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Ethanol's Influence on Rising Food Prices By Don Newman |
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Although the laws of economics are as immutable as the laws of physics, many people, particularly politicians and elected officials, seek to subvert them. Such efforts usually result in unintended consequences which are invariably negative. Federal and local government efforts to promote the manufacture and use of ethanol are having just such unintended consequences. The demand for corn needed for the production of ethanol has resulted in a dramatic rise in the price of that commodity. The price of corn in the last year has nearly doubled from $2.22 to $4.08 per bushel. This rise in price also impacts businesses that raise livestock, as corn makes up a major portion of the diet of farm animals. Poultry, pork, beef, eggs, and dairy products are already beginning to increase in price to cover the additional cost of feed or are expected to rise in the near future. Other common food items will probably be affected as well. Many breakfast cereals are corn based or contain significant amounts of corn. Products as varied as ketchup, soft drinks, canned soup, and pancake mix contain corn syrup or corn flour as part of their ingredients. Eventually such cost increases will have to be passed on to the consumer. Commodities unrelated to corn will also be affected, as farmers will be enticed to move away from less lucrative crops such as soybeans, cotton, wheat, rice, vegetables, barley, and hops. Those last two mean ethanol will even drive up the price of beer. Cereals and other products that depend upon wheat, rice, and other farm commodities will also eventually rise in price. There are other consequences as well. About 10 percent of the world's sugar crop is now being diverted to ethanol production, doubling the global price of sugar. (Americans are unaware of these increases because of farm subsidies to sugar farmers.) The high prices paid for corn by ethanol producers are artificially supported by large and extensive federal government grants and subsidies. The federal government also encourages state governments to give subsidies and tax exemptions to ethanol producers. It is almost certain that the ethanol industry could not stand on its own without these subsidies. The typical argument justifying support for ethanol is that this is the price we have to pay to move to a greener option for powering our autos and electrical power plants. However, the processing and production of ethanol is a major pollution source. Nearly 20,000 tons of pollutants were generated in 2004 by the corn processing plant in Clinton, Iowa. When the fertilizers, pesticides, and water usage (four gallons of water for every gallon of ethanol) are factored in ethanol is not a very green industry at all. The increase in prices induced by ethanol is likely to have a long term effect. Ron Plain, a professor of agricultural economics at the University of Missouri, has stated that "I would argue that ethanol and inflation will raise the prices for meat, eggs, milk, cheese and other dairy products around 12 percent by 2009." Inflation has recently become central concern at the Federal Reserve and any increase spurred by higher prices resulting from ethanol production is worrisome. While many economists and government officials discount the effect of rising prices in food commodities caused by ethanol, it could turn out to be a major problem if they have underestimated that inflationary stimulus. In the meantime, get used to paying more for a range of food items. Consumers will be paying twice; once in taxes to pay for the subsidies for ethanol and once again when shopping for groceries. Donald Newman is a policy analyst with the Grassroot Institute of Hawaii. For More Information:
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