By KEVIN WALKER
Michigan Correspondent

GENEVA — Last week, an Iowa State University economist published a paper that opines the ethanol blender tax credit is irrational and should be eliminated. The paper, by Bruce Babcock of ISU’s Center for Agricultural and Rural Development, was published by the Switzerland-based International Centre for Trade and Sustainable Development.

“There is no rationale for the blender tax credit,” the paper reads. “It does little to help the biofuel industry as long as mandates are in place, except in years when high gasoline prices have already stimulated demand beyond mandated levels.

“In this situation, the extra demand stimulus does help biofuel manufacturers, but at great cost to the livestock sector because it pushes world maize prices even higher than either energy prices or mandates would support. Doing away with the blender tax credit would avoid pushing crop prices even higher during high demand periods.”

Babcock also writes that elimination of the blender credit would eliminate any justification for the U.S. tariff on ethanol imports and that elimination of these would result in a “more flexible” domestic ethanol policy. Such a policy as he envisions it would keep crop prices from going too high when the supply of ethanol feedstocks tightens and keep those prices from becoming too volatile.

“Additional flexibility in U.S. policy could be introduced by relaxing blending mandates when feedstock supplies are low. It makes no sense to force all adjustment to low feedstock supplies on the livestock sector when consumers have gasoline as a ready substitute for lower biofuel supplies,” he wrote.
This paper was published a week after a large majority in the U.S. Senate voted to eliminate the blender credit. That vote was on an amendment attached to a piece of legislation, however, that will likely never become law. In fact, the underlying bill, the Economic Development and Revitalization Act, last week failed a procedural vote in the Senate.

It’s not clear if the earlier vote to eliminate the ethanol subsidy reflects how senators really feel now about the blender credit or if it was just an easy way to make it look like they want to reduce the deficit.

While Babcock’s paper is down on ethanol subsidies, it also points out they aren’t the main culprit behind higher food or crop prices. The paper estimates the impact of U.S. ethanol policies on crop and food prices for the 2005-09 crop marketing years was “quite modest.” The largest impact of subsidies was in 2007 when corn prices would have been 30 cents, or 7.1 percent, lower per bushel than they actually were.

“This is a modest impact because the average maize price in 2007 was more than $2 per bushel higher than the average price in 2004 or 2005,” the paper reads. “This implies that ethanol subsidies have not been the major driver of higher commodity prices.”

It goes on to state that subsidies had even less of an impact on the price of wheat, rice and soybeans. Also, the effect of subsidies on consumer prices of eggs, beef, pork and broilers because of higher feed costs “was even smaller.” Babcock then distinguishes between the effect of subsidies and the effect of ethanol expansion in general.

“If U.S. ethanol production had somehow not been allowed to expand beyond 2004 levels, then maize prices in 2009 would have been about 21 percent lower than they actually were,” the paper reads. “Wheat and soybean prices in 2009 would have been about 9 and 5 percent lower, respectively.”

While the paper calls these price effects significant, it goes on to state that even without ethanol expansion, corn prices would still have been 40 percent higher in 2009 than they were in 2004, wheat 45 percent higher and soybeans 57 percent higher. Since feed prices make up only a small portion of the cost of retail food, the lack of ethanol expansion would have had only a “modest” effect on consumer food prices; retail eggs would have been only 8 cents per dozen less if ethanol had not been allowed to expand, according to the paper.
The whole paper, The Impact of U.S. Biofuel Policies on Agricultural Price Levels and Volatility, can be downloaded from http://ictsd.org/i/publications/108947