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King corn

Money | The push for ethanol is milking dairy consumers

Issue: "Crossing borders," June 23, 2007

Question: What do you get when you mix a potential drought with the global warming debate and a presidential campaign season?

Answer: At least this year, much higher prices for milk and cheese. The prices of dairy products are shooting up this summer, and one of the reasons is a case study in the unintended effects of government subsidies and regulations.

The culprit in this case is a sudden ethanol craze. Ethanol fever strikes every four years when presidential candidates make trips to Iowa, where federal subsidies for the corn-based fuel are hugely popular. But this year President Bush raised the temperature early by calling on Congress in his State of the Union address to "require 35 billion gallons of renewable and alternative fuels" by 2017.

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The prospect of this actually happening has created a spike in demand for corn. The government says that ethanol makers will use 3.2 billion bushels of corn for ethanol this year, up 52 percent over last year, and corn futures are rising, too.

But corn goes not only into ethanol; it also goes into cows as feed, and higher prices for corn mean higher prices for the dairy products that cows produce. Add that to higher fuel costs to transport milk and cheese and to concerns about a July drought, and the result is sharply higher prices.

Michael Hutjens of the University of Illinois predicts that milk prices will rise 40 cents per gallon this summer and that cheese prices will jump 60 cents per pound. Poor families, which spend a greater share of their incomes on food than do other families, will be hit the hardest.

Prices will go up across the country, Hutjens told the Associated Press, but especially in areas outside the Midwest: "Certainly I think you're gonna see it worse in places like the Southeast -in Georgia and Florida-and California."

The lesson is that government interventions in markets are never cost-free. Someone, somewhere has to pay-and in this case it is anyone who frequents the dairy aisles at grocery stores.

Balance Sheet

HOTELS: Marriott is officially rethinking the idea of having a female-only floor in its new Grand Rapids, Mich., hotel. The company's original plan was to set aside the 19th floor (out of 23) in the hotel for women, in part because of security concerns among traveling businesswomen. Roger Connor, spokesman for Marriott International, told the Associated Press that the concept was under review after hearing from many customers who objected to the idea. The new hotel is scheduled to open in September.

AUTOMAKERS: Caught between the rock of lavish pension promises they made long ago and the hard place of today's global competition, the big three automakers are considering a plan to work together on retiree health care. GM, Ford, and Chrysler have $114 billion in combined health care obligations for pensioners. The idea would be for each of them to make a smaller one-time contribution to a health care fund that the United Auto Workers would operate, and in return be relieved of their future obligations. Executives at the company may propose the idea as soon as next month's labor talks. "Ford, GM, and Chrysler are top-heavy in terms of fringe benefits, and that puts them at a disadvantage to the other automakers in the U.S., like Honda and Toyota," industry analyst Dennis Virag told the Bloomberg news service. "It is not surprising they would want to work together on this."

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

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