Repeal of the VEETC?

Senators Tom Coburn, R-OK, and Ben Cardin, D-MD, have introduced legislation into the Senate that would revoke the Volumetric Ethanol Excise Tax Credit, or VEETC. Currently blenders receive 45 cents for each gallon of ethanol incorporated into gasoline. The action by the two senators reflects a growing realization that diversion of 40% of the corn crop to ethanol is contributing to inflation in the U.S. and is exacerbating the problems of poverty and starvation in developing countries.

The General Accounting Office has estimated that repealing the VEETC would save $4 billion over the remaining 40 weeks of 2011 and in the region of $6 billion in each succeeding year. Repeal of the VEETC is strongly supported by industry associations including the National Chicken Council, the National Turkey Federation and the American Meat Institute.

According to information released by the Ethanol Industry Association, ethanol stocks now stand at 19.9 million barrels, the highest since mid-July 2010. Assuming an average 10% addition rate to gasoline as at present, inventory represents a two weeks supply.

Ethanol diversion  

The ethanol industry has attempted to counter objections from livestock producers that diversion of corn is inflationary by responding with the fact that the industry returns dried distillers grains available for feed. During the first week of March 2011, ethanol producers used 360,000 tons of corn which was converted to ethanol, carbon dioxide and 90,000 tons of DDGS representing a 25% yield of this by-product. If the relative metabolizable energy values for corn and DDGS for poultry are compared (1,540 Kcals/lb vs 1,270 Kcals/lb) it is evident that the ethanol industry returns only 20% of the potential metabolizable energy in corn in the form of DDGS.

Prior to the misguided biofuels initiative, most nutritionists were faced with meeting critical amino acid requirement, especially methionine and lysine, depending on the monogastric species for which diets were prepared. With progressive diversion of corn, the emphasis is now on meeting energy requirements. Previous to the advent of ethanol diversion the price of corn was based on supply and demand factors which were in turn influenced by climate and the production levels of livestock.

Corn has now been inexorably linked to the price of crude oil. From a relatively predictable situation involving weather forecasts and projections of harvest and a knowledge of hog, poultry, dairy and beef production, it was possible to anticipate price during a season. Most integrators and large feed producers purchased forward and hedged accordingly, usually within a narrow range of bushel price. The value of corn is now influenced by the avarice of OPEC, the instability of Middle East tyrants and the venality of speculators. Corn- state legislators appeasing their constituents to ensure their prospects for re-election should contemplate the Law of Unintended Consequences and address the public interest.

Repeal of the VEETC is overdue, as are protective tariffs against importation of sugar-derived ethanol. At the end of the day why not use our abundant domestic gas reserves instead of burning food and contributing to inflation?