Should the ethanol industry be preparing itself for a significant shift in government support? During today's OnPoint, Kevin Book, managing director at ClearView Energy Partners, breaks down last week's Senate vote on ethanol subsidies and explains why he believes the vote was largely symbolic in nature. Book also discusses the economics of removing ethanol subsidies.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Kevin Book, managing director at ClearView Energy Partners. Kevin, thanks for coming back on the show.
Kevin Book: Thanks for having me.
Monica Trauzzi: Kevin, the Senate recently voted to end tax credits for ethanol and remove import tariffs. Are these credits actually going to be removed or was this vote more symbolic to sort of put pressure on reforming these credits?
Kevin Book: Well, I think it's sort of an audacious move. This really reveals how much America loves its farmers, that when you have a credit that was expiring, you have, first of all, folks who were trying to take it away before it expires, which reflects one pool of sentiment. And then on the other side you have folks who are saying we know what expiring, but we want to bargain with you. Yesterday was all about symbolism and it was an important symbol. What it said is the status quote will not hold. What it did not say is that it's over.
Monica Trauzzi: How do you account for the difference between the first vote we had in the week on the Coburn amendment and then the final vote at the end of the week? There was something like 30 votes difference on the yes side.
Kevin Book: Monica, it's a classic example of what you often will hear referred to as a cover vote. In essence, on April 6 for example, there were four different climate votes. In all, 64 senators walked off the floor being able to say they'd voted to stop EPA from implementing climate rules, but not all 64 at the same time. In this case, you did have folks who for partisan reasons, and for a variety of their own reasons, wanted to be on the other side of the Coburn amendment. But given the political ramifications of basically saying I support the ethanol status go, there were suddenly 30 let's-have-a-do-over voices that wanted to come to the table. The reason is pretty simple. No one expected that bill to pass. There were technical reasons why it wouldn't and it was really a stampede to make sure that everybody had a chance to at least cover themselves and say, well, we're against it too!
Monica Trauzzi: What was the vote breakdown? Was it based on regions? I mean how did people vote?
Kevin Book: Well, unsurprisingly, there are some dedicated defenders of the ethanol industry from the ethanol producing states. In what we call sort of the ethanol states, the top 10 producers, you had uniform support for the status quote. It's a bargaining position. Even many of those members said we'd, frankly, be OK with negotiating and reforming, but they had to have something with which to negotiate. What was interesting is that Republicans are -- in the House for example, when we look at past ethanol votes they're increasingly the party of ethanol, partly because they took over a lot of Midwestern seats in the last election. In the Senate there are five Senate Democrats who are very much at risk if they don't side with ethanol in the next election. And so they're, frankly, on both sides of the issue as of this week and you had -- almost all of the swing was Democrats. The only Republican change was that you actually ended up getting folks who might not have defended the status quote jumping on. Republicans are, even in the Senate, at least a little bit, ethanol defenders.
Monica Trauzzi: Talk a bit about production versus demand here in the U.S. and just how the ethanol industry is doing right now.
Kevin Book: Well, how they're doing depends on which plant you're looking at and what their individual economics are. The corn prices are very high. So for producers who don't have effectively very cheap plants in other ways, whether it's the feedstock acquisition or their operating costs, it's actually pretty tight right now and they're facing some tight margins. On the other hand, production is well ahead of domestic demand, so there is ethanol leaving the country in a pretty significant way too. It looks like annualized we might see 700 million gallons of exports to Brazil. So, frankly, there's actually money to be made selling ethanol into Brazil right now and some fairly high prices if you have the margins to support the profits here in the U.S.
Monica Trauzzi: The administration has said that we could see job losses if these credits were to be removed. Do you think that's accurate and what are the economic impacts of removing these credits?
Kevin Book: Well, the most immediate economic impact probably concerns corn upstream from the ethanol. You have a certain price indifference that that credit gives the producer. It's an opportunity when the producer gets to keep the credit, which is when there's tight demand and supply balances, where they might buy corn anyway even if the price doesn't necessarily justify it at the pump. On the other hand, if they don't have the credit to give up to the refiner when the price is working against them, then this is core and they probably won't buy. So the first and probably promptest impact of a complete rescission would be, yes, you would lose jobs, but they'd be upstream from production in the farming sector.
Monica Trauzzi: What do we know now about infrastructure support after this vote?
Kevin Book: Well, it's clear that everything was moving gently at first. It looked like it was going to be a more deliberate path towards transitioning out of explicit spending for consumption, which is the blenders' credit, and towards subsidizing a bigger market for ethanol. The problem being, how do you get it into gas tanks? Answer, blender pumps. At the pump dial an ethanol, dial a drink, 0 to 15 percent based on what you bring to the pump. Well, now we see that that is an explicit ask. It's not just gentle, it's not deliberate, it's right at the top of the list. It's exactly what Thune and Klobuchar are asking for in their bill. It's what the industry is saying we need. So it's going to be what I think we should expect to see in the way of reform.
Monica Trauzzi: Does this vote change the dynamic of the RFS? I mean could we see some targets at risk if these credits go away?
Kevin Book: In a-yes, you could see targets at risk in the future. If you had a really explicit, passed into law rescission of the ethanol excise tax credit and sentiment had truly changed, instead of just optically and briefly, then I would say, yeah, you could have a problem in the near years for the RFS. But you had 73 optical votes, but when you looked at the McCain vote became right afterward, you had 59 defenders of ethanol growing its market share. And those 59 defenders are 59 defenders of the RFS at least. Now, give us a Republican Senate and a Republican House and 2013, you start to get to problems with the big extended targets from the 2007 RFS. And, yes, then you might start to see the issue reopened. Rescinded, never. It's section 211(o) of the Clean Air Act. Are you going to vote for dirty air? That was very well placed.
Monica Trauzzi: So, what should the ethanol industry exactly be preparing for at this point? Are there going to be big changes ahead or, like you're saying, this is more symbolic? Are there no changes ahead?
Kevin Book: Oh, there are changes ahead. This was the leading edge of green and clean hard NOX. Ethanol took it first and they're rushing to respond early because one of the things they've always done is responded early to risks to their subsidies and demand supports. This is a change. Right now they have six months left of money. It's not really theirs to give away because it's going to end at the end of the year. But the opportunity to give a budget savings in return for a subsidy that they do want instead of one they can live without, that's an opportunity they're going to seize on as quickly as they possibly can.
Monica Trauzzi: OK, we'll end it right there. Thank you for coming on the show again.
Kevin Book: Thanks for having me.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
[End of Audio]