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U.S. Ethanol Sector Contemplates Subsidy Cuts

Mark Marquis had planned to double the size of his Illinois ethanol plant in 2011, and was considering expanding a Wisconsin facility his family-run firm bought into last July.

But those plans are now on hold, as Marquis and other ethanol producers brace for the possible end of $6 billion a year in U.S. subsidies for the alternative energy source.

“In certain scenarios, it could be very devastating,” said Marquis, whose Marquis Energy operates a 110-million- gallon ethanol plant in Hennepin, Illinois. “It is difficult to know what will happen.”

The 45-cent-a-gallon tax credit for fuel blenders and 54-cent-a-gallon tariff on imports that subsidize the U.S. ethanol industry are due to expire on Dec. 31. With Washington focused on deficit reduction, many in the industry call renewal an uphill battle.

U.S. ethanol plant owners, corn farmers, investors and bankers are scrambling to calculate what removal of subsidies will mean for ethanol production and the price of corn. More than a third of U.S. corn is used to make the biofuel.

Many analysts and industry players say the most immediate impact would be a 10 to 15 per cent drop in production in 2011.

Margins would come under pressure, causing some producers to suffer, and discretionary blending of ethanol with gasoline would likely slide.

Corn prices are also seen impacted. Most analysts polled by Reuters expected U.S. corn futures to drop 10 to 20 cents per bushel if Congress does not extend subsidies. But analysts said corn prices should rebound due to supportive fundamentals and investments by funds.

The ethanol industry would feel only a modest impact if the incentives lapse, said Bruce Babcock, agricultural economist at Iowa State University, citing high crude oil prices and a U.S. law guaranteeing biofuels a share of the market.

“Production will not fall that far,” Babcock said.

Ethanol output would be five per cent, or 600 million gallons, lower without the subsidies than with them, Babcock estimated in a November report, which also estimated that ethanol prices would be six per cent lower and corn prices seven per cent lower.

MOVING TARGET

The profitability of ethanol production is a constantly moving target, as the fluctuating prices of corn, crude oil, corn co-products and natural gas factor in to margins. “There are a lot of moving parts,” said Tom Waterman, industry analyst and publisher ofThe Ethanol Monitor,which tracks industry profitability.

One key calculation is the price of gasoline relative to ethanol prices, which becomes more critical without government support.

Another key to profit margins is the price of the feedstock. Corn is the largest expense for U.S. ethanol makers.

The benchmark corn futures contract on the Chicago Board of Trade hit $6.05 in early November, its highest in 26 months and more than 50 per cent above a year ago.

The Renewable Fuels Association, a trade group, said if the tax incentive expires, two out of every five ethanol plants could close, and more than 100,000 workers could lose jobs.

“It will be a blow to the industry,” said Jeff Broin, CEO of POET, the world’s largest ethanol producer with 27 U.S. biorefineries. The other major producers are Archer Daniels Midland Co. and Valero Energy Corp., each with more than one billion gallons of capacity.

Broin, other ethanol leaders and farm-state lawmakers are pressing for Congress to vote this month to extend the subsidies. The industry says it will accept lower support rates and other reforms if there is a short-term extension of incentives. Their best chance is for ethanol to piggyback on a must-pass tax bill.

“A lapse in the ethanol tax incentive is a gas tax increase of over five cents a gallon at the pump,” said Sen. Chuck Grassley, an Iowa Republican in a Senate speech Dec. 2. “I just don’t see the logic in arguing for a gas tax increase when we have so many Americans unemployed or underemployed and struggling just to get by.”

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“Alapseintheethanoltaxincentiveisagastaxincreaseofoverfivecentsagallonatthepump.”

– SEN. CHUCK GRASSLEY

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