Oil Report

USDA chief says more ethanol-subsidy cuts needed

KANSAS CITY, Mo., Sept 8 (Reuters) - U.S. Agriculture Secretary Ed Schafer criticized U.S. ethanol producers on Monday for depending too heavily on government subsidies and said reductions in government support were needed.

“The ethanol industry has incorporated the fact there are subsidies into their operational, financial models. I think that is a mistake,” Schafer said. “They are going to have to see a gradual ... step-down reduction in subsidies.”

Schafer said the ethanol industry must eventually become commercially self-sustaining.

“The business model has to operate without the subsidies because eventually they are going to go away,” Schafer said on the sidelines of a business journalism conference in Kansas City.

U.S. Republicans called last week for an end to government requirements for ethanol-blended gasoline, a policy backed by the Bush administration. Republican leaders said markets -- not government -- should determine ethanol usage.

Schafer said USDA, in conjunction with the Environmental Protection Agency, the Energy Department and other agencies, plans to roll out a “biofuels action plan” within the next few weeks.

The plan will lay out the government’s view of what elements of the biofuels industry the government sees as sustainable. The plan will give an overview of the biofuels industry, and the government’s ability to support the industry, Schafer said.

About a third of this year’s U.S. corn crop is going to produce ethanol amid efforts to meet the government’s Renewable Fuel Standard, which requires 9 billion gallons in renewable fuels to be blended into the nation’s gasoline supply this year, and 11.1 billion gallons in 2009.

Critics have blamed ethanol and related government subsidy programs for skyrocketing food and livestock feed prices.

The 2008 farm law will cut the tax credit for corn-based ethanol by 6 cents to 45 cents a gallon beginning in 2009. The tax credits are worth about $4.5 billion this year. The farm law extended the 54-cent-per-gallon tariff on ethanol imports through 2010.

Schafer dismissed as unworkable a proposal being floated by Texas oilman T. Boone Pickens and natural gas industry leaders for the United States to make domestic natural gas production a key component of transportation fuel.

“The natural gas situation right now is very dependent on global sources. It is a system that doesn’t lend itself to an accumulation of that resource availability in this country easily without huge investments that we don’t have today,” said Schafer.

“I’d rather see those huge investments going to our renewables and the biomass energies than trying to develop some kind of transportation system for natural gas in this country.”

On a separate issue, Schafer said poultry and pork trade problems with Mexico should be resolved this week to allow Mexican products back into the United States. There has been widespread talk in the U.S. meat markets that Mexico could retaliate after the United States barred meat imports from a number of Mexican plants. (Reporting by Carey Gillam; Editing by David Gregorio)