Washington Restaurant Market Watch: Ethanol mandate drives up food costs in a major way

Washington Restaurant Market Watch: Ethanol mandate drives up food costs in a major way https://wahospitality.org/wp-content/uploads/2015/05/ethanol640-640x198.jpg

By Paul Schlienz

Good intentions often have unintended consequences. Nowhere is this truer than when it comes to ethanol.

Midwestern corn farmers love it. And why shouldn’t they? After all, the Renewable Fuel Standard (RFS), implemented by Congress, in 2005, created an instant market for corn farmers’ products by requiring that a percentage of what they produce be blended into gasoline each year as ethanol. Every year the percentage required increases, diverting more of the U.S. corn supply into ethanol fuel.

Great for corn farmers, but not so great for the rest of us.

Unfortunately for the broader U.S. economy, after the RFS took effect, costs of food commodities, such as corn, grains and oilseeds, poultry, meat, eggs and dairy products all rose dramatically since more of the nation’s corn supply is diverted into ethanol each year.

This has a big impact on restaurants.

“Wholesale food prices have outpaced the consumer price index by more than a full percentage point since the implementation of the RFS,” Mike Brown, president of the National Chicken Council, and Rob Green, executive director of the National Council of Chain Restaurants, wrote in a Wall Street Journal op-ed. “In many instances, especially in the restaurant sector, small business owners are not able to pass on higher retail prices to consumers because of market competition—a concept that the corn-ethanol industry is unfamiliar with thanks to a government quota.”

Before consumers began feeling its bite in a major way, the RFS pushed up costs for various producers in the food chain, including poultry farmers, cattle feeders and dairy farmers. Of course, food costs always fluctuate due to factors including weather, which can’t always be predicted. Nevertheless, the federal corn-ethanol subsidy has created an artificial demand, leading to significant increases in volatility, leaving prices higher.

“The resulting increases in feed costs have also affected the American production of beef, pork and chicken, which had increased consistently over the past 30 years but has now leveled off due to the higher cost of feed,” Brown and Green stated. “As a result, a 2012 study by Pricewaterhouse Coopers estimates that the RFS costs chain restaurants $3.2 billion every year in increased food commodity costs.”

U.S. farmers are the beneficiaries of scores of government aid programs. This year alone, farmers will receive approximately $18 billion in direct subsidies funded by taxpayers. These so-called “farm income safety net” payments flow to farmers through federal crop price support, dairy income support and livestock insurance programs.

Changes, however, may be on the horizon for the federal ethanol mandate. Bipartisan legislation has been introduced in the U.S. House and Senate to repeal the RFS.

“The food industry isn’t anti-ethanol,” concluded Brown and Green. “Repealing the fuel standard would simply require the ethanol industry to compete in the marketplace just like restaurants, food distributors and chicken farmers do every day—without a government mandate guaranteeing secure and growing sales.”

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