Summary
Changes in the ethanol production subsidy and import tariff would be an excellent way to moderate the increases in the short-term price of corn, easing the pain for the US livestock industry. But any change in these policies will have long term impacts on the biofuels sector. These changes were already being discussed, so the move by the Brazilian cane industry may place them into the sights of the US biofuels and ag industry that has already proved itself ready and willing to defend itself against all challenges, both domestic and now, foreign.
Analysis
It was only a matter of time before the ethanol tariff and subsidy started to attract the same attention that the Renewable Fuels Mandate had been getting in the publics eye, with the focus changing from dependence on foreign oil to food costs. IF you believe ethanol is at least partly to blame for increases in food costs, then turning down, or off, the incentives to produce, seems to be a logical move, and worth considering.
Obviously, ethanol isn't the only thing pushing up the costs of food, although the move to dramatically expand production of it started all of this, with droughts, speculators and a cheap dollar also chipping in to fuel the fire.
Although it seems that from a macro-policy perspective, either permanently or temporarily reducing or dropping the subsidy and import tariff is worth considering in an effort to take some of the pressure off of corn prices, and due to the limited crop area, also the prices of wheat and soy, such a change would create a much more negative environment for ethanol producers, which would likely persist to some extent, regardless of whether the waiver is permanent or temporary.
So there will be collateral damage if a change is made, but as I commented in other posts, collateral damage is occurring now, with no change, to the US livestock industry, so the best approach would be to adopt a strategy that threatens to do the least damage to all our customers.
As for the Brazilian cane industry, I am not sure how wise it was for them to wade into this mess, as the US biofuels and ag industry is already in full defensive-offensive mode, and will vigorously defend this new biofuels demand. For the past two weeks, agriculture has been waging a war of words with the Grocery Manufactures Association over their funding of a food first PR campaign. But a foreign funded campaign is likely to attract an even more vivid response.
Senator Lugar, from Indiana, in fact just last week advocated a change in the subsidies and tariff, so the Brazilian's might have been wise to remain on the sidelines for this fight, as it could get a bit ugly.
