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Ethanol without a tax credit?

Jeff Caldwell 07/08/2011 @ 2:04pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

A "compromise" agreement reached in the U.S. Senate this week lands the ethanol industry with a lot to give up if the deal is signed into law.

Lawmakers on Thursday agreed to essentially kill the ethanol blenders tax credit while at the same time extending smaller tax cerdits to pay for infrastructure like blender pumps.

What will the removal of the tax credit mean to the industry and grain markets? First, though it may trim a bit off the top and bottom end of the usual market spikes, the credit's loss shouldn't permanently deflate the grains, says one grain trader.

"The market knows the subsidies are going away...as long as the mandates are intact, it changes the market little," one CME Group floor trader told Agriculture.com Chicago Markets Bureau Chief Mike McGinnis on Thursday. "Taking away [the] subsidy perhaps helps mitigate potential spike highs, as it will be easier to ration ethanol production/demand. But again mandates support potential large baseline demand."

But, even if the corn market isn't gutted if the tax credit goes by the wayside, an immediate end to the policy could make for a rough transition for the ethanol industry as a whole.

"I figured that it might happen, but I worry that cutting it to zero so quickly, instead of phasing it out over time might not give the industry time to prepare," says Agriculture.com Marketing Talk and Nebraska farmer Nebrfarmr.

Others say the potential removal of the credit at the month's end will cause an immediate upswing in gasoline prices at the pump, while others say the domestic ethanol industry could suffer if imported alternatives become more cost-competitive.

"I can see the government doing away with the subsidy, but ending a tariff on Brazilian ethanol is what could hurt," adds Marketing Talk member Blacksandfarmer.

BUt, there is a silver lining for the farm and ethanol sides of the business equation. If the current tax credit is eliminated or restructured to provide more support for new ethanol feedstocks, it could start an industry-wide evolution to cellulosic processes.

"We should be promoting subsidies on the next generation of ethanol (from switchgrass and other biomass) before someone else gains that advantage," says Marketing Talk member wt510151.

   

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