October 23, 2007

America’s efforts to add more corn-based ethanol will increase food prices, says CIBC World Markets

Toronto, Ontario – America’s policy of adding more ethanol to the nation’s fuel supply in an effort to increase energy self-sufficiency will do little more than drive food prices skyward, according to a new report from CIBC World Markets.

The report states that to meet the policy goal of significantly increasing U.S. ethanol production, federal and state governments are extending huge subsidies to ethanol producers to expand capacity, and to corn farmers to supply the crops needed to make fuel. The report says that diversion of an ever-increasing share of the American corn crop from human and livestock consumption to energy production is putting steady and unrelenting pressure on food prices.

“Converting corn from food to fuel has, at best, dubious net energy benefits, but its impact on food prices, already significant, can only grow over time,” says Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets. “With food carrying more than twice the weight in the CPI (consumer price index) than energy, the policy response to record oil prices may become more inflationary than oil prices themselves.

“In the last two years, corn prices have jumped by 60 per cent. Soaring corn prices not only pass directly into animal feed costs and corn-based food prices like tortillas, but they are spilling over to other grain prices as farmers scramble to expand corn production at the expense of other crops. Grain prices are the strongest they have been in memory, while global inventories continue to shrink to record lows.”

In the U.S., 95 per cent of ethanol produced is distilled from corn. The U.S. Administration has set a target to raise ethanol production from a level of roughly one billion gallons a year in 2000, to 35 billion gallons a year by 2017. Rubin notes that huge subsidies needed to achieve these goals are simply not economically efficient, even with US$100-per-barrel oil. The key reason, he says, is the huge amount of energy required in growing and harvesting the corn, transporting it to the distiller, distilling it into ethanol, and then transporting it by truck and train across the country. Ethanol cannot be transported in conventional pipelines.

“By the end of next year, we predict food inflation will be running well over five per cent,” Rubin says. “As ethanol production rises to nine billion gallons in 2009, food inflation will approach seven per cent, its highest level in more than 25 years.”

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