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

    TORONTO, Oct. 22 /CNW/ - CIBC (CM: TSX; NYSE) - 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.
    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.
    Mr. 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
Mr. 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, Mr. 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 Mr. 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."
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/soct07.pdf.

    CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
investment banking, and merchant banking to clients in key financial markets
in North America and around the world. We provide innovative capital solutions
and advisory expertise across a wide range of industries as well as top-ranked
research for our corporate, government and institutional clients.