Ethanol Industry Hurting from Loss of Tax Credit

by Brian McGraw on February 29, 2012

in Blog

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The expiration of the Volumetric Ethanol Excise Tax Credit (VEETC) at the end of 2011 has led to a number of ethanol plants shutting down, and others operating in the red:

After predicting they would survive the end of a major federal subsidy without problems, it looks like officials at the nation’s ethanol producers may have been too optimistic.

Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.

Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state’s $2 billion-plus industry ranks fourth in the nation in capacity and production.

At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.

“Since the first of the year it’s been even-to-slightly negative,” Doyal said.

It’s not exactly satisfying to see economic activity being shuttered during a time of high unemployment, as undoubtedly hard-working individuals at these plants are temporarily out of work. But those who support aligning our energy economy more closely with market principles are in a minority, so we don’t necessarily get to choose when and where some of these decisions (that can be painful in the short run) are made.

Aside from Minnesota, ethanol production in Iowa is struggling as well, operating at  a margin of -11 cents per gallon:

Figures from Iowa State University Extension confirmed that Iowa’s ethanol plants operated in the red during January, to the tune of 11 cents per gallon.

That comes after operating margins of 19 cents per gallon in December, 69 cents in November, 42 cents in October and 34 cents in September.

The first quarter is typically a tough period for ethanol as gasoline demand falls, but ethanol producers had feared a more severe downturn than usual this year due to continued high prices for corn and the loss of the 45-cents per gallon federal tax credit on Jan. 1.

As you can see from the huge swing in profit margins, the expiration of the tax credit certainly hurt the industry. Furthermore, demand for ethanol is currently low as refiners — forward looking economic actors — purchased significant quantities of ethanol prior to the expiration of the tax credit to take advantage of the tax credit before it expired.

In the long run, the industry is still supported by the Renewable Fuel Standard which keeps a floor on demand. Some plants have closed in the short run, though its likely that most will eventually open in the future when demand recovers.

 

James March 1, 2012 at 9:55 am

Now all that needs to be done is to eliminate the Renewable Fuel Standard, and we’ll be good to go.

If an industry needs subsidies to survive, it means only one thing – the industry is not actually needed – or it would be able to survive on it’s own merits.

Christopher Klug March 18, 2012 at 4:01 pm

First of all, this is total fiction. The United States produced more ethanol than ever, we just exported it. We added 10% ethanol to most of the gasoline sold in the US, and had a large surplus that was economically viable as exports. By the way, that exported ethanol is not and never was eligible for subsidies or tax breaks like the VEETC, those only applied to ethanol blended with gasoline for domestic markets. Geez, guys…do your home work at the EIA, and read the papers once in a while.
James, you’re a fool and obviously shilling for Big Oil or the Arabs. Without the RFA, we’d be importing billions of gallons of more imported oil. The answer isn’t increased drilling; that oil isn’t going anywhere, keeping it in the ground is a conservative move to curb the rapacious diet of gas hogs like yourself.

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