AGRICULTURE COMMITTEE

The Agriculture Committee was assigned three studies. Section 1 of House Bill No. 1338 directed a study of issues related to genetic modification of (transgenic) products, including impacts on health, the environment, the food supply, product labeling, and actions by other jurisdictions regarding experimental medicine and research, and the promulgation of accurate information regarding transgenic efforts that exist or are expected to exist in the near future. In assigning this study to the committee, the Legislative Council limited the study to genetic modification of agricultural products. Section 1 of Senate Bill No. 2282 directed a study of methods to encourage production and consumption of ethanol. Section 1 of House Bill No. 1390 directed a study related to the use of biodiesel fuel in this state. The chairman of the Legislative Council also directed a study related to grain shipping rates.

The committee also received a report from the State Seed Commissioner regarding the regional, national, and international status of genetically enhanced or modified seeds and crops and a report from the State Board of Agricultural Research and Education regarding ongoing research activities and expenditures.

Committee members were Senators Terry M. Wanzek (Chairman), Bill Bowman, Duane Mutch, Ronald Nichols, and Harvey Tallackson and Representatives James Boehm, Michael Brandenburg, ThomasT. Brusegaard, April Fairfield, Rod Froelich, C.B. Haas, Joyce Kingsbury, Edward H. Lloyd, Phillip Mueller, JonO. Nelson, Eugene Nicholas, Dennis J. Renner, Earl Rennerfeldt, Arlo E. Schmidt, and Ray H. Wikenheiser.

The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2002. The Council accepted the report for submission to the 58th Legislative Assembly.

TRANSGENIC PRODUCTS STUDY
Background

Transgenic agricultural products represent the culmination of thousands of years of natural and human intervention in the food production process. Yeasts, molds, and bacteria have been used to make fermented foods and to preserve foods for centuries. One example of this is turning milk into cheese. Occurrences that were not capable of being sufficiently explained in the past have now given rise to a whole range of new disciplines. Plant, animal, and microbial biology, biochemistry, and computer science have been linked in the new field of biotechnology. Independently and together, the disciplines promise opportunities and challenges that include the prevention of plant and animal diseases, the control of insects without the use of chemical pesticides, increased livestock productivity, enhanced food quality, reduced environmental degradation, and a host of other outcomes that have not yet been conceived.

Genetic Engineering

Plants and animals are made up of millions of cells, each of which has a nucleus. Inside each nucleus are strings of deoxyribonucleic acid (DNA). The DNA molecules, which are made up of units called genes, contain all the information needed by the cells to create an organism. In the breeding of plants and animals, variety is achieved by having the breeder select from the genetic traits that already exist within a species' gene pool. Creativity is, however, limited by nature. One type of rose can cross with a different type of rose. However, a rose will never naturally cross with a mouse.

When creativity is governed by the possibilities of science, limitations are less defined. Through genetic engineering, genes from one species can be inserted into another species. A gene from an arctic fish such as the flounder can be taken and spliced into a tomato or into a strawberry to make that fruit frost-resistant.

Transferring DNA is accomplished by several methods, including the direct injection of cells with DNA using a special gun or insertion of DNA into specially modified bacteria or viruses that carry it into the cells they infect. Regardless of the method by which it is accomplished, the transference of DNA from one organism to another constitutes genetic engineering and any plant or animal that has been modified to contain DNA from an external source is called transgenic.

Genetic engineering has enabled the development of drugs such as insulin for diabetics and tissue plasminogen activators for heart attack victims. Animal drugs like the growth hormones bovine or porcine somatotropin are being produced by bacteria that have received the appropriate human, cow, or pig gene. Through genetic engineering, genes that are missing or not functioning properly have been identified and replaced. Because of this, treatment regimens are in place for various immune system defects. Presently, gene therapy is also at the clinical trial stage with respect to the treatment of malignant brain tumors, cystic fibrosis, and HIV.

Genetic engineering has produced transgenic plants that are herbicide-tolerant, that are resistant to insects and viruses, and that can produce modified fruits or flowers. Transgenic animals are being developed and raised to help researchers diagnose and treat human diseases. Because companies have designed and are testing transgenic mammals, products such as insulin, growth hormone, and tissue plasminogen activators that are currently produced by the fermentation of transgenic bacteria will soon be available from the milk of transgenic cows, sheep, and goats.

Need for Transgenic Foods

Traditional agricultural technologies have allowed the survival of the current world population using a finite land base. However, expected increases in the world's population make it uncertain whether traditional technologies will be able to meet the food demands of the future world population. Through genetic engineering, the potential exists not only to increase food production but also to enable adequate food production in regions of the world which now have only marginal food production capabilities.

Regulation

As with all new technologies, genetic engineering raises questions regarding the morality of the activity, the balance of benefits and risks, and the appropriate level of public accountability. Genetically engineered products are regulated by a number of federal agencies. Food products are regulated by the Food and Drug Administration under the Food, Drug, and Cosmetic Act. Pesticide products are regulated by the Environmental Protection Agency under the Federal Insecticide, Fungicide, and Rodenticide Act. Plant pests are regulated by the Department of Agriculture under the Plant Pest Act and the Plant Quarantine Act. Internationally, the United States is working on several fronts to bring about the harmonization of regulatory approaches for these products. These efforts include bilateral environmental consultations with the Commission of the European Union and establishment of a permanent technical working group on biotechnology and the environment. There are also informal meetings with representatives of the Commission of the European Union and key trading partners. In addition the United States is participating formally and informally in international efforts to harmonize regulatory approaches for these products.

Moratorium

In 2001 the Legislative Assembly considered placing a moratorium on the commercial release of transgenic wheat. Concerns were raised that such a product would detract from value-added agricultural processing ventures, that it would not be accepted by foreign wheat buyers, and that because other wheat-producing countries such as Canada do not support its commercial release, the United States, and particularly North Dakota, would be left with an unmarketable product. The Legislative Assembly opted instead to further examine whether a moratorium would be appropriate.

Scientific Advances Through Biotechnology

The committee was informed that biotechnology has already produced significant advances in health care, in industry, in environmental sectors, and in agriculture. Because of the human genome project, promising research is being conducted with respect to gene therapy, cell regeneration, customized drugs, and veterinary applications. Industrial and environmental biotechnology is being used to develop innovative manufacturing processes that will reduce dependence on fossil fuels and that will reduce development expenditures. Biotechnology is converging, especially in the areas of health care and agriculture, to provide plant-made pharmaceuticals, plant-made polymers, methods for the environmental remediation of waste sites, and a host of defense applications. It is also improving agronomic performance by reducing dependence on pesticides, improving efficiency and yield, and by providing farmers with more options regarding the planting and raising of crops.

Products already on the market offer characteristics such as disease resistance, pest resistance, and herbicide tolerance. These characteristics enable farmers to reduce chemical usage, reduce labor costs, and improve overall efficiency. Squash, papaya, sweet potatoes, rice, corn, and casava have been enhanced with the plant equivalent of a vaccine that guards against diseases and eliminates the need for insecticides. Corn, cotton, and potatoes are among the new insect-resistant crops. Bacillus thuringensis, a common soil bacterium used widely in a topical form by organic farmers, can now be genetically engineered into crops. Such crops have increased yields by up to 15percent and decreased pesticide use by over 50 percent.

In the area of industrial biotechnology, biological systems such as enzymes are used to improve industry efficiencies, reduce environmental impacts, reduce dependence on fossil fuels, and reduce the effects of global warming. Industrial biotechnology has spawned products such as spider silk. Spider silk comes from goats that have been genetically engineered to produce a particular enzyme in their milk. The product can be synthesized out of the milk and spun into a silk-like fabric which, when woven together, has characteristics that are much more substantial than kevlar. Even though kevlar is traditionally used in bulletproof vests, spider silk is much more effective at stopping bullets.

Food production is one of the driving forces behind biotechnological advancements. In 1928 the American farmer produced an average of26 bushels of food per acre. Today, that number has increased to 136 bushels. The challenge is to produce more food using less land, less water, and fewer chemicals. By the year 2050 the population of the earth is predicted to exceed 9billion. The land necessary to feed that many people at today's rate of production is not available. Consequently, the alternative is to obtain higher levels of productivity from the land that is available. Since biotechnology allows the raising of crops that have increased resistance to pests, disease, acidity, drought, flooding, and salinity, it results in increased yields, reduced inputs, increased efficiency, and improved grower choices. It also promotes conservation tillage, water quality protection, and soil conservation.

There is a recognition on the part of entities involved in the advancement of biotechnology that in order for the science to move forward, it has to work and it has to be safe. Markets have to exist for biotechnology products and the public has to understand the promise of biotechnology.

Biotechnology and the Food Industry

Having the desire to protect hundred-year-old brands to which consumers are loyal, the food industry determined it needs assurances that every ingredient going into its brand-name products is safe and wholesome. As a result the industry has been involved in very comprehensive reviews of biotechnology and of the regulatory framework. The area the food industry sees the greatest level of participation is that involving the health and nutritional benefits of biotech foods.

Overview of biotech food products is provided by the United States Food and Drug Administration (FDA). The FDA requires the completion of a very comprehensive checklist, so that it can be assured there has been a complete evaluation pertaining to the source of every gene or protein. The FDA ensures that consideration is given to toxicity, nutritional profiling, chemical composition, allergenic potential, and antibiotic resistance.

The labeling policy of the FDA is based on the premise that biotech products are no different from their traditional counterparts. The FDA has struggled, however, with how a label could indicate that a product has been modified through biotechnology without making the consumer think that the food has been changed compositionally. Because consumers have indicated that such a label does not exist, the issue of labeling has continued to be debated. Meanwhile, the FDA has introduced voluntary labeling guidelines. Though not yet complete, these guidelines are designed to ensure that claims of nonbiotech foods are truthful and that such claims do not mislead consumers. The proposed guidelines include criteria that must be followed for a company to make a nonbiotech claim. The presumption is that such a claim may not be made unless it is supportable.

The food industry also is dealing with issues of traceability because consumers want assurances that the source of a particular food or ingredient can be identified. In reality, however, labeling is not likely to accomplish this goal. While whole products such as meat can be sourced with relative ease, the components of other products that consist of soy flour, corn, and similar ingredients require a system other than that which is currently in place. The emerging issue involves the mechanics of identity preservation. Agriculture in the United States is conducted on a massive scale and, therefore, by its very nature poses a significant challenge to maintaining or preserving identity. To date, identity-preserved crops are generally produced on a small scale and at a premium price. Tracing such a product through a specially designed system is manageable. Options for providing traceability on a large scale still need to be developed and discussed.

Biotechnology and the Wheat Industry

Twenty-sixpercent of the United States corn crop is transgenic. Sixty-eightpercent of the United States soybean crop is transgenic. Whereas corn exports have in recent years seen a nominal increase, soybean exports have increased by 26percent. Meanwhile, wheat exports, none of which are transgenic, have declined by 17percent.

Grower research conducted in Minnesota, Montana, North Dakota, and South Dakota found that 74percent of spring wheat growers believe transgenic wheat would provide better weed and insect control; 79percent believe transgenic wheat would reduce herbicide and insecticide use; and 64percent believe that transgenic crops are easier to grow than traditional crops. The respondents indicated they were very interested in accessing traits such as higher yields, control of fusarium, and complete tolerance to Roundup, as well as consumer traits such as extended shelf life. When asked if they would be interested in planting a product that was cost-neutral, had effective volunteer control, and for which markets existed, 7out of 10 said they would be very interested.

Whether markets for transgenic wheat actually exist prompted significant testimony and discussion. Some argued that wheat is being made a sacrificial crop and that traditional purchasers of North Dakota wheat are already turning to other sources for their supplies because the United States is pursuing research regarding transgenic wheat. It was suggested a statewide moratorium was the only way to prevent the introduction of a product that carried with it a host of questions regarding not only its marketability, but also regarding its long-term effects on humans, on the environment, and on agricultural production in general. A moratorium was also suggested as a way to give the Legislative Assembly time to address the multitude of concerns.

Committee Considerations and Recommendations

The committee was informed that statements regarding the aversion of export markets to transgenic wheat need to be examined carefully, particularly with respect to the percentage of the product that those countries purchase. The countries that are adverse to transgenic wheat account for only 1 percent of the product purchases. The largest market is the domestic market.

The committee also was informed that statements regarding consumer acceptance of transgenic wheat need to define who the consumer is. Is it the sandwich eater, the bread purchaser, a governmental agency, or some other entity? Household consumers, bakers, and millers have divergent interests. In addition consumer acceptance of transgenic wheat is somewhat of a nebulous concept because the product is not yet available to consumers for their acceptance or rejection.

The committee was informed that confusion also exists with respect to labeling requirements. Approval of a trait is not the same as a labeling requirement. In Japan, labeling is required only if the top threeingredients exceed 5percent. Approximately one year ago, the European Union proposed 1percent tolerance levels and recently approved a .5percent tolerance level. The imposition of tolerances is not a restriction on importation; however, it merely requires that the product be labeled.

The committee was informed that in order for tolerance levels to be in effect, testing mechanisms must also be readily available. The cost of tests has dropped threefold to fourfold over the past two years. There is a correlation between cost-effectiveness and efficiency and precision. Tests that have a 99percent accuracy in determining a 1percent tolerance level cost approximately $120. More precise tests can cost $400. A test that references the Japanese tolerance level of 5percent costs about $20.

The committee was informed that once tests confirm the content of the product, issues of segregation come into play. Segregation is not new to the wheat industry. Segregations are regularly made based on grades, protein, and dockage. Segregation is a major concern, however, for organic farmers.

The committee considered two bill drafts relating to transgenic wheat. The first bill draft would have provided that the producer of an organic wheat crop could file a claim for damages against the patent holder of a transgenic wheat seed provided the producer intended to plant and did plant and harvest an organic wheat crop, the producer discovered through testing prior to sale that the organic crop had become contaminated with a transgenic wheat, the contamination exceeded a tolerance level of 1percent, and the producer's crop was in fact worth less than it would have been had the contamination not occurred. The bill draft would have allowed for this same type of claim by the producer of a nontransgenic wheat and by the producer of nontransgenic wheat seed. Damages for all three types of producers would have been limited to the difference in payment between what the producers actually received and what they would have received had the contamination not occurred. If the producer sues and is awarded damages, the producer would be entitled to reimbursement for all costs and attorney's fees associated with bringing the action. If on the other hand the producer sues and is not successful, the producer would have to pay the costs and attorney's fees that the patent holder incurred in defending the case. The bill draft would have provided that it would be a complete defense against any claim for damages arising under the Act if the patent holder could demonstrate that the contamination occurred or could reasonably be believed to have occurred as a result of an act over which the patent holder had no control. Such circumstances would have included the use of a contaminated seed source, and the use of insufficiently cleaned equipment in the harvesting of the crop, in the transportation of the crop, or in the storage of the crop. The patent holder would still have been responsible for damages arising as a result of an Act of God.

While proponents argued that the bill draft is a necessary first step to reimbursing organic farmers who will lose market share because of contamination by transgenic wheat and to recognizing that not all the product's unintended effects are known, opponents argued that the legal concept of strict liability is applied only to situations in which there are defective or inherently dangerous products. Transgenic wheat is not commercialized now. It will be commercialized only after the federal government, through its regulatory mechanisms, determines that the product is appropriate for release. Opponents also suggested that the current system of liability is applicable to corn, soybeans, and all other transgenic crops and that there is no rational reason to create another system of liability for one particular crop. The committee makes no recommendation regarding the bill draft to authorize the filing of a claim for damages against the patent holder of a transgenic wheat seed.

The other bill draft created a transgenic wheat board. The members of this board would include the Governor or the Governor's designee, three wheat producers, one of whom the Governor would select from a list of three names offered by the North Dakota Farm Bureau and one of whom would be selected from a list of three names offered by the North Dakota Farmers Union, one individual who would represent the grain elevator industry, one individual who would represent the grain transportation industry, three individuals who held doctoral degrees in agricultural research, agricultural economics, law, or a related field, the Agriculture Commissioner, the State Seed Commissioner, and the administrator of the North Dakota Wheat Commission. The board would meet at least quarterly.

The bill draft would give the board a comprehensive set of duties. These duties include soliciting and receiving information on and monitoring scientific, legislative, and regulatory efforts regarding transgenic wheat at state, national, and international levels; soliciting and receiving information on and monitoring national and international wheat markets with respect to the acceptance or rejection of transgenic wheat; and determining whether the production of transgenic wheat in this state will require state or federal legislation addressing a host of issues such as public and private research efforts, grower or planting site registration, inspection, testing and identification, labeling, segregation, identity preservation, tolerances, transportation, liability, assessments, and enforcement.

The transgenic wheat board would have the ability to draft legislation, to recommend any federal legislation it deems necessary to this state's congressional delegation, and to recommend regulatory changes to the Agriculture Commissioner, the State Seed Commissioner, and to any other state agency. The board also would have the duty to serve as a clearinghouse for economic impact data and marketing information pertaining to transgenic wheat.

The bill draft carries an expiration date of June30, 2005. The board would have the ability to introduce its recommendations for consideration by the 59th Legislative Assembly. The Legislative Assembly could in turn determine whether the board's existence should be extended, whether the board's role and mission needed to be reconfigured, or whether the impetus for the board no longer existed.

While opponents of the bill draft indicated that it does not address, control, or limit the introduction of transgenic wheat, proponents of the bill draft indicated that it does allow for continued dialogue regarding the host of issues associated with transgenic wheat.

The committee recommends House Bill No. 1026 to establish the transgenic wheat board. The committee determined that much work remains to be done to establish a system that allows multiple interests to coexist and prosper. Issues of inspection, testing and identification, labeling, segregation, identity preservation, tolerances, transportation, and liability, among others, still need to be explored and discussed from a variety of perspectives before state level legislation and regulation should be undertaken.

ETHANOL STUDY
Background

Ethanol is an alcohol made by fermenting and distilling simple sugars. Ethyl alcohol is found in alcoholic beverages. When denatured, it can be used for both fuel and industrial purposes. The most significant use of fuel ethanol in the United States is as an additive in gasoline. In this venue, it serves as an oxygenate to prevent air pollution from carbon monoxide and ozone, as an octane booster to prevent engine knock, and as an extender of gasoline. Ethanol is produced and consumed mainly in the Midwest where corn, the main feed stock used in ethanol production, is grown.

Ethanol gained favor in the early 1970s when the oil embargoes prompted the search for alternative fuels and for renewable sources of energy. Ethanol fell into both categories. First used as a product extender, ethanol production was further enhanced by a partial exemption from the motor fuels excise tax and the desire of corn producers to expand the market for their crop. More recently the production of ethanol has been stimulated by the Clean Air Amendments of 1990, which required oxygenated or reformulated gasoline to reduce emissions of carbon monoxide and volatile organic compounds. Today 99.8percent of the ethanol used is in a blended form--generally 10percent ethanol to 90percent gasoline. It can be used in purer forms as well.

Ethanol and Agriculture

Approximately 90percent of the feed stock used in ethanol production comes from corn. The remaining 10percent consists of grain sorghum, barley, wheat, cheese whey, and potatoes. Because one bushel of corn can produce 2.5gallons of ethanol, it was estimated that during the 2000-01 marketing year, 615million bushels of corn were used to produce 1.5 billion gallons of ethanol. This amounted to 6.17percent of corn utilization.

Ethanol Production

Ethanol can be processed by dry milling plants, which use a grinding process, or by wet milling plants, which use a chemical extraction process. In both instances the corn is processed and various enzymes are added to separate fermentable sugars. Yeast is then added to make alcohol. If the alcohol is to be used for fuel and industrial purposes, it is denatured to make it unfit for human consumption.

Ninety percent of all ethanol production occurs in the corn belt states of Illinois, Iowa, Nebraska, Minnesota, and Indiana. The proximity of the ethanol production facilities to the raw material helps to keep shipping costs low. Consequently the major purchasers of ethanol are the metropolitan regions in the Midwest. When ethanol is shipped to other regions, costs tend to increase because ethanol-blended gasoline cannot be shipped through petroleum pipelines.

Domestic ethanol production capacity is approximately twobillion gallons per year. During the year 2000 the largest producer of ethanol was Archer Daniels Midland, at 797million gallons. Minnesota Corn Processors produced 110 million gallons, while Williams Energy Services and Cargill each produced 100 million gallons. All other production constituted significantly smaller amounts.

Ethanol Usage - Nationwide

During 1999, 1.4billion gallons of ethanol were consumed in the United States. Most of that consumption was in a blended form consisting of 10percent ethanol and 90 percent gasoline. During that same year gasoline usage was estimated to be 125 billion gallons. Ethanol's market share in 1999 was therefore 1.2percent. Even with growth predictions of 2.6 billion gallons by 2005 and 3.3 billion gallons by 2020, ethanol's market share would still be only 1.5 percent.

Ethanol Usage - North Dakota

North Dakotans consume about 373 million gallons of gasoline each year. Approximately 20 percent of that gallonage contains 10percent ethanol. The size of North Dakota's ethanol market is therefore in the range of eight million gallons per year. This state's existing production capacity is in the range of 30 million gallons annually. The excess ethanol is marketed in other states. Montana has ethanol usage in the range of sixmillion gallons and has no production capacity. Wyoming has ethanol usage of approximately nine million gallons per year but produces five million gallons, and Minnesota has an annual ethanol usage of 240million gallons and a production capacity of 224million gallons.

Committee Considerations and Recommendations

A number of years ago the state of Minnesota mandated the blending of gasoline with ethanol. Today ethanol-blended gasoline constitutes 97 to 98 percent of all gasoline sold in the state. Similarly South Dakota instituted a retail incentive that allows ethanol-blended gasoline to be sold for approximately twocents per gallon less than nonblended gasoline. Today ethanol-blended gasoline constitutes approximately 60percent of all gasoline sold in the state.

In 2001 Iowa enacted a retail incentive bill that provides an income tax credit to retailers whose ethanol-blended gasoline constitutes 60 percent or more of their total retail fuel sales. It is expected this effort will more than double the market share currently enjoyed by ethanol in Iowa.

Against this backdrop the committee considered two bill drafts that would mandate ethanol use and two bill drafts that would provide various incentives designed to increase ethanol production and use in this state. One bill draft provided that all gasoline having an octane rating of 87 and offered for sale must be blended with ethanol at the rate of 10 percent. The other bill draft would have required that beginning January1, 2004, ethanol-blended gasoline would have to be sold from at least one pump at each retail location and that beginning January1, 2005, a retailer would have to offer an ethanol blend from at least one pump dispensing the lowest octane rating of gasoline at each place of business.

Opponents of the bill drafts pointed out that these were mandates and that traditionally mandates have not been looked upon favorably by the electors of this state. They indicated it would be very much preferred if the Legislative Assembly would focus its efforts on production incentives. Unlike a mandate a production incentive would encourage the erection of a new ethanol plant in part by assuring lenders that money was available to assist the owners during the initial years of plant operation. Proponents argued that the state's budget might not be able to accommodate a sizable production incentive for ethanol. A mandate, on the other hand, required no expenditure of funds on the part of the state.

The committee makes no recommendation regarding the bill draft requiring pumps at retail locations.

The committee considered a bill draft that would have provided an income tax credit as an incentive to retailers if 60 percent or more of the total gallons of gasoline sold by that retailer were blended with ethanol. Proponents suggested that any investment in the future of the state's ethanol industry would have a monetary return to the state in terms of additional income taxes being paid, and it would support the agricultural sector by creating a market for corn and increasing the price per bushel anywhere from 5 to 20 cents.

Opponents, however, pointed out that the dollars necessary to fund such a concept would result in a significant reduction in general fund revenues or, if the concept were to be revenue-neutral, there would have to be an increase in motor vehicle fuel taxes. Opponents also pointed out that if ethanol were to be made a more marketable product by means of imposing a lower tax rate than that placed on other motor vehicle fuels, the impact to the state treasury would continue to escalate as more and more ethanol would be purchased at the lower tax rate rather than nonblended gasoline which would be taxed at a higher level.

The committee makes no recommendation regarding the bill draft to provide an income tax credit to ethanol retailers.

The committee considered a bill draft that would have provided an incentive payment to an ethanol plant if it locates in this state, files a request for an incentive payment with the Agricultural Products Utilization Commission, demonstrates that the ethanol to be manufactured would be sold at retail, and if it submits a statement regarding profitability to the Agricultural Products Utilization Commission. If a plant is determined to have made a profit, it would not receive the incentive payment. If a plant is determined not to have made a profit, the payment would be forthcoming. The appropriation, which was at an unspecified level, would have come from the highway tax distribution fund.

Opponents of the bill draft were particularly concerned about the impact the appropriation would have on the highway tax distribution fund and particularly on the ability of the Department of Transportation to provide matching funds for federal grants. Others indicated that legislators were working with the Governor to craft a producer-incentive bill that would be based on countercyclical payments. Because agreements regarding the nature and the scope of the concept were not reached in time to allow for their consideration by the interim committee, the concept is to be offered by individual legislators to the 58thLegislative Assembly.

The committee makes no recommendation regarding the bill draft to provide incentive payments to ethanol plants.

The committee recommends Senate Bill No. 2027 to require that all gasoline having an octane rating of 87 and offered for sale be blended with ethanol at the rate of 10percent. This mandate would serve to promote ethanol and increase its use in a fashion that could not be equaled through any other means, including the erection of a new plant.

BIODIESEL STUDY
Biodiesel - Description

Biodiesel is a diesel fuel substitute that is produced from renewable sources such as vegetable oils, animal fats, and recycled cooking oils. Chemically, biodiesel is defined as the mono-alkyl esters of long chain fatty acids derived from renewable lipid sources. Biodiesel is typically produced through the reaction of a vegetable oil or animal fat with methanol or ethanol in the presence of a catalyst to yield glycerin and biodiesel. Biodiesel can be used in neat form or blended with petroleum diesel for use in diesel engines. The physical and chemical properties of biodiesel, as they relate to the operation of diesel engines, are similar to petroleum-based diesel fuel. Biodiesel is simple to use, biodegradable, nontoxic, and essentially free of sulfur and aromatic compounds.

The concept of using a vegetable oil-based fuel dates back to 1895 when Dr. Rudolf Diesel developed the first compression-ignition engine specifically to run on vegetable oil. Because biodiesel has properties that are very similar to petroleum diesel, it can be blended with petroleum diesel in any ratio and can therefore be used in diesel engines with no major modifications beyond those involving certain hose and fuel line substitutions.

Attributes of Biodiesel
Degradation

The current key biodiesel markets are mass transit, the marine industry, and other environmentally sensitive areas such as mining. In the marine industry biodiesel is gaining favor because it has high degradation attributes. Recent studies comparing the biodegradation of biodiesel and diesel fuel in aqueous solutions found that the biodiesel samples were 95 percent degraded after 28days. At the end of the same period diesel fuel was only 40percent degraded. The study concluded that blended biodiesel would therefore degrade faster than regular diesel fuel.

Flashpoint

For the mining industry, biodiesel is attractive from a safety perspective. Biodiesel has a much higher flashpoint than other fuels, and consequently it needs to reach a much higher temperature before it will ignite when exposed to a spark or flame. Studies have found that if diesel fuel is blended with biodiesel, even in fairly small ratios, the resultant fuel becomes much safer to handle, store, and use than conventional diesel fuel.

Toxicity

Another important aspect of biodiesel is its toxicity level. Health effects can be measured in terms of a fuel's toxicity to the human body or in terms of health impacts tied to exhaust emissions. Recent studies have investigated the acute oral toxicity of pure biodiesel as well as that of a 20 percent biodiesel blend on rats and rabbits. At established median lethal dose levels, there were no observable effects for system toxicity. There were no deaths, significant weight changes, or gross necropsy findings. Aquatic toxicity tests have also demonstrated that biodiesel is less toxic than both diesel fuel and table salt.

Emissions

With respect to emissions reductions, biodiesel in a conventional diesel engine results in a substantial reduction of unburned hydrocarbons, carbon monoxide, and particulate matter. The emission levels of nitrous oxides are less clear. Some are slightly reduced and others are slightly increased. The results were thought to depend upon the duty cycle of the engine and the testing methods employed. Particulate emissions from conventional diesel engines are generally divided into three components. The first is carbaceous material-carbon particles most often associated with the visible smoke of diesel exhaust. The second is hydrocarbon material, which is absorbed on the carbon particles, and the third is engine lubrication oil that passes by the piston oil rings. This final component consists of sulfates and bound water. The use of biodiesel serves to decrease the solid carbon fraction of the particulate matter and eliminates the sulfate fraction, while the soluble or hydrocarbon fraction stays the same or is increased.

In addition to reducing the overall levels of pollution and carbon, the compounds that are prevalent in biodiesel and diesel fuel exhaust are different. The total speciated hydrocarbon mass of biodiesel is nearly 50percent less than that measured for conventional diesel fuel and the associated ozone potential is reduced by the same amount.

Lubricity

Of greater significance to many fleet operators is biodiesel's lubricity levels. In an attempt to decrease particulate matter emitted from diesel-powered engines, the Environmental Protection Agency, in the early 1990s, lowered the permissible level of sulfur in diesel fuel to 0.05percent by weight. Fleet operators soon realized that the use of low sulfur diesel fuel caused injection pumps to wear prematurely. The pump manufacturers determined that this problem could be countered by using fuel with lubricity additives. Research has shown that biodiesel provides significant lubricity over that of traditional diesel fuel. This lubricity has been noted even in blends as low as 1percent.

Resource and Market Issues

The development and commercialization of not only biodiesel, but biofuels technology in general, depend on and, conversely, influence several issues of national importance. At the root of these issues is the finite nature of petroleum. The benefits of biofuels and the influences on the development of biofuels technology are inextricably linked to three vital factors in the continuing stability of this country--the economy, the environment, and energy.

Economy

The United States economy is closely tied to crude oil. A $1 change in the price of a barrel of crude oil can lead to a $1 billion impact in the level of oil imports. Oil imports account for almost half of the United States trade deficit. As a result, any variation in the price has a significant impact on the economy.

United States Military and Oil

In order to maintain the uninterrupted flow of oil from the Persian Gulf region, the United States expends approximately $57 billion per year. During the 1980s this expenditure was $36.5 billion per year. These figures include both military and foreign aid expenditures in the region. When military and energy security factors are taken into account, the true cost for oil reaches $100 a barrel or approximately $5 per gallon. These figures are for peacetime expenditures. Any military engagement in the area would significantly increase the cost of oil. The Persian Gulf War, for example, carried a price tag in excess of $61 billion.

United States Agricultural Economy and Biofuels

The use of biofuels, whether biodiesel or other alternative fuels, can impact many sectors of the United States economy, not the least of which is agriculture. If the biofuels industry could grow to the point where increased feed stock supplies are needed, the agricultural sector could be expanded to meet those needs. Opportunities would exist for farmers to grow new crops and to increase production of traditional crops for new uses. Much of the revenue for manufacturing, installing, fueling, and operating biofuels plants could be maintained in the region that actually provided the feed stock. This would result in jobs in the agricultural sector and in the surrounding communities.

Committee Considerations and Conclusions

The committee was informed that if a 10million gallon biodiesel plant would be built, that facility could utilize 10percent of the North Dakota soybean crop. It was suggested that the resultant biodiesel could be used not only in tractors and combines but in governmentally sponsored forms of transportation such as schoolbuses, garbage trucks, and state vehicles. While the committee members recognized the meritorious nature of requiring the use of biodiesel fuel, they determined that it would be premature to mandate the use of biodiesel fuel before there existed the ability to produce it in sufficient quantities and the ability to market it in locations that are proximate to the users. It was indicated that the Energy and Environmental Research Center at the University of North Dakota would be undertaking a biodiesel impact study in the near future. The committee determined that the results of this study might alleviate some of the existing concerns regarding the cost of biodiesel production, its use in frigid temperatures, its short-term and long-term effects on diesel engines, and the sufficiency of the biodiesel supply infrastructure.

The committee makes no recommendation regarding the biodiesel study.

GRAIN SHIPPING RATES STUDY

The Burlington Northern Santa Fe (BNSF) is one of two principal railroads operating in North Dakota. During the early 1980s BNSF conducted a study regarding the manner in which it was running its grain transportation business. As a result BNSF opted to make some fundamental changes in that aspect of its operations. Burlington Northern Santa Fe stopped using a mileage-based-cost-plus approach to transportation rates and implemented a market-based approach. As a result a farmer's cooperative that ships a single car or a shuttle train from point A to point B pays the same transportation rate as a large shipper such as Cargill. The large shippers are not given favorable positions. However, BNSF does give rate differentials as a function of product efficiency. A single-car shipment is more expensive than a 26-car shipment, which in turn is more expensive than a 52-car shipment. A 52-car shipment is likewise more expensive than a shuttle train consisting of 110 cars.

In the 1990s BNSF started to standardize unit train sizes and began investing in high-capacity cars that carry 10percent more product than their predecessors. Even though BNSF downsized its grain fleet from 35,000 to 29,000 cars, it increased its carrying capacity and broadened its product offerings.

By 2001, 5,500 of BNSF's 29,000 cars were in shuttle service. Those 5,500 cars were generating nearly 40percent of BNSF's carrying capacity. The cars are high-capacity hoppers, and they turn an average of three times a month, as opposed to 1.4 times a month for a traditional grain fleet. The difference is found not in the transit time but in the end points--the time it takes for customers to load and unload and the amount of time it takes to put trains together.

While BNSF has found that these changes dramatically improved overall system performance, grain elevators have found that they are constantly having to make capital investments to accommodate the larger trains. Elevators that spent hundreds of thousands and even millions of dollars to upgrade their facilities to 52-car loading facilities are now not able to obtain the preferred rate given to those that can accommodate the 110-car shuttle trains. In fact, of the 190 elevators on the BNSF line in North Dakota, only nine can accommodate the shuttle trains; approximately 50 can load 52-car shipments; 40 can load 26-car shipments; and the remaining elevators can load only quantities smaller than 26 cars.

Compounding this concern was the fact that in 2001 BNSF was offering inverse pricing rates for grain shipped to the Pacific Northwest. The rates were $1.09per bushel for grain shipped to the Pacific Northwest from Gladstone, 99 cents per bushel for grain shipped from Sterling, 93.5 cents per bushel for grain shipped from Jamestown, and 80 cents per bushel for grain shipped from Breckenridge, Minnesota. It was suggested by grain elevator operators that these rates were instituted at a time when the western part of the state could provide the grain needed for shipment to the Pacific Northwest.

Representatives of BNSF indicated that Montana's wheat production had seriously declined in 2000, and that by early 2001 Pacific Northwest export customers were signaling a concern that not enough wheat would be available to fill their export orders. There was also concern that if wheat availability proved to be insufficient, contracts would be lost to Canadian suppliers. Consequently in March 2001 BNSF put in place rates that allowed the Pacific Northwest exporters to reach farther east than they normally would to obtain the necessary product.

Recognizing the impact the inverse rates were having on the state's smaller elevators, the Governor asked the governors of neighboring states to join him in working toward a solution that would eliminate the unfair grain prices. The Governor specifically asked BNSF to evaluate its rates and to commit to making those rates equitable.

In July 2002 BNSF announced it would end its practice of inverse pricing by increasing rail rates in eastern North Dakota rather than lowering the rates charged in western North Dakota.

The committee makes no recommendation regarding the study of grain shipping rates.

MISCELLANEOUS REPORTS
State Board of Agricultural Research - Annual Evaluation of Research Activities and Expenditures

The State Board of Agricultural Research and Education is at a challenging point in its growth and development. As individual terms of office are concluding, the board is trying to ensure that new members quickly acquire an understanding of the board's role and mission.

In order to best serve its constituency the committee was informed the board is putting forth a concerted effort to determine how it can best serve agricultural producers in this state and, most importantly, how it can best utilize its limited resources. It is anticipated certain programs will have to be terminated or otherwise curtailed in order to avoid a dilution of all the board's efforts. The board indicated such decisions will be difficult, but they will be made with the goal of ensuring excellence in whatever efforts are undertaken and with the hope that the Legislative Assembly will be supportive of the decisions.

State Seed Commissioner - Transgenic Seeds and Crops

Transgenic potatoes and sugar beets have received federal regulatory approval for commercial production, but growers in the state have elected not to adopt the technology. The reason appears to center around market demands. On the other hand more than half of all soybeans and canola now grown in this state contain transgenic traits. North Dakota is capable of producing, handling, testing, and segregating food grade commodities to a fairly low tolerance level, i.e., less than 5percent transgenic content. It is not, however, capable of meeting either a zero tolerance requirement or providing a 100percent assurance regarding the presence or absence of genetic modification in any seed or crop.

Transgenic wheat is regulated under United States Department of Agriculture - Animal and Plant Health Inspection Service research restrictions. Transgenic wheat is not bound by or subject to export tolerances and no commercially available testing methods are available. Therefore all discussions surrounding transgenic wheat tend to be purely speculative.

Transgenic wheat will not be released for commercial production during the coming two to three years. Its patent holder, Monsanto, has publicly committed to withhold release of the product until certain milestones are met, including regulatory approval and market acceptance. In addition to Monsanto's commitment, there are other factors that will ensure the delay in release. Those factors include federal agency response to the heavy and often controversial scrutiny that has been given to the product, the need to establish national and international tolerance levels, and the need to standardize handling, sampling, and testing protocols and procedures.

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