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DAVID KRUSE

By Staff | Jul 1, 2011

The Senate did vote 73-27 to end the ethanol blender’s credit early, but the amendment was attached to a piece of legislation that was not expected to be passed.

It would also require a similar vote in the House where the measure is unlikely to be brought up. It would require a signature from the President which is unlikely to happen.

The conclusion is that the blenders credit will expire at year’s end as scheduled. Losing the blender’s credit is not the demise of the ethanol industry. The RFS is still the cornerstone of ethanol industry support. The RFS is being attacked too, but there is no eminent threat.

What was the blender’s credit designed to do? Give ethanol fair access to the market. Market purists claim that the market makes all these decisions and government should not intervene. Then why have drug laws? The market should not be allowed to decide everything. The petroleum industry controlled the fuel distribution system. They refine and sell petroleum products.

The idea of selling a fuel product that they do not own means voluntarily surrendering market share to a competitor. It doesn’t matter if they buy oil from sworn enemies of the U.S. or that ethanol increases U.S. domestic fuel security, they control and own the fuel market.

Ethanol can sell cheaper than gas and they will still sell gas, denying the price benefit to consumers. Market access is dominantly controlled by the petroleum industry.

The idea that it is somehow a free market is a delusion of market purists. The way ethanol gained market share is that the blender’s credit compensated the oil companies for lost market share. It also went to the blender which allowed the subsidy to circumvent the big oil companies.

The blender’s credit earned through blenders pumps go to the blender, be that an ethanol company or local co-op. It forces open market access for ethanol. Consumers also benefit from the credit as E-blended fuels sell for less than unleaded gas.

Digging deeper into the background, Midwest Corn Belt agriculture was mired in a system of corn subsidies and loan deficiency payments that produced a perpetual burdensome supply of corn. The farm subsidies kept farmers in business producing corn despite prices below the cost of production.

The blender’s credit, which opened the motor fuel market to ethanol, was essentially paid for by cost saving from reduced spending on farm subsidies. We would trade LDPs – and direct payments, too – for ethanol credits any day. Farmers now grow corn for the market and prosper, instead of growing it for the government.

The entire Corn Belt has prospered, boosting GDP in Iowa 9 percent instead of sending the dollars and economic benefit to Tehran and other enemies, in exchange for importing oil.

The Midwest economy is outperforming the U.S. economy because of ethanol. How is damaging the Midwest economy by handicapping ethanol support, going to help the U.S. economy? In doing so, motor fuel prices, now depressing the U.S. economy, will rise further.

Ethanol now constitutes nearly 10 percent of the U.S. motor fuel supply. It is refined locally adding to U.S. fuel refinery capacity. The U.S. consumer pays much less at the pump because of ethanol’s contribution to aggregate fuel supply and contribution expanding refinery capacity.

The high price of oil raised the cost of food far more than higher corn prices have and ethanol lowers the energy cost component of food prices.

U.S. corn production is expanding to meet the increased need for corn for ethanol, but remember that up to 40 percent of corn going into the ethanol process comes out as the co-product, distiller’s dried grain, as feed.

The U.S. Senate decided that while the ethanol credit has eliminated the need for farm subsidies that the ethanol industry subsidy can now be eliminated, too. You know, the ethanol industry agrees with that.

It is a matter of transition – will there be any? The ethanol industry and political allies will put out some thoughtful plans to end the blender’s credit in a transition. The credit was meant to gain market access and expand ethanol infrastructure and blenders pumps can accomplish that to the point the credit is not needed.

That is the direction that this issue is going in. Blender’s pumps give the decision whether to use ethanol to the consumer and not the oil companies. When the ethanol subsidy is gone the oil industry subsidies should be gone, too.

Some of the same hypocrites that voted to end ethanol subsidies voted to keep oil subsidies. They should all go together.

The U.S. Senate did not vote against ethanol this week, just ethanol subsidies, because they voted down the McCain amendment that would have ended government funding for ethanol infrastructure 59-41.

The credit ends, but the assistance in gaining access to fuel distribution bringing the decision to the consumer was re-affirmed by the defeat of the McCain amendment.

There was some irony between the two votes to end the credit, but not to stop funding blender’s pumps.

Work now will focus on a transition from ethanol blender’s credits to new ethanol pump infrastructure.

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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