The federal government has few options to slow down the ethanol boom that has played a big role in drawing down corn supplies to their lowest level in 15 years, says USDA Chief Economist Joe Glauber. "The fact is the industry has pretty much been built," Glauber said. "This isn't a question of just saying 'cut it off.' It's much more complicated than that."
Government mandates, tax incentives and a rise in profit margins during the past year make ethanol attractive to produce, Glauber said. And, he added, U.S. ethanol production is a major factor in tightening supplies of corn, and that there is no room for inventories to fall further.
Asked during a recent commodity industry meeting in Florida about actions government could take if corn futures continue to climb on supply concerns, Glauber said the head of the Environmental Protection Agency could suspend federal biofuel mandates, which require refiners to blend billions of gallons of ethanol into the nation's gasoline each year. He did not say that option is being considered, but conceded the ethanol industry "just isn't responding much to price."
With federal ethanol mandates already in place, however, Glauber said, there was not much that can be done in the short term to force firms to stop making ethanol. Federal law requires that billions of gallons of ethanol be blended in gasoline each year. This year the ethanol mandate is set at 12.6 billion gallons.
EPA has authority to issue waivers to cut the federal ethanol mandate, if it determines that the mandate would severely harm the economy of a certain state or the entire country. But even this action might not completely limit ethanol output in some cases, Glauber said.
In August 2008, a waiver sought by Texas Gov. Rick Perry was denied, but Glauber said even if it had been approved the results might have been muted. "At the time margins were so positive, that in my view, even if you granted waiver there would still have been production," Glauber said.
Aside from the EPA waiver, there is not much the government can do to persuade firms not to produce ethanol, Glauber repeated. Congress could rescind ethanol blender tax credits, but even then there could be scenarios with high energy prices where it would not make a lot difference, Glauber added.
In Congress, some ethanol opponents, including Sen. Dianne Feinstein (D-Calif.), are drafting legislation to trim incentives on ethanol. These proposals could be introduced in conjunction with consideration of either the fiscal 2011 or FY 2012 budget bills.
