Food prices are rising at the fastest pace since 1990, an annualized rate of 6 percent, according to the Bureau of Labor Statistics. Many lawmakers are blaming...
Food prices are rising at the fastest pace since 1990, an annualized rate of 6 percent, according to the Bureau of Labor Statistics.
Many lawmakers are blaming subsidies that encourage farmers to grow corn for ethanol and other biofuels. A World Bank study estimates corn prices rose more than 60 percent from 2005 to 2007, “largely because of the U.S. ethanol program.”
Politicians, including presumed Republican presidential nominee Sen. John McCain, have criticized the subsidies. Yet analysts don’t expect Congress to roll them back because it would jeopardize both parties’ chances in November.
Congress will not “turn on the Corn Belt” because of the votes held by ethanol-producing states, Friedman, Billings, Ramsey analyst Kevin Book argues in a report.
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Book says the 10 states that produce over 80 percent of U.S. ethanol have almost half the 270 electoral votes needed to win the presidential election.
Last month, Congress passed a bill that provides new and bigger subsidies to farmers but it cut a per-gallon ethanol tax credit for refiners to 45 cents from 51 cents.
Under a 2007 law, refiners must blend 9 billion gallons of ethanol into fuel this year, 15 billion by 2015 and 36 billion by 2022.
According to UBS Investment Research analyst Chris L. Shaw, “It is unlikely in our view that the industry will now be dismantled by the government that helped build it.”
Stocks of ethanol producers have fallen amid rising corn prices. VeraSun Energy (VSE) is down 12.5 percent in the past month and down 22.5 percent in the past three months.
Pacific Ethanol (PEIX) lost 9.2 percent for the month and 31 percent for the three months, according to Morningstar.
While many analysts say ethanol is politically untouchable through the elections, Book warns that risk to the sector could increase in 2009 if new leadership at the Environmental Protection Agency brings tougher standards for ethanol producers.