Oct 24, 2007

US Corn Ethanol Policy Will Fuel Inflation

However, the bank finds that this rapid conversion of food to fuel will put increased inflationary pressures on food prices.

CibcBy the end of next year we predict food inflation will be running well over five per cent. 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. ...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.

—Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets

Ninety-five percent of the ethanol currently produced in the US is distilled from corn. The 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 are needed to achieve these goals as corn-based ethanol production is simply not economically efficient—not even with $100 per barrel oil. The key reason is the huge amount of energy that is required in first growing and harvesting the corn, transporting it to the distiller, distilling the ground cornmeal into ethanol and then transporting it by truck and train to users across the country. These more costly transportation methods are required because ethanol cannot be transported in conventional pipelines.

These subsidies, worth some $8 billion in 2006, have stimulated the sector as ethanol production hit six billion gallons a year in mid-2007. At this rate of growth, CIBC World Markets expects the Administration's target will be reached by 2012, a full five years early. The report estimates that subsidies will rise to "a staggering level" of more than $25 billion when production reaches the 35 billion gallon target by 2017 or sooner.

By Mike Millikin greencarcongress.com