Corporate profits in 4th Quarter 2005 highest in 4 decades

Corporate Pretax Profits Jump 14.4%

Strongest Gain Since 1992
Shows Effects of Katrina
Weren't as Bad as Feared
By MARK WHITEHOUSE
March 31, 2006; Page A2

Corporate America's share of the nation's income rebounded from the havoc of Hurricane Katrina to a level not seen in four decades, and the hurricane did a bit less damage to the U.S. economy than previously thought.

The Commerce Department said yesterday that corporate pretax profits in the fourth quarter of 2005 grew 14.4% from the previous quarter, the strongest rate since 1992. Pretax profits in the third quarter fell 4% as hurricane-related insurance payouts slammed financial results.

Corporate profits accounted for 11.6% of gross domestic product in the fourth quarter -- the biggest share of the nation's income companies have taken since 1966. They have been able to do so, say economists, by sharing less with their workers.


"It highlights the increased power of corporate America versus labor," says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. "That is a reflection of the global competition that labor now faces in America."

Economists say profit growth is likely to ebb this year as U.S. unemployment falls and workers regain some bargaining power. In the meantime, companies might reinvest some of their gains, giving the economy added momentum.

"Corporations are sitting on a mountain of cash, so as long as the economy is growing they will start spending some of that cash," says Nariman Behravesh, chief economist at Global Insight, an economic consultancy in Waltham, Mass.

The Commerce Department also reported that real gross domestic product -- the value of the nation's output of goods and services, adjusted for inflation -- grew at a seasonally adjusted, annualized rate of 1.7% in the fourth quarter. The figure was revised up from an earlier estimate of 1.6% but remains the lowest rate recorded since early 2003. For the full year, GDP grew 3.5%.

The small, upward revision in fourth-quarter GDP reflects the fact that companies restocked inventories faster than expected in Katrina's wake. Now, many forecasters believe the economy is experiencing a posthurricane boost as strong demand for consumer and business products has elevated business activity, prompting companies to step up hiring.

"The first quarter is going to be very firm," says Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who estimates that GDP in the first quarter, which ends today, grew at a 4.5% annual rate.

The consensus estimate of economists polled by WSJ.com is that GDP grew at an annual rate of 4.6% in the first quarter, but the growth rate will slow to 3.3% in the second quarter and could be around 2.9% by the end of the year.

The factors that crimped growth in the fourth quarter were largely temporary. Katrina and an unusually cold December took a toll on hiring and consumer spending. Defense spending dropped because of the late signing of an appropriations bill, and special short-term auto discounts prompted people to buy cars earlier in the year.

Now, the picture for jobs and spending looks a lot better. The Labor Department yesterday reported a drop in the number of people filing for unemployment benefits to 302,000 in the week ended March 25, down 10,000 from the previous week. Companies added an estimated 243,000 jobs in February, bringing the 12-month total to 2.1 million. And despite slow auto sales, total retail sales in February were up 6.7% from February 2005.

Write to Mark Whitehouse at mark.whitehouse@wsj.com

GM Workers Worry About Future 3/23/2006

GM Workers Worry About Future

On Plant Assembly Lines
And at Kitchen Tables,
Worry About the Future
'I Got a Sour Taste About It'
By GINA CHON, KRIS MAHER and COREY DADE
Staff Reporters of THE WALL STREET JOURNAL
March 23, 2006; Page A1

Soon after General Motors Corp. announced its massive buyout plan yesterday, news -- and rumors -- began sweeping the company's truck-assembly plant in Pontiac, Mich.

For 52-year-old Larry Walker, the effect was unsettling. A 33-year veteran of the plant who has long planned to retire at 55, Mr. Walker would keep his benefits if he leaves, but receive a payout of only about $35,000.

That may not be much after taxes, he said, especially in an unexpected health-care emergency. He had other concerns too, among them whether he will be able to continue helping out his son, who recently finished an 18-month tour in Iraq. "When I retire, I don't want to have to worry about working again because I can't make ends meet," he said.

For roughly 131,000 affected workers at GM and auto supplier Delphi Corp., yesterday's buyout offer was the start of a personal drama in an industry that, through years of ups and downs, has long been a stable, union-protected bastion of employment. Along assembly lines, in parking lots and around kitchen tables, workers spent the day sifting through the complicated and varying terms of the offer, calculating the value of their packages and weighing how the buyout will affect their lives.

For each, the decision to stay or go will depend on a variety of factors, from length of time with their company to prospects of new jobs or whether a spouse is employed with benefits. In broad terms, the buyouts being offered range from $35,000 for those with the most service to $140,000 to certain others further from retirement age. But there is plenty of fine print to weigh, not to mention personal factors.

While the United Auto Workers, the powerful union that represents most hourly workers among the big U.S. auto makers, helped negotiate the agreement, officials weren't giving much official guidance yesterday. Paul Krell, a spokesman for the union, said UAW Vice President Richard Shoemaker will brief local union leaders next week.

"We will be providing information on how to go about deciding when one of these options is right for members," Mr. Krell said. "People will have both the time and information to make a very well-informed decision." Still, the pressure is on: GM said offers will go out immediately. Workers will have 45 days to accept and then seven more days if they want to reverse themselves.

Some were able to make the decision quickly. Bob Mercado, 51, said he would happily accept his buyout to get away from his job in the paint-repair shop at the Pontiac plant -- where he breathes in paint fumes all day.

That will mean giving up income of about $100,000 a year in exchange for the package with a $35,000 lump-sum payment. Still, he said, "I'm tired of coming here and this will allow me to enjoy life and spend more time fishing." None of his three children plan to attend college, he added, so that won't be an issue.

For Terri Nichols, a single mother with a mortgage, the buyout simply wasn't an option. Ms. Nichols, a 47-year-old press-metal technician in Indianapolis, has been at GM for six years, leaving her eligible for a $70,000 payment -- but "that's just a little over a year's income," she said. She also would be forgoing all her benefits.

Ms. Nichols said staying is a difficult choice, too, given GM's problems, but she hopes "to ride out the storm." "I've heard there's going to be a lot of changes" she said. "I don't think they're going to be good. From what I'm hearing they're going to cut way back."

At some plants, reactions to the offer underscored an age gap. Gino Collins, a 16-year veteran at Delphi's Chassis Kettering plant in Dayton, Ohio, said it was clear during a morning of discussion that the consensus among younger workers with at least 10 years of service was to take the buyout. "They know this place isn't going to be here for much longer anyway," he said. "When it's through, there won't be enough young people at this plant to turn a light on."

But, he said, his own choice is much tougher. If Mr. Collins, who is 58, took a buyout, he would get a lump sum of $140,000, but have no benefits. But if he stays, he said, he is worried that Delphi would look to cut his current wage of $27 an hour, costing him even more. "This is only the first phase," Mr. Collins said. "I want to see how much they want to decrease my wages before I make a decision."

At GM's Doraville, Ga., assembly plant, just north of Atlanta, many workers greeted the news with relief. GM has slated the plant for closure in 2008, and veterans have been reluctant to move away to take jobs at other plants. Because of that, the buyout was taken as a windfall.

But Chris Knight, 40, who has put in 18 years at the plant, said the news left him with bittersweet emotions.

Mr. Knight is well-positioned compared with some of his colleagues. With his experience, he stands to earn a $140,000 payout. He isn't married and has no dependents. He has side businesses, too, including selling used pickup trucks at his small neighborhood dealership, renting out six homes he owns and co-owning a beauty parlor.

But Mr. Knight said it would be hard to lose his steady income of about $65,000 annually, and benefits. "Where is anybody going to find a job paying $28 an hour with [only] a high-school diploma?" he asked.

Moreover, he said, he is sad to leave behind nearly two decades of banging dents out of vehicles and sharing beers and burritos with co-workers at a nearby restaurant. "I got a sour taste about it right now," he said. "I hate to see my home plant go. I think it's a bum deal, really, after you've spent so much time with the company." In the end, he said, he is "probably leaning toward taking the money and leaving."

For Doug Hanscom, the decisive factor may prove to be debt. The 53-year-old said he didn't think he would take the buyout even though he hasn't been on a plant floor since last May, when GM shut his truck and bus plant in Baltimore.

Since then, he has been pulling down a little more than $27 an hour as an enrollee of the company's Jobs Bank, under which GM pays salary and benefits to more than 5,000 UAW members whose jobs have been eliminated. He also has been taking classes in English and labor studies at the Community College of Baltimore County.

Still, with 10 more years of payments on his two-bedroom house in Dundalk, Md., and two more years on his Harley-Davidson motorcycle, he said he worries that one medical emergency could put both at risk. "I've got to have my benefits," said Mr. Hanscom, who will mark 29 years with the company in April. "One minor incident could bankrupt you. One hundred and forty thousands dollars could disappear in a week's time."

Instead, he said, he is hoping that enough workers take the offer to give him a shot at a job at a transmission plant in White Marsh, Md., about 25 minutes away from where he lives. "Hopefully this will give others incentive to retire and move my name up the list," he said.

---- Sarah Nassauer contributed to this article.

Write to Gina Chon at gina.chon@wsj.com, Kris Maher at kris.maher@wsj.com and Corey Dade at

GM Makes Sweeping Buyout Offer 3/23/2006

Shrinking Giant
GM Makes Sweeping Buyout Offer

Deal With Delphi, UAW
Lets Auto Maker Slash
Unionized Work Force
Clearing Out a Generation
By JEFFREY MCCRACKEN and LEE HAWKINS JR.
March 23, 2006; Page A1

General Motors Corp. reached a landmark buyout and early-retirement program yesterday with the United Auto Workers and parts supplier Delphi Corp., marking a major step toward shrinking the unionized North American auto industry.

But for GM, it is not the end of the painful overhaul facing the company after nearly two decades of losing ground to Asian and European rivals.

Under a complex deal worked out in weeks of talks, GM agreed to finance early-retirement packages and buyouts to be offered to as many as 131,000 GM and Delphi workers -- including all 105,000 of GM's current UAW-represented employees in the U.S. The buyouts would range from $35,000 for those with the most service to $140,000 to certain others further from retirement age.

The buyout plan is one of the largest in U.S. corporate history. In effect, GM is offering to take off the assembly line a whole generation of workers hired in the 1960s and '70s when the company still dominated the U.S. auto industry.

But how many will sign up to leave is a big question mark. And even if many do, GM Chairman and Chief Executive Officer Rick Wagoner still faces a series of challenges that the big labor deal won't solve. In 4 p.m. composite trading on the New York Stock Exchange, GM's stock finished up one cent, at $22.01.


On Wall Street, the ultimate worry is whether GM can succeed where some big unionized steelmakers and airlines failed and restructure outside of bankruptcy court. GM has denied any plan to use Chapter 11 bankruptcy to shed its obligations under its current U.S. union agreements. But major credit-rating agencies have dropped GM's debt ratings deep into "junk" levels and warned that without a quickly executed turnaround plan in North America, bankruptcy is a possibility. One agency, Fitch Ratings, has warned that some debtholders could get 40 cents on the dollar in a GM bankruptcy scenario.

Among the challenges still facing GM is an investigation by the Securities and Exchange Commission into GM's accounting. Just last week, the company said it still is unable to file its annual report and added $2 billion to its net loss for 2005, widening it to $10.6 billion.

GM is also struggling to find a buyer to reinvigorate its big finance unit, General Motors Acceptance Corp. A wide acceptance of the buyout, by easing concerns about GM's viability, could speed a sale of a controlling stake in the finance unit. Groups led by two private-equity firms have made bids for GMAC in the $11 billion range.


And GM faces continuing pressure to halt a steady slide in its U.S. market share (to 24.4%, most recently) and beef up its product line.

For GM, the mass buyout is another milestone in a long retreat from the days when it dominated the U.S. auto industry with nearly 50% of the U.S. market, and dominated the American economy as the nation's largest industrial corporation. For nearly four decades after World War II, GM and the UAW set the standard for American industrial workers in terms of wages, health care and pension benefits, in an often contentious partnership.

GM workers, and their counterparts at Ford Motor Co. and Chrysler Corp., consistently earned more than the average American factory worker during the decades between 1960 and 2002, according to a study by the Center for Automotive Research in Ann Arbor, Mich. By 2002, UAW Big Three workers earned an average hourly wage of $25.95, or 69% more than the average manufacturing wage. Health-care and pension costs in recent years have risen even faster, pushing GM's total average hourly labor cost per U.S. factory worker to $74 an hour last year, according to a Securities and Exchange Commission filing.

GM's UAW members also enjoyed unprecedented protection from layoffs, thanks to a program called the Jobs Bank that guaranteed workers nearly all of their full-time pay even if they had no work to do.

But GM's high U.S. labor costs have taken a toll on the company and the UAW as Asian and European auto makers have ramped up production at nonunion factories in the U.S. and Canada. In 1985, when nonunion auto production in the U.S. was minimal, GM had 457,000 factory workers in the U.S. Today, GM has 113,000 U.S. hourly workers. (In all, its North American auto operations employ 173,000, and world-wide its work force is 325,000.)


Some of those jobs have been lost as GM emulated the efficient "lean production" techniques of rival Toyota Motor Corp. But others have been lost because GM has been unable to stop losing market share in the U.S., despite volleys of new models and increasingly expensive price and financing discounts.

Though it's unclear how many workers will take the buyout offers, yesterday's deal is noteworthy if for no other reason than the sheer number of people eligible. GM hopes the offers will get it most of the way toward its announced goal of cutting 30,000 hourly jobs by 2008. Delphi, which has about 34,000 hourly jobs, hopes to eliminate at least 18,000 hourly workers, including 5,000 who transfer back to GM.

The buyout and early-retirement offer is complex. In one of the main provisions, GM and Delphi workers with 30 or more years on the job as of Oct. 1, 2005 -- the week before Delphi's bankruptcy filing -- will be eligible to receive $35,000 to retire and receive a full pension and retiree health care. A UAW member retiring would receive a pension of about $3,000 a month. GM estimates that 36,000 of its 105,000 U.S. UAW hourly employees are eligible under this provision.

GM and Delphi workers with at least 27 but fewer than 30 years on the job as of this July 1 can get the equivalent of an early pension, slightly smaller, that starts right away. Workers with 27 years, for instance, would receive $2,800 a month until they reach 30 years. The deal includes full retiree health care. When they reach what would be 30 years with the company, they will retire and receive a full pension. Workers at GM plants that have been closed or soon will be can retire with 26 years on the job. Those include plants in Oklahoma City, Baltimore, Lansing, Mich., Linden, N.J., and Muncie, Ind.

GM is also trying to buy out younger UAW members. Those with fewer than 10 years of service could get a one-time $70,000 buyout in return for severing all ties with the company, including health-care and other benefits. Vested pension benefits wouldn't be affected. GM employees with 10 or more years of seniority will have the option of a $140,000 buyout under the same terms.

WALL STREET JOURNAL VIDEO


• Lee Hawkins talks about why GM's buyout and early-retirement program is a positive step for the company.

• CNBC looks at GM and Delphi's buyout plan with the United Auto Workers that includes early-retirement offers.

The offers will go out immediately, said the UAW. Workers will have 45 days to accept and then seven more days to rescind, said a GM spokesman, who estimated that buyouts and early retirements should start before June 1.

For those currently eligible for retirement, taking the $35,000 buyout would amount to accepting the value of a new Cadillac CTS sedan in order to retire and collect pensions now, rather than work a few more years. But for younger workers, the calculus of accepting $70,000 to $140,000 to walk away from GM, and give up the rich health care and comparatively high wages is more complex.

Especially in the Midwest, the number of manufacturing jobs that pay as much as GM and Delphi is small and dwindling. That's in part because GM itself is putting pressure on suppliers to shift operations to lower-cost countries such as China or Mexico. If enough workers leave Delphi, the company could find itself in a position where it needs to hire new U.S. employees. But Delphi Chief Executive Robert S. "Steve" Miller has said his company's U.S. hourly wages for future workers need to drop from an average of $26 an hour, not including benefits, to about $12.50 an hour.

Another provision of yesterday's agreement provides that workers at both GM and Delphi with 10 years of service who are over 50 will be offered "mutually satisfactory retirement." They will be able to retire with their accrued pension, plus full health-care benefits until Medicare kicks in.

GM's decision in 1999 to spin off the Delphi auto-parts business was supposed to help GM cut costs and steer the money it saved to designing better cars. Delphi, with about $28 billion in annual revenue, began life as a far-flung collection of operations making parts from seats to spark plugs to radios for GM vehicles.


Delphi tried to diversify its customer base, but found it a struggle to compete, given wage rates that matched GM's levels. These were far higher than even unionized parts makers in the U.S., let alone competitors based in Mexico or China. Last year, facing mounting losses and the fallout from accounting problems, Delphi's directors brought in Mr. Miller, a veteran of complex turnarounds at Chrysler and Bethlehem Steel, to try to salvage the company. In October, he decided Delphi should seek Chapter 11 bankruptcy protection.

In blunt language rarely used in public by senior Detroit executives, Mr. Miller declared that the days when UAW members could expect to earn more than $60 an hour in wages and benefits were over. Mr. Miller has since toned down his public comments, in response to objections from both GM and the UAW. But yesterday's deal represents a tacit recognition by the UAW that it can't hope to save the jobs that GM's market-share losses have effectively wiped out already.

At Delphi, as at GM, yesterday's deal left key questions unanswered. Among these were what the parts maker's remaining hourly workers will be paid and what they will do. The accord also didn't say which Delphi plants are to stay open or which products Delphi will continue making.

Delphi has thrice delayed a threatened move to ask the bankruptcy judge to void its existing labor contracts. Another deadline to do so looms on March 31. Delphi has said it would go ahead to void its labor contracts unless a complete deal with the UAW is reached. But the UAW and other Delphi unions have warned that such a step might provoke a strike. A strike by such a large supplier of parts to GM could quickly shut down production at the car maker, too.

Though other Delphi unions weren't part of yesterday's deal, the company hopes to offer similar early-retirement plans soon to its other 9,000 eligible workers.

For GM, the buyout plan is the latest in a series of moves to cut its U.S. employment costs. The auto maker last fall negotiated a deal to curtail medical benefits for hourly retirees, and earlier this year cut retirement medical benefits for white-collar workers and effectively ended its traditional salaried pension plan.


There would also be significant accounting effects for GM from a mass retirement. The company would greatly reduce the liability it has already recorded for those employees' retirement costs, a figure that is based on assumptions about how many years they are likely to remain on the job. The liability cut would reduce GM's pension expense, resulting in an immediate boost to the bottom line. GM's domestic pension plan, which already has a $6 billion surplus, would become even more overfunded. (For more on this, see related story.)

In terms of GM's credit standing, the uncertain costs of the buyout plan won't immediately jeopardize the company's rating, agencies indicated, but neither will it boost GM's ratings. "Our primary focus is on Delphi's ability to reach a contract with the UAW so as to ensure no production disruptions, and we still don't have a lot of details as to what a restructured Delphi would look like," said Mark Oline, an analyst with Fitch Ratings. "If a [possible] Delphi strike lasted for any extended period, GM's liquidity would erode fairly rapidly."

Because of that, GM has a big incentive to provide more support to Delphi. GM is apt to be very much involved as Delphi and the UAW continue their discussions over plant closures and future production.

GM's fourth-quarter results included $1.3 billion in costs related to plant closings and a $2.3 billion guarantee to UAW members employed by Delphi. Those items reduced GM's bottom line by $3.6 billion, or $6.36 a share. GM has estimated its ultimate tab for bailing out Delphi will be between $5.5 billion and $12 billion.

Standard & Poor's said $2 billion that GM received by selling most of its 20.4% stake in Suzuki Motor Corp. should help GM fund the buyout program. But S&P cited other factors, such as "mounting Delphi-related costs [and] the likely slow progress this year in turning around GM's North American operations," that it said "add to the likelihood that GM's ratings could ultimately be lowered."

Among issues still on the table is how Delphi will deal with its underfunded pension plan. A pension contribution of $1.1 billion is due in June. Both the UAW and the federal Pension Benefit Guaranty Corp. would be likely to resist any attempt by Delphi to terminate the program. To terminate it, Delphi would have to convince the bankruptcy court that it can't operate without doing so.

The Delphi portion of yesterday's agreement needs approval from the bankruptcy court. Delphi is seeking an April 7 hearing. Delphi's creditors' committee -- including bondholders, suppliers and other parties -- has already signaled a willingness to challenge GM on some issues. The committee has a team of lawyers, accountants, investment bankers and others reviewing the terms of GM's 1999 spinoff of Delphi, to see if Delphi was doomed to fail by labor obligations and other agreements imposed by GM.

A GM spokeswoman, Toni Simonetti, said GM was "not in a position" to discuss the total financial impact of the deal on GM now. Whatever its final cost for the buyouts, it will be money the car company can't spend on much-needed new products or features such as gasoline-electric hybrid engines.

One reason large-scale buyout offers are tricky is that employers can't control how many, or which, employees apply. Management experts say the offers tend to attract the most capable employees, those who can most easily find jobs elsewhere. "You create incentives for the wrong people to leave," said Peter Capelli, a management professor at the Wharton School at the University of Pennsylvania. "The lowest performers are generally not the ones who take it up."

This may be less of a concern with assembly-line workers such as GM's than with salaried people. In any case, a buyout is GM's main option for getting its payroll costs down. If it laid off hourly workers, it would still be required, under labor contracts, to pay most of their wages and benefits.

---- Ellen E. Schultz and Scott Thurm contributed to this article.

Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Lee Hawkins Jr. at

Farmers In Fight Against Farm Subsidies 3/14/2006

Pork Chops
In Fight Against Farm Subsidies,
Even Farmers Are Joining Foes

A Snowballing Movement
Draws Churches, CEOs;
Huge Hurdles in Congress
A Bolster to WTO Pressure
By SCOTT KILMAN and ROGER THUROW
March 14, 2006; Page A1

AMES, Iowa -- A movement to uproot crop subsidies, which have been worth nearly $600 billion to U.S. farmers over the decades, is gaining ground in some unlikely places -- including down on the farm.

In Iowa, one of the most heavily subsidized states, a Republican running to be state agriculture secretary is telling big farmers they should get smaller checks. Mark W. Leonard, who collects subsidies himself and campaigns in a white cowboy hat, told a room full of farmers recently that federal payments spur overproduction, which depresses prices for poor growers overseas.

"From a Christian standpoint, what it is doing to Africa tugs at your heartstrings," Mr. Leonard told them. Last year, he helped humanitarian group Oxfam International in its anti-subsidy campaign by escorting a cotton farmer from Mali to church gatherings near his farm in Holstein.


There is a long history of mostly failed attempts to pare farm payments. But the current anti-subsidy sentiment, rising over the last year in the U.S., is stirring attention because it is unusually broad. Students for Social Justice at Baylor University in Texas have dumped cotton balls on the ground to protest cotton subsidies. The foundation of late Nascar legend Dale Earnhardt has teamed up with rock star Bono, whose movement wants to overhaul Western agriculture policies to boost African development.

In Washington, D.C., the Alliance for Sensible Agriculture Policies is meeting to share ideas about changing the farm bill. Participants include Oxfam and Environmental Defense from the left, the National Taxpayers Union on the right and the libertarian Cato Institute. Prominent philanthropic organizations, including the William and Flora Hewlett Foundation, are financing some of this advocacy.

"There are a growing number of people who want to weigh in on farm policy," says Rep. Jerry Moran, a Kansas Republican who sits on the House Agriculture Committee. "They care about Africa. They care about the environment. They care about nutrition."

Grass-roots groups are riding the momentum that began with the push to forgive the debt of poor countries in the late 1990s. Another spur to the anti-subsidy movement comes from the World Trade Organization, where the U.S. is coming under increasing pressure to rein in farm spending.

The movement is tilting against one of the most deeply entrenched federal entitlements. In 1996, a Republican-led Congress passed legislation to wean farmers from subsidies over seven years. But Washington backed off as the farm economy entered one of its cyclical tailspins. The 2002 farm bill signed by President Bush is one of the most lavish ever, even as the economic cycle improved. Last year, the government paid a record $23 billion to farmers.


Shayne Moore, third from left, learns to pick tea leaves in Kenya with fellow members of the Wheaton Bible Church from Wheaton, Ill.


There isn't any serious talk in Washington of wiping out subsidies entirely, and the powerful farm lobby has defended itself against attacks in the past. Legislators representing districts with farming interests, particularly states growing subsidy-rich cotton and rice, consider this a crucial issue and could well block any change in Congress. Because almost every state has farmers, virtually all 100 senators can sympathize with farming interests. In addition, the Senate and House agriculture committees have dominated policy for decades and are largely given a free hand by the governing administration.

But now, farm leaders, federal officials and politicians are seriously discussing alternatives, such as buying farmers out from subsidy programs, incentives to encourage farmers to save during good years and paying growers for environmentally friendly practices. The system could be changed during the current Doha Development Round trade negotiations at the WTO or in Congress during next year's renewal of the farm bill.

Any significant change in the payment formula would rock the farm economy. Federal money could shift between regions, possibly at the expense of Southern farmers who are subsidized to such a degree currently that no new system would likely maintain their level of payments. The price of land, which is tied to the income it generates, would likely fall, denting farmers' biggest source of wealth and collateral.

Moreover, farmers could change what they grow, for example from cotton to vegetables, and U.S. consumers could see food costs rise. The gluts spurred by production-based subsidies are a key reason the U.S. enjoys some of the world's lowest food prices.

The government created subsidies during the Great Depression to fight rural poverty. At the time, 25% of the U.S. population lived on farms. Farmers could get federal money for producing commodities including corn, cotton and wheat when market prices fell below certain levels.

Today, farmers represent less than 1% of the population. Yet, thanks to labor-saving technology, their operations have exploded in size. Since subsidies remain tied to production, subsidy checks have ballooned. The government caps annual payments to an individual farmer at $360,000, though loopholes allow higher payments.

Most subsidies go to farmers who are wealthier than the typical U.S. taxpayer. Little of it goes to poor farmers because subsides are tied to production. According to an analysis by Environmental Working Group, 72% of subsidy money goes to 10% of the recipients. The group opposes output-linked subsidies on the grounds that overproduction hurts the environment. Nor do subsidies do much for rural economic development. Most rural people are no longer engaged in farming and two-thirds of those who farm are growing nonsubsidized crops such as fruits and vegetables.

Reform Camp

The Bush administration is in the reform camp. At the WTO, it has offered to cut by 60% the amount of money it can spend every year on certain subsidies, if the European Union cuts by 83%, a move that the U.S. says would bring both blocs into line. Last month, the White House Council of Economic Advisers took the unusual step of devoting a chapter in the annual "Economic Report of the President" to lambasting crop subsidies, saying they "hurt countries that could benefit from exporting these commodities to the United States."

President Bush has yet to propose his own specific solutions. Administration economists say there are lots of ways to get money to farmers that don't depress international prices, such as insurance programs that protect against big drops in revenue.

The White House has the support of other businesses that would like to see the subsidy question settled in order to spur the lowering of overseas trade barriers on their goods. During a recent meeting in a private club on Chicago's Michigan Avenue, business executives, bankers and economists dined on stuffed chicken served on bone china while preparing a report arguing for an overhaul of the farm program. Several participants are executives of Fortune 500 companies. The task force was assembled by the Chicago Council on Foreign Relations, an 84-year-old nonprofit group that includes many of the Midwest's biggest firms.

The grass-roots campaign to reform subsidies is similar to the one that raised the profile of the African debt crisis. One of the main debt-relief agitators, Irish rock star Bono of the band U2, made a 14-city U.S. speaking tour in November 2002 to raise awareness of African poverty, especially among churches and the Christian music scene.


Bono's advocacy organization, Debt AIDS Trade Africa, or DATA, has now joined with the One Campaign, an alliance consisting of organizations such as Oxfam, to target agriculture policies and subsidies. "If you care about debt cancellation and AIDS, then you have to care about the trade issues, too," says Jamie Drummond, executive director of DATA.

By campaigning on campuses, at rock concerts and at Nascar races, these activists have generated hundreds of thousands of petition signatures and postcards addressed to President Bush, U.S. Trade Representative Rob Portman and members of Congress, urging them to reduce farm subsidies.

One of those listening on Bono's speaking tour was Shayne Moore, a 35-year-old mother of three in Wheaton, Ill. Ms. Moore, a graduate of Wheaton College, an evangelical-Christian school near Chicago, says she "couldn't figure out what my conservative alma mater was doing giving Bono a voice." But "that night changed my life. Bono said something like, 'Politicians get nervous when rock stars and soccer moms get involved.' Well, I thought, I'm a soccer mom."

She traveled to Honduras and Kenya at her own expense, and to last summer's meeting in Scotland of the Group of Eight leading nations, a trip that was paid for by aid groups. Back home, she tells groups what she has seen. "The person picking cotton in rags is just as important as the person picking cotton in an awesome combine," she says in an interview. "I don't begrudge him the awesome combine, but not at the expense of the farmer in rags."

Some humanitarian groups are spreading their message in states that are home to key members of congressional agriculture committees, hoping to exploit splits within the farm business. Subsidized grain farmers in the Midwest are jealous that Southern farmers get more aid for cotton and rice. Young growers complain that subsidies raise the price of land to unaffordable levels. Oxfam America has had five organizers working for more than a year in states such as Kansas, Illinois and California.

The field organizer in Kansas is a far cry from the typical idealistic humanitarian worker. A farmer who often votes Republican, Jim French, 52, abhors attention-getting stunts such as dumping crops on the ground. He came to the attention of Oxfam through his work for Kansas Rural Center, a nonprofit advocacy group for family farmers.

He's pushing the idea that subsidies should be linked to something other than production, such as environmental improvements. "There's a common solution for a problem of the farmers on the Great Plains and a problem of the farmers in Africa," Mr. French says.

He has driven his 12-year-old, hail-pocked Buick LeSabre nearly 20,000 miles over the past year for Oxfam, speaking at farmer conventions, prodding editorial writers at Great Plains newspapers and attending community meetings with members of Congress home from Washington. Last September, he collected hundreds of signatures for a fair-trade petition at a concert in the suburbs of Kansas City, Kan., by a British band he'd never heard of before: Coldplay. In April, he plans to escort an African farmer around the Great Plains.

Mr. French directs a church choir in his hometown, Partridge, Kan., so part of his strategy is to seek out clergy. One recent morning near Hutchinson, nine Mennonite church leaders gathered at a roadside restaurant called Dutch Kitchen. Mr. French wanted to address their congregations. "Instead of constantly sending food aid to Africa, we could do so much more to improve their lives if we make the markets fair," Mr. French said. "Doesn't this message fit with the Gospels?"

Intriguing Question

Mennonites usually avoid political arguments. But the question intrigued the bearded men, some whom have done missionary work with poor farmers overseas. Pastor Miles Reimer said they'd consider Mr. French's appeal. "I think the Mennonites would lean towards helping the small farmers around the world," he said.

In Iowa, Mr. Leonard's campaign for state agriculture secretary wouldn't put him in position to directly change federal policy. But his status as a leading Republican candidate reflects a growing dissatisfaction there with the way subsidies work.

On the campaign stump, Mr. Leonard, 49, who raises cattle and crops, argues that production-based subsidies increase farmers' incentives to get bigger, a development that's speeding the depopulation of the countryside as farmers buy up more acreage.

"Inadvertently, it is a government-sponsored farm-consolidation program," he tells a group of farmers in Ames. "What we need is for that subsidy money to be divided among more farmers."

That sentiment brought him into Oxfam's orbit. Last year, the group was seeking a farmer to speak in Washington in a favor of legislation co-sponsored by Iowa Republican Sen. Charles Grassley that would cut the maximum subsidy payment to a farmer to $250,000 from $360,000. The proposal was defeated in November, 46-53, but the debate helped to pull together people of disparate politics now mobilizing to work on the next Farm Bill.

"As a conservative, Oxfam and I can disagree on a lot of social issues," says Mr. Leonard, who leaves his Oxfam button at home while out campaigning. "But for us to agree on subsidies means something big is happening."

Write to Scott Kilman at scott.kilman@wsj.com and Roger Thurow at roger.thurow@wsj.com

Farmers Sign On to Energy Push - 3/15/2006

Farmers Sign On to Energy Push

Lobby Seeks Incentives, Aid
To Boost Use of Biofuels, Wind Power
By JOHN J. FIALKA
March 15, 2006; Page A4

WASHINGTON -- President Bush's call for Americans to use less oil and more agricultural waste to meet the nation's fuel demands is about to get a lift from the farm lobby.

In an unlikely alliance with the environmental movement, farm groups are seeking federal incentives for forms of renewable energy such as cellulosic ethanol -- a gasoline additive made from farm byproducts -- and electricity from farm wind turbines.


The target for the effort is a farm-support bill that Congress expects to pass in 2007. Two former farm-belt Senate majority leaders, Democrat Tom Daschle of South Dakota and Republican Bob Dole of Kansas, are among the strategists trying to reshape American agriculture to help farmers and ranchers produce so-called energy crops. The two are co-chairmen of the 21st Century Agriculture Policy Project and plan to meet in Washington today to announce their initiative.

The meeting comes just over a month after Mr. Bush used his State of the Union speech to brand the U.S. as "addicted to oil" and to call for replacing much of it with fuel from "wood chips, stalks, or switch grass." The groups are working to assemble the bipartisan muscle to push the policy through Congress.

"We want to create a broader coalition," says Mr. Daschle, who aims to bring industry and financial groups to the mix. He has a good track record. With Mr. Dole, he helped create the coalition that pushed the passage of a federal mandate to almost double the use of ethanol from corn as the centerpiece of last year's energy bill.

A similar coalition met in Washington a week ago to work out the details of getting the 70 farm groups it has assembled to lobby with church groups, labor unions and environmentalists.

"We want to redefine the core functions and the role of American agriculture," says J. Read Smith, a wheat farmer from Washington state and co-chairman of the "25 X '25" group, which is named for its goal of raising the use of renewable fuels to 25% of U.S. energy consumption by 2025 from 3% presently. Mr. Smith says one concern is that U.S. farm subsidies will shrink amid world trade negotiations. Getting more farm and ranch income from energy, he says, will ease the transition.


The politics won't be easy. In the previous farm bill, in 2002, Congress authorized $150 billion over five years for various programs. For the first time it included a portion of the money for energy incentives, but members of Congress's appropriations committees shifted much of the money back to more traditional programs. Despite Mr. Bush's sweeping rhetoric, he asked for only a modest amount of money to promote alternative energy in his budget proposal. And fiscal conservatives in his own party are getting antsy about budget deficits and pricey new government programs.

The policies that both groups are considering include:

Federal loan guarantees and other assistance for electricity-transmission lines from the Dakotas and Montana, which have the nation's greatest wind-power potential, to cities in the Midwest and along the West Coast.

Incentives for companies to build factories that make ethanol from corn stalks, wheat straw, rice hulls, wood chips and other farm wastes.

A federal mandate to require more use of biodiesel, or diesel fuels blended with soybean oil and other vegetable and animal fats.

Tax breaks to promote farm energy cooperatives that can broker sales of energy produced on farms and channel financial assistance to farmers to build wind turbines and other energy-producing devices, such as digesters that extract methane from animal waste.

The presence of environmental groups in the movement is unusual because they have battled with farm groups over the use of fertilizers and pesticides. The Sierra Club opposed incentives for ethanol made from corn as a waste of resources, but it has joined "25 X '25."

Carl Pope, executive director of the Sierra Club, says promoting cellulosic ethanol helps the environment. The farm fuels might ease dependence on oil imports and lessen the use of carbon-rich fuels believed to cause global warming.


Environmental groups previously have pushed more incentives for wind and solar energy and other renewable energy forms but lacked the clout to get them passed by Congress. "The environmental chorus was never big enough to sing this song. We needed a bigger chorus, so now we're adding the bass section," Mr. Pope says.

The goal of 25% renewable energy use by 2025 is ambitious. Currently, according to the U.S. Energy Department, only 3.3% of the nation's energy comes from the renewable fuels that the groups are considering. So far biodiesel has penetrated only 0.14% of the diesel market. Federally subsidized ethanol has captured just 3% of the gasoline market -- but its proven political appeal is the template that the new coalition wants to apply to other energy sources.

According to a study financed by the South Dakota Corn Growers Association, production of ethanol from corn has added more than $1 billion to the economy of Mr. Daschle's home state, creating what economists call a "multiplier effect" that has raised tax revenue, created jobs and prompted at least a 10% increase in the price farmers get for their corn.

Building a bigger coalition, Mr. Daschle says, also might give Congress an added push to regulate man-made releases of carbon dioxide, which are thought to accelerate climate change. Under some regulatory proposals, farmers would get income from selling credits they could receive for planting trees and taking measures to reduce carbons.

"There are still some open questions about the degree to which all of these dots will connect," says Mr. Daschle, whose group plans two more meetings to solicit ideas from farmers, ranchers and conservationists before issuing its policy options in October, on the eve of congressional elections.

Write to John J. Fialka at john.fialka@wsj.com