Bloomberg News

U.S. Senate Votes to Shut Down Tax Break, Tariff for Ethanol

June 16, 2011

(Updates with vote details in fourth paragraph, stock prices starting in seventh paragraph).

June 16 (Bloomberg) -- The U.S. Senate voted to eliminate a tax credit and a tariff that subsidize ethanol production, providing the strongest signal yet that Congress will curtail subsidies for corn-based biofuel.

The 73-27 vote exceeded the 60-vote threshold needed to advance the measure as part of an economic development bill. The underlying legislation isn’t likely to become law, so the vote mostly indicated that it will be difficult for ethanol supporters to extend the 45-cent-a-gallon tax break and the 54- cent-a-gallon tariff beyond their scheduled Dec. 31 expiration.

“We need to look at ways that we can bring the budget deficit down,” said Senator Ben Cardin, a Maryland Democrat who said poultry producers in the eastern part of his state are facing higher prices for corn because of ethanol production. “Repealing unnecessary subsidies should clearly be at the top of our list.”

The vote broke down largely along regional lines. All of the senators from Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Mississippi, Missouri, Nebraska, North Dakota, Ohio, and South Dakota voted against the proposal.

The action came two days after the Senate voted 59-40 against advancing a similar proposal from Senator Tom Coburn, an Oklahoma Republican. Democratic leaders, who wanted to assert their control of the chamber’s proceedings, urged their members to oppose that proposal in protest of the way Coburn forced a vote. Today’s vote was free of those procedural issues and marked a test of senators’ position on the ethanol issue.

Ethanol Subsidies

“There is essentially agreement that this subsidy has to be phased out and taken away, and the producers of ethanol agree,” said Senator Dan Coats, an Indiana Republican who voted against ending the ethanol subsidies.

After the vote, shares of meat companies rose while shares of agricultural processors, farm-equipment manufacturers, ethanol producers and fertilizer makers fell.

Tyson Foods Inc., the largest U.S. poultry producer, rose after the vote. At the market close, Springdale, Arkansas-based Tyson was up 49 cents, or 2.8 percent, to $18.08. Smithfield Foods Inc., the Smithfield, Virginia-based company that is the world’s largest pork processor, rose $1.31, or 6.4 percent, for its biggest one-day increase since Dec. 9, 2010. The company had also reported its first annual profit since 2008.

Archer Daniels Midland Co., the world’s largest grain producer, dropped. Decatur, Illinois-based ADM fell 6 cents, or 0.2 percent, to $29.52, after trading as low as $28.98 after the vote. Corn Products International Inc., a corn refiner based in Westchester, Illinois, fell $1.56, or 2.9 percent, to close at $53.12 for its biggest one-day drop in more than three months.

Market Reaction

St. Louis-based Monsanto Co., which makes agricultural products, fell $1.30, or 1.9 percent, to close at $66.27.

Corn futures for December delivery slid 13 cents, or 2 percent, to $6.53 a bushel on the Chicago Board of Trade, after touching $6.50, the lowest for the most-active contract since March 17. That market closed before the Senate vote concluded.

The price decline occurred on misguided speculation that the Senate action would reduce demand for the grain to make the fuel, said Glenn Hollander, a partner at Chicago-based Hollander & Feurehaken, a cash grain merchandiser and broker.

Cash corn prices have fallen 11 percent in Chicago from a record $7.88 on June 10, government data show.

U.S. refiners are required to use 12 billion gallons of renewable fuels, such as ethanol, this year and 15 billion gallons by 2015 under a 2007 energy law.

‘Improve Demand’

“As long as the federal mandates remain, ethanol demand is not going to collapse,” Hollander said. “The sharp drop in prices this week only helps to improve demand for corn.”

Leticia Phillips, the Brazilian Sugarcane Industry Association’s representative in North America, said in a statement that the Senate vote to end the credit and tariff on imported ethanol “will help lower fuel prices and provide Americans with greater access to clean and affordable fuels like sugarcane ethanol.”

Agriculture Secretary Tom Vilsack reiterated the Obama administration’s opposition to ending the ethanol credit now and said the Senate measure “isn’t the right approach.”

Farm-state lawmakers are supporting a more gradual reduction in ethanol support proposed by Senator John Thune, a South Dakota Republican, and Senator Amy Klobuchar, a Minnesota Democrat. They are still seeking a vote on that proposal.

Coburn and California Democratic Senator Dianne Feinstein put together a coalition that includes anti-hunger groups worried about food prices, taxpayer advocates who call the ethanol program wasteful and animal agricultural processors that compete with ethanol producers for feed.

McCain Proposal Rejected

The Senate later rejected, 40-59, a proposal from Senator John McCain, an Arizona Republican, that would have prohibited federal funding for certain ethanol pumps or storage facilities.

A similar measure in the House offered by Representative Jeff Flake, an Arizona Republican, was adopted 283-128.

“Nobody can defend ethanol subsidies anymore,” Flake said.

The vote also has broader consequences for tax policy. Grover Norquist of Americans for Tax Reform, who has persuaded 40 of 47 Republican senators to sign his no-tax-increase pledge, regards the elimination of a tax break as a tax increase.

Coburn, who drew the support of 32 other Republicans on today’s vote, has been challenging that view. He contends that some tax breaks look more like spending programs and should be eliminated without being paired with a tax cut.

He also has said that some tax breaks will have to be trimmed to get a broader agreement on reducing the federal budget deficit.

Norquist’s group said that it wouldn’t consider a vote for the ethanol proposal a violation of the pledge, provided that lawmakers also support a proposal from Senator Jim DeMint of South Carolina that would eliminate the ethanol usage mandate and the estate tax.

--With assistance from Kathleen Hunter, Alan Bjerga and Bennett Roth in Washington and Jeff Wilson in Chicago. Editors: Jodi Schneider, Leslie Hoffecker

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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