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New Ethanol Studies: Little Effect on Gas Prices, Significant Pressure on Food

Tuesday, June 24, 2008

(American Meat Institute)

Two studies released recently show that federal ethanol mandates have placed significant pressure on food prices, while any effect on gasoline prices has been “almost too small to measure.” 

Dr. Keith Collins, former chief economist of the U.S. Department of Agriculture and Dr. Thomas Elam of FarmEcon LLC, submitted their new analyses to the Environmental Protection Agency (EPA) on Monday, June 23, which was the end of EPA’s public comment period on a request from Texas Gov. Rick Perry to partially suspend the Renewable Fuels Standard (RFS) in light of serious economic harm caused by the current policy.

The Collins study, “The Role of Biofuels and Other Factors in Increasing Farm and Food Prices,” indicates that unless the RFS is suspended or revisited, U.S. grain stocks – already pushed to dangerously low levels – will fall even further as ethanol consumes a larger share of the dwindling corn supply. 

"Government support for corn-based ethanol ensures a permanent, significant, and increasing demand for corn,” Collins said. “These policies interfere with the normal price rationing function of markets when supplies are short such as in 2008, with production being reduced by flooding and excess moisture. In this short-crop environment, biofuels policy, including mandated use of ethanol, causes even higher corn prices, shifts the demand adjustment burden to non-ethanol users of corn--particularly the livestock sector--and puts continuing pressure on food prices."    

Elam’s study, entitled “Biofuel Support Costs to the U.S. Economy: The Key Role of the RFS in a Feedstock Shortage Scenario,” investigates two distinct scenarios: one in which there is crop damage and the RFS remains in place, and one in which there is crop damage but the RFS mandate is reduced by 50 percent.

“Maintenance of the current RFS schedule in the face of a smaller 2008 corn crop will be devastating to meat, dairy and poultry producers,” Elam wrote.  “Consumers will suffer as food and fuel costs rise and supplies of corn-based foods diminish. The overall economy will be damaged from higher inflation and lost jobs in the food production sector.”

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