OUTLOOK ’11: US biofuels hopeful on subsidy, tax credit extensions

28 December 2010 19:01  [Source: ICIS news]

US officials recently approved subsidy for corn-based ethanolBy Ben DuBose and Judith Taylor

HOUSTON (ICIS)--The uncertainty that permeated the US ethanol and biodiesel markets in late 2010 has been replaced by optimism for early 2011 following the December passage of subsidy and tax credit extensions by Congress.

The bill, approved by the US House of Representatives and Senate and signed into law by President Barack Obama, included a one-year extension of the 45 cent/gal federal subsidy for production and consumption of ethanol, which in the US is almost wholly based on corn.

The measure also provided a one-year extension of the 54 cent/gal tariff on imported ethanol, a provision that in the past has served to keep Brazil’s sugarcane-based ethanol out of the US market.

“This will allow America’s ethanol industry to grow and survive,” said Renewable Fuels Association (RFA) president Bob Dinneen.

The US corn-ethanol industry, which suffered under financial strains and a number of bankruptcies in 2008, could have seen a new wave of shutdowns if the subsidies were allowed to expire on 31 December.

Under similar conditions, US biodiesel players had witnessed the near collapse of their industry following the expiration of the $1/gal blenders’ federal tax credit at the end of 2009.

This expiration, along with the European Union’s penalties on US biodiesel imports, underpinned the subsequent decline of biodiesel production in the US.

US biodiesel participants were encouraged, however, by the reinstatement of the biodiesel credit as part of the broader tax relief bill - which also applied retroactively through 2010.

The National Biodiesel Board (NBB) predicted that reinstatement of the credit would increase biodiesel production.

“This will undoubtedly help kick-start the domestic biodiesel industry, lessen our dependence on foreign oil, and create thousands of new jobs across the country,” said Manning Feraci, NBB vice president of federal affairs.

Renewable Identification Number (RIN) trading was active in December, with 2009 RINs retired and 2010 RINs highly sought in order to hedge against fresh Environmental Protection Agency (EPA) mandates which will enter the scene in 2011.

The 2010 RINs have mostly held to a mid-60s cents/RINs price pattern, but jumped higher in several instances whereby large corporations purchased significant RIN volumes on prompt to ensure meeting requirements.

The RINs are used as mechanisms to offset mandates by allowing blenders to meet their quotas without actually buying the physical biofuel product.

The 2011 biodiesel market also is expected to be firmly boosted by a stronger overall market emphasis on renewable fuels and “green” resources and products, sources said.

Even so, the latter half of 2011 could feature yet another protracted legislative battle for both biodiesel and bioethanol producers.

With the November 2010 elections bringing more fiscal hawks and anti-ethanol representatives to the newly Republican-controlled House of Representatives, the one-year extensions could face an even broader threat.

In addition, the Brazilian Sugarcane Industry Association (UNICA) said that it would seek a formal Brazilian government challenge to the US corn-ethanol subsidy and protective tariff before the World Trade Organization (WTO).

UNICA president Marcos Jank said he was confident that one way or another, the US ethanol subsidy and tariff soon would come to an end.

“We know that the days of ethanol subsidies and trade protection are near the end, either because they will expire at the end of 2011 or as a result of litigation at the WTO,” Jank said.

The RFA has long contended that the subsidies were only needed to offset the tax credit given to US refiners and keep the US from subsidising foreign production of ethanol.

All the while, the US industry also continues to await the increased commercial availability of cellulosic-based ethanol.

In November, the EPA again lowered its 2011 blending target for cellulosic ethanol, for which production has continually lagged prior estimates.

As such, the subsidies and tax credits remain critical to the broader industry’s survival, leaving its fate beyond 2011 very much in doubt.

But for one more year at least, the biofuels market has the support it says it needs to succeed.

“[It] provides the market stability, allowing the industry to continue to grow,” said Dinneen.

Additional reporting by Joe Kamalick in Washington and William Lemos in Houston

For more on ethanol visit ICIS chemical intelligence
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By: Ben DuBose
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