The Senate approved an amendment by Sen. Feinstein (D?CA) that would repeal the $0.45/gal ethanol tax incentive and $0.54/gal import tariff by June 30. These incentives are currently slated to expire at year end. The 73?27 vote had bi?partisan support: 33 Rep, 38 Dem, 2 Independents.
As revenue/tax legislation cannot originate in the Senate, it appears the amendment will be "blue slipped" (essentially stripped) from the bill. However, the vote is symbolic of the movement to change ethanol policy.
Eoin Treacy's view Corn
based ethanol remains a contentious industry in an era of high food prices.
Debate continues to rage between those who argue that corn based ethanol is
an inefficient use of corn that also contributes to high food prices and those
who deny any such linkage. This article from the technologyreview.com
kindly submitted by a subscriber may also be of interest.
There are three separate supports for the industry that are worthy of mention. These are the mandate for ethanol usage as an oxygenate in gasoline, tax incentives to support supply and tariffs against imported ethanol, primarily from Brazil. The mandate is unlikely to be changed anytime soon because no one wants to go back to using carcinogenic MTBEs in gasoline. The tax incentive and import tariffs are due to expire at the end of the year. However, they will be heavily defended by the farming and ethanol production lobby. With a presidential election slated for next year, the Iowa caucus is coming into its most influential period so it is debatable whether tax incentives for the industry will be allowed to expire. Tariffs on imported ethanol are potentially less of an issue now than they were 5 years ago. .
Brazil has a highly developed ethanol industry and consumes more ethanol as a fuel for transport than just about anywhere else. Its highly efficient sugar-fed ethanol refineries are in close proximity to the plantations which reduces its cost of production even further. However, sugar prices are in a secular bull market and well above what would have been considered "normal" only a few years ago. Brazilian ethanol, at approximately $2.84 per gallon, is not competitive with US ethanol at $2.64 assuming current market conditions. If the USA's import tariff is removed that will open up the US market to more of Brazil's exports. However, for Brazilian ethanol to be competitive with US ethanol the tax incentive will also have to be removed as planned.
US ethanol prices have been quite volatile since debuting on the CME in 2005. It rallied reasonably consistently until April but has lost momentum and posted two failed upside breaks in the last two months. The first with a weekly downside key reversal and second, two weeks ago, with a large downward dynamic. The recent weakness in the energy complex may be a factor and a sustained move above $2.80 would be needed to reassert medium-term demand dominance.