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DAVID KRUSE

By Staff | Jan 13, 2012

Massachusetts Senator Scott Brown was asked the tough question in an interview on Dec. 21 about what he would agree to in terms of raising revenue to narrow the deficit.

The first and really only specific thing to pop out of his mouth was that he had voted to end ethanol subsidies. That was a pathetic answer, or more accurately, a pathetic non-answer to the question asked.

The 45-cent gallon ethanol blender’s credit lapsed on Jan. 1. Gas prices will go up as a result. That is a tax increase on the middle class. It is the only tax increase that the GOP Tea party has yet to tolerate.

I don’t think that they make ethanol in Massachusetts, but they do use gas and less ethanol will make gas more expensive. Brazil is experiencing an ethanol shortage relative to demand because the price of sugar has risen so much that sugar is worth more than ethanol.

Here in the U.S. ethanol producers have had a great year despite the price of corn. They learned how to sell distiller’s grain at a market value that reduces the exposure of fuel to corn costs.

Over a third of every bushel of corn going into the ethanol process is essentially re-cycled as feed as the distiller’s co-product. Our cattle operation was profitable this year despite the cost of corn. End-users did a lot more complaining about the high price of corn than their bottom line justified in 2011.

Although the price of ethanol in Brazil is prohibitive to export to the U.S., we may import Brazilian ethanol anyway. That is because they score fuels for green house gas and sugar-cane based ethanol gets a better score than corn-based ethanol, based on a pretty subjective analysis.

This results in sugar-based ethanol being anointed with the designation of being an “advanced fuel.” That means that some entities in the U.S., such as California, will pay an inflated premium price to import sugar-based advanced biofuel.

Brazil has no ethanol to export, so they are importing U.S. ethanol in record quantities. Strong demand for U.S. ethanol from Brazil may well offset most of the impact of the loss of the blender’s credit to the ethanol industry this next year.

That means that the U.S. and Brazil will trade ethanol, which is an identical product regardless of the feedstock it was made from, for really stupid reasons that will cost U.S. consumers money. They will pay more for ethanol while Brazilian consumers pay less because the government created this ludicrous system.

USDA is likely understating 2012 U.S. ethanol corn consumption by 25 to 50 million bushels. They are understating feed demand by 100 mb. They are understating exports, too. USDA should revise the 2011 corn production lower, thus tightening corn stocks again from both sides of the balance sheet – supply and demand.

The La Nina is going to cut into South American corn and soybean production and produce a very rough start to the U.S. 2012 growing season. ISU Climatologist Elywnn Taylor already expects a below-trend line 2012 U.S. corn yield.

On the bearish side of the fundamental balance, the Euro needs to remain a currency. Dire forecasts of the Euro, trading par with the dollar in 2012 as the European economy sinks in recession, need to be wrong or fund investors will not bring money back into commodity markets. The U.S. economy is improving despite Washington.

I think Beijing is still in control of its economy. China is going to use more soybeans next year than last and the supply of soybeans is not growing as fast as consumption. China bought South America out of soybeans because they were cheaper and now that prices moderated here in the U.S. China will buy our soybeans again. They will catch up most of the slowed export rate here.

Reverting back to Scott Brown., he has no clue about what ethanol contributes to the U.S. economy except that it was the one tax that he felt safe in raising, not yet aware that it will cost his constituents higher fuel costs at the pump.

It doesn’t matter as the ethanol industry conceded the end of the blenders credit long ago and is in agreement that it should sunset at year’s end.

When a politician says that he doesn’t favor ethanol subsidies, he’s said absolutely nothing. What Scott Brown and the rest don’t say, or are afraid to say, is what they will support to increase revenue to bring the deficit back down to earth. What always strikes me is how ethanol subsidies, which have made a significant contribution to U.S. energy independence, are bad, but they make no mention of oil subsidies.

DTN/Progressive Farmer (Telvent brand) did a study analyzing oil and ethanol industry subsidies in 2010. They concluded that the ethanol industry and subsidies totaled $16.1 billion, or $1.24 per gallon, from 12.95 billion gallons.

What seems to miss everybody’s, including Scott Brown’s, radar, is that oil subsidies total $133.2 billion, or $2.01 per gallon, from 139.5 billion gallons. If you are going after subsidies to narrow the deficit, why are only ethanol subsidies singled out?

When people find out how much the oil industry gets, they shrug it off. The senators that go after ethanol hardest often support oil subsidies the most.

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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