Cows devour ethanol-related tax cut savings for farmers

WASHINGTON — For dairy farmers bracing for higher feed costs next year, the extension of tax cuts proposed in Congress sounds like a good way to save — but their cows may end up eating much of the money.

That's because the bill extends an ethanol blenders' tax credit and an ethanol import tariff, which could help to drive up the cost of corn by tens of thousands of dollars a year on a modest-sized farm, by one economist's estimation.

Corn supplies are already tighter than predicted earlier this year, and economists say corn prices are likely to climb next year with or without ethanol subsidies. But that has only sparked more of a debate in agricultural circles about whether Congress is actually deepening dairy farmers' economic woes by shifting corn, a key cattle feed, into energy. Western dairy organizations have urged Congress to let the tax credit expire; companies that make ethanol say the credit is still necessary to grow the alternative fuel industry and reduce the nation's reliance on imported oil.

"Dairy families are scratching their heads trying to figure out how Congress can justify this taxpayer giveaway to the corn and ethanol industries at the expense of our livestock industries," said Rob Vandenheuvel, general manager of the Milk Producers Council, a California organization, in a press release. "This policy is indefensible, and needs to be stopped now."

Northeast dairy groups have yet to join in on the issue. Because they are small enough to grow a bigger percentage of their own feed, they tend to rely less heavily on purchased grain than California farms. But most do buy at least some corn, said Ronald A. Kuck, a dairy and livestock educator with Cornell Cooperative Extension of Jefferson County, and are far from immune to higher corn prices. Corn makes up about 20 percent of a typical cow's diet, he said. The price of corn has climbed by 60 percent in the last six months and is around $5.85 a bushel in the north country, Mr. Kuck said.

The tax credit's exact impact on corn prices is tough to pinpoint because no one knows what the price of gasoline will be — and thus the consumption of ethanol, said Bruce A. Babcock, an economist at Iowa State University who has written extensively on alternative fuels. But the tax credit and other federal policies generally increase demand enough to affect corn prices, he wrote in a November policy brief.

With the federal fuel mandate, the tax credit and the import tariff in place, a bushel of corn will cost about $5.21 next year, Mr. Babcock estimated. The price falls to $4.86 with just the mandate, and down to $3.84 without any of the programs.

"The dramatic increases in the prices of corn and soybean meal that we are currently experiencing are a direct result of our current ethanol policy," Mr. Babcock wrote.

Corn is in shorter-than-expected supply, Mr. Babcock said, because of poor weather and increased demand from Russia and other foreign markets. The Department of Agriculture reported Friday that corn and grain stocks will remain tight headed into the new year.

The ethanol tax credit is 45 cents per gallon and is paid to the company that blends the fuel. Together with import tariffs and a federal mandate that gasoline contain 10 percent ethanol, the tax credit subsidizes an industry that might never have emerged without taxpayer assistance. The credit costs taxpayers about $6 billion a year but, according to the industry, can help break the country's reliance on foreign oil.

The ethanol industry has been growing in New York. Western New York Energy uses about 19 million bushels of corn a year at its plant in Orleans County, said plant manager Michael Sawyer. A Sunoco ethanol plant at the former Miller Brewing Company site in Fulton is slated to eventually use more than that.

Seventeen senators, both Republicans and Democrats, wrote to Senate leaders in late November, urging them to let the tax credit and import tariff expire. Now that it is in the package, efforts may grow to remove it, either on the House or Senate floor or in a conference that drafts a final version.