Wednesday, January 23, 2008

Grocery Store Prices

Chuck Schumer, the democratic senator from New York, has called for a repeal of the import tariff on ethanol because he feels that the surge in demand for corn-based ethanol in the United States has led to large increases in grocery store prices. He is supposedly especially concerned about a commodity dear to some of his constituents in up-state New York -- milk, which has increased substantially in the past few weeks. In coming to these conclusions, Senator Schumer not only perpetuates one of the greatest known and disproven myths about ethanol, but it shows how little he understands this very complex and dynamic situation that ethanol finds itself in.
First of all, let's get the facts straight. Ethanol demand has increased considerably in the United States leading to increased demand for corn and a subsequent competition for acreage, which has driven up prices for commodities such as corn and soybeans. This strong uptick in ag. products is what Schumer and other critics of ethanol hold as the reason for surging grocery prices. If this correlation is true then we should see a large price increase in the consumer price index CPI over the last few years relative to the prior string of years in which corn and soybean prices were relatively low. The USDA, through their Economic Research Service, found the CPI increased 2.6% between 1996 and 2005, and then only 2.3% in the year 2006. They went even further to record that the CPI for meat products in 2006 only increased by 1%, which would refute any claims that the CPI isn't responsive to corn based products. Iowa State University study these trends and found that a 30% increase in the price of corn would only have a 1% increase in grocery prices.
Experts offer that energy prices for transportation (such as oil and gasoline) along with increasing labor costs constitute a much larger piece of why milk, eggs, and other food staples have increased.
But the above response is only one half of why Chuck Schumer is not only wrong in this case, but proven his naivety in this debate. The other half is the debate about whether or not to have a tariff on imported ethanol. I feel that people don't realize that the main reason the tariff exists isn't for protectionist measures, it is to prevent the Caribbean countries and Brazil from gaining taxpayer benefits that the ethanol industry currently enjoys. What I'm referring to is the 51 cents per gallon blending credit the government pays to blenders in order to establish a market for ethanol in gasoline. The tariff is set at 54 cents per gallon and is used to prevent other countries from exploiting the 51 cents per gallon taxpayer credit that they would otherwise enjoy. What Schumer needs to do first is debate the merits of a 51 cents per gallon tax credit -- to which I see the benefits both of having it available and of doing away with it. However, as long as the credit exists, we need an import tariff to prevent Brazilian and Caribbean nations from exploiting our tax dollars with the 51 cents credit.
Finally, I can't resist using a great analysis refuting the food versus fuel arguement from American Fuels ( The analysis shows that the amount of corn produced, subtracted by the amount of corn used for ethanol, has actually increased since 2005 -- from 9.6 billion bushels up to 10.5 billion bushels. This would seem to negate the argument that some kind of severe shortage of corn has put positive pressure on other industries.
One thing for sure is that politicians definitely make the decisions in this country, but that doesn't always mean that they have the best facts or present the pertinent arguments. Schumer would be doing his state and country a disservice if he follows knee-jerk reactions against ethanol just to assuage fears about rising milk prices.

Original article refuting Sen. Schumer's remarks:

USDA analysis of trends between ethanol and CPI:


mus302 said...

First off thanks for the plug.

I think you are spot on in your analysis.

mtman said...

Schumer is way off base. Lifting the tariff would not amount to more than a few hundred additional gallons of ethanol entering duty free.

Brazil is not going to close there ethanol stations down in order to ship billions of gallons of ethanol to U.S..

Schumer is only pandering to typical politics.