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End is nigh for ethanol blenders' credit

In June, the U.S. Senate voted toe nd the ethanol blenders' tax credit, a move decried by some ag groups and shrugged off by others.

Now, that tax credit, formally known as the Volumetric Ethanol Excise Tax Credit (VEETC) is slated to end with the end of calendar year 2011. With it will go the 54-cent-per-gallon tariff on imported ethanol. Ethanol industry groups were understandably upset with the decision, while cattle industry groups, namely the National Cattlemens Beef Association (NCBA) called it a "giant step toward leveling the playing field for a bushel of corn."

So, what will happen next?

The short answer is probably not a whole lot, at least in the near future. market analyst and trader Kevin Penner says though the credit will be gone, the government's mandate will still be in place, so it's not a situation where the industry's corn demand will fall too much.

"I don't think we'll lose much corn demand because there is still a minimum amount that we have to blend. In essence, the demand level is the law of the land," Penner says.

Add to that the fact that VEETC doesn't affect producers as much as it does refiners and retailers. The credit was originally implemented as a way to encourage the construction of ethanol production and infrastructure, says Chris Thorne of Growth Energy, a renewable fuels industry association. That goal's been accomplished, and now the U.S. ethanol market's reached a point of maturity where the production sides's now largely unaffected by it.

"There's still going to be demand for ethanol in the U.S. We're still in a position where we're exporting to Europe and Brazil," Thorne says. "The question isn't really a production question anymore. The blenders' tax credit worked in the sense it was intended to encourage the ramp-up of production in the U.S."

And, that production capacity's been "going like hell" lately, since the break in corn prices in early November, Penner says. Whether ethanol plant bids for corn adjust differently now because of the absence of the VEETC is unknown, but at least for now, the economics for many plants -- when it comes to macro-level factors like this -- are still fairly solid.

"We've seen a break in margins lately, but overall I think the ethanol industry will survive just fine in 2012," Penner says. "What we'll see is pure economics come into the equation."

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