Ethanol Subsidies Likely to Go, Along with Planned Expansions

Ethanol plant owners, corn farmers, investors and bankers scramble to calculate what removal of subsidies will mean for ethanol production and corn prices.

Mark Marquis had planned to double the size of his Illinois ethanol plant in 2011, and was considering expanding a Wisconsin facility his family-run firm bought into last July. But those plans are now on hold, as Marquis and other ethanol producers brace for the possible end of $6 billion a year in US subsidies for the alternative energy source.

"In certain scenarios, it could be very devastating," said Marquis, whose Marquis Energy operates a 110 million gallon ethanol plant in Hennepin, Illinois. "It is difficult to know what will happen."

The 45-cent a gallon tax credit for fuel blenders and 54-cent a gallon tariff on imports that subsidize the U.S. ethanol industry are due to expire on December 31. With Washington focused on deficit reduction, many in the industry call renewal an uphill battle.

U.S. ethanol plant owners, corn farmers, investors and bankers are scrambling to calculate what removal of subsidies will mean for ethanol production and the price of corn. More than a third of U.S. corn is used to make the biofuel.

Many analysts and industry players say the most immediate impact would be a 10 to 15 per cent drop in production in 2011. Margins would come under pressure, causing some producers to suffer, and discretionary blending of ethanol with gasoline would likely slide.

Corn prices are also seen impacted. Most analysts polled by Reuters expected U.S. corn futures to drop 10 to 20 cents per bushel if Congress does not extend subsidies. But analysts said corn prices should rebound due to supportive fundamentals and investments by funds.

Still, any ethanol industry setback would likely be much less severe than the collapse two years ago, when the industry got hit by a surge in corn prices and then a global recession. The No. 1 producer, VeraSun, fell into bankruptcy.