The next few weeks should bring some clarity to the future of the 45-cent-per-gallon federal ethanol tax credit and the 54-cent-per-gallon import tariff. Both are scheduled to expire on December 31, 2010. If Congress doesn't take action in the upcoming lame duck session, the tax break and the tariff will both expire.
Although the arguments in support of and against their extension have changed little since this past summer, the economic situation in the corn, livestock and ethanol industries has changed dramatically, says Bruce Babcock, an economist with the Center for Agricultural Research and Development at Iowa State University. He has published a study which concludes that a lapse in the ethanol tax break wouldn't be all bad. If the tax credit is allowed to expire, corn farmers would still turn a profit, says Babcock.
The Iowa Renewable Fuels Association and the Iowa Corn Growers Association disagree with Babcock, and say that his study is shortsighted. It looks at only one year, based on current conditions, and doesn't look ahead to the future, says Dean Taylor, a farmer and president of ICGA. If you want to read the entire study yourself, Babcock's research paper is posted on the CARD/ISU site at www.card.iastate.edu/publications/show_policy_brief.aspx?id=1149
IRFA criticizes ISU study as being based on short-term thinking
The ISU study suggests that if Congress allows the tax breaks for ethanol to expire at the end of 2010, the impact would be modest for ethanol producers and corn farmers. Babcock points out that corn prices have risen by 50% or more since June. "Although the arguments in support of and against the tax credit extension have changed very little since summer, the economic situation in the corn, livestock and ethanol industries have changed dramatically," he adds.
If the 45-cent-per-gallon tax break is allowed to expire, the price of corn would drop from the current level of around $5.40 per bushel to about $4.86 per bushel, says Babcock. That price would still be profitable for farmers, whose break-even for corn production this year has run around $4 per bushel or less.
Monte Shaw, executive director of the Iowa Renewable Fuels Association, which represents the biofuels industry, says he was shocked by the ISU study. "This study addresses what will be a long-term decision on taxes, but bases it on short-term changes in recent months," says Shaw. "Maybe there wouldn't be an impact in the next six months, but what about the next six years?"
Ethanol prices have risen, continuing the profitability of ethanol
Babcock says ethanol producers have enjoyed continued profitability this year despite higher corn prices because ethanol prices have also risen, somewhat to the surprise of many analysts. The price of ethanol has risen from around $1.65 per gallon in the early summer of 2010 to as much as $2.25 per gallon by fall because of rising crude oil prices and continued strong demand.
The U.S. ethanol industry is also seeking the renewal of the 53-cent-per-gallon tariff on ethanol imports that are shipped into the United States.
Babcock says livestock feeders are likely to be affected by higher corn prices regardless of what action is taken on the tax credit or import tariffs. He notes that rising costs for corn, reflected in higher feed costs, will eventually cause livestock producers to cut back on the size of livestock herds and thus retail meat prices will come down in the short-run as more meat comes to market due to liquidation of hog and cattle herds. In the long-run, meat prices would move higher as a result of cow herds and sow herds being reduced because less meat would eventually be produced.
Congress faces this decision at a time when corn prices are high
"Congress faces a decision about stimulating demand for U.S. corn ethanol through the use of subsidies for U.S. ethanol production and taxes on imported ethanol -- at a time when corn prices are already so high," says Babcock.Iowa is the nation's largest ethanol producer and has 40 ethanol production plants. Shaw says, "The ISU study shows demand for ethanol would drop by about 600 million gallons, and the economists who authored the study call that a 'modest' decline. It's not modest to those of us in the ethanol industry. With the average plant producing about 100 million gallons of ethanol per year, that drop would be six plants that would have to close in this state. That's six out of the 40 plants in Iowa. That's a lot of jobs, economic activity and tax revenue that would be lost."