Ethanol makers poised to add $6.9B in sales

7/21/2011

Ethanol manufacturers are set to thrive even if they have to give up $6 billion a year in U.S. tax subsidies because a government mandate for increased use of the fuel may add $6.9 billion a year in sales.

U.S. Sen. Dianne Feinstein (D., Calif.) forged a deal July 7 with two farm-state lawmakers to help reduce the federal deficit by ending a tax credit of 45 cents a gallon for mixing the fuel into gasoline, as well as a 54-cent-a-gallon tariff on imports that protects domestic producers from Brazilian competition.

Under the agreement, the proposal wouldn't touch a 2007 federal mandate that refiners such as Exxon Mobil Corp. and BP PLC use 15 billion gallons of renewable fuels by 2015, up 19 percent from the 12.6 billion required this year.

"As long as we have no change in the mandate, we don't have a change in ethanol," said Terry Reilly, an analyst at Citigroup Global Markets Inc. in Chicago. "Consumption keeps on steadily rising."

Demand has been buoyed by ethanol's discount to gasoline. The biofuel, made mostly from corn in the United States, has been about 23 cents cheaper than gasoline on average for the past year. At the July 15 price of $2.873, the government-mandated increase would add $6.9 billion a year in added sales within four years.

Ethanol, fermented from grain in a process similar to making moonshine, has been championed as a gasoline alternative since Henry Ford, the pioneer automaker, called it "the fuel of the future" in 1925. He designed his Model T as a flexible-fuel vehicle that could use both ethanol and gasoline.

The biofuel's government support has been in place since the Energy Tax Act of 1978 was enacted under President Jimmy Carter. Ethanol received added support when President George W. Bush made it the centerpiece of his plan to reduce U.S. dependence on foreign oil.

Several ethanol-producing plants are in northwest Ohio and southeast Michigan, and Maumee-based agribusiness The Andersons Inc. owns or operates ethanol plants.

Ethanol is typically sold at filling stations in a formula known as E10, with 10 percent ethanol mixed with 90 percent gasoline. Makers of the fuel received a boost this year when President Obama's Environmental Protection Agency backed use of a blend with 15 percent ethanol. Some vehicles can run on an E-85 fuel, which has 85 percent ethanol.

Oil companies, required to blend ethanol into gasoline under the Renewable Fuels Standard, are the direct beneficiaries of the federal tax break. Ethanol makers benefit indirectly as the tax credit helps create a market for their product and ensures it remains competitive if prices rise above that of gasoline.

The 208 ethanol distilleries in the United States, mainly concentrated in the corn-rich Midwest, are pumping out the fuel at an annual rate of 13.9 billion gallons, about 1.3 billion gallons beyond what the standard calls for, according to Energy Department data.

Ethanol manufacturers may consume about 40 percent of last year's U.S. corn harvest, according to the Agriculture Department.