May 01, 2008

Gov. Perry Seeks Relief From Skyrocketing Food Prices

Texas Governor Rick PerryTexas Governor Rick Perry issued a statement last week blaming ethanol for high food prices.

Seeking immediate relief from skyrocketing food costs, Gov. Rick Perry today asked the federal government for a 50 percent waiver from the federal renewable fuel standard (RFS) mandate for ethanol produced from grain.

"We appreciate the good intentions behind the push for renewable fuels. In fact we’re diversifying our state’s energy portfolio at a rapid rate, but this misguided mandate is significantly affecting Texans’ family food bill," said Gov. Perry. "There are multiple factors contributing to our skyrocketing grocery prices, but a waiver of RFS levels is the best, quickest way to reduce those costs before permanent damage is done."

This is a direct contradiction to the findings of a report issued by Texas A&M last month that found that ethanol production had little effect on food prices. The report goes on to further note that eliminating the RFS standard would do little to change food prices.

Relaxing the RFS does not result in significantly lower corn prices. This is due to the ethanol infrastructure already in place and the generally positive
economics for the industry. The ethanol industry has grown in excess of the RFS, indicating that relaxing the standard would not cause a contraction in the industry.

So why would Governor Perry propose relaxing the Renewable Fuels Standard when it would have little effect on food prices? Well, I think that this is probably more about protecting two key industries within Texas, livestock production and the oil and gas industry. The first clue comes from the Texas A&M report.

The net balance to the Texas agricultural economy is negative. While corn
and grain sorghum producers benefit from high prices, the livestock industry faces increasing costs. Because the livestock industry is bigger than the crop industry, the net balance is negative.

The next clue come from the fact that a couple of years ago Texas established incentives for ethanol and biodiesel production. The goal was to lure producers to the state. Then last year they ended that program because it was in competition with the state's oil and gas industry.

But some state lawmakers, including the influential chairman of the Appropriations Committee, said they were concerned that ethanol would compete with Texas' native oil industry – and would do so with an unfair, government-sponsored advantage.

"We virtually compete with ourselves when we start to subsidize those [alternative fuels]," said Rep. Warren Chisum, R-Pampa. (Source)

So it appears that Governor Perry is simply using the food prices issue as a way to lower the competition that the livestock industry and the oil and gas industry in Texas face. And while that may be good for Texas, as the Iowa State study pointed out last week, ethanol production has lowered the retail price of gasoline by 29 to 40 cents per gallon, it would not be good for motorists across the country.

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