Ethanol Tax Credits Becoming a Burden

By BILL TOMSONJuly 5, 2008;

WASHINGTON -- The logic of paying gasoline companies billions of dollars a year through tax credits to encourage them to blend corn-based ethanol into gasoline is facing tougher scrutiny now that the once-fledgling ethanol industry is maturing.
Ethanol producers, whom the tax credits are supposed to indirectly benefit, are cutting back on capacity or in some cases mothballing expansion plans because of razor-thin profit margins brought on by high corn prices.
Years ago, when it was an expensive burden for the gasoline companies to conform with the ethanol-blending mandate, a tax credit helped boost demand above the government requirements.
For over a year now, the price spread between gasoline and ethanol has meant that blending in the cheaper, corn-based fuel produces more profits for gasoline producers, said Joel Karlin, an analyst for Western Milling. And that isn't including the 51-cent-per-gallon tax credit gasoline companies like Exxon Mobil Corp. and Chevron Corp. get from the government.
The ethanol tax credit, expected to cost taxpayers roughly $4 billion this year, was originally designed by Congress to spur on a wobbly corn-based fuel industry. The industry has grown, and where the primary concern was once generating demand, it is now dealing with rising corn and other production costs.
Ethanol prices are buoyed by strong oil prices, but the cost of producing the biofuel has also become increasingly more expensive because corn prices have risen to historic highs and the cost of other inputs, like natural gas used in the production process, have soared as well.
Sixty percent of the cost of producing ethanol is corn, said John Urbanchuk, an economist speaking on behalf of the Renewable Fuels Association: "Ethanol plants are right close to the break-even point with corn prices where they are."
Agriculture Department Under Secretary Thomas Dorr agreed that market forces are now playing a much stronger role in generating demand for ethanol from gasoline companies.
"The demand for [ethanol] is big enough that...the full 51 cents [per gallon] is not being effectively utilized," Mr. Dorr said.
In other commodity markets:
GOLD: Futures sold off Thursday, ahead of Friday's holiday, in reaction to dollar gains that occurred despite a European Central Bank rate hike when President Jean-Claude Trichet was not as hawkish on inflation as expected. Nearby July gold lost $12.90 to $931.90 an ounce on the Comex division of the New York Mercantile Exchange, while most-active August fell $12.90 to $933.60.
CRUDE OIL: Futures ended above $145 a barrel for the first time, taking little heed of a strong dollar in order to test new highs. Oil settled $1.72, or 1.2%, higher at $145.29 a barrel.
Write to Bill Tomson at bill.tomson@dowjones.com