March 14, 2007

High corn prices put pressure on US ethanol tax incentive, tariff
 

Simmering frustration by the US livestock industry over near record high corn prices, fuelled by the explosive demand from ethanol producers, boiled over into Congress March 8 in a hearing held by the House Agriculture Committee's subcommittee on livestock, dairy and poultry.

The growing resentment that the growth of the ethanol industry has caused corn prices to double in a year is leading to calls for eliminating the generous tax incentives and tariff protection the industry enjoys.

Representative Adrian Smith (R-NE) quoted farmers in his district that "there's not enough corn at any price." The sentiments were echoed by one of the subcommittee's witnesses, Joy Philippi also of Nebraska and former president of the National Pork Council, who said, "you cannot buy a bushel of corn at any price, it is not available." Smith says the issue on the feed costs is also causing "quite a stir."

Last year's corn prices were in the US$1.85-US$2.00 per bushel range. The current Chicago Board of Trade price is US$4.21 per bushel.

One target of the commotion over corn prices is the 51-cent per gallon excise tax incentive for refiners and others who blend ethanol into gasoline. Virginia Representative Bob Goodlatte, who represents small farmers in Shenandoah Valley, noted there are "not a lot of options right now" to reduce corn prices but suggested there should be a "sunset for the subsidy," referring to the tax incentive. The tax incentive is set to end by 2010.

US Department of Agriculture (USDA) chief economist Joe Glauber predicted ethanol production would hit 12.5 billion gallons before the end of the decade. In written testimony, USDA Deputy Secretary Chuck Conner recalled the ethanol industry produced 1.6 billion gallons in 2000, using about 6 percent of the corn harvest. Last year it produced 5 billion gallons, requiring roughly 20 percent of the corn harvest. The 11.5 billion gallons the USDA officially projects in 2010/11 would require 30 percent of the corn grown in the US

Another target of some lawmakers and witnesses at the hearing is the 54-cent per gallon import duty applied to most foreign-produced ethanol. The tariff is subject to end in 2009.

The cost to the US Treasury for the ethanol tax incentive would exceed US$6 billion, given in excess of 12 billion gallons of production. Ethanol supporters argue there would be related reduction in federal agricultural support payments due to the upward pressure ethanol production puts on corn prices. Some suggest that it should track inversely with the price of oil. If oil prices are high then the incentive would drop. The move would protect the ethanol industry from the fear of what could be a reaction of the oil cartel, forcing oil prices down dramatically, making ethanol cost prohibitive and paralysing an otherwise growing industry.

USDA's Conner suggested growing more corn on land taken out of the Conservation Reserve Program (CRP). Conner said the department would soon release a report showing "several million acres" may come out of CRP as many farmers did not renew its commitment for the program.

Another strategy for dampening corn prices, which Conner predicted will break records next year, is to take land formerly planted with soy and grow corn on it this year. Anecdotal stories indicate many farmers are doing this, however, this not only puts pressure on already high soy prices but could dramatically slow growth of the biodiesel industry.