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Biofuels hinge on tax credit renewal

The hopes of the biodiesel industry lifted when the U.S. Senate voted to extend a $1-a-gallon biodiesel tax credit on March 10.

The Senate’s approval of the subsidy brings fuel plants one step closer to resuming full production, which slowed after the tax incentive expired on Dec. 31, 2009.

University of Missouri Food and Agricultural Policy Research Institute (FAPRI) Co-director Pat Westhoff said not renewing the credit could have significant impacts on the biofuel industry and commodity markets. FAPRI presented its baseline report to Congress on March 9, outlining economic possibilities for livestock, crops and biofuels.

“That tax incentive is a major reason we’ve reached the level of biodiesel production we’ve seen,” he said. “Without that incentive, the industry still has some support from mandates that require a certain minimum level of biodiesel use, but there’s certainly less of an incentive without those credits in place.”

Possible scenarios calculated without the tax incentive show the effect on soybean prices.

“Because of the mandates, we think the short-run impact of the tax incentive is pretty small, but when you look at the 10-year average, it’s closer to a 25-cent per bushel impact on soybeans,” Westhoff said.

The bill extends the credit for one year, applying it retroactively to Jan. 1. A similar bill was passed in the House and lawmakers must negotiate a compromise before sending it to the White House for President Obama’s approval.

The bills would extend the biodiesel credit until Dec. 31, 2010.

At that time Congress will face whether to renew not only biodiesel credits but also a 45-cent ethanol tax incentive set to expire.

“There’s concern in the industry about whether they will be extended or not,” Westhoff said. “The Congressional Budget Office is likely to say that it would cost the Treasury several billion dollars a year to extend the ethanol tax credit.”

Westhoff noted that decisions will impact both soybean and corn prices for farmers. Nearly one-third of the corn crop is used to make fuel ethanol and about 11 percent of U.S. soybean oil is used for biodiesel, according to the USDA Economic Research Service.

“Anything that affects the demand for corn and soybean oil in the country will have an impact on commodity markets everywhere,” he said. “In a certain sense, it doesn’t matter if we have local production or not. There are going to be effects everywhere.”

The FAPRI baseline report is available online at

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