Ethanol Producers On Track For More Tax Credits (ADM, VLO, PEIX)

The tax bill negotiated between President Obama and Republican legislators reportedly contains an extension to the various government supports for ethanol producers. The Renewable Fuels Association has said that the extension is “part of the deal at the moment,” according to Reuters.

This past weekend the US Senate rejected a proposal offered by Senator Max Baucus (D-MT) which would have lowered the blender’s credit from $0.45/gallon of ethanol produced to $0.36/gallon, and would have extended the $0.54/gallon tariff on imported ethanol for one more year. The ethanol subsidies are set to expire at the end of this month.

Following the failure of the Baucus proposal, the blender’s credit, also called the Volumetric Ethanol Excise Tax Credit (VEETC), would remain at $0.45/gallon under the proposed bill, as would the $0.54/gallon tariff and the $0.10/gallon credit for small ethanol producers.

Legislators from corn-producing states support continuing ethanol credits, but there is not a lot of support from elsewhere. Senator Dianne Feinstein (D-CA) told website The Hill that she doesn’t think that the subsidies  should be included in the current bill, but that they may be added to try to garner support for the tax package.

The ethanol blender’s credit, despite its name which would suggest that it is paid to distributors who blend ethanol with gasoline before it is delivered to local gas stations, is passed through almost entirely into producers’ pockets. The credit is not an energy subsidy, but a subsidy for corn farmers and ethanol producers such as Archer Daniels Midland (NYSE: ADM), Valero Energy Corp. (NYSE: VLO) and privately held POET LLC.

Ethanol production in the US is expected to reach 12.95 billion gallons this year and rise to 13.95 billion gallons next year. Those figures are due in no small part to a Congressional mandate to reach 36 billion gallons by 2022. At $0.45 per gallon, the total cost of the blender’s credit in 2010 approaches $6 billion and will top $6.25 billion in 2011.

In the great scheme of things, $6 billion doesn’t cause much of a wrinkle in the estimated cost of the proposed tax bill, which is expected to add as much as $900 billion to the federal deficit over two years. But $6 billion here and $6 billion there, and pretty soon it adds up to real money.

What is especially noxious about this is that ethanol production is government-mandated, so there is no reason for taxpayers to have to add a bonus payment on top of that mandate. If the free market works at all, a required dose of ethanol in each gallon of gasoline ought to push the ethanol price higher without any subsidy.

Pacific Ethanol, Inc. (NASDAQ: PEIX) is up nearly 10% at $0.66 so far today.

Paul Ausick