Blenders' Credit in Jeopardy

August 30, 2011 08:25 PM

Expect corn usage and prices to take a hit if Congress doesn’t make a move

Unless Congress acts otherwise, the 45¢ per gallon tax credit given to gasoline blenders who use ethanol in their formula will expire at the end of this year. Most in the industry agree that eliminating the Volumetric Ethanol Excise Tax Credit (VEETC) will have an immediate impact on how much corn flows to ethanol grinders.

According to recent projections from the Food and Agricultural Policy Research Institute (FAPRI), the amount of corn used by the ethanol industry and corn prices will take a hit if VEETC expires.

Minor Consequences. "We assume the tax credit will expire, and, in the 2011/12 marketing year, we will see a decline in ethanol production and use that is almost entirely due to the elimination of the tax credit," says Pat Westhoff, director of FAPRI at the University of Missouri. "Eliminating the tax credit will not have a huge price impact, largely because the Renewable Fuels Standard is still in place, which puts a floor under ethanol production."

Under the Renewable Fuels Standard, the share of the mandate that can be filled by corn-based ethanol tops out at 15 billion gallons in 2015. That means an additional 800 million bushels of corn will be needed to meet the mandate between the 2011/12 and 2015/16 crop years. Taking into account all biofuels, the mandate tops out at 36 billion gallons in 2022, but many in the industry do not expect technology for alternative biofuels to progress quickly enough to meet the mandate.

High oil and gas prices in the past year—as well as the threat of VEETC elimination—have enticed grinders to make more ethanol than the mandate requires. The Renewable Fuels Standard allows ethanol blenders to trade and hold renewable identification numbers (RINs), which are used to measure compliance. These RINs can be carried from one year to the next, so production one year can be used to meet mandates in the next.

"Right now, we have a big stock of RINs," Westhoff says. "We assume that if the tax credits expire, no one will want to produce and consume more than the mandate requires."

Number Crunch. FAPRI projects a 29¢ per bushel drop in corn prices in 2011/12, in part because of the assumed expiration of VEETC. By contrast, USDA Chief Economist Joseph Glauber assumed in his Agricultural Outlook Forum 2011 presentation that VEETC will be extended and thus projected that corn used to produce ethanol will increase by 100 million bushels in the 2011/12 crop year. His projection for average corn prices also rises from $5.40 per bushel in 2010/11 to $5.60 in 2011/12.

Growth Energy supports phasing out VEETC during the next three years. About a year ago, the group developed a plan that was recently given a thumbs-up by President Barack Obama and Secretary of Agriculture Tom Vilsack. The plan involves mandating that car companies build vehicles that can accept high-ethanol fuel and installing flex pumps at gas stations around the U.S.

Reform or Repeal. "The argument is not about whether to renew or not renew [VEETC], but whether to reform and improve it or repeal it," says Brian Jennings, executive vice president of the American Coalition for Ethanol.

In early May, Sens. Tom Coburn (R-Okla.) and Dianne Feinstein (D-Calif.) reintroduced the Ethanol Subsidy and Tariff Repeal Act, after an earlier effort to repeal VEETC failed. Another bill, introduced by Sens. Chuck Grassley (R-Iowa) and Al Franken (D-Minn.), would cut the tax credit to 15¢ by 2013. In 2014 through 2016, the credit would be tied to crude oil prices before being eliminated in 2016. The bill also includes tax credits for flex pumps.


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