Ethanol bill fuels food costs

Expect the price of beef, pork, chicken and a host of other goods to go up if the House energy bill becomes law. But the trade-off may be worth it.

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By Steve Hargreaves, CNNMoney.com staff writer

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Food prices will likely rise as a result of the biofuels bill that just cleared the House of Representatives, but the hike should be modest.

NEW YORK (CNNMoney.com) -- If a recently passed House bill mandating a 7-fold increase in biofuels becomes law, there's little doubt food prices will rise.

The question is by how much, and is the trade-off worth it?

On Thursday the House, as part of a larger energy package, passed a bill mandating the increased use of biofuels - fuel from ethanol and other plant matter largely used to power vehicles - from current levels of about 6 billion gallons a year to 36 billion gallons a year by 2022.

House leans green on sweeping energy bill

The move is supported by environmentalists, who say biofuels generate about 20 percent less greenhouse gasses than fossil-based fuels like gasoline. Corn farmers and the ethanol industry are obviously on board.

The bill also has the support of those what want to reduce U.S. oil consumption. Over 60 percent of the country's oil is imported - mostly from Canada, Mexico and Venezuela. That 36 billion gallons of biofuel could replace roughly 25 percent of the nation's current gasoline consumption of about 140 billion gallons a year.

But it's clear the biofuels mandate, which calls for 15 billion gallons a year of corn-based ethanol and another 21 billion gallons from "advanced biofuels" that use other plants besides food crops, will drive up the price of corn.

With it, the price of other corn-dependent products like chicken, pork, or items that use corn syrup, like soda, which have already seen an increase, are likely to rise further.

Karen Batra, a spokeswoman for the National Cattleman's Beef Association, said that corn prices are already up 21 percent this year. "The ranchers are already taking a hit."

Food prices overall have risen 4.5 percent over the last year, according to Brian Todd, president of the industry association the Food Institute. Meanwhile, prices for other consumer goods excluding food and energy have risen about 2 percent this year.

But Todd said rising energy prices in general have played a big part in this. In addition to transporting food by truck, the industry is dependent on other oil or natural gas-based goods like fertilizer and packaging plastic.

"In most cases, I think it's probably pretty marginal," Todd said of ethanol's impact on food prices.

The Department of Energy agrees.

"Up to 15 billion gallons [of ethanol] probably would not impact food prices significantly," said Andy Aden, a senior biofuels research engineer at DOE's National Renewable Energy Lab. "But that's where we draw the line."

Significant is a subjective measure, and the House bill will likely impact livestock producers and other corn users more than consumers, said Jacinto Fabiosa, Co-Director of the Food and Policy Research Institute at Iowa State University.

Fabiosa said only about 25 percent of the price of pork at the retail level reflects costs on the farm. So if the price of corn goes up 10 percent, the farmers' overall cost might go up 5 percent, but the ultimate retail price for a pork chop may only rise 1 or 2 percent.

"There's going to be a significant increase at the farm level, but how that translates at the retail level is another matter."

A study by Fabiosa and his colleagues, estimates that a 15 billion gallon increase in ethanol production would translate into a 4 percent increase in the retail price of eggs, a 2 percent increase in the price of meat, and a 0.5 percent increase in overall food prices.

Fabiosa noted that Americans spend only about 10 percent of their income of food, so for them the increase may be palpable. But he said people in other nations spend up to 50 percent of their income of food. That would hurt people who eat imported food like corn, wheat or soybeans, but may help overseas farmers who grow those crops for export.

Of course, there are other problems associated with ethanol, including concerns about the environmental impact of growing so much corn, debates over how efficient the fuel really is, and logistical problems transporting it.

"The renewable fuel title sets up a new crazy-quilt of boutique biofuels that could strain, indeed could break, the nation's fuel supply system, American Petroleum Institute President Red Cavaney said in a recent statement.

But so far most environmental groups support the bill, saying it contains proper safeguards. And the Department of energy stands by its claim that ethanol does in fact produce more energy than is needed to make it.

The bill now heads to the Senate, where the biofuels provision has wide support, but other measures in the bill could keep it from passing.  To top of page

More on the energy bill

The energy bill has finally passed the House of Representatives and is now with the Senate. In addition to raising the biofuels mandate, there are the three other major provisions in the bill:

Raise fuel efficiency standards for vehicles: This would raise average fuel efficiency standards from 25 to 35 miles a gallon by 2020. With wide bipartisan support, the measure is expected to pass. See Fuel efficiency and the American driver.

Require utilities to buy more power from renewable energy: The House wants to make utilities get 15 percent of their power from renewable resources by 2020. About half the states already have this requirement, but a federal law is being opposed by Southeastern utilities and politicians who say their region has fewer renewable options. There is considerable opposition to this in the Senate, and the White House has threatened to veto the entire energy bill if itís included.

Eliminate oil company tax breaks and use the money to fund renewables: The measure would direct $21.5 billion to renewable energy projects and efficiency programs. A big chunk of its funding comes from eliminating some $13 billion in tax breaks for the five largest oil companies. It also faces considerable opposition in the Senate and a veto from the Bush Administration, which says the plan it will discourage domestic energy production and raise prices for consumers.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.