U.S. Environmental Protection Agency Administrator Stephen Johnson’s denial of Gov. Rick Perry’s request for a 50 percent waiver of the federal ethanol mandate came and went without much fanfare. But the economic damage from this market distorting policy will continue to increase.
Far worse is yet to come, as this year’s ethanol mandate of 9 billion gallons expands to 12 billion in 2010 and to a whopping 36 billion in 2022 – an amount that would consume more than today’s entire U.S. corn crop.
Those who deny ethanol’s role in today’s food inflation need a reality check. This year’s dramatic 9.8 percent rise in the Producer’s Price Index and the 6.7 percent six-month increase in the Consumer Price Index for food is undeniably tied to a tripling of the price of a bushel of corn in less than four years. Food inflation not seen in 20 years, these CPI rates coincide with the first year of implementation of the ethanol mandates enacted in late 2007.
Economists at the World Bank, International Monetary Fund and the United Nations recently concluded that 70 to 75 percent of the unprecedented increase in global food prices results from international bio-fuel policies, among which the United States is the dominant player.
If the price of the main raw material in a product triples within a few years, the price of the retail product necessarily will increase. Roughly 80 percent of the production cost of eggs is the price of feed grain made from corn. The retail price of eggs has increased more than 30 percent in the last year. Similarly, dairy products have double-digit price increases driven by a 50 percent production cost in feed grain.
The price of flour has soared 33.8 percent during the first half of this year. The price of pasta and cornmeal rose 40.6 percent. Higher and higher corn prices lead farmers to plant more acres to corn and less to essential food grains like wheat. In 2008, 234.8 million acres were planted to the four major U.S. crops (corn, wheat, soybeans and cotton). To meet the expanding bio-fuel mandates, five million additional acres of corn will be needed in 2009.
The EPA evidently was convinced by ethanol proponents who claim that the price of corn is a minor player among multiple inflationary forces. Of course, fuel prices, a weak dollar, and rising foreign demand influence domestic and international food prices.
Ethanol proponents, however, misleadingly claim that oil price is the main culprit. Crude oil prices influence food prices because corn is now valued more as a fuel source than as food. The omission in this claim: the federal ethanol mandate largely created the fuel value of corn, a generous tax credit buttressed that value, and an import tariff protected the domestic price.
Since all taxpayers eventually must make up for the federal revenue lost through ethanol tax credits, taxpayers are indirectly financing their own food inflation! In 2008, the tax credit will amount to approximately $4.6 billion. In 2015, the amount approaches $7.6 billion under a 15-billion gallon mandate. The aggregate loss to the U.S. Treasury under the current law is $1.6 trillion of ethanol tax credit in 2022.
Gov. Perry’s wise request for EPA to waive 50 percent of the annual ethanol mandate was widely supported. Twenty-five U.S. senators, including both Texas senators and presidential candidate John McCain, have called for a waiver or repeal of the mandate. The EPA received 15,000 comments on the waiver. Many organizations devoted to world hunger support the repeal of America’s current ethanol policy.
U.S. energy policy has been supplanted by counterproductive environmental policy. Built on mandates, subsidies, trade restrictions, and bans on production, federal energy policy operates like slipshod energy central planning. Let ethanol compete in the market without government preference.
Food inflation is just one of the reasons why our federal ethanol policy must be repealed.
Kathleen Hartnett White is Director of the Center for Natural Resources at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. She is the former Chair of the Texas Commission on Environmental Quality.