Colorado Corn

By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- The U.S. ethanol industry could continue to "thrive on its own, even without subsidies," according to a study released Wednesday by the National Turkey Association, the National Chicken Council and the American Meat Institute.

"Fuel Ethanol Subsidies: An Economic Perspective," by FarmEcon.com President Thomas Elam, said the 51-cent blenders' tax credit was created at a time when the ethanol industry was not profitable.

"Changing circumstances have rendered the current fixed payment federal ethanol subsidy program obsolete," the study said. "The influence of the subsidy program has shifted from making ethanol feasible to causing significant increases in grain prices, distorting farmer planting incentives and causing the cost of producing the U.S. food supply to increase."

The study comes at time when livestock groups have been calling for the federal government to end subsidies to ethanol. Many of these groups have said that higher corn prices are driving up their costs to produce meat and are driving up food costs for consumers.

Under federal law gasoline blenders receive 51 cents for every gallon of ethanol they blend with gasoline -- a major incentive that has sparked ethanol industry growth.

During a press conference Wednesday, Elam said the subsidy should be eliminated because the ethanol industry's expansion and subsequent increased demand for corn permanently has changed corn prices.

"Typically it takes a weather issue for prices to go above $3 a bushel," he said. "The difference this time is that this is a permanently higher level of demand as long as the subsidy program adds to the value of corn that ethanol producers can afford to pay."

According to the study, the subsidy program is not making a "material contribution to U.S. net energy supplies or energy cost independence of the U.S. economy."

It also said the subsidies are hurting consumers through higher food prices. In June General Mills, citing higher grain prices, announced that it was raising prices of all boxed cereals by about 4 percent and reducing box sizes.

The total cost of just the grain price increases alone is about $115 per person per year, or $460 for a family of four, the study said.

This report contradicts findings of a study published last week by Washington, D.C.-based Food and Water Watch entitled, "Retail Realities: Corn Prices Do Not Drive Grocery Inflation." That study said that while consumers face higher prices at the grocery store, "there is little evidence that this grocery inflation can be blamed primarily on the cost of corn" derived from increased demand for ethanol.

Though the price of corn has increased and the price of groceries has risen, the study said higher corn prices don't necessarily cause higher food prices. In fact, in the past three decades meat and milk prices have been relatively non-responsive to changes in corn prices, the Food and Water Watch group said.

"Elimination of the federal subsidy, or placing it on a sliding scale based on gasoline prices," FarmEcon.com's study argued, "would reduce the effects of ethanol on energy and food costs."

It also said that while ethanol production would be a "viable business today even without federal subsidies, the presence of the 51-cent-per-gallon subsidy is a major driver in the rapid increase in corn use for ethanol."

At 51 cents per gallon, the subsidy enables ethanol producers with a 2.8-gallon-per-bushel ethanol yield to pay $1.43 per bushel (51 cents times 2.8) more for corn than they would if they did not receive the subsidy, the study said.

"In a sense, ethanol is profitable in spite of subsidies, not because of subsidies," the study concluded. "If the ethanol subsidies were to disappear, corn prices would drop, ethanol would still be profitable, and we would all benefit from lower costs of food and ethanol production."

In fact, the study suggested the industry should go one step further beyond eliminating the subsidy. "If oil prices go high enough the government should consider taxing ethanol used for fuel to alleviate the effects of ethanol demand on food prices," the study said.

As a recent downturn in the price of ethanol has shown, ethanol profitability would suffer without the 51-cent tax credit. For example, profitability at the hypothetical Neeley Biofuels Inc. 50-million-gallon plant in southeast South Dakota recently saw its profitability dip to minus 2 cents per gallon as recently as last week. Eliminating the 51-cent subsidy would drop profitability to about minus 53 cents.

Todd Neeley can be reached at Todd [dot] Neeley [at] dtn [dot] com.

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