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Myke's Biofuels Blog: The Fed Seeks the Removal of the Tariff on Foreign Ethanol to Reduce Corn Costs ... Wrong Move for the Wrong Reasons

by Myke Feinman, Biofuels Journal Editor

Removing the tariff on imported ethanol (read Brazil) would hurt one of the fastest-growing industries in the U.S. economy.

So why would the Federal Reserve Board Chairman Ben Bernanke testify at the end of February before the U.S. Senate Banking Committee that Brazilian sugarcane ethanol should enter the United States tariff-free? He said to keep the cost of food down in the U.S. Huh?

Let’s back up a second. What are we really talking about here?

Credit and Tariff

Ethanol blenders receive a blender's credit of 51 cents per gallon to blend ethanol into gasoline—no matter whether it's produced domestically or foreign.

There is also a 54-cent tariff on imported ethanol, essentially negating the blender’s credit for foreign-produced ethanol.

So, if the U.S. removed the tariff but kept the blender's credit, essentially you would be subsidizing foreign-produced ethanol.

John Urbanchuk, director of LECG, Wayne, PA, a group that produces the Renewable Fuel Association's annual report on the impact of the ethanol industry, told me March 7 that removing the tariff would encourage domestic ethanol producers to move their operations to a foreign country.

Sugar for Less Expensive Ethanol

Urbanchuk pointed out that foreign made ethanol (the majority of which is from Brazil) is made from low-cost sugar, and the Brazilian plants burn the sugar cane bagasse (think of corn stover) to reduce natural gas costs.

Thus, Brazil can produce ethanol for less money than U.S. producers.

"Because of the U.S. sugar program, we don't have access to low-cost sugar," Urbanchuk points out. "As a result, our sugar industry could not be competitive in supplying the ethanol industry."

In addition, U.S. ethanol producers must adhere to environmental and safety regulations that are not required of Brazilian producers, also reducing the Brazilian cost of ethanol production.

So, to bottom-line this, Brazil produces ethanol with lower cost feedstocks, utilizes a system to burn the bagasse to save on natural gas costs, and is not required to follow health and safety regulations that U.S. ethanol producers must follow. The net result: They can make ethanol for less than U.S. producers.

But Urbanchuk pointed to another major problem for the environment if we started encouraging Brazil to produce more ethanol.

"To grow more sugarcane to produce more sugar, you are going to need more land," Urbanchuk pointed out. "Where would Brazil get more land? Rainforests."

In an atmosphere where biofuels are being criticized for encouraging foreign nations to tear down rainforests in favor of energy crops, and a U.S. economic environment with a slow-down in job creation, why would the Federal Reserve Board chairman suggest we harm the U.S. ethanol industry.

Urbanchuk's Report: Ethanol Strong for U.S. Economy

Question: If Brazil can produce ethanol less expensively, why don’t we just let them sell it here, tariff free, one might ask?

Answer With Another Question: Should we be fixing something that’s not broken?

The ethanol industry is one of the fastest-growing industries in the nation’s economy right now, providing 42,959 construction jobs, 195,682 related jobs, and adding $36 billion dollars to the economy in 2007.

More importantly, the Urbanchuk report notes that the domestic production of nearly 6.5 billion gallons of ethanol in 2007 meant that the United States needed to import 228.2 million fewer barrels of oil in 2007 to manufacture gasoline, or roughly the equivalent of five percent of total U.S. crude oil imports.

The value of the crude oil displaced by ethanol amounted to $16.5 billion in 2007—money that stayed in the American economy.

Federal Reserve's Idea

Okay, now let's get back to the Chairman Bernanke's idea:

The head of the Federal Reserve, said that the demand for ethanol produced from corn (read the U.S. ethanol industry), is pushing up the food prices in the United States.

And, he said that other crops, such as soybeans, were also being affected as farmers switched to more lucrative corn production, in turn, pushing up prices for those crops as well.

Mr. Bernanke's statements were in response to a question from Senator Wayne Allard (R-CO) who asked about the benefits of reducing tariffs in order to contain inflation caused by escalating food prices in the United States.

So, on the surface, Mr. Bernanke's statements sound reasonable. Except for one small problem: They are based on myths and misinformation.

Alleged Fact No. 1: Ethanol produced from corn is pushing up the price of food.

Real Fact: The real culprit, established by two separate economic reports, for the rising cost of food is transportation costs, not ethanol (read increasing price of crude oil here). An Informa Economics report released last fall states that raw materials for food account for about 19 percent of U.S. food costs, half the level of 30 years ago. A report written by Urbanchuk in June showed that rising energy costs force up the price of groceries more than twice that of any increase in corn prices.

Alleged Fact No. 2: Crops such as soybeans are being affected by farmers switching to corn due to ethanol.

Real Fact: Okay, Mr. Federal Reserve Board Chairman. Have you seen what the price of soybeans are lately? Do you really think farmers are passing up the chance to grow soybeans at record high prices (Averaging more than $12.50/bushel this month compared to $7.50 a year ago). In addition, do you know, Mr. Chairman, what bad weather does to the prices of crops worldwide or what nations like China are doing to the demand for soybeans?

I guess what upsets me more about Mr. Bernanke's response to the Senator's question is that it is based on myths, not facts, from a man who should KNOW BETTER. Isn't the Federal Reserve charged, in part, with making sure the economy is strong and holding inflation down?

I know the Federal Reserve has a tough job, especially now with the high cost of energy eating away at everyone’s paychecks. But don't blame it on home grown fuels. Instead, we should do whatever we can to encourage ways to produce fuel without fossil fuels imported from foreign nations.

Thanks for listening, biofuels buffs.