Battle Lines Drawn For Ethanol Debate

on October 26, 2011 at 6:00 AM

The ethanol and biofuels markets are set for major change as tax benefits and other subsidy programs expire and face high barriers to renewal in an era of contracting federal budgets.

The changes for the ethanol business will be “dramatic,” former Senate majority leader Tom Daschle told the CME Global Financial Leadership Conference in Naples, Florida.

“I don’t think there’s any choice” but to reduce or remove subsidies for ethanol and other biofuels, Daschle said, acknowledging that the once-inviolable Department of Agriculture budget has become open for review as political realities intrude. “There are too many fiscal implications to our subsidies today,” Daschle said, and even in states like Iowa “there’s a new realization that that’s going to have to be addressed.”

Changes could include opening the US market to international biofuel imports, particularly from Brazil. The domestic biofuels industry lobbied for, and received, tariffs on cheaper Brazilian biofuel imports as producers in the US worked to achieve scale. That has limited development of biofuel capacity in third-world countries, Daschle pointed out, saying that the subsidies were having international aid implications beyond the energy markets.

Shape Shifting

An audience poll at the CME Group conference in Florida showed an almost unanimous consensus in favor of reviewing biofuel subsidies, and even agricultural firms that have benefited from the policies said many of the subsidies had outlived their use and warping market incentives.

Mandates for ethanol production and use as currently written are too inflexible, and create a boom-and-bust cycle in the ethanol business, Cargill executive vice president Emery Koenig told the conference. Adjusting subsidies to allow for price and demand changes would make for a more effective market, and promote “a healthier food environment,” Koenig said.

In many cases the industry has outlived the use of subsidies in their current form, Archer Daniels Midland senior vice president Matt Jansen said at the CME conference. “Even without credits, ethanol is a good business prospect,” Jansen said.

Growing Innovation

Second-generation biofuel technology may limit the need for the current subsidy program even if the US could afford it. Ethanol is being produced from other sources of biomass besides corn, Daschle pointed out, including wood waste and algae, with new developments in “corn stover” or the stalk and remainder of the corn after the plant is harvested.

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