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By Cole Gustafson, Published July 17 2009

New energy economics: Potential impacts of cap and trade on ND corn production

FARGO - I recently spent an afternoon with the leadership of the North Dakota Corn Growers Association trying to discern the impact of pending federal cap and trade legislation. It is quite likely that corn is the one commodity that will be the most affected because of ties to fertilizer, livestock production and biofuels. At this stage, it is very difficult to forecast if these effects will be positive or negative because many of the programmatic details have not been finalized. In essence, cap and trade provides both opportunities and risks, depending on how the legislation is implemented.

Opportunities:

Providing carbon offsets – Corn production is among the most energy-intensive crops to raise. Consequently, it has great opportunity to provide carbon offsets to other sectors facing carbon caps. However, corn growers have a concern. Rising yields, which are expected to top 300 bushels per acre, create substantial field residue. At present, carbon offsets are available only for shifts to reduced or no-till systems. Minimum tillage may not be a viable option in cool northern climates as yields increase.

Increased demand for biofuels – Firms under carbon regulation can meet their imposed cap by utilizing biofuels that meet Environmental Protection Agency guidelines for lowering greenhouse gas emissions. This would be a tremendous new demand for corn-based biofuels. However, in initially proposed rules, the EPA did not consider the carbon footprint of corn ethanol to qualify, but the U.S. House version of the climate bill directs the EPA to accept corn ethanol.

Energy Saving Technology – The U.S. government expects that rising energy prices will stimulate increased development of energy-saving technology. Given that corn production utilizes considerable energy for fieldwork, fertilizer, irrigation and drying, lower energy costs would increase the crop’s competitiveness with other production alternatives.

Yield Growth – The carbon footprint of corn production is highly dependent on yields. If new technology raises corn yields, the carbon footprint for each bushel produced will fall dramatically. It is unknown if farmers or seed companies will be able to reap the benefit and sell carbon offsets.

Risks:

Increased fertilizer costs – Early on, the EPA stated that its priorities were energy generation, transportation and agriculture.

However, the EPA has stated that agriculture would be exempt from having a cap imposed. However, it is not clear if that applies to agribusinesses, especially fertilizer. If fertilizer emissions become regulated, costs of producing corn would escalate directly. Even more concerning is that corn would be at a comparative disadvantage with other crops due to its high fertility needs.

Higher livestock production costs – Similar to fertilizer, emissions from large, concentrated livestock units also are of great concern to the EPA but were not included in the U.S. House version. If livestock were regulated, it would diminish profitability and demand for feed.

Rising energy costs – Under cap and trade, economists forecast that energy prices will increase significantly. This would raise production costs for energy-intensive crops such as corn.

Unequal international implementation – A major concern following the Kyoto round of negotiations was the lack of participation among trade competitors, especially China. If major corn export competitors failed to apply similar regulations to their fertilizer and chemical industries, foreign corn producers would have a significant cost advantage.

Gustafson is a biofuels economist with the NDSU Extension Service.