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By Staff | Apr 23, 2010

The only way to get a $1/gallon tax credit on a gallon of biodiesel is to make one. Without the tax credit, no gallon of biodiesel would be produced. Many talk about what these tax credits cost the U.S. Treasury. The answer is “nothing.”

The cost to the Treasury is what they lose by not having the tax credit because the biodiesel industry will be mothballed and written off. Jobs will be lost. The lack of paychecks reverses tax withholding into unemployment benefits.

The $1/gallon biodiesel tax credit expired at year’s end and despite there being a consensus of support in Congress for the tax credit, Congress proved too dysfunctional to enact the legislation to extend the credit. Congressional leaders have been struggling to get the necessary work done and have promised to make the credit retroactive. Such a promise is worth little and worth less everyday. Biodiesel plants can’t operate without the credit.

Congressional leaders have promised to do a lot of things they have not done. Once a plant is shut down, it’s hard to resurrect, particularly because the tax credit extension was only for this year and would have to be done again. If U.S. farmers depended on Congress for their seed, we would all starve. Planting seasons nor business can function forced to conform to the inability of Congress to perform.

By the time Congress gets around to reauthorizing the biodiesel tax credit it will be time to do it again. The process of annualized tax credits just doesn’t fit Congressional lack of functionality. Five-year authorizations would essentially reduce the Congressional workload to something more realistic for them to handle. That’s why they don’t do farm bills every year. Several cornbelt biodiesel plants have shut down or been put into a state of “hot idle” so they can be restarted waiting on Congress.

This is a huge expense and the longer Congress diddles, the less year is left. If Congress doesn’t act until summer, then companies have to decide whether to risk starting up for what could be a short run before the credit expires again. Congress talks big about being green, but talk is cheap and biodiesel jobs lost were green jobs.

Imagine how tough it would be to reauthorize the biodiesel tax credit if Congress opposed biofuel. Iowa Senator Chuck Grassley heaps the blame on Nancy Pelosi and Harry Reid. They are Congressional leaders and the buck stops with the leadership.

The House, however, passed the extension. Initially, it was the Senate that didn’t get the job done. That’s Reid’s turf. Grassley’s turf, too. Later, the Senate tacked the credit onto a tax bill and then the House failed to act before the Easter recess. Grassley then could blame Pelosi.

Ironically, Pelosi and Reid are not anti-biofuel. If Reid is beaten in the fall election but Republicans do not take control of the Senate, NY Senator Chuck Schumer may become majority leader and he is very much antibiofuel. Grassley needs to work on the biofuel opposition in his own party. The fall election may worsen biofuel political prospects rather than improve them.

Congressional dysfunctionality goes beyond which party is in power. The Republican National Committee is having a hard time running itself these days. The last Congress that I remember that worked was the Newt Gingrich Congress. They had a specific list of objectives.

They enacted them, then lost focus and spiraled into the abyss, too. It’s very difficult to keep 435 eyes on the ball enough to score points. Reid may have an impossible job in the Senate and some are focused on seeing to it things like the biodiesel tax credit blow up so Reid gets the blame.

The ethanol tax credit and tariff expire at the end of the year. Different than with the biodiesel credit, there is active opposition to all or part of the ethanol subsidy and tariff. Failure to extend the ethanol blender’s credit and tariff will shrink back the ethanol industry.

Ethanol companies are not going to operate with negative margins like they did during the last washout. They will opt to cutback production rather than produce at a loss. The extension needs to be five years, not just one or Congress is not performing.

The loss of the blender’s credit would take 30 cents/bushel or more off the price of corn, more longer term when carryover stocks grow, forcing farmers to reduce corn production. They cut back corn production and there are more acres to grow too much of everything else, so soybeans, cotton, sorghum and wheat prices would suffer, too.

What has happened with the biodiesel credit is a bad bellwether to what could happen with the ethanol blender’s credit. This issue may well play into how the 5 1/2 year corn cycle bottoms at year end.

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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