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- During the 1986 Regular Session of the Louisiana Legislature House Bill 550 passed and was subsequently signed by the Governor. This act repealed the gasohol tax exemption 60 days after it was signed and went into effect on or about October 1, 1986.
- During the 1985 Regular Session Act 917, the Agricultural Ethanol Production Law, was passed and had been signed into law. For all intents and purposes this law lay dormant until triggered by Act 550, mentioned above.
- In other legislation during the 1986 Regular Session and the Special Session the actual gasohol subsidy was addressed again. The direct subsidy to be paid was reduced from $1.60 to $1.40 per gallon of ethanol. The total subsidy to be paid from the Agricultural Industry Incentive Fund directly to the ethanol producers was limited to $52 million dollars per year.
- Act 917, mentioned above, created the Agricultural Industry Board to administer the Fund, also mentioned above, and in general, to administer the gasohol program in Louisiana. Its make up, duties, and the rules it had promulgated are covered in detail in Appendix I.
- Gasohol is an important new industry in Louisiana's economy, with an especially important impact on the state's distressed farm economy. It is hoped that this report and the data collected and published here proves to be of service to those trying to understand and deal with the fuel alcohol issue in Louisiana. The first full year that fuel ethanol plants have operated in Louisiana was 1985. The following report is an analysis of the benefits, primarily to agriculture, and the costs of the state gasohol tax exemption. One is able to determine with a good deal of certainty the direct benefits to farmers as the only feedstock used in l985 was sugarcane molasses. The cost side, the amount of the gasohol tax exemption, is available from the Department of Revenue and Taxation. The major findings were:
- - The primary benefit to farmers was an increase of 5.3 million dollars in the total price of the l985 sugarcane molasses crop.
- - The gasohol tax exemption during the same time period was 28 million dollars.
- - Louisiana's exemption was the largest in the nation.
- - There were l78 new jobs created in the gasohol industry in 1985.
- - There must be a state home grown feedstock requirement of some sort to ensure a tangible benefit to farmers.
- Looking at l986 and l987, at ethanol plants that were in operation or under construction in 1986 and planned for construction in 1987, and assuming that the current legislation does not change, one finds:
- - The gasohol tax exemption cost rises to 54 to 64 million dollars a year when all of the existing plants at the beginning of l986 reach their full capacity.
- - Two very large plants are currently under construction that will put the gasohol industry's capacity at 75 or 80 percent of the Louisiana gasoline market.
- - If all 10 of the gasohol plants operating or under construction in l986 are able to sell their gasohol in Louisiana the gasohol tax exemption will be 217 million dollars at $1.40 per gallon of alcohol. (Note, the total payments are capped at $52 million by law.)
- - The October 1986 to May 1987 Louisiana selling price of ethanol is reported to be in the $0.62 to $0.78 per gallon range. This price is for the 95 percent or so, 5 percent denaturant blend as delivered from the plant; not on a 100 percent ethanol basis. Prices vary widely from state to state, due to the size of the state subsidy and perhaps special competitive situations. The price used in Figure 1 is a published January price, when all the confidential business plans were approved for 1987 by the Agricultural Industry Board (AIB). The current combined Louisiana and federal tax subsidies are $2.00 per gallon of ethanol.
- - In October, 1986, the state's home grown requirements for molasses as well as other feedstocks went to 100 percent for a manufacturer to qualify for the State subsidy. Year in and year out the Louisiana sugar industry has produced enough molasses for 14.4 million gallons per year of ethanol. The demand for molasses feedstock has historically exceeded this amount and if current construction plans are met the molasses available from Louisiana will not be sufficient to meet a 100 percent home grown feedstock requirement.
- - Sweet sorghum has been investigated by LSU and others as a source of molasses for alcohol plants. Thus far sweet sorghum has been found to be far too expensive as a feedstock. In addition there are tillage and severe milling problems associated with sweet sorghum.
- - The state's largest ethanol producing user of molasses is planning to be able to use grain also by mid-l987.
- - The price of ethanol is directly related to the wholesale price of gasoline. Gasohol and gasoline prices have dropped sharply as the price of crude oil has dropped.
- Finally, using the data collected in the report there are many ways to change the current or future effects of Louisiana's gasohol tax exemption. It is hoped that this report will provide a common basis for analyzing such changes. Some are presented below.
- - In 1985 the benefits of the $1.60 per gallon Louisiana ethanol tax exemption was split between agriculture and gasohol interests in the following fashion; $0.30 went to agriculture and the remaining $1.30 went to gasohol producers.
- - The U.S. average state tax exemption in l985 was $0.47 per gallon of ethanol or $0.047 per gallon of gasohol.
- - If the state exemption or subsidy were eliminated altogether under current market conditions, the molasses based ethanol business could not survive in Louisiana. If it received the same price as in other states with no exemption and paying the 1985 price of molasses ($70 per ton), costs would exceed income.
- - On September 1, 1986, the gasohol tax exemption ceased and certified alcohol producers began receiving a direct subsidy of $1.40 per gallon of alcohol from the Louisiana Agricultural Industry Fund. Farmers are to be paid $2.25 per bushel of corn for alcohol versus a selling price of Louisiana corn sold for other purposes of $1.65 per bushel. Based on these figures the farmer receives 17 percent or $0.24 of the $1.40 per gallon state subsidy as a premium on his corn.*
- - The current total state subsidy expressed in bushels of corn is $1.40 per gallon of ethanol times 2.57 gallons ethanol per bushel or $3.60 per bushel.
- * The above figures were early January 1987 figures. The May 1987 Louisiana figures are for "A contract" corn at $2.65 per bushel. The author's understanding is that "B contract" corn (corn sold after July 1, 1987,) currently is Chicago Board of Trade (CBT) price with no premium. This may change during the current session of the Legislature. The May 15, 1987, actual selling price for Louisiana corn from the Louisiana Farm Bureau (CBT price plus basis point) statewide averaged $2.02 per bushel. The range of Louisiana corn for April and May 1987 has ranged from $1.87 to $2.07 per bushel (CBT plus basis points).
Based on $2.65 "A contract" corn and a $2.02 Louisiana selling price, the premium to farmers would be $0.245 per bushel, virtually the same as the farmer's share used in Figure I.
| Notes on Figure I: The net raw material cost used was that for grain sorghum, the only Louisiana grain crop actually being used at the time the graphic was prepared. The farmer's share in the figure was based on information furnished by the Louisiana Department of Agriculture as to what the projected premium price the Louisiana Agricultural Industrial Board (AIB) was requiring over the Chicago Board of Trade (CBT) corn price at that time. At the current writing the farmer's premium share is quite a bit less, as the CBT corn price has moved much closer to the floor price set by the AIB for a farmer to be able to "cash flow". "Cash flow" as used in the agricultural community defines the conditions, particularly the selling price, a farmer must have to pay all of his bills and make a profit. Corn should become the predominant fuel alcohol feedstock as 1987 progresses. The net raw material cost for sugarcane molasses could also have been used, as most of the ethanol produced to date under the Louisiana gasohol program has been made from molasses. The Louisiana selling price of ethanol was a published price from the January 1987 time frame. |
- Fuel ethanol producers are not receiving the value they should be receiving at current selling prices as can be seen by examining Figure I. If ethanol were priced as other goods normally are, its wholesale price would be at least $3.42 per gallon rather than the $0.74 it was selling for in January 1987, On September 1, 1986, the State of Louisiana switched from a $1.60 per gallon of ethanol tax exemption to a $1.40 per gallon direct subsidy to the producer. The wholesale price to the gasohol blender promptly dropped from the $2.10 per gallon range to the $0.70 to $0.78 per gallon range in response. This is because the producer began receiving his subsidy directly rather than indirectly from the actual blender, who was the party receiving the tax exemption. Chemical Week in discussing the same problem as it occurs around the country says ethanol producers could improve their margins if they "have enough nerve" to price it as if it were an octane improver and assign it a fuel value. Other industrial analysts say that with the prices of competing octane boosters slipping as gasoline prices go down that there is little likelihood of the marketplace supporting such a move. There are signs that both the wholesale price of gasoline and of ethanol are beginning to recover from their low points of early April 1986.
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This page updated June 1989
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