Ending Ethanol Subsidies Won’t Reduce Food Costs After All

By:  Bob Adelmann
08/18/2011
       
Ending Ethanol Subsidies Won’t Reduce Food Costs After All

The recent attempt to terminate both the ethanol subsidies of $.45 a gallon and the $.54-per-gallon import tariff on Brazilian sugar-based ethanol by the Senate failed because it was an amendment attached to a bill that was doomed to failure anyway. Both will cease on December 31 automatically, ending 33 years of subsidizing the ethanol industry; however, food prices are likely to stay high anyway. The main reason is neither the subsidy nor the tariff, but the mandate by the government requiring gasoline refiners to continue to increase their usage of ethanol when blending their gasoline products. Under the 2007 Renewable Fuels Standard, the United States is required to use 12.6 billion gallons of ethanol this year, increasing to 15 billion in 2015, and 36 billion gallons by the year 2022.

The recent attempt to terminate both the ethanol subsidies of $.45 a gallon and the $.54-per-gallon import tariff on Brazilian sugar-based ethanol by the Senate failed because it was an amendment attached to a bill that was doomed to failure anyway. Both will cease on December 31 automatically, ending 33 years of subsidizing the ethanol industry; however, food prices are likely to stay high anyway. The main reason is neither the subsidy nor the tariff, but the mandate by the government requiring gasoline refiners to continue to increase their usage of ethanol when blending their gasoline products. Under the 2007 Renewable Fuels Standard, the United States is required to use 12.6 billion gallons of ethanol this year, increasing to 15 billion in 2015, and 36 billion gallons by the year 2022.

The ethanol producers have largely accepted the reality saying that those subsidies of $6 billion a year aren’t needed anymore. With oil prices at $100 a barrel, the fuel blenders such as Valero, Archer Daniels Midland, and POET haven’t needed the subsidies to make a profit, because ethanol costs less than gasoline in many of their markets. Even Bob Dinneen, president of the Renewable Fuels Association, has changed his mind.

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