$4 per gallon for Gas and Milk?

If crossing the threshold of paying $4.00 per gallon of milk feels similar to having paid $50 for a tank of gas, the reasons behind these increases are more closely linked than you know. The reasons are twofold, but ethanol is behind both.

The Energy Policy Act of 2005 mandated that 4.7 billion gallons of ethanol be added to the nation’s gasoline supply by 2007, which is only a fraction of the 140 billion gallons of gasoline the U.S. currently uses yearly. However, the government also provides tax credits, incentives, and subsidies that add up to roughly $1 per gallon of gas, causing U.S. farmers to decide that they’d rather be a part of the “Fuel Basket” than the “Bread Basket” of the world. As a result, the risk of new investments in refinery capacity for oil companies because of the ethanol production has caused oil refining capacity to be severely stretched. Together, these factors have caused gas prices to rise to unprecedented levels. And, therefore, the cost to transport all groceries to the stores has risen proportionately.

The other reason for the increase in the price of milk is pointed out in a story by Julie Jargon in the June 25th edition of The Wall Street Journal, “Milk-Price Rise Expected to Steepen in July.” “Some dairy farmers are raising milk prices to offset the higher prices they pay for cattle feed as corn prices rise” due to the ethanol mandate. Cheese, chocolate, and even Pizza Hut prices are rising now due to the higher price of milk.

Unfortunately for consumers, the current price increases in gas and food are only the beginning. The Senate has now passed, and the House is now considering, legislation that will mandate ethanol production to be increased sevenfold.