To Fix Rising Food Prices, Repeal the EPA Ethanol Mandate

August 29, 2012 J

By: Christine Harbin

Struggling American households see the cost of rising food prices every day. The price of groceries has gone up 7% since President Obama took office.  Although there are many factors that affect the price that people pay at the grocery store, one big reason is strict Environmental Protection Agency (EPA) rules on ethanol, which divert corn into fuel. In order to address rising food prices, policymakers should permanently repeal these rules.

One of the most onerous EPA rules causing the price of corn to rise is the renewable fuel standard (RFS), which mandates that refiners blend a certain amount of ethanol in gasoline, with the intended goal of reducing emissions. Most of the ethanol is made from corn, and EPA levies a hefty fine on refiners that can’t find enough to blend in. The mandate was set at 10 percent when the RFS program started in 2005, but now the EPA is trying to increase it to 15 percent, making a lot of the problems associated with the mandate worse.

This ethanol mandate makes it more economically attractive for farmers to devote less of their corn yields to food, and divert more of it to fuel.  We can see this in the data. Between 2008 and 2012, the percentage of U.S. corn acreage that farmers dedicated to ethanol production increased from 25 to 40.

The ethanol mandate increases the demand for corn in the economy, which causes corn prices to rise higher than if there were no mandate at all.

Corn may seem plentiful in an agricultural sense, but it’s scarce in the economic sense.  Americans may have unlimited wants for corn, but the amount of corn that we have is limited. If more of it goes into our gas tanks, then there’s less available to go to our grocery stores. There’s a trade-off between the two.

The mandate makes the price of other commodities rise too. Higher corn prices make feed for animals more expensive, and results in higher prices for beef, pork, chicken, eggs, and dairy. To compound the upward pressure on demand, farmers will sow more corn to chase government money, which causes wheat and soybean production to fall, and prices for those food products to rise too. Almost no part of a family’s grocery budget is exempt from corn’s higher prices.

EPA is going to seek public comments on waiving the RFS rule, but this relief would only be temporary. Although waiving the mandate is a step in the right direction and an admission that the cost of the mandate is too high on hardworking Americans, it doesn’t go far enough. Instead of tinkering with the rules of the game when they become inconvenient, Congress should repeal the EPA rule permanently. This would be less distortive in the economy because it would reduce the uncertainty that businesses face when planning for the future.

The quickest and simplest way to curb rising food prices would be to repeal the EPA mandate on ethanol.  Removing the mandates encourages farmers to shift corn production back to food consumption and away from wasteful fuel blends. According to a new study from Purdue University, food prices would drop by about 13 percent if the EPA did just that. For this problem of rising food prices and so many others, the better solution is less government—not more. If the Obama administration were serious about addressing rising food costs, then they would put pressure on Congress to repeal the EPA’s ethanol mandate permanently.

But Washington is doing the opposite.  Instead, many of the policy proposals on the table would have little effect on food prices, and would end up creating more problems. Fast-tracking the Farm Bill through the House, for instance, would extend myriad wasteful programs that have more to do with placating special interests than providing relief to families at the grocery store.

Just as Nobel laureate Milton Friedman remarked, “I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse.” The problem of rising food prices is no exception.

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