Scott Irwin, a professor of agricultural and consumer economics, is an expert on agricultural commodity markets.
Photo by David Riecks, ACES-ITCS
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The lame-duck Congress yielded a one-year extension of the 45 cents per gallon tax subsidy for ethanol blenders, which, along with a 54 cents per gallon tariff on foreign ethanol, was due to expire at year's end. Scott Irwin, a professor of agricultural and consumer economics, is an expert on agricultural commodity markets. He spoke with News Bureau Business and Law editor Phil Ciciora about what impact the one-year extension will have on Illinois, one of the biggest states for producing corn and corn-based ethanol.
How will the extension of the tax credits affect Illinois farmers?
It has a direct impact on Illinois farmers to the degree that the tax-cut deal supports ethanol production, which in turn directly impacts corn prices. In addition, there's a biodiesel tax credit that was also renewed through 2011 that will directly affect the price of soybeans through the soybean oil market, since soybean oil is refined into biodiesel.
Livestock producers weren't particularly thrilled over the tax credit extensions, because what is an output and a source of revenue for crop producers is an input and a cost for them. Ultimately, those cost increases will work their way through the food chain back to the consumer.
Does this deal speak to the power of the ethanol lobby in Washington?
Absolutely. I would be the first to admit that I was surprised at the final outcome. In following the debate as it evolved, it seemed to me that the most likely outcome would be that the ethanol tax subsidy would survive, but at a substantially lower rate. And then, almost at the last-minute, it came out that both the tax credit and the tariff would remain unchanged for the next year. That's a pretty strong testament to the power of the ethanol industry and the agricultural groups that support the biofuels industry.
With the subsidy expiring all over again at the end of 2011, is this just the opening salvo before the issue of subsidies for biofuels is relitigated all over again in Congress?
Yes. This was just one in a long series of political tussles over biofuels policy in general. That's already started.
Politicians and farm groups are very cognizant that this is only a one-year extension, and they're already laying out their positions for what they think should happen when this deal expires at the end of 2011.
Although it's still unpredictable as to how it will be resolved, it's hard for me to see how the ethanol interests can maintain the same level of support going forward. They're already trying to anticipate that with a proposal to reduce the tax credit and use the money saved to pay for infrastructure spending for the industry. Those kinds of proposals are out there, but my own guess is that they will be hard to sell in the current political climate. What's probably more realistic is how big of a cut in total dollars the industry will have to take.
Ethanol supporters would argue that a one-year extension doesn't provide much certainty to the industry and to investors. How important is certainty, especially for biofuels industry, such as cellulosic ethanol?
Well, it's a little hard to think of how much more certainty an industry needs, or would want.
Right now, the ethanol industry receives three types of government support. There's the support through the tax code and tax credits that were just renewed. Along with that, there's 54 cents per gallon import tariff. Plus, there are the Renewable Fuel Standard mandates that specify a minimum amount of ethanol must be blended into our fuel supply.
In some sense, that's a pretty extensive list of government support, and that doesn't even count state and local incentives for the construction of ethanol plants, and some state mandates and incentives in terms of gas taxes and rebates. There's such a long list of incentives that's supporting the industry that it's hard for me to imagine how you get more certainty, and why would an industry need more.
What's your prediction on how this issue is resolved a year from now?
I think we're headed to a compromise, not another extension. The main driver is the push to reduce spending at the federal level. Clearly, there's less of a consensus going forward that ethanol is a good thing.
I think there are several factors coming together to pressure these subsidies, and one of the more interesting aspects of this debate is figuring out who benefits from this combination of government support and protection.
What do you think a good compromise would look like?
I support a variable credit scheme, where the tax credit part of the subsidies is only paid to blenders when it's uneconomic for them to use ethanol. Absent subsidies, blenders and energy companies will use ethanol when it's cheaper than regular conventional unleaded gasoline. So the subsidy would only kick in when ethanol is above gasoline prices. That could potentially generate very large budget savings.
But it's also important to keep in mind the quantity of ethanol that's produced and consumed in the U.S. is also driven by the level of energy prices - specifically, crude oil prices. Once you get around roughly $80 per barrel of crude, ethanol would be used whether there were any subsidies or not. People tend to forget that. So if you took out all of the subsidies, at today's crude oil prices we would still have a fairly large ethanol market and industry. That tends to get forgotten in the debate.
We've been on a slow ascent over the course of the last 18 months back toward the $100 oil, and lot of analysts believe that as the global economy recovers, crude oil will head back to $100 per barrel territory by spring, which would make ethanol on its own even more viable.
Will this political wrangling with biofuels policy have any upward pressure on prices at the pump?
I don't think it's a big enough dollar amount relative to the size of the U.S. gasoline market, which is at least 140 billion gallons, to make a large difference. If you take out $6 billion, that's still pocket change compared to the energy sector as a whole. So it's not going to have much of an impact. Without the subsidy, you might see a really small increase in gas prices - maybe a penny or two.