With the Dec. 31 expiration of the Volumetric Ethanol Excise Tax Credit (VEETC), the U.S. ethanol industry declares it is ready to stand on its own. A tariff of 54 cents a gallon on ethanol imports is also set to expire at year's end.

Although the tax credit of 45 cents a gallon will soon be gone, the Renewable Fuel Standard (RFS) mandating the production of about 13.2 billion gallons of ethanol in 2012 will remain in place.

Many U.S. livestock producers welcome expiration of VEETC and the import tariff. They believe that the RFS, as well as VEETC and the import tariff, have all contributed to the higher price of corn which has more than doubled since the ethanol production mandate became effective in 2007. For the first time, the ethanol industry will consume more U.S. corn in 2011 than the livestock and poultry industries.

“It is time for ethanol to stand on its own, and I believe it can.” according to Steve Meyer, president, Paragon Economics and co-author of the CME Daily Livestock Report. “U.S. livestock and poultry growers have paid a dear price for subsidized demand for corn and that price is now being passed along to U.S. consumers in the form of record-high meat and poultry prices.”  

Thanks to the high cost of crude oil, corn-based ethanol is attractively priced, according to a Reuters report. Ethanol production and exports are record-high this year and the U.S. mandate assures renewable fuels a share of the U.S. motor fuel market.

For the post-VEETC environment, U.S.  ethanol makers will focus on promoting higher blends of ethanol into gasoline, installation of "blender" pumps to dispense higher blends, and larger production of flex-fuel vehicles.

“Higher blends, blender pumps and flex-fuel vehicles are fine as long as their adoption and use are in response to market forces and not government subsidization,” says Meyer. “The best solution at this point is to let markets work. Further government intervention is neither needed nor advisable.”

Ethanol producers in Brazil are watching U.S. developments closely. The Brazilian Cane Sugar Association (UNICA), whose members also make ethanol, says removal of the tariff will open the U.S. market and spur long-term growth for Brazilian ethanol. "This will give us the right conditions to invest in expanding existing mills and invest in the 130 new ones we think we'll need to double our output in 10 years," UNICA president Marcos Jank said.

Ethanol proponents believe that consumers capture many benefits from ethanol. "Our folks are very solid in this belief: We produce the cheapest fuel on the planet," Tom Buis, head of trade group Growth Energy, said recently. According to the group’s website, “Growth Energy represents the producers and supporters of ethanol who feed the world and fuel America in ways that achieve energy independence, improve economic well-being and create a healthier environment for all Americans now.”

“Mr. Buis is correct only in the short term regarding U.S. ethanol costs,” says Meyer. “The only reason U.S. ethanol is cost-competitive is that sugar prices have been record-high in the past year and are still over two times their levels of 2007.” Meyer expects growers in South America will respond by increasing sugar cane production. “Plus, the process of producing ethanol from sugar cane is much less expensive than producing ethanol from corn.”

U.S. livestock and poultry producers have requested an escape clause be added to the U.S. law to lower the mandate when corn supplies are tight, such as this year. “At least some relief from the mandate is a must in the case of a 1983 or 1988 magnitude crop disaster, not just a short crop as we saw in 2011,” Meyer says.

Ethanol groups have asked Congress to extend incentives, due to expire in 2012, for ethanol made from cellulose, found in trees and grass.

Source: Reuters, Paragon Economics