Ethanol not the main cause of food price hikes

Tuesday, June 2, 2009

The increased use of ethanol accounts for only 10-15 per cent of the rise in food prices in the 12 months before April 2008, according to the U.S. Congressional Budget Office (CBO).

Much of the rest of the cost is due to higher transportation costs, the study says. Food prices rose by more than five per cent in 2008, four per cent in 2007 and 2.5 per cent in 2006.

The non-partisan Budget Office examined the relationship between increasing ethanol production and rising food prices. In particular, it analyzed how much the increase in prices might raise federal expenditures on food assistance programs.

When the consumer price index in the United States increases, so does government spending on food assistance programs, other social assistance and federal pension plans for civilians and military personnel. The most recent price hikes are expected to increase costs of those programs by about $900 million annually.

The study linked profitable ethanol production, corn and gasoline prices, reporting that when a gallon of gasoline costs more than 90 per cent of the price of a bushel of corn, it is profitable to produce ethanol. Ethanol needs subsidies when gasoline falls below 90 per cent. When it is higher, there is an incentive to expand production capacity.

The study further stated that better technology squeezes 2.8 gallons of ethanol from a bushel of corn today, compared to 2.5 bushels in 1989. When technology allows for three gallons of ethanol per bushel, the ratio of gasoline price to corn drops to 80 per cent. BF