Feinstein in the News

The nation's $6 billion subsidy program for ethanol producers would be eliminated under a proposed deficit-reduction deal detailed Thursday, but corn-state senators negotiated for more than $600 million to help promote sales of ethanol-blended gas at service stations.

The White House, along with key ethanol-industry supporters, backed the proposal, which was cobbled together by three senators. It still faces an uncertain future in the House as one piece of broader bargaining over federal spending and tax policy.

The proposal would end the decades-old subsidy by July 31. It now gives gasoline retailers an excise tax credit of 45 cents for each gallon of ethanol they blend with their motor fuel. A tax of 54 cents a gallon on imported ethanol would also be retired at the end of the month.

The significance of the ethanol-subsidy program has changed since 2006, when the federal government mandated the petroleum industry to annually buy billions of gallons of biofuels, the vast majority of which is corn-derived ethanol.

The program "became less of a sacred cow," said Rick Brehm, chief executive officer of Lincolnway Energy, a closely held ethanol producer in Nevada, Iowa. "I think we have all been expecting a reduction" in the tax credit.

A Senate vote last month signaled a majority of that body was ready to end the subsidies.

That vote led ethanol industry supporters Sen. Amy Klobuchar (D., Minn.) and Sen. John Thune (R., S.D.) to negotiate a deal with Sen. Dianne Feinstein (D., Calif.).

Ms. Feinstein's proposal calls for about $1.33 billion in savings achieved for the rest of the year to be used to reduce the federal deficit. The remainder of the savings, about $668 million, would be used to extend a host of tax credits, including money for alternative-fueling infrastructure such as blender pumps at gas stations that let consumers boost the percentage of ethanol in the fuel they buy.

The White House, in a statement, said the senators' proposal "provides a road map for the American biofuels industry to navigate their own future expansion."

The government's ethanol mandates, which began five years ago and triggered a rapid expansion of the ethanol industry, require gasoline retailers to use 12.6 billion gallons of corn-derived ethanol this year. The mandate grows to 15 billion gallons in 2015 for corn-derived ethanol.

An end to the ethanol tax breaks could sting consumers. About 90% of the gasoline sold in the U.S. contains at least 10% ethanol, indeed the E-10 fuel blend is the most popular at the U.S. pump. Such a move would increase the federal excise tax on the E-10 gasoline by 4.5 cents a gallon.

Ethanol officials said Thursday that ethanol-blended gasoline would probably remain cheaper than conventional gasoline in the Midwest, however, because corn-derived ethanol is currently cheaper to make than petroleum-derived gasoline.

All commercial-scale ethanol in the U.S. is corn-based, but that's slowly changing. The Energy Department announced Thursday it would help finance the construction of the first U.S. major plant that would make ethanol that is cellulose-based.

An end to the tax on imported ethanol wouldn't have much impact on domestic prices in the short run because the U.S. is now an ethanol exporter. The U.S. has imported sugar-derived ethanol from Brazil in the past, but Brazilian sugar prices have climbed so high in recent months that Brazil is importing each month tens of millions of gallons of corn-derived ethanol from the U.S.

"While initial imports will be modest, eliminating the ethanol import tariff is an important step towards developing a global market for clean energy and will ultimately benefit both Americans and Brazilians through increased competition and reduced price volatility," said Leticia Phillips, a spokeswoman for the Brazilian Sugarcane Industry Association, or UNICA.

The loss of the subsidy would be a blow to gasoline companies because they are the ones who received it for blending ethanol, said Joel Karlin, an analyst for Western Milling, but the effect on ethanol companies and corn farmers would be minimal.

Grain traders have been expecting the subsidies to end since last year, but some were surprised by the quick timetable. That helped limit gains in corn prices on Thursday, though prices still rose on strong import demand from China.

In trading at the Chicago Board of Trade Thursday, the corn futures contract for December delivery, the most actively traded contract, settled at $6.155 a bushel, up seven cents a bushel.

"Everybody assumed we're going to lose [the subsidies] anyway," said Jim Gerlach, president of A/C Trading in Indiana.