Senate vote marks start of end for ethanol subsidies

Although vote may ultimately be symbolic, move underscores increasingly hostile attitude toward federal ethanol support.

4 min read

The Senate voted overwhelmingly today to eliminate billions of dollars in support for the U.S. ethanol industry, sending a strong message that the era of big taxpayer support for biofuels is ending.

The 73-27 vote may ultimately be symbolic since the White House has vowed not to repeal ethanol subsidies fully and the bill the repeal language is attached to is not expected to make it into law. But it underscores the growing desperation to find savings in a budget crisis that is forcing both sides of the aisle to consider sacrificing once-sacred government programs.

"Ending this wasteful handout would ensure taxpayers no longer subsidize the already profitable corn ethanol industry," Democratic Sen. Frank Lautenberg said.

The increasingly hostile attitude toward federal ethanol support has added fuel to a steep fall this week in the price of corn, from which most U.S. ethanol is made.

The Senate vote shows the odds are diminishing that the 45-cent-a-gallon subsidy the government gives refiners and the 54-cent-per-gallon tariff on imported ethanol--both targeted in today's vote--will be extended at current rates beyond their scheduled expiration at the end of this year.

The Senate measure still faces a long road to becoming final. The White House issued a statement saying it was against a full repeal of ethanol subsidies, indicating it could use its veto power if the amendment continued to advance in Congress.

"We need reforms and a smarter biofuels program, but simply cutting off support for the industry isn't the right approach," Agriculture Secretary Tom Vilsack said.

The strong vote in favor of eliminating the $6 billion a year in ethanol subsidies reflects the push by both parties to rein in the government's huge deficit.

"The way we get out of trouble as a nation is a couple of billions of dollars at a time," said Republican Sen. Tom Coburn, who co-sponsored the ethanol amendment.

The Senate vote also comes as criticism mounts globally over subsidies for corn-based ethanol, blamed by some for raising food costs.

Last week, the World Bank and other international organizations called on governments to stop their ethanol subsidies because of concerns they were driving up food prices.

While more ethanol is good for corn farmers, U.S. livestock producers argue their feeding costs have gone up, which has raised food prices for consumers.

Corn price collapse
While a loss of subsidies may hurt profits for companies such as Valero and Marathon Oil that blend ethanol into gasoline, it would be unlikely to cause a large or sudden fall in ethanol output. Fuel companies must still blend a minimum of 12.6 billion gallons of ethanol into the gasoline pool this year under the federal Renewable Fuels Standard. Current output is running at less than 10 percent above that rate.

But the prospect of an even modest reduction in demand has helped drive Chicago corn prices more than 12 percent lower this week, pulling them down from a record near $8 a bushel a week ago.

Traders are betting on reduced demand from ethanol makers whose profit margins are being squeezed by near-record corn costs and falling gasoline prices, in addition to the longer-term risk of reduced government support.

"This helps explain continued fund liquidation in the feed-grains today, as the continued record prices keep pressure on government to lower food prices," said analyst Mike Zuzolo of Global Commodity Analytics & Consulting in Lafayette, Indiana.

The Brazilian Sugarcane Industry Association welcomed the Senate vote. "Allowing other alternative fuels like sugarcane ethanol to compete fairly in the U.S. will save Americans money, cut dependence on Middle East oil and improve the environment," the trade group said. The U.S. Renewable Fuels Association trade group called the vote shortsighted and said it didn't make sense given that the Senate voted less than a month ago to keep billions of dollars in tax breaks for big oil companies that are making record profits.

Senate Majority Leader Harry Reid asked his Republican colleagues who voted down the ethanol subsidies also to end government financial breaks for Big Oil.

U.S. lawmakers are working on other compromise measures to scale back ethanol subsidies.

Republican Sen. Charles Grassley and Democratic Sen. Kent Conrad have introduced legislation to continue the blender tax credit and import tariff at much lower rates for five years.

On Tuesday, the Senate fell far short of the 60 votes needed that would have stripped the industry of federal incentives.

The ethanol subsidy amendment today from Coburn and Democratic Sen. Dianne Feinstein will be tacked on to an underlying economic development bill, which faces a difficult time passing the Senate.

Meanwhile, the House of Representatives voted 283-128 today to prevent Agriculture Department funding for tanks and blender pumps that the ethanol industry wants so stations can sell gasoline with higher ethanol blend rates.

The Senate took the opposite view, voting against a separate amendment that would have blocked federal funding for such ethanol infrastructure.