From the AP:

Dairy market forecasters are warning that consumers can expect a sharp increase in dairy prices this summer. By June, the milk futures market predicts, the price paid to farmers will have increased 50 percent this year - driven by higher costs of transporting milk to market and increased demand for corn to produce ethanol.

U.S. retail milk prices have increased about 3 percent, or roughly a dime a gallon, this year, according to the U.S. Department of Agriculture.

But University of Illinois dairy specialist Michael Hutjens forecasts further increases of up to 40 cents a gallon for milk over the next few months, and up to 60 cents for a pound of cheese.

That would drive the cost of a gallon of whole milk around the country to an average of $3.78, based on the USDA’s monthly survey of milk prices in 30 metro areas.

If Hutjens’ prophecy holds true that will mean that milk prices will have increased 15% just this year by the end of summer.  Clearly this is a price gouging conspiracy by a cabal of profiteering cattle farmers.  I demand that Congress investigate!

Seriously, there is no reason to investigate milk prices just as there is no reason to investigate gas prices.  Both are set by the market.  What would Congress find if they did investigate the increase in the price of milk?  At the bottom of the price increase they would find that they deserve a great deal of blame.

The government in this country has become obsessed with subsidizing and generally giving favor to biofuels.  This has disrupted the market prices for food commodities like corn.  It all goes back to supply and demand.  The government has dramatically increased the demand for corn, but they can’t do the same with supply since there is a finite amount of arable land for crop production.  The end result is that the price of corn and other crops increases as a portion of the finite supply is diverted from consumption to energy production.

Exacerbating the problem is that ethanol containing fuels, like the much touted E-85, cost more than regular gasoline and offer inferior performance.

E85 is made up of 85 percent ethanol made from grain and 15 percent conventional pump gasoline. Throughout the country the price of E85 is higher than gasoline even though the corn-based fuel contains only 72% of the energy in a gallon of gasoline.

The market place isn’t driving the demand for E-85, the government is doing that.  As the previous article states, “many Midwestern drivers are passing up E85 even though the corn based fuel is better for the environment and their local economy.”

But government mandated/encouraged biofuels are also indirectly driving up the cost of regular gasoline.  As oil companies see Congress set mandatory increased biofuel usage requirements they have less incentive to make long term investments into increasing refining capacity.  Would you spend billions of dollars to expand production if you were sure the government was going to undermine your investment by mandating that consumers purchase a competitor’s product?  That uncertainty about the future is driving up current prices (just like it does in any market).

Ethanol itself may not be the environmental panacea that most advocates claim.  The artificially created price increases for corn will cause more farmers to produce more corn.  That will mean less crop rotation, which is environmentally harmful because it leads to increased usage of pesticides and fertilizer.

The government’s increased intrusion into the energy market has wrought numerous negative consequences.  The price of milk is just the latest victim.  I wish the politicians would open their eyes and recognize their blunder.

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This entry was posted by Brian on Sunday, June 3rd, 2007 at 6:42 am and is filed under Energy, Government. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.