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3 September, 2008 - It’s Time to Back Away

At the question and answer session with Secretary of Agriculture Ed Schafer at the Farm Progress Show in Iowa last month, a farmer from Iowa, posed an interesting question that surprised some people in the audience made up of Midwestern farmers. The farmer prefaced his question by saying he was a strong supporter of ethanol; had been ever since the beginning of the industry. But his question for the Secretary.... “ Isn’t it time to start phasing out the subsidies put in place years ago to help the then-new ethanol industry?”

In case you have forgotten, let me tell you what those subsidies are. First of all, ethanol blenders, not farmers, get a separate 51-cent a gallon tax credit that runs through the year 2010. Then there is a tariff on imported ethanol to protect our domestic industry from imports from countries like Brazil. It is a 54-cent a gallon tariff that under current law will expire at the end of December 2009.

In his response, Secretary Ed Schafer pointed out that these aids for the ethanol industry certainly made sense at the beginning. It was a fledgling industry battling for recognition and a role in our National Energy Policy and it needed this kind of government support to grow and to establish itself as a self-sustaining industry.

The Iowa corn farmer said he is concerned that ethanol plants, many farmer-owned, are now putting the subsidy into their annual cash flow projections and expecting that government tax credit every year. He said that is a dangerous assumption because Congress, without warning, could terminate the credits and tariffs and leave the ethanol industry scrambling to readjust its financial projections overnight. In light of the growing criticism of ethanol, Food vs. Fuel, the producer was concerned that under heavy pressure, Congress could change its mind. He said it’s time that perhaps we back away from this kind of assistance for the ethanol industry, an industry that should now be mature enough that it could stand on its own without government help.

Secretary Schafer concluded his answer by stating that in the long-run, it would probably be good for the ethanol industry to begin a phase-out of the program.

I tend to agree, but I’d feel a lot better if Congress would also agree to phase out the subsidies for the oil industry that have been in place for decades longer than the ethanol industry has been in existence. Critics of ethanol calling for an end to government help conveniently ignore the oil subsidies that far outweigh the aid for ethanol. Thanks to the Iowa farmer, Dean Kleckner, former President of the American Farm Bureau, for raising the question and again expressing his support for ethanol.

My thoughts on Samuelson Sez.