[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





                    HEARING TO REVIEW THE POTENTIAL
                   ECONOMIC IMPACTS OF CLIMATE CHANGE
                           ON THE FARM SECTOR

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON CONSERVATION, CREDIT,
                          ENERGY, AND RESEARCH

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 2, 2009

                               __________

                           Serial No. 111-38


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov



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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

Robert L. Larew, Chief of Staff      Nicole Scott, Minority Staff 
Andrew W. Baker, Chief Counsel       Director
April Slayton, Communications 
Director

                                  (ii)
?

       Subcommittee on Conservation, Credit, Energy, and Research

                   TIM HOLDEN, Pennsylvania, Chairman

STEPHANIE HERSETH SANDLIN, South     BOB GOODLATTE, Virginia, Ranking 
Dakota                               Minority Member
DEBORAH L. HALVORSON, Illinois       JERRY MORAN, Kansas
KATHLEEN A. DAHLKEMPER,              SAM GRAVES, Missouri
Pennsylvania                         MIKE ROGERS, Alabama
BETSY MARKEY, Colorado               STEVE KING, Iowa
MARK H. SCHAUER, Michigan            RANDY NEUGEBAUER, Texas
LARRY KISSELL, North Carolina        JEAN SCHMIDT, Ohio
JOHN A. BOCCIERI, Ohio               ADRIAN SMITH, Nebraska
MIKE McINTYRE, North Carolina        ROBERT E. LATTA, Ohio
JIM COSTA, California                BLAINE LUETKEMEYER, Missouri
BRAD ELLSWORTH, Indiana              GLENN THOMPSON, Pennsylvania
TIMOTHY J. WALZ, Minnesota           BILL CASSIDY, Louisiana
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
FRANK KRATOVIL, Jr., Maryland
SCOTT MURPHY, New York
WALT MINNICK, Idaho
EARL POMEROY, North Dakota

               Nona Darrell, Subcommittee Staff Director

                                 (iii)
                             C O N T E N T S

                              ----------                              
                                                                   Page
Boccieri, Hon. John A., a Representative in Congress from Ohio, 
  submitted report...............................................    98
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     3
    Prepared statement...........................................     4
Holden, Hon. Tim, a Representative in Congress from Pennsylvania, 
  opening statement..............................................     1
    Prepared statement...........................................     2
Latta, Hon. Robert E., a Representative in Congress from Ohio, 
  prepared statement.............................................     6
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     5
Smith, Hon. Adrian, a Representative in Congress from Nebraska, 
  prepared statement.............................................     6
Walz, Hon. Timothy J., a Representative in Congress from 
  Minnesota, prepared statement..................................     6
    Submitted report.............................................   163

                               Witnesses

Glauber, Ph.D., Joseph, Chief Economist, U.S. Department of 
  Agriculture, Washington, D.C...................................     8
    Prepared statement...........................................    10
Outlaw, Ph.D., Joe L., Co-Director, Agricultural and Food Policy 
  Center; Professor and Extension Economist--Farm Management and 
  Policy, Department of Agricultural Economics, Texas A&M 
  University, College Station, TX................................    49
    Prepared statement...........................................    51
    Submitted report.............................................   216
Westhoff, Ph.D., Patrick, Co-Director, Food and Agricultural 
  Policy Research Institute; Research Associate Professor, 
  Department of Agricultural Economics, University of Missouri-
  Columbia, Columbia, MO.........................................    54
    Prepared statement...........................................    56
Antle, Ph.D., John M., Professor of Agricultural Economics and 
  Economics, Montana State University; Courtesy Professor of 
  Agricultural and Resource Economics, Oregon State University; 
  University Fellow, Resources for the Future, Bozeman, MT.......    60
    Prepared statement...........................................    61
Capper, B.S.c., Ph.D., Judith ``Jude'' L., Assistant Professor of 
  Dairy Science, Department of Animal Sciences, Washington State 
  University, Pullman, WA........................................    67
    Prepared statement...........................................    68
Pottorff, Richard C., Chief Economist, Doane Advisory Services, 
  Rochester, MN..................................................    78
    Prepared statement...........................................    79

                           Submitted Material

National Oilseed Processors Association, submitted statement.....    90
West, Ford B., President, The Fertilizer Institute, submitted 
  statement......................................................    89

 
                    HEARING TO REVIEW THE POTENTIAL
                   ECONOMIC IMPACTS OF CLIMATE CHANGE
                           ON THE FARM SECTOR

                              ----------                              


                      WEDNESDAY, DECEMBER 2, 2009

                  House of Representatives,
 Subcommittee on Conservation, Credit, Energy, and 
                                          Research,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Tim 
Holden [Chairman of the Subcommittee] presiding.
    Members present: Representatives Holden, Herseth Sandlin, 
Dahlkemper, Markey, Schauer, Kissell, Boccieri, Costa, 
Ellsworth, Walz, Kratovil, Murphy, Goodlatte, Moran, Rogers, 
Schmidt, Smith, Latta, Luetkemeyer, Thompson, Cassidy, and 
Minnick.
    Staff present: Christy Birdsong, Nona Darrell, Tony 
Jackson, Craig Jagger, Tyler Jameson, John Konya, Scott 
Kuschmider, James Ryder, Anne Simmons, April Slayton, Debbie 
Smith, Rebekah Solem, Patricia Barr, Tamara Hinton, Josh 
Maxwell, Mary Nowak, Ben Veghte, and Sangina Wright.

   OPENING STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    The Chairman. This hearing of the Subcommittee on 
Conservation, Credit, Energy, and Research to review the 
potential economic impacts of climate change on the farm sector 
will come to order. I would like to welcome our witnesses and 
guests to today's hearing, the first of two hearings on the 
topic of climate change as it pertains to agriculture. Today, 
our witnesses will provide testimony on the impacts of climate 
change on the farm sector, and tomorrow's panel will discuss 
the cost and benefits of agriculture offsets. The intent of 
these hearings is not to cover all issues related to climate 
change, but to cut through the talking points and rhetoric used 
to distort the conversation to suit special interests.
    Over the next 2 days we will hear testimony from 
researchers with different areas of expertise, backgrounds, and 
perspectives to find out what climate change and legislation 
related to climate change really means for agriculture. I hope 
they can provide a complete and realistic analysis of the two 
biggest areas of concerns, impacts and offsets. The Committee 
on Agriculture took a first step in March of this year by 
issuing a climate change questionnaire that was sent to over 
400 agriculture-related organizations to solicit input on 
greenhouse gas emissions. Their responses and other related 
issues were further discussed at a hearing in June during the 
debate of the American Clean Energy and Security Act.
    It became clear after these efforts that there is much 
interest from the agriculture community, and from Members of 
this Committee, in the way agriculture fits into the climate 
change debate. Regardless of what side of the debate we are on 
everyone can agree there is much more work to be done in this 
area. More information is needed to determine what we can be 
doing better. The 2007 Supreme Court decision has left us all 
in a state of confusion. We do not yet know the implications of 
what kind of domino effect this decision will have on all 
industries. We do know that EPA will likely take actions to 
regulate greenhouse gases under the Clean Air Act.
    No matter what your position is on climate change, I don't 
believe having EPA regulating emissions on farms is the way any 
of us want to proceed. The successful efforts of Chairman 
Peterson during the debate of the climate change bill to 
prevent EPA regulation of greenhouse gases under the Clean Air 
Act ensures that there should be no cow tax or EPA regulations 
of agriculture. The bill passed by the House, however, is a 
long way from the President's desk. There is still a lot of 
work to do and more information to be gathered. These hearings 
may produce more questions than answers, but they will allow us 
all the opportunity to hear from the distinguished panelists 
who have the knowledge and expertise on these issues, the 
researchers, economists, educators and analysts.
    I look forward to their testimony and the opportunity to 
listen, learn, and question those who have been doing the 
actual work on agriculture and climate change.
    [The prepared statement of Mr. Holden follows:]

  Prepared Statement of Hon. Tim Holden, a Representative in Congress 
                           from Pennsylvania
    I would like to welcome our witnesses and guests to today's 
hearing, the first of two hearings on the topic of climate change as it 
pertains to agriculture. Today, our witnesses will provide testimony on 
the impacts of climate change on the farm sector, and tomorrow's panel 
will discuss the costs and benefits of agriculture offsets.
    The intent of these hearings is not to cover all issues related to 
climate change, but to cut through the talking points and rhetoric used 
to distort the conversation to suit special interests. Over the next 2 
days, we will hear testimony from researchers with different areas of 
expertise, backgrounds and perspectives, to find out what climate 
change and legislation related to climate change really means for 
agriculture. I hope they can provide a complete and realistic analysis 
of the two biggest areas of concern: impacts and offsets.
    The Committee on Agriculture took a first step in March of this 
year by issuing a climate change questionnaire that was sent to over 
400 agriculture-related organizations to solicit input on greenhouse 
gas emissions. Their responses and other related issues were further 
discussed at a hearing in June during debate of the American Clean 
Energy and Security Act.
    It became clear after these efforts that there is much interest 
from the agriculture community, and from Members of this Committee, in 
the way agriculture fits into the climate change debate. Regardless of 
which side of the debate we are on, everyone can agree there is much 
more work to be done in this area. More information is needed to 
determine what we can be doing better.
    The 2007 Supreme Court decision has left us all in a state of 
confusion. We do not yet know the implications or what kind of domino 
effect this decision will have on all industries. We DO know that EPA 
will likely take actions to regulate greenhouse gases under the Clean 
Air Act. No matter what your position is on climate change, I don't 
believe having EPA regulating emissions on farms is the way any of us 
want to proceed.
    The successful efforts of Chairman Peterson during debate of the 
climate change bill to prevent EPA regulation of greenhouse gases under 
the Clean Air Act ensure that there should be no cow tax or EPA 
regulation of agriculture. The bill passed by the House, however, is a 
long way from the President's desk. There is still a lot of work to do 
and more information to be gathered.
    These hearings may produce more questions than answers, but they 
will allow us all the opportunity to hear from distinguished panelists 
who have the knowledge and expertise on these issues--the researchers, 
economists, educators and analysts. I look forward to their testimony 
and the opportunity to listen, learn and question those who have been 
doing the actual work on agriculture and climate change.

    The Chairman. I now recognize the Ranking Member of the 
Subcommittee, the gentleman from Virginia, Mr. Goodlatte.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Thank you, Mr. Chairman. I want to thank you 
for holding today's hearing to review the potential economic 
impacts of climate change on the agriculture sector. The House 
has passed H.R. 2454, but by a very close margin, with the 
overwhelming majority on my side of the Committee, including 
myself, voting no. And many questions still remain on the 
impact that cap-and-trade will have on our economy, and this 
Committee should continue to intensely review how these 
proposals will affect farmers and ranchers, as well as 
consumers of agricultural products. The Senate is considering 
similar legislation to the American Clean Energy and Security 
Act or ACES, as its authors like to call it.
    I have another name for this legislation, the Agriculture 
Can't Exist Standards. There are many studies that model the 
effects of cap-and-trade on our economy. I am very interested 
to hear from our witnesses today who will discuss their cap-
and-trade analyses for the agriculture industry. Although each 
model uses different assumptions and has different end results, 
the conclusions of these studies remain the same. Cap-and-trade 
legislation has the potential to devastate the agriculture 
community with higher energy prices and lower farm income. As 
these higher energy prices ripple throughout the economy, 
producers will pay more for fertilizer, pesticides, seed, 
equipment, machinery, steel, and other supplies needed for 
their agriculture operations.
    This is expected to increase operating costs, anywhere from 
10-32 percent. Studies show a decrease in farm income from $5 
billion to $50 billion per year. According to ERS, net farm 
income will be down $30 billion in 2009. Additionally, grain 
and meat processing and food production facilities will be hit 
with the same costs as producers. Rural America cannot afford 
the economic stifling effects of a cap-and-trade policy. 
Proponents of cap-and-trade may point to the agriculture 
offsets provision that is supposed to create potential for farm 
revenue, but this provision picks winners and losers by 
ignoring certain commodities and regions and by excluding early 
actors of conservation practices.
    In essence, not every farmer and rancher will be able or 
even eligible to participate. Although we are still anxiously 
waiting to see USDA's regional analysis for the potential of 
agricultural offsets, the EPA analysis of offsets shows that 
farmers best and only chance to participate in an offset 
program would come from taking land out of production to plant 
trees. Congress is creating another government mandate that 
will result in an artificial competition between food, feed, 
fuel, and now carbon. This will undoubtedly change cropping 
patterns, which will reduce our domestic supply of agricultural 
products and ultimately increase commodity prices.
    This policy will reduce exports and move our agriculture 
production overseas forcing other countries to clear land for 
agriculture production to meet their food, feed, and fiber 
needs. Mr. Chairman, you are absolutely correct when you refer 
to the problem we are confronting with the Environmental 
Protection Agency, and the possibility, in fact, right now the 
likelihood that they will take action absent Congressional 
action in this area. However, there is a simple solution that 
the Members of this Committee should take the lead on in 
pushing since Members on both sides of the aisle in large 
numbers opposed the cap-and-trade legislation, and that would 
be to simply push for legislation that restrains the authority 
of the EPA to take the action that they are threatening to 
take. That to me would be the simplest way to set the standards 
for the Congress in how we will proceed from here.
    If were to do that, the Congress would be retaking control 
of this important policy area from the Environmental Protection 
Agency, an agency that is acting based upon a Court decision 
that was rendered; notwithstanding the fact that when the Clean 
Air Act standards were set that they are operating on had no 
one in the Congress, or for that matter in the EPA thinking 
that back in the 1970s that that would be an appropriate thing 
to do to regulate carbon dioxide emissions. What this all means 
for the American consumer is higher food costs or worse, a 
dependency on foreign nations for our food supply.
    Mr. Chairman, I again thank you for holding the hearings 
this week. The impact that cap-and-trade will have on the ag 
sector and our economy and our very lives is extensive. We 
should make sure that we fully vet its impact, particularly at 
a time when our economy is struggling and unemployment is at 
10.2 percent. It is no time to further cripple our economy with 
the burdens of a cap-and-tax policy. I hope that we can 
continue these discussions at the full Committee so that all 
our Members have the opportunity to review cap-and-trade policy 
and the effects it will have on their constituents.
    [The prepared statement of Mr. Goodlatte follows:]

Prepared Statement of Hon. Bob Goodlatte, a Representative in Congress 
                             from Virginia
    Mr. Chairman, thank you for holding today's hearing to review the 
potential economic impacts of climate change on the agriculture sector.
    The House has passed H.R. 2454, but many questions still remain on 
the impact that cap-and-trade will have on our economy. And, this 
Committee should continue to intensely review how these proposals will 
affect farmers and ranchers, as well as consumers of agricultural 
products. The Senate is considering similar legislation to the American 
Clean Energy and Security Act or ACES as its authors like to call it. I 
have another name for this legislation: the Agriculture Can't Exist 
Standards.
    There are many studies that model the effects of cap-and-trade on 
our economy. I am very interested to hear from our witnesses today who 
will discuss their cap-and-trade analyses for the agriculture industry. 
Although each model uses different assumptions and has different end 
results, the conclusions of these studies remain the same: cap-and-
trade legislation has the potential to devastate the agriculture 
community with higher energy prices and lower farm income.
    As these higher energy prices ripple throughout the economy, 
producers will pay more for fertilizer, pesticides, seed, equipment, 
machinery, steel, and other supplies needed for their agriculture 
operations. This is expected to increase operating costs anywhere from 
10-32 percent. Studies show a decrease in farm income from $5 billion 
to $50 billion per year. According to ERS, net farm income will be down 
$30 billion in 2009. Additionally, grain and meat processing and food 
production facilities will be hit with the same costs as producers. 
Rural America cannot afford the economic-stifling effects of a cap-and-
trade policy.
    Proponents of cap-and-trade may point to the agriculture offsets 
provision that is supposed to create potential for farm revenue. But 
this provision picks winners and losers by ignoring certain commodities 
and regions, and by excluding early actors of conservation practices. 
In essence, not every farmer and rancher will be able or even eligible 
to participate.
    Although we are still anxiously waiting to see USDA's regional 
analysis for the potential of agriculture offsets, the EPA analysis of 
offsets shows that farmers' best and almost only chance to participate 
in an offset program would come from taking land out of production to 
plant trees. Congress is creating another government mandate that will 
result in an artificial competition between food, feed, fuel, and now 
carbon. This will undoubtedly change cropping patterns, which will 
reduce our domestic supply of agricultural products and ultimately 
increase commodity prices. This policy will reduce exports and move our 
agriculture production overseas forcing other countries to clear land 
for agriculture production to meet their food, feed, and fiber needs.
    What this all means for the American consumer is higher food costs 
or worse a dependency on foreign nations for our food supply.
    Mr. Chairman, I again thank you for holding the hearings this week. 
The impact that cap-and-trade will have on the ag sector, and our 
economy, and our very lives is extensive. We should make sure that we 
fully vet its impact. Particularly, at a time when our economy is 
struggling and unemployment is at 10.2%. It is no time to further 
cripple our economy with the burdens of a cap-and-tax policy.
    I hope that we can continue these discussions at the full Committee 
so all our Members have the opportunity to review cap-and-trade policy 
and the effects it will have on their constituents.

    The Chairman. The chair thanks the gentleman, and asks all 
other Members of the Subcommittee to submit their statements 
for the record.
    [The prepared statements of Messers. Peterson, Walz, Smith, 
and Latta follow:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you, Chairman Holden, for holding the hearings today and 
tomorrow to look more closely at the impact of climate change and 
climate change legislation on the farm sector.
    I am going to keep my remarks brief so that we can get to the 
substance of today's hearing. In fact, the very reason for today's 
hearing is to cut through all the rhetoric and talking points and focus 
on the reality of how agriculture is involved in climate change and 
proposals to regulate greenhouse gas emissions.
    When it became clear that Congress was going to act on climate 
change legislation and that EPA was prepared to act if Congress did 
not, we realized that the Agriculture Committee needed to be engaged in 
this process or else we would be left with much of the burden and none 
of the potential benefits of climate change legislation. The bottom 
line for me was that we needed to be sure that EPA would not be coming 
onto farms to regulate greenhouse gas emissions. I don't want to turn 
around in a year or 2 and find that we're fighting an uphill battle 
against EPA on whatever regulatory scheme they come up with to hold 
agriculture responsible for greenhouse gas emissions.
    H.R. 2454 is far from perfect, and more protections for the 
agriculture and forestry sectors are needed before I will vote for 
final passage of the conference report. But, everyone agreed that the 
changes we made for agriculture in the House-passed bill were necessary 
and good.
    Moving forward, we are here today to listen and learn about the 
economic analysis that has been done on climate change and agriculture, 
which will help us understand what the potential impacts might be, 
whether we act or fail to act on climate change legislation. I look 
forward to learning more from our witnesses and the discussion we will 
have here today.
                                 ______
                                 
    Prepared Statement of Hon. Timothy J. Walz, a Representative in 
                        Congress from Minnesota
    Chairman Holden, Ranking Member Goodlatte, thank you for holding 
this hearing to look at the objective research surrounding the effects 
of climate change and climate change legislation on the agriculture 
sector. I further appreciate that this hearing is coupled with the 
hearing tomorrow to look at agriculture offset programs, for we must 
look at how these issues are coupled together.
    Climate change is a real and serious problem, and we're simply 
hurting ourselves every day we don't act to change the way we emit 
greenhouse gas. We have an obligation to fix this problem, to set an 
example for the world, to strengthen our economic security and energy 
independence. However, we must do it wisely, it must make sense, and it 
must not do more harm than good.
    I firmly believe our agriculture producers can and want to be a 
part of the solution. I understand much of the testimony today will 
focus on how H.R. 2454, the American Clean Energy and Security Act, 
will increase energy prices for farmers. However, I believe we must 
also focus on the cost of inaction.
    Do the costs associated with H.R. 2454 outweigh the costs of 
inaction? The Institute for Policy Integrity at New York University's 
School of Law has done an analysis showing the benefits of H.R. 2454 
will exceed costs by 9:1. Of course, this is looking at climate change 
across all sectors. What I want to know is if the agriculture 
economists here today have done similar studies looking at the cost of 
inaction on the agriculture sector and how those costs compare to the 
cost of H.R. 2454.
    I look forward to the testimony today.
                                 ______
                                 
 Prepared Statement of Hon. Adrian Smith, a Representative in Congress 
                             from Nebraska
    Thank you, Mr. Chairman. I appreciate the Subcommittee holding this 
hearing to review the economic impact of climate change policy on the 
farming sector.
    Recent efforts to reduce greenhouse gas (GHG) emissions by 
implementing a ``cap-and-trade'' system add up to a national energy tax 
at a time when both producers and consumers are struggling. While I 
support investment in clean, renewable energy, the infrastructure 
needed to employ this approach is not realistic. The farming sector is 
one of the most energy-intensive industries, both directly and 
indirectly. The Third District of Nebraska is one of the leading 
agricultural districts in the country, home to more than 30,000 farmers 
and ranchers who would suffer from even a slight increase in operating 
cost.
    Assumptions about cap-and-trade's potential impact are being made 
on all sides of this debate. Forecasting cropland changes, weather 
patterns, and energy and commodity prices, while useful, is not exact. 
But one thing is certain: forcing a cap-and-trade mandate will create 
greater challenges for our rural economy. As a Member of this 
Subcommittee, I would like to see more thoughtful deliberation on such 
far-reaching policy, which is why I voted against the American Clean 
Energy and Security Act when it came before the House in June of this 
year, and more recently joined a number of my colleagues in sending a 
letter to the Chairmen and Ranking Members of the House Energy and 
Commerce, Agriculture, and Small Business Committees requesting a joint 
hearing to examine climate change legislation and its effects on 
manufacturing, agriculture, and small business in the Midwest.
    Over the past decade, improved agricultural practices such as no-
till cropping, targeted chemical applications through global 
positioning satellite technology, and methane digesters have reduced 
emissions from the agricultural sector. Strategies which involve a 
voluntary offset program could allow for farmers and ranchers to reduce 
emissions and recover a portion of their increased input costs. Federal 
policy should reward--not punish--our producers who are responsible 
stewards of the land.
    Again, thank you, Mr. Chairman. I appreciate the opportunity to 
hear the testimony of these experts and look forward to moving ahead in 
a bipartisan, productive manner.
                                 ______
                                 
    Prepared Statement of Hon. Robert E. Latta, a Representative in 
                           Congress from Ohio
    Good Morning. Chairman Holden and Ranking Member Goodlatte.

    Thank you for having this hearing today to examine Climate Change 
legislation and its economic impacts on the farm sector. H.R. 2454, the 
misleading titled ``American Clean Energy and Security Act of 2009,'' 
otherwise known as cap-and-tax was the vehicle used in the House of 
Representatives early this July. While narrowly passing the House by 
219-212 margin, there was strong bipartisan opposition to this bill, 
which will be detrimental to our economy.
    I represent Ohio's Fifth Congressional District, the largest 
agricultural and largest manufacturing district in Ohio. Recently, I 
sent a letter to the Chairmen and Ranking Members of the House 
Agriculture, Energy and Commerce, and Small Business Committees, as 
well as Democratic Leadership asking them to hold a joint hearing on 
the impact which climate change legislation will have on the 
agriculture, manufacturing, and small business sectors. The Midwest is 
dependent on agriculture, manufacturing and small businesses, and I 
hear daily from my constituents regarding this issue and what negative 
effect it will have upon them. I was joined on the letter by Republican 
Leader John Boehner and Republican Conference Chairman Mike Pence, both 
also from the Midwest, along with 29 other Members of Congress.
    Unfortunately, only 0.8 percent of Ohioans are actively employed in 
the agriculture sector. The farmers in my district are not solely 
farmers; they are producers who farm full time and many of whom also 
have full time jobs in industries such as manufacturing. Ohio boasts 
over 618,000 manufacturing jobs according to most recent Bureau of 
Labor Statistics data. These are people who work in energy intensive 
industries that will be hit the hardest if this proposed climate change 
legislation is signed into law, or if the proposed Federal regulations 
are made final. These current pieces of legislation and proposed 
Environmental Protection Agency regulations will not only kill jobs in 
the United States, but will destroy the agriculture, manufacturing and 
small business jobs in my Congressional District and throughout the 
country. These are the same small businesses that make roughly 70-80 
percent of all new jobs in the United States each year.
    My district's main crops are corn, soybeans, and wheat. All of 
these crops have a significant operating cost for fuel, seed, 
electricity, fertilizers, and chemicals, all of which will increase 
heavily under current climate change legislation in the House and 
Senate. Operating costs amount to 71 percent for corn, 50 percent for 
soybeans, and 72 percent for wheat. Farmers in my district will not be 
able to sustain their farms and support their families with these 
increased costs.
    According to the Heritage Foundation, farm income is expected to 
drop $8 billion in 2012, $25 billion in 2024 and over $50 billion in 
2035 if H.R. 2454 is enacted or similar legislation. This represents 
decreases of 28, 60, and 94 percent, respectively. In addition, I have 
farmers in my district that strongly believe in domestic energy 
production to reduce our costs at the pump and our dependency on 
foreign oil, all the while helping to bring back American jobs. With 
gasoline and diesel prices continuing to rise, the only thing this 
legislation will reduce is the size of individuals' pocketbooks, 
especially with gasoline and diesel costs projected to be at least 58 
percent higher under current climate change legislation. Under the 
current climate change legislation being proposed, economic impacts are 
severe, with job loss predicted at an astounding 1.1 million with peak 
unemployment projected at 2.5 million. This legislation will have an 
even more devastating effect by 2035, as by that time this legislation 
is projected to have reduced our gross domestic product by $9.6 
trillion. This legislation will result in higher energy costs for 
consumers, particularly in areas such as mine, where coal is the 
primary energy source.
    Over 86 percent of Ohio's electricity is generated by coal. The 
costs incurred from this legislation on electricity generators will be 
passed along to the consumers. Not only will farmers in my district, 
and throughout the country, be burdened with not being able to afford 
to operate their farms, this legislation will raise their electric 
rates, gasoline rates and place an even larger burden on their family. 
A family of four could incur costs anywhere from $1,500 to $4,300 per 
year. In these tough economic times, this is an unbearable cost on the 
taxpayer.
    The Fifth District's rural community relies on eleven different 
electric cooperatives to supply electricity throughout the district. 
Rural utility companies such as the ones in Ohio are more dependent on 
coal for electricity generation than utilities in urban areas. 
According to data from the National Rural Electric Cooperative 
Association, eighty percent of electricity production by a rural 
electric co-op is generated by coal compared to fifty percent 
nationally.
    In 2006, China surpassed the United States as the world's largest 
carbon dioxide emitter. According to date from the Global Carbon 
Project, from 2000 through 2007, global total greenhouse gas emissions 
increased by 26 percent. During that same period, China's carbon 
dioxide emissions increased 98 percent, India's increased 36 percent, 
while the United States' carbon dioxide emissions only increased by 
three percent. If the United States were to completely cease using 
fossil fuels, the increase from the rest of the world will replace 
United States' emissions in less than 8 years.
    We have an Administration that has stated they do not want to 
burden tax increases on anyone making under $200,000 per year. However, 
Americans who make under this amount still use electricity and gas, 
they still go the service station to fill their gasoline tanks, and 
they purchase things that have to be manufactured, processed and 
transported. With each of these respective items, cap-and-trade will 
drive up prices.
    A 2008 study by Doane Advisory Services, who is testifying today, 
has calculated the per-acre production cost increases under current 
climate change legislation. With my district's main crops being corn, 
soybeans, and wheat, we would see an increase in production costs of 
each by 27 percent, 15 percent and 27 percent, respectively. These are 
direct prices only, and do not take into account the high costs of 
transportation, manufacturing, and processing of these crops.
    Just as burdensome as proposed climate change legislation will be, 
the 2009 United Nations' Conference on Climate Change in Copenhagen is 
projected to produce an agreement similar to the one passed in 1997 in 
Kyoto. Just like Kyoto, Copenhagen will be an agreement that will be 
detrimental to the U.S. economy and its energy intensive industries. 
This agreement will be a legally binding, comprehensive threat to 
America, especially detrimental to the Midwest.
    Copenhagen will be a multi-nation agreement with 192 countries 
participating in this process, which makes the United States and its 
efforts to control its outcome very difficult to agree on the final 
terms. America will be expected to show leadership at Copenhagen and 
succumb to the European Union and the group of 77 developing countries 
to agree to a legally-binding document. The U.S. will be required to 
reduce their greenhouse gas emissions significantly even though 
countries such as China and India will not be forced to comply. The 
U.S. has had little if no increase in greenhouse gas emissions since 
1997, yet we will be expected to further reduce ours to make up for 
other countries non-participation. This will do nothing but further 
decrease jobs, reduce our GDP, drive up the costs of energy, and 
increase our national debt. This agreement will force our taxpayers' 
hard-earned dollars to go to developing nations to develop their clean 
energy programs. The U.S. will be forced to redesign their energy 
policy, as well as help fund other countries' energy policies including 
sending billions of dollars every year to China.
    As if U.S. Government regulation is not enough, U.S. companies and 
small businesses would be forced into investigations and decisions to 
be cast down upon them by foreign entities and governments. Just like 
cap-and-trade legislation, the Copenhagen Agreement will be a pure 
transfer of wealth not from the heart of the Midwest to the East and 
West Coasts, but from the entire United States to the rest of the 
world. The Energy Information Administration in the Department of 
Energy released a study which projected costs of U.S. compliance 
between $100 and $397 billion annually. Between legislation, 
regulations, and a potential treaty, American farmers, manufacturers 
and small businesses are facing severe consequences.
    It is time for Congress to take a strong look at climate change 
legislation and the effects it will have on our economy, especially how 
hard it will affect the midwestern states that rely heavily on 
agriculture, manufacturing, and small businesses. I am still requesting 
that a joint hearing be held between the House Committees on 
Agriculture, Energy and Commerce, and Small Business. I do not want to 
see the Midwest be unfairly penalized, and we must ensure that our 
hard-working Americans have job security in farming and manufacturing. 
We need to keep American farmers feeding the world, our manufacturers 
in operation to keep our citizens employed by making American-made 
products, and our small businesses given incentives to create jobs and 
expand operations to new markets. I look forward to working with my 
colleagues on both sides of the aisle on this critically important 
matter.

    The Chairman. And we would like to welcome our first 
witness, Dr. Joseph Glauber, Chief Economist, United States 
Department of Agriculture, Dr. Glauber, you may begin.

   STATEMENT OF JOSEPH GLAUBER, Ph.D., CHIEF ECONOMIST, U.S. 
          DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

    Dr. Glauber. Mr. Chairman, Congressman Goodlatte, and 
Members of the Subcommittee, thank you for the opportunity to 
review the potential economic impacts of proposed climate 
change legislation to the farm sector. Specifically, my 
comments today focus on how changes in energy prices under a 
cap-and-trade system for greenhouse gas emissions would likely 
affect farmers and ranchers. The economic impacts of climate 
change on the farm sector are broad, complex, and will evolve 
slowly over the next decades. Impacts will be influenced by the 
timing and the extent of climate change; the efficacy of 
actions to mitigate emissions and adopt changes, and the forms 
of actions taken within the United States and in other 
countries; and the extent to which mitigation within the farm 
sector can be compensated through greenhouse gas offsets or 
other mechanisms.
    Our preliminary analysis of H.R. 2454, published last July, 
focused on the economic impacts of changes in energy prices 
associated with the cap imposed on domestic emissions. We have 
refined and expanded that analysis and my written testimony 
summarizes preliminary findings focusing on the effects of 
higher energy prices. Agricultural producers are not affected 
uniformly by the rise in energy prices and not all agricultural 
producers have the same opportunities to provide offsets. How 
changes in energy prices and the ability to provide offsets 
affect different parts of the agricultural sector relate to the 
relative and absolute magnitude of the changes in production 
costs and ability to change farming practices.
    Energy-related inputs and the ability to generate and 
provide offsets have a different importance across the sector 
and impacts reflect those different roles, both by commodity 
and region of the country. Energy consumption in the 
agricultural sector can either be direct, such as gasoline, 
diesel, petroleum, natural gas, electricity, and energy used 
for operating irrigation equipment; or indirect such as the 
energy used to produce fertilizer. Over 2005 to 2009, using 
data collected by the Economic Research Service, shows that 
expenses from direct energy use averaged about 6.7 percent of 
total production expenses in this sector, while fertilizer 
expenses represented another 6.5 percent. With the more recent 
increase in energy costs, the combined share of these inputs 
reached nearly 15 percent in 2008.
    In general, energy costs as a percent of total operating 
costs are highest for wheat and feed grains with energy input 
shares of some 50 to 60 percent of total operating cost. On a 
per-acre basis energy costs are generally highest for rice, 
corn, and cotton. Direct energy costs make up a small share of 
total operating costs on livestock operations comprising less 
than ten percent of total operating cost for dairy, hog, and 
cow-calf operations. However, these operations also experience 
energy costs indirectly through higher feed costs. Feed costs 
average from less than 11 percent of a cow-calf total operating 
cost to almost 77 percent for dairy.
    Agriculture and forestry are not covered sectors under the 
cap-and-trade system of H.R. 2454. Therefore, producers in 
these sectors are not required to hold allowances for 
greenhouse gas emissions. Nonetheless, U.S. agriculture would 
be affected in a variety of ways. Energy providers' compliance 
with greenhouse gas emission reduction legislation will likely 
increase energy costs. Higher prices for fossil fuels and 
inputs would increase agricultural production costs, 
particularly for more energy intensive crops. This would in 
turn affect planting and production, which would affect the 
livestock sector through higher feed costs. Higher energy 
prices could also result in increased biofuel production.
    Using energy price scenarios estimated by the Environmental 
Protection Agency and the Energy Information Administration, we 
found that farm level price and income effects due to higher 
production costs will be relatively small, particularly over 
the short run, that is, over the next--from 2012 to 2025, when 
fertilizer producers will be eligible for significant rebates 
under the so-called energy intensive export or the trade-
affected industries. In the longer term, the energy price 
effects grow larger and the impact on production costs are 
roughly proportional in magnitude. This assumes no change in 
technology or production practices which could mitigate some of 
the impact.
    Though the effects are not incorporated into the main 
findings of this testimony, H.R. 2454 would also provide 
opportunities for farmers and ranchers to receive payments for 
carbon offsets. Revenue from offsets for changes in tillage 
practices, reductions in methane and nitrous oxide emissions in 
tree plantings, for example, could mitigate the effects of 
higher energy prices for many producers. Last, H.R. 2454 could 
have significant land effects. Though this analysis does not 
include bioenergy production effects or changes in land use due 
to added fuel production, or carbon sequestration through 
afforestation, both could further affect output prices and farm 
income.
    I will deal with this tomorrow in more depth--our analysis 
does include this, and I will presenting this in tomorrow's 
testimony. Again, thank you, Mr. Chairman, for holding these 
hearings on climate change. I think it is important to spend 
the time to understand the effects on agriculture, and I hope 
my testimony today and tomorrow is useful in that regard. I am 
certainly happy to answer any questions.
    [The prepared statement of Dr. Glauber follows:]

  Prepared Statement of Joseph Glauber, Ph.D., Chief Economist, U.S. 
              Department of Agriculture, Washington, D.C.
    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to review the potential economic impacts of proposed 
climate change legislation to the farm sector. Specifically, my 
comments today focus on how changes in energy prices under a cap-and-
trade system for greenhouse gas (GHG) emissions would likely affect 
farmers and ranchers based on analyses of the American Clean Energy and 
Security Act of 2009 (H.R. 2454), which included a cap-and-trade system 
for GHG emissions. The economic impacts of climate change on the farm 
sector are broad, complex and will evolve slowly over the next decades. 
Impacts will be influenced by the timing and extent of climate change, 
the efficacy of actions to mitigate emissions and adapt to changes, the 
form of the actions taken within the United States and in other 
countries, and the extent to which mitigation within the farm sector 
can be compensated through GHG offsets or other mechanisms.
    We have not been able to quantify all of these factors and their 
influence on the farm economy. Our preliminary analysis of H.R. 2454, 
published in July,\1\ focused on the economic impacts of changes in 
energy prices associated with the cap imposed on domestic emissions.
---------------------------------------------------------------------------
    \1\ U.S. Department of Agriculture, Office of the Chief Economist 
and Economic Research Service. ``A Preliminary Analysis of the Effects 
of H.R. 2454 on U.S. Agriculture'' July 22, 2009. Available at http://
www.usda.gov/oce/newsroom/archives/releases/2009files/HR2454.pdf.
---------------------------------------------------------------------------
    We have refined and expanded that analysis and my comments today 
will summarize preliminary findings focusing on the effects of higher 
energy prices. The findings suggest that under the energy price 
scenario estimated by the Environmental Protection Agency, price and 
income effects due to higher production costs will be relatively small, 
particularly over the short run (2012-2025) when fertilizer producers 
will be eligible for significant rebates. Separate testimony will 
address the role of GHG offset markets and their effects on farm 
income, the analysis of which suggest that the cap-and-trade as a whole 
likely will have a positive effect on net farm income.
    Agriculture and forestry are not covered sectors under the cap-and-
trade system of H.R. 2454. Therefore producers in these sectors are not 
required to hold allowances for GHG emissions. Nonetheless, U.S. 
agriculture would be affected in a variety of ways. Energy providers' 
compliance with GHG emissions reductions legislation will likely 
increase energy costs. Higher prices for fossil fuels and inputs would 
increase agricultural production costs, particularly for more energy-
intensive crops. This would, in turn, affect plantings and production, 
which would affect the livestock sector through higher feed costs. 
Higher energy prices could also result in increased biofuel production. 
It is worth noting that fertilizer prices will likely show little 
effect until 2025 because of the H.R. 2454's provision to help energy-
intensive, trade exposed industries mitigate the burden that the 
emissions caps would impose.
    Though the effects are not incorporated into the main findings of 
this testimony, H.R. 2454 would also provide opportunities for farmers 
and ranchers to receive payments for carbon offsets. Revenue from 
offsets for changes in tillage practices, reductions in methane and 
nitrous oxide emissions, and tree plantings, for example, could 
mitigate the effects of higher energy prices for many producers.
    Last, H.R. 2454 could have significant land use effects. Though 
this analysis does not include bioenergy production effects or changes 
in land use due to added biofuel production or carbon sequestration 
through afforestation, both could further affect output prices and farm 
income.
Energy Use by U.S. Agriculture
    Agriculture is an energy intensive sector with row crop production 
particularly affected by energy price increases. Direct energy 
consumption in the agricultural sector includes use of gasoline, diesel 
fuel, liquid petroleum, natural gas and electricity. Indirect use 
involves agricultural inputs such as nitrogen and other fertilizers 
which have a significant energy component associated with their 
production. Over 2005-2008, ERS data show that expenses from direct 
energy use averaged about 6.7 percent of total production expenses in 
the sector, while fertilizer expenses represented another 6.5 percent. 
With the more recent increases in energy costs, the combined share of 
these inputs reached nearly 15 percent in 2008.
    In general, energy costs as a percent of total operating costs are 
highest for wheat and feed grains. Based on cost of production data for 
2007 and 2008, wheat, sorghum, corn, barley and oats have energy input 
shares between 55 and 60 percent (table 1). Cotton and soybeans are 
among the least energy intensive crops, with total energy costs 
representing only about 30 percent of total production costs.
    A somewhat different distribution of energy costs by commodity 
results if looked at in terms of per-acre costs for energy-related 
inputs rather than shares of operating costs. Rice, corn, and cotton 
have the highest per-acre expenses for these inputs. Again, energy-
related costs for soybean production are low among these crops.
    There is also variation in the regional distribution of energy-
input costs. Figure 1 illustrates this for wheat and soybeans, two 
sectors at the opposite end of the energy-input share spectrum. For 
wheat, the regions with the largest share of input costs allocated to 
energy are the Fruitful Rim and the Heartland (71 percent), followed by 
the Prairie Gateway (69 percent).
    Wheat production cost relationships for the Northern Great Plains 
and the Prairie Gateway, where the majority of the crop is grown, 
present an interesting contrast in operating expenses. While the two 
regions have a similar share of production costs attributable to 
fertilizer expense in 2008 (44-45 percent), the shares of costs that 
are for fuel, lubrication, and electricity are much different (25 
percent for the Prairie Gateway, while only 11 percent for the Northern 
Great Plains). This is likely due to the high level of irrigation used 
in the Prairie Gateway.
    For soybeans, the region with the largest share of input costs 
allocated to energy is the Southern Seaboard (54 percent), followed by 
the Eastern Uplands (45 percent). The region with the largest soybean 
plantings is the Heartland, which has the second lowest share of energy 
inputs in total operating expenses, at 36 percent.
    Direct energy costs make up a small share of total operating costs 
on livestock operations, comprising less than ten percent of total 
operating costs for dairy, hogs and cow-calf operations (table 2). 
However, these operations experience higher energy costs indirectly 
through higher feed costs. Feed costs ranged from less than 11 percent 
of a cow-calf operator's total operating costs to almost 77 percent for 
dairy.
    Trends in energy-related inputs could themselves change in the 
future in response to climate change impacts, as shifts in temperature 
and precipitation alter the need for fertilizer, pesticides, and 
irrigation. USDA's production cost modeling framework does not reflect 
these future changes in agroclimatic conditions.

        Figure 1. Total energy input costs as a percentage of total 
        operating costs, 2008, by ERS Farm Resource Region (soybeans 
        and wheat). 

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Effects of Higher Energy Costs on U.S. Agriculture
    To represent the effects on the U.S. agricultural sector of higher 
energy costs resulting from the emissions cap-and-trade system in H.R. 
2454, estimated energy price changes from EPA's (June 2009) and EIA's 
(August 2009) analyses were used to derive implications for crop-
specific production costs.\2\ Cost categories in the USDA-ERS cost of 
production framework included in this analysis were fertilizer and 
fuel, lube, and electricity. As shown in the previous section, these 
production inputs represent a significant portion of operating expenses 
for major field crops. We use the Food and Agricultural Policy 
Simulator Model (FAPSIM) to analyze the effect of H.R. 2454 on national 
level production costs. This model allows farmers to change acreage 
decisions in response to higher energy prices, but does not allow for 
changes in input mix. Though FAPSIM is only designed to examine short-
term impacts, we extrapolate to the intermediate and long-term to make 
an initial assessment of how higher energy prices in those years would 
affect farmers if they made identical decisions to those modeled in the 
short term. We know this is not the case due to changes in productivity 
over time as well as farmers ability to adapt to higher energy prices 
by shifting away from energy-intensive inputs. Regional effects are 
discussed only for the short-term impacts.
---------------------------------------------------------------------------
    \2\ For the June EPA H.R. 2454 analysis, scenario 2 was used. The 
EPA analysis of H.R. 2454 can be found at:
http://www.epa.gov/climatechange/economics/economicanalyses.html. For 
the EIA analysis, the basic case was used. The EIA analysis of H.R. 
2454 can be found at: http://www.eia.doe.gov/oiaf/servicerpt/hr2454/
index.html.
---------------------------------------------------------------------------
    For the short-term scenarios, agricultural sector impacts were 
derived for 2012-2018 based on energy price changes from the EPA and 
EIA analyses. While most of the direct energy price increases would be 
felt immediately by the agricultural sector, fertilizer costs would 
likely be unaffected until 2025 due to provisions in H.R. 2454 that 
would distribute specific quantities of emissions allowances to 
``energy-intensive, trade exposed entities'' (EITE).\3\ Additionally, 
EPA analysis indicates that the allocation formula would provide enough 
allowances to cover the increased energy costs of all presumptively 
eligible EITE industries. Based on these considerations, the USDA 
analysis assumes H.R. 2454 imposes no uncompensated costs on nitrogen 
fertilizer manufacturers related to increases in the price of natural 
gas through 2024. These allocations are terminated beginning in 2025. 
This reflects an assumption that enough foreign countries have adopted 
similar GHG controls to largely eliminate the cost advantage for 
foreign industries. These assumptions are consistent with the treatment 
of EITE industries, including nitrogen fertilizer manufactures, in the 
EPA analysis of H.R. 2454.
---------------------------------------------------------------------------
    \3\ Under Subtitle B of Title IV, ``energy-intensive, trade exposed 
entities'' (EITE) covers industrial sectors that have: (1) an energy or 
greenhouse gas intensity of at least 5% and a trade intensity of at 
least 15%; or (2) an energy or greenhouse gas intensity of at least 
20%. Without these allocations, firms in EITE industries would incur 
energy-related costs that foreign competitors would avoid; hence, 
putting them at significant market disadvantage. The bill sets a 
maximum amount of allowances that can be rebated to EITE industries at, 
2% for 2012 and 2013, 15% in 2014, and then declining proportionate to 
the cap through 2025. Beginning in 2026, the amount of allowance 
rebates will begin to be phased out and are expected to be eliminated 
by 2035. The phase-out may begin earlier or be delayed based on 
Presidential determination.
---------------------------------------------------------------------------
    Medium-term and long-term impacts are based on EPA estimated 
changes in energy prices. Years covered in this analysis for these 
periods are 2027-2033 and 2042-2048. Since EPA results were presented 
in 5 year increments, results for other years covered in the analyses 
were derived by interpolation and extrapolation. EITE rebate scenarios 
are not covered for these periods since the rebates are assumed to end 
after 2025 in the EPA analysis. Because of the time horizons considered 
in the medium and long term analyses, there is much uncertainty 
surrounding the effects estimated here. Factors such as yield 
productivity, development of energy-saving technologies and weather can 
all have major effects on supply, demand and price outcomes, thus 
mitigating or exacerbating the effects estimated here.
    As emission caps become more stringent over time, allowance prices 
and corresponding energy price impacts become larger. Results for these 
scenarios illustrate some of these larger impacts. Table 3 shows 
selected energy-related impacts from the EPA and EIA analyses of H.R. 
2454 that were used for the agricultural sector scenarios across each 
of the time periods. EIA results were available on an annual basis out 
to 2030.
    Using the EPA and EIA results shown in the previously mentioned 
tables, changes in measures of energy-related agricultural inputs were 
estimated. Fuel price impacts are based on the EPA petroleum price 
changes and the EIA diesel fuel (transportation) price changes. 
Fertilizer price impacts in the EPA scenarios reflect price changes for 
natural gas and petroleum, while those in the EIA scenarios are based 
on price changes for natural gas (feedstock) and industrial distillate 
fuel oil.
    Table 4 shows the average percent changes in the indexes of prices 
paid by farmers for fuels and fertilizer across the various time 
periods and scenarios analyzed. Reflecting the differences in the 
relative sizes of the EPA and EIA energy price impacts, effects on 
producer input prices during 2012-2018 are about twice as large for the 
EIA-based scenarios compared to the EPA scenarios. The exception is the 
net fertilizer cost increase, reflecting in part different rebate sizes 
and inclusion within the EIA scenario of a greater shift from coal to 
natural gas under H.R. 2454.
National Impacts of Higher Energy Prices
    The discussion of national impacts on the agricultural sector 
resulting from higher energy prices associated with the proposed 
emissions cap-and-trade policy is divided into two parts. First, an 
assessment of the impacts on major field crops and the livestock sector 
is discussed. This is followed by a discussion of impacts of higher 
energy costs on production expenses for the fruit and vegetable sector. 
Both discussions cover multiple short-term scenarios, as well as a 
medium-term and a long-term scenario, as discussed above. The analysis 
and discussion below does not include the effects of GHG offsets or 
other mechanisms to compensate farmers for emissions reductions and 
carbon sequestration. It also does not include the effect of other 
countries enacting policies mitigate GHG emissions. When revenues from 
offsets are considered in conjunction with production costs, net farm 
income is expected to be positive. These effects of offsets will be 
discussed briefly today, and in more detail in my testimony tomorrow.
    To assess impacts on major field crops and the livestock sector, 
changes in agricultural production costs arising from higher energy 
prices are used as inputs to FAPSIM. This model covers commodity 
markets for corn, sorghum, barley, oats, wheat, rice, upland cotton, 
soybeans (including product markets for soybean meal and soybean oil), 
cattle, hogs, broilers, turkeys, eggs, and dairy. Fruit and vegetables 
are not modeled in FAPSIM but are analyzed using a separate model 
below. FAPSIM calculates the impacts of changes in production costs on 
supply, demand, and prices in each of these markets over the years 
2009-2018. At the aggregate level, the model also computes associated 
changes in production expenses in the sector and net farm income. The 
model simulations for the different scenarios and time periods assume 
no changes in technology or production practices (such as fertilizer 
application rates) beyond those implicit in the reference scenario's 
trends.\4\
---------------------------------------------------------------------------
    \4\ A more detailed description of FAPSIM is given in Appendix A.
---------------------------------------------------------------------------
Short-term Scenarios_EPA and EIA Energy Prices
    Higher prices for energy-related agricultural inputs (fertilizer 
and fuel) raise the cost of production for all major crops. Table 5 
shows the average nominal dollar impacts on variable production costs 
per acre for major field crops over 2012-2018. For the EPA scenario 
(based on energy price increases consistent with EPA's CO2-
equivalent allowance prices for 2015 and 2020), the largest changes in 
per-acre production costs from baseline levels are for crops that use 
more energy-related inputs, most notably rice, corn, and cotton. 
However, compared with overall crop-specific production costs, high-
cost rice and cotton are relatively less affected by the energy-related 
input changes (each up by less than two percent), while sorghum 
production costs are relatively more affected at 2.2 percent. This is 
due to the lower energy-input share relative to production costs for 
rice and cotton producers (as shown earlier in table 1). Whether looked 
at on a cost per acre basis or on a cost as share of production costs 
basis, soybean production costs are less affected than those of most 
other crops.
    For the EIA scenario, energy-related production cost impacts for 
all crops are generally on the order of twice as large as those for the 
EPA scenario. However, the relative impacts among the crops are similar 
to those identified for the EPA scenario. For both price scenarios, the 
EITE rebates for fertilizer producers result in a significant reduction 
in potential costs since most of the impacts are limited to the 
increase in fuel costs.
    Acreage effects, without offsets, are modest (table 6). Under the 
EPA price scenario, overall acreage planted to major field crops 
decreases by 133,000 acres, a less than 0.1 percent change from 
baseline levels over 2012-2018. However, relative net returns among 
cropping alternatives, along with differences in producer responses to 
changes in economic incentives, result in varying impacts for each 
crop. Wheat acreage is down the most at 63,000 acres. While corn 
acreage also declines (less than 0.1 percent decline), its impacts are 
sharply reduced because of the importance of the EITE rebates in 
determining fertilizer costs. Also, the net shift of acres to soybean 
production is reduced relative to baseline levels as the relative cost 
advantage of the low-fertilizer input crop is diminished with the 
rebate.
    Similarly, for the EIA scenario, a larger absolute decline in total 
acreage results, though still modest, with planted acreage down 354,000 
acres. This represents a 0.1 percent decline in planted acreage. Wheat 
and corn acreage still experience the largest reductions. Again, there 
is a net switch in acreage to soybeans as their returns are affected 
the least among crops.
    In general, crop production is down slightly, leading to higher 
prices (table 7). However, since production changes are small under the 
EITE rebates, price impacts are minimal, with no price change greater 
than 0.4 percent (0.2 percent and 0.4 percent are the highest price 
changes under the EPA and EIA scenarios, respectively). Under both 
scenarios, slightly higher corn prices, which are partially offset by 
lower soybean meal prices, lead to a a small increase in feed costs for 
the livestock sector (table 8). As a result, livestock production 
declines slightly. The impacts on livestock production vary across 
livestock species reflecting the relative shares of corn and soybean 
meal in the typical feed ration. Because corn is large part of their 
feed ration, pork and beef are affected more than poultry. Feed costs 
under the EIA scenario experience a larger increase than those from the 
EPA scenario, resulting in slightly larger livestock production 
declines.
    Net farm income in the agricultural sector declines from the FAPSIM 
baseline on average by $0.76-$1.72 billion (0.9-2.1 percent) over 2012-
2018 (table 9). This change is due primarily to higher production 
expenses, although higher cash receipts partly offset the increases in 
production expenses. These income effects do not reflect revenues from 
GHG offsets nor do they reflect the related effects of land use changes 
associated with GHG offsets. These effects will be examined in more 
detail in tomorrow's testimony.
Effects on Production Expenses for the Fruit and Vegetable Sector
    Fruits and vegetables are not included in FAPSIM. Instead, data 
from USDA's 2007 Agricultural Resources Management Survey (ARMS) were 
used to estimate the effects of H.R. 2454 on the fruit and vegetable 
sector. Average per farm effects on variable costs of production were 
estimated based on the increased input prices for fuels, electricity 
and fertilizer estimated under the FAPSIM runs described above.
    Unlike for most row crops and livestock production, labor is the 
single largest variable cost for vegetable, melon, fruit and tree nut 
farms. However, the second largest expense component is fertilizer and 
agricultural chemicals. In 2007, fertilizer and agrichemicals accounted 
for about 18 percent of the variable cash expenses of vegetable and 
melon farms and 13 percent for fruit and tree nut farms. Motor fuels 
and oil used to run tractors, generators, and irrigation pumps 
accounted for five percent of vegetable cash costs and four percent of 
cash costs for fruits and tree nuts. In this analysis, per-acre 
fertilizer application rates are assumed to remain unchanged. Over the 
medium- and long-run, this is unrealistic since most growers would 
adjust application methods, amounts, timing, or the mix of crops 
produced to reduce expenses.
    In addition, electricity is required by these farms to run 
irrigation pumps, ice makers, lights, and sorting and packing equipment 
in packing sheds. Although the exact share is not certain, electricity 
likely accounts for a significant share of the 4-5 percent of cash 
costs accounted for by expenditures for utilities. This analysis for 
the fruit and vegetable sector assumes that the entire utility expense 
category consists of electricity costs since there was no way to break 
out electric costs from telephone, water, and other utility expenses. 
Like fertilizer and other fuel expenses, no adjustments were assumed in 
electricity use; thus, the results for energy costs assumed here are 
likely high estimates.
    Impacts of higher fertilizer, fuel, and electricity prices on 
variable costs within the fruit and vegetable complex are generally 
small in terms of percentages (table 10). Across the EPA and EIA short-
term scenarios, impacts on costs for all fruits and vegetables were two 
percent or less. Over the long-term, the total impact under the EPA 
energy price scenarios was estimated to be 3.8 percent, or $7,747 per 
farm that specializes in fruits and vegetables (farm for which more 
than half of all sales come from fruits and vegetables).
Impacts Across Farm Types and Regions
    Regional and farm type impacts are based on results from the Farm-
Level Partial Budget Model. The model operates on individual farm data 
for farm businesses from ARMS. The model reflects historic production 
patterns and farm structure within each region. Any potential 
structural or production responses by farms are not included within the 
model.
    The model uses results from the FAPSIM scenarios discussed earlier 
as inputs to derive regional and farm type impacts consistent with the 
national outcomes. Results can be summarized across various groupings 
of farms such as by resource region, commodity specialization, or farm 
size categories. Nonetheless, since farm business performance varies 
within these groupings, results do not indicate performance of 
individual farms within a group.
    The overall impacts reported in this section can differ from those 
in the national farm income accounts due to a number of factors. This 
section reflects, in part, on farm businesses \5\ so the concentration 
of expenses is higher than for all farms. Further, part of the 
differences relates to the treatment of rent--the national accounts use 
net rent, while rent comes directly out of net cash income at the farm 
level.
---------------------------------------------------------------------------
    \5\ Farm businesses are defined as family and non-family operations 
that report farming as their principal occupation.
---------------------------------------------------------------------------
    A simulation of how the legislation will impact agriculture by farm 
type reveals that some segments of agriculture will be more impacted by 
the legislation than others. The analysis focuses on results for 2014 
and this 1 year analysis serves as an example of regional and commodity 
differences in the short run.
    Rebates to the fertilizer industry as an EITE to compensate for 
higher natural gas prices significantly lessens the impact of the 
higher energy prices across all farm types. With EITE rebates, 2014 net 
cash income for all farm businesses is estimated to be 1-4 percent 
lower than in the 2014 baseline level compared to the 1-2 percent 
decline in net farm income presented in the previous section. Wheat, 
cotton, rice, and ``other crop'' producers have a decrease in net 
income of 2-8 percent across the EPA-based and EIA-based scenarios 
(figure 2). Except for ``other livestock'' producers, most other farm 
types have a net income decrease of around 1-3 percent. As in the 
previous sections, these impacts do not include revenue from GHG 
offsets or increased biomass production.
    The impact of higher energy prices under a fertilizer rebate 
scenario is not evenly distributed. Other cash grains, wheat, corn, 
soybeans, cotton, rice, specialty crops, and hogs account for nearly 49 
percent of all farms, but these farms also account for over 63 percent 
of the projected decrease to net cash income relative to 2014 baseline 
levels. As was the case in analyzing farm types, net cash farm business 
incomes under both the EPA and the EIA-energy price scenarios are 
reduced across all regions. All regions can expect a decrease in net 
cash income, ranging from less than two percent to about seven percent 
(figures 3 and 4), with the biggest decrease in the Mississippi Portal 
region under the EIA scenario. Again, it is important to note that 
these estimated income effects do not reflect management decisions 
about changes in inputs, revenues from GHG offsets nor do they reflect 
the related effects of land use changes.

        Figure 2--Reduction in farm business net cash income by farm 
        production specialty, 2014, with EITE rebate.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        
        Figure 3--Reduction in farm business net cash income by 
        resource region, EPA-based results, 2014, with EITE rebates.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        
        Figure 4--Reduction in farm business net cash income by 
        resource region, EIA-based results, 2014, with EITE rebates.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        
Medium-term and Long-term Impacts
    As cap levels become more stringent over time, allowance prices and 
corresponding energy price impacts become larger. FAPSIM is designed to 
evaluate short-term impacts. It is therefore difficult to make accurate 
statements about the medium and longer-term. Nonetheless, to make some 
initial assessment of the effects of higher energy prices on 
agriculture beyond the initial short-term focus, the estimated impacts 
of energy prices for selected periods from the EPA analysis were used 
to look at two additional time periods using the FAPSIM framework. 
First a medium-term scenario was based on EPA estimated changes in 
energy prices for 2027 33. Then a long-term assessment was based on EPA 
results for 2042-2048.
    The methodological approach used was similar to that used earlier. 
However, given the assumptions necessary to extrapolate beyond the 
FAPSIM time frame, these should be viewed with full acknowledgement of 
the limitations of this analysis. Since these two additional time 
periods are beyond the horizon of the FAPSIM model, results were 
generated within the FAPSIM time horizon based on percent changes for 
affected variables and then inflated to the medium- and long-term time 
periods based on the annual inflation rate from the EPA analysis, 1.8 
percent. This implies a constant real price assumption for those two 
additional time periods. Additionally, no additional changes in 
production practices beyond those implicit in underlying trend yields 
between now and these time periods is assumed. While these assumptions 
are analytical simplifications, they provide a vehicle for simulating 
representative impacts were they to occur in the short run. For the 
medium-term and long-term periods, there are no EITE rebate simulations 
included as those rebates are assumed to end after 2025 in the EPA 
analysis. For comparison purposes, results shown in this section repeat 
some of the earlier short-term impacts.
    This approach has limitations given the observation that energy per 
unit of output has drastically declined over the last several decades. 
These estimates are likely an upper bound on the costs because they 
fail to account for farmer's proven ability to innovate in response to 
changes in market conditions.
    Table 11 presents the impacts of higher energy prices on average 
annual production costs in the medium and long term along with those 
from the short-term (no-rebate case) discussed earlier. The medium- and 
long-term impacts on production costs have a relatively larger impact 
on fertilizer intensive crops such as corn compared to less fertilizer 
intensive crops such as soybeans. In the long-term, corn production 
costs are estimated to increase by more than $25 per acre (in $2005), 
representing an increase of almost ten percent. In comparison, soybean 
production costs rise by $5.19 per acre, on average, 4.6 percent. 
Wheat, sorghum, barley, and oats would see increases similar to corn in 
percentage terms. Rice is estimated to have the largest average per-
acre increase in the long term at $28.08 per acre, although its 
percentage increase would be less than that for wheat, corn, and the 
other feed grains. Likewise, cotton has a relatively high absolute 
increase in production costs, but this represents a smaller share of 
operating expenses. Soybean production costs remain the least affected.
    Resulting adjustments in the agricultural sector to these higher 
production expenses follow the same dynamics as discussed earlier for 
the short-term results. Acreage shifts would lead to changes in 
commodity prices and adjustments through the livestock sector.
    Table 12 presents the projected impacts of the higher energy costs 
across the different time periods for farm cash receipts, production 
expenses, and net farm income. In the long-term results, fuel, oil, and 
electricity expenses are estimated to increase, on average, 22 percent 
above baseline levels, while fertilizer and lime expenses are estimated 
to rise, on average, by almost 20 percent. While total receipts 
increase marginally--due to higher crop and livestock prices--they only 
partly offset the increase in expenses. As a result, higher energy 
prices associated with H.R. 2454 would lower net farm income by as much 
as 7.2 percent from baseline levels in the long term scenario. These 
results do not include the effects of GHG offsets.
    Last, it is important to note that the medium to long term analyses 
are conservative given that energy use per unit of output has declined 
significantly over the past several decades. Because of this, the 
estimates in table 11 are likely an upper bound estimate on the costs 
because they fail to account for farmers' ability to fully respond to 
changes in market conditions. In addition, the analysis is also 
conservative because it does not account for revenues provided by GHG 
offsets, expanded renewable energy markets, or the effects GHG offsets 
and biofuel production have on land use, production and prices.
    In my testimony tomorrow I will address the effects of GHG offsets 
on the U.S. agriculture, including effects on farm income. The results 
are drawn from modeling results provided by EPA from an economic model, 
developed by Bruce McCarl at the Texas A&M University.\6\ Table 13 
provides a summary of those findings on farm income. Modeling results 
provided by EPA show the annuity value of changes in producer surplus 
over the entire simulation period.\7\ When the effects of GHG offsets 
are taken into account, it is estimated that the annuity value of the 
change in producer surplus is expected to be almost $22 billion higher; 
an increase of 12 percent compared to baseline producer surplus. About 
78 percent of this increase is due to higher commodity prices as a 
result of the afforestation of cropland, with the remainder due to GHG 
related payments. Almost 30 percent of the gains would occur in the 
Corn Belt followed by the South East region (16 percent of the gains), 
Great Plains region (13 percent), and South Central region (ten 
percent).
---------------------------------------------------------------------------
    \6\ The results presented in table 13 reflect simulation output 
from March 2009. A more complete description of FASOM modeling 
framework and a complete list of commodities can be found at: http://
agecon2.tamu.edu/people/faculty/mccarl-bruce/FASOM.html.
    \7\ The EPA model estimates the impact on producer surplus, a 
concept similar to net farm income.
---------------------------------------------------------------------------
    The producer surplus impacts exclude earnings from the sale of 
carbon from afforestation. The annuity value of the gross revenues 
associated with the sale of afforestation offsets would result in 
approximately $3 billion of additional farm revenue. About 90 percent 
of that additional revenue would be generated in four regions of the 
country: the Corn Belt (40 percent), Lake States (25 percent), South 
Central (14 percent), and Northeast (11 percent). However, part of that 
increase in revenue will be offset by the continued costs associated 
with maintaining afforestation projects.
Conclusions
    Mr. Chairman, I appreciate the opportunity to discuss how a cap-
and-trade system would likely affect farmers and ranchers. In today's 
testimony I have focused almost exclusively on how higher energy prices 
would affect the agriculture sector. Separate testimony will discuss 
the role of GHG offsets in much greater detail and how a properly 
designed offset program can both mitigate energy price impacts of a 
cap-and-trade system and provide significant benefits to farmers and 
ranchers. I am happy to answer any questions.
                                 Tables

 Table 1--Energy Related Inputs Relative to Total Operating Expenses for
                        Selected Crops, 2007-2008
------------------------------------------------------------------------
                                   Fuel                 Fertilizer
                         -----------------------------------------------
        Commodity                     Percent of              Percent of
                            $/acre     operating    $/acre     operating
                                         costs                   costs
------------------------------------------------------------------------
                   Corn        37.11        14.1      116.16        44.3
               Soybeans        17.71        15.1       20.22        17.2
                  Wheat        22.51        20.6       42.60        39.0
                 Cotton        54.98        12.6       76.88        17.6
                   Rice       122.28        27.7       93.35        21.2
                Sorghum        48.83        34.3       38.02        26.7
                 Barley        26.06        20.5       44.31        34.8
                   Oats        20.26        20.8       38.97        40.0
                Peanuts        76.88        16.6       88.04        19.0
------------------------------------------------------------------------
Source: Economic Research Service. Available at http://www.ers.usda.gov/
  data/CostsandReturns/.


 Table 2--Energy Related Inputs Relative to Total Operating Expenses for
                      Selected Livestock, 2007-2008
------------------------------------------------------------------------
                                     Fuel                   Feed
                           ---------------------------------------------
                                                                Percent
  Commodity       Unit                  Percent of                 of
                              $/unit     operating    $/unit   operating
                                           costs                 costs
------------------------------------------------------------------------
       Milk   Per cwt sold        0.76         5.2      11.16       76.5
       Hogs   Per cwt gain        1.81         3.5      29.61       57.6
   Cow-calf   Per bred cow       66.42        10.1      71.52       10.8
------------------------------------------------------------------------
Source: Economic Research Service.


                            Table 3--Estimated Impacts of H.R. 2454 on Energy Prices
----------------------------------------------------------------------------------------------------------------
                     2015        2020        2025        2030        2035        2040        2045        2050
----------------------------------------------------------------------------------------------------------------
$ per ton CO2e (2005 $)
----------------------------------------------------------------------------------------------------------------
Allowance price:
  EPA 1.........     12.64       16.31       20.78       26.54       33.92       43.37       55.27       70.40
  EIA 2.........     20.96       29.95       42.80       61.16     8     0     8     0     8     0     8     0

----------------------------------------------------------------------------------------------------------------
                                          Percent change from baseline
----------------------------------------------------------------------------------------------------------------
Electricity
 price:
  EPA...........      10.7        12.7        14.0        13.3        16.9        24.0        29.1        35.2
  EIA...........       6.1         4.1         2.7        19.7     8     0     8     0     8     0     8     0
Natural gas
 price:
  EPA...........       7.4         8.5         8.6        10.4        14.3        18.9        24.1        30.9
  EIA...........       2.2         4.7         6.2        17.1     8     0     8     0     8     0     8     0
Petroleum price:
  EPA...........       3.2         4.0         4.7         5.6         7.2         9.0        11.4        14.6
  EIA...........       7.3         8.4        10.0        13.8     8     0     8     0     8     0     8     0
----------------------------------------------------------------------------------------------------------------
1 Source: EPA, June 23, 2009. The EPA analysis of H.R. 2454 can be found at: http://www.epa.gov/climatechange/
  economics/economicanalyses.html.
2 Source: EIA, August 4, 2009. The EIA analysis of H.R. 2454 can be found at: http://www.eia.doe.gov/oiaf/
  servicerpt/hr2454/index.html.


  Table 4--Prices Paid By Farmers, Energy Related Agricultural Inputs,
                            Various Scenarios
------------------------------------------------------------------------
                           EPA short   EIA short  EPA medium   EPA long
          Item            term (2012- term (2012- term (2027- term (2042-
                              18)         18)         33)         48)
------------------------------------------------------------------------
          Average annual percent change from reference scenario
------------------------------------------------------------------------
                   Fuel          2.6         5.3         4.6         9.3
             Fertilizer          0.3         1.7         8.4        17.6
------------------------------------------------------------------------


 Table 5--Effects of Energy Price Increases on Nominal Per-Acre Costs of
                     Production, 2012-2018 Averages
                  (Percent Change Shown in Parentheses)
------------------------------------------------------------------------
        Commodity           EPA price scenario      EIA price scenario
------------------------------------------------------------------------
            Corn                      1.44                    4.72
                                    (0.4%)                  (1.5%)
         Sorghum                      1.52                    3.71
                                    (0.9%)                  (2.2%)
          Barley                      0.85                    2.41
                                    (0.6%)                  (1.6%)
            Oats                      0.69                    1.97
                                    (0.6%)                  (1.7%)
           Wheat                      0.80                    2.31
                                    (0.6%)                  (1.7%)
            Rice                      3.74                    9.14
                                    (0.7%)                  (1.7%)
   Upland cotton                      1.76                    4.56
                                    (0.3%)                  (0.9%)
        Soybeans                      0.55                    1.43
                                    (0.4%)                  (1.0%)
------------------------------------------------------------------------


 Table 6--Effects of Energy Price Increases on Planted Acres, 2012-2018
                                Averages
          (in 1,000 Acres, Percent Change Shown in Parentheses)
------------------------------------------------------------------------
        Commodity           EPA price scenario      EIA price scenario
------------------------------------------------------------------------
            Corn                       ^27                     ^89
                                   (^0.0%)                 (^0.1%)
         Sorghum                       ^26                     ^48
                                   (^0.3%)                 (^0.7%)
          Barley                        ^2                      ^6
                                   (^0.1%)                 (^0.1%)
            Oats                       ^10                     ^25
                                   (^0.3%)                 (^0.7%)
           Wheat                       ^63                    ^176
                                   (^0.1%)                 (^0.3%)
            Rice                        ^3                      ^8
                                   (^0.1%)                 (^0.3%)
   Upland cotton                        ^7                     ^20
                                   (^0.1%)                 (^0.2%)
        Soybeans                         4                      19
                                    (0.0%)                  (0.0%)
                         -----------------------------------------------
  Total.................              ^133                    ^354
                                   (^0.1%)                 (^0.1%)
------------------------------------------------------------------------


 Table 7--Effects of Energy Price Increases on Farm Level Prices, 2012-
                              2018 Averages
                  (Percent Change Shown in Parentheses)
------------------------------------------------------------------------
        Commodity           EPA price scenario      EIA price scenario
------------------------------------------------------------------------
     Corn ($/bu)                     0.00                    0.01
                                    (0.1%)                  (0.3%)
  Sorghum ($/bu)                     0.01                    0.01
                                    (0.2%)                  (0.4%)
   Barley ($/bu)                     0.00                    0.01
                                    (0.1%)                  (0.3%)
     Oats ($/bu)                     0.00                    0.01
                                    (0.1%)                  (0.4%)
    Wheat ($/bu)                     0.01                    0.02
                                    (0.1%)                  (0.3%)
    Rice ($/cwt)                     0.01                    0.03
                                    (0.1%)                  (0.3%)
Upland cotton ( cents/               0.04                    0.11
              lb)                   (0.1%)                  (0.2%)
 Soybeans ($/bu)                     0.00                    0.00
                                    (0.0%)                  (0.0%)
Soybean meal ($/ton)                 0.00                    0.03
                                    (0.0%)                  (0.0%)
Soybean oil ( cents/lb)              0.00                    0.01
                                    (0.0%)                  (0.0%)
------------------------------------------------------------------------


  Table 8--Effect of Energy Price Increase on Feed Costs and Livestock
                      Production, 2012-2018 Average
                     (Percent Change From Baseline)
------------------------------------------------------------------------
        Commodity           EPA price scenario      EIA price scenario
------------------------------------------------------------------------
Beef:
  Feed costs............              0.1%                    0.1%
  Production............             ^0.0%                   ^0.1%
Pork:
  Feed costs............              0.1%                    0.2%
  Production............             ^0.0%                   ^0.0%
Young chickens:
  Feed costs............              0.0%                    0.2%
  Production............             ^0.0%                   ^0.0%
Milk
  Feed costs............              0.1%                    0.3%
  Production............             ^0.0%                   ^0.0%
------------------------------------------------------------------------


   Table 9--Effects of Energy Price Increase on Farm Income, 2012-2018
                                 Average
   (Billion Dollars, With Percent Change From Baseline in Parentheses)
------------------------------------------------------------------------
        Commodity           EPA price scenario      EIA price scenario
------------------------------------------------------------------------
Cash receipts:
  Crops.................             0.02                    0.08
                                    (0.0%)                  (0.0%)
  Livestock.............             0.03                    0.12
                                    (0.0%)                  (0.1%)
                         -----------------------------------------------
    Total cash Receipts.             0.05                    0.20
                                    (0.0%)                  (0.1%)
                         -----------------------------------------------
    Total production                 0.80                    1.91
     expenses...........            (0.3%)                  (0.6%)
                         ===============================================
      Net farm income...            ^0.76                   ^1.72
                                   (^0.9%)                 (^2.1%)
------------------------------------------------------------------------


     Table 10--Effects of Energy Price Increases on Per-Farm Variable Cash Production Expenses for Fruit and
                                                Vegetable Sector
----------------------------------------------------------------------------------------------------------------
                           Vegetable and melons          Fruit and tree nuts           Fruits, tree nuts, and
                                                                                             vegetables
       Scenario        -----------------------------------------------------------------------------------------
                           Dollars        Percent        Dollars        Percent        Dollars        Percent
----------------------------------------------------------------------------------------------------------------
Short term:
  EPA, with rebate....        1,275           0.44            758           0.45            909           0.44
  EIA, with rebate....        2,616           0.91          1,398           0.82          1,754           0.86
        Medium term           6,134           2.13          2,933           1.72          3,869           1.89
                   Long term 12,387           4.29          5,831           3.42          7,747           3.78
----------------------------------------------------------------------------------------------------------------


 Table 11--Estimated Impacts on Per-Acre Variable Costs of Production of
      Higher Energy Prices Under an Emissions Cap-and-Trade System
        ($2005/Acre, Percent Change From Baseline in Parentheses)
------------------------------------------------------------------------
                    Short-term (with   Medium-term (no    Long-term (no
       Crop              rebate)           rebate)           rebate)
------------------------------------------------------------------------
         Corn               1.19             12.02             25.19
                           (0.4%)            (4.6%)            (9.6%)
      Sorghum               1.26              5.45             11.30
                           (0.9%)            (3.9%)            (8.0%)
       Barley               0.70              5.00             10.44
                           (0.6%)            (4.1%)            (8.5%)
         Oats               0.57              4.12              8.66
                           (0.6%)            (4.4%)            (9.3%)
        Wheat               0.66              4.94             10.34
                           (0.6%)            (4.5%)            (9.5%)
         Rice               3.09             13.48             28.08
                           (0.7%)            (3.1%)            (6.5%)
Upland cotton               1.46              7.90             16.44
                           (0.3%)            (1.8%)            (3.7%)
     Soybeans               0.45              2.50              5.19
                           (0.4%)            (2.2%)            (4.6%)
------------------------------------------------------------------------


 Table 12--Estimated Impacts on Net Farm Income of Higher Energy Prices
                 Under an Emissions Cap-and-Trade System
      ($2005 Billion, Percent Change From Baseline in Parentheses)
------------------------------------------------------------------------
       Item            Short-term        Medium-term        Long-term
------------------------------------------------------------------------
Total receipts              0.0               0.4               0.9
                           (0.0%)            (0.2%)            (0.3%)
Total expenses              0.7               2.7               5.6
                           (0.3%)            (1.1%)            (2.2%)
  Fuel, oil and             0.7               1.3               2.6
   elec-..........         (6.4%)           (11.1%)           (22.2%)
    tricity.......
  Fertilizer and          < 0.1               2.0               4.3
   lime...........         (0.3%)            (9.5%)           (19.9%)
                   -----------------------------------------------------
    Net farm               ^0.6              ^2.4              ^4.9
     income.......        (^0.9%)           (^3.5%)           (^7.2%)
------------------------------------------------------------------------
USDA data based on EPA results, selected time periods.



------------------------------------------------------------------------
                                      billion (2004) dollars annualized
               Region                           annuity value
------------------------------------------------------------------------
             Corn Belt                                  6.4
Great Plains (no forestry)                              2.9
                      Lake States                       1.6
             Northeast                                  0.4
       Rocky Mountains                                  1.5
     Pacific Southwest                                  0.7
     Pacific Northwest                                  0.7
         South Central                                  2.3
             Southeast                                  3.4
South West (no forestry)                                1.9
                                    ------------------------------------
  U.S. Total.......................                     22
------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.

    Appendix A--The Food and Agricultural Policy Simulator (FAPSIM)
    The Food and Agricultural Policy Simulator (FAPSIM) is an annual, 
dynamic econometric model of the U.S. agricultural sector. The model 
was originally developed at the U.S. Department of Agriculture during 
the early 1980s.\8\ Since that time, FAPSIM has been continually re-
specified and re-estimated to reflect changes in the structure of the 
U.S. food and agricultural sector. The model includes over 800 
equations.
---------------------------------------------------------------------------
    \8\ Salathe, Larry E., Price, J. Michael, and Gadson, Kenneth E. 
``The Food and Agricultural Policy Simulator.'' Agricultural Economics 
Research, (34(2)): 1-15, 1982.
---------------------------------------------------------------------------
    The model contains four broad types of relationships: definitional, 
institutional, behavioral, and temporal. Definitional equations include 
identities that reflect mathematical relationships that must hold among 
the data in the model. For example, total demand must equal total 
supply for a commodity at any point in time. The model constrains 
solutions to satisfy all identities of this type.
    Institutional equations involve relationships between variables 
that reflect certain institutional arrangements in the sector. 
Countercyclical payment rates calculations are example of this type of 
relationship.
    Definitional and institutional equations reflect known 
relationships that necessarily hold among the variables in the model. 
Behavioral equations are quite different because the exact relationship 
is not known and must be estimated. Economic theory is used to 
determine the types of variables to include in behavioral equations, 
but theory does not indicate precisely how the variables should be 
related to each other. Examples of behavioral relationships in FAPSIM 
are the acreage equations for different field crops. Economic theory 
indicates that production should be positively related to the price 
received for the commodity and negatively related to prices of inputs 
required in the production process. Producer net returns are used in 
the FAPSIM acreage equations to capture these economic effects. 
Additionally, net returns for other crops that compete with each other 
for land use are included in the acreage equations. While the model 
covers the U.S. agricultural sector, trade for each commodity is 
included through econometrically-based export equations.
    For the most part, FAPSIM uses a linear relationship to approximate 
the general functional form for each behavioral relationship. 
Generally, the parameters in the linear behavioral relationships were 
estimated by single equation regression methods. The large size of the 
model precludes the use of econometric methods designed for systems of 
equations. Ordinary least squares were used to estimate the majority of 
the equations. If statistical tests indicated the presence of either 
autocorrelation or heteroscedasticity in the error structure of an 
equation, maximum likelihood methods or weighted least squares were 
used.
    Temporal relationships are empirical equations that describe the 
inter-relationships between variables measured using different units of 
time. For example, not all of the variables in FAPSIM are measured 
using the same concept of a year. Commodity data are reported on a 
marketing year basis; budgetary data are reported on a fiscal year 
basis; and farm income data are reported on a calendar year basis. As a 
result, empirical equations are sometimes needed to establish 
relationships among variables in these different temporal categories. 
For example, cash receipts for crops are reported on a calendar year 
basis, but production and price information for crops are on a 
marketing year basis. Equations are used in FAPSIM to estimate cash 
receipts using information from both marketing years that overlap the 
calendar year.
    Commodities included in FAPSIM are corn, sorghum, barley, oats, 
wheat, rice, soybeans, (including product markets for soybean meal and 
soybean oil), upland cotton, cattle, hogs, broilers, turkeys, eggs, and 
dairy. The dairy model contains submodels for fluid milk, evaporated 
and condensed milk, frozen dairy products, cheese, butter, and non-fat 
dry milk. Each commodity submodel contains equations to estimate 
production, prices, and different demand components. FAPSIM also 
includes submodels to estimate the value of exports, net farm income, 
government outlays on farm programs, retail food prices, and consumer 
expenditures on food. All of the submodels are linked together through 
the variables they share in common.

    The Chairman. Thank you, Doctor. I understand the 
information presented today is an expanded and refined version 
of an earlier study done by USDA. Can you walk us through the 
differences in modeling assumptions and underlying input data 
that is used here and not in your previous examination, and why 
did you decide to focus on increased energy costs?
    Dr. Glauber. Well, primarily the most significant impact, 
at least--this bill will affect agriculture in several ways, 
and if you focus on the cost side, because of the emissions 
caps that are in this bill that will raise energy prices. There 
are several analyses of what the impacts will be. EIA has put 
out an analysis, and there have been several private analyses 
as well. Those will affect energy prices. A lot depends on our 
assumptions in terms of what the estimated effects on fuel 
prices will be. We also know what the effects would be on 
natural gas. Natural gas can potentially affect fertilizer 
prices. And because of that, we can then translate that into--
and what we do in our modeling is look at these increased price 
effects and look at what the impact will be on agricultural 
production.
    Higher energy prices, in general, raise the cost for these 
producers, which cause them either to grow less of a particular 
crop, or switch to other crops. When you have those sorts of 
production impacts then prices rise partially offsetting the 
impact, because the higher prices will increase revenue, but it 
has another impact in the sense that it increases feed costs 
for livestock producers. Now that is all on the cost side, and 
I dare say that looking at some of the other studies that have 
been done, certainly, most people go about the modeling in a 
very similar way. That is they look at what the impacts on the 
energy prices are going to be, and then translate those into 
the production cost impacts.
    The other side of this, though, is in part what will be 
discussed tomorrow, which I think is as, if not more, 
significant, and that is the offset side. It is significant 
because offsets, one, are important for reducing the cost of 
the cap-and-trade emissions by having offsets. It mitigates the 
impact on energy prices so that is important, not just for 
agriculture, but, obviously, for all sectors of the economy. 
The second thing is that offsets have a potential income source 
for producers although, as I mentioned in my opening statement, 
that will differ across regions and across commodities.
    And, third, are the land use implications. If offsets are--
if the practice is used to gain offset credits through 
afforestation, for example, that is putting agricultural land 
or pasture land and planting forests then obviously that is 
taking land out of production and has potential implications 
for prices that way.
    The Chairman. What are your initial thoughts on the other 
analyses that are out there? Is there any of them that you can 
think that are completely off base?
    Dr. Glauber. Well, I have--and I can't say I have seen all 
of them. Certainly some of my colleagues behind me--I am very 
familiar with the FAPRI modeling results and very familiar with 
the Texas A&M modeling results, and Doane's modeling results, 
and I would say that by and large they are very similar to the 
way we approached the problem. The differences, largely, are in 
what the assumptions are on the energy price impacts. Again, we 
used the Environmental Protection Agency's impacts, estimated 
impacts, on fuel prices like gasoline, natural gas, 
electricity. In this analysis, we broadened the analysis to 
also include EIA impacts. That was not available to us when we 
put out the preliminary report in July, but EIA has since come 
out with analyses.
    But, if, for example, you consider scenarios that have far 
higher price impacts then those will have far larger impacts on 
production costs. But I would say, generally, the modeling that 
was used that is looking at production cost data and looking at 
those impacts how higher energy prices will affect production 
costs, I think that we pretty much share a common modeling 
framework there.
    The Chairman. Thank you, Doctor. And, last, do you think 
the agriculture sector would be disproportionately affected by 
higher energy costs compared to other sectors?
    Dr. Glauber. Well, there is no question that agriculture is 
an energy intensive sector, and in that sense they will be 
affected. There are other sectors, obviously, that are highly 
energy intensive as well. I do think the offsets provide 
opportunities, however, to offset the production cost 
increases. So, agriculture, while it will be hit by higher 
energy costs, I also think it has unlike a number of other--
because it is an uncovered sector, it does have opportunities 
to provide offsets which could result in income for producers.
    The Chairman. Thank you, Doctor. The chair recognizes the 
gentleman from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Dr. Glauber. Those farmers and 
ranchers who will be able to have some of those offsets are hit 
or miss, right? Some will be able to take advantage but some 
won't?
    Dr. Glauber. It is certainly true that a lot depends on 
where you are in the country, what sort of commodity you would 
grow, what sort of opportunities you would have that way.
    Mr. Goodlatte. So this legislation is really massive 
picking of winners and losers by government fiat as opposed to 
allowing farmers to fend for themselves and compete for 
themselves. They will be put at the mercy of this legislation 
depending upon what crops they grow, what area of the country 
they operate in, what climates they operate in, and what types 
of energy sources they use.
    Dr. Glauber. Well, I would just say, and, unfortunately, 
just the way the testimonies are broken out here, I don't have 
a lot of the information on offsets in the current testimony, 
but in tomorrow's testimony you will see I have provided a 
table that shows potential offsets from a variety of 
agricultural practices that would be, potentially, available to 
not just someone using no-till, but also for livestock 
producers or others using--would reduce greenhouse gas 
emissions through reductions in methane.
    Mr. Goodlatte. These analyses you provided us are 
preliminary on the effects of higher energy prices. Can we 
expect a complete analysis on all agriculture production inputs 
such as pesticides, seed, equipment, machinery, steel, and 
other supplies needed for agricultural operations? Is USDA 
conducting any studies of H.R. 2454's effect on ag processors 
or manufacturers?
    Dr. Glauber. We have not. Certainly as you go down or up 
the marketing chain one way or the other, there are a lot of 
energy costs imbedded in those industries and, unfortunately, 
we don't have a lot of data on that. USDA doesn't. Our data 
mainly is at the farm level.
    Mr. Goodlatte. And I am also aware that there have been 
requests for state by state analysis or more detailed analysis 
for livestock and specialty crops, so what is the status of 
those economic assessments?
    Dr. Glauber. Well, we do include a number of regional 
breakouts here. Certainly if you are looking at production cost 
data in the aggregate that is available by state. That is 
pretty easy to put together, and we have that and we are more 
than happy to provide it to the Committee. We also, using the 
Economic Research Service, their survey data on cost 
production, were able to break out the energy cost by farm, 
various sorts of farming operations by region, not down to the 
state level but down to a regional level. That would give a 
pretty good indication for your area or anyone's, and some of 
that is in this material summarized in maps, et cetera, but we 
have the raw data that we certainly would be happy to provide 
in tabular form.
    Mr. Goodlatte. And if they have been completed, how many 
acres will move from crop and pasture production into forestry, 
and what impact will that have on grain prices?
    Dr. Glauber. Well, there again there are a number of models 
out there that have looked at this issue. What I will do as a 
brief preview of what I am going to do tomorrow, we do look at 
the analysis that was provided to us from EPA that was based on 
the Texas A&M so-called FAPSIM model, and in that analysis, the 
analysis that was done back in March of 2009, they show a 
substantial number of acres going into forestland, some 60 
million by the year 2050. Now in our own studies of 
sequestration, some of which were done by the Economic Research 
Service, you get a very different pattern over the near term. 
With low carbon prices you see a lot of land going into--or a 
lot of farmers adopting no-till practices, a number of what I 
would consider less disruptive practices in terms of their 
effect on production.
    With higher carbon prices then the real issue at that point 
is where would the carbon come from, and is that sufficient 
enough to--with carbon prices say at $50 or $60 a ton, is that 
sufficient enough to have a producer devote land and put in a 
long-term set-aside by planting trees.
    Mr. Goodlatte. I take it that the long-term prognosis is 
that tens of millions of acres are headed into forests.
    Dr. Glauber. Well, that is certainly the case with the EPA 
analysis, and they show that some----
    Mr. Goodlatte. And I take it that the incentives are not 
going to be there since wood is a carbon-based source of 
energy, the incentive is not going to be there to be able to 
burn those trees to use that as a source of energy in the 
future. They are just a carbon sink. At some point in time, we 
are going to have to figure out what to do with all those 
trees. They are going to die and release that carbon back into 
the atmosphere at some point.
    Dr. Glauber. The whole idea of a carbon sink would be 
permanent to put that in trees.
    Mr. Goodlatte. But it is a very problematic thing for 
farmers to lose the productive use of their land. The last 
question, if I might, Mr. Chairman, will Secretary Vilsack 
travel to Copenhagen to represent U.S. agriculture interests 
during the climate change discussions, and since we are still 
learning so much about the effects of H.R. 2454, I am curious 
what his message might be on behalf of agriculture.
    Dr. Glauber. Congressman, I can tell you that he is 
traveling to Copenhagen. I think what he will--I can't speak 
for the Secretary here, but I know that, just based on what he 
has said in the past, that he believes there is a real good 
possibility for agriculture in the climate change legislation 
and he will be promoting the offsets and the mechanisms that 
producers can potentially gain from this.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Ohio, Mr. Boccieri.
    Mr. Boccieri. Thank you, Mr. Chairman. I had some specific 
questions for you, Doctor. I don't claim to be a climatologist 
or a scientist. In fact, I graduated with a degree in baseball 
and minor in economics when I was in college, but we have to 
pay attention to what our national security experts are 
suggesting. I am interested, after serving now for 15 years in 
the military, why the Department of Defense and why the CIA are 
saying that we need to elevate this from a debate on--a 
national debate to a matter of national security, and where, in 
fact, every candidate running for the highest office in this 
country last year suggested that this is a threat to national 
security. Did you take that into account in your analysis?
    Dr. Glauber. The short answer is no. What we don't look at, 
and it is a legitimate issue, is what the effects of climate 
change itself are on agriculture. I believe that you will have 
the opportunity to ask one of the panelists on the next panel 
on that issue. But let me just say briefly, there have been a 
lot of studies on what the potential costs of agriculture will 
be or potential cost of climate change on agriculture, or 
global warming, as it were. And certainly if you look at in the 
short run, particularly, with the small increases in global 
temperatures of the 1 to 2 centigrade level that you can 
actually see growth in agriculture that is actually for things 
like grains, which are highly adaptable to climate. They 
actually do thrive and do pretty well.
    But at the same time, most of these studies then show that 
as global warming increases that you begin to see a sharp 
deterioration in yields. And more disturbing is the 
variability, and that is what is expected. What most are 
showing, most of these studies show a lot of variability in 
climate, and we know what that does for agriculture.
    Mr. Boccieri. I know USDA has conducted analysis of the 
possible effects to U.S. farmland from increasing climatic 
variability. Has the USDA concluded that climate change is real 
and that it is affecting farmlands across the international 
spectrum?
    Dr. Glauber. I think certainly the USDA believes that 
climate change is a problem that needs to be addressed.
    Mr. Boccieri. Well, I would like to reiterate some of the 
remarks some of our retired generals who have served under both 
Presidents, Democratics and Republicans alike, they said that 
climate change would provide the conditions that will extend 
the war on terror. It is fairly interesting that we are having 
this discussion because the farmer and the landowner that we 
are trying to protect we also have to take into account the 
national security aspects of this as well. I want to know, 
specifically, if you believe and the USDA believes that the 
offsets that are provided to the landowner and farmers will 
offset if there are marginal increases. In Ohio we have 
regulated utilities. And the industry is heavily regulated so 
any cost increases has to go before a nonpartisan board, and so 
I hope that those were taken into account in your study as 
well. But I want to know, specifically, from you if you think 
that the offsets will significantly reduce any of your 
projected increases.
    Dr. Glauber. The answer is yes. I think offsets will 
certainly provide an income source for producers that will 
allow them to offset the impacts of----
    Mr. Boccieri. Would that be greater? Will the income be 
greater than the cost?
    Dr. Glauber. Yes, and our analysis shows that the income 
will be greater. I think the most important or the more 
important question is how the offset--how any offset provisions 
are set up and established and administered because the 
concerns that have been expressed by others about potential 
impacts on food prices, et cetera, you want to make sure you 
are setting up an offset program the right way.
    Mr. Boccieri. Okay. Thank you, Mr. Chairman.
    Mr. Golden. I thank the gentleman, and recognizes the 
gentleman from Louisiana, Mr. Cassidy.
    Mr. Cassidy. Thank you. Page 18, your graph shows that the 
Mississippi Portal is going to be particularly affected by 
decreases in farm business net cash income. Why is the 
Louisiana, Mississippi, Arkansas, Tennessee area particularly 
affected?
    Dr. Glauber. One reason is because on a per-acre basis the 
impacts for cotton and rice are high. As you know, they are 
both high input cost and they are also both energy intensive--
--
    Mr. Cassidy. Now this analysis, I don't mean to interrupt--
--
    Dr. Glauber. No, go ahead.
    Mr. Cassidy. In this analysis, do you include aquaculture, 
the crawfish and cat fish farming operations?
    Dr. Glauber. We did not explicitly analyze aquaculture. 
However, I can say because obviously they consume--they will be 
affected much like other livestock producers would be affected.
    Mr. Cassidy. Now it is my concern since those particular 
operations are low margin and they are facing stiff competition 
from countries like China, which have basically said they are 
not going to follow this, they are going to decrease their rate 
of increase sort of thing, but we can't monitor unless we pay 
for it, that the margins will be terribly affected. Clearly, it 
is going to be hard to reforest aquaculture. It is going to be 
more difficult to--I guess you grow cypress trees. So I guess 
my question is, do we know what is going to happen to their 
farm income and what that will do, specifically, as regards 
their ability to compete with their foreign competitors?
    Dr. Glauber. Well, once again we say, and it is important 
to recognize that because of the provisions that would 
essentially give rebates to fertilizer producers that the price 
increases for things like nitrogen are going to be very muted 
through 2025, so you are talking about a pretty long way out 
where the price impacts, in general, from any sort of cap-and-
trade system would be fairly small.
    Mr. Cassidy. But as you point out though that the costs are 
still not insignificant and also the transportation cost would 
be still unaffected by this, correct?
    Dr. Glauber. To the extent that fuel costs were, yes.
    Mr. Cassidy. Which I gather those are fairly fuel intensive 
operations as well. So, okay, the intrinsic, intensive or the 
EITE, the energy-intensive and trade exposed industries, that 
presumes that other states, other nations, will actually adopt 
something such as cap-and-trade or a carbon tax or whatever, 
but the example we just used, China, they probably won't if we 
listen to what they are saying now. So is there a provision to 
extend the rebates to fertilizer producers if the energy-
intensive and trade exposed industries are continually exposed?
    Dr. Glauber. I believe the House bill has some border tax 
adjustments beyond the year 2030 that could potentially take 
that into----
    Mr. Cassidy. Border tax?
    Dr. Glauber. Border tax adjustment.
    Mr. Cassidy. Now that sounds like a tariff.
    Dr. Glauber. It sounds like a tariff.
    Mr. Cassidy. Now that sounds illegal according to WTO. Do 
we know that those provisions would pass muster with WTO?
    Dr. Glauber. I do not. That has been--I will say that the 
WTO had been very concerned about that. There has been a lot of 
talk in the WTO recognizing that a climate treaty is likely, 
and the WTO has been looking at that issue and published a 
report just last year or earlier this year talking about the 
potential of border tax adjustments and how they should be 
treated.
    Mr. Cassidy. Frankly, if I was a crawfish farmer or a rice 
farmer, I may be planting cypress trees right now, which brings 
me to my next point. Just in the aggregate, we are talking 
about the offsets having an offsetting affect upon the loss in 
farm income, but it is important to note that there are some 
regions of the country which are more easily reforested and 
others that are less easily reforested. So, again, if we are 
speaking about the areas in which we are flooding fields, 
coastal Louisiana, for example, to grow rice, it will be more 
difficult to reforest those. So I just want to make the point 
that we do ourselves a disservice in this conversation to lump 
the offsets from reforestation with the net income loss from 
the other measures of this bill. Would you agree with that or 
disagree?
    Dr. Glauber. Well, as I said earlier, there is no question 
that some producers are going to have greater opportunities 
than others to take advantage of particular offset provisions. 
I don't think that necessarily means that one is excluded just 
because one can't grow trees, for example. There are other 
things, changes in diets for animals, that can result in fewer 
greenhouse gas emissions, and those could be potential offset 
sources.
    Mr. Cassidy. If I could have 30 more seconds. Will you be 
able to provide us with something specific for the aquaculture 
industries in terms of the impact upon net income?
    Dr. Glauber. I would be more than happy to do that in a 
follow up.
    Mr. Cassidy. That would be great. Thank you.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentlewoman from Colorado, Ms. Markey.
    Ms. Markey. Yes, thank you, Mr. Chairman. Thank you, Dr. 
Glauber, for this update. I have some questions on your 
modeling for future energy prices. Have you analyzed whether or 
not a cap-and-trade system with ag offsets would actually help 
to stabilize energy prices for ag in the future? It looks like 
from table 3 that electricity, that input cost will continue to 
increase. Does this take into account the increased use, 
whether it is nuclear or natural gas, wind, energy, on how they 
will stabilize our energy prices in the future, so what can you 
say about the future of energy costs?
    And then, second, did your modeling take into consideration 
the cost of doing nothing, particularly given the volatile 
swings in energy costs that we have now? Look just last year 
when we were paying for $4.00 a gallon gas. Did you take into 
consideration what would be the increased cost for agriculture 
if we do nothing?
    Dr. Glauber. Thanks. Insofar as the first question is 
concerned what we did is we utilized the energy price impacts 
that were estimated by EPA and EIA. Now both of those have 
specific scenarios that they considered, and I believe both of 
these scenarios that we looked at have a development of nuclear 
power and development of other renewables that will help meet 
these goals. In regards to your second question, no, what we 
considered was sort of the current environment and I assume 
current what we have under our baseline in terms of energy 
price. And we didn't look at any variability or probabilistic 
model there. We just considered what our estimates are for 
energy price increases over the next 10 years.
    Ms. Markey. So just to be clear then, on table 3 then 
according to EPA the impact on energy prices continues to 
really increase dramatically until 2050, which is where your 
modeling went up to 2050.
    Dr. Glauber. Absolutely. They are increasing in tandem, in 
lock step with the allowance prices, and because allowance 
prices are soon to be increasing because of--allowance prices 
are increasing by roughly five percent per year and so because 
of that energy prices are increasing accordingly.
    Ms. Markey. Thank you.
    The Chairman. The chair thanks the gentlewoman and 
recognizes the gentleman from Ohio, Mr. Latta.
    Mr. Latta. Thanks, Mr. Chairman. Thank you very much for 
being with us today. If I could just go over to your figure 3 
on the graph on page 17. I am kind of interested in this. I 
represent, to just kind of give you an idea, northwest and 
north central Ohio. I represent across northern Ohio underneath 
Michigan. I represent about halfway down Indiana, and then I go 
about 140 miles east. And I look at this, and it shows only 
according to EPA, it says there is only one percent decline or 
less in income and then getting into another part of my 
district it says 1-2 percent. But I am kind of curious about 
this because all of the different figures and facts that we 
have examined and seen since the debate started on cap-and-tax 
that we are going to get hit a lot harder. And one of the 
figures that we saw was through the Heritage Foundation when 
they put together--since Ohio uses about 86 to 87 percent of 
all of our energy is coal-based, Indiana next door is around 
94, I believe, and I believe it is 80 percent of all my rural 
electric co-ops in Ohio are co-generated where they get their 
energy from.
    And when I look at these numbers especially with the--that 
I represent the largest ag district in Ohio, and also 
interestingly enough I represent the largest manufacturing 
district in Ohio, that farmers in this area are only going to 
be affected by a one percent decline or less in net cash income 
when we see all these other statistics showing that because of 
our high coal usage for energy usage on the farms we are going 
to be affected a lot more. So I am just kind of curious on that 
to begin with.
    Dr. Glauber. Sure. One, realize that we are looking at our 
short-terms results, at price increases that will essentially 
be seen for the electricity sector and the petroleum sector. 
Fertilizer producers, which is a big component of your 
producers costs, energy-related costs, will be exempt because 
of the rebates provided under H.R. 2454. So in that case the 
main source is coming from higher fuel costs, and again based 
on EPA and EIA estimates, EIA being roughly or a little bit 
higher than EPA, in some cases about twice that, you are 
talking about four percent sort of increase for electricity 
under the EIA when petroleum prices are up around eight percent 
by 2020.
    And so over the near term those are pretty small costs. 
That is an increase--again if you look at total cost of 
production remember that fuel costs are about 5-6 percent, so 
you are increasing what is an increase in energy prices on the 
order of 5-10 percent. Energy prices there only comprise for 
the total production cost of these producers in the ten percent 
range, 10-15 percent range, so it is small when it is worked 
through that way. Now if you add fertilizer, of course it 
roughly doubles that impact.
    Mr. Latta. Well, again, I guess when you look at different 
statistics because we are looking at some of the areas where we 
are seeing maybe an increase with fuel prices in gasoline and 
diesel because, of course, when these have to be refined, and I 
have refineries right around my district, that you are looking 
at in some cases about a 50 percent increase predicted into the 
long term. At the same time when you figure into this is that, 
I have like probably a lot of other folks that are on this 
Committee, a lot of my farmers not only farm full time but they 
have to work off the farm full time. When you look at the job 
hit on and off the farm my concern is we have a lot of farmers 
that rely on that off-farm income to make sure they can keep 
farming. When you put these two things together with the loss 
of income on the farm and then the question--we have been hit 
tremendously. According to the National Association of 
Manufacturers we have the ninth largest manufacturing district 
in the country. Now I am down to 15. I don't even want to see 
what the next number is going to be.
    But what I am really concerned about is that we are just 
seeing the net cash farm income going down and with these 
increased costs because again we have to have both in our area 
for a lot of these people to survive.
    Dr. Glauber. Well, again, insofar as agriculture is 
concerned where we did our estimations the energy price impacts 
over the short run should be small. I think that, again, over 
the longer run, as you say, if you look at the EPA and EIA 
analyses, as one goes out to 2030, for example, one begins to 
see price impacts, the energy price impacts out at the that 
level or at 2030, more in the range of 10-14 percent. If you go 
out to 2050, at least with the EPA analyses they are up more in 
the 30-35 percent range for at least natural gas and 
electricity. But, in the short run, particularly with the 
fertilizer rebates, that the impacts are--again, our estimates 
would show that those impacts are actually quite small.
    Mr. Latta. Mr. Chairman, if I can just ask one last 
question. Okay. If you go in your farthest out-years of a 30 
percent increase, I guess my question is on the smaller family 
farms. How are they going to sustain because I am just thinking 
about those like my family and my wife's family, they have been 
on the same farm since the 1830's, and my brother-in-law's 
farm, my father-in-law is pretty much retired, but my nephews 
are looking at whether they want to farm in the future. My 
question is with this 30 percent, when you are looking at these 
cost increases, how is the smaller farmer going to survive in 
the future?
    Dr. Glauber. Well, if you translated the cost, those price 
increases directly into the production cost for 2050, they 
would be large costs. Again, if you are talking about as a 
percent of total production cost of being some 10-15 percent 
and increasing 10 percent or 30 percent, you are talking three, 
four, five percent potential hit on production costs, which is 
substantial. That said, that analysis is--we are talking about 
something in 2050, and we know that if you look back to the 
1970's and look at the current situation, we know our energy 
efficiency has improved dramatically over that time. So, again, 
one presumes--we didn't assume it in our analysis because we 
were conservative in that regard.
    But the issue is whether or not you have switched to more 
energy efficient technologies and things that would lessen that 
impact, switch to less energy intensive crops. And then, 
because of the offset side of the equation there is potential 
for making up those costs, particularly for Ohio where there 
would be a lot of potential things that could be done, tillage 
practices, et cetera.
    Mr. Latta. I thank the Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Michigan, Mr. Schauer.
    Mr. Schauer. Thank you, Mr. Chairman. Dr. Glauber, as I was 
looking at your testimony, I didn't find that the analysis took 
into account impacts of increased bioenergy production. I 
wonder if you could talk about that.
    Dr. Glauber. In the analysis that was presented here, we 
did not. You are right. With higher energy prices that can 
potentially bring in more biofuel production, particularly for 
things like cellulosics, where I think people have talked about 
how the technologies there, the costs of producing cellulosic 
ethanol is quite high currently, but relative to higher energy 
prices it could potentially bring in production. And I think 
that some of the models that have been done show that. Now, 
remember, in the long run that most of our models in our 
baseline show higher biofuel production and because of the 
mandates, et cetera, under the Energy Act there are limits to 
what, for example, could potentially be produced by starch-
based ethanols. But, on the cellulosic side it could 
potentially speed development of some of those technologies.
    Mr. Schauer. Do you have any sense of the positive job 
impacts from that increased bioenergy production?
    Dr. Glauber. I don't offhand. I can certainly--we have done 
studies on employment effects of biofuels, et cetera, and could 
certainly provide those.
    Mr. Schauer. I come from the Midwest, as did the previous 
speaker, so I am very concerned, ultimately, about the impact 
on jobs. Agriculture is the second largest industrial sector in 
Michigan that is growing. That is a very positive sign. We have 
a very diverse agricultural sector as well. I wonder, you used 
some of the EPA's data. I want to make sure that we are looking 
at this in a relative and dynamic way. EPA, if we don't pass 
legislation, is going to be implementing carbon reductions 
across the economy. I wonder if you have that kind of relative 
comparison or whether you take that into account. Again, sort 
of the question is what if we do nothing given the EPA is going 
to be moving forward. I am not sure the public really 
understands that.
    Dr. Glauber. It is a good question, and, frankly, in our 
baseline we did not--what our baseline assumes is sort of 
business as usual relative to current world, and so we haven't 
looked at a regulatory structure and what those potential 
effects would be.
    Mr. Schauer. Candidly, I am very afraid of what would 
happen if the EPA goes forward, and I think that is something 
that we need an addendum to this report to take your best guess 
of what the impact would be on agriculture if the EPA went 
ahead on their own. I am very, very concerned about that.
    Dr. Glauber. Well, just offhand, if I may, one of the key 
issues is what would happen to offsets, and if this were just 
in terms of the regulatory side in terms of providing 
restrictions and imposing costs that would ultimately be 
translated through the energy cost side of this. The flip side 
is would there be benefits on the other side, on the offset 
side, and I think there is where the problems would lie.
    Mr. Schauer. And this Committee worked very hard to protect 
agriculture and make sure the cap-and-trade program didn't 
apply to farms, and we want to keep the USDA fully in its 
present position to oversee and support farming activity. Just 
also under the theme of sort of looking at this in a relative 
and dynamic way, we also need to take into account what some of 
our international competitors are doing. This is a global 
industry and some of our competitors are setting voluntary 
carbon caps. I wonder if you would take that into account in 
terms of looking at pricing.
    Dr. Glauber. There again, we did not take into account what 
is going on internationally. I think that is an issue. It 
certainly affects not just the cost side of the equation. That 
is what competitors might be paying but it would also 
potentially affect the offset side. That is, if we are looking 
at international offsets, which is again a big part of H.R. 
2454, that too would have obviously a big impact.
    Mr. Schauer. And the gentleman from Louisiana brought up 
the issue of sort of border adjustments or border protections. 
I strongly supported that within this bill and clearly we can't 
allow our farmers and our economy to be at a disadvantage, 
because in some form or fashion there will be a reduction in 
greenhouse gases in this country. If our competitors are not 
doing likewise--that will cost us jobs--so I just wanted to 
editorialize on that point.
    Dr. Glauber. And the key thing there is just to follow up 
as well is being able to do this in a WTO compliant way.
    Mr. Schauer. Thank you. I yield back.
    The Chairman. The chair thanks the gentleman. The chair 
would ask all Members to try to stay to the 5 minute rule. We 
have, obviously, a lot of Members with interest here, so we 
have a second round if anyone has further questions. I now 
recognize the gentleman from Pennsylvania, Mr. Thompson.
    Mr. Thompson. Thank you, Mr. Chairman. Dr. Glauber, thank 
you for your testimony. I want to start with a real basic and 
then go to something--my next question is very specific. 
Recently, the term global warming has been widely rebranded 
climate change. Dr. Glauber, could you please explain that 
phenomenon and also define climate change.
    Dr. Glauber. Well, I guess I don't have great definitions 
for climate change, just in the sense that we would see 
significant changes in climatic patterns, things like 
temperature and precipitation, variability of climate and 
moving to where we would see distributions of temperature and 
precipitation that would adjust--that would change over time, 
either favorable or unfavorable, I would characterize.
    Mr. Thompson. Which sounds like something we have always 
experienced, I would say.
    Dr. Glauber. Yes.
    Mr. Thompson. I promised a real specific question then. 
Obviously, agriculture has many different elements in that 
industry. I want to talk about one that is--well, just one of 
the elements, an important one, though, in my district and 
important in that it meets a strategic need in our country in 
terms of dairy. And I will be real specific. I am trying to 
look at the impact--my average dairy herd is family-owned, 85 
head. They have enough acreage to grow just enough corn for 
most of them to feed their herd. And some of the things that 
they are living with are transportation cost, which for the 
milk--and our dairymen pay that. I think you mentioned 5-10 
percent is the number I heard for an increase in cost there.
    Diesel and gas prices because our equipment, that is what 
it runs on, whether it is tractors, generators, whatever. 
Again, 5-10 percent was your number. Electricity costs, the 
Pennsylvania Public Utility Commission looked at the Waxman-
Markey bill. They estimated electricity cost in Pennsylvania 
going up 30 percent. Equipment cost, in terms of knowing what 
this would do to manufacturers in Pennsylvania, and our farmers 
can't afford to buy new equipment too often, but when they can 
it even drives up the cost to use equipment. Fertilizer costs, 
I think your numbers you gave, I heard in your earlier 
testimony, was ten percent in terms of getting as much corn 
production as possible to feed their herd.
    The processor cost, which, unfortunately, many of those can 
pass along to the producer in the short run. A simple question 
for you. How would these dairy farmers survive under this?
    Dr. Glauber. Well, again, I think for most of the--you are 
talking about dairy producers in your region, which are 
effectively crop producers and dairy producers.
    Mr. Thompson. But the crops they are producing are corn to 
feed their cows.
    Dr. Glauber. That is right.
    Mr. Thompson. They are not planting trees.
    Dr. Glauber. That is right. And so in general one can talk 
about the cow side of it, as it were. Essentially the big 
impact there is on feed. Feed is very big component of a dairy 
producer's cost, and to the degree that feed cost will be 
affected dairy producers would be affected as well. Now, again, 
I think on the feed side because of the rebates, et cetera, 
under this bill, at least in the short run would be small. So 
the impact on that side of the equation would be, and certainly 
our analyses of dairy production, et cetera, don't show very 
large changes in herd size or profits from that industry.
    Mr. Thompson. Let me say though right now the average 
farmer is losing $100 per cow per month in terms of dairy, so I 
would encourage you to go back and look at the competencies of 
whoever is doing your numbers on terms of impact on dairy. And 
I realize that feed is one component, and it is important, but 
the numbers that you in your testimony today, in your written 
testimony and what you have shared, transportation cost, diesel 
and gas operation cost. We really didn't get into the 
manufacturing side or what the hell it is going to drive up the 
cost of equipment in terms of new milking parlors, tractors, 
all the things that our farmers use.
    I mean feed is obviously important, but I don't think we 
have the luxury of this--of just looking at one element. We 
have to look at the whole picture. I want to move on just a 
little bit to--well, actually I am not going to move on at this 
point. Maybe we will do a second round. I would appreciate it.
    The Chairman. The chair thanks the gentleman, and we will 
do a second round. The chair recognizes the gentleman from 
Maryland.
    Mr. Kratovil. Thank you, Mr. Chairman. Thank you, Doctor, 
for your testimony. Your analysis distinguishes among farm 
types and regions. My question is does your analysis 
distinguish between farmers from states that are already 
participating in cap-and-trade programs in terms of regional 
programs?
    Dr. Glauber. Well, it does in the sense that the regional 
cost structures are imbedded in this model, so we take into 
account what producers in a given region, what those current 
costs of production are.
    Mr. Kratovil. And what is the impact on cost, 
comparatively, between states that are already participating in 
regional cap-and-trade programs and those that are not?
    Dr. Glauber. There I would--just looking at the data, we 
don't see large discrepancies between regions, in general. 
Where we see the biggest impact, at least it was pointed out, 
in one of the earlier questions is that for those crops that 
are highly energy intensive that they tend to be affected.
    Mr. Kratovil. But the argument for the increase in cost 
under the proposed legislation is that having a cap-and-trade 
program would indeed increase costs, correct?
    Dr. Glauber. Having a cap-and-trade program, well, in the 
sense that it affects, yes, in the sense that it affects 
utility prices.
    Mr. Kratovil. So for states that were already participating 
in a regional program, presumably, if that is true their costs 
would have already gone up?
    Dr. Glauber. Well, under this bill I am not sure. If you 
look at H.R. 2454 in looking at given the specifics of what the 
energy price impacts are estimated by EPA and EIA, then all 
regions will see some increases in energy prices.
    Mr. Kratovil. Are you aware of any study that specifically 
is looking at the issue of those already existing cap-and-trade 
programs and the impact for those states as related to other 
states that are not?
    Dr. Glauber. I am not aware of any--I would be happy to get 
back with you on that. I am not personally aware of any. That 
doesn't mean that there aren't studies out there, so we will 
look into that.
    Mr. Kratovil. Let me go back to sort of follow up on Mr. 
Schauer's question. Without specifically excluding ag from EPA 
regulation as was done in the energy bill, is it possible that 
EPA could and would, in fact, regulate ag?
    Dr. Glauber. That is better directed at EPA.
    Mr. Kratovil. Let me ask it this way. Without such a 
specific exclusion, what would prohibit EPA from doing so?
    Dr. Glauber. Well, you are right in that sense that any 
regulations could be structured to affect all parties. That 
would be at the discretion of how EPA would interpret the 
legislation and Court decision.
    Mr. Kratovil. You mentioned the cost of fertilizer. What is 
the percentage of fertilizer that would be imported and so 
would not be subject to the additional cost that you are 
talking about?
    Dr. Glauber. I think currently about 50 percent--we are at 
about 50 percent or so imported.
    Mr. Kratovil. And 80 percent of it would not be subject to 
those additional costs that we are referring to?
    Dr. Glauber. That is right.
    Mr. Kratovil. Having spent significant time evaluating the 
proposed legislation given the fact that ag currently is not 
subject to the cap but can, in fact, participate in the offset 
program, what additional amendments would you suggest that we 
could do to further protect ag?
    Dr. Glauber. Well, again, in my view the single most 
pressing important issue in this whole debate is how the offset 
programs would be structured. It is a very careful balance of 
ensuring a program that would provide ample offset 
opportunities across a wide range of regions and commodities, 
but in a way that wouldn't have those sort of unintended 
consequences of extremely high consumer prices, food prices, 
for example.
    Mr. Kratovil. Thank you, Doctor. I will yield back.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Alabama, Mr. Rogers.
    Mr. Rogers. Thank you, Mr. Chairman. I just want to ask two 
quick questions. One is a follow-up to Ms. Markey's question 
when you were talking about your modeling and you included 
development of nuclear power in that modeling. Tell me more 
about that. We haven't built a new nuclear facility in over 30 
years in this country.
    Dr. Glauber. Let me clarify. We don't have a nuclear 
industry modeled in the agricultural sector models that we are 
using. What I was saying is that we use the projections for the 
impacts on energy prices that were done by EPA and EIA, and we 
use those scenarios that--we took the so-called reference 
scenarios both by EIA and EPA that assumed that nuclear 
capacity would be built. I might add both of them have done 
analyses of if it weren't built what the effects would be. I 
can say at least for 2030 if one looks at allowance prices, and 
remember that allowance prices are a rough indicator of what 
the energy prices would be, under the EPA scenario some $26 
under the case we were looking at, and with a modified nuclear 
option some $30 under EIA was more like $61 under the reference 
price or under the reference scenario increasing to $72, so an 
increase if that capacity is not built in.
    Mr. Rogers. And I think that is the more realistic 
projection as a practical matter. The 2030 option, even if we 
were to start construction on some new facilities, we would be 
stretching it to get to that. The only other thing I wanted to 
ask about was when Mr. Goodlatte was talking to you, you 
mentioned that--you were talking about offsets in the uncovered 
sector that could generate some revenue for farmers. Tell me 
more about what you meant about how they would generate 
revenue.
    Dr. Glauber. Well, in the sense that farmers can undertake 
practices that they would be essentially sequestering carbon 
under a variety of practices. It could be something like 
conservation, tillage or no-tillage where you would earn ``X'' 
tons per acre for undergoing a practice. Because industries in 
affected sectors are going to be interested in reducing their 
reduction commitments, they will be willing to pay and so there 
would be a transfer there.
    Mr. Rogers. That is all I needed. Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Minnesota, Mr. Walz.
    Mr. Walz. Thank you for being here, Dr. Glauber. I really 
appreciate it. It is important for us to keep a couple things 
in mind. The first thing I would says is the title of this 
hearing was going to be the potential economic impacts of 
climate change on the farm sector, not H.R. 2454 but of climate 
change. In this argument, if I could reduce and take care of 
two things that I didn't have to be concerned about, one is if 
I did not believe against the preponderance of every single, 
every single major scientific organization, that human impact 
is leading to climate change. If I could exclude that from my 
reasoning and exclude that oil is at $78 a barrel at the worse 
recession since the 1930s, and demand is at its lowest and it 
is not going to go up, then we could make some debates that 
there is going to be a negative economic impact on farming.
    The fact of the matter is when I hear people talk about 
what about tillable land, what about picking winners and 
losers, what about flooding in Louisiana, the bill won't do 
that, the climate will do that. I think we need to have a 
honest discussion. If that is not part of what you believe then 
that needs to be put forward to where it is, and not go after 
where the data shows where EPA is at, not go after the data 
that shows where the projections are at based on baseline data. 
If you want to reject the scientific preponderance of this, 
that is absolutely correct. I don't think we need to pick 
winners and losers, and I don't think it needs to be a choice 
in this. I think we can exercise leadership, protect the farm 
economy, protect the national security, and get to the heart of 
that.
    So my question is, coming from USDA what studies are out 
there to show, as I have seen some, part of the climate change 
is not fictional global warming for the entire globe, it is the 
instability of climate and unpredictability which is the 
farmer's worse enemy. One of the things we see is a 
concentration of precipitation in much larger amounts in 
smaller days. Have you taken that into consideration?
    Dr. Glauber. It is not taken into account in the modeling 
itself, in part, because to understand that a lot of these 
effects are--most of these studies that you mentioned, and 
there has been a number of studies that conclude very similar 
effects on agriculture. Most of those occur out in the----
    Mr. Walz. We don't have that data, and we don't have that 
data from USDA. How can we make a good assumption? If the world 
were going to stay exactly the same as it is today, as I said, 
no climate change is going to be a negative effect other than 
the usual swings or there is no change in oil prices, we might 
be able to determine that. I do have a study that shows, and it 
was one for agriculture in Illinois alone, about a 1.2 
centigrade increase in climate there will show a difference of 
about $9.3 billion in projected losses. Now is that a scenario 
that is every bit as plausible as oil prices staying stable or 
nothing happening? Those are things we need to look at. Another 
study found that the value of rain-fed non-irrigated farmland 
in the central United States will fall 69 percent in the next 
75 years because of its ability to be able to produce.
    Those are part of the equation we need to come up with and 
decide, and I would ask and see if, Mr. Chairman, I could 
submit to the record--Dr. Glauber, are you familiar with the 
study that came out of New York University Institute for 
Quality and Integrity, the Other Side of the Coin, that talks 
about and looked at these things not specifically for 
agriculture but the economy as a whole a 9:1 cost basis. One of 
the best investments we can make is to get a handle on this, 
control our own energy needs. Like the gentleman from Virginia 
said, the generals understand there is a national security 
need, and they project it to be a positive on the investment, a 
9:1 return.
    Are those the type of things that should be studied in 
particular and in specific towards agriculture because, if I 
could, I would like to submit this one to the record.
    [The document referenced is located on p. 163.]
    The Chairman. Without objection. And then tomorrow I am 
going to submit one from the University of Tennessee that does 
start to do this. My question is does USDA with its resources 
attempt to duplicate or find out what this one is the analysis 
of the implications of climate change and then energy 
legislation?
    Dr. Glauber. Congressman, I don't want to leave you with 
the wrong impression. We have done work on climate change and 
done numerous studies over the years that have looked at the 
impacts of climate change on agriculture, and I would be happy 
to provide those.
    Mr. Walz. Is any of it positive?
    Dr. Glauber. No. I mean in the sense--no, they all conclude 
very similar results, that is----
    Mr. Walz. Are my nieces and nephews going to be able to 
farm if we do nothing?
    Dr. Glauber. It will depend on the crop. The more adaptable 
crops, there is potential--the bigger concerns are for the 
crops that are very specific to----
    Mr. Walz. Rice and----
    Dr. Glauber. Or fruits and vegetables and some of the crops 
that have a very definite niche with ecological demands----
    Mr. Walz. Well, I look forward--I know tomorrow, and I sure 
don't want to steal your thunder on this, tomorrow's hearing 
may be a more appropriate place to talk about a little some of 
the positives and some of the opposites as it goes in. But I 
would like to say, Mr. Chairman, I believe that all of us here, 
it behooves us to look at evidence on all sides of this and a 
short term view of this, a short term view of what is going to 
happen, is not going to secure this nation's food, fiber, fuel 
and national security, and I yield back.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Nebraska, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman, and thank you, Dr. 
Glauber, for your service and for your time here today. You did 
talk or you mentioned changing the diet, or the diet in 
livestock. Could you elaborate on that?
    Dr. Glauber. Well, the numerous studies done or some 
studies done at least in terms of greenhouse gas emissions and 
whether or not under the current feed ration mix that cattle, 
hogs, and poultry, and looking at switches in diets to more--I 
believe it is more oils, is that right? Some shifts in diet, 
studies have been done that show that there are potential 
greenhouse gas reductions. Those could be, potentially under 
some offset program, credited. I can get you more information 
on that. In terms of feed rations and things like that, they 
are not exactly my specialty, but we certainly have information 
on that.
    Mr. Smith. In light of the fact that margins in livestock, 
in the livestock industry today are narrow to non-existent and 
even worse, I hope that we can have some balance there, but I 
appreciate that. On the transactional costs of purchasing 
credits, for example, what do you see as the average cost 
there? What would go to the brokers and certainly the traders, 
so to speak?
    Dr. Glauber. I think that is a great question, and a lot 
will depend--I mean there are a whole host of issues when you 
are talking about an offset program in terms of how verifiable 
the offset is, how permanent it is, and to the degree that 
there is less reliability, then you are talking about potential 
discounts in the transactions. Just transaction cost 
themselves, those could--I would anticipate those would be 
pretty low just looking at other markets, contingency markets, 
that we see, things like the permits for acid rain and other 
sorts of things. I think the bigger concern is getting an 
offset market where you are crediting here a ton for this 
operation that you can verify that it actually is a ton, and it 
will be--you will be doing what you say you are going to be 
doing. And that is important not just for domestic legislation, 
it is also important, obviously, for international accounting.
    Mr. Smith. The gentleman from Minnesota certainly pointed 
out with some passion on the issue as well that there is great 
harm and danger looming due to climate change, and are you 
confident that the cap-and-trade bill would mitigate that harm?
    Dr. Glauber. The issue, ultimately, will be what can be 
done internationally, clearly. I mean this is not something 
that one country can do in terms of global warming. I think it 
is important for--it speaks to the bigger issue of getting 
international agreement on greenhouse gas emissions.
    Mr. Smith. But you would say that we need to move forward 
first before other rather large emitters of carbon would 
participate?
    Dr. Glauber. I think that, yes, I think that the climate 
bill itself, to me the key thing about the climate bill is 
doing it correctly in terms of things like the offset program 
and having that established----
    Mr. Smith. In terms of international participation?
    Dr. Glauber. Yes, both for that and also that we ensure 
that we have sufficient offsets to mitigate the cost of the 
legislation itself. But, also in terms of, as I mentioned 
earlier, not causing unintended consequences of sequestering or 
pulling large swaths of land out of production.
    Mr. Smith. And do you believe that enactment of a cap-and-
trade bill would or would not lead to higher food prices 
worldwide?
    Dr. Glauber. I think, again, depending how the offset 
provisions are accomplished, that there is potential there for 
higher food prices if a lot of land is taken out of production. 
I think the energy cost side, again, is relatively small, 
ultimately.
    Mr. Smith. But do the offsets depend on taking land out of 
production?
    Dr. Glauber. Not necessarily. There are other ways of 
acquiring carbon and again it depends on where the land is 
taken out of production, whether or not it is pasture land 
which obviously has an effect as opposed to prime corn land. 
So, there are real concerns there in terms of getting that part 
of it right, but there is obviously great potential there for 
the agricultural sector.
    Mr. Smith. Thank you. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman and recognize the 
gentlewoman from Pennsylvania, Mrs. Dahlkemper.
    Mrs. Dahlkemper. Thank you, Dr. Glauber. I want to ask if 
you believe that the peer reviewed economic literature 
regarding the impact of cap-and-trade has a generally settled 
opinion on the likely impacts of the legislation.
    Dr. Glauber. I think that--well, the economic literature on 
cap-and-trade, there is--there are a lot of studies out there 
that show estimates. I certainly looked at the EIA and EPA 
numbers, and they are fairly consistent. EIA is a little higher 
in terms of their overall impacts, and I would say in terms of 
translating that into the impacts on agriculture. I mentioned 
at the outset, I think that most of the models that have been 
done on the agricultural side show fairly similar, if one uses 
the same estimated impacts on energy prices, the impacts on 
agriculture that these models would derive are fairly similar.
    Mrs. Dahlkemper. And do these economic models adequately 
incorporate, do you think, a fair array of opinions from 
different climate scientists?
    Dr. Glauber. Well, again, I want to be careful here because 
I don't think--most of these models have not really looked at 
the sort of counter-factual case of what would happen if we had 
large changes in the climate, what about those costs, because 
then you would have to look at both what the impacts of the 
legislation are in terms of costs and offsets on producers, but 
also the impact on climate itself and how that is mitigated. I 
think that was alluded to by the previous questioner. I think 
that one way or the other that has not been done, and I am not 
aware of any model that has looked at that whole array of 
issues, and it is important, as was mentioned earlier.
    Mrs. Dahlkemper. Certainly in my region in northwestern 
Pennsylvania we have a grape industry that could be very much 
affected as well as certain nursery stock and other specialty 
crops. Thank you. I yield back.
    The Chairman. I thank the gentlewoman and recognize the 
gentleman from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I appreciate the 
opportunity, and thank you, Dr. Glauber, for being here today. 
In your testimony you start out by saying that you are 
reviewing the potential economic impacts of the proposed 
legislation on the farm sector, and the cap-and-trade 
legislation is based on the fact that we have man-made global 
warming. As a result of the revelations over the last week with 
regards to the U.N. Intercontinental Panel on Climate Change 
and how those folks have been able to skew some of the data and 
to withhold some of the information with regards to actual 
global warming trends and what have you, I am curious as to 
whether we are going to continue down this path or not. I have 
a couple quotes here just this morning from Tim Wirth, 
President of the U.N. Foundation, ``We have to right this 
global warming issue. Even if the theory is wrong, we will be 
doing the right thing in terms of economic environmental 
policy.'' Christine Stewart, the former Canadian Minister of 
the Environment who led that country's delegation to Kyoto 
said, ``No matter if the science of global warming is all 
phony, climate change provides the greatest opportunity to 
bring about justice and equality in the world.''
    These folks are out there with an agenda that doesn't 
include the facts. Based on this, what do you at the USDA, do 
you believe that--are you going to continue to support this 
position?
    Dr. Glauber. Congressman, all I can tell you is I am asked 
to do analyses of what things like the legislation would have 
on agriculture, and I think there we try to be as objective as 
we can be. We try to be as transparent as we can be in terms of 
what the assumptions are. We look at how this legislation would 
affect a variety of agricultural producers and ranchers and on 
a regional basis. I haven't looked at the broader literature on 
global warming. I am aware of the controversies that have 
arisen over the last----
    Mr. Luetkemeyer. Excuse me, but my question is if we are 
aware that this is based on unsound science, it is based on a 
political agenda versus actual belief that there is man-made 
global warming, why are you pursuing this at all? Shouldn't you 
be going out here and disclosing the correct information and 
trying to get something done that is correct and that is going 
to be impactful and helpful to our farmers instead of wallowing 
around in something that is not right?
    Dr. Glauber. I think the issue again for me is how would 
this legislation affect agriculture. I can't address this 
controversy. It will get resolved hopefully. I don't know what 
the answer is.
    Mr. Luetkemeyer. Okay. You are saying that you are going to 
address the impact on the farming community. One of the 
individuals that is going to testify shortly is Dr. Westhoff, 
from the University of Missouri, which happens to be in my 
district. He heads up or is Co-Director of Missouri's Food and 
Agricultural Policy Research Institute, which studies these 
type of things. His study, and I assume his testimony this 
morning will include that the costs for Missouri wheat 
producers are going to go up over ten percent by 2050 and over 
nine percent for corn producers in Missouri. How are they going 
to survive between now and then?
    Dr. Glauber. Well, again, as I said in my opening comments, 
certainly in the short run through 2025 most of the costs that 
would otherwise affect wheat producers in Missouri would be 
things like nitrogen fertilizer costs which will be----
    Mr. Luetkemeyer. Forgive me for interrupting, but I have 
only a minute left here. But my question is this, and you have 
been asked three times now and you have never answered it, how 
are farmers going to exist between now and then, whenever you 
think the markets are going to turn or they can afford this. 
The gentleman from Nebraska just asked the same question as 
well, how are they going to be able to afford an increased cost 
when they are already in a negative position with their cash 
flow and with their income? How can they continue to absorb 
increased costs if they don't get to price their products, sir?
    Dr. Glauber. If you look at the size of the energy price 
impacts, again you are talking about impacts that are out at 
2050, and I might add our numbers aren't all that different 
from what we----
    Mr. Luetkemeyer. They are immediate that take place over a 
lot of time. They are going to be immediate with regards to the 
impact on the farming community from now on for the next 15, 
20, 30 years. How are they going to survive between now and 
then?
    Dr. Glauber. My point is they are gradual impacts. These 
are very gradual impacts, and for the first 12, 15 years they 
are very small, very small. And we are assuming--and Pat does 
the same thing I do when I look at these analyses. We assume 
essentially that the current technologies in place are going to 
remain in place.
    Mr. Luetkemeyer. Sir, if you have a wound and you bleed a 
certain level of blood all the time eventually you are going to 
pass out and you are going to die, and that is exactly what has 
happened to our farmers. They are wounded right now and they 
are bleeding, and they need some help, and this does not help. 
Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman, and 
recognizes the gentleman from California, Mr. Costa.
    Mr. Costa. Have you had time to check out the differential 
as it relates to energy costs as it relates to specialty crops? 
It seems to me there is a limited evaluation in the analysis 
that you provided on the impacts of specialty crops in 
comparison to other--the program crops that we see in other 
parts of the country. Obviously, I am speaking California 
specific where we have the largest, in terms of farm gate 
agricultural production, approximately $37 billion last year, 
in almost 300+ specialty crops. And, of course, we have high 
energy costs there as you know as we look at alternatives. 
Could you please respond?
    Dr. Glauber. You are right in the sense that, frankly, we 
don't have the detailed cost of production data that we would 
like to have on fruits and vegetables that we have on our row 
crops. Most of the row crops and livestock, things like cow-
calf operators, hog operations, and dairy, we do periodic 
surveys where we take very detailed--collect very detailed data 
on cost of production. That is one of the reasons we are able 
to do the sort of simulations, et cetera, that we do. For 
fruits and vegetables, what we do is we have an annual survey 
that surveys farms across the U.S., including fruit and 
livestock--or, excuse me, fruit and vegetable producers. And 
the analysis that we did there or that we presented in this 
report breaks out those producers in the aggregate, again 
showing fairly small cost as affects total production costs, 
largely because labor is such a large--such a big individual 
component for fruits and vegetables.
    Mr. Costa. Well, labor is a big estimate, and we will get 
to that in a moment, but you indicate in your testimony, and 
correct me if I am wrong, I noted $7,747 increase in energy 
costs for fruit and vegetable farms.
    Dr. Glauber. On average.
    Mr. Costa. Right. This is an annual increase?
    Dr. Glauber. This would be the increase for that year 
relative to the baseline in the year, yes. It is looking over 
the average for 2012 to 2018 looking at the average annual 
increase.
    Mr. Costa. Well, given the horrific challenges U.S. 
agriculture is facing and in California, I can tell you it is 
just difficult, and then I am going to ask you the next 
question. Do these numbers take into account the notion that in 
places that I am talking about 99 percent of our agriculture is 
irrigated and agriculture depends upon irrigation. It adds to 
those energy costs.
    Dr. Glauber. Two things. One is my colleague corrects me 
that that was the long run impact that is out--closer to 2040, 
2050, that $7,000 number. But you are right, the energy costs 
are imbedded in things like irrigation. We do take that into 
account in terms of the potential increase, and when we were 
doing the analysis we also looked at surcharges on electricity 
prices and natural gas prices that are used for irrigation.
    Mr. Costa. And when did this--dairies as well are very 
energy intensive, and while the example that my colleague 
talked about from his constituent, or smaller dairies, with 
dairies in California that average 600 cows or 1,000 cows 
milking, those are much larger dairies, I can tell you they are 
energy intensive.
    Dr. Glauber. You are right. Obviously, when you are looking 
at any producer, it is hard to--we tend to look at just the 
nature of it. We have to do averages so----
    Mr. Costa. I know, but these numbers are somewhat false. 
You are not taking into account the other larger problem. I 
voted against cap-and-trade because I just don't think it works 
for some of the same reasons that was mentioned here earlier. 
But that aside in the drought conditions that we are 
transporting water at enormous cost, have you taken any 
snapshot to look into the impact that droughts are having in 
certain key areas of the country, especially the regulatory 
drought that we have in California?
    Dr. Glauber. In the sense that the cost of production data 
was based on 2007, it does not reflect the more recent 
increases due to the regulatory----
    Mr. Costa. Then a lot of this information then is no longer 
valid in terms of our current----
    Dr. Glauber. Well, it may not be valid for a specific----
    Mr. Costa. I mean this drought has lasted 3 years and in 
other parts of the Southwest, and God forbid it lasts a fourth 
year, but it seems to me you need to go back and update your 
information at the very least if this is going to be of any 
value to us.
    Dr. Glauber. Well, again, Congressman, I would be happy to 
look at some follow-up and get back to you on it.
    Mr. Costa. All right. We will follow up. Thank you very 
much.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Kansas.
    Mr. Moran. Mr. Chairman, thank you. Dr. Glauber, thank you 
for the opportunity to question you today. And again I 
apologize for the last time we were together in this room in 
which I didn't give you a chance to respond to my question. I 
even heard from your predecessor that I was rude to you, so 
again I apologize for my manners.
    Dr. Glauber. That is quite all right.
    Mr. Moran. It was unbecoming of me and hopefully out of 
character. I would say that the legislation passed by the House 
of Representatives now a few weeks ago in my mind remains the 
most damaging piece of legislation ever passed by the House of 
Representatives during my time in Congress, as far as it 
affects agriculture. And I indicated that in this Committee and 
I indicated that on the House floor and urged my Agriculture 
colleagues to oppose that legislation despite the efforts by 
this Committee to refocus some of the jurisdiction of the issue 
from the EPA to the Department of Agriculture.
    One of the things that I think we have not talked about, 
and I am interested in knowing whether your study has 
considered at least this theory of mine, and that is while 
agriculture producers will not move their operations abroad due 
to increasing cost, the land is here in the United States, 
farming will continue as long as it is conceivably profitable, 
but I have a great concern about agricultural processors. It 
seems to me that with increasing costs caused by cap-and-trade, 
and other issues, agriculture processors can move their 
operations abroad which then not only has an employment 
consequence to the United States but has a cost effect upon 
agriculture producers. The farmer ultimately is damaged by the 
industry that he or she deals with being countries away around 
the globe as compared to down the road.
    And, again, my premise is based upon the belief that the 
increased cost to agriculture processors whether it is an 
ethanol plant or a processing facility, a chemical company, a 
livestock processor, a packing plant, we have to have real 
concern that that sector of the agriculture economy departs 
this country as it becomes less and less competitive in a 
global economy. Any comments or response to my thoughts?
    Dr. Glauber. Congressman, frankly, we haven't looked at the 
processing sector. One of the difficulties is we just don't 
have cost data on it, and I know just in speaking to some of 
the people that have come through my office, and I presume have 
also been up to see you too, are processors who are concerned 
about this aspect. Again, a lot will depend on what the 
individual price impacts are on these individual firms. Again, 
in the near term it is less of an issue. Over the longer run, 
the bigger issue is going to be on efficiencies and things like 
that. But you are right. For some processing firms, they may be 
very energy intensive, and those will take--just like in 
agriculture there will be differential----
    Mr. Moran. Would it be safe to assume that refining 
capacity, if it moves abroad, is more expensive, the end 
product is more expensive to agricultural and other consumers 
in the United States? And my assumption is that it is better to 
have the packing plant down the road buying your cattle than in 
South America. That has to have a price consequence, a cost 
consequence upon the actual farmer or stockman in the United 
States, true?
    Dr. Glauber. Yes. There is no question. If there is added 
cost at the processing level that has some effect both in terms 
on the retail side and also on the other side on the purchasing 
side.
    Mr. Moran. Thank you, Dr. Glauber.
    Dr. Glauber. Thank you.
    Mr. Moran. Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman. Doctor, you 
have been very generous with your time, but I believe Mr. 
Thompson had a follow-up comment or question.
    Mr. Thompson. Just real quickly. First of all, let me in 
the spirit of apology, let me apologize for questioning the 
competence of the folks who have done the analysis on dairy 
farming. Let me encourage them to go back to the books and look 
at the statistics you shared today in terms of diesel, gas, and 
electricity cost and all those things that, frankly, farmers 
have to figure out how to write the check out for on a monthly 
basis, because it is all part of the picture, and they are 
drowning, they are dying today. As my colleague from Missouri 
talked about, in general about farmers, the dairy farmers are 
really taking it hard.
    Just briefly, natural gas is the cleanest fossil fuel, and 
we certainly have vast amounts of on tap resources right here 
on and off shore in the Outer Continental Shelf. Natural gas, 
we have already established, is also a necessity in running our 
nation's farms. In my view, if this debate is really about 
curbing our carbon emissions and we really wish to protect our 
farms and food supplies then natural gas should be encouraged. 
Natural gas to me is a bridge that buys us time until we have 
significant amounts of renewable energy and proper 
infrastructure in place. Not only will natural gas be a cleaner 
fuel and one that we can control the price of here at home, 
natural gas production will create a enormous number of 
skilled, good paying jobs.
    I know the Marcellus Shale that is in part of my district 
and New York and Ohio and West Virginia that created, I 
believe, somewhere around 28,000 jobs in 2008. Dr. Glauber, you 
discussed H.R. 2454 will necessarily increase energy costs in 
the agriculture sector and how the legislation attempts to 
lessen the burden. My question is why bother capping natural 
gas and offering all these offsets when we have huge amounts of 
natural gas that can be easily developed and in quantity. The 
Marcellus Shale plate alone is the single largest plate of 
natural gas in the world, and that is in addition to everything 
else we have on the continent and the Outer Continental Shelf, 
and also it is just clean, good clean energy.
    Dr. Glauber. Well, there are a lot of advantages for 
natural gas and certainly in terms of pollutants, et cetera. 
However, on a greenhouse gas side, they do have substantial 
greenhouse gas emissions, and that is, at least in theory, why 
they were addressed specifically in the legislation. I would 
agree with you in many of the points you made insofar as, one, 
natural gas, we know a lot of producers use it already as a 
direct fuel cost for pumping for irrigation, et cetera, and 
there are a lot of advantages of natural gas. And certainly 
when we saw the increases in the prices over the last few years 
those producers had to make some pretty quick adjustments.
    Mr. Thompson. I yield back.
    The Chairman. I thank the gentleman. The gentleman from 
Louisiana, a follow-up question?
    Mr. Cassidy. First a comment based on what you just said. 
Actually, you could probably show that natural gas has a lower 
carbon footprint than corn-based ethanol, and I think that 
would be fairly easily shown. But as I looked at your testimony 
on page 23, yes, page 23, and again I am looking at rice--
energy inputs relative to total operating expenses for selected 
crops. Rice takes it on the chin. I think rice, if you add the 
cost of fuel and fertilizer, is the highest priced of any other 
among all the crops.
    Dr. Glauber. Absolutely, per acre. You are absolutely 
right.
    Mr. Cassidy. Now really this kind of extends my argument 
regarding aquaculture to rice. Will they be able to compete 
absent WTO-defined tariffs with foreign importers if they have 
such an energy-intensive process?
    Dr. Glauber. Well, the flip side of it is looking at it on 
a percent of operating cost and there rice is not quite as high 
as some of the other commodities, but still quite high, in 
general. I think that a key for rice will be, potentially, 
whatever offsets can be generated on rice production by tillage 
practices, et cetera.
    Mr. Cassidy. Now my next question is knowing that they 
flood, is there going to be some sort of carbon offset for 
flooding? They don't till per se.
    Dr. Glauber. My colleague here who knows a lot about 
offsets says that there are potentials on nutrient management, 
and what I would like to do is follow up with you with a more 
detailed response.
    Mr. Cassidy. My next question is that clearly the Achilles' 
heel behind this whole theory of this bill is the carbon 
leakage of energy intensive industries to other nationals, the 
Caribbean, China, India, et cetera, who just said they are not 
going to comply with this. So what about carbon leakage of our 
fertilizer? We are already importing some percentage you 
mentioned. Frankly, I can see a business plan you would not 
expand here. You would expand elsewhere because in 15 years 
this subsidy goes away and you would be at a competitive cost 
advantage by carbon leakage of the fertilizer manufacturers.
    Dr. Glauber. Well, again, with rebates that will take you 
through 2025, thereabouts, you are right. At that point, 
natural gas prices, if that is phased out, there are issues 
then about competition with foreign producers, and a lot will 
depend there in terms of what is done internationally.
    Mr. Cassidy. So we know that it is the global emissions of 
carbon that is important, not just that which is produced in 
the United States. If we have carbon leakage of these energy 
intensive industries then we are probably net going to be no 
better off, maybe worse, assuming they have lower environmental 
protections. My next question is the EITE, does that totally 
hold the producer harmless? For example, they are going to buy 
natural gas to make their fertilizer, but that natural gas 
price is already inflated because there is going to be someone 
else who is having to pay for emissions and tacking that on to 
the cost of the natural gas. And so there are several areas in 
the production line where the natural gas price will be 
elevated. Is the producer of the fertilizer totally held 
harmless or is it only for that which they themselves would be 
penalized for emitting?
    Dr. Glauber. My understanding is that they will be exempt 
from the additional surcharge that would be implied by the 
allowance price for carbon.
    Mr. Cassidy. And is that the well head to their product 
going out the door, or is it just for the natural gas coming in 
to their product going out the door?
    Dr. Glauber. I think it is as a feedstock that that price 
will be----
    Mr. Cassidy. From the well head?
    Dr. Glauber. Yes.
    Mr. Cassidy. So then the cost of that offset passes all the 
way down to the producer, the refiner, and then the 
intermediary, the pipeline guy, and then the fertilizer 
manufacturer itself?
    Dr. Glauber. Yes. That is my understanding. Now the other 
thing too is that don't forget because natural gas prices are 
going up for others, those who aren't protected, they are 
actually the demand. Demand would be affected a bit for natural 
gas prices, so if you take out the allowance price the price 
could be slightly smaller than it would have been otherwise. 
But again that is very conjectural.
    Mr. Cassidy. One more thing. The industrial-owned rural 
utilities, they are going to be subject to both the renewable 
energy standard and they are going to be subject to their 
emissions standard. Many of them in the Southeast have limited 
access to renewable energy sources, but they are also going to 
have the carbon exemptions, and since they are investor-owned, 
they will not have the same for whatever megawatts exemption. 
What is going to be--did you break out the impact of investor 
owned utilities versus the municipalities or the co-ops as 
regard to what is going to happen to the rural people in their 
districts?
    Dr. Glauber. We did not, Congressman, but let me get back 
to you on that as a follow up.
    Mr. Cassidy. It seems like that could be a significant 
difference.
    Dr. Glauber. I would be happy to look at it.
    Mr. Cassidy. Thank you very much. I yield back. Thank you.
    The Chairman. The chair thanks the gentleman. Dr. Glauber, 
thank you very much. You have been more than generous with your 
time, so thank you very much.
    Dr. Glauber. And we will see you tomorrow.
    The Chairman. See you tomorrow. We now would like to 
welcome our second panel. I would like to yield to the 
gentleman from Missouri for an introduction of one of our 
panelists.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. As I get settled 
in, it is my privilege this morning to introduce to the 
Subcommittee, Dr. Pat Westhoff. He is Co-Director of the Food 
and Agricultural Policy Research Institute there at the 
University of Missouri. It is called FAPRI, an acronym. He is a 
Research Associate Professor in Agriculture Economics. FAPRI 
conducts some of the most respected objective agricultural 
research in the world. I am proud to represent this institution 
in Congress. Dr. Westhoff is a native of Manchester, Iowa, and 
he joined FAPRI in 1996.
    Prior to joining FAPRI Missouri, he served 4 years as the 
Chief Economist for the Democratic staff of the United States 
Senate Committee on Agriculture, Nutrition, and Forestry. From 
1983 to 1992 he worked at the Iowa State University Center for 
Agricultural and Rural Development for FAPRI at Iowa State. He 
obtained his Ph.D. in agricultural economics from Iowa State 
University. We don't hold that against him. He is now at MU. We 
beat them in football this year so we are okay with that, 
right, Doc? Through the hard work of Dr. Westhoff and Dr. 
William Meyers, FAPRI has gained the respect of the 
agricultural industry from the much anticipated yearly baseline 
projection to the analysis conducted for Congress and outreach 
with farmers and agricultural organizations. FAPRI serves as a 
valuable asset for this industry helping both producers and 
policy makers develop smart decisions about the future of 
agriculture in Missouri, and throughout this nation.
    They are basically the Bible when it comes to agriculture 
in our state. Through fantastic research, we rely on them 
tremendously for their input and data that they come up with. 
Pat himself has been a tremendous asset to my district and to 
the American agricultural industry. I greatly appreciate his 
being here today and look forward to his testimony. Welcome.
    The Chairman. The chair thanks the gentleman. We also would 
like to welcome Dr. Joe L. Outlaw, Professor and Extension 
Economist--Farm Management and Policy, Department of 
Agricultural Economics, Texas A&M University; Dr. John M. 
Antle, Professor of Agricultural Economics and Economics, 
Montana State University; Dr. Judith Capper, Assistant 
Professor of Dairy Science, Department of Animal Sciences, 
Washington State University; Mr. Richard Pottorff, Chief 
Economist, Doane Advisory Services, St. Louis, Missouri. Dr. 
Outlaw, you may begin when you are ready.

        STATEMENT OF JOE L. OUTLAW, Ph.D., CO-DIRECTOR,
 AGRICULTURAL AND FOOD POLICY CENTER; PROFESSOR AND EXTENSION 
     ECONOMIST--FARM MANAGEMENT AND POLICY, DEPARTMENT OF 
AGRICULTURAL ECONOMICS, TEXAS A&M UNIVERSITY, COLLEGE STATION, 
                               TX

    Dr. Outlaw. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to testify on behalf of the 
Agricultural and Food Policy Center at Texas A&M University on 
our research regarding the potential economic impacts of 
climate change on the farm sector. For more than 25 years we 
have worked with the Agriculture Committees in the U.S. Senate 
and House of Representatives providing Members and Committee 
staff objective research regarding the potential affects of 
agricultural policy changes on our database of U.S. 
representative farms.
    My testimony today summarizes the results of an analysis 
request from Senator Saxby Chamblis to analyze the impacts of 
the cap-and-trade provisions of the American Clean Energy and 
Security Act of 2009 on the farm sector. Our analysis, which I 
have provided for the record,* assessed the impacts of H.R. 
2454 by including: the anticipated energy related cost 
increases directly experienced by agricultural produces for 
inputs such as fuel and electricity and indirectly experienced, 
such as higher chemical prices resulting from higher energy 
prices; the expected commodity price changes resulting from 
producers switching among agricultural commodities; 
afforestation of land previously employed in agricultural 
commodity production; and the estimated benefits to 
agricultural producers from selling carbon credits.
---------------------------------------------------------------------------
    * The document referred to is located on p. 216.
---------------------------------------------------------------------------
    AFPC currently does not maintain sector level economic 
models with the amount of detail required to develop estimates 
of all the impacts listed above along with their feedback 
effects. Therefore, we utilized the EPA estimated energy price 
changes, as well as estimates of carbon and agricultural 
commodity prices from McCarl's FASOM-GHG model to evaluate the 
farm level effects of H.R. 2454. The results of this analysis 
are dependent on the estimated outcomes contained in the EPA 
analysis of H.R. 2454. As additional sector level analyses are 
conducted and estimates are refined, AFPC will update the farm 
level analysis.
    AFPC has a history of maintaining a unique dataset of 
representative crop, livestock, and dairy farms and utilizing 
them to evaluate the economic impacts of agricultural policy 
changes. This analysis was conducted over the 2007-2016 
planning horizon using FLIPSIM, our risk-based whole farm 
simulation model. The data described 98 farming operations in 
the nation's major production regions came from producer panel 
interviews to gather, develop, and validate the economic and 
production information required to describe and simulate 
representative crop, livestock, and dairy farms.
    In our report we analyzed three scenarios relative to our 
baseline. Today these results are going to focus on the cap-
and-trade with ag carbon credits scenario. Mr. Chairman, we 
have been doing policy analysis for the Congress for nearly 30 
years and we have never had to make this many assumptions just 
to complete an analysis. Cropland requirements for carbon 
dioxide sequestration specify that land must be engaged in a 
minimum or no-till cropping program. Extension budgets from 
different states were used to determine changes in input and 
overhead costs typically experienced in converting from 
conventional tillage practices to no-till farming. Methane 
digesters may be beneficial to some confinement dairies, 
allowing them to generate electricity and reduce greenhouse 
gases.
    This study assumed a dairy size of 500 cows or more is 
necessary to make erecting a methane digester a viable economic 
option, which eliminates--we had 16 of 22 farms that would be 
able to do this. For this study, AFPC's representative cattle 
ranches and rice farms were the only two categories of farms 
that were assumed not to participate in carbon sequestration 
activities. In terms of measuring performance, our report had 
five different measures. We have used average ending cash 
reserves in 2016 to highlight as the most appropriate measure 
to evaluate this type of long-run decision. In other words, 
will the farm be better off or worse off at the end of the 
period based on cash on hand at the end of the year?
    Table 2 provides a summary of the farms with higher and 
lower, relative to the baseline, average ending cash reserves 
in 2016. Twenty-seven out of 98 representative farms are 
expected to be better off at the end of the period in terms of 
their ending cash reserves. Most of the feedgrain/oilseed farms 
located in or near the Corn Belt and wheat farms located in the 
Great Plains, have higher average ending cash reserves under 
this scenario. Eight wheat farms are better off under this 
scenario, while one cotton and no rice farms or cattle ranches 
are better off. One dairy is better off because it produces and 
sells surplus corn and soybeans which are projected to see 
higher prices as a result of this program.
    While a few farms would be as well off as under the 
baseline with only slightly higher carbon prices each year, 
there are also several farms that would need carbon prices of 
$80 per ton per year or more to make them as well off as under 
the baseline. I would like to finish with a few points. These 
results are entirely dependent on the EPA analysis, however, we 
were only able to analyze the very beginning of the cap-and-
trade implementation through 2016. Based on the projected 
carbon prices after 2025, producers would be much better off 
waiting for higher carbon prices to sell carbon credits.
    We based many of our assumptions regarding how the cap-and-
trade program in H.R. 2454 would work on the Chicago Climate 
Exchange which may or may not be accurate. Mr. Chairman, that 
completes my statement.
    [The prepared statement of Dr. Outlaw follows:]

 Prepared Statement of Joe L. Outlaw, Ph.D., Co-Director, Agricultural 
    and Food Policy Center; Professor and Extension Economist--Farm
Management and Policy, Department of Agricultural Economics, Texas A&M 
                    University, College Station, TX
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify on behalf of the Agricultural and Food Policy 
Center at Texas A&M University on our research regarding the potential 
economic impacts of climate change on the farm sector. For more than 25 
years we have worked with the Agricultural Committees in the U.S. 
Senate and House of Representatives providing Members and Committee 
staff objective research regarding the potential affects of 
agricultural policy changes on our database of U.S. representative 
farms.
    My testimony today summarizes the results of an analysis request 
from Senator Saxby Chamblis to analyze the impacts of the CAP and Trade 
Provisions of ``The American Clean Energy and Security Act of 2009'' 
(H.R. 2454) on the farm sector. Our analysis, which I have provided for 
the record, is entitled ``Economic Implications of the EPA Analysis of 
the CAP and Trade Provisions of H.R. 2454 for U.S. Representative 
Farms''. Our report assessed the impacts of H.R. 2454 by including:

   The anticipated energy related cost increases directly 
        experienced by agricultural producers for inputs such as fuel 
        and electricity and indirectly experienced, such as, higher 
        chemical prices resulting from higher energy prices.

   The expected commodity price changes resulting from 
        producers switching among agricultural commodities and 
        afforestation of land previously employed in agricultural 
        commodity production.

   The estimated benefits to agricultural producers from 
        selling carbon credits.

    AFPC currently does not maintain sector level economic models with 
the amount of detail required to develop estimates of all of the 
impacts listed above along with their feedback effects. Therefore, we 
utilized the EPA estimated energy price changes, as well as, estimates 
of carbon and agricultural commodity prices from McCarl's FASOM-GHG 
model to evaluate the farm level impacts of H.R. 2454.

    The results of this analysis are dependent on the estimated 
outcomes contained in the EPA analysis of H.R. 2454. As additional 
sector level analyses are conducted and estimates are refined, AFPC 
will update the farm level analysis. 

     AFPC has a 26 year history of maintaining a unique dataset of 
representative crop, livestock and dairy farms and utilizing them to 
evaluate the economic impacts of agricultural policy changes. This 
analysis was conducted over the 2007-2016 planning horizon using 
FLIPSIM, AFPC's risk-based whole farm simulation model. Data to 
simulate 98 farming operations in the nation's major production regions 
come from producer panel interviews to gather, develop, and validate 
the economic and production information required to describe and 
simulate representative crop, livestock, and dairy farms. The FLIPSIM 
policy simulation model incorporates the historical risk faced by 
farmers for prices and production.
Scenarios Analyzed
   Baseline--Projected prices, policy variables, and input 
        inflation rates from the Food and Agricultural Policy Research 
        Institute (FAPRI) January 2009 Baseline.

   Cap & Trade without Ag Carbon Credits--Assumes H.R. 2454 
        becomes effective in 2010. Imposes EPA commodity price 
        forecasts along with estimated energy cost inflation on 
        representative farm inputs.

   Cap & Trade with Ag Carbon Credits--Assumes H.R. 2454 
        becomes effective in 2010. Imposes EPA commodity price 
        forecasts along with estimated energy cost inflation on farm 
        inputs, converts farms to no-till production (if applicable) 
        and/or installs a methane digester on dairies over 500 head and 
        sells carbon credits at EPA estimated market prices.

   Cap & Trade with Ag Carbon Credits and Saturation--Assumes 
        no-till farmland reaches carbon saturation in 2014. This 
        scenario represents the loss of revenues that will be 
        experienced by farms at some point due to carbon saturation of 
        the soil. This scenario is not relevant for the analysis of 
        methane digesters on the dairies since saturation is not an 
        issue.

     This testimony will focus on the Cap & Trade with Ag Carbon 
Credits scenario.
Assumptions
    Mr. Chairman, we have been doing policy analyses for the Congress 
for nearly 30 years and we have never had to make this many 
assumptions--just to complete our analysis.
    Cropland requirements for carbon dioxide sequestration specify that 
land must be engaged in a minimum or no-till cropping program. Higher 
fuel and input costs have driven the majority of the AFPC 
representative crop farms to participate in some form of reduced 
tillage; however, very few are truly no-till operations.
    Extension budgets from different states were used to determine 
changes in input and overhead costs typically experienced in converting 
from conventional tillage practices to no-till farming. All AFPC farms 
with the potential to sequester carbon dioxide (based on Conservation 
tillage soil offset map available from the Chicago Climate Exchange) 
were converted to no-till operations using their respective state 
Extension budgets as a template. Crop yields were not changed when the 
switch to no-till was made.
    Methane digesters may be beneficial to some confinement dairies, 
allowing them to generate electricity and reduce greenhouse gases 
(GHG). The destruction of GHGs makes the dairies eligible to receive 
carbon credits for their efforts. This study assumed a dairy size of 
500 cows or more is necessary to make erecting a methane digester a 
viable economic option. Sixteen of 22 AFPC representative dairies have 
sufficient cow numbers to justify a digester based on this assumption
    For this study, AFPC's representative cattle ranches and rice farms 
were the only two categories of farms that were assumed not to 
participate in carbon sequestration activities. In order to participate 
in the grassland or pastureland carbon sequestration, the ranches would 
need to reduce their stocking rates substantially which would have 
substantially changed the economics of the ranches. Therefore, we 
assumed they would likely not participate for the purposes of this 
study. We are unaware of any carbon sequestration protocol in effect 
for rice farms therefore we assumed they would be unable to 
participate.
Commodity Prices, Inflation Rates, and Interest Rates Assumed in the 
        Analysis
    We developed annual estimates of commodity prices and inflation 
rates by interpolating between the 5 year time periods and alternative 
carbon price scenarios, and applying the percentage changes in the 
estimated economic variables from the EPA scenario estimates and EPA 
Baseline to the January 2009 FAPRI Baseline.
    The estimated gross and net-to-farmer carbon prices per ton 
utilized in this study are summarized in Table 1. AFPC assumed that a 
fee structure similar to that used by the Chicago Climate Exchange 
(CCX) would likely be utilized under H.R. 2454.

     Table 1. Gross and Net-to-Farmer Carbon Prices Utilized in Representative Farm Analysis, 2010 to 2016.1
----------------------------------------------------------------------------------------------------------------
                   Year                       2010      2011      2012      2013      2014      2015      2016
----------------------------------------------------------------------------------------------------------------
Gross ($/ton)                                   8.97     9.704    10.438    11.172    11.906     12.64    13.374
Net-to-farmer ($/ton)                           7.75     8.41      9.07      9.73     10.40     11.06     11.72
----------------------------------------------------------------------------------------------------------------
1 These prices were derived from EPA estimates for 2015 and 2020 and extrapolated and interpolated to provide
  annual estimates.

Measures of Economic Performance
    Five alternative measures of economic performance are provided for 
each of the farms. These are:

   Average Annual Total Cash Receipts--Average annual cash 
        receipts in 2010-2016 from all sources, including market sales, 
        carbon credit payments, countercyclical/ACRE, direct payments, 
        marketing loan gains/loan deficiency payments, crop insurance 
        indemnities, and other farm related receipts.

   Average Annual Total Cash Costs--Average annual cash costs 
        in 2010-2016 from all sources including variable, overhead, and 
        interest expenses.

   Average Annual Net Cash Farm Income--Equals average annual 
        total cash receipts minus average annual cash expenses in 2010-
        2016. Net cash farm income is used to pay family living 
        expenses, principal payments, income taxes, self employment 
        taxes, and machinery replacement costs.

   Average Ending Cash Reserves in 2016--Equals total cash on 
        hand at the end of the year in 2016. Ending cash equals 
        beginning cash reserves plus net cash farm income and interest 
        earned on cash reserves less principal payments, Federal taxes 
        (income and self employment), state income taxes, family living 
        withdrawals, and actual machinery replacement costs (not 
        depreciation).

   Average Ending Real Net Worth--Real Equity (inflation 
        adjusted) at the end of the year in 2016. Equals total assets 
        including land minus total debt from all sources.
Results
    Average ending cash reserves in 2016 will be highlighted as the 
most appropriate measure to evaluate this type of long-run decision. In 
other words, will the farm be better off or worse off at the end of the 
period based on cash on hand at the end of the year?
    Table 2 provides a summary of the farms with higher and lower 
(relative to the Baseline) average ending cash reserves in 2016. 
Twenty-seven out of 98 representative farms are expected to be better 
off at the end of the period in terms of their ending cash reserves.

 Table 2. Representative Farms by Type That Have Higher or Lower Ending
    Cash Reserves for the Cap & Trade With Ag Carbon Credits Scenario
                        Relative to the Baseline.
------------------------------------------------------------------------
     Farm Type           Higher             Lower             Total
------------------------------------------------------------------------
Feedgrain/Oilseed              17                 8                25
        Wheat                   8                 3                11
       Cotton                   1                13                14
         Rice                   0                14                14
Cattle Ranches                  0                12                12
                   -----------------------------------------------------
  Total...........             27                71                98
------------------------------------------------------------------------

    Results show that all of the crop farms and dairies are expected to 
realize slightly higher average annual cash receipts under the Cap & 
Trade scenarios due to slightly higher crop and milk prices resulting 
from instituting cap-and-trade. The lone exception is the 12 cattle 
ranches that realize slightly lower receipts due to lower calf prices. 
As one would expect, the Cap & Trade with Ag Carbon Credits scenario 
results in slightly higher cash receipts than the Baseline. The amount 
of the carbon credits is relatively small with many farms averaging 
less than $10,000 per year higher receipts.
    Costs differ from the Baseline and Cap & Trade with Ag Carbon 
Credits due to imposition of higher input costs and expenses incurred 
for conversion to no-till on farms eligible for carbon credits and 
construction of methane digesters on eligible dairy farms.
    Most of the feedgrain/oilseed farms located in or near the Corn 
Belt and wheat farms located in the Great Plains, have higher average 
ending cash reserves under the Cap & Trade with Ag Carbon Credits 
scenarios. In addition, all but a few of the feedgrain/oilseed farms 
end the analysis period with higher cash reserves. Eight wheat farms 
are better off under the Cap & Trade with Ag Carbon Credits scenario, 
while one cotton and no rice farms or cattle ranches are better off. 
One dairy (WID145) is better off because it produces and sells surplus 
corn and soybeans which are projected to see higher prices as a result 
of cap-and-trade.
    The average level of carbon prices necessary for the farms to be as 
well off as under the Baseline were estimated for farms who would be 
worse off under the Cap & Trade with Ag Carbon Credits scenario. Given 
the assumptions in this study, for some farms such as rice and the 
cattle ranches, no level of carbon prices would make them as well off 
as the Baseline. While a few farms would be as well off as the Baseline 
with only slightly higher carbon prices each year, there are also 
several farms that would need carbon prices of $80 per ton per year or 
more to make them as well off as the Baseline.
    I would like to finish with a few points:

   These results are entirely dependent on the EPA analysis, 
        however, we were only able to analyze the very beginning of Cap 
        & Trade implementation through 2016.

   Based on the projected carbon prices after 2025, producers 
        would be much better off waiting for higher carbon prices.

   We based many of our assumptions regarding how the Cap & 
        Trade program in H.R. 2454 would work on the Chicago Climate 
        Exchange which may or may not be accurate.

    Mr. Chairman, that completes my statement.

    The Chairman. Thank you, Dr. Outlaw. Dr. Westhoff.

  STATEMENT OF PATRICK WESTHOFF, Ph.D., CO-DIRECTOR, FOOD AND 
  AGRICULTURAL POLICY RESEARCH INSTITUTE; RESEARCH ASSOCIATE 
                    PROFESSOR, DEPARTMENT OF
        AGRICULTURAL ECONOMICS, UNIVERSITY OF MISSOURI-
                     COLUMBIA, COLUMBIA, MO

    Dr. Westhoff. Thank you, Mr. Chairman, for the opportunity 
to speak with you and other Members of the Subcommittee, and 
thanks to Congressman Luetkemeyer for the very kind 
introduction. My name is Pat Westhoff, and I am the Co-Director 
of the Food and Agricultural Policy Research Institute at the 
University of Missouri. Today, I will discuss some of the 
reasons why there is so much uncertainty about the impacts of 
climate change legislation on the farm sector. As you know, 
legislation approved by the House would create a cap-and-trade 
system. And as Dr. Glauber talked about earlier, the Energy 
Information Administration has estimated possible impacts of 
the legislation on energy markets and the general economy.
    Translating these estimated changes in energy costs to 
changes in farm production expenses is not as easy as one might 
think. Given the EIA's basic estimates of the House bill's 
impact on energy cost, we estimate that operating costs for 
corn producers would increase by about 1.8 percent in 2020 
compared to levels that would have prevailed in a reference 
scenario. Operating costs would increase by two percent for 
wheat, 2.2 percent for soybeans, and 2.3 percent for cotton. 
Using the EIA's energy cost estimates for 2030, we estimate 
that nominal corn operating expenses would increase by 5.7 
percent relative to a reference scenario. Soybean costs would 
increase a little bit less while the proportional increase in 
wheat and cotton cost would be actually larger than those for 
corn.
    Other estimates of energy costs would, of course, lead to 
different estimates of crop production cost impacts. In 
addition to its basic scenario, EIA has examined a number of 
other scenarios for how the House-passed bill would impact 
energy markets. Because these different scenarios result in 
different estimates of fuel costs, they result in different 
estimates of farm production expenses as well. In 2020, corn 
operating expenses increased by just .9 percent in one of those 
EIA scenarios, but as much as 2.5 percent in another one of 
those scenarios. In 2030, the corresponding changes ran from as 
little as 2.3 percent to as much as 8.4 percent, so just making 
the point again there is great uncertainly what the production 
cost impacts might be because of so much uncertainty of what 
the impacts might be on energy costs.
    I want to focus most of my remaining remarks on possible 
impacts on crop production patterns because I don't think those 
have gotten enough attention so far. There are several reasons 
why crop production patterns could shift in response to climate 
change legislation. First, rising input costs could cause some 
shifts away from crops that experience the largest increases in 
production expenses. Second, the opportunity to earn offset 
income could encourage landowners to reduce the amount of land 
used to produce current crops and expand the area devoted to 
forestry or the production of energy crops, as we have heard 
about today already.
    If relatively little land shifts from cropland to forestry 
uses, climate change legislation may have only very small 
effects on crop production and crop prices, but if more 
significant amounts of cropland shift to forestry uses, the 
result would be larger production in crop production. This in 
turn would result in higher crop prices that would increase 
market revenue for farmers who continue to grow traditional 
crops. This increase in market revenues could offset some or 
even all of the increase that might occur in crop operating 
expenses. If large shifts in acreage do occur, they would have 
impacts that go far beyond possible effects on crop producer 
receipts. Higher crop prices would increase feed costs for the 
livestock industry. These higher feed costs, in turn, would 
result in reduced production and higher prices for meat and 
dairy products. Consumer food prices would increase.
    Higher crop prices would reduce the quantity of 
agricultural products exported by the United States. Forestry 
uses of land result in different patterns of rural employment 
and economic activity that result from current crop production 
patterns. Finally, it is important to distinguish the effects 
that result when one country changes its policies from effects 
that result when all countries change policy simultaneously. 
For example, much of the analysis conducted so far assumes that 
U.S. firms will be able to purchase large amounts of offsets 
from other countries for practices that reduce emissions or 
sequester carbon. Similar policies in other countries could 
increase competition for such offsets. This would tend to 
increase allowance prices, resulting in higher domestic energy 
prices and more demand for domestic offsets.
    In summary, there are five things we think we know and do 
not know. Number one, the House-passed legislation would raise 
energy costs, and this would translate into higher farm 
production expenses; two, just how large the increase in 
production costs would be is unknown. Alternative sets of 
reasonable assumptions result in very different estimates of 
crop production cost impacts; number three, the ability to earn 
offset income by changing production practices or planting 
trees or energy crops could have major impacts on agricultural 
production, commodity prices, farm income, consumer food costs, 
and rural communities; four, the greater the shift in acreage 
away from production of traditional crops to trees or energy 
crops, the larger the potential impact on crop production and 
prices. Resulting increases in revenues may offset some or even 
all of the increase in production expenses for crop producers, 
and, finally, unilateral U.S. changes in climate policy could 
have very different impacts than if there is a multilateral 
agreement to reduce greenhouse gas emissions. Again, thank you 
very much, Mr. Chairman, for your interest in our work.
    [The prepared statement of Dr. Westhoff follows:]

  Prepared Statement of Patrick Westhoff, Ph.D., Co-Director, Food and
 Agricultural Policy Research Institute; Research Associate Professor, 
Department of Agricultural Economics, University of Missouri-Columbia, 
                              Columbia, MO
    Thank you, Mr. Chairman, for the opportunity to speak with you and 
other Members of the Subcommittee. My name is Pat Westhoff, and I am a 
Co-Director of the Food and Agricultural Policy Research Institute at 
the University of Missouri (FAPRI-MU). For the last 25 years, our 
mission has been to provide objective analysis of issues related to 
agricultural markets and policy.
    Our institute is examining some of the possible impacts of climate 
change legislation on markets for agricultural products, farm income, 
and consumer food prices. So far, the research has raised many 
questions and provided few definitive answers.
    Today, I will discuss some of the reasons why there is so much 
uncertainty about the impacts of climate change legislation on the farm 
sector. Consistent with FAPRI's mission, I will neither endorse nor 
oppose particular policy proposals, but hope to provide information 
that will be useful as you consider issues related to climate change.
    Legislation approved by the House (H.R. 2454) would create a cap-
and-trade system. Such a policy would raise farm production expenses by 
increasing energy costs to users of fossil fuels. It would also 
encourage activities that reduce greenhouse gas emissions and sequester 
carbon. Some of these activities could have important impacts on 
agricultural production, which in turn would affect farm commodity 
prices.
Production cost impacts
    The Energy Information Administration (EIA) has estimated possible 
impacts of the legislation on energy markets and the general economy. 
In its ``basic'' scenario, EIA estimates that the House-passed bill 
would raise the nominal cost of diesel fuel by about eight percent in 
2020 from reference scenario levels. Electricity costs would increase 
by about four percent, and industrial users would pay 14 percent more 
for natural gas.
    Translating these estimated changes in energy costs to changes in 
farm production expenses is not as easy as one might think. Consider 
the case of fertilizer. Nitrogen fertilizer is produced in a very 
energy-intensive process that uses large quantities of natural gas. One 
might therefore expect that nitrogen fertilizer costs would increase in 
line with the estimated increase in natural gas costs.
    The story is more complex. First, much of the nitrogen fertilizer 
used in the United States is imported, and foreign fertilizer producers 
would not necessarily experience the same change in production costs as 
domestic manufacturers. Second, the House-passed legislation includes 
provisions to provide free emission allowances to energy-intensive, 
trade-exposed (EITE) industries, including the nitrogen fertilizer 
industry. This could hold down costs to nitrogen fertilizer producers, 
at least until EITE allowances are phased down beginning in 2025. 
Third, even if the result is a significant increase in fertilizer 
prices, farmers could reduce their fertilizer usage, thus limiting 
increases in expenditures.
    FAPRI-MU has prepared preliminary estimates of impacts on farm 
production expenses that try to consider all of these concerns. Given 
EIA's basic estimates of the House bill's impact on energy costs, we 
estimate that operating costs for corn producers would increase by 
about 1.8 percent in 2020 compared to levels that would have prevailed 
in a reference scenario. Operating costs would increase by 2.0 percent 
for wheat, 2.2 percent for soybeans, and 2.3 percent for cotton.
    These estimates of production cost impacts all depend on a 
particular set of EIA estimates of energy cost impacts for one 
particular year. As the cap on greenhouse gas emissions is reduced over 
time, EIA estimates that energy costs would increase by even larger 
proportions. In 2030, for example EIA's basic scenario estimates that 
the House-passed bill would raise nominal diesel fuel costs by 15 
percent, electricity costs by 22 percent, and industrial natural gas 
costs by 26 percent. Furthermore, the scheduled phase-down of free EITE 
allowances means that nitrogen fertilizer producers would be less 
insulated from increases in natural gas costs.
    Using EIA's energy cost estimates for 2030, we estimate that 
nominal corn operating expenses would increase by 5.7 percent relative 
to a reference scenario. Because soybean production uses little 
nitrogen fertilizer, soybean costs would increase less (4.9 percent), 
while the proportional increase in wheat (6.3 percent) and cotton (6.4 
percent) costs would actually be proportionally larger than the 
increase for corn.
    Other estimates of energy costs would, of course, lead to different 
estimates of crop production cost impacts. In addition to its basic 
scenario, EIA has examined a number of other scenarios for how the 
House-passed bill could impact energy markets. For example, in its 
``high offsets'' scenario, EIA considers what might happen if it is 
very easy to find ways to reduce greenhouse gas emissions and sequester 
carbon. This would substantially reduce the cost of emission allowances 
and result in significantly lower energy costs.
    In contrast, EIA's ``high cost'' scenario assumes that it is not as 
easy to reduce emissions in electric utilities as in the basic 
scenario, in part because it proves more difficult to expand production 
of nuclear energy. This raises the estimated costs of emission 
allowances and the costs to users of fossil fuels.
    Because these different scenarios result in different estimates of 
fuel costs, they result in different estimates of farm operating 
expenses. In 2020, corn operating expenses increase by just 0.9 percent 
in the high offset scenario, but by 2.5 percent in the high cost 
scenario. In 2030, the corresponding changes are 2.3 percent in the 
high offset scenario and 8.4 percent in the high cost scenario (Table 
1).
    Other institutions have also estimated impacts of the House 
legislation on energy costs. For example, CRA International estimates 
were used in earlier FAPRI-MU analysis of possible impacts on Missouri 
crop production expenses. In that analysis (FAPRI-MU Report #05-09), 
Missouri dryland corn operating costs increased by 3.2 percent in 2020 
and 3.8 percent in 2030.
    The earlier analysis did not consider impacts of EITE provisions, 
thus explaining its larger estimate of 2020 production cost impacts. 
However, in 2030, EIA's basic and high cost scenarios result in larger 
impacts on energy costs than estimated by CRA. It should not be 
surprising, therefore, that the estimated impacts on 2030 national corn 
operating costs under EIA's basic and high costs scenarios are larger 
than the previous FAPRI-MU estimate of increases in 2030 Missouri 
dryland corn operating costs.

 Table 1. Estimates of Changes in Nominal Farm Operating Costs Resulting
                             From H.R. 2454
------------------------------------------------------------------------
                         EIA basic      EIA high offset   EIA high cost
                         scenario          scenario          scenario
------------------------------------------------------------------------
Nominal energy cost
 impacts *
  Diesel fuel
    2020...........           8.3%              4.6%             9.0%
    2030...........          15.0%              8.0%            17.5%
  Electricity
    2020...........           3.8%              3.6%             5.4%
    2030...........          22.3%             11.8%            32.7%
  Industrial
   natural gas
    2020...........          14.4%              8.3%            20.2%
    2030...........          25.9%             10.2%            39.9%
Crop operating cost
 impacts
  Corn
    2020...........           1.8%              0.9%             2.5%
    2030...........           5.7%              2.3%             8.4%
  Soybeans
    2020...........           2.2%              1.3%             2.6%
    2030...........           4.9%              2.5%             6.3%
  Wheat
    2020...........           2.0%              1.0%             2.8%
    2030...........           6.3%              2.6%             9.2%
  Upland cotton
    2020...........           2.3%              1.4%             2.9%
    2030...........           6.4%              3.1%             8.8%
------------------------------------------------------------------------
* Calculations based on EIA reported nominal energy cost data. Note that
  inflation-corrected real price changes generally would be slightly
  smaller, as EIA estimates that the scenarios would result in slightly
  higher rates of overall price inflation in the economy.
The EIA scenarios are briefly described in the text. The full EIA
  analysis is available at http://www.eia.doe.gov/oiaf/servicerpt/hr2454/
  index.html.

    The key point is that there is great uncertainty about the 
magnitude of the impact on farm production expenses, primarily because 
of great uncertainty about the magnitude of impacts on energy costs. If 
it is relatively easy for electric utilities and others to reduce 
greenhouse gas emissions and sequester carbon, allowance prices will be 
relatively low, increases in energy costs will be modest, and impacts 
on farm production expenses will be fairly small. If it proves much 
more difficult to reduce emissions and sequester carbon, allowance 
prices will be much higher, as will energy costs and farm production 
expenses.
Shifts in production patterns
    In addition to its effect on production expenses, climate change 
legislation could have many other important effects on the farm sector. 
For example, others will speak to you tomorrow about the opportunities 
for farmers to earn income by selling offsets for activities that 
reduce emissions or sequester carbon. I want to focus most of my 
remaining remarks on possible impacts on crop production patterns.
    There are several reasons why crop production patterns could shift 
in response to climate change legislation.
    First, rising input costs could cause some shifts away from crops 
that experience the largest increases in production expenses. Unless 
changes in production expenses are larger than in the scenarios we have 
examined so far, we do not expect this effect to cause large reductions 
in overall U.S. crop production. As a result, we do not expect the 
increase in production expenses to translate into very large increases 
in prices for corn, wheat, soybeans, cotton, and other crops.
    Second, the opportunity to earn offset income could encourage 
landowners to reduce the amount of land used to produce current crops 
and expand the area devoted to forestry or the production of energy 
crops. Analysis conducted for the Environmental Protection Agency using 
the FASOM model suggests that climate change legislation could lead to 
tens of millions of acres shifting from crop and pasture uses to 
forestry. Analysis conducted at the University of Tennessee suggests 
that there could be a large expansion in production of energy crops 
such as switchgrass.
    We have begun to do some work looking at the possible impacts on 
the farm sector that might result if some land shifts to forestry uses 
in response to climate change legislation. As the work is ongoing, it 
would be premature to cite specific estimates, but it could be useful 
to discuss some early lessons that appear likely to hold even after we 
refine the analysis.

    (1) If relatively little land shifts from cropland to forestry 
        uses, climate change legislation may have only small effects on 
        crop production and prices. If crop prices are largely 
        unchanged, producers who face higher production expenses are 
        likely to experience a reduction in income, unless they can 
        earn money by selling offsets for practices like conversion to 
        no-till farming methods.

    (2) If more significant amounts of cropland shift to forestry uses, 
        the result would be a larger reduction in crop production. 
        This, in turn, would result in higher crop prices that would 
        increase market revenue for farmers who continue to grow 
        traditional crops. This increase in market revenues could 
        offset some or all of the increase in crop operating expenses.

    (3) If very large amounts of land shift to forestry uses, as 
        suggested in the FASOM analysis, the reduction in crop 
        production could cause very significant increases in crop 
        prices. The resulting increase in market revenue could well 
        exceed any increase in crop operating costs. In such a case, 
        net revenue over operating costs could exceed reference 
        scenario levels, even for producers who do not directly earn 
        any offset income.

    If large shifts in acreage do indeed occur, they would have impacts 
that go far beyond possible effects on crop producer receipts. Higher 
crop prices would increase feed costs for the livestock industry. These 
higher feed costs, in turn, would result in reduced production and 
higher prices of meat and dairy products. Consumer food prices would 
increase, not just for products made from grains and vegetable oils, 
but also for beef, pork, poultry and milk. All else equal, higher crop 
prices would reduce the quantity of agricultural products exported by 
the United States. Forestry uses of land result in different patterns 
of rural employment and economic activity than result from current crop 
production patterns.
    If climate change legislation increases the demand for land to 
sequester carbon in trees, prices for crop and pasture land are likely 
to be bid higher. This would benefit current landowners, but could make 
it more difficult for new and established producers who rent land or 
who were looking to buy additional land to grow traditional crops.
    In addition to possible impacts on crop supplies, climate change 
legislation could have complex effects on the demand for agricultural 
products. Higher energy costs would make it more expensive to process 
and transport food, likely increasing the gap between farm and consumer 
food prices. The demand for biofuels could be affected both by the 
opportunity to earn offset income and by changes in fossil fuel prices. 
Effects of climate change legislation on the macroeconomy could have an 
impact on domestic food demand. Export demand facing U.S. agriculture 
could be affected both by the legislation's impacts on the global 
economy and by the opportunity of foreign producers to earn offset 
income by changing production practices to reduce emissions and 
sequester carbon.
From bills to regulation
    Any analysis being done today about the impacts of climate change 
legislation will be built on a series of assumptions about how the rest 
of the policy process will unfold. Final legislation may differ in 
important ways from the House-passed bill. Many important decisions 
would need to be made in writing rules to implement any legislation 
that is finally approved. It is inevitable that many of the policy 
assumptions underlying analysis today will differ in important ways 
from final implementation of compromise legislation. Just to take one 
critical example, impacts of climate change legislation on the farm 
sector will look very different if implementing rules make it very easy 
to earn offset income by planting trees than if it is difficult.
Climate change and international efforts
    The discussion so far has not focused on climate change itself, 
primarily because I am not an expert on climate change and its 
potential impacts on agricultural production. It has been argued that 
the proposed legislation would have only modest impacts on the world's 
climate over the next few decades. If instead the climate effects are 
large, they might have important impacts on agricultural production and 
prices.
    When examining trade agreements, it is important to distinguish 
effects that result when one country changes its policies from effects 
that result when all countries change policies simultaneously. A 
similar point is relevant here: it is important to be clear whether one 
is reporting changes that result only from proposed U.S. climate change 
legislation, or changes that might result if there is a global 
agreement. The discussion here has focused on U.S. legislation only, 
but it could matter tremendously what actions other countries are also 
taking to address climate change.
    For example, much of the analysis conducted so far assumes that the 
U.S. firms will be able to purchase large amounts of offsets from other 
countries for practices that reduce emissions or sequester carbon. 
Similar policies in other countries could increase competition for such 
offsets. This would tend to increase allowance prices, resulting in 
higher domestic energy costs and more demand for domestic offsets.
Summary
    There is considerable uncertainty over the possible impacts of 
climate change legislation on the U.S. agricultural sector. Here is a 
brief summary of what we think we know and what we do not:

    (1) The House-passed legislation would raise energy costs, and this 
        would translate into higher farm production expenses.

    (2) Just how large the increases in production costs would be is 
        unknown. Alternative sets of reasonable assumptions result in 
        very different estimates of production cost impacts.

    (3) The ability to earn offset income by changing production 
        practices or planting trees or energy crops could have major 
        impacts on agricultural production, commodity prices, farm 
        income, consumer food costs, and rural communities.

    (4) The greater the shift in acreage away from production of 
        traditional crops to trees or energy crops, the larger the 
        potential impact on crop production and prices. Resulting 
        increases in revenues may offset some or all of the increase in 
        production expenses for crop producers.

    (5) Unilateral U.S. changes in climate policy could have very 
        different impacts than if there is a multilateral agreement to 
        reduce greenhouse gas emissions.

    Thank you for your interest in our work.

    The Chairman. Thank you, Doctor. Dr. Antle.

        STATEMENT OF JOHN M. ANTLE, Ph.D., PROFESSOR OF
AGRICULTURAL ECONOMICS AND ECONOMICS, MONTANA STATE UNIVERSITY; 
                     COURTESY PROFESSOR OF
 AGRICULTURAL AND RESOURCE ECONOMICS, OREGON STATE UNIVERSITY; 
    UNIVERSITY FELLOW, RESOURCES FOR THE FUTURE, BOZEMAN, MT

    Dr. Antle. Mr. Chairman and Members of the Subcommittee, 
thank you for this opportunity to appear today and testify 
about the potential impacts of climate change and greenhouse 
gas mitigation on the farm sector and the food industry. My 
name is John Antle. I am a Professor of Agricultural Economics 
and Economics at Montana State University in Bozeman, Montana. 
The following are the main points I would like to emphasize. 
First, agriculture and the food system are likely to be 
impacted substantially by climate change and by policies 
designed to mitigate the effects of greenhouse gas emissions. 
While these sectors are dynamic and have demonstrated 
capability to adapt to change, the economic impacts of climate 
change on agriculture and the food system more broadly are 
likely to be substantial.
    There are many important unanswered questions about the 
ability of agriculture and the food system to adapt to climate 
change, including the effects of policies designed to reduce 
greenhouse gas emissions as my colleagues have been pointing 
out. Second, studies of climate change impacts have likely 
underestimated the impacts of climate change on agriculture and 
the food industry, and have underestimated the importance of 
possible adaptations and mitigating effects of climate change. 
Climate impact assessments of agriculture have been limited in 
scope and relevance because of limitations of the data and the 
models used. Moreover, studies have not measured the cost of 
adaptation or accounted for possible changes in climate 
extremes.
    For example, studies of production agriculture have not 
adequately accounted for impacts of pests and diseases on 
crops, and have not adequately addressed impacts on important 
climate sensitive sectors such as specialty crops, 
horticulture, livestock, poultry, and rangelands. The impacts 
of climate change on transportation infrastructure and the food 
processing industry, and the effects of greenhouse gas 
mitigation policies also have not been studied adequately. 
Third, there is a need for a comprehensive assessment of the 
effects of existing and likely future policies on agricultural 
adaptation. Many existing policies are likely to affect the 
ability of U.S. agriculture and the food sector to adapt to 
climate change, and in my written testimony I provide further 
discussion of these issues.
    Finally, there is a potential important role for the public 
sector to facilitate agricultural adaptation to climate change. 
The substantial role that the public sector has played in 
making investments that led to the success of U.S. agriculture 
in the 20th Century raises a number of questions about the 
appropriate policies in the context of climate change. A key 
question for policy is whether climate change justifies an 
expanded role in these areas or whether markets can stimulate 
adequate responses to the adjustments that will be required as 
the climate changes.
    Again, thank you, Mr. Chairman and Members for this 
opportunity to participate in this panel. I will be happy to 
respond to your questions. I will just conclude by noting that 
in addition to my written testimony, this is related to some 
work that I have been carrying out with an organization here in 
Washington, D.C., Resources for the Future on climate 
adaptation. I think some of that other work might be of 
interest to the Committee. Thank you very much.
    [The prepared statement of Dr. Antle follows:]

 Prepared Statement of John M. Antle, Ph.D., Professor of Agricultural
 Economics and Economics, Montana State University; Courtesy Professor 
    of Agricultural and Resource Economics, Oregon State University;
        University Fellow, Resources for the Future, Bozeman, MT
    Mr. Chairman and Members of the Subcommittee, thank you for this 
opportunity to appear today to testify about the potential impacts of 
climate change on the farm sector. My name is John M. Antle and I am a 
Professor of Agricultural Economics and Economics at Montana State 
University in Bozeman, Montana. I also am a Courtesy Professor of 
Agricultural and Resource Economics at Oregon State University, and a 
University Fellow at Resources for the Future in Washington, D.C. I was 
first involved with research on the economic impacts of climate change 
while serving as a Senior Economist for the President's Council of 
Economic Advisers in 1990, and since then have conducted research on 
climate change impacts and greenhouse gas mitigation in the United 
States and in other regions of the world. I have also served as a Lead 
Author and Contributing Author to the Third and Fourth Assessment 
Reports published by the Intergovernmental Panel on Climate Change.
    My testimony today is a brief summary of a longer publication that 
may be of interest to this Committee, available on the world-wide web 
(www.rff.org/News/Features/Pages/Climate-Change-Forcing-Farmers-to-
Adapt.aspx). That study reviews recent research on economic impacts of 
climate change, and discusses implications for U.S. agriculture's 
potential to adapt to climate change. That report was prepared for a 
research program at Resources for the Future--a nonpartisan research 
organization in Washington, D.C.--on adaptation to climate change in 
agriculture and other sectors of the U.S. economy (http://www.rfforg/
News/ClimateAdaptation/Pages/domestic_home.aspx).
    The following are the main points I would like to emphasize:

   Agriculture and the food system are likely to be impacted 
        substantially by climate change and by policies designed to 
        mitigate the effects of greenhouse gas emissions. While these 
        sectors are dynamic and have demonstrated capability to adapt 
        to change, the economic impacts of climate change on 
        agriculture and the food system are likely to be substantial. 
        There are many important unanswered questions about the ability 
        of agriculture and the food system to adapt to climate change. 
        There are also important, unresolved questions about the 
        effects of policies designed to reduce greenhouse gas 
        emissions.

   Studies of CC impacts have likely underestimated the impacts 
        of climate change on agriculture and the food industry, and 
        thus have underestimated the importance of possible adaptations 
        in mitigating the effects of climate change. Climate impact 
        assessments of agriculture have been limited in scope and 
        relevance because of limitations of the data and models used. 
        For example, studies of production agriculture have not 
        adequately accounted for impacts of pests and diseases on 
        crops, and have not adequately addressed impacts on important 
        climate-sensitive sectors such as specialty crops, 
        horticulture, livestock, poultry and rangelands. The impacts of 
        climate change on transportation infrastructure and the food 
        processing industry, and the effects of greenhouse gas 
        mitigation policies, also have not been studied adequately.

   There is a need for a comprehensive assessment of the 
        effects of existing and likely future policies on agricultural 
        adaptation to climate change. Many existing policies are likely 
        to affect the ability of U.S. agriculture and food sector to 
        adapt to climate change. These include:

     Agricultural subsidy and trade policies which reduce 
            flexibility and have unintended consequences for global 
            markets.

     Production and income insurance policies and disaster 
            assistance. While providing some protection against climate 
            variability and extreme events, to some extent these 
            policies also may reduce the incentive for farmers and 
            ranchers to take adaptive actions.

     Policies encouraging soil and water conservation and 
            provision of ecosystem services. These policies protect 
            water quality and enhance ecosystem services such as 
            wildlife habitat, but also may reduce flexibility to 
            respond to climate change by reducing the ability to adapt 
            land use and to respond to extreme events.

     Environmental policies and agricultural land use 
            regulation, such as regulations for location and disposal 
            of waste from confined animal production facilities, are 
            likely to affect the costs of adaptation.

     Tax policies affect agriculture in many ways, and 
            could be used to facilitate adaptation, for example, 
            through favorable treatment of capital depreciation and 
            investments needed to offset greenhouse gas emissions.

     Energy policies and greenhouse gas mitigation policies 
            are likely to have many impacts on agriculture as a 
            consumer and as a producer of energy. Development of new 
            bioenergy production systems and greenhouse gas offset 
            policies may benefit agriculture and facilitate adaptation. 
            The increased cost of fossil fuels associated with 
            greenhouse gas mitigation policies will adversely affect 
            incomes of farmers in the near term, in the longer term it 
            will have the benefit of encouraging adaptation.

   There is a potentially important role for the public sector 
        to facilitate agricultural adaptation to climate change. The 
        substantial role that the public sector has played in making 
        the complementary investments that led to the success of U.S. 
        agriculture in the 20th century raises a number of questions 
        about appropriate policies in the context of climate change. A 
        key question for policy is whether climate change justifies an 
        expanded role in these areas or whether markets can stimulate 
        adequate responses to the adjustments that will be required as 
        the climate changes. Examples of areas for public activity may 
        be:

     Estimation of adaptation costs and reassessment of 
            impacts.

     Breeding climate-resilient crop and livestock 
            varieties.

     Adaptation of confined livestock and poultry 
            production to climate change and extremes, and development 
            of resilient livestock waste management technologies.

     Impact of climate change on insect pests, weeds and 
            diseases and their management.

     Effects of adaptation strategies on ecosystem services 
            associated with agricultural lands.

     Public information on long-term climate trends.

     Assessing implications of energy policies and 
            greenhouse gas mitigation policies for agriculture and the 
            food sector.
Adaptation and Impact Assessment
    Agricultural production and productivity depend on the genetic 
characteristics of crops and livestock, soils, climate, and the 
availability of needed nutrients and energy. Researchers use crop and 
livestock growth simulation models to analyze the possible impacts of 
climate change and increases in atmospheric carbon dioxide 
(CO2) concentrations (known as CO2 fertilization) 
on crop and livestock productivity. Temperature and precipitation, key 
drivers of agricultural production, operate on the highly site-specific 
and time-specific basis of the microclimate in which a plant or animal 
is located. Aspects of agriculture and food system impacted by climate 
change include:

   Soil and water resources.

   Crop, livestock and poultry productivity.

   Farm structure, income and financial condition.

   Waste management for confined animal production facilities.

   Ecosystem services from agricultural landscapes.

   Food quality and safety.

   Market infrastructure.

   Food processing and distribution.

    Several methodologies have been used to estimate possible impacts 
of climate change on agriculture. Most studies use integrated 
assessment models, which combine process-based crop and livestock 
models that simulate the impacts of climate change on productivity with 
economic models that simulate the impacts of productivity changes on 
land use, crop management, and farm income. Some studies instead use 
statistical models based on historical data to estimate effects of 
temperature and rainfall on economic outcomes, and then use these 
models to simulate future impacts of climate change. Some of these 
integrated assessment models also link the farm management outcomes to 
environmental impact models to investigate impacts such as those on 
water use and quality, soil erosion, terrestrial carbon stocks, and 
biodiversity. The data presented here are derived from the recent U.S. 
assessment of climate change impacts on agriculture (Reilly et al. 
2003), which used an integrated assessment model.
    Research suggests that in highly productive regions, such as the 
U.S. Corn Belt, the most profitable production system may not change 
much; however, in transitional areas, such as the zone between the Corn 
Belt and the Wheat Belt, substantial shifts may occur in crop and 
livestock mix, in productivity, and in profitability. Such changes may 
be positive if, for example, higher temperatures in the northern Great 
Plains were accompanied by increased precipitation, so that corn and 
soybeans could replace the wheat and pasture that presently 
predominate. Such changes also could be negative if, for example, 
already marginal crop and pastureland in the southern Great Plains and 
southeast became warmer and drier. In addition to changes in 
temperature and precipitation, another key factor in agricultural 
productivity is the effect of elevated levels of atmospheric 
CO2 on crop yields. Some studies suggest that higher 
CO2 levels could increase the productivity of small-grain 
crops, hay, and pasture grasses by 50 percent or more in some areas 
(and much less so for corn), although these effects are likely to be 
constrained by other factors, such as water and soil nutrients. 
However, elevated CO2 could also increase weed growth, and 
these adverse effects of climate change have not been incorporated into 
impact assessments.
    According to the U.S. assessment study, the aggregate economic 
impacts of climate change on U.S. agriculture are estimated to be very 
small, on the order of a few billion dollars (compared to a total U.S. 
consumer and producer value of $1.2 trillion). This positive outcome is 
due to positive benefits to consumers that outweigh negative impacts on 
producers. Impacts on producers differ regionally, and the regional 
distribution of producer losses tends to mirror the productivity 
impacts, with the Corn Belt, Northeast, South, and Southwest having the 
largest losses and the northern areas gaining. The overall producer 
impacts are estimated to range from ^4 to ^13 percent of producer 
returns, depending on which climate model is used. Some statistical 
modeling studies have produced estimates of much smaller impacts on 
U.S. agriculture. For example, the study by Deschenes and Greenstone 
(2007) finds positive impacts on the order of 3-6 percent of the value 
of agricultural land and cannot reject the hypothesis of a zero effect.
Limitations of Integrated Assessment and Statistical Models
    There are a number of significant limitations to integrated 
assessment models, as well as the statistical models, as discussed in 
detail in Antle (2009). One critical limitation of these modeling 
studies is the difficulty in quantifying the costs of adaptation. 
Whereas these studies have attempted to quantify the impacts of climate 
change on physical quantities of production and their economic value, 
few, if any, studies have attempted to quantify the costs of adapting 
to climate change. These costs would include adaptations to production 
agriculture, including additional research and development of crop and 
animal varieties, and changes in or relocation of capital investments 
such as crop storage infrastructure, confined animal facilities and 
waste management investments. If the rate of climate change were 
relatively high, implying that the costs of adaptation were also 
relatively high, then the net benefits of adaptation would also be 
lower, and less adaptation would occur. Consequently, contrary to many 
economists' arguments that adaptation is likely to offset much of the 
adverse impacts of climate change, it may be that if the costs of 
adaptation are high, the impact estimates assuming little adaptation 
may be closer to actual outcomes than the estimates that ignore 
adaptation costs.
    In addition to their inherent model limitations, the impact 
assessments cited above do not consider many of the potential impacts 
of climate change on the food transportation, processing, and 
distribution sectors mentioned above. In particular, none of the impact 
assessments has considered the costs of relocating input distribution 
systems, crop storage and processing, or animal production, waste 
management, slaughter and processing facilities. Only recently have 
some studies begun to assess impacts of proposed GHG mitigation 
policies on production agriculture or on input production and 
distribution, output transport, or food processing and distribution 
systems. Recent experience with higher fossil fuel costs suggests that 
these impacts may be more important for farmers and food consumers than 
the impacts of climate on productivity. Thus, by largely ignoring 
possible impacts of future climate change mitigation policies, the 
impact assessments carried out thus far may have missed some of the 
most important long-term implications of climate change.
Policy Issues
    The evidence on likely impacts of climate change on agriculture and 
the food sector suggest two aspects of policy that need to be 
evaluated. First, many existing policies affect agriculture and the 
food sector, and many of these policies are likely to affect 
adaptation. Climate change is not likely to be the focus of many of 
these policies, but it does make sense for policy design to take 
adaptation into consideration. Second, there may be a role for public 
policy in facilitating adaptation of agriculture and the food sector.
Policy Design and Adaptation
    As yet there has not been any systematic effort to evaluate the 
effects of these existing policies on adaptation. Some examples of 
existing policies and their possible effects on adaptation are 
described here.
    Agricultural subsidy and trade policies. Agricultural subsidy 
programs for major commodity crops such as wheat, corn, rice, and 
cotton, as well as trade policies such as the import quota on sugar, 
were established in the 1930s and continue today. The structure of 
these programs has changed over time, but a common feature is that they 
reduce flexibility by encouraging farmers to grow subsidized crops 
rather than adapting to changing conditions, including climate. In 
addition, because the United States produces a large share of many of 
these commodities, these policies have the unintended consequence of 
distorting global markets and discouraging an efficient allocation of 
resources in other parts of the world.
    Production and income insurance policies and disaster assistance. 
There is a long history of both private and public crop and insurance 
schemes for agriculture and disaster relief programs. The most recent 
farm policy legislation, enacted in 2008, continued existing crop 
insurance subsidies, introduced a new revenue insurance program, and 
established a permanent disaster assistance program. These types of 
publicly subsidized crop and income insurance could be one way to 
address increasing climate variability and climate extremes associate 
with climate change. Whether this is an appropriate policy response to 
climate change is an open question that deserves further study. In any 
case, it is clear that public subsidies for crop or revenue insurance 
and disaster assistance, like other types of agricultural subsidies, 
will have the effect of reducing the incentive for farmers and ranchers 
to avoid adverse impacts of climate change through adaptation.
    Soil and water conservation policies and ecosystem services. Over 
time U.S. agricultural policies have shifted from commodity subsidies 
towards a variety of policies that provide subsidies to encourage 
protection of soil and water resources and the provision of ecosystem 
services. For example, the Conservation Reserve Program, established in 
1986 legislation, has led to more than 30 million acres of land being 
taken out of crop production and put into grass and tree cover through 
cost-sharing of conservation investments and long-term contracts 
providing payments to maintain conserving practices. While these 
policies protect surface water quality from soil erosion and chemical 
runoff, and enhance a number of ecosystem services such as wildlife 
habitat, they also reduce flexibility to respond to changes in climate 
over time, by reducing the ability to adapt land use, and also reduce 
the ability to respond to extreme events. For example, according to CRP 
rules farmers are not allowed to use CRP lands for grazing or to 
harvest grasses as animal feed. As a result, when severe droughts 
reduce availability of livestock feed in pasture and rangeland farmers 
are not allowed to use CRP lands for livestock, even though in many 
places this could be done on a temporary basis without substantially 
impacting environmental benefits of the CRP. In some cases the 
Secretary of Agriculture can waive these rules to allow grazing. 
Changes in program design, such as more flexibility in administrative 
rules, and better targeting of the policies towards lands with high 
environmental value, could facilitate adaptation.
    Environmental Policies and Agricultural Land Use. Many 
environmental policies affect agricultural land use and management. 
Policies governing the management and disposal of animal waster from 
confined animal feeding operations are an important example that has 
clear implications for adaptation. Both state and Federal laws regulate 
the choice of sites and management of these facilities. Changes in 
average climate and climate extremes are likely to impact the viability 
of these operations in some locations, for example where waste ponds 
become vulnerable to extreme rainfall events and floods. Environmental 
regulations raise the cost of re-locating facilities and thus have the 
unintended consequence of discouraging spatial adaptation. Including 
benefits of climate adaptation in regulatory design could lead to 
policies that achieve the dual goals of environmental protection under 
current climate and the need for adaptation to future climate.
    Tax Policies. A wide array of tax policies affect agriculture, 
including the taxation of income and the depreciation of assets. Tax 
rules could be utilized to facilitate adaptation in a variety of ways, 
for example, by accelerating the depreciation of assets, and by 
encouraging investments that reduce greenhouse base emissions. However, 
creating such policies for climate adaptation alone may prove difficult 
to implement, since many other types of economic and technological 
changes may also lead to capital obsolescence and it may not be 
desirable to give favorable tax treatment in all such cases.
    Energy Policies. The increasing public interest in developing 
domestic sources of non-fossil based energy, including biofuels, has 
already resulted in significant policy developments, such as subsidies 
for corn ethanol, and is likely to have important implications for both 
food and fuels prices and for adaptation. Further developments in 
biofuels could further change the way land is used for food and fuel 
production and have implications for adaptation, and will be impacted 
by related energy policies, such as requirements for use of renewable 
energy. Development of other types of energy technologies, such as the 
use of animal waste for energy production, may have important impacts 
on the adaptability of these systems and the way they are regulated 
(see the preceding discussion of environmental regulation).
    Greenhouse Gas Mitigation Policies. Policies that constrain 
greenhouse gas emissions have the potential to affect agricultural 
operations as both emitters and as suppliers of offsets to emissions, 
depending on how such policies are designed and implemented. For 
example, recent legislative proposals have imposed some limits on the 
use of offsets, but also have excluded agricultural operations from 
emissions caps. Moreover, because agriculture and the food system are 
relatively intensive fossil fuel users, any policy that effectively 
raises the cost of fossil fuels will have potentially important impacts 
on these industries.
Policies to Facilitate Adaptation
    The record shows that U.S. agriculture's success in the 20th 
century was dependent on complementary investments in physical and 
human capital and agricultural research and extension, many of them 
publicly funded through institutions such as the land grant 
universities. Moreover, complementary policies have fostered the 
conservation of natural resources and the adoption of more sustainable 
management practices. This experience suggests that that the U.S. 
agricultural sector is capable of adapting to a wide range of 
conditions and adopting new technologies as they become available. As 
long as the rate of climate change is relatively slow and predictable, 
we can expect the same to be true with future climate change. However, 
important questions remain about how effectively the sector could adapt 
to rapid changes in average climate or increases in extreme events.
    The substantial role that the public sector has played in 
facilitating agricultural development raises a number of questions 
about appropriate policies in the context of climate change. The 
justification for public funding of infrastructure, research, and 
information systems was based on economies of scale as well as the 
public good aspect of basic research needed to develop agricultural 
technologies. Although a substantial public role remains in 
infrastructure, research, and outreach, it has diminished over time as 
private institutions have become increasingly capable of providing 
these services. A key question for policy is whether climate change 
justifies an expanded role in these areas or whether markets can 
stimulate adequate responses to the adjustments that will be required 
as the climate changes. Some examples of the key questions about 
adaptation and a possible role for public sector involvement follow:

   Estimation of adaptation costs and reassessment of impacts. 
        As noted above, the impact assessments carried out thus far 
        have largely ignored the costs of adaptation for the 
        agricultural production sector and for the broader food 
        industry. Besides biasing the conclusions of the impact 
        assessments, data on costs of alternative adaptation strategies 
        are needed to inform both private and public decision makers. 
        Costs should be evaluated under alternative scenarios for the 
        rate of climate change, climate variability, and the occurrence 
        of extreme events. Thus far, most of the research effort has 
        been devoted to the impact on grain crops. Much more research 
        on impacts and costs of adaptation in other agricultural 
        systems is needed, particularly for livestock and other 
        economically important products, such as vegetable and fruit 
        crops.

   Identifying adaptation strategies and supporting basic 
        research needed for development of adaptation technologies.

     Basic crop and animal research on vulnerability to 
            extremes.

     Breeding resilient crops and livestock varieties.

     Research on effects of climate change on pests and 
            diseases and their management.

     Development of more resilient livestock waste 
            management technologies, incorporation into biofuels 
            production.

   Identifying and estimating the vulnerability of ecosystem 
        services to climate change and adaptive responses. Agricultural 
        land-use practices are known to have important impacts on the 
        provision of ecosystem services. As yet, the impacts of climate 
        change on ecosystem services have not been quantified 
        systematically on a regional or national basis. Research is 
        needed to evaluate the effects of alternative adaptation 
        strategies on ecosystem services.

   Provision of public information about long-term climate 
        trends and their economic implications. There is a great deal 
        of public information available on short-term weather 
        forecasts, but there may be a need for more public awareness of 
        long-term climate trends and forecasts. This information is a 
        public good that may need to be supported with public funds.

   Implications of climate change and mitigation policies for 
        agriculture and the food sector. As yet, virtually no research 
        has been done on identifying and quantifying potential impacts 
        or adaptation strategies for the food sector. Included in such 
        an analysis would be costs of adapting the food distribution 
        system to a warmer climate and potential impacts on the 
        prevalence and control of foodborne pathogens. The dependence 
        of this sector on fossil fuel-based energy also suggests that 
        GHG mitigation policies could have substantial impacts on the 
        national and global food system as it presently operates. As 
        yet, none of these issues has been addressed in impact 
        assessment studies.
References
    Antle, J.M. 2009. Agriculture and the Food System: Adaptation to 
Climate Change. Resources for the Future. www.rff.org/news/
climateadaptation.
    Deschenes, O., and M. Greenstone. 2007. The Economic Impacts of 
Climate Change: Evidence from Agricultural Output and Random 
Fluctuations in Weather. American Economic Review 97(1): 354-385.
    Reilly, J., F. Tubiello, B. McCarl, D. Abler, R. Darwin, K. Fuglie, 
S. Hollinger, C. Izaurralde, S. Jagtap, J. Jones, L. Mearns, D. Ojima, 
E. Paul, K. Paustian, S. Riha, N. Rosenberg, and C. Rosenzweig. 2003. 
U.S. Agriculture and Climate Change: New Results. Climatic Change 57: 
43-69.

    The Chairman. Thank you, Doctor. Dr. Capper.

     STATEMENT OF JUDITH ``JUDE'' L. CAPPER, B.S.c., Ph.D.,
  ASSISTANT PROFESSOR OF DAIRY SCIENCE, DEPARTMENT OF ANIMAL 
       SCIENCES, WASHINGTON STATE UNIVERSITY, PULLMAN, WA

    Dr. Capper. Thank you very much. Mr. Chairman and the 
Members of the Subcommittee, it is a pleasure to be here. 
Obviously, I am from England but I have worked at Washington 
State University for the past 7 months. I would like to start 
by making it clear that our model is an environmental impact 
model as opposed to an economic model per se, but having said 
that as stated in my testimony carbon is the intrinsic 
fundamental unit of energy use. Therefore, if we want to make 
improvements both in economic sustainability and environmental 
sustainability, we have to look at carbon as the intrinsic unit 
of that. Based on that, there is an interesting link between 
economics and environmental impact, and the work that I am 
going to present to you shows that if we improve environmental 
impact by improving productivity then we also improve the 
economic prospects for the farming sector.
    So, as you can see, on the graphs here we have an issue in 
that at present offset programs do not take into account 
productivity as a means to reduce environmental impacts. This 
is, in part, because the environmental impact programs to date 
have concentrated on a process basis per cow, per animal, per 
farm. If we do that, as you can see on the right, the carbon 
footprint per cow has doubled over the last 65 years between 
1944 and 2007, but again this is on a per head basis. If we 
look at it on an output basis as an industry that is meant to 
produce food, produce dairy, per gallon of milk or per pound of 
milk the dairy industry has made huge strides.
    In the U.S. we have cut the carbon footprint of a gallon of 
milk by \2/3\ between 1944 and 2007. This means that as a total 
dairy industry we have cut our total carbon footprint over 
those years by 41 percent, which is a huge achievement and 
something that we should be very, very proud of. As I say, this 
is basically due to huge improvements in productivity. We have 
a four-fold increase in milk yield per cow between 1944 and 
2007. That means compared to 1944, back then we produced 53 
billion kilos of milk per year using almost 26 million dairy 
cows. Now due to improvements in nutrition/genetics management, 
we make 84 billion kilos of milk using only 9.2 million animals 
per year.
    What that means is we have a huge improvement in 
environmental impact. We use 21 percent of the animals, 23 
percent of the feed, 35 percent of the water, and only ten 
percent of the land per gallon or pound of milk now than we did 
65 years ago. What this also has is obvious economic 
consequences to the producer. Less feed, less land, less water, 
less fertilizers, all has huge economic consequences. I would 
like to point out that this also has an impact on the beef 
industry if we go from a pasture-based beef system to a corn-
based beef system. We have a huge improvement in growth rates 
and the animals are grown over about 200 fewer days.
    That means with corn-based it yields more production, a 
more efficient system. We use about a third of the total energy 
to produce that beef. We have a third of total methane 
emissions and we cut land use by a fraction of 13, so again 
less resources, a beneficial environmental impact, and a 
beneficial effect on economics. Finally, this isn't confined 
just to farm level. If we look at the transportation sector 
here we have an example which we presented last month to the 
Cornell nutrition conference comparing buying eggs from a local 
farm, a farmer's market, and a grocery store. Because of the 
huge productivity of the food transport system in the states, 
we can cut our fuel use from 9 liters per dozen eggs if we buy 
individually per farm to only .03 liters per dozen eggs from a 
grocery store.
    So in summary, productivity is extremely important to cut 
both environmental impact and to improve economic 
sustainability. Thank you, and I will be very happy to answer 
any questions.
    [The prepared statement of Dr. Capper follows:]

    Prepared Statement of Judith ``Jude'' L. Capper, B.S.c., Ph.D., 
                               Assistant
 Professor of Dairy Science, Department of Animal Sciences, Washington 
                     State University, Pullman, WA
Summary
    The purpose of U.S. animal agriculture is to produce high quality 
meat, milk and eggs for human consumption. The environmental impact of 
livestock production must therefore be assessed on a whole-system basis 
and expressed per unit of food produced. Improving productivity (output 
per unit of resource input) is a key factor in reducing the 
environmental impact of livestock production. Systems that allow for 
increased milk yield per cow, improved growth rate per beef steer or 
greater quantities of food product to be moved using a single vehicle 
allow for considerable reductions in resource use, greenhouse gas 
emissions and economic cost per unit of food produced. Management 
practices and systems that intuitively appear to be environmentally and 
economically beneficial should therefore be subjected to scientific 
assessment in order to correctly assess their potential for mitigating 
the environmental impact of livestock production.
Introduction
    All food production systems have an impact upon the environment, 
regardless of how and where the food is produced. The environmental 
impacts of agricultural practices are increasingly well-known, not only 
to food producers but also to policy-makers, retailers and consumers. 
Increased public awareness of these issues underlines the critical need 
to adopt livestock production systems that reduce the environmental 
impact of agricultural production. This can be achieved through the use 
of management practices and technologies that encourage environmental 
stewardship at the farm-level, as well as improving transportation 
operations to reduce the eventual environmental and economic cost to 
the consumer. In the following testimony I will discuss the potential 
for improved productivity to mitigate the environmental impact of 
animal agriculture.
Low-Input Production Systems Are, By Definition, Low-Output Production 
        Systems
    The dichotomous challenge of producing more food from a dwindling 
resource base often leads to the suggestion that adopting low-input 
production systems is the key to sustainable agriculture. However, this 
defies a fundamental principle of physics, the First Law of 
Thermodynamics which states that `energy can neither be created nor 
destroyed, it can only change form'. Carbon is the key unit of currency 
of energy use of living organisms. Just as we balance our checkbook 
every month, energy (carbon) inputs and outputs must be balanced 
against each other. By definition, a low-input production system is a 
low-output system. Within livestock production systems, low-output 
systems are characterized by reduced productivity over a fixed time 
period. The following examples will discuss the effects of improved 
productivity manifested as increases in milk yield per day (dairy 
production), growth rate (beef production) and transportation carrying 
capacity (egg production).
Environmental Assessment Must Be Assessed Per Unit of Food Produced
    The purpose of any livestock production system is to provide 
sufficient safe, nutritious, affordable meat, milk or eggs to fulfill 
market demand. In contrast to more uniform manufacturing industries, 
livestock production occurs within myriad different systems that range 
from extensive to intensive; small-scale to large-scale and 
independently owned and managed to contracted production. Environmental 
impact has previously been assessed per acre, per animal or per 
facility. Although this may provide an indication of the impact of 
animal production on a specific geographic region, this fails to 
consider the true aim of the system--to produce food.
    When assessing environmental impact, it is therefore essential to 
express impact per functional unit of food, e.g., resource use and 
waste output per lb, kg or gallon of product (Schau and Fet, 2008). 
Thus, greenhouse gas (GHG) emissions should not be simply assessed as 
per animal or per facility but based on system productivity using a 
lifecycle assessment (LCA) approach. Prescribed by the EPA, LCA 
incorporates all inputs and outputs within food production and allows 
valid comparisons to be made between systems. For example, it is 
intuitively obvious that a 50 cow dairy will have lower annual methane 
emissions compared to a 500 cow dairy. However, the 500 cow dairy will 
produce more milk both per facility (as a consequence of the increased 
number of animals) but also, according to a recent USDA-NAHMS report 
(USDA, 2007) an extra 1,152 kg milk per cow annually. Greater 
productivity is associated with both physical and financial economies 
of scale, but also with a reduction in environmental impact through the 
`dilution of maintenance' effect (Bauman et al., 1985).
The `Dilution of Maintenance' Effect
    All animals require a daily amount of maintenance nutrients to 
maintain weight, bodily functions and health. This `fixed cost' must be 
met before production (growth, pregnancy or lactation) can occur and is 
fulfilled by primary (feed, water) and secondary (cropland, fertilizer, 
fossil fuels) resource inputs. It is also associated with a proportion 
of the animal's daily waste and GHG output. To use dairy cows as an 
example, `dilution of maintenance' occurs when output (milk yield per 
cow) is increased, thus diluting the maintenance cost over more units 
of production and improving efficiency. This effect is not simply 
confined to lactating cows: the national herd also contains a 
considerable number of non-productive animals (non-lactating cows, 
replacement heifers and bulls) that serve to maintain the dairy herd 
infrastructure and require maintenance nutrients. Improving 
productivity thus improves efficiency and reduces the total population 
size required to produce a set amount of milk. Consequently it reduces 
both resource use and GHG emissions per unit of milk produced.
Improving Productivity (Milk Yield) Reduces the Dairy Industry's 
        Environmental Impact
    The effect of improved productivity on the environmental impact of 
producing a set quantity of milk is perhaps best illustrated by 
comparing U.S. dairy production in 1944 compared to 2007 (Capper et 
al., 2009b). The agrarian vision of U.S. dairy farming involves cows 
grazing on pasture with a gable-roofed red barn in the background--a 
traditional low-input system. By contrast, the image of modern dairy 
production propounded by anti-animal agriculture activists is 
synonymous with ``filthy and disease-ridden conditions'' and 
``industrialized warehouse-like facilities that significantly increase 
GHG emissions per animal'' (Koneswaran and Nierenberg, 2008). It is 
indeed true that modern dairy cows produce more GHG emissions than 
their historical counterparts. Figure 1 shows that daily GHG emissions 
per cow (expressed in CO2-equivalents, the standard measure 
for expressing carbon emissions) have increased considerably over the 
past 65 years. The average dairy cow now produces 27.8 kg of 
CO2-equivalents per day compared to 13.5 kg CO2-
equivalents per day in 1944 (Capper et al., 2009b). However, expressing 
results on a `per cow' basis fails to consider system productivity. 
When analyzed using LCA on a whole-system basis, GHG emissions per kg 
of milk produced have declined from 3.7 kg in 1944 to 1.4 kg in 2007, a 
63% reduction. This has been achieved through considerable improvements 
in productivity conferred by advances in animal nutrition, genetics, 
welfare and management. Annual milk yield per cow more than quadrupled 
between 1944 (2,074 kg) and 2007 (9,193 kg), allowing 59% more milk 
(84.2 billion kg vs. 53.0 billion kg) to be produced using 64% fewer 
lactating cows (9.2 million versus 25.6 million).
    The resource use and waste output per unit of milk for 1944 and 
2007 production systems are shown in Figure 2. The 4.4-fold increase in 
productivity (milk yield per cow) drove a 79% decrease in total animals 
(lactating and dry cows, heifers, mature and adolescent bulls) required 
to produce 1 billion kg of milk. Feed and water use were reduced by 77% 
and 65% respectively. The total land required for milk production in 
2007 was reduced by 90% compared to 1944, due to both improved crop 
yields and the shift from feeding pasture to nutritionally-balanced 
diets based on silage, hay and concentrate feeds. Manure output from 
the modern system was 76% lower than from the 1944 system, contributing 
to the aforementioned 63% decrease in the carbon footprint per unit of 
milk. In consequence, the carbon footprint of the entire dairy industry 
was reduced by 41% by the adoption of technologies and modern 
management practices that improved productivity between 1944 and 2007.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Figure 1. Carbon Footprint per Cow and per Kilogram of Milk for 
        1944 and 2007 U.S. Dairy Production Systems (Capper et al., 
        2009).

    The U.S. dairy industry has led the major global dairy regions in 
terms of productivity since 1960 (FAO, 2009). The average U.S. dairy 
cow produced 9,219 kg milk per year in 2007. By contrast, the average 
annual yield for the top six milk-producing counties in Europe was 
6,362 kg milk per year, while annual production in New Zealand and 
Canada averaged 3,801 kg milk/cow and 8,188 kg milk/cow respectively 
(FAO, 2009). On a comparative basis, this meant that for every one 
dairy animal in the USA in 2007, Canada required 1.1 animals, Europe 
required 1.4 animals and New Zealand required 2.4 animals to maintain a 
similar milk supply (Figure 3, Capper et al., 2009a). This clearly 
demonstrates the important of improving productivity in reducing the 
number of dairy animals required to produce a set amount of milk, 
therefore reducing total resources and GHG emissions associated with 
milk production.
    Within any milk production system, a relatively minor increase in 
productivity will have a major environmental mitigation effect. Simply 
increasing the average U.S. dairy cow's daily milk yield from 29.5 kg 
to 34 kg would reduce the dairy population required to fulfill the 
market demand for milk by 12% (Capper et al., 2008). This would reduce 
the GHG emissions per billion kg of cheese by 1,173,000 metric tonnes--
equivalent to taking 246,900 cars off the road or planting 184 million 
trees. This improvement in productivity would also equate to a 
significant improvement in economic sustainability for the producer. 
Fetrow (1999) discusses a similar improvement in productivity conferred 
by the use of the technology recombinant bovine somatotropin (rbST) and 
concludes that a 50% return on investment can be gained. Furthermore, 
as noted by Alvarez et al. (2008), improvements in productivity are 
intrinsically linked to economic and labor efficiencies. 

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Figure 2. 2007 U.S. Milk Production, Resource Use and Emissions 
        Expressed as a Percentage of the 1944 Production System 
        (Adapted from Capper et al., 2009).
Improving Productivity (Growth Rate) Reduces the Environmental Impact 
        of Beef Production
    Mirroring improvements in dairy productivity over time, the average 
beef-carcass yield per animal has increased over the past 30 years from 
266 kg in 1975 compared to 351 kg in 2007 (USDA, 1976; USDA/NASS, 
2008). It appears that slaughter weight has reached a plateau beyond 
which the processor is unwilling to venture. However, improving 
productivity by increasing growth rate confers considerable potential 
as a mechanism to reduce the environmental impact of beef production. 
As previously described, all animals have a basic requirement for daily 
maintenance nutrients to maintain health and body tissues. As growth 
rate increases, fewer days are required to grow the animal to slaughter 
weight, thus saving maintenance nutrients and associated resource 
inputs. 

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        Figure 3. Dairy Animals (Cows, Heifers and Bulls) Required to 
        Produce One Billion kg of Milk in 2007 (Capper et al., 2009a).

    According to Capper et al. (2009a) finishing beef steers on pasture 
takes 438 days, compared to 237 days to finish identical animals on 
corn-based diets. This is due to the lower growth rate conferred by 
pasture-based diets. In combination with increased daily GHG emissions 
and energy use by animals fed pasture-based diets, the extra 201 days 
of maintenance nutrients results in a threefold increase in total 
energy use and methane emissions to finish the pasture-fed steer. To 
supply the extra maintenance nutrients required, 13 more land is 
required to finish a pasture-fed beef steer than a corn-fed steer. 
These results are in agreement with modeling simulations of beef 
production systems published by researchers at Iowa State University 
(Lawrence and Ibarburu, 2007), and with the suggestion by Avery and 
Avery (2007) that pharmaceutical technologies used to improve growth 
rate in beef animals have positive environmental and economic effects. 
Furthermore, Acevedo et al. (2006) analyzed the economic implications 
of differing productivity in conventional (grain-fed), grass-fed and 
organic beef production systems and concluded that the conventional 
system, with its high growth rate, was the most economically-beneficial 
to the producer.
Productivity Plays a Key Role in Reducing the Environmental Impact of 
        Food Transportation
    Transportation represents a relatively minor component of the total 
environmental impact of food animal production with the major component 
occurring during the on-farm production phase (Berlin, 2002; Steinfeld 
et al., 2006). Nonetheless, the productivity (in this situation defined 
as the quantity of food product moved over a specific distance) of the 
transport system has a major effect upon the total environmental impact 
attributed to transportation. In response to the current tendency to 
use `food miles' as an indicator of environmental impact, three 
scenarios were developed by Capper et al. (2009a) to model the 
transport of a dozen eggs from the point of production to the 
consumers' home. The three scenarios were as follows: (1) the local 
chain grocery store supplied by a production facility with eggs 
traveling a total distance of 805 mi; (2) a farmer's market supplied by 
a source much closer than the grocery store's source; (total distance 
traveled 186 mi) or (3) directly from a local poultry farm (total 
distance traveled 54 mi). Intuitively it would seem that buying eggs 
directly from a local poultry farm would be the situation with the 
lowest environmental impact. However, the grocery store eggs, which 
traveled the furthest distance, were shown to have lowest fuel 
consumption per dozen eggs (0.56 liters), buying eggs from the local 
farm had the highest fuel use (9.12 liters per dozen eggs) and the 
farmer's market eggs were intermediate between the other two scenarios. 
The high energy efficiency of the grocery store system can be 
attributed to its reliance on tractor-trailers that have a capacity of 
23,400 dozen eggs--a huge increase in productivity compared to the 
other two scenarios. Again, it is clear that productivity has a 
significant impact, not simply upon resource use and consequent 
environmental impact; but, given the current financial situation, on 
the economic sustainability of the food transport system.
Conclusion
    The global population is predicted to increase to 9.5 billion 
people in the year 2050 (U.S. Census Bureau, 2008). Total food 
requirements will increase by 100% (Tilman et al., 2002) as a function 
of both the 50% increase in population and the additional global demand 
for animal protein as people in developing countries become more 
affluent (Keyzer et al., 2005). The resources available for 
agricultural production are likely to decrease concurrently with 
population growth due to competition for land and water and depletion 
of fossil fuel reserves. To continue to produce sufficient milk, meat 
and eggs for future domestic and export markets in an environmentally 
and economically sustainable manner it is essential to examine the 
entire food production system and to make judgments based on 
productivity, expressed per unit of food. There can be no doubt that 
improving productivity, whether as part of on-farm production or 
further down the transportation chain has a considerable effect upon 
total environmental and economic impact.
References Cited
    Acevedo, N., J.D. Lawrence, and M. Smith. 2006. Organic, Natural 
and Grass-Fed Beef: Profitability and constraints to Production in the 
Midwestern U.S., Iowa Beef Center, Iowa State University, Ames, IA.
    Alvarez, A., J. del Corral, D. Solis, and J.A. Perez. 2008. Does 
intensification improve the economic efficiency of dairy farms? Journal 
of Dairy Science 91: 3693-3698.
    Avery, A., and D. Avery. 2007. The Environmental Safety and 
Benefits of Pharmaceutical Technologies in Beef Production, Hudson 
Institute, Center for Global Food Issues, Washington, D.C.
    Bauman, D.E., S.N. McCutcheon, W.D. Steinhour, P.J. Eppard, and 
S.J. Sechen. 1985. Sources of variation and prospects for improvement 
of productive efficiency in the dairy cow: a review. Journal of Animal 
Science 60: 583-592.
    Berlin, J. 2002. Environmental life cycle assessment (LCA) of 
Swedish hard cheese. International Dairy Journal 12: 939-953.
    Capper, J.L., R.A. Cady, and D.E. Bauman. 2009a. Demystifying the 
environmental sustainability of food production. In: Proceedings of the 
Cornell Nutrition Conference, Syracuse, NY.
    Capper, J.L., R.A. Cady, and D.E. Bauman. 2009b. The environmental 
impact of dairy production: 1944 compared with 2007. Journal of Animal 
Science 87: 2160-2167.
    Capper, J.L., E. Castaneda-Gutierrez, R.A. Cady, and D.E. Bauman. 
2008. The environmental impact of recombinant bovine somatotropin 
(rbST) use in dairy production. Proceedings of the National Academy of 
Sciences 105: 9668-9673.
    FAO. 2009. FAOSTAT. http://faostat.fao.org/. Accessed: 09/04/2009.
    Fetrow, J. 1999. Economics of recombinant bovine somatoptropin use 
on U.S. dairy farms. AgBioForum 2: 103-110.
    Keyzer, M.A., M.D. Merbis, I.F.P.W. Pavel, and C.F.A. van 
Wesenbeeck. 2005. Diet shifts towards meat and the effects on cereal 
use: can we feed the animals in 2030? Ecological Economics 55: 187-202.
    Koneswaran, G., and D. Nierenberg. 2008. Global farm animal 
production and global warming: impacting and mitigating climate change. 
Environmental Health Perspectives 116: 578-582.
    Lawrence, J.D., and M. Ibarburu. 2007. Economic Analysis of 
Pharmaceutical Technologies in Modern Beef Production in a Bioeconomy 
Era, Iowa State University.
    Schau, E.M., and A.M. Fet. 2008. LCA studies of food products as 
background for environmental product declarations. International 
Journal of Life Cycle Assessment 13: 255-264.
    Steinfeld, H. et al. 2006. Livestock's Long Shadow--Environmental 
Issues and Options, Food and Agriculture Organization of the United 
Nations, Rome.
    Tilman, D., K.G. Cassman, P.A. Matson, R. Naylor, and S. Polasky. 
2002. Agricultural sustainability and intensive production practices. 
Nature 418: 671-677.
    U.S. Census Bureau. 2008. Total Midyear Population for the World: 
1950-2050. http://www.census.gov/ipc/www/idb/worldpop.html. Accessed: 
July 2009.
    USDA. 1976. Livestock Slaughter Annual Summary 1975, USDA, 
Washington, D.C.
    USDA. 2007. Dairy 2007, Part I: Reference of Dairy Cattle Health 
and Management Practices in the United States, 2007, USDA-APHIS-VS, 
Fort Collins, CO.
    USDA/NASS. 2008. Livestock Slaughter 2007 Summary, USDA, 
Washington, D.C.
                               Attachment

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    The Chairman. Thank you, Dr. Capper. Mr. Pottorff.

   STATEMENT OF RICHARD C. POTTORFF, CHIEF ECONOMIST, DOANE 
                ADVISORY SERVICES, ROCHESTER, MN

    Mr. Pottorff. Good afternoon. Thank you for the invitation 
to participate in today's hearing. My name is Richard Pottorff 
and I am Chief Economist for Doane Advisory Services. The focus 
of our study was on the cost of production. We didn't look at 
potential revenue gain from the sale of carbon offsets or the 
impacts that may result from land moving out of crop production 
that was not considered. Nor were costs for transporting goods 
to and from farms, possible increases in the cost of food or 
feed processing distribution, or other off-farm costs 
evaluated.
    Several studies, including those from government sources, 
showed the adoption of a climate change bill being considered 
in the spring of 2008 would result in higher energy prices. 
Energy prices are a major factor in the cost of producing 
crops. Production costs are impacted directly raising the cost 
of diesel fuel, gasoline, propane, electricity, and all the 
other things that farmers use to produce and harvest crops and 
store them. Production costs are also impacted indirectly. 
Natural gas is a critical factor in the production of nitrogen 
fertilizers which is a key crop nutrient. To meet the 
objectives of this study, we first estimated the relationships 
between the energy prices and the various components of 
production, per acre production costs.
    The per acre production costs were based on USDA's cost and 
return budgets at the national level for the eight major crops. 
The data were extended using USDA's forecast for 2008, 2009, 
and then using the energy price forecast provided by EPA and 
the Energy Information Administration. We projected those 
production costs out through 2020. The alternative scenarios 
were then looked at to evaluate what the changes in energy 
prices would have on the cost of producing the major crops. The 
alternative scenarios were based on the productions from the 
Environmental Protection Agency's analysis of the Lieberman-
Warner Climate Security Act of 2008.
    The alternative scenarios used in this study covered a wide 
range of possible impacts on energy prices. One scenario 
included in the EPA study assumed that substantial growth in 
nuclear power and biofuels would mitigate the impact on energy 
prices. Under this scenario, natural gas prices were up 35 
percent in 2020 compared to the baseline and crude oil prices 
were 27 percent higher. A second scenario was developed based 
on assumptions that nuclear power and biomass power production 
did not exceed the growth in the baseline scenario by 2020. In 
this scenario, natural gas prices were up 50 percent compared 
to those in the baseline and crude oil prices were up by 37 
percent.
    The third alternative used for the evaluation assumed that 
the nuclear power and the biomass production did not exceed the 
baseline levels, and that carbon capture and sequestration 
technology did not become commercially available until after 
2020. Natural gas prices and crude oil prices were up by 71 
percent and 52 percent, respectively, using this set of 
assumptions. The higher energy cost boosted crop production 
costs on a per acre basis by a range from $40 to $79 for corn, 
$11 to $20 an acre for soybeans, $25 to $48 an acre for cotton, 
$80 to $153 an acre for rice, and $16 to $32 for wheat. Added 
together, these increased production costs in 2020 ranged from 
a range of $6 billion on the low side to $12 billion on the 
high side compared to the baseline.
    A subsequent study evaluating the impact of higher energy 
prices on the U.S. livestock sector was undertaken. Using these 
same three scenarios, and assuming that the higher cost of 
producing crops was passed along as higher feed cost for 
livestock producers, livestock production cost for dairy, hogs, 
and cattle would increase by a total of $2.5 billion to $5 
billion by 2020 compared to the baseline. Our studies were 
completed using energy price forecasts based on the Lieberman-
Warner bill that was considered in the spring of 2008.
    Government agencies have produced new reports with very 
different results based on the Waxman-Markey bill that passed 
the House of Representatives. The new EPA study showed 
dramatically different impacts on energy prices. The most 
recent study show natural gas prices up only modestly by 2020, 
even as caps are put on greenhouse gas emission. The 
determination of the level of the increase in energy prices as 
a result of climate change legislation is critical in 
determining the impact on farmers' crop production cost. Last 
year's EPA study showed big increases in energy prices and this 
year's study show very modest increases.
    Other studies show significantly larger energy price 
impacts. Assumptions about these energy shifts, such as 
shifting from coal to natural gas for electricity generation, 
assumptions about the expansion in nuclear energy, or the 
assumptions about the gains in energy use technologies will all 
have huge implications on the estimates of cost of producing 
the crops for America's crop producers. Thank you.
    [The prepared statement of Mr. Pottorff follows:]

   Prepared Statement of Richard C. Pottorff, Chief Economist, Doane 
                    Advisory Services, Rochester, MN
    Good morning. Thank you for the invitation to participate in 
today's hearing. My name is Richard Pottorff and I am Chief Economist 
for Doane Advisory Services. Doane is an information company that 
provides economic information, analysis and forecasts to the 
agriculture industry. The company is headquartered in St. Louis, 
Missouri, and is a part of Vance Publishing Company.
    About 18 months ago, we were commissioned to conduct a study 
designed to measure the impact that proposed climate change legislation 
would have on production costs for U.S. crop producers. The study, 
titled ``An Analysis of the Relationship Between Energy Prices and Crop 
Production Costs'', was completed in May of 2008. The focus of the 
study was on costs of production. Potential revenue gains from the sale 
of carbon offsets or the impacts that may result from land moving out 
of crop production were not considered. Nor were costs for transporting 
goods to and from farms, possible increases in costs of food or feed 
processing, distribution, or other off-farm costs evaluated.
    Several studies, including those from government sources, showed 
that adoption of the climate change bill being considered in the spring 
of 2008 would result in higher energy prices. Energy prices are a major 
factor in the cost of producing crops. Production costs are impacted 
directly, raising expenditures for diesel fuel, gasoline, electricity, 
propane, and natural gas used by farmers to produce and harvest crops. 
Production costs are also boosted indirectly. Natural gas is a critical 
factor in the production of nitrogen fertilizers--a key crop nutrient.
    To meet the objectives of the study, we first estimated the 
relationship between energy prices and the various components of per 
acre crop production costs. Production costs vary significantly from 
region to region, and even from farm to farm. The per acre production 
costs were based on USDA Costs and Return budgets at the national 
level. The data were extended for 2008 and 2009 using USDA forecasts, 
and the production costs were projected through 2020 based on the 
estimated relationships between production costs and energy prices. 
Energy price forecasts used came from USDA and the Energy Information 
Administration. Once this ``baseline'' was established, we evaluated 
the energy price impacts under various scenarios using the statistical 
relationships. Alternative scenarios were based on projections from the 
Environmental Protection Agency's analysis of the Lieberman-Warner 
Climate Security Act of 2008.
    The alternative scenarios used in this study covered a wide range 
of possible impacts on energy prices. One scenario included in the EPA 
study assumed substantial growth in nuclear power and widespread 
international action. Under this scenario, natural gas prices were up 
35 percent in 2020 compared to the baseline and crude oil prices were 
27 percent higher. A second scenario was developed based on assumptions 
that nuclear power and biomass power production did not exceed growth 
outlined in the baseline scenario by 2020. In this scenario, natural 
gas prices were up 50 percent compared to those in the baseline and 
crude oil prices were 37 percent higher. The third alternative used for 
evaluation assumed nuclear power and biomass production do not exceed 
baseline levels and carbon capture and sequestration technology does 
not become commercially available until after 2020. Natural gas prices 
and crude oil prices go up by 71 percent and 52 percent, respectively, 
under this set of assumptions.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    A subsequent study evaluating the impact of higher energy prices on 
the U.S. livestock sector was undertaken. Using the same three 
scenarios, and assuming that the higher costs for producing crops were 
passed along as higher feed costs for livestock producers, livestock 
production costs for dairy, hogs, and cattle would increase by a total 
$2.5 billion and $3.5 billion in 2020 compared to the baseline.
    Our studies were completed using energy price forecasts based on 
the Lieberman-Warner bill that was under consideration in the spring of 
2008. Government agencies have produced new reports with very different 
results based on the Waxman-Markey bill that passed the House of 
Representatives. The new EPA studies show dramatically different 
impacts on energy prices. The more recent studies show natural gas 
prices up only modestly by 2020, even as caps are put on greenhouse gas 
emissions.
    This determination of the level of increase in energy prices as a 
result of climate change legislation is critical in determining the 
impact on farmer's crop production costs. Last year's EPA studies 
showed big increases in energy prices in stark contrast to this year's 
results. Other studies show significantly larger energy price impacts. 
As an example, the midpoint of the high and low scenarios by the 
National Association of Manufactures is near a 40 percent increase in 
natural gas prices in 2020. Assumptions about energy shifts, such as 
shifting from coal to natural gas, assumptions about the expansion of 
nuclear energy, and assumptions about gains in energy use efficiencies 
will have huge implications for the estimates of changes in production 
costs for America's crop producers.

    The Chairman. Thank you, sir. Dr. Westhoff, we are all 
aware of what the FAPSIM model shows, and the fact that EPA 
utilized it in their analysis or determining the impacts of 
H.R. 2454, but do you believe that such land shifts are likely 
to happen, and what would carbon prices need to be for a land 
to move out of crop production into trees?
    Dr. Westhoff. Well, I very deliberately highlighted that as 
a major source of uncertainty that we are trying to conduct 
ourselves right now. I will say that my own personal impression 
is that the kind of shifts talked about in the EPA analysis do 
seem to be on the high side today. But, I also can't pretend we 
fully had a chance to look at all the possible stories that 
might unfold as people respond to, the possibility for any 
large amounts of money from carbon offsets. We have started to 
look at some other scenarios that look at more modest changes 
and shifts in acreage that might occur, and we find that the 
sort of qualitative results I talked about this morning hold 
even if the shifts in acreage are not anywhere nearly as large 
as in the analysis done for EPA.
    The Chairman. Thank you. Dr. Capper, your testimony was 
very interesting, Mr. Goodlatte and I, think it is very helpful 
to a hearing we are going to be having next week, so thank you 
so much for that. But what is your sense of the economics of 
methane digesters in dairy and beef operations and what will it 
take for more digesters to be installed?
    Dr. Capper. I think that is a great question. I think the 
main issue we have with the methane digesters are that they are 
not a size neutral technology so they may be ideal, for 
example, on a farm with 1,000 cows or 2,000 cows, but on a farm 
with 50 cows at the moment, the economics aren't there to make 
them economically viable.
    The Chairman. So the economics where the Ranking Member and 
I come from, the Midatlantic and the Northeast, probably would 
not be economically viable.
    Dr. Capper. Absolutely. Yes, absolutely.
    The Chairman. Mr. Pottorff, is your organization currently 
working to update the 2008 study?
    Mr. Pottorff. We are not at the moment. We haven't been 
commissioned to do that.
    The Chairman. Thank you. The chair recognizes the Ranking 
Member, the gentleman from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. Dr. Capper, I want 
to join the Chairman in commending you for the interesting 
information you have provided us. What policies can Congress 
pursue that will achieve the goal of reduction in greenhouse 
gases without disrupting farm input costs and farm income?
    Dr. Capper. As I said in my testimony productivity appears 
to be absolutely key. If we can improve milk yield per cow, for 
example, we count the number of animals----
    Mr. Goodlatte. What can Congress do about that?
    Dr. Capper. So, therefore, we need to keep in place the 
tools and the management practices that allow us to do that 
whether that----
    Mr. Goodlatte. Those are mostly developed in the private 
sector, are they not?
    Dr. Capper. Absolutely. Yes, they are.
    Mr. Goodlatte. And could there be significant GHG 
reductions just from additional research and development?
    Dr. Capper. Absolutely there could. That is important, but 
again we have to consider productivity as the main factor.
    Mr. Goodlatte. But the research that we do provide some 
assistance for could help to increase productivity?
    Dr. Capper. Of course. Yes. Absolutely. Absolutely.
    Mr. Goodlatte. So that type of approach as opposed to the 
sale of credits and so on might bear more effect on 
productivity than a cap-and-trade arrangement.
    Dr. Capper. Yes. Absolutely.
    Mr. Goodlatte. What do you believe the environmental impact 
would be of shifting more agriculture production overseas? If a 
farmer can't comply with cap-and-trade requirements and the 
cost of doing business rises. If it is found to be cheaper to 
distributors and food processors, and so on, to import more 
food, would that not have the effect of actually increasing 
greenhouse gas emissions; since American producers are 
generally more efficient, as you demonstrated in your chart, 
than the impact of shifting the production to other places and 
the transportation costs of transporting those agricultural 
products further and further away from the end consumers?
    Dr. Capper. Yes. Absolutely. Transportation is a fairly 
minor component compared to what comes from the cow, but there 
is absolutely not doubt that as a U.S. dairy industry we are 
highly efficient and we have a really low environmental impact 
compared to other countries, again, as in the testimony.
    Mr. Goodlatte. Thank you. Dr. Outlaw, you mentioned in your 
testimony that not all of the representative farms that you 
discussed could participate in offset projects. Did any of 
these representative farms have higher cash reserves at the end 
of the period?
    Dr. Outlaw. Yes. There were a number of them that would see 
benefits from higher prices. That is the question that Pat was 
asked earlier. If there are land shifts to afforestation, for 
example, then some of the cropland will go out and prices will 
rise, and that is driving more the results in than the carbon 
part of our analysis. The actual selling carbon offsets 
performed--only averaged a little over $10,000 per farm per 
year. So most of the ones that were better off were because of 
price impacts.
    Mr. Goodlatte. And that, of course, is borne by the 
consumer, is that not correct?
    Dr. Outlaw. Absolutely.
    Mr. Goodlatte. So, as with so many other aspects of cap-
and-trade, whether it is a utility company or some other 
entity, some of the ability to sustain this is by their ability 
to transfer those costs to others and ultimately that burden 
can fall on the consumer.
    Dr. Outlaw. Correct. And the ranches that we analyzed, we 
didn't assume they were eligible, which at some locations they 
would very well be, but we didn't assume for this analysis but 
they are made much worse off because of the higher feed costs.
    Mr. Goodlatte. Did any of the representative farms that did 
have offset projects end up with lower cash reserves?
    Dr. Outlaw. Yes. Yes, they did.
    Mr. Goodlatte. Can you explain that?
    Dr. Outlaw. Well, in a lot of cases, for example, in the 
dairies our assumption was 500 cows or more to put in a methane 
digester, but not in all cases is that a financially sound 
move. They were actually well worse off by trying to sell 
program credits by doing this and selling electricity than they 
would have been otherwise.
    Mr. Goodlatte. And finally to Dr. Westhoff, your testimony 
gives several scenarios that there is a shift of crop acres to 
trees. If there is a large shift as expected by the EPA, how 
will this change the structure of agriculture? Could this drive 
farmers and ranchers out of business?
    Dr. Westhoff. Well, you definitely have impacts that will 
be worldwide in their nature. I mean we would be talking about 
shifting a lot of agricultural production out of the U.S., 
which would have impacts on everything from the farmer to the 
processor to the consumer. We do think it would have impacts on 
things like rental rates that farmers have to pay for land and 
the cost of land itself. If you are a landowner, this might be 
a very good thing. For someone who has to rent land for a 
living, it might not be such a good thing.
    Mr. Goodlatte. And from a homeland security perspective 
since that has been raised at this hearing earlier it would 
make us more dependent on foreign sources of food, would it 
not?
    Dr. Westhoff. It would mean that we would have less exports 
and that is certainly true.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentlewoman from South Dakota.
    Ms. Herseth Sandlin. Thank you, Mr. Chairman. I thank you 
and the Ranking Member for this hearing and the witnesses for 
their testimony. Dr. Antle, I would like to pose my questions 
to you and then the other witnesses can certainly add their 
perspectives. As it relates to your testimony with regard to 
the way that a robust public investment in agriculture in the 
20th century led to such great advancements in agriculture and 
technology. I know some of the questioning here today, 
particularly of Dr. Glauber, focused on the state of the 
climate science, what the best approach to addressing 
greenhouse gas emissions would be in terms of a policy matter 
of cap-and-trade versus some other system. But, separate from 
that if we just accept that there have been climate changes 
regardless of what has caused it, and its impacts on 
agriculture, in your opinion what is the best role for the 
public sector in facilitating agricultural development in the 
transition to a new energy economy? Where can Federal resources 
best be targeted to provide the greatest benefit to help 
agriculture adapt to changes in climate?
    Dr. Antle. Well, thank you for that question. Good 
question. I think perhaps like my colleague has suggested 
increasing investments in productivity are important, but I 
would point out that an important caveat there is that just 
raising productivity doesn't reduce emissions. It reduces 
emissions per unit of output but of course not overall 
emissions, and hence the idea of cap-and-trade type policy. But 
to better facilitate adaptation, we need to do a better job of 
understanding the range of possible impacts, hence in my 
testimony some of the comments about, for example, looking in 
more detail at the potential impacts of extreme climate events, 
for example, and how that would impact agriculture, and then 
also, really, how agriculture is going to be organized 
spatially. If we do see continuing changes in climate like we 
have been seeing agriculture is, in a sense, going to move 
around, and there are potentially important questions about how 
that will happen.
    For example, the livestock industry. Relocating livestock, 
confined animal production, could be a real challenge given the 
regulatory environment we have and other issues. So, we need to 
look more broadly. The studies that have been done so far have 
really focused on grain production and sort of major commodity 
production, and that is largely because that is where we have 
models to simulate effects of climate. But a lot of other areas 
of agriculture are, of course, just as important.
    And another thing that the studies have tended to over 
emphasize are costs of adaptation. When you look at these 
studies what you see is that in fact there has been a lot of 
emphasis on what are the benefits of adaptation with very 
little attention to what are the potential costs of adaptation, 
and that, of course, tends to bias the results. So, we need to 
think more carefully about where we think agriculture is headed 
in the future, impacts on the various parts of agriculture, not 
just grain crop production, and how research could help 
mitigate the impacts and facilitate the adaptations.
    Ms. Herseth Sandlin. I appreciate that response. Any 
thoughts as it relates to domestic biofuels production? I 
understand the focus on grain because the models are there, but 
it is also because grain production, at least for grain-based 
ethanol production. What about, for example, some of the 
research that maybe you are doing, that folks at South Dakota 
State University are doing as it relates to cover crops in 
addition to other farming practices, or the investments that we 
have made in the past as it relates to providing the foundation 
for seed technology that, again, goes not just to productivity 
but perhaps meeting our domestic biofuels needs as well.
    Dr. Antle. Definitely, there are a lot of opportunities 
there also with confined animal, waste management. USDA has 
some real breakthroughs there, so, yes, I think there are a lot 
of opportunities.
    Ms. Herseth Sandlin. Well, I appreciate your focus on what 
is going to happen spatially. I found your written testimony 
very interesting as it relates to what may happen to the Corn 
Belt versus Northern Great Plains and, again, how that affects 
both grain production as well as livestock production. Any 
other witnesses--my time is up, and I know we have votes, so if 
any of you want to respond to those questions if you could do 
so in a written submission, I would appreciate it. Thank you, 
Mr. Chairman.
    The Chairman. The chair thanks the gentlewoman. The 
gentleman from Pennsylvania.
    Mr. Thompson. Thank you, Mr. Chairman, and I thank the 
panel for your testimony. Dr. Westhoff, you talked about, in 
your testimony and your remarks, about crop production 
patterns, and it was referenced early we certainly have 
concerns about food security in the future. I think that is a 
huge risk for us to be depending on other countries for our 
food supply. In your remarks with the potential for shifting 
certain crops and agricultural commodities, are there certain 
crops or commodities you see that are more at risk based on 
what information we have now to shifting to offshore or 
overseas?
    Dr. Westhoff. There is lots of uncertainty here as has kind 
of been my theme, I guess, all morning here is there is lots of 
uncertainty about the effects we are likely to see. I do think, 
as Dr. Glauber talked about this morning, crops like rice, for 
example, is one where it is hard to see many positives that 
might come from the legislation's impacts. That may be one 
where reduced exports would be even more likely in future 
commodities. I do want to stress that even though we are 
talking about lower levels of U.S. production going overseas is 
a possibility here, I don't think we are likely to talk about a 
scenario where the U.S. becomes an importer of those products. 
Reduced exports is the most likely outcome.
    Mr. Thompson. Okay. Thank you. Dr. Antle, you noted in your 
remarks that the market changes in responding to climate 
change. I was wondering are there any, based on your 
experience, any examples of potential market changes that could 
occur that you can give as an example?
    Dr. Antle. In response to climate?
    Mr. Thompson. Yes, please.
    Dr. Antle. Sure. And some of them have been described here 
already, but the modeling studies, for example, suggest that 
green production might--corn, soybean production might move 
west and north, so that would have production impacts, and 
would impact market distribution systems, for example. You 
could also--and then further south you go typically the more 
adverse impacts are--what the current studies tend to show is 
that in the U.S. some areas benefits and some areas are harmed, 
and on net the impacts are fairly small. So that kind of 
shifting of comparative advantage would certainly have market 
impacts, you can imagine.
    Mr. Thompson. Thanks. And then my final question, Dr. 
Capper, the information provided was very interesting in terms 
of dairy in terms of the increase in productivity since 1944. 
If I read that correctly, 443 percent increase in productivity, 
more efficiency. Just very simply my question is given those 
huge leaps, what--two questions, I guess, two-part question. 
What were the motivating forces to have that happen and then 
what is the potential for giving that growth, significant 
growth, so far, what is the future for--potential for future 
productivity increases?
    Dr. Capper. Okay. So the advances that we have made to date 
have been huge, and they were basically economically based. It 
became more economically sound to have cows that gave more milk 
via nutrition/genetics management, and so on. The average 
animal now gives about 22,000 pounds of milk per year. The 
record cow has given about 40,000 pounds of milk per year and 
there are herds with an average of over 30,000 pounds of milk 
per year, so we still have a huge way to go in improving 
productivity that way and improving economics of the 
environment as well.
    Mr. Thompson. Okay. Thank you. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman. The gentleman from 
Minnesota.
    Mr. Walz. Thank you, Mr. Chairman, and thank you all for 
taking the time to testify. I really appreciate the different 
takes on this. Just a couple questions. I was referencing 
before the study that came out of New York University more 
integrated than this. I think maybe we make a mistake. 
Obviously, we are concerned. This is the Agriculture Committee. 
It is our Committee of jurisdiction, but to look at one sector 
and silo it away from the overall impacts and how they are all 
going to tie together, is a mistake, and I know all of you are 
looking in that direction too.
    I just wanted to focus on a couple of things. Again, Dr. 
Antle, you probably hit it more where I was coming from on 
this. The cost of doing nothing and the cost of allowing 
climate change as it exists to go forward, that has to be 
factored in. That has to be laid on the table as we look 
forward. I think one of the things I am coming to, and there is 
a University of Tennessee study, and maybe you guys can help me 
as peer review type of things, of starting to show the positive 
impacts of this and into the numbers of $364 billion above 
letting the EPA do this, potentials that are there.
    So, the question is, can we do this type of legislation 
right if it is coupled with an energy policy that includes 
nuclear power which I agree has to be a part of this? Can we 
make this broader where we start to get energy security on 
this, we start to transfer, and we don't harm the agricultural 
markets? Do you feel from your expert opinion that the 
potential there lies to do this if we do this right, or is the 
cap-and-trade exactly the wrong way to go? And, Dr. Capper, I 
find it interesting you said most of the productivity 
improvements were done in the private sector and you all said 
at state universities. I say that because Dr. Borglum is from 
the University of Minnesota and Texas A&M from the Green 
Revolution and other things that come out of it. And I also say 
that because when I request money for Aphid control research at 
the University of Minnesota that is of course an earmark that 
isn't for bid.
    Now are we counterproductive in everything we are doing? To 
you I want to ask, what we want is this. We want stability in 
our agricultural markets. We want stability in our energy 
markets. We want the ability to control human emissions of 
greenhouse gases if we believe that that is important. In your 
expert opinion, can that be done? Each of you, can it be done? 
The question basically is should we throw the cap-and-trade 
side of things out and is there a different way to do it, or in 
your opinion is it important to look at this? And I say that 
because what is hanging over this is all of us know one of two 
things. It is either the climate change itself is going to make 
these things known to us and we are going to find out, or EPA 
is going to do it one way or another or maybe both. So my 
question is, is this the right approach in your opinion, cap-
and-trade?
    Dr. Outlaw. To be honest with you, Congressman, I really 
hadn't thought about it in that regard. Most of our work is on 
a request basis where we are requested to do certain things. 
Could it be done? Absolutely, it could be done. The question 
that I have as an economist is what is the economic cost on the 
players that are affected and are there ways to mitigate those 
costs or not, and, if not, maybe another approach. So my answer 
is not really an answer. It is more of a question.
    Mr. Walz. No, and I appreciate that because it is complex 
and I appreciate all of you thinking at it from those different 
angles.
    Dr. Westhoff. FAPRI does not endorse or oppose legislation, 
but I will say that I think it is appropriate to ask the 
question: what are the consequences of doing nothing. In my own 
written testimony I do mention the fact that it is important to 
distinguish the impacts of U.S. legislation by itself and what 
that might do incrementally to climate change versus the 
impacts of other countries likewise agreeing to something.
    Dr. Antle. Congressman, it is important for us to do 
something if we think this is a serious problem, and we all 
know there are a number of different ways to create incentives 
for not only agriculture but the rest of our economy to respond 
to do something different. We have to change. If we are going 
to solve this problem of climate change and energy consumption, 
we have to do things differently. So, yes, there may be some 
impacts on agriculture and there may be some impacts on you and 
me, but that is the price we have to pay for changing if we 
think it is important to change.
    Dr. Capper. Again, I agree. I think it is something we 
should change and that we can change, and the only thing we 
have to take into account is we have a growing population. We 
have to use more food and we have less resources and what is 
the best way that we can possibly do that economically and 
environmentally.
    Mr. Pottorff. Yes, sir. I think that there have been some 
public studies out that show the potential yield implications 
of doing nothing are extreme, 40, 50 percent declines in yield 
production. Meanwhile, we are talking about needing to increase 
food production by 50 percent by 2050 or even more. And so I 
think that we need to take some action. What action we take is 
hard to say. I just want to suggest that we want to be careful 
when we do this so that we don't hamstring American farmers and 
that we don't hamstring our fertilizer industry. Over the last 
decade, we have seen 25 ammonium-producing fertilizer plants 
close, and we have out-sourced basically our nitrogen 
fertilizer applications, and that is why I was so concentrated 
on natural gas because it does have such a big impact on the 
fertilizer industry.
    Mr. Walz. Thank you all.
    The Chairman. The chair thanks the gentleman, and the chair 
thanks our witnesses for their testimony today. Unfortunately, 
we are going to have to run. There are five votes on the House 
floor. Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any question posed by a Member. The hearing of 
the Subcommittee on Conservation, Credit, Energy, and Research 
is adjourned.
    [Whereupon, at 12:34 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
    Submitted Statement by Ford B. West, President, The Fertilizer 
                               Institute
December 4, 2009

Hon. Tim Holden,
Chairman,
Subcommittee on Conservation, Credit, Energy, and Research,
Committee on Agriculture,
Washington, D.C.

    Dear Chairman Holden,

    The Fertilizer Institute (TFI) respectfully submits this letter for 
the record in response to statements that were made during the Dec. 2 
Subcommittee hearing that was held to examine the potential economic 
impacts of climate change policy on the agricultural sector.
    During the hearing, U.S. Department of Agriculture Chief Economist 
Joseph Glauber comprehensively reviewed the potential economic impacts 
of climate change on the farm sector. On page six and seven of his 
written testimony, Dr. Glauber states:

        ``While most of the direct energy price increases would be felt 
        immediately by the agricultural sector, fertilizer costs would 
        likely be unaffected until 2025 due to a provision in H.R. 2454 
        that would distribute specific quantities of emissions 
        allowances to `energy-intensive, trade exposed entities' 
        (EITE). Additionally, EPA analysis indicates that the 
        allocation formula would provide enough allowances to cover the 
        increased energy costs of all presumptively eligible EITE 
        industries. Based on these considerations, the USDA analysis 
        assumes H.R. 2454 imposes no uncompensated costs on nitrogen 
        fertilizer manufacturers related to the increases in the price 
        of natural gas through 2024.''

    TFI would like to make you aware of several factors that dispute 
Dr. Glauber's statements regarding the potential impacts of climate 
change policy on fertilizer costs. First, nitrogenous fertilizer 
manufacturing is listed as a covered sector in the Environmental 
Protection Agency's (EPA) analysis of presumptively eligible sectors, 
which may receive allowance rebates under Subtitle B of Title IV in the 
House-passed climate bill H.R. 2454. However, phosphatic fertilizer 
manufacturing, potash mining and phosphate rock mining, all of which 
are industrial sectors that encompass two of the primary fertilizer 
nutrients (phosphorous and potassium) are not listed as eligible 
sectors. Given this circumstance, it is not wise to assume that 
fertilizer costs, which can be responsible for 19-44 percent of total 
operating expenses depending on the crop, would likely be unaffected by 
the legislation until 2025.
    Second, it is currently impossible for anyone, including EPA and 
Dr. Glauber to predict exactly how many free emission allowances 
nitrogen fertilizer manufacturers will receive under Subtitle B of 
Title IV in H.R. 2454. All of the trade vulnerable industries will be 
seeking free emission allowances from a limited and defined pool and 
that pool will shrink each year. Emissions that aren't covered by free 
allowances would need to be covered by purchased allowances.
    Furthermore, Sec. 763., Title IV (page 1088) of H.R. 2454 states 
that the purpose of the emission allowance rebate program is ``to 
provide a rebate to the owners and operators of entities in domestic 
eligible industrial sectors for their greenhouse gas emission costs 
incurred under this title, but not for costs associated with other 
related or unrelated market dynamics.'' Thus nitrogen fertilizer 
manufacturers would receive some allowances for their greenhouse gas 
emission cost (direct emission + indirect electricity emission) only, 
and therefore are not compensated for costs related to the increases in 
the price of natural gas, which accounts for 70-90 percent of nitrogen 
fertilizer production costs. Increases in the price of natural gas 
resulting from climate change legislation would have a significant 
impact on the nitrogen price paid by U.S. farmers as indicated on the 
attached graph, which demonstrates the high correlation between the 
price of natural gas paid by U.S. nitrogen manufacturers and the price 
of nitrogen fertilizer (anhydrous ammonia) paid by U.S. farmers. For 
example, as natural gas prices increased from $3.68 to $8.07 per 
thousand cubic feet from 2000 to 2008, the nitrogen price paid by U.S. 
farmers rose from $227 to $755 per material ton.
    I hope you will take the points that have been raised within this 
letter into consideration as you continue to address the economic 
impact of climate change policy on the agricultural sector. 
Specifically, we hope you will note that there is no established 
economic data available to support the statement that fertilizer costs 
would likely be unaffected until 2025 under a cap-and-trade policy.
            Sincerely,

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            
Ford B. West,
President.

CC:

Secretary of Agriculture, Hon. Tom Vilsack;
USDA Chief Economist, Joseph Glauber, Ph.D.;
Subcommittee Ranking Member, Rep. Bob Goodlatte.
                               Attachment
The Cost of Natural Gas Drives Nitrogen Prices Paid by U.S. Farmers

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Data Source: USDA--retail price of anhydrous ammonia paid by 
        U.S. farmers; EIA--U.S. wellhead price of natural gas.
                                 ______
                                 
     Submitted Statement by National Oilseed Processors Association
    The National Oilseed Processors Association (NOPA) offers its 
thanks and appreciation to Chairman Holden and Ranking Member Goodlatte 
for holding this hearing to review the potential economic impacts of 
climate change on the farm sector. NOPA also thanks you for the 
opportunity to submit for the record NOPA's views regarding the 
potential impact of global climate change legislation on the oilseed 
processing industry.
    NOPA is a national trade association comprised of 15 member 
companies engaged in the production of food, feed, and renewable fuels 
from oilseeds, including soybeans. NOPA's member companies process more 
than 1.7 billion bushels of oilseeds annually at 65 plants located 
throughout the country, including 60 plants that process soybeans.
    As your Committee begins consideration of global climate change 
legislation, we respectfully provide you with our perspectives on how 
such legislation may impact oilseed processors. Attached to our Written 
Statement is a document entitled ``NOPA Estimates of Costs to NOPA 
Member Companies Associated with Global Climate Change (GCC) 
Legislation: Costs Due to CO2 Allowances and Increased 
Energy Prices ($1,000s)'' (see Attachment A). Also attached to our 
Written Statement (see Attachment B) is a letter to Chairman Holden and 
Ranking Member Goodlatte, informing them of the views of a coalition, 
of which NOPA is a member, including food, feed, ingredient, beverage, 
and consumer product processors, manufacturers, distributors, and 
retailers, on prospective climate change legislation.
    Today, USDA will discuss the impacts of climate change legislation. 
NOPA believes the climate change legislation passed by the House will 
cause a significant restructuring of the U.S. economy and in particular 
agriculture from farm to fork. Conducting analysis on a dynamic and 
ever changing industry such as agriculture is no easy task. The climate 
change legislation being discussed today sets in law specific goals and 
targets that must be met through 2050. Assumptions play a key role in 
determining analysis and impact--because agriculture is so dynamic and 
ever changing, those assumptions will be subject to dissection and 
question.
    With so many uncertainties and difficulty forecasting so far into 
the future, NOPA is concerned about the cost of allowances, increased 
energy cost, commodity cost, transportation cost, loss of productive 
cropland to trees and grass, acreage shifts, impact on livestock and 
poultry sectors, and compliance with our WTO obligations, to name a 
few.
    While USDA and some of the other witnesses at today's hearing are 
discussing the impact of climate change legislation on farmers, NOPA 
believes analysis by USDA and the other witnesses should include the 
economic impact from farm to fork. Examples should include other ag-
related industries such as processors (e.g., oilseed, meat processors), 
food manufacturers, ag equipment manufacturers, exporters, and 
transportation.
    The assumptions used to estimate the cost of carbon allowances 
varies; Charles River Associates (CRA) International, in a May 2009 
study, estimated carbon allowances at $22 CO2 per ton in 
2015, $46 CO2 per ton in 2030, and $124 CO2 per 
ton in 2050. USDA, on the other hand, has estimated $12.64 
CO2 per ton in 2015, $26.54 CO2 per ton in 2030, 
and $70.40 CO2 per ton in 2050. The cost variance and 
implications are staggering: (1) carbon offsets are a potential income 
source for producers and forest landowners; this offset program could 
have a devastating impact on land use, taking productive crop land out 
of production and planting it to trees, thereby causing higher 
commodity prices and higher food prices for domestic and foreign 
consumers; (2) the cost of purchasing allowances by NOPA member 
companies on Day One is substantial--in the millions of dollars on an 
annual basis; and (3) acreage shifts will impact NOPA member 
facilities' ability to obtain soybeans for processing and could lead to 
higher transportation costs, impacting competitiveness for upstream 
customers and their ability to compete in domestic and international 
markets.
    Depending on one's assumptions, some of USDA's preliminary analysis 
shows that in 2050: CO2 allowance cost per ton--$70.40; a 
loss of almost 60 million acres, of which 35 million acres comes from 
productive cropland and 24 million acres from pastureland; soybean 
acreage--29% below current baseline; and hog production slaughter--23% 
below current baseline. These assumptions could have a devastating 
impact on NOPA members' processing facilities, soybean farmers, 
livestock and poultry customers, other ag related businesses and, more 
importantly, the rural communities in which NOPA plants are located.
    Our views and concerns are discussed below:

   Direct Costs to Oilseed Processing Industry (Attachment A). 
        The American Clean Energy and Security Act of 2009 (H.R. 2454), 
        Subtitle B of Title IV, defines ``energy-intensive, trade 
        exposed entities'' (EITE) to include industrial sectors that 
        have an energy or greenhouse gas intensity of at least five 
        percent or a trade intensity of at least 15%. Entities meeting 
        the EITE qualify for free allowances. NOPA members do not meet 
        EITE. Without these allowances, firms in industrial sectors 
        such as oilseed processing would incur energy-related costs 
        that foreign competitors would not face, putting them at a 
        significant market disadvantage.

    In the near term (2015-2019), NOPA members would spend an estimated 
        $790 million on purchasing greenhouse gas (GHG) allowances and 
        additional energy costs to operate their facilities--that's 
        about $2.6 million per plant over that time period in 
        additional annual operating costs. In the moderate term (2020-
        2024), NOPA members would incur an estimated $1.1 billion on 
        allowances and additional energy costs--that's about $3.7 
        million per plant in additional annual operating costs. This 
        means in the near-to-moderate term (2015-2024), NOPA members 
        would incur nearly $1.9 billion in additional costs.

   Loss of Productive Cropland. NOPA members are extremely 
        concerned about the unintended and problematic consequences of 
        agricultural producers taking arable cropland out of production 
        and converting it to grassland or trees to earn carbon offsets. 
        USDA estimates that by 2050, land converted to afforestation 
        would increase to nearly 60 million acres--35 million from 
        cropland and 24 million from pastureland. Any program that 
        inadvertently incentivizes agricultural producers to take 
        productive and environmentally sustainable cropland out of 
        production to earn carbon offsets would devastate U.S. 
        agricultural competitiveness and could severely strain the 
        ability of the food, feed, and renewable fuels industry to meet 
        worldwide demand.

    Further analysis is needed to determine the impacts on agricultural 
        production (including the livestock and poultry sectors), 
        commodity prices, farm income, consumer food costs, and rural 
        communities.

   Impact--Unintended Consequences. Our members, as well as one 
        of their principal customers (i.e., animal producers), have 
        limited ability to pass costs on to users/consumers of their 
        products; thus, we (and they) are very concerned with any cost 
        impacts on our industry, including costs for allowances and 
        energy price increases associated with the legislation. To the 
        degree that our members can pass costs on to their customers, 
        the result would be higher food prices domestically and higher 
        prices on the products our members (and, in turn, our 
        customers) export to other countries. Higher prices would make 
        our industry less competitive both domestically and 
        internationally, resulting in reduced revenue for farmers, 
        processors and livestock/poultry producers, loss of jobs within 
        the food and related industries (e.g., logistics) chain, and 
        increased food/feed prices for U.S. consumers.

    In circumstances in which our members cannot pass on these 
        increased costs, they would experience higher operating costs 
        at their facilities, rendering them less competitive both 
        domestically and internationally. The result would be reduced 
        revenue for both farmers and processors and the loss of jobs 
        within the food and related industries chain.

    Higher operating costs and a less competitive business environment 
        would result in a transfer of oilseed processing and related 
        jobs, including animal production, to other countries and a 
        transfer, not a reduction, in global GHG emissions. In fact, 
        the climate change problem would be exacerbated to the degree 
        that those operations are transferred to countries that use 
        energy sources that are more carbon-intensive.

   Underestimated Impact of Climate Change. The impacts of 
        climate change legislation on the food processing industry and 
        transportation infrastructure, including the impacts of GHG 
        mitigation policies, have not been studied adequately. A full 
        review of the benefits and costs of carbon tax and cap-and-
        trade programs should be undertaken. In a high-volume, low-
        margin business like the one in which our members operate, 
        domestic production can quickly move to foreign competitors, at 
        the expense of U.S. production and jobs. If implemented in an 
        aggressive or reckless manner, either a carbon cap-and-trade or 
        carbon tax program would have disastrous economic consequences 
        on the U.S. oilseed processing industry. Either program would 
        result in food, feed, and renewable fuel prices increasing to 
        such a degree that the industry could not absorb the associated 
        costs, rendering the oilseed processing industry much less 
        competitive on exports to foreign markets.

    For these critical reasons, NOPA opposes any unilateral climate-
        related legislation that calls for either a carbon tax or a 
        mandatory cap on GHG emissions. We do not believe sufficient 
        effort has been put towards the development of voluntary 
        initiatives that provide the framework for effective, 
        voluntary, pro-growth, technology-driven approaches to reduce 
        energy use, and thereby achieve GHG reductions in an 
        economically sound manner. We believe that global GHG emissions 
        are best addressed through voluntary initiatives, as well as 
        through increased research, development and deployment of 
        innovative breakthrough technologies. NOPA and its members are 
        focused on solutions that will continue to promote U.S. 
        agriculture and the food, feed, and renewable fuels industry.

   Distribution of Allowances. Any cost of allowances for 
        entities that emit more than 25,000 tons of GHGs annually would 
        be directly added to the operating cost of each facility. One 
        can safely assume that firms necessarily would need to cover 
        added costs by passing them forward in the supply chain. This 
        inevitably would impact costs for consumers, returns for 
        processors, or a combination of both. However, there comes a 
        point when it is no longer possible to pass on all such costs 
        in a globally competitive market. Therefore, without an 
        appropriate allocation of allowances, processing firms in the 
        United States may not remain viable.

    If a cap-and-trade approach is taken, we believe it would work 
        best--both for the oilseed processing industry and all energy-
        intensive sectors--if allowances are distributed 
        proportionately to each industry's emissions, thereby 
        mitigating the direct and indirect impacts on all regulated 
        industries. Such a proportionate allocation would be the 
        fairest system, because it would avoid arbitrarily picking 
        winners and losers and assist all industries in making the 
        challenging transition to a low-carbon economy. A fair 
        distribution of allowances would provide an appropriate 
        percentage of allowances to the food, feed, and renewable fuels 
        sector. It would also avoid the impression that the allowances 
        represent subsidies to favored industries--an accusation that 
        could subject the U.S. to World Trade Organization (WTO) 
        disputes and American companies to retaliatory tariffs. We 
        cannot demonstrate international leadership by approving GHG 
        legislation that undermines our international credibility on 
        trade liberalization.

   Climate Change is a Global Challenge. Climate change is a 
        global challenge requiring multilateral solutions that do not 
        shift the economic burden to agricultural production, 
        processing, and manufacturing of food and feed products and 
        renewable fuels. Rising energy costs commensurate with either a 
        carbon tax or an emissions cap imposed on U.S. operations would 
        threaten the viability of not only the energy-intensive, 
        import/export-sensitive U.S. oilseed processing industry, but 
        other sectors of manufacturing in the U.S., resulting in some 
        companies facing the decision to move operations out of the 
        country. Hence, legislation must ensure that developed and 
        developing nations alike share responsibility for addressing 
        climate change. Additionally, any emission reductions from such 
        legislation must be verifiable and enforceable, particularly 
        with respect to impacts on international trade.

   World Trade Organization (WTO) Obligations. Any U.S. carbon 
        reduction program must be structured in a manner to protect our 
        competitive advantage while being consistent with our 
        international trade obligations under the WTO, recognizing that 
        many of our competitors likely do not have similar policies in 
        place. Structuring a program in this manner would be a huge 
        challenge, considering our WTO commitments. Any U.S. carbon 
        reduction program could lead to allocation schemes and trade 
        mechanisms that could face WTO challenges, already a very 
        complex problem. Designing a program/scheme to address ``carbon 
        leakage'' without risking retaliation from our overseas 
        customers would be a very difficult task. If the U.S. fails in 
        this task, the current global recession we are experiencing 
        could be exacerbated by a wave of international protectionism.

   Federal Preemption of Regional, State and Other Carbon 
        Reduction Programs. The oilseed processing industry supports 
        Federal preemption of all regional, state and other carbon 
        reduction programs or, at a minimum, the harmonization of these 
        climate initiatives. Any legislation that allows regions, 
        states and other entities to pursue their own programs would 
        only lead to confusion, multiple sets of record-keeping and 
        additional expense, all of which would serve to undermine 
        regulatory effectiveness, create investment uncertainty, and 
        negatively impact U.S. competitiveness. The objective should be 
        to avoid unnecessarily driving up compliance costs and making 
        environmental goals even more difficult to reach. To the degree 
        that these other climate initiatives remain, it is paramount 
        that they be harmonized with the Federal program to eliminate 
        the cost and chaos multiple independent systems would impose on 
        the regulated sectors.
Conclusion
    During these difficult economic times, it is unwise to insert 
additional economic uncertainties into an already fragile marketplace 
without full consideration of the consequences. In the event Congress 
acts to limit GHG emissions, a full review of the benefits and costs of 
the legislation should be undertaken.
    Thank you for allowing NOPA to share its views on global climate 
change legislation. We look forward to working with you and Members of 
the Committee in addressing the challenges and opportunities facing 
businesses across the country, but, in particular, rural businesses 
that serve domestic farmers and livestock and poultry producers.
                              Attachment A
Cap & Trade Legislative Proposals: Very Costly to the U.S. Oilseed 
        Processing Industry
    The National Oilseed Processors Association (NOPA) is an important 
stakeholder in the global climate change legislative proposals that are 
being considered by the U.S. Congress. NOPA is a national trade 
association that represents 15 companies engaged in the production of 
food, feed and renewable fuels from oilseeds, including soybeans. 
NOPA's 15 member companies process more than 1.7 billion bushels of 
oilseeds annually at 65 plants located throughout the country, 
including 60 plants which process soybeans.
    Our members, as well as their customers (i.e., animal producers), 
have very little ability to pass costs on to users/consumers of their 
products; thus, we are very concerned with any cost impacts on our 
industry, including costs for allowances and energy price increases 
associated with the legislation:

   To the degree that our members can pass costs on to their 
        customers, the result would be higher food prices domestically 
        and higher prices on the products our members (and, in turn, 
        our customers) export to other countries. Higher prices would 
        make our industry less competitive both domestically and 
        internationally, resulting in reduced revenue for both farmers 
        and processors, loss of jobs for our members, and increased 
        food/feed prices for U.S. consumers.

   To the degree that our members cannot pass on costs, they 
        would experience higher operating costs at their U.S. 
        operations, rendering them less competitive both domestically 
        and internationally. The result would be reduced revenue for 
        both farmers and processors and the loss of jobs for our 
        members.

   Higher operating costs and a less competitive business 
        environment would result in a transfer of oilseed processing 
        and related jobs, including animal production, to other 
        countries and a transfer, not a reduction, in global GHG 
        emissions. In fact, the climate change problem would be 
        exacerbated to the degree that those operations are transferred 
        to countries that use energy sources that are more carbon 
        intensive.

    Following are some of the highlights of NOPA's cost analysis (see 
attached)

   In the near term (2015-2019) NOPA members will spend an 
        estimated $790 million on allowances and additional energy 
        costs to operate their plants--that's about $2.6 million per 
        plant over that time period in additional annual operating 
        costs.

   In the moderate term (2020-2024) NOPA members will incur an 
        estimated $1.1 billion on allowances and additional energy 
        costs to operate their plants--that's about $3.7 million per 
        plant in additional annual operating costs.

   In the near-to-moderate term (2015-2024) NOPA members will 
        incur nearly $1.9 billion in additional costs.

October 2009
                               attachment
                               10/13/2009

 NOPA Estimates of Costs to NOPA Member Companies Associated with Global
    Climate Change (GCC) Legislation: Costs Due to CO2 Allowances and
                 Increased Energy Prices ($1,000s) a  b
------------------------------------------------------------------------
                                          Year
              ----------------------------------------------------------
                  2015        2020        2030        2040        2050
------------------------------------------------------------------------
         CO2       90,066     114,629     188,319     302,949    507,644
 Allowances c
          d e
Natural Gas c      41,106      54,808      78,787     126,744    184,977
            f
Fuel Oil c f          681         795       1,305       2,100      3,348
Electricity f      25,500      51,000      71,400     114,750    155,550
              ----------------------------------------------------------
  Total......     157,353     221,232     339,811     546,543    851,519
    $/bushel.        0.09        0.13        0.20        0.32       0.50
------------------------------------------------------------------------
a Subject estimates are based on 1.7  109 bushels of soybeans crushed/
  year from NOPA Statistics (Crush) Reports for NOPA Fiscal Year 2007-
  2008.
b Subject estimates are based on fuel use and electricity utilization
  estimates for a hypothetical soybean processing plant from a 19
  January 2009 NOPA submittal to the United Soybean Board with
  recommendations on updating of a National Renewable Energy Laboratory
  (NREL) database for soybean processing (electricity input: 1,500 kWh/
  1000 bushels of soybeans; heat input: 31 MMBTU/1000 bushels of
  soybeans, including 65.5% from natural gas/landfill gas, 0.5% from #2
  fuel oil, 1% from #6 fuel oil and 33% from coal/biomass).
c Fossil fuel heat contents used in the subject estimates (1.01 MMBTU/
  1,000 CF of natural gas; 18.60 MMBTU/ton of coal; 5.85 MMBTU/bbl of
  fuel oil) are from a May 2009 ``Average Heat Content of Fossil-Fuel
  Receipts'' issued by the U.S. Energy Information Administration.
d Emission factors used in estimating greenhouse gas emissions from the
  burning of fossil fuels (0.0545 kg CO2/CF of natural gas; 2,106.9 kg
  CO2/metric ton of coal; 426.1 kg of CO2/bbl of #2 fuel oil; 495.4 kg
  of CO2/bbl of #6 fuel oil) are from USEPA's 2009 GHG ``Fast Facts.''
e Price of CO2 allowances used in estimating costs for 2015, 2020, 2030,
  2040 and 2050 ($22, $28, $46, $74 and $124/ton, respectively) are from
  a May 2009 report by CRA International entitled ``Impact on the
  Economy of the American Clean Energy and Security Act of 2009 (H.R.
  2454).''
f Increased prices in 2015, 2020, 2030, 2040 and 2050 for natural gas
  ($1.20/MMBTU, $1.60/MMBTU, $2.30/MMBTU, $3.70/MMBTU and $5.40/MMBTU,
  respectively), fuel oil ($0.12/gal, $0.14/gal, $0.23/gal, $0.37/gal
  and $0.59/gal, respectively) and electricity ($0.01/kWh, $0.02/kWh,
  $0.028/kWh, $0.045/kWh and $0.061/kWh, respectively) used in
  estimating costs are from a May 2009 report by CRA International
  entitled ``Impact on the Economy of the American Clean Energy and
  Security Act of 2009 (H.R. 2454).''

                              Attachment B
December 2, 2009

Hon. Tim Holden,
Chairman,
Subcommittee on Conservation, Credit, Energy, and Research,
Committee on Agriculture,
Washington, D.C.

Hon. Bob Goodlatte,
Ranking Minority Member,
Subcommittee on Conservation, Credit, Energy, and Research,
Committee on Agriculture,
Washington, D.C.

    Dear Chairman Holden and Ranking Member Goodlatte:

    On July 20, 2009, we sent the attached letter to Senators Boxer and 
Inhofe, to inform them of the views of our coalition of food, feed, 
ingredient, beverage, and consumer product processors, manufacturers, 
distributors, and retailers on prospective climate change legislation. 
As industries which provide abundant and affordable food and essential 
consumer goods to all Americans, we felt it necessary to inform you via 
today's letter of our concerns with climate change policies that could 
have direct and indirect impacts on the cost of food, feed, and 
household products.
    We have carefully followed the draft legislation released as a 
Chairman's mark by Senator Boxer. We do recognize and appreciate 
positive steps in certain areas, specifically the ability of a wider 
array of methane projects to qualify as offset opportunities. We are 
disappointed, however, that the draft legislation does not adopt any 
preemption or harmonization provisions, an omission that could result 
in additional Clean Air Act regulation of sources that already are 
subject to the emissions cap contemplated in this legislation.
    As we have stated before, the facilities represented by this 
coalition emit roughly two percent of the nation's greenhouse gases 
(GHGs), but are especially vulnerable to indirect costs. Consumers of 
the products we produce could be negatively impacted by climate change 
legislation that significantly increases our energy, transportation, 
regulatory, and commodity costs. In our view, Congress should take care 
to avoid adverse impacts on food security, prices, and accessibility.
    While we have a number of concerns with the draft legislation, 
three issues in particular are paramount as the Congress continues to 
modify the bill:

   Allowances--It is critical that any legislation provide 
        allowances to the manufacturers, distributors, and retailers of 
        food, feed, and household products. The distribution of 
        allowances should be based upon an industry's historic 
        emissions, and additional allowances should be distributed to 
        reflect reductions in emissions between 2000 and 2012. Our 
        industry will be at a significant economic disadvantage to 
        other industries and our competitors around the globe unless 
        the legislation fairly distributes allowances pro rata across 
        all industrial sectors. While food and beverage producers 
        account for 1.21% of the nation's direct GHG emissions (Carbon 
        Risks and Opportunities in the S&P 500 at 12), if cap-and-trade 
        legislation is approved, our manufacturers will be more 
        affected by it than this modest figure suggests. All members of 
        the food supply chain are disproportionately vulnerable to 
        indirect costs passed through by suppliers. When considering 
        the total GHG emissions from each sector, including suppliers, 
        the food, feed, and beverage sector has the fourth largest 
        exposure to carbon costs--more than the chemical, retail, basic 
        resources, and automobile and parts sectors. (Carbon Risks and 
        Opportunities in the S&P 500 at 13).

   Preemption--Comprehensive climate change legislation should 
        preempt or, if necessary, harmonize state and regional climate 
        change programs. In addition, comprehensive climate change 
        legislation should explicitly preempt EPA regulation under the 
        Clean Air Act, including EPA's authority to issue New Source 
        Performance Standards for sources that emit between 10,000 and 
        25,000 tons of CO2e/year and requirements that 
        certain sources be subject to Prevention of Significant 
        Deterioration and Title V permitting. Exposing industry to 
        additional regulation from either EPA or states and regions 
        will yield little additional environmental benefit but could 
        result in significantly higher costs.

   Offsets--Our organizations believe a viable offset system is 
        essential to achieve cost containment, as demonstrated by 
        recent EPA and CBO economic analyses. We urge the Committee to 
        work with the food industry and our partners in agriculture and 
        forestry to create an offset scheme that balances the need for 
        affordable offsets with the need for productive land. In 
        particular, we urge the Committee to devise an offset system 
        that limits the retirement of frequently cultivated cropland. 
        Sound climate change legislation should not pit our climate 
        security needs against our food security needs.

    We believe these issues will have a profound impact on the 
international competitiveness of our industry and our ability to 
provide U.S. consumers with abundant and affordable products. We would 
be pleased to discuss these or other issues related to climate change 
legislation with you or your staff in greater detail.
            Sincerely,

American Bakers Association;
American Feed Industry Association;
American Frozen Food Institute;
American Meat Institute;
Corn Refiners Association;
Grocery Manufacturers Association;
Institute of Shortening and Edible Oils;
International Dairy Foods Association;
National Chicken Council;
National Council of Farmer Cooperatives;
National Grain and Feed Association;
National Meat Association;
National Renderers Association;
National Oilseed Processors Association;
National Turkey Federation;
North American Millers' Association;
Pet Food Institute;
Snack Food Association.
                               attachment
July 20, 2009

Hon. Barbara Boxer,
Chairman,
U.S. Senate Committee on Environment and Public Works,
Washington, D.C.

Hon. James M. Inhofe,
Ranking Minority Member,
U.S. Senate Committee on Environment and Public Works,
Washington, D.C.

    Dear Chairwoman Boxer and Ranking Member Inhofe:

    As a coalition of food, feed, ingredient, beverage, and consumer 
product processors, manufacturers, distributors, and retailers, we 
respectfully provide you with our perspectives as your Committee begins 
consideration of climate change legislation, and how such legislation 
may impact providing abundant and affordable food and necessary 
consumer goods to all Americans. Specifically, as you develop climate 
legislation, we urge you to consider the direct and indirect impacts on 
the cost of food, feed, and household products.
    Our facilities emit roughly two percent of the nation's greenhouse 
gases, but we are disproportionately vulnerable to indirect costs. As a 
result, poorly designed climate legislation could significantly 
increase the price of food and other household products. In particular, 
poorly designed climate legislation could significantly increase 
energy, transportation, regulatory, and commodity costs. These are 
paramount considerations Congress must consider and prioritize among 
the issues it addresses. Congress must take extreme care to avoid 
adverse impacts on food security, prices, safety, and accessibility to 
necessary consumer products. For this reason, we have joined together 
to represent the views of this vital segment of our economy as Congress 
debates this important issue.
    If a cap-and-trade approach is taken, we believe that climate 
legislation should embrace the following principles:

   Allowances--The distribution of allowances should be based 
        upon an industry's historic emissions and additional allowances 
        should be distributed to reflect early action reductions in 
        emissions between 2000 and 2012. Although we are an energy-
        intensive industry, H.R. 2454 fails to provide allowances to 
        the manufacturers, distributors or retailers of food, feed, or 
        household products and fails to provide transition assistance 
        to low-income households struggling with rising food prices. 
        Thus, our industry will be at a significant economic 
        disadvantage to other industries unless the legislation fairly 
        distributes allowances pro rata across all industrial sectors.

   Threshold--If a cap is adopted, EPA should not be authorized 
        to lower the threshold for the cap in the future, or use the 
        Clean Air Act to regulate greenhouse gas emissions from sources 
        beneath that threshold. Capturing facilities emitting between 
        10,000 tons and 25,000 of CO2e/year would more than 
        double the number of facilities subject to regulation, but only 
        increase the share of emissions subject to regulation by \1/2\ 
        of 1 percent, according to EPA.

   Offsets--A viable offset system is essential to contain 
        costs. Food processors, farmers, forest landowners, and others 
        should be permitted to generate offsets, including efforts to 
        capture methane either on the farm or through modifications to 
        wastewater systems, to reduce the cost of allowances without 
        unnecessary limitations on the quantity of available offsets. 
        No distinction should be drawn between the use of domestic and 
        international offsets, and no restrictions should be placed on 
        the use of offsets by covered facilities. A well designed 
        offset system should strike a balance between the need for 
        affordable offsets and the need for productive farmland.

   Preemption--Comprehensive climate legislation should preempt 
        or, if necessary, harmonize state and regional climate 
        programs. In addition, comprehensive climate legislation should 
        explicitly preempt EPA regulation under the Clean Air Act, 
        including EPA's authority to issue New Source Performance 
        Standards for sources that emit between 10,000 and 25,000 tons 
        of CO2e/year.

   Trade--Climate legislation should be contingent on Senate 
        ratification of an international commitment to reduce 
        greenhouse gas emissions that includes all major sources of 
        emissions and should not authorize the Administration to place 
        border measures on goods imported from other nations that do 
        not have equally stringent limits on GHG emissions. In general, 
        climate legislation should be designed to comply with our trade 
        obligations. We should not demonstrate global climate 
        leadership by undermining our commitment to global trade.

    In addition, we believe that Congress should carefully consider the 
cost of allowances between 2020 and 2050, resolve tax treatment 
questions raised last month by the Joint Committee on Tax, resolve the 
regulation of any futures or derivatives markets that arise as a result 
of climate legislation, and make significant financial incentives 
available for energy efficiency.
    As you develop climate legislation, we urge you to carefully 
consider its impact on the price of food and household products. We 
believe that H.R. 2454 will increase food and feed prices and reduce 
the international competitiveness of our businesses, and look forward 
to working with you to craft climate legislation that reduces 
greenhouse gas emissions but which also ensures a safe and affordable 
supply of food.
            Sincerely,

American Baking Association;
American Feed Industry Association;
American Frozen Food Institute;
American Meat Institute;
Grocery Manufacturers Association;
Institute for Shortening and Edible Oils;
National Chicken Council;
National Council of Farmer Cooperatives;
National Grain and Feed Association;
National Meat Association;
National Oilseed Processors Association;
National Turkey Federation;
North American Millers' Association;
Pet Food Institute;
Snack Food Association.
Submitted Report by Hon. John A. Boccieri, a Representative in Congress 
                               from Ohio

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Submitted Report by Hon. Timothy J. Walz, a Representative in Congress 
                             from Minnesota

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Submitted Report by Joe L. Outlaw, Ph.D., Co-Director, Agricultural and 
        Food Policy Center; Professor and Extension Economist--
Farm Management and Policy, Department of Agricultural Economics, Texas 
                             A&M University

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                                  
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