The indirect subsidies pay producers what they need to cover costs. The direct (51¢) subsidy is split between producers and consumers with consumers getting what the producers needed and producers getting the rest as windfall profits.
If this sounds strange, it's because it is. If producers need 20¢ of the 51¢ subsidy, the ethanol requirements drive the ethanol price up to cover the extra 20¢, and then the 51¢ is split, with 20¢ going to consumers and 31¢ given to producers as windfall profits. No one intended this, but politicians don't understand market forces and the law of unintended consequences often bites them in the ass.
Here's an example. Suppose the costs of making gasoline and ethanol are:
Cost of making gas = $1.80 Cost of making ethanol = $2.00
Ethanol needs a subsidy and gets two of them. (1) Indirectly from a requirement to buy ethanol. (2) Directly from a 51¢ blenders credit. The indirect subsidy--the requirement--will force blenders to pay $2.00 for ethanol because producers will not sell for less than their cost. So that's like a 20¢ subsidy to ethanol producers--just what they need.
But if ethanol producers charged only $2.00, blenders would buy all the ethanol they could. That's because, with the blenders credit, they'd only be paying $1.49, far less than the $1.80 wholesale cost of gasoline. The blenders credit creates artificial demand that drives the wholesale price of ethanol up to $2.31. At that price, ethanol, in effect, costs blenders $1.80, the same as gasoline. That puts an end to the excess demand for ethanol. So here's the final result.
Wholesale price actually paid to ethanol producers = $2.31
Wholesale price effectively paid by ethanol blenders = $1.80
Actual production cost of ethanol = $2.00
So consumers get a 20¢ benefit, because competition forces blenders to pass on their 20¢ savings relative to the $2.00 production cost of ethanol, and producers get a 31¢ windfall profit. That's how the direct 51¢ subsidy is divided up.
If the cost of gasoline goes up closer to the cost of ethanol, say to $1.90, then ethanol producers only need 10¢, so they get a 41¢ windfall and consumers get a 10¢ savings.When gasoline costs more to make than ethanol (because of high oil prices), ethanol producers keep the entire blenders credit as a windfall gain and consumers keep none of it. It makes you wonder who thought this up.
What about corn farmers? If ethanol production grows very quickly, as in 2006--2007, corn production can't keep up. Corn prices rise, and this allows corn farmers to capture some of the windfall profits going to ethanol producers. Once corn production catches up, corn prices will go back down.
