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Want Cheaper Food? End the Ethanol Mandate
February 27, 2013, 10:46 am
Filed under: Uncategorized

Want Cheaper Food? End the Ethanol Mandate:

Walmart has not had a good year
so far. In an email leaked
earlier
this month, the company’s vice president of finance and
logistics grumbled that “February (month to date) sales are a total
disaster… the worst start to a month I have seen in my… 7 years
with the company.”
Why is the nation’s largest retailer struggling so much? In

today’s
Wall Street Journal, Forbes publisher
Rich Karlgaard notes the retailer’s sales problems and points to a
couple of reasons why the company is having so much trouble. The
expiration of the payroll tax cut, which for the last few years has
reduced take home pay levels by about $80 per month for families
making $50,000 annually, is probably one factor. But Karlgaard also
points to the role of food price inflation:

Food prices are rising faster than overall inflation. Inflation
is the great hidden tax, especially when it hits essentials like
food. Core inflation is running at about 2%, but the U.S.
Department of Agriculture predicts that food prices will be up
3%-4% in 2013. This will nip at Wal-Mart customers and Wal-Mart
itself, which now gets half of its U.S. revenue from groceries.
Will Wal-Mart eat the inflation and hurt its profit, or will it
pass it onto its customers and risk driving them away? Food
inflation presents no good choices.

Food price inflation is indeed complex, and there’s no simple
way to prevent it. But there is a single step that government could
take that would almost certainly significantly arrest the rapid
rise in the cost of food: end ethanol energy mandates.
There’s very little question
about whether or not ethanol subsidies and related mandates, which
essentially pay farmers to grow fuel instead of food, drive up the
price of food. Ethanol policy hits corn directly, but because corn
is so integral to the rest of the food production process, a rise
in the price of corn quickly results in a rise in the price of
other farm commodities such as meat, poultry, dairy, and soy
products. When the Congressional Budget Office
looked
at the impact of ethanol subsidies on overall food
prices between April 2007 and April 2008, the nonpartisan
scorekeeper found that 10-15 percent of the 5.1 percent rise in
food prices, as measured by the Consumer Price Index, could be
attributed to ethanol subsidies.
The CBO noted at the time that it was difficult to precisely
estimate the impact of ethanol subsidies going forward. But in
early 2011, corn prices spiked after a
crop shortage
, which many analysts expected to translate into
higher food prices. And over the years, ethanol subsidies, along
with a renewable
fuel standard
which pushes energy producers to include ethanol
in their products, has resulted in what the Farm Foundation

describes
as a “persistent demand shock.” Some 40 percent of
the nation’s annual corn crop is now redirected into ethanol
production.

Congress
allowed
direct ethanol subsidies to end in 2011, but the
renewables standard remains, and it’s by far the bigger factor.
Even modest changes in ethanol policy could have a big impact. Last
summer, three farm economists at Purdue University
estimated
that even if we just partially relaxed the
renewables standard, corn prices could drop by
as much as 20 percent
. (That could also help ease the
impact of rising gas prices, another factor that Karlgaard names as
hurting Walmart in his oped, by increasing
fuel economy
.)
It’s not just American consumers who would benefit. It would
also help stop the rise of food prices worldwide, which harms poor
and developing nations. The global impact is big enough that last
summer, the World Bank
suggested
that an immediate easing of the renewables mandate
could prevent a world food crisis.
Whether we’re talking about America or the rest of the world,
the reality is that higher food prices hit the poor the hardest —
not just because they have less overall but because they spend a
much larger portion of their incomes on food. The ethanol mandate
is essentially a tax on the poor, in the U.S. and
elsewhere.
Ending the ethanol mandate wouldn’t fix all of Walmart’s
problems, or put a stop to rising food prices, and its impact might
not be felt immediately due to the farm production cycle. But over
time, it would probably restrain the rise in food prices, helping
Walmart’s business and making life better for Walmart’s
customers. 


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