SEC. CHUCK CONNER: Bob, thanks for the introduction. You and I go back, gosh, so far. Back in the days when this wasn't a very popular business, and this was a smaller crowd in those days. But we've stayed at it, and I appreciate your changing this industry through such a remarkable period of time.

Folks, let me just say that the last couple of weeks have really been a bit of a blur for me as I have been adjusting to an unexpected new role as the Acting Secretary. I mentioned to my wife last night that I would be speaking to this robust group today, and I said, everything is going on in terms of changes in my career, and I was a little bit nervous about appearing in front of so many old friends here. She gave me some good advice. She said, well whatever you do don't try to sound intellectual, so.

[Laughter.]

So I will not be intellectual with you today. Dru is the intellectual of the two of us, so.

I thought I would talk to you a little bit today about how far we have come with that ethanol, and a little bit about where the U.S. Department of Agriculture thinks we may be headed in the future. The extraordinary take-off of this nation's renewable energy industry has really been a remarkable story. It's been a story of expectations that were surpassed. It's been a story of expectations that were adjusted and then surpassed.

I remember one event in particular. You know, you look back upon your career once in awhile, just things where you note you've sort of been a part of something that's going to represent dramatic change just in the way people operate their daily lives.

One event I always remember is the day I was working for Senator Richard Lugar, the senior senator from Indiana, to whom I owe a great deal in terms of my own career. But on this particular day, they were removing all the IBM Selectric typewriters out of our office and replacing them with desktop computers. And, of course, as you can imagine, in a large office everyone was upset because this was change, they loved their old IBM Selectrics, and they didn't want these loud clacking computers. But you had to sit back and, as you were trained on how to use these things, you knew that there was going to be a big change in the world because of that type of technology.

And I've got to tell you, folks, that is exactly how I feel with the ethanol industry. You just can't help but sit back and say, you know, 10 years from now the world is going to be a dramatically different place than where we are today as a result of the work that hopefully our agency is doing, but primarily the work that each one of you are doing out there in your own businesses.

Let's just look at the growth that we're seeing this year, and this will be a review for some of you certainly. Most of you know that both the nation's capacity to produce ethanol and, as well, our farmers' ability to supply the corn that will be needed is in a great deal of change. Your organization, the RFA, of course, has been the authoritative scorekeeper on plants being built, capacity added, how many gallons produced, so I know you are familiar with the trend line. And let me just say that the Department of Agriculture is an agency of 110,000 employees, and when it comes to ethanol all of those employees call Bob. And that's pretty much how this system operates in terms of where we get our information. So if you hear me repeat Bob's statistics, it's logical because his statistics are pretty much the ones we use as well.

One thing their statistics reveal pretty clearly is the pace of change that is transforming this industry. In all of 2006, 1 billion gallons of ethanol production capacity and 15 new plants came on-line in the U.S. in all of 2006. But just since March of this year the industry has more than matched that - 1.2 billion gallons of production capacity and, again, another 15 new plants.

So you haven't just picked up the pace from last year; you've more than doubled it. And that's a pretty good growth curve in any business sector. A little more than two years ago in the Energy Policy Act, Congress and the President set a renewable fuels standard for the nation. It called for 7.5 billion gallons of renewable fuels to be part of our overall fuel production by the year 2012. Today, again, thanks to exceeded expectations, faster than expected production in both production capacity and demand, your industry is on track to pass that goal, we believe, this year, five years ahead of schedule.

Several factors have come together to spur this growth-the RFS [Renewable Fuels Standard], refining industries adoption of ethanol as a substitute for MTBE, and of course the nation's growing appetite for the 90/10 gasoline ethanol-blended fuels. I think the public's strong support for renewable fuels in general has also played an important role. I believe people like this stuff. I believe virtually every American wants to see our nation cut its dependence on imported oil, especially oil drawn from an unstable and even hostile part of the world. And as I travel around, folks, I will tell you this is a huge motivating factor out there in the general public. They want the U.S. to supply more and more of its own energy.

And renewable fuels offer us one of the best ways, of course, to do that. The rising market demand for ethanol created recently, somewhat recently, an updraft on corn prices, strongly, of course, over the last year. Those prices in turn changed the planting plans of literally thousands of farmers all over the country this past spring. They responded to the new market conditions by planting nearly 15 million additional acres of corn, a total of almost 93 million acres in all, more than we have seen at any time since right after WWII. It's remarkable growth, at a level no one would have expected to be possible.

That was even more than our experts at USDA and, of course, many others had been counting on. Thanks to the tremendous effort these farmers put out and the generous amount of rain of course and good weather in the corn belt states, we are looking forward to a 13.3 billion bushel corn harvest this fall. And again you guys know, but it bears repeating, that that is an all-time record for this country.

The concern about whether there would be enough corn to meet both our feed and fuel needs has, at this point, been proven to be unfounded. Overall, we expect ethanol demand for corn will rise to about 3.3 billion bushels this year, or consume about 25 percent of our crop, to put it in another way. This is, again, a full 5 percentage points from just 2006.

But while the share of the corn crop devoted to livestock will be lower in percentage terms, the fourth point to note is that the actual number of bushels of corn being fed to livestock is up from 5.7 billion bushels to 5.8 billion bushels. In addition to meeting all our demands for ethanol, the corn farmers in this country put out enough to actually increase the number of bushels of corn available for feed.

There is also a running discussion in the media, and of course a lot of other public forums, about whether our expanding production of ethanol is to blame for higher-than-normal food price inflation, which we have seen this year. Ladies and gentlemen, clearly ethanol demand is having some impact. I don't think that's something we can deny at this point. But the data that has been presented to me shows that it has been assigned far more than its fair share of blame for what is happening in our grocery store aisles.

Yes, feed prices are about 22 percent higher than they were a year ago. That we acknowledge. But our economists tell us that for every dollar a bushel increase in the price of corn, that has a very small percentage increase in retail price of meat products. That is because so many other factors go into raising an animal to market, the processing and transportation to bring a cut of meat to the retail stores.

Over the last three years the domestic food price increases have averaged roughly about 2.7 percent. And that's been a pretty flat trend line over the past several years. This year our economists are telling us to expect a food price inflation of somewhere around 3.5 to 4.5 percentage points, a little bit higher. In fact, of course, there quite a few factors at work here beyond ethanol. The food price inflation will be higher and some of those reasons are quite traditional. Big one, of course, being weather. Droughts in Europe, Asia, and especially Australia have cut into the wheat crop around the world and produced record prices of more than $9 a bushel as we have seen in recent weeks.

When it comes to milk and dairy products, the drought in Australia and the rising market demand in China and other Asian nations have contributed substantially to the higher prices we have seen this year. And all retail food prices continue to be impacted, of course, by the large factor of the retail price of oil. About 80 cents of every retail dollar spent on food goes to cover processing, packaging, distribution and marketing costs. Of course you recognize all of those are very, very intensive consumers of energy and directly impacted by rising energy costs.

But we have already seen signs that farmers around the world are planning a considerably bigger wheat crop next year. We expect similar results from other markets such as dairy as well. Our economists tell us that they expect food price increases to moderate in 2008 to somewhere in the 3 to 4 percentage point range, again getting fairly close to returning to our historical levels. That would be in keeping with the historical patterns that we had seen prior to this ethanol situation. And again, they will tell you the markets will moderate and stabilize, we believe, over a longer period of time.

So I think what we've seen this year is positive proof that the laws of supply and demand are still in effect and we believe working quite effectively in this rapidly changing agricultural arena.

We have also seen some resilience and flexibility in our corn production capacity that, simply, most said was impossible. This is good news to know, but we will still have room to grow in our use of corn as a feedstock for ethanol. I think there is also broad recognition by the President, the Congress and the industry, however, that at some point out there a ceiling does exist. It's called by many different names; some call it a "blend-wall." Clearly, a ceiling exists somewhere out there in the future.

To reach the more ambitious RFS that is being talked about and debated in Congress today, whether it is the 35 billion gallon goal set by the President, proposed by the President, or the 36 billion gallon standard suggested by the Senate, which they have adopted, it is all going to mean that we need, we believe, to go beyond simply corn and soybeans as feedstock.

Those commodities clearly, ladies and gentlemen, brought us to today. But we do have to look and plan for the next phase. The challenge before us is to find practical and cost effective ways to produce cellulosic ethanol from a whole variety of feedstocks depending upon what region of the country you are from. That is going to require not only scientific breakthroughs, but innovative approaches to the logistical, planning and infrastructure challenges that cellulosic ethanol production brings.

That is why the administration and the Department of Agriculture proposed $1.6 billion in new spending on research and development in the area of renewable fuels as part of this year's Farm Bill debate. The focus of most of our proposals was specifically on speeding the development and full commercialization of cellulosic ethanol. The House-passed bill, I am pleased to say, did incorporate most of our renewable energy proposals. They met with strong favor. However in the case of our proposal for the new Bioenergy and Biobased Product Research Initiative, funding authority was provided for the program. Funding however was not provided. Obviously authority without funding doesn't get you very far in terms of research, development and commercialization.

We consider these initiatives to be a critical part of our overall renewable fuels program. It would link the Department of Energy Laboratories and the even larger university communities into a single network and seek to use the respective strengths from each sector to the best advantage. It would also competitively source many of our research dollars, and again, which will aid this industry tremendously.

Because of the long lead times involved in research work of this type, and the personal commitments involved, we believe an insured funding stream has simply got to be necessary in the future. It can't be subject to the whims of "here's your change from Congress", which is why we proposed it again as mandatory funding dollars.

The version of the Farm Bill energy title that has been circulating in the Senate would create a regional research network and provide it again with this sure source of funding through mandatory dollars. But because the networks would be limited to land-grant universities as well, we believe this approach would not be quite as competitive as it would be if we make it broadly based to all sectors including all the universities. We will continue to work with the Congress in the weeks ahead to make our case and seek this common ground because we believe.

Apart from what is taking place on Capitol Hill, we have been taking steps at the departmental levels in recent months to try to establish some of the framework, and begin some of the fieldwork that will needed to help bring in renewable fuels to this next level.

We have revamped our Biomass Research and Development Board that serves as the federal government's main coordinating body for promoting biofuels and biobased products. We have drawn more and more senior officials from participating agencies to support the cochairs, Tom Dorr our Under Secretary for Rural Development, and Andy Karsner,Assistant Secretary of the Department of Energy, two individuals that I think your industry and organization are greatly familiar with..

The Board has begun working on a biofuels action plan to support the President's 20 and 10 plan to reduce the nation's use of gas use by 20 percent over the next 10 years, and expand in that process its reliance on renewable fuels.

The Board is looking now at how to advance all phases of the biomass production cycle, from plant science and feedstock production through the distribution and end-use infrastructure which is so critical going forward. And we will be considering whether or not we need to expand the amount of ethanol allowed in non-flex-fuel vehicles to support continued growth for that industry as well. And again I know this is a critical issue for you guys going forward.

We've hired a consulting firm, Booz Allen Hamilton to support the board as it proceeds forward in putting together a plan. Again, which I think is an important step.

Solving the challenges of cellulosic ethanol won't only mean finding the right enzyme to break down cells walls and free the energy inside. It will also mean solving the very practical challenges of collecting feedstocks and moving fuels in an efficient and cost-effective manner..

To help advance that goal, our scientists are working with our partners in the Land Grant universities around the country. And our economists at the Economic Research Service have begun work on a study of the relative costs and availability of different biofuel feedstocks.

And USDA also has a unique research capability of its own that it can bring to bear on advancing cellulosic ethanol production. A few of these I will go through. We have the largest staff of plant scientists with expertise in plant breeding, genomics and genetics that are vital to achieving our national bioenergy goals.

We also manage the National Plant Germplasm System, one of the largest genebank systems in the world, in partnership with agricultural experiment stations. The system conserves the plants and seeds of nearly 10,000 species of plants. Perhaps somewhere in that 10,000 is the seedstock that will provide the plant for a major increase in cellulosic ethanol production.

And we have a 60-year history in developing biobased products from agricultural materials and transferring that technology to industry as well.

I do believe that Congress recognizes the same potential that all of you do in renewable fuels and shares our sense of urgency we feel about moving ahead with the next generation of feedstocks.

So I am optimistic that sometime in the next few months we will have a farm bill. We will have a farm bill that invests in those areas in a way that allows us to build in a future of greater choice and energy security for our nation.

Now if I could just close with a thought about the farm bill. Let just say at the Department of Agriculture we appreciate the economic times that we are in today. These economic times are caused in many ways by the work your companies are doing out there. This is a great time to be a farmer in American agriculture today whether you're a livestock farmer, whether you're a corn farmer, wheat-whatever the case may be we are seeing record income levels across the board in every single one of these sectors. It's simply a great time to be in American agriculture.

But ladies and gentlemen, here is our challenge and here is my challenge as the Acting Secretary of Agriculture. It is not about so much next year because next year is going to be a good year for American agriculture. How do we sustain this five, 10 years down the road so that this is not a blip on the graph to where suddenly we're up here but a couple of years from now we're way down here and the people are suffering for it?

Historically that would be a track that American agriculture and agricultural income would take. Good times today, horrible times tomorrow, they are just around the corner. You know, if you go out there and talk in the coffee shop, bad times of course are just around the corner. Our challenge is to draft farm policy and have policies coming out of our agency that help us sustain that so that you're going to have ups and downs but let's take that big down out of this market, to sustain these better times.

I believe renewable energy from biofuels are our way of sustaining those good times, not for a year or two, but for a whole generation of producers involved in American agriculture. And this is a noble goal I can tell you. It would be a great, great thing. I don't believe it's just simply going to happen on its own. It requires some strategic planning and investment. We are prepared to do that, and we appreciate the fact that we know you are too, and you want to be a partner with us in this process.

I hope you view the Department of Agriculture as your partner in this because we certainly feel that way, appreciate the relationships we've had in this room. And I again thank you all very much for what happens here and look forward to working with you.

[Applause.]

QUSETION: I'm Bruce Chamberson from (unclear) Corporation. We see in today's Wall Street Journal they are blaming us on the rising price of ketchup, is caused by ethanol. What you need to help get the right story out to the public about what's really going on?

SEC. CONNER: Well, let me tell you, Bruce, I think I can play a significant role in that. I think one of the responsibilities of the Acting Secretary of Agriculture is good factual data out there, particularly in areas where factual data may not be in order. As I went through in my remarks, we have to acknowledge that ethanol has had some impact on food prices. I think we acknowledged that. But at the same time, I believe the data clearly shows that impact has been overstated. The rising cost of energy, if you look at the change in the cost of a barrel of crude oil, the amount of crude oil consumed by the agricultural sector, that you impact as much as a 20 to 30 percent increase in that is having on retail food prices - and again that translates into higher packaging costs, higher transportation costs, all the things that go into taking a product from the farm to the grocery shelf, is having a much, much greater impact than higher grain prices as a result of ethanol.

And I always, always remind folks that the American farmer - and again I think this is my role as Secretary of Agriculture - the American farmer gets about 20 cents of the American food dollar in this process. So somehow the notion that grain prices and the hard work of the American farmer are driving up food prices, I will continue to argue that one for a very, very long, and just don't believe that's the case at all.

MODERATOR: (unclear) probably is already planning a press event where he fills up bags of ketchup, and there's a popcorn reference there.

SEC. CONNER: I think I better get out of here before you guys do that. Thank you all very much.

[Applause.]