US Ethanol Subsidy is History (ADM, VLO, PEIX, GPRE, CZZ, RDS-A)

After 30 years of payments to farmers and blenders, the federal subsidy on corn-based ethanol expired when Congress adjourned last week without taking any action to renew the payments. A cynic might say that this Congress has finally accomplished something by doing what it has done best — nothing. The subsidy cost US taxpayers about $6 billion annually.

The lack of Congressional action ends the $0.45/gallon blender’s credit on US-produced ethanol and the $0.54/gallon tariff on imported ethanol. US ethanol producers Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Pacific Ethanol Inc. (NASDAQ: PEIX), and Green Plains Renewable Energy Inc. (NASDAQ: GPRE) had already seen the writing on the wall and are not likely to feel any appreciable pain from the end of the subsidies. Brazilian cane-based ethanol maker Cosan Ltd. (NYSE: CZZ) and its partner, Royal Dutch Shell plc (NYSE: RDS-A) have also been making a profit exporting ethanol to the US in spite of the tariff.

The end of the subsidy does not end the federal mandate on the use of alternative fuels for transportation. Earlier this week we looked at the nonsensical mandate adopted by Congress in 2007 that calls for 200 million gallons of alternative fuels to blended with gasoline in 2012. Virtually every drop will come from ethanol, and the producers really don’t need a subsidy on top of a mandate to make a profit. The mandate alone will do quite nicely, thank you very much.

Paul Ausick