Each spring and summer in the Gulf of Mexico, nutrient-rich ef- fl uent from the Mississippi and Atchafalaya Rivers stimulates algae growth. The rates of growth are typically so high that when the algae die and decompose, they consume more dissolved oxygen than can be replenished by the ocean. The Gulf hypoxic zone or “dead zone” is created when dissolved oxygen levels become too low to support sea life.

Volumetric excise tax credits—more commonly known as blenders tax credits—have been in place since 1978 for ethanol and since 2004 for biodiesel. The ethanol subsidy will fall from its current level of 51¢ per gallon today to 45¢ per gallon on January 1. The biodiesel subsidy is $1.00 per gallon (50¢ per gallon for previously used oils or grease). The subsidy is paid on every gallon of ethanol or biodiesel that is blended in the United States with any quantity of fossil fuel. All biofuels blended with fossil fuels are eligible for the subsidy regardless of where the biofuels were produced or where the blend is consumed. The blenders tax credit reduces the tax liability of blenders, so it is equivalent to the U.S. Treasury writing a check to blenders for each gallon of biofuels they use. The purpose of the subsidy is to increase the willingness of blenders to buy U.S.-produced biofuels and to increase the domestic price of biofuels. It has undoubtedly met these objectives for U.S.-produced corn ethanol. But opponents of the biodiesel blenders credit argue that its main effect is to subsidize biodiesel produced in Southeast Asia, South America, and Europe that is destined for European consumption.

The recent dramatic decline in crop prices is a boon for livestock producers but a bust for crop producers, particularly for producers who just agreed to pay high rents. More generally, the tremendous volatility in all commodity markets makes it nearly impossible for producers and the food industry to plan for the future. But farmers need to begin planning for their 2009 crop, and food producers need to make procurement plans for the remainder of this marketing year. The type of plan that will be profi table depends on the answers to a number of key questions: Have we seen the end of high corn prices? Will prices continue to decline, and if so, how low will they go? Have we seen the end of the food versus fuel debate?

U.S. consumers are on track to consume 138 billion gallons of gasoline in 2008 (down from 142 billion gallons in 2007) and approximately 9 billion gallons of U.S.-produced ethanol plus perhaps another 800 million gallons of imported ethanol. Fuel blenders have a strong incentive to use all this ethanol because they receive a 51¢-per-gallon subsidy (the blenders tax credit) from taxpayers. In addition, since February of this year, the price of ethanol has been less than the price of gasoline. U.S. Environmental Protection Agency (EPA) regulations allow blended fuel to contain up to 10 percent ethanol. California regulations allow up to 5.7 percent blends.