Iowa State University Center for Ag and rural Development economist, Bruce Babcock, produced a study that questions the need for the ethanol blender’s credit and tariff cost now that the EPA has put the Renewable Fuels Standard (RF2) in place. The executive summary of his analysis is that, “Expanded mandates under the Renewable Fuel Standard provide ethanol and biodiesel producers a guaranteed future market at volume that exceeds what they have produced in the past. Despite having these mandates in place, biofuel producers continue to support tax credits and ethanol import tariffs. An examination of how the new mandates will be implemented shows that biofuel producers will receive little or no additional benefit from tax credits.”
Babcock believes the RFS2 and Renewable Indemnification Numbers (RINs),that can be bought and sold to satisfy mandate requirements, will protect the biofuel’s industry without the blender’s credit and tariff.
Let’s review. The EPA mandates use of 15 billion gallons of conventional ethanol in 2015 and 20 billion gallons of non-cellulosic biofuels by 2022. Each gallon of ethanol is assigned a RIN. So if one blender has met its allotment of ethanol use to meet the mandate, if it uses more ethanol it can sell the RINs from the excess to a blender that has not met its requirement. In further review, the 54 cent ethanol tariff is set to offset the 45 cent blender’s credit so that imported ethanol is not subsidized by U.S. taxpayers. While the 15 billion gallon conventional biofuel mandate will be met mostly by corn based ethanol, it doesn’t have to be.
Imported Brazilian ethanol can fill that mandate too. EPA designated sugar based ethanol as an advanced biofuel, qualifying it to meet the advanced biofuel mandate that corn based ethanol can not. Market conditions have existed whereby significant quantities of Brazilian ethanol were imported, despite the tariff. None of it is being imported now because Brazilian ethanol supplies are so tight and demand so strong they have had none available for export. In fact, recent market conditions would have allowed U.S. corn based ethanol to have been exported to northern Brazil if not blocked by President Lula da Silva.
Recent reports are that cargoes of U.S. ethanol have been exported to Europe. The U.S. ethanol tariff has not been the last word on whether Brazilian ethanol is imported. Market conditions have played a significant role as to what occurs. Again, all the tariff is is an offset to the blender’s credit.
Some ethanol opponents go after the blender’s credit knowing its elimination would undermine the base reason for the tariff, which is legal under WTO rules. Other ethanol opponents go after the tariff knowing that if it is eliminated, U.S. taxpayers will not like the idea of subsidizing Brazilian ethanol with the blender’s credit building an argument to eliminate it. If the mandate was enough to sustain biofuel demand, then the biodiesel industry should be running despite the loss of its $1/gallon tax credit. It is not.
CARD is not the only academic opinion on the street. The Ethanol Monitor wrote, “A recent FAPRI analysis suggested discontinuation of the tax credit and tariff would lead to a 10.3 percent loss in ethanol production compared to expected production levels if the tax credit were extended. Another paper done by Entrix, using an average of elasticity values from other published papers, found that removing the tax credit would result in a 37/gallon, or 22.5 percentreduction, in ethanol prices. The Entrix analysis also found that removal of the tax credit and tariff would lead to a 38 percent loss in production compared to 2009 total production.”
Editor Tom Waterman forecast, “Here’s what would happen if it were announced that effective January 1, 2011, there would no longer be a blender’s credit, or an import duty. Ethanol prices would fall by between 30 and 50 cents per gallon, depending on the relationship between gasoline and ethanol at the time. Based on these levels, I would expect corn to drop by about 30 cents per bushel. When I plug these numbers into our profitability tables, we find that the average ethanol plant, in one week, falls from slight profitability to losses of 35 to 45 cents per gallon. How much production would remain after about two or three months of losses of this type? There is simply no gray area in an academic’s world – which alone renders this type of analysis virtually useless. You certainly don’t want to build a business model based on them.”
The whole point of the blender’s credit and tariff is to give the ethanol industry the stability it needs to dig a deep enough financial footing to survive earthquakes like the one it recently endured. The industry has not fully recovered financially from its shakeout and losing the credit and tariff now will destabilize it again unnecessarily.
I noted that Babcock’s study was published by the Center for Agriculture and Rural Development: (ISU), yet the next line says, “The views expressed in this publication do not necessarily reflect the views of CARD or ISU.”
That would be like David Kruse airing the CommStock Report and ending in a disclaimer that the views may not represent those of the CommStock Report. That must be the difference between the academic world and the real one.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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