SEC. ED. SCHAFER: I'm pleased to be with you today, and lest anybody start to panic I assure you I'm not going to be speaking for 30 minutes. I apologize for my cold, I know I sound a little stuffy here but I assure you I spent the weekend with our youngest daughter who is a physician assistant. She assured me that I'm past the contagious stage, so I think we're going to be all right.

I do appreciate the invitation to be with you as well for this important topic, but also because it gives me an opportunity to get out of Washington, D.C. for a couple of days which is always a good thing.

You know, in North Dakota—we're adjusting from North Dakota life to life in Washington, D.C. It is quite different as you can imagine. In North Dakota it is wide open spaces and not that many people. I kind of think it's like moving from life in the vast lane to life in the fast lane in Washington, D.C.

But you know, when people in North Dakota go off to Washington, whether it's an elected official or head of a trade group or for whatever reason, we have to worry about them a little bit because after they've been there some time that they start to lose good judgment and common sense—and as we say in North Dakota, maybe there's something funny in the water out there.

So I was very pleased to find as my arrival at USDA came that on all of the water systems in Washington in the USDA building, in the drinking fountains, the coffee machines, everything has big blue reverse osmosis filters there. So I'm thinking I'll probably be all right for my short time at USDA before I get back home to North Dakota.

You know, it's really good to be with you today to discuss renewable fuels because, given the coverage in the recent months, I have to say that it's a story that's both been under-reported and over-reported: over-reported because back in Washington some people have been pretty eager to blame ethanol and biodiesel production for higher fuel prices and higher food prices.

Well, that's a debate that I'm happy to join. Higher prices from corn certainly have had an impact, but those who are singling out biofuels to blame are really ignoring the elephant in the room. That elephant is the roughly 60 percent increase in the world price of oil over the last 12 months.

Higher fuel costs have hit farm production pretty hard. They've also jacked up the cost of packaging and transportation and distribution, all of which help raise the cost of products on our retail shelves. Taking biofuels out of the picture does nothing to blunt the impact of soaring oil prices. It just leaves us paying more for gasoline.

In fact, the Department of Energy calculates that blending ethanol into gasoline cuts the price of a gallon of gas by 20 to 35 cents a gallon. That's a savings to the American drivers of $28 billion to $49 billion. And if you split the difference of that, it's about a $200 annual saving for the typical family in the United States today.

If you're like a lot of people in America that think Kansas City is in Kansas, that means drivers in Kansas save $300 to $500 billion every year from the introduction of ethanol into gasoline. And Missouri, where we are, we got to $1 billion in savings. So ethanol production is lowering the cost to our drivers out there.

Despite the recent flood in the Midwest, we're on track for the second best production corn crop ever. More than 12 billion bushels of corn are expected. And also for the soybeans, the fourth best year ever, with almost 3 billion bushels in yield. This should ease some of the pressure on food prices.

On the other important side of the story is the broadest support for renewable fuels in the new farm bill, particularly those fuels made from biomass feedstocks. The new farm bill produced more $1 billion in money for renewable energy programs over the next five years. But just as important as the money is the forward moving path and the flexible policy tools that the farm bill creates to help make the second generation set of goals for biofuels a commercial reality.

For the first time, USDA will be able to help bio refineries adopt new production technologies on a commercial scale. We'll be able to provide loan guarantees of up to $250 million to help promising technologies jump out of the laboratory and into the marketplace much faster and on a larger scale.

The farm bill also creates a new biomass crop assistance program that helps create integrated models for how we can successfully grow and harvest and collect and distribute and process biomass materials. Once those models are refined and proven, they can be expanded all over the country.

We pledge to make good use of these authorities at USDA to help get this industry moving, while being careful at the same time not to let companies become dependent on taxpayer support.

And exciting things are already happening with cellulosic ethanol. The POET plant in Scotland, South Dakota, is going to be turning out 20,000 gallons of cellulosic ethanol made from corn fiber and corn cobs later this year. Next year they will start work on a commercial scale to sell cellulosic ethanol plant in Iowa. That's a joint effort between POET and the U.S. Department of Energy called Project Liberty. Also the KL Processing plant in Wyoming is starting to turn woody biomass into ethanol as well.

I have to tell you, one of the exciting projects I've seen recently is in our citrus biomass laboratory, USDA's citrus laboratories in Florida, where they are generating ethanol out of the orange peels that are left over from the huge orange juice industry. It's kind of fun to see that creative use of the orange peels, a byproduct and often leftover byproduct. You know what was interesting as well is, it smells pretty good, you know.

[Laughter]

Anyway, back in Washington the USDA is working with the Department of Energy, with the EPA and with other agencies on a national biofuels action plan. That plan will tackle the scientific, the logistical and other issues that must be overcome to meet the very ambitious renewable fuels standard that the President and Congress set for us in last year's energy bill. We expect to roll that plan out in the next few weeks.

Watching oil prices top $140 a barrel and gasoline spike to over $4.00 a gallon this summer has underlined as never before how urgently we need to find and develop clean and new sources of energy. And seeing the instability in the foreign markets of that energy, we now more than ever know that we need to develop a safe, clean, affordable and domestic supply of energy that will secure our future. That's going to take a combined effort by government and the private sector to get that job done.

I appreciate the opportunity to be with you. I look forward to the panel and the questions. And Bill, thanks again for the invitation to be with you all today, and I'll look forward to the interaction.

MODERATOR: Thank you, Mr. Secretary. Let us now move over to our, I don't know if they are panelists or conversationalists. But would one of you gentlemen like to begin the conversation?

CHRIS CLAYTON: I'll go first. I'm a terrible conversationalist, but you did talk about the renewable fuels standard and the reason for biofuels action plan, some of the challenges of that. As an official from very pro-ethanol administration, I wonder how you interpret what happened with the GOP platform last week, calling for an end to mandates. And then what does that say to investors about the stability of ethanol policy particularly for that second generation?

SEC. SCHAFER: Well, you know, I appreciate your question because I did raise my eyebrows actually when I saw the Republican platform plank regarding mandates. And it spurred my thinking to remind me that I myself am not a mandate person. I don't believe our government should tell manufacturers what cars they ought to manufacture. I don't believe that the government should tell individuals what kind of car they have to drive or what kind of fuel to put in their car.

And I am reminded that the rules for renewable fuel standard are often categorized as a mandate including goals or targets (unclear) and there's no mandate there. There is no requirement for ethanol manufacturing or investment. It's a goal to say that we can generate 36 billion gallons in the year 2020 of renewable fuels.

But also I think it's important to note that of that 36 billion gallons of renewable fuel, 14 percent of it is targeted for a cap for corn-based ethanol generation. So I think what happened in the Republican convention at the platform committee level is, Republicans went back to their roots of saying government is there to help support and pursue public policy, but it's not there to tell us what to do.

And as I looked at that, how it relates to this specific issue on renewable fuel standards in this country, I believe that it's important that we can put dollars and subsidy generated by tax dollars into incentives to increase investment for a new industry, for a new product, and for infrastructure. Importantly, I believe those incentives ought to stay there until the industry is mature, until money and dollars can be made, profits can be made, and the infrastructure developed. And then those dollars should go away and into other public policy pursuits.

So I think it really matches what we're trying to do. I would also note as a former governor, I don't ever recall once campaigning on a Republican platform that I ever saw any platform plank reduced to actual public policy.

[Laughter]

BRAD ZIGLER: I'm going to jump in here. Mr. Secretary, Natural Resources Research Journal back in 2005 published a study that was significant. Ethanol production required more fossil fuel energy than the yield that we get from the outsource fuel. I'm wondering in your opinion if that was evidence of 2005 technology and relative inefficiency, do you think that with the technology that you see now in the field such as the fractionalization that energy yields are more efficient, where do you see them going from here?

SEC. SCHAFER: You know, it's hard to focus on one study. There are so many. And what really we have to include in those kind of studies are how we can take the inputs on the particular study. I don't know if this is the particular one, but more than one so far has stated clear-cutting forests in Brazil, what's the effect on the environment, and what is the cost of energy, and therefore the cost of energy in ethanol production is less than one. Most studies I've seen I think confirm the fact that there is a positive energy generation from the production of ethanol. It's not a big one, though. It's 1.2 percent. It's more than a 1 to 1 ratio, but certainly not as high as some other biofuels can make.

I think importantly at USDA laboratories we're working on a better fermentation process, better feedstocks that use less energy cost to grow, to collect and distribute. And certainly as the technology moves forward we're going to see more production per acre of ethanol, which then drives down the cost of production for energy cost per gallon produced.

So I believe that currently we do have a positive effort for the production of energy through ethanol. It's not as great as it used to be, but I'm convinced that the technology is moving so that while we develop the infrastructure and pursue this important public policy for our country, we will see increases in that efficiency as we move forward.

QUESTION: (unclear). Talking about the effect of ethanol on gasoline consumer policies, and you talk about (unclear). Is it also apparent (unclear portion)? (unclear) lowest increase in production in renewable fuels (unclear) sugar. (unclear) (unclear) support public policy. How (unclear)?

SEC. SCHAFER: Well, you know, the tariff on imports of ethanol, for instance, is an interesting dynamic in the current new farm bill. You know, I had the opportunity to recommend to the President that he veto the wildly popular farm bill. And not only did he have to do it once but he had to do it twice because of the mistake that Congress made.

You know, it's important to the administration, it believes in an open market, free market approach, that feedstocks ought to be generated by markets. And in that case in order to generate feedstocks for the marketplace we just shouldn't have tariffs on imported products. We pushed Congress to allow a tariff on imported ethanol to lapse. It was supposed to lapse a couple years from now. We did not win that argument and we will have that tariff through the life of the farm bill which will last through the next couple of years.

So I think the representative form of government in our Congress cutting that into a little section as we promote here, and that public policy probably overrode the long term development of this industry. Certainly, I speak in general terms for the administration that we need to reduce tariffs, barriers, duties, any kind of government restrictions that interfere with the free marketplace in feedstocks for the generation of our biofuels.

Speaking personally, I feel strongly that we have to this industry develop to that mature profitable area, and then back off the subsidies, duties, tariffs—which are all protection issues. It goes away in the marketplace through our products.

So while we deliver now the authority to generate tariffs and the resultant revenues from imported biofuels, both feedstocks and (unclear), that is not necessarily the direction that this administration and myself personally or USDA would like to see.

QUESTION: (off-mike) (unclear)

SEC. SCHAFER: Well, I think we're dealing with two different issues here. One is an import duty law. I think in that case you can make the tariffs disappear when they lapse or overnight with the stroke of a pen.

The blender credits are a little different issue. In the new farm bill the Congress increased those blenders credits for cellulosic. Again as an effort to say we need to charge up this part of the equation of the second generation to support them. We need to get incentives out there for investment in second generation and to move it from the laboratories into the commercialized marketplace.

So I think that was okay. I think that it's a good sense to say we want to spur this forward and that makes an important public statement.

My major concern as I mentioned in here is that we don't want to see the industry getting dependent on these subsidies. My major concern back from my time as governor is, it is a good idea if you have to use last year's dollars to generate a product or a new career or new industry.

But I think it's a bad idea long term when those very companies that are seeking these subsidies bill it as an operational cost. It must be considered a development cost, employee training issue, relocation cost, or something that tells your development it can stand on its own. But we here in the United States of America did not build huge economic engine in this country really by private enterprise because government gave money to operate the business. I think that's a mistake, and in this case I believe personally that the ethanol industry has incorporated the taxpayer subsidies into their operational financial models. I think that's a mistake, and because of that everybody has to see a gradual lessening or a step down reduction of the subsidies because when you built in the financial model.

MODERATOR: We'll take one more question from our conversationalists, and then open the mikes up in the back of the room there and give you all a chance for another one later.

QUESTION: You talked about (unclear). (unclear) serves as a function market. (unclear). As you look ahead at that feedstocks involvement, what are some challenges you see at the USDA for long-term (unclear)?

SEC. SCHAFER: That's a good direction for a question. I guess I see it in a couple of matters here. One is, I don't expect USDA to carry a huge role in as you mentioned the identification of products or the conditions under which they are grown or we're not going to stamp it USDA foods or organically generated foods or things that we normally use our inspection efforts for.

I do believe, to go back to our previous comment, that feedstocks ought to be generated by the marketplace, and our role in that is to generate through our research efforts (unclear) to advance the ability of developing different kind of feedstocks to make that productive realm. I must say however that I just came this morning from a meeting of the new EPA committee that's looking at the environmental impacts of biofuel production. And importantly as we look at the balance of keeping our land productive and the economic cost of the environmental ways to protect that land, I think the USDA will have a very important role as we champion the production on the land in a manner that is environmentally sound.

We promote at USDA good environmental practices, good taxpayer investments in watersheds and buffer strips, things that protect our environment. We develop precision farming techniques such as no till tilling that keeps plant material on the ground so the ground under it can become a better carbon sink.

We can promote better water, better drainage systems, those kind of things so that we can be champions of bioenergy, but do it in a manner that also champions the environmental protections that are important impacts on pure water, air, and land .

So I guess I don't anticipate that USDA inspection services will be approving or disapproving of certain feedstock or the method under which it is grown as far as a certain productive energy source. Going back to how much energy you can produce out of a bushel, I don't think that's our role. I think our role is to make sure that we keep that balance between the productivity of the land and the important environmental concerns like air and water. I don't know if that answered your question.

MODERATOR: If anybody wants to go to the microphone and ask questions? Meanwhile, while we're waiting for that lineup, Brad, you missed your chance. Would you like to weigh in now?

BRAD ZIGLER: Well, I was going to ask you if you thought the biofuels (unclear) is something of a one off or do you see this as -- we had a lunchtime speaker talk about the desire for a national energy policy. How do you see biomass, biofuel production fitting into a more global approach?

SEC. SCHAFER: Well, you know, I'm in that all the above category. I think we need to be pursuing all kinds of energy sources. In 1996, I was the Chairman of the Interstate Oil and Gas Compact Commission; those are all the states that produce oil and/or gas. And when I was chairman there, we developed a public policy and issued a booklet called "America, a Dependent Nation." At that point in time we were developing a little over 40 percent of our energy costs through nondomestic sources, imports—mostly of oil.

We projected at that time that if we don't do something about pursuing domestic sources of energy in our country, that we will see the day when 60 or 65 percent of our energy efforts are imported to the U.S. We generated the booklet we gave at that time in 1996 to make a presentation to both then President Bill Clinton and Senator Bob Dole, and said, "We need to enter this into the public discussion in the presidential race." Of course we all know we didn't hear anything about that in the presidential race. So by the end of the course of today, we're looking at 65 percent of our energy sources being imported in this country.

It behooves us to put on the table a national energy policy, and that national energy policy in my view must include the enhancement and cleaner discovery, recovery and use of traditional fossil fuel resources in this country.

I think it must include the public policy direction of biofuels, but we also have to look at the incentives of wind, of natural gas, of solar. And as an example the solar tax credits are about to expire. Why would you invest in a very expensive energy generated resource today without good public policy or (unclear)? Congress has not seen fit to do give those credits. So you've got (unclear) as well, so you have solar, wind credits.

So it would help if we had an overall, overarching national energy policy that says this is where the country needs to go. If we don't have one then we can't develop public policy to move us in that direction, whether it be tax incentives, regulatory issues, whatever they may be. Until you get that overall picture, we're not going to move in the right direction.

We don't have it. We've been talking about it in this country for years and years and years. And to date Congress has not seen fit to develop a national energy policy. Until we do, we're not going to see a proper pathway unless we get there that includes what I said earlier, all of the above.

MODERATOR: Great. Well, let's go to the audience.

QUESTION: Gary (unclear) from the News Journal in Wilmington. Can you talk at all about the issue of food safety? We've had had some highly publicized instances of salmonella outbreaks and things like that. Talk if you would about what your department is doing to reassure consumers about the food supply.

SEC. SCHAFER: Sure. The safety of the food supply is the most important focus of the United States Department of Agriculture. As we look at the broad array of what we deal with at USDA, the ultimate, the end result is that safety of the food supply.

And I'm pleased that today the United States of America has the safest and most abundant food supply in the world. As you mentioned, we're seeing increased incidences of incidences of salmonella, E. coli, and those issues. But what it can tell you is that while our inspection efforts have been increasing, while I think the industry has been better at self-policing and informing us when they've had problems, while the media headlines and 30 second news stories, seemingly are increasing the incidences of salmonella and e-coli are actually down.

That doesn't change the image that we have in the marketplace. But what we do specifically to deal with that is we are constantly changing our inspection protocols. As you know, E. coli and salmonella, which are basically beef or poultry, the bacterias evolve and mutate and change drastically, so we're constantly trying to stay ahead of being able to test and detect them and contain them. That's a big effort because what you do today doesn't mean it will work for tomorrow.

We're also encouraging the industry to pursue better eradication techniques in the processing facilities. I've been touring the country and getting into the slaughter houses and food processing plants to see what's being done, and I'm very convinced that the efforts that are put forth by the industry, both with worker and employee training and new techniques and eradication techniques, are very important.

For instance, I'm excited about a new process that I believe Armour is using right now, either Armour or Cargill, I don't know which one. They put a packaged meat under 87,000 pounds of water pressure, and when they do that it breaks the cell of the bacteria and kills it. And they do this after it's packaged, so you know what's in that package is clean and safe. Maybe about 70 percent of their meat now is under that process.

That doesn't change the trim cuts and things that come off the meat, but another thing we found out through our efforts to do the process of cutting better is recently there was an E. coli recall on ground beef. And we have very strict standards on ground beef and ground beef that comes out of the plant. The interesting thing was this: it was reblended afterward with higher quality beef cuts going into the ground beef production because they wanted to sell it as high quality ground beef.

The problem is, when you cut a steak in a facility it can have some E. coli on it because you're going to cook it and it's going to clean up because of the heat. When you take it raw, you grind it up and put it in ground beef, it may not, because it's thicker and it doesn't get cooked the same way, et cetera. So we looked at it this way: Okay, we don't have e-coli standards on trimmed cuts that we do on the ground beef. Now we understand the problem, how can we change our process to make sure now that we've developed standards for the trimmed beef as well.

So we're constantly evolving that effort to do it better. I don't recall the numbers but the incidences of these problems are way down. Hopefully we'll continue that effort so that we can continue also to assure the public that we do have a safe food supply.

MODERATOR: Okay. Next.

QUESTION: You went at length about a successful food policy but you said you're developing processes in the industry, new technology, private and public sectors seem to cooperate. As this food industry has gained, you just said there is no national energy policy. (unclear) 20, 25 years. I wonder could you speculate on why there is no national energy policy? Actually what you're learning in the food industry and how it could apply? Is there some (unclear) covering? Is there a theme that could be learned?

SEC. SCHAFER: It's dangerous to speculate. But here's my belief as to what's happening as to why we haven't generated a national energy policy. I think that a representative form of government where we elect people to go in and represent us to the political system helps divide and really pit one source against another. What we have said is, "Okay, in my state I have the potential wind generation, so I'm going to have to champion that. In my state we have coal production, so I'm going to champion that. And in my state we have oil, and I'm going to champion that. In my state we've got an interest in the industry that's making blades for wind generators, whatever it might be."

And because we don't have unlimited resources like we said by identifying single pieces, we pit one against the other. We don't look at overall policy, we say we don't have enough money, we don't have the resources, so therefore I've had to get to get enough votes for wind versus coal, or I've got to get enough votes for battery oxide cells for hydrogen, or whatever it is. And because of that, we have fractured the focus so much that we don't get that overall public policy.

And I think it's going to take some real strong leadership to look and say, "This is the overall policy; we're not choosing one or another, we're not trying to pit one against the other or take away from one to advance another. We're not going to trash the coal industry, and were not going to champion wind energy at the expense of the coal energy, but this is the directional area that this country needs to go."

So I think it's been that effort for our representatives to say, I represent this piece or this small location or this region, and then we've been able to in the public sector we've been able to compete those pieces against one another at the expense of each other instead of generating the overall cost. That's what I think needs to happen.

MODERATOR: This will be the last question that we have time for.

QUESTION: This is Thomas Allen of Dow Jones News Wire Service, Kansas City. I'm just wondering if you could update us on the situation with the pork and poultry trade with Mexico. We're hearing that they are maybe some of those companies making shipments from Mexico. I don't believe we've heard anything from USDA officially on this matter. I was wondering if you'd give us an update.

SEC. SCHAFER: Sure. We've been hearing that the past several days there have been several shipments of pork specifically that have been turned back from import into Mexico. We currently believe that it is a normal course of business. We have an equivalency system where we regularly send our inspectors to Mexico to inspect their facilities. We have Mexican inspectors come to the U.S. and inspect facilities.

And we do that so that we understand each other has an equivalent food inspection system on a system wide basis so we don't have to monitor every plant all the time with more inspectors. In that case it's not unusual for Mexican inspectors to be in U.S. facilities. Off and on they find problems that don't meet their standards; we find problems down there that don't meet our procedures and requirements. It's back and forth all the time.

We now have some poultry facilities and specifically pork facilities that have been delisted because of what the Mexican inspectors have found in our plants. Those will be corrected. I don't think there's anything serious here and that it is the normal course of business the way we operate with other countries.

MODERATOR: Okay. Well, Mr. Secretary, thank you so much for your time.

[Applause]