About one-third of the enormous U.S. corn crop isn’t going to into cereal or to feed cows — it’s helping run your car.  The ethanol industry has tripled in size since 2005, when a series of hefty government subsidies began.

As the ethanol industry eats up more and more corn, it has helped drive up the prices of grain.  That’s good news for the Corn Belt, but the meat and dairy industries are up in arms over the high cost of their main feed.  And ultimately, consumers feel the rising costs, most strongly in the prices of meat, dairy and eggs.

How corn costs reach your table

Take Chris Stelzer, head chef for the Green Hills Retirement Community in Ames, Iowa.  Stelzer likes to cook the seniors things that remind them of home: meat and potatoes, angus beef, pork loin.  It’s with these foods that he’s seen the most drastic rise in prices.

“The prices of beef and pork have definitely gone up in the last few months. Tenderloin's gone up about $2 in the past month or two, and pork's gone up about a dollar or so,” Stelzer said.

He said while meat prices always go up at holidays, this year the increase started earlier and went higher. 

Courtney Bloxham, the community’s dietician and food director, added that food costs have been rising over the last few years.

“We do a budget analysis every year, and I would say 2 to 3 percent would be a typical increase, but several years ago we asked for much more, just because we knew the food costs was going up, the consumer index was rising,” she said.

U.S. Department of Agriculture figures show meat costs up as much as 12 percent since last year.

The story of corn

But let’s get out of the kitchen for a minute — this is a story about corn.  Because when you’re eating meat, you’re indirectly eating lots of corn.  Far more corn goes into raising that T-bone steak than a box of cornflakes. When it comes to raising meat, eggs and dairy, feed is the biggest cost.  And, most likely that feed is corn.

For years the livestock industry has been the main buyer of cheap and plentiful corn.  Then came the ethanol mandate in 2005.  Ultimately the government required that we use nearly 13 billion gallons of ethanol this year. And the way we make ethanol here:  yup, corn.

To further boost using corn to fuel your car, Congress created subsidies paying gasoline blenders for every gallon they blend with ethanol. And it’s worked. The ethanol industry’s consumption of corn has grown from 12 percent five years ago to 34 percent this year. 

“I don’t see why we can really justify subsidies when all that does is it raises the cost of producing food,” said economics professor Bruce Babcock at Iowa State University.  His research shows that ethanol policies increase the cost of food at least 1.5 percent. The impact on meat prices is significantly higher.

Paying fuel over food

It’s economics 101: ethanol plants increase the demand for corn, driving up the prices for other buyers — like livestock producers.  International demand is up, too; and we’re exporting more ethanol than ever before.   Many grain farmers are seeing record incomes this year.

American Meat Institute president J. Patrick Boyle says in the bidding war for corn, it’s not a level playing field because the ethanol industry is benefiting from a trifecta of government subsidies.

“The government mandates the consumption of your product, subsidizes its production and then insulates the product from international competition,” he said.

Boyle said it’s time for the industry to stand on its own two feet and function in a competitive, non-subsidized market. 

“That tax credit today is costing the American taxpayer about $5 billion this year,” he said. “We think that is way too much money to begin with, and we think it’s gone on way too long as well.”

But guess who disagrees? The Renewable Fuels Association says the meat industry just wants to return to the days when the subsidies helped them.  Director of Public Affairs Matt Hartwig argues that for years before the ethanol mandate, corn prices were artificially low.

“Look, in the past the government has paid farmers when the price of corn fell below a certain point,” Hartwig said.  “We were doing that for decades, to the tune of several billion dollars a year.  Now the corporate livestock industry, the junk food industry, they all loved that.”

Tying food prices to energy

Ethanol demand has helped send corn prices soaring, far above the point where they would trigger those government payments.

And economist Babcock said the mere fact that ethanol has grown so robust — ethanol comprises about 8 percent of fuel consumed here — has already driven changes in the commodity market behind food. 

“We've now hitched price of corn, inextricably linked the price of corn, to price of crude oil.  And I think we can't turn clock back, that's the way it is,” Babcock said.

And this new reality means another link between the cost of food and the cost of oil.With corn prices tied to oil prices, when the price of gas goes up it raises the demand for ethanol.  That means consumers will feel it in two places: at the pump and on the dinner table.

More from this special report

Hope or Hoax: The Truth Behind the American Ethanol Debate