Friday’s WSJ documented an effect of ethanol mandates:
Rising costs for agricultural commodities are making their way up the food chain into the food you eat. Thanks to rising demand for corn-based ethanol, corn prices have nearly doubled during the past year. That’s raised costs for corn products, like the ubiquitous high-fructose corn syrup that’s used to flavor everything from Apple Jacks to Yoplait Yogurt. It’s also raised costs for livestock and poultry, which are fed corn, and for crops like soybeans, which farmers are replacing so they can grow more corn.
Yesterday, the Labor Department reported February prices for “crude foodstuffs and feedstuffs” were 18.8% above year-ago levels. Food companies are starting to pass those higher costs on — wholesale consumer food prices were 6.8% above year-ago levels. Today’s report on consumer inflation will probably show higher prices at the checkout line, too.
These higher prices might not be a bad thing if we were getting some environmental benefit from increase ethanol use. But as Jerry Taylor and Peter Van Doren have shown, we’re not.
Farmers, of course, are benefitting. And we Americans like farmers — so much so that we throw subsidies their way despite the fact that U.S. farm households earn about 11 percent more on average than non-farm households. Unfortunately, the subsidy inherent in ethanol mandates disproportionately impacts the poor, who spend a larger percentage of their incomes on food. Doesn’t that seem like a perverse sort of redistribution?
Unfortunately, the situation is likely to persist. Midwestern farmers constitute the sort of discrete and insular group that organizes well to curry legislative favors. Food consumers, by contrast, are pretty widely dispersed and difficult to organize. And since the costs of ethanol mandates (increased food prices) are diffuse while the benefits (increased profits for farmers) are concentrated, farmers will be much more likely to lobby for their preferred outcome.
I say we require ethanol to stand on its own two feet, and if it can’t, let it fail.
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I grew up in rural Iowa where they are building a number of ethanol plants, so I’ve witnessed the positive economic impact that the ethanol market has had on these small farming communities. My experience with family farming operations suggests that much of the wealth of the average farmer has been created by assets that are passed down through generations of farmers. The start-up farming operations that I am familiar with generally revolve around livestock rather than crop production. If subsidies and tax breaks make crop production so profitable, my guess is that we would see more entrants into this market. Shouldn’t we see more corn producers increasing supply such that prices might stabilize in the near future?
I’d also be curious to see some statistics on how the increase in agricultural commodities correlates to an increase in the grocery bill for the average consumer. How much of that 6.8% is directly attributable to the increase in corn prices? And how likely is it that ethanol will be a viable and evironmentally sound alternative in the future?
Not only do farm households earn more, but they get special tax breaks not available to other businesses (see Schedule F and references to “non-farm” on Form 1040). In addition, they own a lot of very valuable land and equipment. Farm households may not make a large income, but they are usually very wealthy when measured by net worth.