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News : US Economy Last Updated: Jun 20, 2011 - 7:55 AM


US Senate votes to end $6bn biofuels subsidies; Biofuels use 40% of US corn output and 20% of global sugar output
By Michael Hennigan, Founder and Editor of Finfacts
Jun 17, 2011 - 5:36 AM

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The US Senate voted on Thursday night to end $6bn in subsidies for biofuels which consume 40% of US corn output. Worldwide, biofuels account for 20% of global sugar output.

The House does not have to accept the measure as tax bills must originate in that chamber while President Obama is a supporter of the biofuels industry and his Agriculture secretary is a former governor of Iowa, a corn growing state.

Nevertheless, the 73-27 vote signals broad bipartisan support for a program that was once seen as untouchable.

Oklahoma Republican Tom Coburn led the move to repeal the 45-cent blender tax credit for ethanol, as well as the 54-cent tariff on imported ethanol. Senator Dianne Feinstein, Democrat of California, was the co-sponsor of the bill.

Currently, most US gasoline contains up to 10% ethanol, in part because of federal regulations. The Obama administration has proposed pushing the blend limit to 15%.

 Since 2000, US ethanol output has risen 10-fold and corn has gone from less than $2 a bushel to nearly $8.

Last week, a report prepared for the G20 group (pdf) of leading developed and emerging economies, by 10 multilateral organisations, including the World Bank, United Nations and International Monetary Fund, was published and said that the demand for food and feed crops for the production of biofuels is another significant factor in the volatility of food prices.

The report says: "During the 2007-2009 period biofuels accounted for a significant share of global use of several crops - - 20% for sugar cane, 9% for vegetable oil and coarse grains and 4% for sugar beet. Projections encompass a broad range of possible effects but all suggest that biofuel production will exert considerable upward pressure on prices in the future.

For example, according to one study international prices for wheat, coarse grains, oilseeds and vegetable oil could be increased by 8%, 13%, 7% and 35% respectively. Moreover, as long as governments impose mandates (obligations to blend fixed proportions of biofuels with fossil fuels, or binding targets for shares of biofuels in energy use), biofuel production will aggravate the price inelasticity of demand that contributes to volatility in agricultural prices."

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