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Farm Bureau meeting: State Ag Department may face budget cuts

BROOKLYN PARK - The state Department of Agriculture could face as much as 10 percent budget cut in the next biennium, forcing the agency to prioritize programs.

What was thought to be a $2 billion state budget problem this summer for the next two-year state budget has grown now to $4 billion or $5 billion, partly because of the economic downturn, state Agriculture Commissioner Gene Hugoson says.

"As we look through the agency budgets, where the state is going to be spending money, we could be looking up to a 10 percent cut in state budgets over this next legislative session," Hugoson said this past weekend during the Minnesota Farm Bureau Federation's two-day annual meeting in Brooklyn Park.

The agency is to "go through and look for those issues and things that we're doing if there are things we can along without," he said. "We're at the point now where we can't just take 10 percent off everybody's budget, because we've done that in the past and we're down to the bare bones in some of these areas."

That will mean eliminating some programs, he said.

Hugoson has served as the state's agriculture commissioner since 1995, first appointed by Gov. Arne Carlson and then reappointed by Govs. Jesse Ventura and Tim Pawlenty. He gave the MFB members a glimpse of ag issues this year and in the future, framed by the budget issues.

Bovine TB

One of the biggest ag issues for the department has been the control of bovine tuberculosis in northwest Minnesota, primarily in Beltrami and Roseau counties. The 2008 Legislature approved legislation to create a bovine TB management area within which the state is offering cattle herd buyouts and stepped up efforts to cull free-ranging deer believed to be carrying the animal disease.

With the discovery of bovine TB, the U.S. Department of Agriculture restricted cattle movement and increased testing of cattle throughout the state. But in October, the USDA allowed Minnesota to become a split-state, confining the stricter standards to the smaller northwest Minnesota problem area and allowing the rest of the state to be TB-free.

"You have to go two years without any new detection in order to get that TB-free status back from USDA," said Hugoson. "What we saw in northern Minnesota was contained in a small area, which was the good news. But if that started to spread, it would have had ramifications for a lot of people."

The irony of the whole state under restriction, he said, "is that 300 miles away in southeastern Minnesota were affected the same as if you lived 1 mile away, whereas people in North Dakota just not very far away were immune from it because they were in a different state."

Hugoson said Minnesota received the split-state status from USDA in record time.

Ethanol peak?

A rising concern, he said, is the state of the ethanol industry and renewable fuels in general. With gas prices declining, ethanol investors are wondering if the renewable fuel has peaked.

"Certainly the VeraSun bankruptcy caused a lot of angst for a lot of folks and a lot of questions for others," Hugoson said, referring to one of the nation's largest ethanol producers with 16 plants in eight states. It filed for bankruptcy on Oct. 31.

VeraSun has two plants in Minnesota, at Janesville and Welcome, with financing causing delayed openings.

"It is causing some real serious situations for some folks," Hugoson said. "In some respects, it's going to affect some of the country elevators more than it is some of the farmers."

Some farmers have sold their grain there but now will not get their contract price, "they'll still have the grain to sell at the current market price," he said. "On the other hand, we've got some grain elevators that bought the grain from the farmers at contract prices of $6 or more with the provision that this was going to be turned around and delivered to VeraSun,"

The elevators are obligated to pay the farmer the higher price but can't turn around and collect from VeraSun, he said.

The crisis isn't at the point where some elevators might go out of business, he said, "but certainly it's going to cause some challenges for them."

Some rural lending institutions may also be affected, he predicted.

"The dilemma is while VeraSun is the culprit in this in a lot of people's minds, the reality is timing was everything," he said. VeraSun got started in 2006, the peak, and took on a lot of debt and contracted for corn at their new facilities at record-high prices.

"Now, ethanol prices have gone way down because oil prices have gone down," Hugoson said. "So it isn't an easy time for any renewable fuel entity. Minnesota has been positioned in the sense that the ethanol plants that we have that are two years old or older are probably sitting in pretty good shape."

Those plants have paid off most of their debt in one year, because they had good time with high gas prices and low corn prices, he said. "There were some record, record profits that were made at some of these ethanol plants."

One plant made $1 million profit a week, he said.

Another concern, Hugoson said, "is that we were expanding too much too fast, particularly at the point where there was not as much consumption of ethanol being projected that's going to take up al the ethanol that was projected to be produced."

Minnesota has created a market for ethanol and biodiesel while other states didn't, he said. "In many cases they were bragging about how much ethanol they were producing but not really doing that great of a job in consuming."

Those states were counting on sending the renewable fuel to California and New York by building a host of ethanol plants.

Minnesota put in place some mandates to use renewable fuels, resulting in more use. The state started by mandating a 10 percent ethanol mix in gasoline and 2 percent renewables in diesel, he said. "We are now in a position of moving biodiesel up to 20 percent on an incremental basis and 20 percent for ethanol, pending approval by the EPA."

Critics say the United States has overextended itself in renewable fuels, and that with lower gas prices, the urgency to develop renewable fuels is no longer there, he said.

"The reality is that we've been there before, we haven't done things and it's gotten us in trouble," he said. "Even as we're sitting here, we've got Middle Eastern oil cartels that are looking at trying to limit the production of oil in order to raise prices again."

Hugoson said that "America would be in real tough shape if, in fact, we did not pursue an aggressive renewable fuel program."

There will be ups and downs, he said, "and from a farmers' standpoint, we can relate to the unpredictability."

There are some challenges for Minnesota farmers, Hugoson said, "but agriculture is still a very important part of this state. We've done a terrific job ... and it's our intention to keep it up."

Agriculture, to be successful, needs to diversity, he said. "We need to continue to push renewable fuels but we also have to stress our livestock industry."

A new $1 million livestock improvement program drew $11 million in requests, he said, adding the $1 million will leverage $150 million in improvements.

Agriculture also can't ignore exporting, he said. Minnesota had $3.6 billion in exports the last year, with 96 percent of the world's population living outside the United States.

New middle-income classes are being created in India and China which will need U.S. meat as they improve protein consumption, he said. "Oftentimes, their first priority when they get extra money is to improve their food consumption, their diet."