Efforts to end the 45-cent per gallon government subsidy for ethanol reached a peak the past couple weeks and it looks like its days are numbered. The subsidy is set to expire the end of this year, but legislation recently introduced would move up the end date.
U.S. Senators Tom Coburn, (R-Okla.), and Diane Feinstein, (D-Calif.), have introduced legislation to pull the plug on the Volumetric Ethanol Excise Tax Credit subsidy, or VEETC, which has fueled an artificial competitive landscape since 2005. The proposed bill has bi-partisan support which increases the likelihood that we will see the subsidy, and its partner, the import tariff on imported ethanol, come to an end. Backers want to pass the repeal by July.
Corn is a primary feed grain in the United States for hogs, beef cattle, poultry and dairy, accounting for more than 90 percent of total feed and production use. It is the largest single cost in raising cows, chickens, turkeys and hogs. This year, 40 percent of the corn crop will be diverted for ethanol production, up from 5 percent in 2000.
Increases of corn used for fuel production puts upward pressure on corn prices, demand for cropland, and the price of animal feed. Siphoning off that much corn raises the price of other farm commodities including soybeans, meat, poultry and dairy products as well as the retail price of food in general.
Consumers pay $1.78 per gallon of subsidized ethanol-blended fuel through embedded costs before ever filling their tanks. If left intact through 2011, VEETC alone will have cost taxpayers $30.5 billion over its lifetime.
Groups including the National Pork Producers Council, National Chicken Council, National Cattlemen's Beef Association and American Meat Institute say enough is enough. Opponents of the subsidy say lawmakers could eliminate $6 billion in annual government expenditures by eliminating VEETC. With Congress searching for ways to reduce the budget, the prospect is very enticing.
The American Farm Bureau and the nation’s corn growers, on the other hand, argue in favor of keeping the subsidies, pointing to the importance of clean fuel and reducing the dependence on foreign oil. Although it backs the goal of reducing foreign oil imports, animal agriculture says it should not be done in a way that places them at a competitive disadvantage. After all, they receive no federal subsidies to produce pork, beef, chicken and turkey.
Imagine a subsidy role reversal. How would a government mandate for consumption of pork chops or steaks be accepted? How about a mandated production level for hamburgers or chicken tenders?
It’s no secret that government subsidies play havoc with markets and create barriers to efficient functioning of trade. Animal agriculture, and other industries, that have to compete with the ethanol industry for corn, are clearly at a disadvantage.
Because the U.S. market is saturated with ethanol, we now export more and more to foreign markets. According to the Coburn website, federal subsidies have created an ethanol surplus in 2010, leading the U.S. to become a net exporter of ethanol—397 million gallons in 2010 and 917 million gallons since 2005. In the case of these ethanol exports, the government is now subsidizing energy programs of other nations.
While ending the government ethanol subsidy will help level the playing field, the federal mandate for ethanol production will likely remain in place. If the VEETC repeal passes, the potential reduction in ethanol margins may bring about some new dynamics.
Who knows, we may hear the ethanol industry itself chanting a new mantra: “End the ethanol mandate.” Wouldn’t that be a turnabout?