SEC. MIKE JOHANNS: Thank you very much. Well, thank you very much, President Jischke. I really appreciate the opportunity to be here today. I have to admit in front of this crowd with some trepidation that many years ago when I was looking around for undergraduate schools I did not have the good sense to come to Purdue. But I did do the next best thing, ladies and gentlemen. And I told the last group I spoke to that I thank the Dear Lord for Indiana every night when I lay down and go to bed. Now you probably wonder why I'm gushing about this. It's because I married a Hoosier, so I did the next best thing.

Well, I do want to say thanks for the excellent tour. This is one of those tours where you walk in, you know you're going to have a limited amount of time, and you wish you could spend all afternoon. It was very impressive.

With the great work that is going on right here and at other universities and research centers across this nation. I am really more confident than ever that we will unlock the secrets of cellulose before very long. Maybe in a generation we'll be looking back on gasoline the way that people looked back on whale oil today and wondering what all the fuss was about.

Well, energy is on everybody's minds these days, and I do want to visit with you about that. I also thought that maybe this would be a great opportunity to give you a quick overview of our proposals, the Administration proposals for this year's Farm Bill because they affect energy so directly and they affect the agricultural sector.

So while I speak here, if the technology is working right -- yes it is -- we're going to walk you through a PowerPoint here.

When I came to Washington a little more than two years ago, the Farm Bill was already visible on the horizon. I saw the run-up to the bill as a chance to really examine what was working with our farm policy and quite honestly what wasn't working. I saw it as an opportunity to connect with people whose lives were very directly impacted by our policies.

So we began by talking with farmers and ranchers all across this great nation to see what they thought about the current policy, and we got a lot of valuable insights.

Ladies and gentlemen, all told, we collected more than 4,000 comments from farmers and ranchers and agricultural stakeholders in the 52 Farm Bill Forums that we held across the United States. We analyzed what we heard, we did some rethinking, and we came out with a set of Farm Bill proposals that I believe provide a very strong safety net for producers, while moving us to a more market-based approach, and setting an ambitious agenda for renewable energy.

Now as this slide would indicate, the Farm Bill is a very important piece of legislation. I think sometimes people look at the USDA and they say to themselves, well that's where the farmer programs are managed. And yes, we do manage farm programs there. But we do so much more.

The Farm Bill really sets the direction for all of USDA's programs. The previous law, the 2002 Farm Bill, will expire later this year and Congress will have to choose to either extend it or replace it, and these are all the areas that will be impacted by that decision.

To step back a little bit, the 2002 Farm Bill in my judgment was the right answer at that time. And I will tell you, as the governor of Nebraska, a major farm state, I supported that bill. We had just come off several years of weak prices and declining exports, so expanding the safety net for farmers made sense at the time. It was also the first Farm Bill to include an energy title. I find that a remarkable statement today when you think of the profound impact energy is having on agriculture, and the '02 bill was really the first time we had an energy title in a Farm Bill. It also greatly expanded our conservation programs -- two important policy choices that were made during that Farm Bill that are even more relevant today.

But going to the next slide, let me point out some things. Times do change. And times have changed. And the world is changing around us. We are now in a much stronger farm economy than we saw in '01 and '02. Corn prices recently hit a 10-year high, and soybean prices also have been strong. In fact, except for cotton, prices for all major program commodity crops have been strong. Farm cash receipts should reach a record $259 billion in '07; that's up $20 billion from just two years ago and up $16 billion from just last year. Those are very large jumps.

We recently bumped our export estimate this year to $78 billion. This means a one-year increase of $9.3 billion which is the second largest year-to-year increase on record.

Times do change, and of course one of the major changes is that the demand for energy crops is literally transforming rural America.

Going to the next slide, we had a few basic principles in mind as we sat down to shape our proposals. First, we wanted to make our support for producers more predictable. At our Farm Bill Forums, we heard from many farmers that our countercyclical program payments weren't providing support when it was needed most. You see, our system was based on price, but it did not take into account revenue or yields. So in years where the production was down because of drought or other problems, and prices were high, the countercyclical did not kick in; so there was no help for farmers.

But during years of high production, those good years when prices were fairly steady, they were getting payments from us and very large amounts that they would tell us at the forums, quite honestly, were more than they needed.

We propose moving to a revenue and a yield-based system to rectify that issue. Now producers will get help in years when they need it most.

Secondly, we wanted to distribute our support more equitably amongst the agricultural sectors. So we decided to expand our support for farmers who grow fruits and vegetables or other specialty crops as they are referred to in Washington. This segment of the market has been showing strong growth and last year sales at the farm gate of these products reached $37 billion. Yet they received virtually no support, and definitely no cash support from the subsidies.

To make sure our support is distributed more evenly among producers, we're also proposing new payment limits, and we have lowered the cap on the adjusted gross income from $2.5 million annually to $200,000. So if you go over $200,000 worth of adjusted gross income, you would graduate from the cash subsidy payments.

Third, we wanted our farm programs to be better able to withstand the challenges we face in the international trade arena. Support tied to price or tied to production opens up challenges under the rules of the World Trade Organization, and over the last few years we've had to deal with a series of legal setbacks on our support programs. We are reforming these programs to make them more market-oriented and to ensure that Americans and not our trading partners are setting the future direction of our farm policy.

You see, it makes no sense whatsoever to pass a program that in effect paints a bull's-eye on the back of the American farmer. That's no safety net at all.

And fourth, we wanted to make sure that we were making wise and effective investment of taxpayer dollars. I believe strongly in providing support for farmers and ranchers. I think it is an investment in America; I believe it's a wise federal policy. But we also have to respect budget constraints and exercise fiscal responsibility.

The next slide indicates kind of the macro picture of our proposals. Altogether, our proposals would save more than $10 billion over the next five years compared with what was actually spent over the last five years relative to the '02 bill. They would also fit within the President's plan to eliminate the budget deficit by 2012. Yet they would still deliver $5 billion more in support than if we just simply said, let's extend or reauthorize the current '02 bill.

The major new spending commitments we have proposed are in conservation and in the energy title. We would direct an additional $7.8 billion to conservation programs over the next 10 years. These help us support farmers without affecting the price for production of crops. And we also propose $1.6 billion for renewable energy initiatives, which I'll talk more about in greater detail in just a moment.

The next slide indicates we would also propose $1 billion in loans, and $500 million in grants to assist rural communities. These funds would help to rehabilitate rural critical access hospitals, and I might mention that you have 36 of those hospitals in the state of Indiana. These funds would also go toward rural infrastructure needs.

I mentioned specialty crops a minute ago. This slide depicts what we're proposing to do with our specialty crop programs. We want to target nearly $5 billion in support to specialty crop producers. Specialty crops are now close in value to our program crops; yet as I said, they receive virtually no cash subsidy support.

And we heard so much about the need to support beginning farmers. All the young people that are here today, this is an area of my presentation that I would strongly recommend you make some mental notes or jot down some notes. I'm especially pleased with these proposals. For starters, we're proposing a $250 million increase in direct payments to beginning farmers in the program crop area, and we've proposed other changes to make loans more accessible and flexible, those details are available on the USDA website, USDA.GOV.

As you can see, ladies and gentlemen, there's a lot in this Farm Bill. Now I'd like to focus on just one part of it. I came here today to see what you were doing with renewable energy, and I have to tell you I was impressed.

Going to the next slide, energy as we all know is a critical national security issue. It's an economic security issue, and it's an environmental issue. I believe it's especially appropriate to be talking about renewable fuels on National Agriculture Day because agriculture is going to be a very big part of the solution to our nation's energy challenges, and more specifically renewable fuels are going to play a very big role in the future of agriculture.

Going to the next slide, the President's Farm Bill proposal includes more than $1.6 billion for research and development in new renewable energy funding. A big piece of it, $210 million to support $2.1 billion in loan guarantees, is there to help build commercial skill cellulosic ethanol plants in rural areas. But there is very much more. For research, $500 million over the next 10 years for a major new bioenergy and biobased products research initiative. I saw the research you are doing here at Purdue, as I said, this is one you want to pay attention to.

And there is another $500 million in grant money which would go directly to farmers and ranchers and rural small businesses to invest in renewable energy and energy efficiency projects. Then with specific focus on cellulosic ethanol, we would commit $150 million to biomass research and $150 million to wood-to-energy research. And provide $100 million in direct support to cellulosic ethanol producers to help them reach commercial skill operations.

It just seems to me with the research you are doing here in cellulosic energy, there's some opportunities. Bottom line, energy is a priority for the country, for the President and for the United States Department of Agriculture. The Farm Bill touches on initiatives spread throughout the Department.

Biofuels are a good a place to begin. Ethanol and biodiesel in my judgment are the new frontier for corn and soybeans. U.S. production capacity for both fuels has grown very rapidly over the last few years. Today for ethanol it's 5.6 billion gallons with another 6.4 billion under construction. And for biodiesel, it's 864 million gallons with another 1.7 billion under construction. Our production numbers haven't caught up with our capacity yet, but they have been rising sharply.

I might mention, we recently displaced Brazil as the world's largest producer of ethanol.

The president of the Renewable Fuels Association, the Ethanol Industry Group, will be joining us by a conference call I believe in just a few minutes. I'll let him tell the rest of the story. It's a great story.

Biofuels are already driving commodity prices. They are also producing a wave of new jobs, new businesses, new construction, and new infrastructure, and what I find exciting is it's happening in rural America. Wind power has also grown rapidly. Wind may not be the crop we can grow, but it is a resource that we can harvest. Because of siting constraints, wind farms have to be built mostly in rural areas, and they will be paying royalties to farmers and ranchers and other rural landowners. Installed wind capacity in the United States has quadrupled since 2000. It's gone from 2,578 megawatts of installed capacity to 11,603, and that's a remarkable amount of growth. Some of these new wind farms are being built by rural electric cooperatives which we helped finance, or by rural investors assisted by the USDA Rural Development program.

As part of his strong leadership on energy issues, the President has set a national goal of boosting our annual production of renewable fuels in the U.S. to 35 billion gallons within the next 10 years. He has also tasked us to cut our annual consumption of gasoline by 20 billion gallons at the same time.

These are a challenge, but they are attainable targets. The President is very simply counting on the creativity, the ingenuity and the enterprise of the American people to close the gap between where we are today and where we need to go; and history tells us that's a sound bet. We recognize that we won't be able to reach the renewable fuel goal the President has set just by relying on corn and soybeans.

That's why, ladies and gentlemen, we're giving a very high priority to research into ways to make cellulosic feedstocks, such as grasses, and woodchips and agricultural waste, a cost-effective alternative to corn and soybeans, or an addition, in making ethanol and biodiesel fuel. The answer to this puzzle is going to be found in the research lab.

That's why I'm very excited about what I see here at Purdue. The work that is being done here is truly trend-setting, it's incredible. And we're proud to be a partner through CSREES, the Cooperative State Research Education Extension Service, in funding some of the research.

The work on biocatalysts, yeasts and plant lipids being done right here at Purdue is an important part of our effort to unlock the energy that nature has stored in our plants. USDA's own scientists, especially at the Agricultural Research Services Peoria Center, are also in the hub. They are developing new enzymes that can be used to break down cell walls. And the Forest Service, which is USDA's agency, is doing its own work on woody biomass into energy and cellulosic ethanol.

Perhaps this gives you a flavor of what USDA is all about and why we're starting to talk about the USDA being the energy agency. Since 2001, the USDA Rural Development area has invested more than $480 million in 1,100 renewable energy and energy-efficiency projects. We do everything from farms to biorefineries to solar power to methane gas recovery. The list just goes on and on.

Today, we're announcing the availability of $176.5 million in loan guarantees and $11.4 million in grants under our Renewable Energy and Energy Efficiency Program. These funds can support renewable energy and energy efficiency projects that are undertaken by farmers and ranchers or small businesses. In Indiana last year, we committed $500,000 under this program to Integrity Biofuels in Morristown. Our grant is helping Integrity double production to 14 million gallons a year.

Not too long ago when you looked at a map of ethanol and biodiesel industries, there was a big blank where Indiana was at. But your governor Mitch Daniels, your director of Agriculture Andy Miller, the great work of institutions like Purdue, have turned that all around in a big hurry. Indiana is benefiting from strong leadership.

There's another initiative we are launching today that I hope will be of interest to you. As a research tool for you and for anyone in the private sector or academia who would like to partner with us, we have developed a new web tool called the Energy Matrix. No, we didn't name it after a movie. We named it the Energy Matrix because it is a matrix. I hope you'll check it out. The Energy Matrix is easy to navigate on-line system that lets you search a cross the USDA by agency, technology type and type of activity. There's a lot to explore; energy touches everything. It involves challenges, but what great opportunities.

Let me just wrap up with this thought. You know, if you think about it, what I just said is the opposite side of the same coin, and the American free market system has a genius for flipping the coin, for turning problems into opportunities. We believe that's going to happen in energy as well. The President's Farm Bill proposals, America's Farm Bill, are an aggressive, realistic investment in America's energy future.

And it's been a privilege for me to present that to you this afternoon. Thank you very much.

[Applause.]

DEAN WOODSON: Thank you, Secretary Johanns. You and the President have outlined a very aggressive strategy for American agriculture, and we're proud to be a part of helping with the solutions to the challenges you've put before us.

We now will enter the phase of the discussion where we have a distinguished group of panelists, both here on stage and joining us by conference call. So Secretary Johanns is joined to his right by Martin Jischke, the tenth president of Purdue University, by Andy Miller the director of the Indiana State Department of Agriculture, by Dr. Michael Ladisch distinguished professor of Agriculture and Biological Engineering, and the director of the Laboratory for Renewable Resource Engineering here at Purdue.

Dr. Keith Collins, the chief economist for the U.S. Department of Agriculture, is here with us today as well. And then finally, on stage Dr. Bernie Tao, who's a professor in agriculture and biological engineering and holds the Indiana Soybean Alliance chair for New Uses of Soybean.

By phone we have Under Secretary Tom Dorr calling in from Washington, and Bob Dinneen who is the president of the Renewable Fuels Association of America. So we're pleased to have them with us by phone.

We have mics available, and if you just indicate your interest and question we'll roam the room and try to catch you. I will announce before we get started that the Secretary and Dr. Collins and others in their party will need to leave promptly at 5:00. If there are other burning issues that the other panelists can help answer, we may be able to stay a bit longer.

We also have phone lines open. And if I can watch the red light above, I know when someone's calling in and we'll try to get their questions answered as well.

So with that, let me start out by giving the scientist the first crack. We are at Purdue. Mike and Bernie, Dr. Tao and Dr. Ladisch, tell us why this kind of funding is so important for research into cellulosic ethanol and biodiesel.

DR. TAO: The question is, why is it so important? I think it's very important because it supports the future of the research and the future of the development of the cellulosic ethanol industry. That is, the students, the excellent students that we have here at Purdue University.

Both graduate students and undergraduate students in our laboratory are so enthused and, matter of fact, in our classes are so enthused about this area. This funding enables them to get a taste of the research and also collaborate with key scientists such as Dr. Nancy Ho who developed the yeast -- in order to learn what this technology can do. So what it will do for us is help to translate this technology from concept to laboratory and, since we work so closely with industry, the first steps toward a development of the cellulosic ethanol industry itself.

DR. LADISCH That's absolutely right, Mike. When you look forward, this research and this type of activity really is reaching out for the future, not just in the education area and the research area but also the basic nature of our nation if you look at energy security and you look at the issues involved in that politically, internationally, we really have an opportunity to realign the historical agriculture and the energy industries and the chemical processing materials industries that hasn't existed for almost 100 years here. So this really ties into the economics and the opportunities for agriculture and the nation for the next several decades.

DR. WOODSON: Questions in the audience? If not, I will continue. Wait for a microphone, please.

QUESTION: Yes, sir. My question is, why are we going to use food for fuel? My name is Murray Gingrich (sp). I'm the president, CEO, of Indiana Clean Energy, Indiana's largest soybean biodiesel plant, over 85 million gallons, which will break ground in 60 days. Now we've not asked for any government support in this for personal reasons. But why are we using food for fuel?

SEC. JOHANNS: I'm trying to grab ahold of that, and I'm going to already queue up Dr. Collins who can talk a little bit with me about this issue. The whole issue of the tension between food and fuel has really arisen as we've seen those corn prices and soybean prices go up. And we study those things very carefully. Those are issues that are of concern to us because if you're a dairy farmer out there, you saw your input costs for corn go from $2.00 a bushel to the vicinity of $4.00 a bushel very, very quickly. It happened really within about a year's period of time.

Here's kind of what we see as we look out there. When we sat down to think about our Farm Bill proposals, we focused on the cellulosic ethanol. That's not to say that we believe that corn-based ethanol won't be a part of our ethanol future. I think there's a solid foundation. I believe that it will.

But we really believe that the next generation is cellulosic ethanol. So if you look at the programs we've offered in our Farm Bill proposal, they are targeted at cellulosic. The research to development, the loan guarantee program are specifically targeted at cellulosic.

The other thing I will say to you, and this is actually Dr. Collins' area a little more than mine, but farmers respond to the market. In a free market system, I would just suggest that the market does work. The signal being sent to farmers today is that there's $3.50 corn out there, $4.00 corn, and we anticipate -- although our evidence at this point is anecdotal; we'll have better figures on March 30 -- we anticipate more corn acres are going to be planted.

There's a little bit of flex there too because soybean acres can move over to corn acres pretty readily, but the other thing that's going on is that last year we raised our largest soybean crop ever and we have the largest carryover. So you do have some flexibility in that decision in terms of the macro picture, the overall picture.

Then the other thing I will tell you is that the President's goal is based upon renewable and alternative energy sources. What does that mean? It could be cellulosic ethanol, could be plug-in vehicles, could be a whole host of solutions that are brought to bear to the energy issues that we face. So those would be some of the things I'd offer in response to your question.

Doctor, any thoughts?

DR. KEITH COLLINS: My boss did a good job sounding like an economist there. Good answer. Just a couple of brief thoughts about this. I first would say that I don't think about using food for fuel. I think about using crops for fuel. I say that because this use has been an objective of agriculture for a long, long time. Henry Ford built a car out of plastic made from soybeans a long, long time ago. We've been trying to utilize agricultural commodities in industrial uses for decades precisely because the productive capacity of American agriculture has been so great. It's often overwhelmed demand and created lower prices. That's why we have this elaborate system of price and income support programs at USDA. So it's not a new thing to use crops for fuel.

I think the Secretary mentioned some of the things that we're focusing on as now the fuel component of demand has grown so large that it's raised questions about what it means for food prices in the future. I think the focus on improving the yields of corn, for example, which the private sector is doing, attracting acreage into crop production -- and we certainly have a lot of acreage in the United States that could still come into crop production as prices go up -- I think the focus is on cellulosic ethanol, where we're going to use residues or waste which are clearly not suitable for food.

In addition to that, as you develop these grasses and switch grass and mycanthes and all the alternatives, a lot of that will be grown on nonprime agricultural land that wouldn't be used for food -- rangeland, cropland pasture. So I think those are alternatives that over time will mitigate some of the current pressure we feel right now between this trade-off between food and fuel.

DR. WOODSON: I think I have an indication that Under Secretary Dorr or Mr. Dinneen would like to make a comment.

MR. DINNEEN: If I could, yes. This is Bob Dinneen with the Renewable Fuels Association. Both the Secretary and Dr. Collins have indeed done a great job responding to that question. I would just add one other thought, and that is when you're processing corn into ethanol, you're not using the entire kernel of corn. We only borrow the starch, and what is left behind is a very high-value protein, high-value nutrient feed product that is then used in cattle markets, poultry markets, and other livestock markets. So it's really not a food versus fuel debate here whatsoever.

DR. WOODSON: I've got two questions here, two gentlemen.

QUESTION: I was just curious. How much of a factor it's going to be to improve the efficiency of the cellulosic ethanol as far as their production of the crops, as much as it is to improve the yields?

DR. LADISCH: There are two components to your question, I believe. And that is, how much improvement is needed in growing the crop and the second was, how much improvement is needed in the processing of the crop to ethanol. If that's the question, basically growing the crop is going to be very important. This is why we're looking at different sources of cellulosic feedstocks for these plants. And these would include switchgrass, different types of agriculture residues, crops that are grown to maximize biomass, the cellulosic part.

And with current technology such as being pursued by Clint Chappel and his group and Rick Neiland, 10 tons per acre, 1,000 gallons of ethanol per acre, are certainly possible.

In the bioprocessing area, pretreatment, softening up that tough cellulosic material so you can break it down into sugars, and then being able to ferment all the sugars, not just glucose as we now do with corn but also the pentose by Dr. Nancy Ho are key because they increase the conversion by 40 to 50 percent as was pointed out earlier today by Dr. Jischke.

So combined, we think that 1,000 gallons per acre from cellulosic materials is certainly within reach in the near future. This will transform the industry and meet some of the goals. You've probably heard it 30 by 30, Bob Dinneen can address that -- 30 percent of U.S. gasoline fuel consumption by 2030 is certainly possible.

But this will require technology, it will require research, require sharp graduate students -- I'm making a pitch here -- and others to join us in this effort to carry out work not only in engineering but also in agriculture.

SEC. DORR: I have a question here. Under Secretary Dorr. I'd like to add one comment to that question and response. I completely concur about the improvement of yields. Yesterday we were privy to a meeting with Metabolics, who is partnering with ADM. And some of their switchgrass genomes are actually producing not only pretreated material but also material that already has some preformed plastic already growing within the plant as they harvest it. The researcher can probably define that better than I.

But, I think, another major issue for research and one that we tend to often overlook is the need for what you did allude to in your question, the efficiency of both processing and transporting the crop. One of the things I think we need to be sure that we not overlook is dealing with our partners in the oil and gas industry who already have a lot of technology, a lot of background in distribution and storage and transportation of these products. So the conception, for example, of moving switchgrass by baling it and moving it, the traditional agricultural approach, may be overridden if we look at it closely, by pulverizing it, and moving it, and moving it through pipes in the slurry system and storing it in liquid tanks. There are a lot of those issues that need to have research but also offer an awful lot of potential for economic growth and development if we do it correctly.

MR. DINNEEN: Just quickly, I would also add that from the perspective of the ethanol industry today it's unrecognizable from what it was five years ago and will be unrecognizable again five years from now. But technologies that the industry is pursuing, whether it's low cook, no cook fermentation, or corn fractionalization or corn oil extraction, and the energy processes that we are looking at, whether biomass cathefication or using as the Secretary referred to cow manure to power the plants, we are becoming far more efficient today. And as new capital comes into the industry, new intellectual capital is coming into the industry as well. And we are looking at a range of technologies that will transform the industry.

DR. WOODSON: Thank you. One question, Dr. Jischke, I would like to ask of you. Purdue University has launched an outstanding interdisciplinary effort in discovery part. How do you envision this research enterprise fitting into this new agenda for American agriculture?

DR. JISCHKE: It seems to me it provides an enormous opportunity for producers specifically but for research universities generally. If you try to think about the system that has to evolve in order to capitalize on this energy opportunity, it involves the basic plant sciences, it involves an enormous number of engineering disciplines and the conversion of these plants to ethanol. There are a bunch of very interesting system questions. Under Secretary Dorr just referred to one, is it smart to bail it and ship it? How big should these plants be? What are the underlying economics? Where's the leverage in the research? And finally, what is a sensible policy for our national government in fostering the development of this industry? I think most of you know there's currently a subsidy policy that subsidizes ethanol at 51 cents a gallon. We have some very astute economists who have made the argument that perhaps a more variable subsidy that depends on the price of oil would be a wiser policy, more cost effective policy for our country.

All these issues require further study, and they are not the province of any single discipline. What we've created here at Purdue and other universities are creating as well is a capacity for a multidisciplinary, interdisciplinary approach where we can bring basic sciences together with engineers together with economists together with systems modelers; and begin to understand the full range of research questions that are out there that have to be pursued if we are to capitalize on what is a staggering opportunity.

I want to end on the scale of the opportunity. If we could replace half the imported oil of the United States, and the President's Council of Advisors on Science and Technology on which I serve has estimated that is possible with biofuels -- that's $150 to $170 billion a years. You just heard the Secretary in his remarks that said the farm receipts today are $259 billion. Think of the economic impact and the resulting broader social impact of an infusion of another $150 to $160 billion into rural America because of the emergence of an alternative energy industry. It's staggering. And that does not count a penny of all the national security and international relations savings that might come from a higher level of energy independence. This is an extraordinary opportunity for this part of the country because this is where the good land is, sir. And it's an amazing opportunity for our country, and I believe the great research universities, Purdue included, ought to marshal their capacities to help get at this opportunity, to be utterly transformative.

DR. WOODSON: Director Miller?

DIRECTOR MILLER: Thank you, Doctor. I think you just encapsulated exactly why everyone in the state of Indiana, frankly around the country, should be excited about this opportunity. The other amazing thing about the figures that Dr. Jischke just put forward is almost every single penny of that will be going to towns and communities that today are struggling to revitalize themselves. Right before us in a state like Indiana we have an opportunity to reshape our rural economy in a way that we have not seen in decades if not over a century. I think it's incumbent upon all of us as Governor Daniels said earlier today, to think about this as a pioneering time.

Now I'm sure the remainder of questions are going to focus largely on the challenges that are before us, but the key thing is to not let our challenges be obstacles or barriers, but instead look at those with folks like Dr. Ladisch and Dr. Tao at the forefront of helping us turn those challenges into opportunities. And to do that we must remember that the stakes are extremely high, and the opportunity for a state like Indiana is absolutely phenomenal. And really at the end of the day that's where Governor Daniels, Lieutenant Governor Skillman get as excited as they do about this opportunity and what it could mean for Indiana.

DR. WOODSON: Thank you. Question?

QUESTION: Howard Duff, retired ag economist here, now a farmer and farm consultant. I've heard opportunity, I've heard agriculture. I like to play offense rather than defense. Help me play offense with the people in this issue. In the last 19 days I've gone to bed before 7:00 a.m. four times. The short run issue with a great thing about ethanol is that more people are going to lose their farms -- the tenants that is are going to lose their leases before next year than at any time since the early '70s, and they won't even know it until it's gone.

DR. WOODSON: Howard, do you have a question?

MR. DUFF: I have a question. That's the introduction. My question is, what can USDA, what can the people's scientists do in a land grant to create a positive opportunity from this great thing of ethanol to change? But what can be done to make sure there really are farmers here at the supply chain? We talk about supply chain economics, and I'm concerned about the front of that being no more than serfs. And that's my question. How can I play offense in this? And I'm sorry to bring this up because everything's going so great. But doggone it, there are negative consequences, and those are the ones I'm here about.

DR. WOODSON: Thank you. Anyone care to --

SEC. JOHANNS: I can offer a thought or two. It's a complicated question, but here are some thoughts. When we went out and did our Farm Bill Forums, we heard from farmers all across the country about some of the challenges that you've raised, the cash rents getting very expensive, very difficult for young farmers to get into farming, land prices going so high that it was making it very difficult, farm payments going only to a few of the very large operators and really making it difficult on the medium-sized, smaller operators.

We heard all the things I think your question at least implies.

In our Farm Bill proposals, we've really addressed all those issues. If you look at our beginning farmer proposals, I will promise you that if you studied all the farm bills dating back to the very first one that was released by Henry Wallace you would never see a stronger beginning farmer proposal in the farm bill.

We improve our loan portfolio. We enhanced the direct payment for beginning farmers by a significant percentage for the first five years they are in farming. Probably the most controversial proposal we've put out there, although we believe in it very strongly, is the proposal on payment limits. We basically say this. We say, if you have an adjusted gross income, averaged over three years, we'll allow you to average it three years, if you have an adjusted gross income over $200,000 you graduate from farm subsidy payments. It's America, and we wish you well. If you want to own all the land next to the farm you own, you're free to do that, but there' s a point at which we believe the subsidies should no longer be there.

Now here's what I will tell you we've done with our payment limit provision. We've impacted about 2.3 percent of those individuals who are in the upper echelon of tax filers. And you can even slice it finer than that. What we've really impacted is about 38,000 people. Adjusted gross income, these are wealthy people, people doing well by any stretch, any definition, any county, anyplace in the United States.

The other thing that we have done because we think this just simply works better for farmers is, we have increased the amount of money we're putting into conservation programs by $7.8 billion. And we studied our conservation programs. What we see is, they tend to help that farmer that is a smaller farmer, a medium sized farmer, plus the environmental benefits we achieve are very positive. We increased funding for research and development.

I guess what I'd say to you is, look at our Farm Bill proposal, and I think many of the things you worry about we heard from farmers and we addressed in areas of our Farm Bill proposal. As somebody said, the day we put it out, this is not your grandfather's Farm Bill. It is not. It is a forward-leaning, futuristic Farm Bill that I really think has a very positive agenda for American agriculture, and I think it's going to do a lot of good and especially I think it's going to help some young people who are in this audience who are interested in getting into production agriculture.

DR. WOODSON: Dr. Collins?

DR. COLLINS: Yes, thank you. The speaker made a point. I think the Secretary did a great job describing our policy initiative at USDA to deal with some of the concerns that are arising. But the speaker made a point that everything's not hunky dory in the biofuels world. I think it's a valid point that I ought to mention or amplify. I think first of all on the crops side, we're talking about record or near-record prices for a range of crops. This is leading to an increase in farm income for crop agriculture that's unprecedented, record crop receipts in 2007. If you look at corn receipts alone, we expect them to go from $23 billion to $31 billion this year. Now you can argue that this is creating problems for crop producers, but I have difficulty seeing those problems in that environment. Yes, you're getting higher land prices because of low interest rates, the liquidity in our economy, because of the increases in nonagricultural use value that bleeds over from the nonfarm economy and from the high farm income we've had over the last couple of years.

Where I think there is a legitimate point about adjustment and adverse consequences is more on the livestock side because of the higher feed prices. Bob Dinneen talked about distiller-dried grains coming back into the feed supply. Well, that's 30 percent of every bushel of corn that goes into an ethanol plant, not 100 percent of every bushel. So it's a legitimate issue, and we're seeing higher feed margins squeezed in the short term for livestock producers. That generally means production will get cut back, market prices will go up over time, consumer prices will go up over time, and the original margins will be restored with some adjustment.

Unfortunately that means some pain in the near term, and that's the kind of transition and adjustment we're going through right now. But I would say to that that there's an end in sight on that, first of all. There always is. And second of all, I would say, thank God it's not the mid 1990s. You know, in the mid 1990s when we set our record-high corn price of $3.24 a bushel for the '95, crop we were looking at $65 cattle prices. The futures market in cattle right now is $97 a hundredweight. We've had much stronger livestock prices. So this transition that we're going through right now, this adjustment that's taking place, at least it's taking place with a little bit firmer base in the livestock side.

But I think there's no denying that, there is some adjustment that will go on, and I think agriculture has demonstrated that it can manage those kinds of adjustment of the magnitude that we're looking at right now.

I say that hopefully. We'll see how it works over the next couple of years, but I'm optimistic that it will work out.

DR. WOODSON: We have a question from a livestock producer.

QUESTION: Thank you. My name is John Hardin. And I'll ask Dr. Collins to comment on this. Obviously, we are all very excited about what a new use and new products mean to American agriculture. One of the parts that Congress has passed to support the ethanol industry is the $.54 a gallon duty. And I'm, quite frankly, very worried about the unintended consequence of encouraging much more livestock production in South America as opposed to ethanol production and its impact on our future ability to be competitive as we export.

I'd be curious to know what you your reaction is. And I think the other thing to understand is, the current technology for moving ethanol is not through a pipeline. And quite frankly both the West Coast and the East Coast could easily use ethanol that is in demand at this moment that we cannot produce. I think that taken with the comments that Dr. Jischke made were all about optimizing policy for American agriculture. I'd be curious as to your thoughts on those matters.

DR. COLLINS: If I understand your question, you are suggesting that if we didn't have the 54 cent import duty on ethanol that that would be positive for our livestock industry and probably more negative for the South American livestock industry. Is that --

QUESTION (Mr. Hardin): The point is, if we put a barrier in place, the South Americans have another way to deal with that. And I think it's an unintended consequence, and I quite frankly have a very difficult time wondering why we don't have a duty on Iranian oil but we do on our allies' ethanol. And I realize there's lots of politics, but just ask you to respond to that.

DR. COLLINS: Well, the 54 cent duty on ethanol traces back to I think the 1970s, and it really reflects the fact that at the time we had a 54 cent tax credit for the production of ethanol in the United States. The idea of the duty was not to transfer the tax credit subsidy to foreigners, but to have it be received by domestic producers to develop the domestic industry. Since then that 54 cent duty has been lowered to 51 cents, but it's still pretty close to the 54 cent import duty. Both of those, the tax credit and the import tariff, are set to expire here over the next couple of years. The tariff in 2009 and the credit in 2010. There will be a national debate about whether they should be extended or not.

And the environment, the policies in place at that time will really determine the merits of what happens there. I think the primary determining factor will be the extent to which the renewable fuels standard we have in place today, which mandates 7.5 billion gallons of renewable fuels be used by 2012, whether that's increased, how much it's increased by, whether it becomes an alternative fuel standard as opposed to just a renewable fuels standard. That will play an important role in whether people think a continued tax credit is merited.

The tariff, I would say, will be tied to the continuation of the tax credit.

MR. DINNEEN: If I could underscore what Dr. Collins just indicated though, because it's a very important point, the secondary tariff on imported ethanol is not a barrier to entry at all. We imported 650 million gallons of ethanol last year, 450 million gallons of that directly from Brazil. The secondary tariff is there only to make sure the investment the U.S. taxpayers are making on a renewable fuels industry is targeted on U.S. farmers and U.S. industry. Brazil has done a great job subsidizing and building their industry. They don't need our tax dollars as well.

The other point in terms of the pipeline the questioner had asked, we've got a very effective virtual pipeline. We get ethanol anyplace it needs to be with the rail and barge and truck. There is not a market in this country that is looking for ethanol today that is not being met. Ethanol is being blended in 46 percent of the nation's fuel. Every gallon of gasoline in California is blended with ethanol. Every gallon of gasoline in New York City is blended with ethanol. So the fact that there's just not enough market demand to justify putting ethanol on a pipeline in this country is not a barrier to us meeting the marketplace demand at all either.

DR. WOODSON: Thank you. We've reached the hour of 5:00. I want to again thank the Secretary and Dr. Collins for being with us today, and give them a chance to leave. If there are other burning questions, we could try for just a few more minutes. But please join me in thanking the Secretary for being here.

[Applause.]

QUESTION: How much does the ethanol production affect local water supplies?

DR. TAO: That is an open-ended question. Modern plants use as little as one gallon of water per 10 gallons of ethanol produced. That water comes in with the corn. However, in many cases existing plants are not that efficient. So really it depends on the bioprocess, the actual manufacturing facility design as far as the impact on the water quality because the impact would come from the recycling or disposal if you will of the water. If this is done through the sorts of treatment facilities that are installed in modern plants, the impact is there but it's small, and with this, Andy, I would probably defer any further questions to the Indiana Department of Environmental Management because they would have those questions.

DIRECTOR MILLER: I will tell you a couple things. I do know of all the plants we've permitted in the state, water usage has not been a limiting factor. The second thing, we sat through an amazing presentation by two of the leading developers of ethanol facilities around the country, and if you look at the technology development, we are seeing ourselves clear to the point where almost zero new water would be needed to be introduced into an ethanol plant. Whoever made the point several comments ago about the fact that technology is reinventing itself is absolutely true. The market has an impetus to remove water because adding water, using water costs money. And so the market has an impetus to reduce it, and the technology is, while it's not complete yet it's near completion. I think again you're going to see the ethanol technology reinvent itself several times over the next several years.

DR. WOODSON: Thank you all for joining us today, and please join me in thanking our other panelists.

[Applause.]