Corn Futures

Ethanol survived a summer attack in Congress, but another battle looms this month. Are tax breaks for ethanol good public policy?For two decades, ethanol has been the fuel of the future-a renewable, corn-based, domestically produced, and environmentally friendly alternative to gasoline.One problem. Like every other alternative to gasoline, it's more expensive. And when given the choice between cheap and expensive, consumers will inevitably choose cheap."Nineteen out of 20 people, they're still going to buy on price," noted Philip Shane, market development director for the Illinois Corn Growers Association and the Illinois Corn Marketing Board.For years, the federal government and corn-belt states have given ethanol a tax break, and a big one. In an effort to make the price of fuels with ethanol competitive with pure gasoline, governments have slashed motor-fuel and sales taxes. With all its promise for the United States agricultural economy, natural resources, and cleaner air, the reasoning went, the fuel of the future deserved some help until it found its feet.It has indeed found its feet. Ethanol production has grown from less than 200 million gallons in 1980 to an estimated 1.6 billion gallons this year. And 55 percent of the automobile fuel sold in the United States contains some ethanol.But the fuel still needs its tax-break crutches to get along. With the federal tax break scheduled to expire on September 30, 2000, and with no extension on the books yet, ethanol is at a crucial juncture. The next few months could determine whether ethanol will survive into the twenty-first century.At stake in the battle over the ethanol tax break is the future of the corn-based fuel and, more importantly, the price of corn and its effect on farmer income.If the federal tax break for renewable fuels expires in 2000 or is eliminated before then, in other words, the bottom will probably fall out of corn prices, ethanol production will likely grind to a halt, and the fuel will be largely abandoned as a viable alternative to gasoline. "It will be a shock to the markets," Shane said."Virtually every ethanol plant in the country would shut down," said Trevor Guthmiller, executive director of the American Coalition for Ethanol in Sioux Falls, South Dakota.The Cost Of EthanolThis summer, as Congress and President Bill Clinton negotiated a long-term budget deal, ethanol supporters pushed for an extension of a renewable-fuels tax break, which applies almost exclusively to ethanol, until the year 2007. But petroleum interests, led by House Ways and Means chair and oil enthusiast Bill Archer of Texas, pushed to eliminate the tax break altogether, before its scheduled expiration in three years. Neither side won. The tax break is still scheduled to expire in three years."We're kind of back to square one," Guthmiller said.The break, which exempts the common blend of 90 percent gasoline and 10 percent ethanol from 5.4 cents of the federal fuel tax, makes the blend's price competitive with 100 percent gasoline.The tax break actually exempts a gallon of ethanol from 54 cents of federal fuel tax. At the pump, that translates to 5.4 cents for the 90-10 blend, and 45.9 cents for E-85, a blend of 85 percent ethanol and 15 percent gasoline used in "flexible fuel" automobiles. (Such cars can run on any combination of ethanol and gasoline from 85 percent ethanol to 100 percent gasoline, but operate best with 85 percent ethanol. Conventional engines cannot run on a gasoline-ethanol blend with more than 30 percent ethanol.) In all, the tax break will cost the federal government about $800 million this year, far greater than the $555 million that ethanol supporters claim their industry generates for the federal government in personal and business income taxes.In addition to the federal tax break, many states with large amounts of corn production also give ethanol a boost with tax breaks or other incentives. In Illinois, ethanol gets a 30-percent break from the state sales tax, which amounts to between 1.5 and 2 cents at the pump for a 90-10 gasoline-ethanol blend. Ethanol opponents peg the cost to the state at about $50 million a year in lost revenue.Such breaks have been a major factor in ethanol's emergence. Ethanol production currently uses about 6 percent of the United States corn crop. In Illinois, 17 percent of the corn crop is used to make ethanol.The fuel is made by turning corn starch into alcohol. Ethanol can be made from any number of natural materials, but corn is presently the crop of choice for ethanol, because its starch is easiest to extract and process. And "it's just what we have an abundance of," Guthmiller said.But it's still more expensive than importing and refining oil. Ethanol is usually made by "wet milling" corn to separate its components, and then fermenting the starch to make ethanol. The relatively expensive process is used because it creates marketable byproducts.Clean-air requirements have also boosted ethanol's fortunes. The 1990 Clean Air Act requires that the forty most polluted cities in the country use "oxygenated" fuels-which, because of its tax break, essentially means ethanol-during some months to reduce auto emissions.And fueled by emissions standards and the seemingly permanent tax break given to ethanol, the auto industry has been making more flexible-fuel cars. The popular Ford Taurus has had an E-85 option for the past three years, and Ford and Chrysler will be making E-85 engines standard on some of its 1998 models.But even though flexible-fuel cars have become more common, their shortcomings highlight ethanol's problems.Guthmiller has driven a flexible-fuel car since 1990. Although he likes the car, he admits that the fuel costs more than a gallon of regular unleaded gas, even with the tax break. And he gets less than 90 percent of the mileage of pure gasoline because of ethanol's lower energy content.The Next StepWhile state tax breaks are secure, the future of the federal ethanol incentive is less certain.The next skirmish will come soon, as Congress begins rewriting its major transportation bill later this month.Ethanol supporters will try again to get the tax break extended to 2007, while the oil industry, not to mention backers of every other alternative fuel, will fight the extension. "We would absolutely oppose that," said David Sykuta, executive director of the Illinois Petroleum Council. Sykuta said that virtually all his clients sell products with ethanol."We'd like to see it [the tax break] go through this year," Guthmiller said, instead of having to sweat out an uncertain future as the expiration date closes in.U.S. Senator Dick Durbin told Illinois Times that he and other ethanol supporters have lined up seventy members in the upper chamber to support the ethanol incentive extension, and the Clinton administration is also on board. But "you can't be too confident. The House has not been that encouraging," Durbin said.Ethanol supporters also lost a powerful ally in the Senate when Senate Majority Leader Bob Dole retired from Congress last year during his failed presidential bid.Durbin said he's not worried that the incentive will be eliminated because of its support in the Senate and White House.He is concerned, however, that if the House blocks its extension, investors and businesses might be unwilling to back ethanol-related projects and research. Without the tax break extended long-term, there would be no guarantee that ethanol's price could be competitive with gasoline.Shane of the Illinois Corn Growers Association said corn producers recognize that in a volatile political climate, they need to continue to develop new products and markets for corn. Production of corn sweeteners, for instance, uses about 100 million more bushels of corn per year than ethanol. But, Shane said, even that market is shaky, with Mexico considering placing tariffs on sweeteners to protect its market for sugar at home."We're not putting all our eggs in one basket," Shane said. "However, this [ethanol] is a huge market at this time, and we can't afford to lose it."Cutting Costs For Corn's SakeIf Congress could just extend the ethanol tax break another seven years, supporters swear, the current subsidy could be reduced or possibly eliminated.They pledge that by 2007, researchers will have found ways to make ethanol more competitive pricewise with gasoline. After that, they say, federal and state tax breaks could be at least reduced.One key will be the Corn to Ethanol Research Pilot Plant, an $18 million facility slated to open in 1999 at Southern Illinois University at Edwardsville. This past session, the Illinois General Assembly unanimously approved funding for the plant. According to the Shane, the project is now looking for federal funding.The plant will conduct research projects designed to reduce the production costs, and hence the price, of ethanol. And one early analysis indicated that production costs can be streamlined.A feasibility study looked at ten out of a possible 100 research projects. Of those, only seven were far enough along to estimate their outcomes. Even so, three of those projects would probably reduce the cost of ethanol production by 10 cents a gallon. Researchers need time to realize that savings potential, Shane said.But even by 2007, he conceded, the ethanol industry will likely still need substantial tax breaks. "We're confident we can reduce the price," he said. He added that the price reduction might be in the neighborhood of 20 cents per gallon, still requiring a subsidy of more than 30 cents per gallon of pure ethanol, or 3 cents per gallon of gasoline blended with 10 percent ethanol, to remain competitive.Opponents of ethanol say promises of cost-saving sound familiar. "They swore on their stack of Bibles that they'd only need it [the federal tax break] until '83," said Sykuta of the Illinois Petroleum Council.The Battle AheadEthanol supporters know they have a tough job ahead of them. "This is going to be an ongoing battle," Guthmiller said. "We have to dig in."Ethanol enjoys wide support in the states that benefit most from its use, especially Illinois, Indiana, Iowa, Kansas, and Nebraska. But outside of the corn belt, the fuel is reviled.One persistent problem for ethanol supporters has been their ineffectiveness in conveying ethanol's benefits to the public. "I think that is a big problem," Shane said. "People don't know what to believe." And the petroleum industry has a number of convincing arguments that the ethanol tax break should be eliminated.Ethanol opponents, for one thing, can cast the tax break as corporate welfare. The real beneficiaries of the tax break are ethanol processors. And chief among those is the monolithic Archer Daniels Midland company, which controls more than half of U.S. ethanol production at its four plants in Illinois and Iowa. The next largest producers, Cargill and Pekin Energy Company, are dwarfed by ADM's production prowess. ADM profits the most from the subsidy, especially with clear-air and auto-emissions standards that essentially require the use of ethanol.And while the oil crisis of the 1970s spawned a handful of possible alternatives to reduce the country's reliance on foreign oil, ethanol has been the focus of federal and state incentives. "It's not a rational state policy to study only one alternative," Sykuta said.Ethanol supporters will have to make clear, convincing arguments in favor of their fuel to ensure its survival. They must focus on reduced automobile emissions in vehicles that use ethanol, especially E-85. They need to emphasize the value of the fuel to the American economy and to agriculture, as well as the fact that corn, unlike oil, will never grow scarce and is not controlled by a foreign interest.They also must ensure that the public understands the importance of the ethanol tax break to farmers. Even farmers whose corn is used to make ethanol don't benefit directly from the break, but without it, all farmers would be much worse off. The incentive makes ethanol economically feasible for processors such as ADM, thus increasing demand for corn and boosting prices in the process.It wouldn't hurt to take a few shots at the oil industry, either. The Institute for Local Self-Reliance, a Minnesota-based environmental think tank, estimates that the U.S. petroleum industry enjoys about $3.7 billion in tax breaks from state and federal governments. Not surprisingly, oil interests such as the Illinois Petroleum Council don't boast about subsidies for their products.But in the end, price sells. And if ethanol production costs can't be cut significantly in the next few years, the fuel of the future could become just another failed experiment, albeit a long-lived one.

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