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By Staff | Aug 13, 2010

The headlines varied from a statement: “Study: End of Ethanol Subsidies Wouldn’t Be Huge” to a question – “Iowa State Study: Ending Subsidy Won’t Be So Bad?”

The Brazilian sugar cane industry group wants to get rid of the ethanol blender’s credit because with it gone, they argue there is then no justification for the 54 cent/gallon ethanol tariff.

Brazil doesn’t currently have surplus ethanol to export because its own domestic demand has been so strong. All vehicles sold in Brazil are flexfuel and the standard blend is E-23.

The EPA is handicapping us, over-complicating a decision to raise the blend cap here to E-15. The U.S. tariff is a World Trade Organization legal way of offsetting the blender’s credit that benefits foreign as well as domestic ethanol.

Brazil wants to fully open the U.S. ethanol market as it is expanding its ethanol production with intentions of growing exports and the U.S. requires the least-cost transportation to a major market. Brazil recently dropped WTO authorized sanctions compensating them for cotton subsidies.

I’m not convinced that if Wikileaks.org released all the e-mail traffic between Brazil and Washington D.C. that a back room deal hasn’t been made that the U.S. concedes its ethanol tariff quid pro-quo for Brazil dropping sanctions.

Brazil’s sugar producers hired ISU’s Center for Ag and Rural Development, headed by Dr. Bruce Babcock, to evaluate the impact of losing the blender’s credit and tariff. The study concluded “Ethanol production would likely drop by an estimated 700 million gallons in 2011 from the projected 13.5 billion gallons under existing policy, if the 45-cent-per-gallon subsidy ended. Corn prices would drop 23 cents per bushel and the price of ethanol would be 12 cents per gallon lower.”

That’s a price-negative, 250-million bushel reduction in corn consumption. Corn growers would lose $3.1 billion a year and 12 cents per gallon lower prices for ethanol would eliminate the margins in ethanol production.

With profitability gone, a 700-million gallon reduction in ethanol production would be optimistic. Without a profitable corn-based ethanol industry you can erase any chances of developing a cellulosic industry.

Brazilian sugar growers believe they can fill U.S. ethanol demand, able to produce sugar-based ethanol cheaper than corn. They care about a U.S. cellulosic industry to the degree they hope one never develops as it could be more competition to them. If they can kill the blender’s credit and tariff, they cap U.S. ethanol production.

Importing ethanol from Brazil is not any benefit to U.S. energy security or trade balance than buying foreign oil. The closest example that we have to what happens after Federal subsidies are withdrawn from biofuel is the loss of the $1 per gallon biodiesel tax credit. That industry has for all intents and purposes shut down.

The biodiesel industry has a Renewable Fuels Standard mandate, but the petroleum industry is paying offsets for not using biodiesel every chance it gets, buying Renewable Identification Numbers, which satisfy the obligation without using the fuel.

Feedstuffs Magazine noted, “Each batch of biofuel blenders use receives a renewable identification number. Blenders can buy RINs from others if needed to comply with the biofuel use mandates.”

Missouri University think tank FAPRI, said that if credits are eliminated, RIN values rise. “If the credit is removed, the cost of meeting the mandate would be transferred from the government (which funds the tax credits) to taxpayers, who would pay for the higher-embedded RIN price.”

FAPRI’s analysis of the impact of allowing the ethanol blender’s credit and tariff to expire was over 50 cents per bushel in 2011-12, before corn producers reduce production, modifying the loss to near 20 cents per bushel in outlying years.

Having lived in the Midwest all my life and in rural areas where agriculture is the dominant driver for the economy, the development of the ethanol industry was the greatest economic development event to come along in my experience.

It changed corn demand so that farmers, who had been farming for the government, now were paid directly by the market. Livestock industries have adjusted to the additional demand for corn and the Midwest cattle industry has thrived, benefiting from reduced cost of gain through the availability of wet distiller’s grain.

Washington must be careful when the focus is supposed to be on jobs and the economy, not to disrupt Corn Belt agriculture, with misdirected biofuel policy, undermining the economic development that has kept the rural Midwest economy above water in the recession.

Congress appears poised to wreack similar damage on the Midwest economy by withdrawing support for biofuels. The Federal Government’s tax loss to BP tax credits alone, estimated at near $10 billion is almost twice the annual cost of biofuel subsidies.

Eliminate the biofuel subsidy and the Midwest economy will head into a double dip recession.

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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