Ethanol demand to push food prices 5% higher next year: economist

The United States' policy of subsidizing ethanol to reduce its dependence on foreign oil is causing higher food prices in Canada as well as the U.S., the chief economist of CIBC World Markets says.

"When you add it all up, it's fairly significant because food inflation is already well over four per cent, and we would expect it to move higher as more and more corn production is diverted to ethanol as is required under President Bush's plan," Jeff Rubin said Monday.

"When you overlay that with the inflationary hit from oil itself, they're going to produce the hottest inflation numbers that we've seen yet this cycle."

The U.S. federal and state governments provide massive subsidies $8 billion US last year to encourage ethanol producers to expand and corn farmers to supply the crops to make the fuel. The growing diversion into ethanol has resulted in a 60 per cent rise in corn prices in the past two years, Rubin said.

'The cost of this endeavour is enormous and is rising with every gallon of ethanol produced. The only thing Bush's renewable energy policy will fuel is inflation.' Jeff Rubin, CIBC economist

This affects most food categories, since corn is not only a direct product for human consumption but is a major animal feed whose cost affects meat prices. Derivatives such as corn syrup and corn starch are ingredients in a vast array of processed foods and drinks.

Corn-based staples like tortillas have become more costly, along with other grains, fruits and vegetables that are pushed aside as farmers cash in on corn. Canadians can expect their food prices to be squeezed as the United States "is a major, major corn exporter to the rest of the world," Rubin said.

He predicts food costs will be rising at a rate of over five per cent next year and seven per cent by 2009, adding that for poor Americans, food already consumes nearly 40 per cent of their spending.

"If wages don't respond, then it's a real wage cut for most folk because there aren't a whole lot of substitutes for food and energy," he said.

Canada invests $1.5 billion in renewable fuels

U.S. President George W.Bush aims to raisehis country'sethanol production from one billion gallons in 2000 to 35 billion gallons in 2017. In Canada, the government has pledged$1.5 billion over seven years to promote renewable fuels such as ethanol, and it is requiring that Canadian gasoline consist of five per cent renewable content by 2010.

Rubin is among various experts who argue that corn-based ethanol "is simply not economically efficient," citing the heavy energy inputs required to grow and harvest the corn, transport it to the distiller, distil it into ethanol and then carry it by truck and train to end users.

A study by the Library of Parliament in March suggested Ottawa's investments in biofuels will be of little benefit in cutting dependence on fossil fuels or reducing greenhouse gas emissions. Such findings are disputed by groups such as the Canadian Renewable Fuels Association, which say biofuels will clean up the country's air.

"Ethanol indeed has certain benefits, but only for those who grow corn and distil it into alcohol," Rubin countered.

"The cost of this endeavour is enormous and is rising with every gallon of ethanol produced. The only thing Bush's renewable energy policy will fuel is inflation."