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U.S. ethanol demand would increase without tax creditsstudy

Consumer prices of commodities that are traded in international markets are influenced by such factors as supply, demand and governmental policies to control trade or prices. Fuel ethanol is no exception.

Intense debate has focused on the shifting costs of ethanol at the fuel pump and the impact of the United States' energy and trade policies.

What would happen to fuel ethanol prices and trade in a U.S. market free of trade distortions and taxes? A recent analysis by Amani Elobeid and Simla Tokgoz, associate scientists at the Iowa State University Center for Agricultural and Rural Development (CARD), addresses that question.

The study looks at the two largest ethanol producers: Brazil (ethanol from sugarcane) and the U.S.(ethanol primarily from corn). The analysis was based on mathematical simulations using an international ethanol model and country-specific models. The simulations were performed for two U.S. policy reform scenarios: one for trade liberalization alone and the other adding removal of the U.S. 51-cent-per-gallon tax credit to refiners blending ethanol.

"Our study suggests that U.S. trade barriers have kept domestic prices strong," Elobeid said. "Removing trade distortions would decrease the price for U.S. ethanol, while the world price would increase, as U.S. demand -- and ethanol imports -- would increase."

According to the economists' analysis, Brazil would likely capitalize on this demand, especially in the U.S. coastal regions where transportation costs are high for Midwestern ethanol. Removal of the federal tax credit translates into only a small price reduction for consumers, because most U.S. ethanol is blended with gasoline at 10%.

"The effects of the removal of U.S. trade and price distortions extend well beyond the ethanol market to corn and its byproducts and sugar markets," Tokgoz said.

Consumer prices of commodities that are traded in international markets are influenced by such factors as supply, demand and governmental policies to control trade or prices. Fuel ethanol is no exception.

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