End to Ethanol Tax Break?

Written By Brianna Panzica

Posted July 8, 2011

The government is hard-pressed to cut national deficit.

Rumors have been floating about the possibility of various subsidy cuts, including those that have fueled solar and other renewable industries.

The most recent discussion, and the most serious, has been regarding the ethanol subsidy.

It offers a $0.45-per-gallon excise tax credit, and it has also imposed a $0.54-per-gallon tariff on ethanol imports.

But a proposal, signed by Senators Dianne Feinstein, John Thune, and Amy Klobuchar, would put a premature end to this subsidy on July 31.

Yet it would come with a compromise.

According to the proposal, $1.3 billion of the estimated $2 billion saved will go to reduction of the national deficit, an issue much more pressing than aiding ethanol, according to some.

The other one-third, approximately $668 million, will go to an extension of tax incentives on other biofuels, including fuel from algae.

The government subsidy for ethanol is worth an estimated $6 billion.

According to the Energy Independence and Security Act of 2007, a national standard of 36 billion gallons of biofuel is required by 2022.

However, there is a 15 billion gallon limit on ethanol.

Part of the money saved will go to other biofuel subsidies, and so the government would not abandon the overall goal.

The proposal must still pass a vote by the Senate and the lower house.

Ethanol production has sent corn prices to record highs this year, as the standard for gasoline now contains 10% ethanol.

The end of the tax break could lower corn prices.

The nation will be looking at more imports of ethanol, especially if the tariff is removed, and Brazil could become a primary supplier.

Brazilian ethanol producers use sugarcane as their base, according to the Wall Street Journal.

But Ned Schmidt, editor of Agri-Food Value View, is not concerned about the future of ethanol if the subsidy cut passes.

“Ethanol is now established as a part of the U.S. fuel supply, and that will not change,” he told the Wall Street Journal.

It will change the industry, however. Schmidt believes companies that have established themselves well will have potential for growth if the proposal passes, while smaller or newer companies may be weeded out.

Schmidt sees potential in Archer Daniels Midland Company (NYSE: ADM), a processing company, as well as Bunge Limited (BG), which has sugarcane assets in Brazil.

Keep an eye on the large ethanol-related companies in the coming months.

If the proposal is passed, the ethanol industry may see big changes.

That’s all for now,


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