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US wholesale costs fall for third month on cheaper gas Bill to axe mandate

WASHINGTON, Nov 13, (Agencies): US wholesale prices dropped in November for the third consecutive month, pushed down again by cheaper gasoline and lower home heating oil costs. But excluding volatile energy costs, inflation was mostly stable. The producer price index, which measures prices before they reach the consumer, declined 0.1 percent last month, the Labor Department said Friday. This comes after similar decreases in October and September. Overall wholesale prices have risen just 0.7 percent in the past 12 months. Excluding energy and food prices, so-called core wholesale prices increased 0.1 percent in November and 1.3 percent over the past 12 months.

“If you are worried about upside inflation risks, you need to look elsewhere,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Both consumer and wholesale inflation have been running extremely low in the past year. High unemployment and weak wage increases have made it difficult for businesses to raise prices.

Mild inflation has allowed the Federal Reserve more latitude to use its policies to try and stimulate growth. And some Fed officials have raised concerns that inflation is running too low. Energy costs have kept inflation well below the Fed’s 2 percent target. In November, gas costs tumbled 0.7 percent and home heating oil prices plunged 5.7 percent. The costs for new cars also fell 0.8 percent last month. Consumers are benefiting from cheaper prices, particularly when they fill up their cars and trucks. The average national price for a gallon (3.8 liters) of gas was just $3.25 on Friday, according to AAA’s Daily Fuel Gauge Report. The costs of raw materials such as corn, wheat, cane sugar, coal and iron ore have each fallen over the past 12 months. Those declines suggest that inflation should be held in check in the months ahead.

Wholesale food prices were flat last month. Pork costs increased 5.6 percent, but the wholesale prices for bread rolls, muffins, bagels and croissants fell 4.2 percent after a sharp rise in October. The Fed has said it will keep the short-term interest rate it controls at nearly zero at least until the unemployment rate falls below 6.5 percent and as long as inflation isn’t expected to rise above 2.5 percent at an annual rate in the near future. The unemployment rate fell to 7 percent in November. Low inflation has also allowed the Fed to continuing buying bonds to try and lower long-term interest rates. Fed officials meet on Tuesday and Wednesday to evaluate their interest rate policies.

A group of US Senators introduced a bill on Thursday to eliminate the corn ethanol mandate but leave other elements of biofuels policy intact, arguing that current law raises the cost of food and animal feed and damages the environment. The bill, introduced by Dianne Feinstein, a California Democrat; Tom Coburn, an Oklahoma Republican; and eight cosponsors, faces an uphill battle as many lawmakers from agricultural states support the Renewable Fuel Standard (RFS)that dictates rising volumes of ethanol made from grains, including corn, be blended into motor fuel. The bill supports development of advanced biofuels, including those from made from soybean oil, grasses and trees, Feinstein said. But it would eliminate the mandate for corn-based ethanol, which currently represents the vast majority of biofuels produced in the United States.

She said the corn mandate diverts a large proportion of the US corn crop towards making fuel, raising animal feed and food prices. In the 2012/13 marketing year, over 4.6 billion bushels of corn was used for the production of ethanol and by-products, out of a drought-reduced total US supply of 11.9 billion bushels, according to the US Department of Agriculture. “I strongly support requiring a shift to low-carbon advanced biofuel, including biodiesel, cellulosic ethanol and other revolutionary fuels. But a corn ethanol mandate is simply bad policy,” Feinstein said in a statement.

Corn ethanol opponents say that the mandate has helped lead to higher gasoline prices because it has pushed the industry to a so-called “blend wall”, a point at which refiners would have to blend ethanol into gasoline at a higher level than 10 percent per gallon, currently the dominant blend in the United States. Fears about the blend wall have pushed refiners and blenders to buy renewable fuel credits. That has pushed up prices of credits in the market, adding costs to refiners and lending support to gasoline prices.

Coburn said the corn ethanol mandate costs taxpayers billions of dollars and causes higher fuel prices at the pump. “Eliminating this mandate will let market forces, rather than political and parochial forces, determine how to diversify fuel supplies in an ever-changing marketplace,” Coburn said. The ethanol industry suffered a blow last month when the Environmental Protection Agency, which administers the RFS, proposed the first cut in the use of biofuels since the law was expanded in 2007. If the bill eventually became law it could hurt alternative fuel producers such as Archer Daniels Midland Co and private company POET. But ethanol experts said the EPA’s proposed cuts, and backing for ethanol among many lawmakers, discounts chances that the bill would move forward anytime soon. “I don’t think the bill is going to be a high priority on Capitol Hill, especially after the Environmental Protection Agency already gave ethanol opponents much of what they want last month,” said Wally Tyner, an energy economist at Purdue University. Rich Nelson, an analyst at Allendale Inc, said: “While this is a bipartisan effort and does have a chance to cause the grain trade some concern, it’s very likely this will not be passed.”

The EPA proposed cutting the overall 2014 mandate to 15.21 billion gallons, about 16 percent less than the current 2014 mandate’s 18.15 billion gallons, and below this year’s requirement of 16.55 billion gallons. Corn prices fell more than 1.5 percent on Thursday after the senators announced the bill, notching the biggest one-day loss since mid-November. March corn on the Chicago Board of Trade was down 6 cents per bushel at $4.33-1/4 in afternoon trading. “The proposal had a definite immediate shock to prices, but long-term I don’t think it has a chance getting through Congress, it will have a tough time clearing the farm lobby,” said Sterling Smith, futures specialist for Citigroup. “Also, there’s a lot of ethanol use ... even without the mandate, so I question how much of an impact ending the mandate would have,” Smith said.

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