Wednesday, June 18, 2008

Want Lower Prices ? Reduce the Ethanol Tariff !

Watching the devastation impacting farmlands in Iowa and the surrounding states is a stark foretelling that food prices will increase.

The Bureau of Labor Statistics released CPI data for the first quarter of this year showing food and beverage prices rising at an annualized, seasonally adjusted rate of 5.1 percent.
“Federal food-to-fuel mandates have led to over one quarter of corn to be diverted from food to ethanol production, driving up the price of corn and other commodities to historic highs,” was the immediate reaction from Scott Faber, vice president for Federal Affairs at the Grocery Manufacturers Association. “These rates will only increase following the USDA’s report that farmers will plant less corn in the coming year. Before these effects spread further across our economy and around the world, Congress should take immediate action by revisiting food-to-fuel mandates.”

Faber’s assertions can be debated, but with Congressional mandating the use of ethanol, there is a demand yet the cost of corn is actually delaying the opening of two brand new VeraSun facilities in Welcome MN and Hartley IA. Clark Fredericksen said "I think the ethanol industry, as a whole as some of these new plants come on are going to look at whether the margins are profitable enough to start right now, at the price of corn, or would they be better off, cost effective to delay them, until the price of corn eventually does come back down."
That’s millions of gallons of ethanol that these facilities may not produce this year … as well as jobs.

Congress’ ethanol mandate impacting prices has been a concern since First District Congressman Gil Gutknecht was promoting his 10/10 Act (10% ethanol by 2010). I contacted Gutknecht suggesting that H.R. 4409 The Fuel Choices for American Security Act of 2005 seemed to be a better bill. Included in H.R. 4409 was a 10 % ethanol requirement with a deadline of 2015, but also many more provisions; such as vehicle efficiency improvement, promoting hybrid technology, and requiring a 20% petroleum reduction by 2015 for vehicles used by federal agencies. H.R. 4409 had a broad group of 83 co-sponsors including many fiscal conservative members. Gutknecht wrote me that he has concerns with H.R. 4409 since it would repeal the tariff on imported ethanol. We do not want to be replacing foreign oil with foreign ethanol. I believe we should produce as much ethanol domestically as possible.

Despite all of Congress’ efforts, ethanol domestic production is struggling.

Since Congress has enacted mandates, foreign markets may be part of the answer. Unfortunately, foreign ethanol is subject to a 54-cents-per-gallon tariff and a 2.5 percent duty.

Ben Lieberman of the Heritage Foundation wrote “Consumers would benefit if the market—not special-interest politics—decided how much ethanol to use and where it should come from.

May I remind everyone that is advocating drilling in ANWR or the Outer Continental Shelf (OCS) that those projects will take years (maybe decades before meaningful production is achieved) but eliminating the ethanol tariff could impact supply and prices immediately … plus allow more corn to be used in foodstuff.

The efforts to make America “independent of foreign producers” should be a grave concern to all free market advocates and a trend toward an Isolationist Worldview and that is troubling in a global economy.
George Bush warned during his State of the Union address that “America rejects the false comfort of isolationism.
Isolationism would not only tie our hands in fighting enemies, it would keep us from helping our friends in desperate need.
In a dynamic world economy, we are seeing new competitors, like China and India, and this creates uncertainty, which makes it easier to feed people's fears. So we're seeing some old temptations return. Protectionists want to escape competition, pretending that we can keep our high standard of living while walling off our economy. … We hear claims that immigrants are somehow bad for the economy -- even though this economy could not function without them. (Applause.) All these are forms of economic retreat, and they lead in the same direction -- toward a stagnant and second-rate economy.

We need to remember that Canada is America’s leading importer of crude oil. Mexico is number three. With Iraq as number six, the question begs to be asked: Why are American troops in the middle of a civil war to determine the future of Iraq yet some people are advocating that America become "oil independent"? How will the Iraqi economy advance, if America is not an active trading partner?

In the world economy, remember the words of Baron de Montesquieu who wrote in his 1748 work, The Spirit of the Laws, “Peace is the natural effect of trade. Two nations who traffic with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling: and thus their union is founded on their mutual necessities.”

Closing our ports to foreign trade will hurt America in the long run.

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