| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

News Main Page 
 
 News
 Irish
 European
 International
 Asia-Pacific Business Week
 
 Analysis/Comment

RSS FEED


How to use our RSS feed

 
Web Finfacts

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

We provide access to live business television and business related videos from: Bloomberg TV; The Wall Street Journal; CNBC and the Financial Times. Click image:

Links

Finfacts Homepage

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Search

News : International Last Updated: Dec 19th, 2007 - 13:17:15


Report says America's efforts to add more corn-based ethanol to the nation's gas tanks will fuel little more than inflation
By Finfacts Team
Nov 2, 2007, 09:43

Email this article
 Printer friendly page

Report finds going yellow to send food prices soaring while delivering dubious energy benefits

America's policy of adding more ethanol to the nation's gas tanks in an effort to increase energy self-sufficiency will do little but drive food prices skywards, finds a new report from CIBC World Markets, a unit of one of Canada's biggest banks.

The report states that to meet the policy goal of significantly increasing U.S. production of ethanol to reduce dependence on imported oil, 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 the fuel. This diversion of an ever-increasing share of the American corn crop from human consumption and livestock feed 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 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."

Ethanol is used as an additive to gasoline, and can comprise as much as 10 per cent of the fuel mixture in standard automobiles. Ninety-five per cent of the ethanol produced in the U.S. 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 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.

However, the bank finds that this rapid conversion of food to fuel will put increased inflationary pressures on food prices. "By the end of next year we predict food inflation will be running well over five per cent," adds Rubin. "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."

He notes that while accounting for less than 15 per cent of the consumer price index, food represents one of the least substitutable areas of consumer demand. For low income Americans, food costs represent nearly 40 per cent of monthly budgets.

When compared with the huge investments in subsidies and the impact of soaring food prices, Rubin states that the net energy benefits of a U.S. domestic ethanol policy are marginal.

"Most recent studies suggest that corn- based ethanol in the U.S. provides only a 25 per cent net energy benefit compared to the energy required in its production. By comparison, Brazilian ethanol, made from sugar cane, provides a 90 per cent increase in energy - and a gallon of pure ethanol holds about 30 per cent less energy than a gallon of gasoline."

He adds that even if the Administration's 35 billion gallon target is met, it will have a negligible impact on U.S. energy independence. Corn for ethanol currently accounts for 13.5 per cent of all corn production in the U.S., yielding roughly 6.2 billion gallons of ethanol which is equivalent to only a one percentage point reduction in U.S. gasoline consumption. Even if the U.S. achieved President Bush's 2017 target of 35 billion gallons per year that would only reduce gasoline consumption by an estimated 6.5 per cent.

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


© Copyright 2007 by Finfacts.com

Top of Page

International
Latest Headlines
Markets News Wednesday: Stocks deep in red ink across the globe: Asia-Pacific and Europe slump following grim day in New York
Apple launches MacBook Air - the world’s thinnest notebook
Europe suffered a slowdown in labour productivity in 2007; Rich countries face struggle to achieve rises in living standards
Wednesday Newspaper Review - Irish Business News and International Stories
Intel reports 51% rise in Q4 2007 net income but cautious outlook for 2008 sends shares plunging 14% in after-hours trading
Markets News Afternoon: Citi rains heavily on markets in Europe and US - Dublin plunges almost 4%
US retail sales fell in December signalling that consumer spending is under strain; Producer/Wholesale prices rose 6.3% in 2007 - the highest since 1981
Citigroup reported Q4 2007 loss of $9.83 billion; Write-downs and increased credit costs were a massive $22.2 billion
Markets News Tuesday: Citi bad news awaited; Markets fall in Asia-Pacific and Europe; Dollar up from near record low against Euro; Gold price over $900
Hong Kong and Singapore again head Index of Economic Freedom; Ireland gets third ranking
Tuesday Newspaper Review - Irish Business News and International Stories
US Hedge Fund Index shows return of 11.15% in 2007 - More than double the S&P 500 performance
Markets News Afternoon: Stocks rally in US and Europe boosted by positive fourth quarter data from IBM and SAP
IBM reports strong fourth quarter preliminary earnings boosted by Asia, Europe and Emerging Countries
Markets News Monday: Start of US fourth quarter earnings season has investors worried about how banks and brokerages have performed
Monday Newspaper Review - Irish Business News and International Stories
US study says Environmental Factors shaping New Global Economy
Markets News Afternoon: Report say Merrill Lynch will announce $15bn loss next week; Stocks down in US and Europe - Dublin market up; Gold tops $900
US trade deficit increased to $63.1 billion in November
OECD Composite Leading Indicators signal a downswing in all major OECD economies