End of US ethanol subsidies is nearing

Sen. Dianne Feinstein (D, Calif.) said in a statement that she had reached a deal with Sen. Amy Klobuchar (D, Minn.) and John Thune (R, S.D.) under which a tax credit of 45 cents a gallon for blending ethanol into gasoline would expire on July 31. A tax of 54 cents a gallon on imported ethanol would also expire at the end of the month.

 

The deal is significant because the Minnesota and South Dakota lawmakers are ethanol supporters who have been trying to find a way to keep federal support for ethanol alive even while acknowledging that subsidies must be pared back.

 

A big winner of the deal would be the Brazilian ethanol industry, which has struggled to gain large-scale access to the US market because of the impediment of the tariff of 54 cents a gallon.

 

Grain traders have been expecting the subsidies to end since last year, but some were surprised by the quick timetable. That helped limit gains in corn futures, although prices still rose on strong import demand from China.

 

Analysts expect the impact on the ethanol industry, and corn prices, to be limited in the near-term. Federal biofuel production mandates remain in place, and blenders still have an economic incentive to use ethanol, though that would change during periods when ethanol prices climb above gasoline prices.

 

Longer-term, the bigger impact will come from the elimination of the import tariff. In the short-term Brazil will not be exporting much ethanol to the US even if the tariff is removed because high domestic demand is consuming almost all of what the country can produce,

 

Tight sugar cane supplies have forced Brazil to use the crop for sugar rather than ethanol, but that will eventually change, putting Brazil’s sugar-based ethanol in direct competition with US corn-based ethanol, tying together corn and sugar prices.