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Ending ethanol tax credit only one risk for industry

Removing the ethanol subsidy will have only a modest effect on biofuel plants, corn producers and livestock feeders, says Cole Gustafson, biofuels economist.

The U.S. Senate has sent a strong message to the biofuel industry by suggesting the ethanol blender’s tax credit, known as the Volumetric Ethanol Excise Tax Credit, or VEETC, will be terminating soon. The credit was created in 2004 to help encourage greater production of ethanol.

For several reasons, removing the subsidy will have only a modest effect on biofuel plants, corn producers and livestock feeders.

First, it already was scheduled to sunset by the end of the year, so the industry was preparing for reduced support and change. Second, most of the subsidy does not go to ethanol producers. Economists have found that blenders often pass the subsidy on to consumers instead of the ethanol producers to remain competitive with gasoline and increase market share. Consequently, ethanol plants didn’t directly benefit from the policy nearly as much as the public thought.

The biofuel industry also faces more important risks than the loss of the subsidy. Most prominent is the high cost of corn, which is the primary feedstock for ethanol production. Although corn prices have moderated recently, so have petroleum prices. Therefore, profit margins continue to be pressured and are just slightly above breakeven at typical Midwestern ethanol plants.

Adverse weather is posing an additional risk to local ethanol plants. Typically, ethanol plants source corn from immediate regions (less than 60 miles) surrounding their facility. Heavy spring rains and recent Midwest floods have led to localized corn production shortfalls and difficulty getting corn to plants because of deteriorating roads. Therefore, some plants face greater supply risks and increased operation costs because of the need to obtain corn from greater distances.

A more important federal policy for the biofuel industry is the Renewable Fuel Standard. It mandates growing U.S. consumption of renewable fuels, including ethanol. Last week, the Environmental Protection Agency reaffirmed its support for the policy when it established renewable fuel consumption targets for 2012.

Even if the termination of the blender’s credit were to affect ethanol plant profitability adversely, blenders eventually would have to raise ethanol prices in the marketplace to secure enough ethanol to meet the mandate.

The ethanol industry did have one positive development during recent policy discussions. The ethanol industry had sought to utilize budget savings from curtailment of the tax subsidy to develop a new program targeted to increasing consumer demand and awareness.

Most notable was the use of funds to make blender pumps more available to consumers so they could choose the proportion of ethanol in their fuel at the time of purchase. If consumers have a choice, industry studies have found that many purchase more than 10 percent ethanol, which is the only choice available in many filling stations. There was a movement to eliminate funding for this program, but it survived.

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