represents Omaha, Nebraska, obviously a state
that is heavily dependent on natural gas.
Congressman Terry, I appreciate you being here today, and
thanks for your testimony.
STATEMENT OF THE HONORABLE LEE TERRY (NE-02), CONGRESSMAN, US
HOUSE OF REPRESENTATIVES
Mr. Terry. Thank you, Mr. Chairman, Mr. Barrow. I
appreciate you holding a hearing on this specific topic.
Natural gas accounts for nearly a quarter of America's
energy supply and is used in more than half of the U.S.
households and businesses. In fact, in my metropolitan area
just about 62 percent of the homes are heated with natural gas.
Unfortunately, the United States faces a natural gas challenge
that threatens the profitability of almost every sector of our
economy, as well as our citizens' quality of life.
Nationwide, natural gas prices are up from $1.50 per 1,000
cubic feet just 10 years ago to $7.19 at the close of the
market yesterday. This is compared to about right now 70 cents
in Venezuela, 40 cents in North Africa, 80 cents in Russia and
$3.70 in Eastern Europe.
Farm states, including mine of Nebraska, yours of Georgia
and, Mr. Chairman, yours of Missouri, have been hit especially
hard by higher natural gas prices since natural gas is the
primary material in nitrogen fertilizer, as well as a key fuel
for irrigation and drying of grains.
In Nebraska, anhydrous ammonia fertilizer has increased
from about $175 per ton in 2000 to as much as $375 per ton last
planting season. About half of America's nitrogen fertilizer is
now imported today due mostly to the high cost of the key
ingredient of natural gas.
Since 2001, at least 15 U.S. fertilizer production
facilities have closed primarily due to the high price of
natural gas. This could serve as a severe impact on the U.S.
economy and our farmers.
The reasons for concern are magnified when one considers
that U.S. natural gas consumption is expected to increase 40
percent over the next 20 years. Simultaneously, domestic
natural production will drop one percent per year. Keep in mind
the global expansion and need for natural gas, particularly
from China.
Until substantial new gas supplies are brought to market,
the nation's businesses, manufacturers and farmers may not have
an adequate supply of affordable natural gas to meet their
needs. In fact, a recent study by the American Gas Foundation
found that if current natural gas constraints are continued
through 2020, the price of natural gas is likely to rise above
$13 per 1,000 cubic feet.
There are steps Congress can take to address the natural
gas crisis. Now, it has to be a multifaceted approach. Last
year we passed a pipeline. We think that is going to be an
immediate help. Well, I will tell you what. The politics of the
pipeline in Alaska may take 10 years to settle before the 10
years to build, but that is one of the key components,
increasing continental production.
Then we have to say and realize we cannot meet the needs
and that we will have to import, and that is where liquid
natural gas comes in. Chairman Alan Greenspan in several
speeches has mentioned the importance of LNG to our economy.
I have introduced a bill, H.R. 359, that would encourage
this additional component of additional supply of natural gas
to our domestic supply--that is H.R. 359--that ameliorates the
morass of permitting. It streamlines the permitting process for
an LNG facility.
Right now we have four facilities. There are some offshore
facilities that may come on line in the next couple years, but
when we talk to those who have asked for a permit for an LNG
facility they come back with the same story, and that is the
morass for the myriad of permits is intolerable. It delays and
even kills good projects.
What we have done in H.R. 359 is basically two simple
approaches. There has to be a lead authority, and that should
be FERC. We need to have the states and localities involved in
the process, but not with veto powers. Also what we have found
out is there are folks in the process that have permitting
powers that intentionally delay action on their permit, in fact
de facto vetoing the permit.
What this bill, H.R. 359, also does then is for localities,
states, state agencies, other federal agencies, once the permit
request has been filed the clock starts ticking. They have one
full year then to present the evidence or begin the process of
working with FERC to state what hazards may occur or may not
occur. We then have a 301 year timeline.
It is a simple process. We should encourage more LNG
because we are not going to be able to meet our own needs with
domestic production in the pipeline. It has to be a
multifaceted approach, and this is just one of the prongs.
I appreciate, Mr. Chairman, you giving me the opportunity
to come here and talk about liquid natural gas because,
frankly, as we have talked about energy bills, until just in
the last couple months, no one has talked about liquid natural
gas and the impact that it is having on our farmers and our
small businesses, so thank you for holding this hearing.
[Congressman Terry's statement may be found in the
appendix.]
Chairman Graves. Thanks for being here, Mr. Terry.
You mentioned some offshore facilities. Where are they
located?
Mr. Terry. That is a good question. Mostly in the Texas and
Louisiana facilities right now. There is one in the northeast.
There is one in New York, one in Boston, so that is where they
are right now.
There are permits that have been applied for in California,
along the Gulf coast and the northeast, and those are the ones
that are caught up in the regulatory morass.
Chairman Graves. I appreciate you being here. Thank you
very much for testifying on your bill.
Mr. Terry. Thank you very much.
Chairman Graves. We are going to now seat the second panel.
I want to remind everyone that all the statements made by the
witnesses and the Members of the Committee will be placed in
the record in their entirety. We will go ahead and bring
everybody up.
Again I want to thank all the witnesses for being here
today. To kind of explain the way the light bar in front of you
works, everybody has five minutes to give your testimony. When
you have one minute left it turns to yellow and then turns to
red.
Now, do I follow that? Not necessarily. If you have
something to say I want to hear it. I do not like shutting
people off, but we do use the time lights just so everybody has
some idea of what is going on.
I want to thank everybody for being here today. What we are
going to do is we will introduce each of you individually, let
you give your opening statement, and then we are going to have
questions for you.
First on the panel is Charlie Kruse who is president of the
Missouri Farm Bureau in Jefferson City, a friend of mine and
also a farmer. He and his family farm down in Dexter, Missouri,
and have been farming for a long, long time. Charlie is very in
touch with the issue of natural gas and what it is doing to
farmers and the squeeze that it is placing on them.
Charlie, thank you for being here, for coming all the way
out. I appreciate and look forward to hearing your testimony.
STATEMENT OF CHARLIE KRUSE, MISSOURI FARM BUREAU
Mr. Kruse. Thank you, Mr. Chairman. We appreciate, Mr.
Chairman, you and the Members of the Committee having this
hearing. I am joined in the hearing room this morning by a
number of Missouri Farm Bureau folks who happen to be out here
this week, and I will just say we are all very proud of our own
Congressman, Sam Graves. We appreciate you having this hearing.
My name is Charlie Kruse. I am a fourth generation farmer
from Dexter, Missouri, in southeast Missouri. My wife, Pam, and
I own a row crop farm and operate it in the boot heel of
Missouri. I am the president of Missouri Farm Bureau, and I
also serve on the American Farm Bureau Board of Directors.
I appreciate the opportunity to share the Farm Bureau's
perspective on the impacts of high natural gas prices. Whether
it is gasoline, diesel, electricity or natural gas, farmers and
ranchers must have access to reliable and affordable energy
inputs. Unfortunately, our country's failed energy policy makes
it increasingly difficult for us to produce food and fiber for
the United States and the world while at the same time
providing for our own families.
Using USDA statistics as a basis, the Farm Bureau has
estimated that increased energy input prices during the 2003
and 2004 growing seasons have cost U.S. agriculture over $6
billion in added expenses. Natural gas is especially important
to agriculture, as we all know, because it is used to produce
nitrogen fertilizers and farm chemicals, as well as electricity
for lighting, heating, irrigation and grain drying.
Natural gas can account for nearly 95 percent of the cost
of nitrogen fertilizer. During the last four years, the price
of natural gas has been extremely volatile, causing retail
nitrogen fertilizer prices to dramatically increase.
For example, between 2000 and 2003, the average retail cost
of nitrogen fertilizer skyrocketed from around $100 per ton to
$350 or more a ton. On my own farming operation, the cost of
nitrogen fertilizer is 70 percent higher today than it was two
years ago. The same is true for other energy inputs, whether it
is diesel fuel, LP gas or whatever.
While I am paying more to plant and harvest my crops, that
does not necessarily mean I am receiving or will receive more
for what I sell. Currently the price of corn is about 30 to 35
percent lower than a year ago. Soybean prices have fallen 35 to
40 percent. I think it is clear farmers are caught in a real
squeeze at this point in time.
Manufacturers and retail suppliers are also reeling from
the effects of increased natural gas prices. According to The
Fertilizer Institute, 15 nitrogen fertilizer plants have
permanently stopped production since 2000, representing 22
percent of domestic capacity. Another 20 percent of the
industry is temporarily shut down due to high natural gas
prices.
All the while, the agriculture industry is becoming more
reliant on foreign imports to meet farmers' demands. An article
featured last year in Amber Waves, a publication of USDA's
Economic Research Service, states that over half of the
nitrogen used in the United States today is imported. In the
1980s, our nation was the largest exporter of nitrogen
fertilizer. Now we are the largest importer.
We should be very concerned about increasing our dependence
on foreign sources for the nitrogen fertilizer needed to raise
the food and fiber on which our country relies.
There are a lot of reasons why the price of natural gas has
skyrocketed. First, our national energy policy has discouraged
domestic exploration and recovery of oil and natural gas, which
has made us more dependent on foreign energy sources.
Second, many power plants have been forced to use natural
gas to generate electricity in order to comply with
environmental regulations, even though we have huge reserves of
coal and the technology to use coal safely and efficiently. The
Energy Information Administration estimates demand for natural
gas will increase 54 percent by 2025 with electric power
generation accounting for 33 percent of consumption.
We recognize there is no silver bullet for solving our
nation's energy woes. However, prompt, decisive action must be
taken now if we are going to avert a major energy crisis. Farm
Bureau supports domestic exploration and recovery of energy
resources using sensible, environmentally sound methods. We are
encouraged by yesterday's vote in the Senate to explore for
energy in Anwar.
We support the use of renewable energy, such as ethanol and
biodiesel. We support incentives for the use of clean coal
technology and electric power generation, and we support the
use of nuclear energy.
In closing, the perfect storm--the combination of
significantly higher energy and fertilizer costs coupled with
falling grain prices and cotton and rice prices--spells serious
trouble for rural America. For this reason it is our hope that
Congress will act soon to address these problems.
Mr. Chairman, Congressman Barrow, we appreciate you taking
time to hold this hearing today and look forward to answering
any questions.
[Mr. Kruse's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Kruse.
Next on the panel is Terry Hilgedick from Hartsburg,
Missouri. Terry is chairman of the Missouri Corn Merchandising
Council.
Terry, thanks for coming out to Washington to testify.
STATEMENT OF TERRY HILGEDICK, MISSOURI CORN MERCHANDISING
COUNCIL
Mr. Hilgedick. Thank you and good morning, Chairman Graves
and Mr. Barrow. Thank you for the opportunity to testify on the
impact of high natural gas prices to farmers.
My name is Terry Hilgedick, as Congressman Graves
mentioned, and I am Chairman of the Missouri Corn Merchandising
Council and a member of the National Corn Growers Association's
Public Policy Action Team. I am from Hartsburg, Missouri, where
my wife, Kristie, and I grow corn, soybeans, wheat and
watermelons.
NCGA was founded in 1957 and represents more than 33,000
dues paying members from 48 states. NCGA also represents the
interest of more than 300,000 farmers who contribute to corn
check off programs in 19 different states. NCGA's mission is to
create and increase opportunities for corn growers and to
enhance corn's profitability and use.
My purpose today is to provide insight to the Subcommittee
on how high natural gas prices affect the cost of producing
important fertilizers that farmers rely on for their crops.
Increased natural gas prices have already had an adverse effect
on farmers due to higher production cost and will continue to
do so in the future.
Growers rely on affordable natural gas as a feedstock for
fertilizer, but also for energy for irrigation, drying grain
and producing ethanol. Whether used directly as a feedstock or
for heat and power generation, reasonably priced natural gas is
essential to grower profitability.
Fertilizers account for more than 40 percent of the total
energy input per acre of corn harvested. Most of that energy is
consumed in the production of nitrogen fertilizer. Retail
prices for fertilizer, the prices paid by farmers, rise sharply
when natural gas increases. According to the USDA, farm gate
prices for fertilizer have jumped to record high levels. The
largest component of making all basic fertilizer products is
natural gas, accounting for more than 90 percent of the cost of
production.
Nitrogen fertilizer is a key input for the bountiful yields
achieved by U.S. corn farmers. Rising natural gas prices in the
U.S. have caused domestic nitrogen fertilizer producers to
severely curtail production. Of the 16.5 million tons of
nitrogen capacity that existed in the U.S. prior to 2000,
almost 20 percent has been closed permanently. Another 25
percent is at risk of closing within the next couple years.
Farmers face higher nitrogen fertilizer prices and the prospect
that there might not be an adequate supply of nitrogen
fertilizer to satisfy our needs at any price.
Nitrogen fertilizer producers have no way of curtailing or
reducing their demand for natural gas other than shutting down
the process itself. This not only destroys their businesses,
but it drives up fertilizer prices to the American farmer and
food prices to the American consumer. These production
curtailments and higher nitrogen prices are largely the cause
of the current surge in nitrogen imports.
Imports currently account for about 40 percent of the U.S.
nitrogen fertilizer supply. Lower natural gas prices in the
Middle East, Asia and South America make it difficult for U.S.
nitrogen fertilizer producers to compete with these countries
with much lower gas prices.
These countries take their excess natural gas, turn it into
fertilizer and undersell U.S. producers. This practice will
only become more common in the future. Supplies of nitrogen
fertilizer have been adequate during periods of high natural
gas prices in the past primarily because of increased imports.
Natural gas accounts for 70 to 90 percent of the cost of
producing anhydrous ammonia, a key source of nitrogen
fertilizer. In the midwest, at the beginning of the year 2000
anhydrous ammonia was selling for about $170 a ton. Last
spring, anhydrous ammonia was selling for $360 a ton. The price
of anhydrous at my local dealer last Friday was $435.
For my family farm, the price increase in one year amounts
to $13,000 for ammonia alone, and we will have to absorb an
additional $7,000 cost increase when other forms of plant food
are added in. All costs we cannot pass on to our buyers of
production. Unfortunately, these high and volatile prices are
expected to continue into the foreseeable future.
Higher natural gas prices will also negatively impact the
country's growing ethanol industry. The second biggest cost in
ethanol production, second only to feedstock, is the cost of
energy, generally natural gas. Energy costs typically make up
about 15 percent of a dry mill plant's total cost.
According to USDA's latest crop production report, this
year's corn crop will be the largest ever, and yields will
increase by nearly seven bushels per acre compared to last
year. When harvested, more than 10 percent of that crop will be
turned into ethanol. The corn industry becomes more energy
efficient every year, but we still must have the adequate,
reliable and affordable natural gas to fuel the industry.
Government policy is creating a supply squeeze for natural
gas. Electric utilities and other industries are moving away
from using nuclear energy and our plentiful supplies of coal
and moving towards use of natural gas. Natural gas has been the
fuel of choice for more than 90 percent of new electric
generation to come on line in the last decade. In addition, as
that happens our access to natural gas is limited due to
environmental policy. Clearly we cannot have it both ways.
Our ability to be efficient and environmentally friendly
corn producers will face huge obstacles if our nation cannot
come to grips with its desire to have limitless resources like
natural gas for production and not realize that these resources
have to come from somewhere.
I am sure that the Members of the Subcommittee as
individuals know this well. However, Congress seems to be
unaware of this fact. We can produce corn, but we need you to
produce the kind of policy that enables us to use the needed
resources to do our jobs.
Our nation's current natural gas crisis has three
solutions, increase supply, conserve what we have and reduce
demand. The 109th Congress is facing a daunting task of finding
ways to balance our nation's dwindling supply of and rising
demand for natural gas.
Additional supply is available from three primary sources,
onshore production, offshore production and liquified natural
gas. While there is considerable activity underway in each of
these areas, Congress can do more to facilitate the timely
development of these critical supply sources. Congress must
also adopt measures to ensure new coal and new nuclear
facilities are constructed.
Congress should provide federal loan guarantees and other
incentives for the retrofitting of existing natural gas fired
facilities with the new integrated gasification combined cycle
and next generation nuclear technologies. It is vitally
important that these forms of power generation be developed and
deployed. Without them, the demand for gas fired plants will
continue to grow and place an ever increasing burden on the
nation's supply base.
Support through long-term extension of tax credits and
other incentives for other emerging technologies, including
wind and biomass, is also an important element to diversifying
our nation's energy resource portfolio. We urge Congress to act
expeditiously to promote the development of domestic energy
resources to help secure future economic growth for our nation.
Congress needs to enact a comprehensive energy bill now
that provides, one, an enhanced role for renewable energy
sources; two, further development of all energy resources for a
more diverse portfolio; and, three, environmentally responsible
production of adequate domestic supplies of natural gas.
There are many indications that our nation's economy and
energy security will be seriously impacted should we not take
action to expand all sources of domestic energy to feed our
country's growing demand. The days of cheap energy are behind
us. A renewable fuel standard as part of a comprehensive energy
policy would result in expansion of ethanol production,
directly contributing to the domestic fuel supply, thus
reducing our dependence on imported oil.
Our ability to produce food and fuel for our nation and the
world depends on sound energy policy. I encourage this
Subcommittee to continue to address energy and natural gas
issues. Your decisions impact family farmers' ability to
compete internationally.
Simply put, farmers need access to reliable sources of
energy and raw materials so they can use the fertilizers
necessary to produce an abundant, affordable and healthy food
supply.
Thank you, Mr. Chairman.
[Mr. Hilgedick's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Hilgedick.
We will next hear from Bill Pirkle, who is the Managing
Director of Environment Health and Safety, and correct me if I
get this wrong, but you are with the Agricultural Retailers
Association and The Fertilizer Institute. Is that correct?
Mr. Pirkle. That is correct.
Chairman Graves. Thank you for being here. I appreciate you
coming all the way from Collinsville, Illinois, to be with us
today, and I look forward to your testimony.
STATEMENT OF J. BILLY PIRKLE, AGRICULTURAL RETAILERS
ASSOCIATION/THE FERTILIZER INSTITUTE
Mr. Pirkle. Thank you. I appreciate the opportunity to come
and speak to you, Mr. Chairman, and to the Committee and to the
guests of the Committee on behalf of the Ag Retail Group and
The Fertilizer Institute and Royster-Clark, which has 250 ag
retailer facilities. We serve about 40,000 farmers in 22
states, and we supply crop inputs to another 30 states.
Royster-Clark traces its roots back to 1872 and a sleepy
town in North Carolina, Tarboro, North Carolina. Our
headquarters are in Norfolk, Virginia, and we employ around
2,500 employees.
ARA is a non-profit trade organization that represents the
industry's ag retailers across the United States. Not only does
it represent its members; it also educates members on the
political process and important issues that affect our
industry.
TFI is also a leading voice in the nation's fertilizer
industry, and you have heard comments from some of the data
that they have furnished on this issue.
One of the things that I would like to speak to you on this
morning is that the United States needs a reliable and
plentiful supply of natural gas for nitrogen fertilizer. As was
mentioned before, 70 to 90 percent of the cost of anhydrous
ammonia is from the cost of natural gas. Currently, the
nitrogen fertilizer industry accounts for about three percent
of the nation's consumption of natural gas as well.
The current natural gas crisis is exacting a heavy toll on
our industry. In fact, as has been mentioned in former
testimonies, 15 facilities have been shut down permanently.
There is another five that have been idled, and that capacity
has reduced the domestic production 35 percent. It has also
been mentioned this morning, and I would agree, that the
imports have increased by 50 percent.
One of the effects upon the supply to the growers is that
these domestic facilities stored and had infrastructure within
the domestic United States to store product. With the closing
of those facilities, 30 percent of the storage capacity of the
domestic farmers and their access to those raw materials and
crop inputs have been closed.
This increases the cost for the farmer to find suppliers of
these raw materials through rail and truck infrastructure. As
you know, our country is facing logistical issues as well,
which increases the cost of the supply to the farmer and also
to the ag retailer.
Royster-Clark is also pleased and concerned about at the
same time the issue of natural gas as we have entered into a
study with Rentech, who is a technology company, and we are
looking at what we call a coal to corn project. This coal to
corn project will actually take Illinois coal, and we will ship
it to our East Dubuque, Illinois, nitrogen facility. This
technology is not new. It is called Fisher-Trops.
Rentech is actually working with the Coal Coalition in
Illinois, along with the governor of Illinois and the local
coal industry to try to convert our facility to this ultra
clean technology. The clean distillate fuel that would also be
produced from that facility could be used in municipalities to
help with ambient air quality standards. The Department of
Defense has shown some interest in this technology as part of
their Clean Fuel Initiative.
The company's conversion to clean coal will ultimately
replace the natural gas with this coal gasification as its
source of energy for fertilizer production. This shift will pay
huge dividends for Royster-Clark, greatly reducing the
company's cost of doing business and eventually creating more
jobs, 100 new jobs at the facility, an estimated 200 coal
mining jobs in Illinois and 1,500 construction jobs during the
construction of the facility.
This important coal to corn project will pave the way for
expansion that will keep the nitrogen fertilizer production
facility in Illinois intact. This also will allow us to supply
the midwest farmers and growers in our area.
As excited as we are at Royster-Clark about the promise
this project represents for our company, we would like to add
that this is not a realistic option for many other domestic
nitrogen producers due to the hundreds of millions dollars
necessary to complete the coal to gasification feedstock
conversion.
Also, there are problems with availability to coal
logistically close to the domestic production facilities, and
in some states there is an absence of political and financial
assistance that has been offered to us by the State of
Illinois.
Mr. Chairman, allow me to relay my recommendations which we
believe should be included in the federal energy legislation
and policy. The first recommendation that we recommend is
opening additional federal lands and offshore areas to oil and
gas exploration and production. We also believe that you should
assure that there is an infrastructure for a pipeline to bring
that supply to market.
We also support the bill to build new liquid natural gas
terminals by placing the exclusive jurisdiction over these
regulatory matters of liquid natural gas under the Federal
Energy Regulatory Commission.
We believe that these policies and these initiatives are
critically important to the energy security, food security and
our nation's security, and we strongly urge the Members of this
Committee to support their inclusion in the industry
legislation to be considered by the United States House of
Representatives.
Let me conclude by saying thank you for the opportunity
this morning to share my testimony.
[Mr. Pirkle's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Pirkle. I appreciate you
being here.
Next we are going to hear from Dr. Thomas Duesterberg, who
is President and CEO of the Manufacturers Alliance here in
Washington, D.C. I appreciate you being here.
I do want to point out too we received notice that we have
a series of votes, three votes, at approximately 11:00, which
will be sometime in there, but just so everybody is aware that
we may have to recess for a very short period of time to run
over and vote.
Mr. Duesterberg, I appreciate you being here.
STATEMENT OF THOMAS J. DUESTERBERG, Ph.D., MANUFACTURERS
ALLIANCE/MAPI
Mr. Duesterberg. Mr. Chairman, I appreciate the opportunity
to be here.
Manufacturers Alliance represents about 450 manufacturing
companies ranging from the auto sector to the chemicals
industry to the electronics industry. Our membership represents
over $3 trillion in final sales, and the products of our
industries are closely related to the concerns of rural
America, in addition to being in many cases located in rural
America.
I have chosen today to focus on the role of Liquified
Natural Gas and the crisis, but I wanted to call your attention
to the cost squeeze that is affecting manufacturing today, and
this points out why it is important to focus on natural gas
costs.
This is an era of global competition which just continues
to increase. Not only China, but now India, Malaysia,
Indonesia, Mexico are all competing with U.S. manufacturers. In
this environment we have seen a cost squeeze that is produced
by a variety of circumstances.
We have a strong dollar, which continues to be an issue for
manufacturers as especially Asian producers/producing countries
keep the value of their currencies low. Benefit costs are
rising rapidly, up 32 percent since 2001. Metals of all sorts,
including steel, copper and other inputs to manufacturing, have
almost doubled in the last few years.
We have done a study on a variety of factors affecting
manufacturing, the price of manufacturing compared to our nine
leading trading partners, and a combination of higher taxes
here than elsewhere, higher benefit costs, higher energy costs,
regulatory costs and tort costs add about 22 percent to the
cost of labor in this country, which is already high so it
produces a considerable cost squeeze.
Natural gas is important to manufacturing. The sector uses
about a third of all natural gas used in this country. It is
especially important, as has already been pointed out, to the
chemicals industry, but also to the glass industry and to the
metal forming industry, which have few options for this heat
source.
The impact of this cost squeeze and the higher price of
natural gas has been especially devastating on the chemicals
industry, which has lost 90,000 jobs in the last few years. We
went from a trade surplus of $16 billion in 1997 to a trade
deficit of $11 billion in 2003 largely because of this.
Now, one thing that we have looked at as a near term
solution. We endorse increases in supply of all sorts,
including what has been mentioned for electricity, diversifying
electricity, but there are stupendous amounts of natural gas
available in the world, including in politically stable places
like Norway, Australia, the Netherlands, the Caribbean, which
could provide a solution to the price of natural gas.
We have calculated that without increased supply of LNG,
the price of natural gas could rise to about $12.62 per 1,000
cubic feet over the next 15 years. If, however, we take
advantage of momentum to increase the supply of LNG, there have
been three new facilities that have been licensed in the last
year. There are 19 facilities in the United States that have
licenses in various stages of the process.
If we can approve only six new facilities from those 19, we
could have up to 25 percent of the domestic supply from LNG by
the year 2010. We think that this can reduce the price of
natural gas by about 20 to 25 percent over current levels.
Mr. Chairman, let me conclude by saying that manufacturing
is at a crossroads because of a cost squeeze and because of
global competition. The doubling or even tripling of natural
gas prices has exacerbated this crisis, so we need immediate
attention.
In addition to increasing domestic supply, we think
increasing the ability to import LNG could be a near term
solution. The economics are good right now for LNG imports, and
we encourage the Committee to investigate means to accomplish
this such as Congressman Terry's bill to promote expedited
licensing.
[Mr. Duesterberg's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Duesterberg.
Next we are going to hear from Paul Cicio, who is the
Executive Director of the Industrial Energy Consumers of
America here in Washington, D.C.
Thank you, Paul, for being here.
STATEMENT OF PAUL N. CICIO, INDUSTRIAL ENERGY CONSUMERS OF
AMERICA
Mr. Cicio. Good morning, Chairman Graves, Ranking Member
Barrow and Members of the Committee. I am the Executive
Director of the Industrial Energy Consumers of America.
Among other things, I would like to bring to the
Committee's attention the important issues relating to the
regulation of natural gas futures contracts markets. This June
will be the five year anniversary of the beginning of the
natural gas crisis. Cost of the crisis is nearing $200 billion.
It was in June of 2000 that natural gas prices averaged
above $4 per million BTU, a price level that immediately began
to impact competitiveness of U.S. manufacturing and small
business. One by one, manufacturing plants were permanently
shut down, idled, reduction was shifted overseas and resulted
in a loss of some three million relatively high paying jobs.
Today, with a brisk economic recovery, manufacturing is still
down some 2.5 million jobs.
Natural gas prices have continued to rise. Prices on the
New York Mercantile natural gas contract closed at $7.14 per
million BTU this Monday. In November of 2004, prices reached
levels of just under $10 per million BTU.
Had it not been for industrial demand destruction as a
result of high natural gas prices and the resulting decline of
consumption by the manufacturing sector, together with a cool
summer and a mild winter, we would potentially be facing
rationing of natural gas.
The point is the U.S. has a serious natural gas crisis that
has the potential to get much worse before it gets better, and
sound energy policy is not praying for a cool summer and a warm
winter. In the meantime, we will continue to witness the
dismantling of U.S. manufacturers who built facilities here in
the United States based on globally competitive natural gas
prices for fuel and feedstock.
Mr. Chairman, I would like to turn our attention to the
natural gas market issues. Energy markets have changed
dramatically, and regulatory oversight, transparency and limits
to rampant speculation by traders, particularly unregulated
hedge funds, is needed to meet this challenge.
Changes made by the Commodity Futures Modernization Act of
2000 were very well intended, but did not anticipate the rapid
market changes or the problems it would cause by relaxing CFTC
regulatory oversight. The changes that a self-regulated NYMEX
has made to the natural gas futures contract contributes to the
significantly increased volatility.
The natural gas market is no longer being set by consumer
demands for the physical supply of gas. Instead of the market
serving the greater public good, it serves the investment
interests of an ever growing number of speculators and
unrelated billion dollar hedge funds that are completely
disconnected from the consumer and the manufacturing market.
None of them appear concerned that there are negative impacts
on your constituents.
The NYMEX natural gas futures contract has the distinction
of being the most volatile commodity in the world, far more
volatile than crude oil. The trading limits, commonly referred
to as circuit breakers, are about twice that of other energy
commodities and about four times that of agricultural
commodities in general.
We encourage the Congress to look at the agricultural
market. There is no question that the government understands
that we must provide affordable food and stable prices. As a
result, agricultural commodities set futures trading limits
that are substantially below that of the NYMEX natural gas
contract and as a result have lower volatility. We believe that
natural gas should be treated with the same priority.
The Industrial Energy Consumers of America encourages the
Committee on Agriculture to make the following necessary
legislative changes to support consumers within the
reauthorization of the CFTC:
1] NYMEX should be required to seek prior CFTC approval of
proposed changes to the terms and conditions of contracts as it
did before CFMA was implemented. CFTC should be required to
evaluate the economic impacts of proposed changes and seek
public input, a similar approach to the Federal Energy
Regulatory Commission;
2] Give CFTC authority to establish trading limits similar
to agriculture commodity markets that are far less volatile;
3] Give CFTC and the SEC greater regulatory oversight that
increases the transparency of market players and transactions
in both NYMEX and the OTC sufficient to prevent market
manipulation;
4] CFTC should evaluate after hours overnight trading and
determine if its operations are in the best interests of energy
markets and can operate without manipulation. If not, it should
be eliminated;
5] Congress should prohibit senior CFTC enforcement
officials from taking jobs with organizations that their agency
oversees for one year. This would eliminate serious integrity
and ethic issues;
6] Restore and reinforce the anti-fraud anti-manipulation
gap to CFTC that it once had over energy swap transactions
prior to year 2000.
Thank you very much.
[Mr. Cicio's statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Cicio. We appreciate your
testimony.
Next we are going to hear from Peter Jones, who is
President of Wexco Corporation. He is with the Consumers
Alliance for Affordable Natural Gas in Lynchburg, Virginia.
Peter, thank you for being here.
STATEMENT OF PETER JONES, WEXCO CORPORATION
Mr. Jones. Good morning, Chairman Graves, Congressman
Barrow and Members of the Committee. I am Peter Jones,
President of Wexco Corporation of Lynchburg, Virginia.
Established in 1975, Wexco has grown into a highly
respected and capable supplier of machinery components for the
plastics industry both in the U.S. and internationally. Thank
you for the opportunity to testify before you regarding the
critical issue of natural gas markets and pricing.
Today I am appearing on behalf of the Consumers Alliance
for Affordable Natural Gas, which was formed to call attention
to the natural gas crisis and develop rational policy responses
to the natural gas supply/demand imbalance.
CAANG represents a broad collection of industrials, farming
interests and other consumers of natural gas. Since the 1990s,
government policies have encouraged the use of natural gas as a
clean fuel with the largest growth in demand coming from the
electric utility sector. Yet supply has not kept pace because
of government policies that have restricted the access to
abundant domestic reserves.
The resulting supply/demand imbalance has driven U.S.
natural gas prices to unprecedented heights. In fact, they are
two to three times historical levels, and they are the highest
in the industrial world.
Domestic prices are projected to stay at these globally
uncompetitive levels for the foreseeable future. As we have
heard, April natural gas futures are already over $7, which for
a month is the first time in history. This is troubling
considering that natural gas is the key feedstock in fuel used
in our plastic industry, as well as chemical, fertilizer, paper
and other manufacturing companies and heating homes and
producing electricity. Natural gas impacts all facets of the
economy.
Because of high natural gas prices, manufacturing plants
have closed and jobs have moved to other countries with lower
energy costs. Communities across the nation are suffering. Some
three million manufacturing jobs have been lost, but we need to
understand that each of these jobs supports four to five other
jobs in surrounding communities, so it ripples through the
economy.
Okay. What has happened to Wexco Corporation that I
represent? Our two primary operating costs are natural gas and
steel. Our natural gas prices have tripled since I started in
Wexco in 1999, and our steel prices at least in part driven by
natural gas have also dramatically raised, so our operating
costs are skyrocketing. At the same time these high prices are
forcing my customers to move offshore where they can achieve
competitiveness.
We cannot follow them. We have to stay here in Virginia. My
business and our 68 employees are being squeezed. When I
started we had 135 employees, and we have downsized to 68. Our
benefits are pressured, and our company of 30 years history is
definitely under siege.
The nation did not find itself in this mess overnight, so
solutions to help alleviate the natural gas supply/demand
imbalance will not come overnight. We must address structural
supply/demand imbalance, which is the fundamental cause of the
high, volatile natural gas prices.
Only with a balanced and comprehensive portfolio of
policies that address both sides of the equation will the
problem be resolved. There is no silver bullet.
We believe in four pillars to accomplish this. First, we
believe in the short term aggressive energy efficiency and
conservation measures must be taken, which offer the best near
term opportunities for reducing price pressures of natural gas.
Second, significant diversification of industrial and power
generation fuels, including renewables, clean coals, syn gas
from coal, biomass or other materials and nuclear energy to
reduce the demand or offset natural gas use and as a matter of
energy security.
Thirdly, expanded supply including LNG and new
environmentally sound U.S. production, and finally an
infrastructure upgrade that includes LNG terminals, an Alaska
pipeline and improved storage and transmission facilities.
The natural gas problem is complex. It will take a
multifaceted effort to resolve it, and it must be resolved for
U.S. manufacturers to remain globally competitive and to give
our small businesses and farmers a fighting chance to compete.
Thank you for this opportunity to present our views. I look
forward to answering any of your questions.
[Mr. Jones' statement may be found in the appendix.]
Chairman Graves. Thank you, Mr. Jones.
Mr. Barrow?
Mr. Barrow. Thank you, Mr. Chairman. It is my pleasure to
introduce my guest at these proceedings, Mr. Ben Boyd from
Screven County, Georgia.
As I stated before, Ben is the chairman of the American
Farm Bureau's Young Farmer Committee. Not the Georgia Farm
Bureau, but the American Farm Bureau Young Farmer Committee,
and I am very proud to represent him.
He has a lot of friends from the Georgia Farm Bureau who
are here with him today. I want to thank them for being here.
Ben, thank you for testifying today.
Chairman Graves. Thank you too, Ben. I want to congratulate
you on being chairman of the American Farm Bureau Young Farmer
Committee.
I was Chairman of the Missouri Young Farmer Committee and
served on that committee for two years. I did not have the
pleasure of being able to be on the American Young Farmer
Committee, but I am very impressed.
Thank you for being here.
STATEMENT OF BEN BOYD, FARMER
Mr. Boyd. Thank you. I appreciate you all letting me be
here today. As I said, I am Ben Boyd, and I farm with my father
and my brother close to a little town called Sylvania, Georgia.
We are a diversified farm. We grow cotton, peanuts, corn,
soybeans, small grains and cattle.
I am a member of the Screven County Farm Bureau, and as we
have said I have the pleasure to serve on the American Farm
Bureau Young Farmer Committee, which lets me talk to a lot of
people from all over the country, but today I am here speaking
on behalf of myself, a farmer from Georgia.
I just want to thank my congressman, Mr. Barrow, for
letting me come here today. I appreciate you letting somebody
like me come and talk to you all.
As we have all affirmed now, natural gas is a critical
resource for nearly every farmer in this country from
fertilizer, crop protection, chemicals, energy used to dry and
store all our commodities. My farm and just about everyone else
relies heavily on natural gas.
When the price of natural gas increases as much as it did
since 2002, the price for products I use on my farm which are
based on natural gas increase as well. Since 2002, nitrogen
fertilizer prices have increased 113 percent for me. On my
farm, that means an increase of about $54,880 just in nitrogen
based fertilizer prices for me to try to work this year on the
same crops that I have been growing the whole time.
For my corn acres I went from about $36 per acre in
nitrogen prices in 2002 to $64 per acre in 2004, and it is
going to be even higher this year I am afraid. Our cotton acres
are the same way. Cotton takes nitrogen too. The same fate. As
nitrogen goes up, so do my prices for raising this cotton. We
use mostly anhydrous ammonia because it is the most economical
of all nitrogen based fertilizers.
I do not come here to ask for a break to facilitate
inefficiencies. I want to do the best job I can, but I feel
like I have cut costs about as much as we can without seeing a
dramatic decrease in crop production.
Our farm also uses natural and LP gas to dry commodities.
Just on our peanut drying bill alone, the increase has been
about $4 per ton this year, so that has been close to $4,000
this past year in increased drying costs.
Farmers all across Georgia and all across the nation deal
with higher energy input costs over the last few growing
seasons, but in general in this time higher commodity prices
have been in place and so we have kind of been able to offset
differences, but this year is not the same. As inputs are going
up the prices are going down. Many Georgia farmers just like me
are going to find it more and more difficult to sustain
profitability.
We are eventually going to reach a point where energy costs
and energy related inputs force me and my neighbors and people
from all over the country to not only change our crops, but
maybe to change our livelihoods. When gross income on the farm
falls, our rural communities suffer.
When farmers stop farming by choice or by circumstance we
lose infrastructure, and this is critical. When we lose this
infrastructure in these rural communities, it cannot be
replaced without huge capital expenditures in the future.
This is something that really matters to me in the little
place I live called Poor Robin, Georgia. Please do not
underestimate the difficulty it is going to put on young
farmers all over the country. I will argue that nitrogen is the
most important fertilizer element to most crops. If something
is not done with this problem, I do not know how we are going
to be able to keep going.
I believe American agriculture is just as much a national
security issue as anything else we do. If you have plenty to
eat, you have 1,000 problems. If you are hungry, you only have
one.
We have been blessed in America. We have more abundance
than we know what to do with, and I think it is imperative that
we maintain a broadbased agriculture industry so we grow food
all over the country to provide safe, affordable and abundant
supply of food and fiber for our citizens. We should also be
able to rest assured that our food, we have plenty of it and it
is safe.
In closing, what I want everybody to get from this is that
this is important to me. We talk about endangered species. You
are looking at one. I am a 27-year-old farmer. There are not
many of us left, and if for some reason we skip a generation in
farmers for one reason or another I am afraid it is going to be
because it is not profitable.
It is hard to get into. Right now if you cannot make a
living for it--you can ask my banker. It is looking rough, but
I think we can do some things that will help. If we can cut our
costs as much as we can--I want to do my part. I will cut
everything out I can, but I am at the point right now if I cut
anything else productivity is going to go down.
If we could do something to decrease the energy related
input cost, be it fertilizer, chemicals, all of these things,
transportation both ways, I think it would let us be able to
produce the food that our citizens need while maintaining these
rural economies that according to me are extremely important in
this part of the world.
I just thank you all for letting me talk today.
[Mr. Boyd's statement may be found in the appendix.]
Chairman Graves. We are going to take a quick recess. We
have three votes, twenty minutes maybe, twenty-five minutes, I
hope to be back.
I do have several questions. I am interested in coal
gasification. I am also interested in what some of your
opinions are, particularly Mr. Cicio, in market manipulation,
and then I want to hear from our three farmers about what is
happening to their operations personally.
You know, agriculture, farming, is the only business out
there that I know of that buys everything retail and sells
everything wholesale. It is completely backwards to the way it
is supposed to be. We are price takers on both ends.
I am particularly interested in what this has done to your
operation personally and the impact. You kind of addressed it a
little bit and nibbled around the edges, but I want to hear it
direct so you might think about those questions.
We should be right back just as quickly as possible. I
thank everyone for their patience.
[Recess.]
Chairman Graves. I want to thank everybody for your
patience in our vote. It obviously took longer than we had
thought, but again thank you all for being here, and I hope
your schedules have not been messed up too much.
Charlie Kruse is not going to be with us. He did have some
commitments, which is fine.
I do want to start with Mr. Cicio. I would be curious as to
what your take is on market manipulation and just how much you
think is there. It is frustrating the way limits are set or
where they are set for natural gas as opposed to other farm
commodities, but I am curious about what your take is on market
manipulation and just how widespread it is.
Mr. Cicio. Congressman, we have a very interesting
situation where there is enormous speculation and enormous
increased volatility that has occurred. It is only
directionally up, but it is all legal. There is nothing that is
illegal about what is going on. The sad thing is that they are
permitted by law to do these things.
We could not understand why things were as volatile as they
were, and we looked at the construct of the NYMEX natural gas
contract, and we found some very revealing things.
Since the passage of the Commodity Futures Modernization
Act, it deregulated essentially NYMEX and allowed them to do
whatever they want with the terms and conditions of the NYMEX
contract. Since 2000, year 2000, they changed the terms of this
contract four times, and they have changed the terms, such as
the limits, to make it more volatile.
Today, as I mentioned in my testimony, the limits are twice
that of other energy commodities and four times the limits of
agricultural commodities, so what you have then is a contract
that if you were a speculator, a trader, a hedge fund, that is
a perfect environment for volatility.
If you are the New York Mercantile or you are a trader,
speculator, volatility is good. You want an environment, a
contract that you can push the price around at will. If you are
a consumer, you want stability. That is why we like the
agricultural commodity situation.
Our number one priority is turning back the clock a bit on
the Commodity Futures Modernization Act. Many of the things
that were in place, the law of the land, prior to the year 2000
is what we would like to see. Prior to 2000, if the NYMEX
wanted to change the contract they had to make that request to
the CFTC. The CFTC would evaluate it and either approve it or
disapprove it.
We would like to go a step further and encourage the CFTC
to do an evaluation of the impact of the proposed changes by
NYMEX and allow for public input, and that is pretty much the
way FERC manages their issues.
In terms of manipulation, to our knowledge it is not
illegal. They have been given the legal right to do this
through the design of that contract. We need to fix the
contract.
Chairman Graves. Mr. Pirkle, you mentioned coal
gasification. Could you explain that a little bit more for my
clarification and explain that? If you just do a little bit
more in-depth on that, I would appreciate it.
Mr. Pirkle. Sure. Rentech is a technology holding company
that has a patented process that is an enhanced Fisher-Trops
technology, and Fisher-Trops technology is probably 60 years
old. It was developed in Germany during World War II for a way
to convert to fuel their armed forces.
It is presently being used in South Africa. There are some
production facilities that are there that are actually using
the Fisher-Trop technology.
Rentech has actually taken that Fisher-Trop technology and
developed and refined it, and the part that they patented is
actually when you burn--they can actually consume high sulfur
coal which has higher BTU values, so they can actually do that,
and with their patented process they capture the sulfur and
condense the sulfur emissions down to elemental sulfur, and
they can sell that elemental sulfur, so for air emissions it is
a clean fuel.
However, it is capital intensive. To construct a facility,
the estimates right now are somewhere around $400 million to
erect and construct the facility, and that is the stage that we
are at right now.
A product that I mentioned, the clean distillate fuel, is a
product that will come out of the process. The clean distillate
fuel is a low sulfur diesel fuel substitute or equivalent. It
has one part per million sulfur.
I mentioned in my testimony that municipalities are very
interested in that if they are in a non-attainment area for
their municipal transportation needs. The Department of
Defense, with their clean fuel initiative, is interested in
this clean distillate fuel equivalent as well.
The State of Illinois has given a $5 million grant to
complete the engineering studies. Those engineering studies are
near completion. The next step after that would be the raising
of the funds to start construction and to move forward with the
conversion process.
We have some papers that were developed that give a report
of the engineering studies and a little bit more in-depth
information on the Fisher-Trop technology that we could submit
to you if that would meet your needs.
Chairman Graves. Very much so. If you would submit that, I
would appreciate it very much.
Mr. Pirkle. We can do that.
Chairman Graves. My staff will work with you to get that.
I do want to hear from Terry and Ben, both of you all, on
just what this is doing to your personal operations because as
farmers you are hit from both sides and there is not much you
can do about it, particularly in today's environment where we
have decreasing profit margins in farming. It just makes it
that much more tough when you see natural gas which is used for
drying and then of course the fertilizer costs on top of that.
What do you foresee in the future with your operations and
what worries you and just how tough it is going to be? Terry?
Mr. Hilgedick. Okay. Basically on our farm we try to look
at it a few different ways. We can improve efficiency of the
fertilizer that we use. Currently our farm last year, we were
producing one bushel of corn for one unit of nitrogen, and we
feel like we are probably hitting the wall there.
We applied three different times throughout the growing
season, once at planting, once at side rest time, which the
corn is about a foot tall, and once again at about six feet
tall through irrigators. We feel like we are probably running
out of efficiency there, so as far as tweaking that much more I
do not know what we would do really and still maintain the kind
of yields it takes to make a little money farming.
Secondly, we can try to buy seasonally. Sometimes it works.
It worked in 2004. We were able to buy in the fall of 2003 and
saved about $50 a ton. That opportunity has not presented
itself thus far in our area in 2005 so we are uncovered on our
costs on anhydrous ammonia, and, as I mentioned earlier, we are
looking at $400 plus a ton.
We cannot grow corn is an option. It is unacceptable for a
lot of reasons in that our crop rotations are destroyed. Our
yields on our other crops such as soybeans would then plummet
due to lack of rotation, so it is a tough animal.
Fourthly, we just pay the price and go on. That is kind of
where we are getting to more all the time and just absorb the
cost and try to find it somewhere else, try to find some
dollars elsewhere.
Chairman Graves. Ben?
Mr. Boyd. Well, for us, as I talked about, we can change
what crops we are using a little bit to help a little bit, but
with us we can grow peanuts, which do not take as much
nitrogen, but it is just like he said on rotation. We are just
prolonging the inevitable when we do that because it is a pay
it now/pay it later deal.
From my perspective, we do not really need a bandaid like
that. We need something that will fix us for a while. What
really scares me is we are being able to do it right now.
Obviously I am still farming so I tend to believe if it keeps
going the way it is going we are going to be farming on equity
and that is not good because that will run out, especially for
me.
The way it is increasing, if it keeps going up, like right
now somehow we are making it, but if it keeps increasing at the
rate it is and what they say it might, I do not know. We are
going to pray and hope we have a good season, have a good crop,
because it is not looking real pretty right now.
Chairman Graves. Mr. Barrow?
Mr. Barrow. Thank you, Mr. Chairman.
Ben, to follow up on what you were saying, are there things
you can turn to for fertilizer besides nitrogen based
fertilizers? Is that an option?
Mr. Boyd. No, sir. What I just said about the crops and
changing around, that obviously will not work but a minute or
two. I mean, nitrogen is its own thing. It would be like saying
do you want food or water. You have to have it.
Mr. Barrow. I want to harken back to something you said at
the end of your testimony when we were being called away.
You took a generational perspective on things, and I just
want you to share with us. How do you think that young farmers
today are facing challenges that young farmers yesterday and
before your daddy's generation? Tell us how things look to you
today, as opposed to the way things looked back then.
Mr. Boyd. Absolutely. Farming is to capital intensive right
now. It is hard to get into if you are not in some sort of
operation. With that, we start losing farmers. Like with the
age, like the demographics, farmers are getting older and
older. There are not many young guys coming up.
If we ever miss a generation of farmers in there, it is not
something that you can pick up a textbook. I am not saying that
farmers are smart or anything, but just smarter than anybody
else so that you could not just have a textbook. You just
cannot wake up one morning and decide I am going to be a farmer
and read, you know, or read lots of books and figure things out
because it is always different.
I would just argue that if we lose it, especially if we
lose it in regions, there are some parts of the country that
are more efficient at growing some stuff. We need to have
people producing commodities all over the country, and if we
ever skip one generation I think it is going to be hard for us
to get back into it.
Mr. Barrow. Thank you, sir.
Mr. Chairman, you have asked some of the questions I wanted
to ask, so I am through.
Chairman Graves. Manufacturing. Can any of you delve into
competitiveness with some of your foreign competitors? I do not
know if any of you have foreign competitors. You may know in
general what their energy prices are or what it is doing as far
as how that affects you. I would be curious about that.
Mr. Jones. I can speak. In the machine that we make --we
make barrels that go into injection molding machines and so on.
We have a high cost of energy in casting the biometallics
inside the steel cylinders.
There are competitors in China who could put a barrel in
one of our customer's plants and make a profit for less money
than it takes for us just to produce it. I mean, it is
dramatic.
The only thing that keeps us going at this point in time is
because most of the equipment in the United States, because of
the recession we have had and the lack of a capital investment
short term, most of that equipment is older equipment, and
people run it until it is about ready to drop and they need a
barrel now, and they are not going to get it from China.
So in the short term there is a little bit of protection
there, but in the longer term, Congressman, is that the people
who make resin, plastic resin, are putting all their capital
offshore. The largest manufacturer of injection molding
machines now in the world, which makes as many as all the
others in the United States combined, is in China.
Plastic processing. I defy you to go into WalMart or Home
Depot and find any consumer product made out of plastic that
does not say Made in China on it. We are impacted both from a
cost standpoint in manufacturing and from a standpoint that the
pie that we vie for is getting smaller and smaller.
Chairman Graves. Go ahead.
Mr. Duesterberg. I might comment just in general. Natural
gas prices in Europe, of all places, are now 25 percent or so
lower on average than they are here. They get gas from Russia
primarily, but also get gas from North Africa in the form of
LNG.
Gas is the primary determinant of location now for the
chemicals industry, and you see unfortunately major chemical
companies in the United States now locating in the Middle East
because gas is--they used to burn it. It is available for less
than $1 per 1,000 cubic feet.
These industries, if we do not address the problem, are
going to continue to move offshore. We are going to continue to
put large swaths of the manufacturing sector at a competitive
disadvantage if we do not get the price of natural gas down to
a level where it is more competitive even with the Europeans.
Chairman Graves. Do you have any more questions?
Mr. Barrow. No, Mr. Chairman.
Chairman Graves. It is obvious that we need some long-term
solutions in the energy bill, if we can get that passed.
There was a little bit of a ray of hope I guess that came
out of the Senate the other day at least in looking at some of
the things we can do in terms of more domestic production of
some of our energy sources.
Obviously Liquid Natural Gas has a lot of potential. We
need to do everything we can to try to get that permitting
process expedited. Mr. Terry, we are working with him a little
bit on that.
What we are going to look at is some of the short term,
some things we can do to hopefully eliminate the volatility
very quickly. I am going to be filing a bill as soon as we get
back from Easter break dealing with the price stops and looking
at basically we are going to attempt to implement some limits
much like what we see in the farm commodities arena.
Hopefully that will help out or at least lessen the
volatility short-term, but obviously long-term we have got to
come up with some serious solutions to this because it is
hitting everybody. It is hitting our farmers. It is hitting our
manufacturers. It is hitting consumers. It is hitting
homeowners. Everybody has seen their heating bill skyrocket. We
have to do something, and I believe in that.
I appreciate everybody coming out today and giving your
testimony. I know some of you it was much tougher to get here
than others, but I appreciate that quite a little bit.
Please work with my staff. If you have any other
suggestions let us know as we are working through this process
of filing the bill. Again, thank you.
This hearing is adjourned.
[Whereupon, at 12:04 p.m. the Subcommittee was adjourned.]
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