May 2, 2008
 

US lawmakers and agencies debate ethanol impact

 

 

Although subsidies to ethanol producers are having a sizable impact on food prices, the impact is limited to corn-based food goods and will likely subside over time, USDA chief economist told Congress on Thursday Federal government.

 

Joseph Glauber told a hearing of the Joint Economic Committee that ethanol subsidies were having an "important impact" on corn prices, directly pushing up the cost of corn-based food.

 

He told the panel that retail food prices increased by 4 percent in 2007, the fastest since 1990. Prices are forecast to grow between a further 4 percent -4.5 percent in 2008, he said.

 

However, he said the ethanol subsidies had little to do with sharp increases in wheat and rice prices. That has had more to do with the rapid increase in demand from countries like China and India for high quality foods, and adverse weather conditions in major wheat producers like Australia and Canada, which has severely reduced yields.

 

Glauber said he anticipated the ethanol impact on the price of corn to moderate over time.

 

US lawmakers this week have been debating the link between the rapid increase in US corn-based ethanol production and the escalation in food prices worldwide.

 

Some clearly believe the link exists and is part of an explanation for rising food prices, while others are downplaying the impact of subsidies and the biofuel mandate, and a third group have denied there is any connection whatsoever.

 

Sen. Charles Schumer, D-N.Y., the chairman of the economic panel, pointed out that ethanol subsidies encouraged corn planting to an extent that it in 2007 it accounted for a quarter of US crop output, up from 15 percent just two years earlier.

 

"This has obviously raised the price of corn and grains because farmers have shifted more land into corn production, squeezing domestic supplies of other crops," Schumer said.

 

Sen. John Sununu, R-N.H. added that if a quarter of corn production is diverted to energy uses, there would obviously be an impact on US and world food prices.

 

Sen. Amy Klobuchar, D-Minn., said ethanol producers need to be encouraged to use different types of raw materials rather than corn for biofuel, such as switch grass and corn stalks. 

 

However, such technology has yet to be proven on a commercial level and many analysts do not expect a full-scale production facility to come online for years.

 

Speaker of the House Nancy Pelosi, D-Calif., cited statistics that said that ethanol was responsible for 15 percent of the rise in food prices.

 

But she said that reducing the subsidies would only be part of a solution to the food crisis.

 

White House spokesman Tony Fratto said only a "small portion" of the rise in food prices could be blamed on the ethanol subsidies.

 

Fratto said there has been too much focus on biofuels and not enough attention to other factors that affect food prices,

 

Sen. Sam Brownback, R-Kan., said at the Economic Committee hearing that without ethanol and other biofuels, the price of gasoline would be 15 percent higher than its already historic levels.

 

The price of food was affected as much by spiraling commodity prices, which were largely being driven by hedge funds and other speculators, he said.

 

Meanwhile, Connecticut Gov. M. Jodi Rell Thursday asked the US Congress to put on hold requirements that a certain amount of renewable fuels be blended into the fuel supply, saying that the mandate is driving up food prices.

 

She becomes the second governor to take aim at the national standard, which Congress expanded in 2007 in an effort to reduce US dependence on foreign oil. Last week, Texas Gov. Rick Perry asked for an exemption from the renewable-fuels standard, claiming it was adding to food costs around the state.

 

"Connecticut residents and business owners are squeezed from one side by energy prices and on the other by food prices," Rell said in a statement. "The pressure is relentless and mounting ever-higher. It is time for the federal government to take some strong, definitive action to address these issues."

 

Last year, Congress passed an energy bill requiring that 36 billion gallons of ethanol and other renewable fuels be blended into gasoline by 2022. Some 9 billion gallons have to be blended into gasoline in 2008, and a total of 11.1 billion gallons in 2009.

 

The farm bill is in its last stages of negotiation before Congress, with lawmakers in the House and Senate trying to reach agreement on final details.