The US Senate, by a 73-27 margin, has approved an amendment to an economic development bill that would end the $0.45/gallon ethanol credit and the $0.54/gallon tariff on imported ethanol. A similar vote on Tuesday failed when Democrats objected.

The subsidies were scheduled to end in December, but could end sooner if the House of Representatives follows the Senate’s passage. That’s not likely, however, even though the Obama administration did not support killing the subsidies. Tax activists have declared that a vote to kill the subsidy is a vote to raise taxes, something most Republican members of Congress have pledged not to do.

The impact on ethanol producers like Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Pacific Ethanol, Inc. (NASDAQ: PEIXD) and Great Plains Renewable Energy, Inc. (NASDAQ: GPRE) are likely to be negligible because the bulk of the $0.45/gallon volumetric credit was funneled back to corn producers. Two winners could be Cosan Ltd. (NYSE: CZZ) and partner Royal Dutch Shell plc (NYSE: RDS-A), whose $12 billion joint venture, Raizen, the US is an obvious target for the cheaper sugar cane-based Brazilian ethanol.

The high cost of corn has been partially attributed to nearly 40% of the US crop being directed to ethanol production. Some 5 billion bushels of US corn are expected to be used to make ethanol this year.

The situation with the end of the $0.54/gallon tariff is a bit more interesting. Should this tariff disappear, Brazilian ethanol could find its way to the US where it would undercut corn-based ethanol pricing. US farmers could see a dramatic fall in corn prices as a result.

There are still a lot of “ifs” related to this vote to kill the ethanol subsidies. The likeliest outcome is that the fight will be postponed to later in the year. The scenarios will remain the same. One thing that will be different is that farm lobbyists will start to rev up their machinery more, now that they know which way the wind is blowing.

Since this news broke, we have seen “hails” released in press releases from the American Frozen Food Institute and from teh Sugarcane Ethanol Producers association.

Paul Ausick

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