Biofuel Support Costs to the U.S. Economy: The Key Role of the RFS in a Feedstock Shortage Scenario

Executive Summary

The U.S. government has a long history of aiding the biofuel industry. In 1978 the first federal financial supports for use of ethanol blended with gasoline were set at a fixed $0.40 per gallon payment for 1 gallon of ethanol added to 9 gallons of gasoline to make “gasohol”¹, now known as “E10”. Subsequent programs changed support levels and added usage mandates, but we have had continuous Federal financial support of biofuels for over 30 years.

With the passage of the 2008 Farm Bill current Federal law pays a fixed minimum of $0.46 per gallon for all ethanol blended with gasoline. Payments go to petroleum blenders in the form of a tax rebate. The recently enacted Energy Independence and Security Act of 2007 also mandated 9 billion gallons of renewable food-based biofuel use in 2008, 10.5 billion in 2009, and 15 billion gallons by 2015. There is also a $0.54 per gallon import duty on ethanol, and biodiesel tax credits. Additional Federal mandates for biofuels raise the total mandate to 36 billion gallons in 2022. State and local programs for both fuel ethanol and biodiesel also add to the financial support for biofuels. This paper will focus on the effects of the Federal biofuels program for corn-based ethanol and soyoil-based biodiesel in a situation where the corn crop is insufficient to meet the RFS and maintain food, feed and export use.

Federal biofuel support policy has significantly increased the attractiveness of ethanol and biodiesel production to levels well beyond that furnished by market forces alone. U.S. energy policy is now having major effects on crop demand, crop plantings, crop prices, food production costs and the long term availability of major U.S. grain and oilseed crops for food use and exports.

The feedstock demand and commodity price-enhancing effects of Federal energy policy have been so extreme that feedstock prices have increased to the point where biofuels profitability itself has been reduced significantly. An ethanol refinery model maintained by DTN² showed losses for much of the first half of 2008. In 2006 and 2007, when corn prices were much lower, the model was showing significant profits. Biodiesel production from soy oil has become very unprofitable.

The effect of biofuel policy on biofuel costs and profitability is perhaps the greatest irony of our biofuels support policy. By dramatically increasing demand for limited supplies of feedstocks our Federal energy policy has increased the total cost of biofuel production well beyond what the free market alone would have allowed. Biofuel producers are not reaping most of the benefits of the program. Biofuels policy has become windfall profit gains for grain and soybean producers.

In a situation where feedstock crops fall short of being able to meet the RFS and maintain the nation’s food supply the price effects of biofuel policy are greatly exaggerated. The combined effects of a tax credit subsidy and demand that is not responsive to price can result in extreme price movements. This has become abundantly evident in 2008. Poor weather through mid June has reduced prospects for both the U.S. corn and soybean crops. As a result, corn and soybean prices have far surpassed prior records.

¹Energy Tax Act of 1978
²http://www.dtnethanolcenter.com/index.cfm?show=10&mid=32

Further Reading

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