By: Eric Mittenthal
It is being called the worst drought in decades. Corn fields throughout the Midwest are dry and yields are expected to be down 20 bushels per acre or more. This means corn prices are skyrocketing; up 50 percent in the last few weeks alone, and they could hit $10 a bushel, far above previous record prices. The high price of corn has several consequences, but one of the most important is on the price of food. With smaller supplies of more expensive feed, farmers will struggle to feed their livestock and poultry and the costs will likely get passed on to the consumer.
Of course there is one additional artificial pressure contributing to the price of corn, the Renewable Fuel Standard (RFS), requiring nearly 40 percent of the corn grown in the U.S. be used for ethanol production. A new study released this week suggests that the RFS is not only contributing to high corn prices, it is also negatively impacting gas prices. The key findings include:
- Ethanol, because its energy cost is higher than gasoline and because of its negative effect on fuel mileage, added about $14.5 billion, or 10 cents a gallon, to motorists’ fuel costs in 2011.
- Increased ethanol production since 2007 has had no effect on gasoline production or oil imports, contrary to supporters’ claims.
- Corn used for ethanol production rose 300 percent from 2005 to 2011, increasing from 1.6 billion bushels to 5 billion. (Ethanol production now uses more than 40 percent of the U.S. annual corn supply.)
- Corn now represents about 80 percent of the cost of producing ethanol compared with 40-50 percent before implementation of the mandate.
- Corn prices jumped to more than $6 a bushel in 2011 from $2 in 2005.
- The rate of change for the Consumer Price Index for meats, poultry, fish and eggs increased by 79 percent while it decreased by 41 percent for non-food items since the RFS was revised in 2007.
- Ethanol production costs and ethanol prices have all but eliminated a market for ethanol blends higher than 10 percent.
- The United States exported 1.2 billion gallons of ethanol in 2011.
The study concludes that the ethanol mandate should be revised to allow automatic adjustments to reduce incentives for ethanol production when corn stocks are forecast to reach critically low levels such as this year.
Legislation – the “Renewable Fuels Standard Flexibility Act” (H.R. 3097), sponsored by Reps. Bob Goodlatte, R-Va., and Jim Costa, D-Calif. – that would require a biannual review of ending corn stocks relative to their total use would be a good approach to dealing with this issue. If the ratio falls below 10 percent, the RFS could be reduced by 10 percent. If it falls below 7.5 percent, the mandate could shrink by 15 percent; below 6 percent, it could be reduced by 25 percent; and if the ratio falls below 5 percent, the ethanol mandate could be cut by 50 percent.
Food and fuel needs don’t have to be pitted against each other with the consumer as the loser. It is clear that with the current policy, that is occurring. With corn prices likely to be at an all time high, now is the time to act.