A new report from the Center for Agricultural and Rural Development at Iowa State University suggests that US policies on renewable fuels should be more flexible to variations in corn prices.
The study suggests the ethanol industry could be used to absorb some of the price instability for corn, rather than passing price increases on to the food industry.
The policy briefing from economics professor Bruce A Babcock came as the nation’s political leaders consider whether biofuels measures should be included within energy legislation to be decided either before or during the next session of Congress.
Reflecting on increases in livestock feed prices linked to the 50% rise in corn prices in the last six months, Professor Babcock probed the impacts of either keeping corn ethanol tax credits and import tariffs in place next year, or allowing them to end on December 31.
His conclusions were that the impact of the tax credits would be “modest” in supporting ethanol producers next year with the EPA’s ethanol mandate setting a floor level for ethanol, and that it would “not be that difficult politically” to allow them to expire.
He said: “High crude oil prices combined with a 12.6-billion-gallon ethanol mandate in 2011 translate into robust corn demand by the domestic ethanol industry even if the tax credit is not extended.”
Prof Babcock suggested that with Brazil’s sugarcane industry currently in no position to export ethanol, thanks to strong domestic demand and a strong Brazilian currency, there would also be little change in the US ethanol market if the import tariff was lifted.
He said there was a 50% chance that removing the tax credit and import tariff would have “no impact” on ethanol production.
Mandate
The report also made the suggestion that with corn prices currently high, owing to a collapse of the Russian wheat crop and heavy summer rains in the US, the federal government could respond to the situation by waiving the 2011 mandate for including ethanol within transport fuel.
Prof Babcock said if the US government’s policy goals were to keep down animal feed prices, removing the ethanol mandate could relieve some of the demand for corn since ethanol production would reduce.
Ethanol production would drop by 1.7 billion gallons for the year without the mandate in place, his report predicted, but Prof Babcock then argued that the resulting drop in demand for corn, bringing a $3.84 per bushel drop in corn prices, would make the corn ethanol industry “more competitive” despite a “significantly lower ethanol price” resulting from the loss of ethanol demand.
The report concluded: “If stability in feed costs is a policy objective, then waiving the mandate in years of tight corn supplies would allow the fuel sector to help absorb corn supply disruptions rather than burdening only the livestock sector.”
Prof Babcock said that alongside the freedom for fuel blenders to include higher levels of ethanol within transport fuel, a more flexible approach to ethanol mandates could be taken to stabilize food prices.
“Moving toward an ethanol policy that allows blends to adjust to the relative price of ethanol and gasoline might become attractive if US corn production cannot keep pace with domestic and world demand,” he said.
Ethanol industry
US ethanol producers have been pressing Congress to extend the tax credits in the “lame duck” session before the new session begins in January.
Tens of thousands of jobs could be at stake, according to a group of ethanol and agricultural industry associations, which wrote to Congressional leaders yesterday.
The groups want an extension to the Volumetric Ethanol Excise Tax Credit, the Alternative Fuel Infrastructure Credit and a broadening of the cellulosic ethanol producer tax credit to include additional feedstocks like algae.
The letter to Speaker Nancy Pelosi, House Minority Leader John Boehner, Senate Majority Leader Harry Reid, and Senate Minority Leader Mitch McConnell warned of higher gasoline prices if a loss of the tax credits leads to a reduction in the amount of ethanol blended in transport fuel.
The industry groups, which included the Renewable Fuels Association, National Corn Growers Association and American Farm Bureau Federation, said reducing demand for ethanol would mean production plants closing.
“One analysis concluded that as many as 118,000 jobs could be lost if Congress fails to extend this important incentive,” they warned.
“Not only are these incentives necessary to provide certainty in the marketplace as we work collaboratively to reform the Federal tax structure for renewable energy, but they are also essential if we, as a nation, are intent on continuing our goals of achieving energy security, creating green jobs, and revitalizing rural communities across the country,” the groups concluded.
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