Special Report

Food Before Fuel

How Congress is allowing ethanol to poison our economy.

By and 6.14.07

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Feel like you're getting squeezed by prices at the gas pump? Get ready to experience that same feeling at the grocery store. As ABC News reported recently, average food retail prices of across the United States have risen by 4 percent during the past year alone. Beleaguered American consumers must now pay record gas prices to get to the grocery store, where they again meet sticker shock. And who is to blame? Not grocery stores or food producers, but Congress.

Food prices today are rising steeply because Congress decided to link the price of food with the price of oil. As a result, now whenever the price of oil increases, food prices follow. Worse still, Congress is currently contemplating further tightening this link. Let us explain.

This mess started in 2005, when Congress passed that year's Energy Policy Act, which mandated the incorporation of 7 billion gallons of corn-based ethanol into the American fuel supply in an effort to reduce gasoline consumption. Ethanol production, suddenly buttressed by a federally guaranteed demand for its product, overnight became an extraordinarily profitable venture.

Invariably, a market disruption of this magnitude is at once unpredictable and consequential. Congress likely did not then foresee that the artificial demand for ethanol created by this mandate would cause a sharp increase in the price of groceries. Such, however, is the nature of meddling in the market.

Before the 2005 Act, the American farmer sold corn that was for the most part eaten, either by people here and abroad or by livestock. But the new ethanol mandate suddenly gave American corn growers a vast new customer base -- everyone who owns a car. Of course, a precipitous increase in demand will have an effect on price; accordingly, a bushel of corn that cost $2.00 two years ago, costs close to $4.00 today.

The effects of this price increase have been profound. As it turns out, corn is integral to a huge array of groceries. Corn syrup is widely used as a sweetener, because sugar is too expensive and there are health fears about artificial substitutes. And, of course, corn goes into lots of baked goods. Of particular significance, corn is the primary feed for livestock; there are no substitutes with a comparable nutritional value. Consequently, as the price of corn increases, it costs more to feed cows, pigs and chickens. These costs are then passed along to the consumer, who pays more for dairy, meat, eggs, and all the derivatives thereof.

Unfortunately, the collateral damage wrought by ethanol mandates does not end there. With corn hovering at record prices, farmers have found it more profitable to grow corn, thus leaving less land available for the production of other grains, reducing their supply. The prices of grains and grain byproducts, like bread or pasta, increase accordingly.

The upward trend in grocery prices is unlikely to end. With the Chinese and Indian economies growing, demand for crude oil remains robust. American refinery capacity is strained. Supplies, moreover, are always subject to disruptions due to turmoil in political hotspots like the Middle East, Venezuela, and Nigeria. Indeed, we are already gearing to pay $4.00 a gallon.

High gas prices set in motion a process that ultimately results in increased grocery bills. Because Congress decided that the price of ethanol should be pegged to the price of gasoline, the more expensive gasoline becomes, the more profitable ethanol production becomes. In turn, the more profitable ethanol production becomes, the more ethanol producers are willing to pay for a bushel of corn. And the more they are willing to pay for a bushel of corn, the more the American consumer pays for groceries.

So what does Congress plan to do? Not help consumers. Disconcertingly, Congress is now mulling an enormous expansion of the ethanol mandate, potentially to 35 billion gallons -- a five-fold increase of the current mandate. This situation may be about to get worse.

Ethanol mandates were a miserable, poorly thought out exercise in 2005, and they remain so today. They hold the American consumer's grocery budget hostage to the Byzantine and murderous politics of the Middle East. Far from promoting energy independence, Congress has put the House of Saud in control of your grocery bill.

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About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.
About the Author

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute.