U.S. biofuels hurt if 2010 tax break expires-report

(from a Reuters news agency article by Charles Abbott)

* Biofuel output would fall 10 pct without tax breaks

* Corn, soybean price would drop 15 cts per bushel

* Ethanol tax credit, import tariff expire in 2010

* Biofuel trade groups seek long-term extension

U.S. fuel ethanol and biodiesel production would be cut by 10 percent if Congress allows biofuel tax credits to expire this year, a University of Missouri think tank said on Tuesday.

Corn and soybean prices would fall by 15 cents a bushel, estimated the Food and Agricultural Policy Research Institute (FAPRI). One-third of the corn crop is used to make fuel ethanol and about 11 percent of U.S. soybean oil is used for biodiesel.

Fuel ethanol producers such as Archer Daniels Midland Co (ADM.N), POET and Valero Renewable Fuels (VLO.N) — the three largest distillers — would be affected too.

The ethanol tax credit of 45 cents a gallon and a tariff of 54 cents a gallon on ethanol imports are scheduled to expire at the end of this year. The $1-a-gallon biodiesel tax credit died at the start of the year but would be revived for 2010 in a bill pending in the Senate.

Without the tax breaks, said FAPRI, ethanol and biodiesel production will track the usage levels mandated by a 2007 energy law. It guarantees annual use of 15 billion gallons of corn-based ethanol beginning in 2015 and 1 billion gallons of biodiesel starting in 2012.

FAPRI said ethanol production would fall by 1.5 billion gallons a year lower, a 10 percent drop, without the tax breaks. Imports also would surge.

Biodiesel production would run roughly 10 percent lower without the tax breaks, or about 100 million gallons a year in 2012 to 2014, said FAPRI.

Our Take:
Aside from making ethanol and distillers grains, the number one job of America’s ethanol industry will be to push hard for a renewal of tax credits for both ethanol and biodiesel and the import tariff. The ethanol industry still has to fight for every gallon of marketshare, and fight hard when it comes to butting heads with Big Oil.

One of the chief criticisms of these programs is how much they cost the taxpayer—and shouldn’t a worthwhile industry stand on its own two feet. The answer is that when it comes to the oil industry, ethanol is battling a monopoly with 100 years of profit, capitalization and tax breaks that have cemented its place as our sole source of transportation energy for so many decades.

Let’s just take a quick look at the math, too. At 0.45 cents per gallon incentive, the 2009 production of 10.75 billion gallons (source: ethanolRFA.org) cost us $4.8 billion dollars. A recent report from the United Nation’s International Energy Agency estimated annual subsidies paid for oil globally would reach $500 billion. Since America consumes a quarter of the world’s oil, let’s estimate that U.S. oil companies reap a benefit of $125 billion annually. We are paying more for dirtier (Canada Tar Sands) and environmentally riskier (deep offshore drilling) energy supplies. When corn ethanol reaches its highest production level of 15 billion gallons by 2015, that will be $6.75 billion – doesn’t that investment make at least as much sense as paying 15-times that for fossil fuel? After all, the fossil fuel supply is only ten times what the ethanol supply is.

Everyone who benefits from U.S. farm-based energy production has a stake in this fight. A loss of $0.15 cents a bushel on corn, based on the 2009 crop, would be a loss of nearly two billion dollars of farm income. Even wind and solar industries should give a consideration to joining the ethanol alliance in this fight—A) these budding industries could use tax incentives to help them get to a permanent foothold, and B) the farmers who depend on ethanol do not forget their friends.

We think the Reuter’s report jumps the gun on imports, but not by that much. Imports won’t surge this year, regardless of what happens to the tariff, because the rise in the world price for sugar has caused Brazil to shift its cane feedstock into sugar production, away from ethanol—they dropped their standard gasoline blend down from 25 percent ethanol to 20 percent in order to forestall a crisis. Still, without the 54-cent tariff, it’s only a matter of time before Brazil can undercut domestic producers and cause significant damage to the industry.

So, friends of ethanol, now’s the time to contact lawmakers and remind them how important ethanol is to you, to farmers, to rural communities, and to the energy and economic security and of the nation, as well as the preservation/restoration of clean air in American cities.

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