Senate Votes to End Ethanol Credit

Discussion
Jun 17, 2011
George Anderson

America has an energy problem. It also has a fiscal deficit problem. Some would say, it has a corporate welfare problem. Recently, it has had a commodity price problem, as well. Yesterday’s vote in the Senate to end a tax credit for companies that blend ethanol with gasoline appears as though it may, in a small way, indicate a willingness in Washington to address at least some of those problems.

The measure had wide support (73-27) with even some farm state Senators voting to end a tax credit of 45 cents per gallon. The Government Accountability Office, according to a Los Angeles Times report, concluded the tax credit was no longer needed because legislation passed in 2005 required ethanol to be blended with gasoline.

“I think we’re looking at everything now,” Sen. Mike Johanns (R-NE), told Politico. “Trying to figure out what to do with the budget has caused us all to come to grips with some things we’ve supported in the past.”

Sen. Dianne Feinstein (D-CA) who co-sponsored the measure with Tom Coburn (R-OK), told Politico, “I think the days of large subsidies like this are really over, and this is kind of the first vote on it.”

The action in the Senate does not mean passage of the bill is a sure thing. The measure would still need to be debated and passed in the House and Senators from farm states have already introduced compromise legislation in the body that could alter its final form.

Regardless of what happens in the end, yesterday’s action had an immediate effect on commodities where the price of corn and wheat fell to their lowest levels in three months. An end to the ethanol subsidy would likely decrease the need for corn for fuel purposes leaving more on the market for other, lower paying uses such as feed for livestock.

“It’s getting a lot of pressure,” Jonathan Barratt, managing director at Commodity Broking Services Pty., told Bloomberg News. “We’re expecting further losses for the grain sector.”

According to Bloomberg, global demand for corn has increased 20 percent over the last five year as subsidies and tax incentives have boosted ethanol production. Thirty-eight percent of domestic corn production was designated for use in ethanol, according to the U.S. Department of Agriculture.

The Grocery Manufacturers Association (GMA) applauded the action by the Senate and an amendment in the House of Representatives that would end federal subsidies of corn ethanol.

“With corn prices at record levels, these votes convincingly show that the tide has turned against using food for fuel and that Americans want responsible energy policy solutions that do not pit our nation’s energy needs against food security for millions of families,” said Pamela Bailey, president and CEO of GMA.

Discussion Questions: How will the end of ethanol subsidies, if that happens, affect the retail industry in the short and longer terms?

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11 Comments on "Senate Votes to End Ethanol Credit"


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Charles P. Walsh
Guest
Charles P. Walsh
9 years 10 months ago

In the short term (6-12 months)the increased supply of corn for foodstock will decrease the cost to food manufacturers. Some of this short term gain will be retained by the food manufacturers and some will be passed onto the retailers. The retailers in turn will pass on a portion of the savings to consumers in the form of price rollbacks. In this inflationary period of time, the savings may be significant enough to allow retailers to rollback prices, but it is probably more likely that such rollbacks will be moderate.

In the longer run (12 -24 months) it is possible that as grain production shifts to balance the decreased demand for energy stock and the concomitant downward pressure on price, the windfall savings to manufacturers and retailers will wither.

Farmers have enjoyed a somewhat profitable run due to these farm subsidies but it is likely that additional pressure from retailers to manufacturers and from manufacturers to growers will place profit squeezes on the commodity grain growers in the longer term.

Ryan Mathews
Guest
9 years 10 months ago

It remains to be seen what the long-term impact will be on fuel costs and, by extension, on the price of food.

A more interesting question might be whether or not this move signals the beginning of a reassessment of all federal subsidies and what impact would that have on the industry.

Gene Detroyer
Guest
9 years 10 months ago
Subsidies are bad policy to begin with. They hit the citizen in the pocketbook coming and going. They cost the tax payer money and artificially increase the price of any product that is being subsidized. The ethanol situation is incredibly bizarre. It is blatant corporate welfare under the guise of energy independence made no sense at all. It is a typical play of how interest groups and politicians screw the American public. After all, what could be more American than running our cars on good old American corn? These plays are targeted to the naive, ignorant and illogical. The use of ethanol is mandated by law, protected by tariffs, and companies are paid by the federal government to use it. One has to ask how this ever passed in the first place. Certainly, it was worth many, many campaign contributions, and a few luxury vacations (I mean fact finding trips.) It drives the price of food up. It drives the price of gasoline up. It drives the deficit up. And, it dirties the air!!! Perhaps… Read more »
Camille P. Schuster, PhD.
Guest
9 years 10 months ago

Maybe this means that subsidies by the federal government can no longer be taken for granted. This sets a precedent for re-examining all subsidies during this season of very difficult budget decisions. One decision may not have a huge impact on the economy in general but a series of similar decisions may have a significant impact on the economy. It will be interesting to see if this becomes a trend.

Ralph Jacobson
Guest
9 years 10 months ago

The effects of this subsidy may be similar to that of one of yesterday’s discussion topics on undocumented workers. Commodity and labor costs drive the profitability of the whole food ecosystem. The bigger question on this topic is when will the US take note of other nations that have eliminated their own dependence upon oil and transformed their economy to a renewable transportation energy source? Perhaps the answer is never.

We continue to drill, mine “clean” coal (seriously? Clean Coal??) and use basic electric car technology that was in use more than 100 years ago. Get serious. If there should be any subsidies for energy/fuel, they should be for our oil companies to completely retool their facilities for hydrogen. Yes, that’s right, give these companies billions more in funding, on top of their unprecedented profits, so we can finally secure our energy needs and stop any dependence on foreign resources.

Here’s how much it will cost to get a true hydrogen highway going, just like Norway and other countries are doing today.

Cathy Hotka
Guest
9 years 10 months ago

When corn sells for $6 per bushel, many things in the grocery store become more expensive. I just spent a week on a hog farm in Iowa (really) and the impact on small farmers has been intense. Our parade of farm subsidies should be sharply curtailed.

Ben Ball
Guest
9 years 10 months ago

End the ethanol subsidies? Fine.

Now — where is the corresponding legislation to end the federal mandate of 10% ethanol blend?

Let the markets fall where they may — but let them fall without intervention on EITHER side.

Jerome Schindler
Guest
9 years 10 months ago

As they say, don’t count your chickens until they’re hatched. The corn growers lobby will pay whatever it takes in campaign contributions to continue that subsidy in some shape or form.

Mel Kleiman
Guest
9 years 10 months ago

Simply a move in the right direction. Shows that maybe in the long run, we will end up with not only a better budget but also a true energy and subsidies policy built on true needs

Gordon Arnold
Guest
9 years 10 months ago

The problem with ethanol is that when blended with petroleum fuels and distributed through pipelines the alcohol separates from the petroleum products. There are many companies working to remedy this issue but as of now there is not much has worked to solve this transportation need. So our dream of low cost alcohol-based fuels mixed with petroleum fuel products is just another nightmare for this robust depression to deal with.

Kai Clarke
Guest
9 years 10 months ago

It will not. This subsidy has clearly not impacted the prices of fuel, nor has it empowered alternate energies in the long run. Until we stop our dependence on foreign oil, none of this will change.

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