Extending the current ethanol tax credit and tariff would boost corn-based fuel production – and corn prices – report University of Missouri economists.

The current 45¢ tax credit for biofuel blenders and associated 54¢ tariff on ethanol imports were studied by the MU Food and Agricultural Food and Policy Research Institute (FAPRI). Economists ran “what-if” scenarios on FAPRI computer models of the U.S. farm economy.

Both tax laws are due to expire Dec. 31, 2011.

With incentives in place, they saw fuel production from corn go up 1.2 billion gallons a year and corn prices rise 18¢/bu.

Increased demand for corn as an ethanol fuel source would expand corn acreage by 1.7 million acres, says Seth Meyer, MU FAPRI economist and author of the study, released June 27.

“The study considers only changes in the ethanol tax credit and tariff, but not changes in current mandates to use a set amount of biofuels,” Meyer says.

FAPRI prepares an annual 10-year baseline of agricultural production to analyze effects of policy changes on farm income.

"The baseline prepared earlier this year assumed biofuel tax credit and tariff expire at the end of 2011, as provided in current law,” says Pat Westhoff, director of MU FAPRI. “This analysis looks at an alternative scenario that keeps ethanol tax credit and tariff at current levels.

“There is debate about federal support of the ethanol industry,” Westhoff notes. “At a Paris meeting last week, G-20 nation trading partners raised concerns about U.S. support of biofuels.

“The revised baseline gives FAPRI a tool to study proposed policy changes.”

Under current energy legislation, blenders who add ethanol to gasoline receive a 45¢/gal. tax credit. A 54¢/gal. tariff slows import of foreign ethanol.

Our ethanol policy is complex, Westhoff explains.

“When you give fuel blenders a tax credit, they keep part of the benefit and charge service stations less for blended fuels. In turn, service stations should charge consumers less for blended fuel at the pump. At the same time, blenders can pay more to ethanol plants that in turn pay farmers more for corn,” adds Westhoff.

“Our work suggests that how benefits of the blender’s tax credit are shared among fuel consumers, ethanol plants and corn farmers is very sensitive to market conditions,” Westhoff said.

MU FAPRI maintains computer models of all agricultural commodities. Those are used to calculate the economic impact of changes in laws and farm policies.