Cramer on Ethanol: 'Drop the Mandate, Prices Plummet'

     CNBC host Jim Cramer has added himself to a short list of broadcast journalists who are willing to connect food inflation to government-mandated use of ethanol, a gasoline additive made with corn.


     Cramer told NBC “Today” show host Matt Lauer April 25 that ethanol is one of two main causes for recent food inflation, which has led to higher grocery prices for Americans and food riots in some poorer countries.


     “One, longer-term, greater affluence of China and India. Those people now want protein-filled diets, beef and chicken,” Cramer said. “Short-term though, ethanol in this country. That mandate has bid up everything. You drop the mandate, prices plummet.”


     The mandate Cramer referred to started in 2005, when the federal government established a requirement for ethanol to be mixed into the nation’s gasoline supply. Congress updated the mandate, which President Bush signed, in December 2007, requiring 36 billion gallons of ethanol to be mixed with gasoline by 2022.


     The artificial demand for corn to make ethanol has driven up its price. The higher value of corn has affected downstream products – everything from soft drinks that use corn syrup to meat from corn-fed animals. And as farmers realize the higher value of corn, they switch from other products such as wheat or soy, lowering the supply of other goods.


     The broadcast networks – ABC, CBS and NBC – praised ethanol early in its introduction and have been willing recently to report that ethanol is partially responsible for food inflation. But few have mentioned that demand for corn-based ethanol is driven by government mandates, not natural market forces.


     Lauer also asked Cramer about a recent column in The Wall Street Journal that suggested Americans should consider stockpiling food as a short-term investment strategy.


     Cramer called the proposal “fatuous, perhaps even stupid.”