Corn prices in 2011 “would be about 17 percent lower than they are expected to be under current policies if ethanol subsidies had been eliminated before the beginning of the year,” according to a new study by Bruce Babcock, a professor of economics at Iowa State University.
“The Impact of US Biofuel Policies on Agricultural Price Levels and Volatility” finds that high gasoline prices create a high demand for ethanol, the renewable, liquid fuel additive that comes mainly from corn. This in turn creates a tight market for corn. “Under these tight conditions, the report says, “the added demand incentive from the blender tax credit can have a significant impact on maize prices.”
The Senate last week voted 73-27 on an amendment sponsored by Oklahoma Sen. Tom Coburn to repeal the Volumetric Ethanol Excise Tax Credit, also known as the Blender’s credit. Thirty-three Senate Republicans joined with 40 Democrats to vote against the $6 billion annual subsidy that provides 45 cents a gallon to oil refiners who produce the biofuel as well as tariff protection of 54 cents a gallon added to imports.
The ethanol debate is the latest drama in the efforts of Republicans and Democrats to reach agreement on reducing the deficit as the clock ticks down to Aug. 2, the deadline Treasury Secretary Timothy Geithner has set for raising the debt ceiling. Otherwise, he warns, the country runs the risk of default on Treasury bonds. Republicans, primarily, have tied substantial debt reduction to a vote to increase the borrowing limit.
The amendment is now attached to a bill that is unlikely to pass, the Christian Science Monitor observed. President Obama has also said he would veto any attempt to cut entirely subsidies for ethanol producers. Ethanol critics argue that the subsidies are wasteful and unnecessary as the federal Renewable Fuels Standard (RFS) requires ethanol to be blended into gasoline. Supporters contend Ethanol will help reduce dependence on foreign oil.
Babcock’s study indicates the need for what the author calls a more flexible U.S. biofuel policy. The blender tax credit, the report finds, only helps the biofuel industry in years when high gas prices stimulate demand beyond mandated levels. This comes at a greater cost to the livestock industry, which must absorb the increased price of corn used to feed animals.