US ethanol subsidies helped drive Egypt revolt - economist

03 February 2011 23:10  [Source: ICIS news]

WASHINGTON (ICIS)--US federal subsidies for corn ethanol may in part be responsible for the uprising in Egypt by driving food grains prices higher, an economist said on Thursday, but biofuels officials dismiss the claim, citing global food demand as the cause.

Wall Street economist Lawrence Kudlow argued that federal subsidies paid to support US corn ethanol production since 2004 has played a major role in driving up the cost of corn and other grains, such as wheat.

Kudlow, former chief economist at Bear, Stearns & Co and now president of his own New York City investment research firm, noted that corn prices have risen 88% over the last year and wheat has shot up by 114%.

According to the Chicago Board of Trade, as quoted in the Wall Street Journal, March corn futures hit a 30-month high of $6.67/bushel, up from $4/bushel a year ago.

Kudlow said that because the US dollar is the world’s reserve currency, those sharp gains in the dollar cost for corn are reflected in food grains prices worldwide.

A good part of the global increase in food grains costs, said Kudlow, “can be placed at the doorstep of bipartisan US policies to subsidise ethanol”.

The US government pays refiners and fuel blenders 54 cents/gal to blend domestic ethanol, which is wholly corn-based, into the nation’s fuel supplies.  Although criticised by some in Congress, that subsidy was extended for another year by legislation approved in December.

Citing the Wall Street Journal data, Kudlow noted that in 2001, only 7% of US corn went to ethanol, but by 2010 ethanol production was consuming 39% of the nation’s corn crop.

“So instead of growing wheat, our farmers are growing corn in order to cash in on ethanol subsidies,” Kudlow argued.

As the world’s largest importer of wheat, Egypt has been hard hit by the increasing grains prices, he said, with Egyptian food costs inflation rising by as much as 20%.

Part of the increased cost of food grains, he said, must be attributed to US Federal Reserve Board policies of the last three years, which have kept interest rates at near zero and also have flooded the market with dollars. Those actions in turn have spurred inflation in global food costs, Kudlow said.

But Matt Hartwig, spokesman for the Renewable Fuels Association (RFA), dismisses Kudlow’s argument.

“What is forcing grain and food prices higher are the same factors that always drive prices higher - global demand, adverse weather, surging energy prices, export bans, monetary polices and, of course, speculation,” Hartwig said.

He noted that 2009 and 2010 worldwide grains supplies were the highest, successively, ever recorded, at more than 2.6m tonnes annually.

“Of that, US ethanol production requires just 3%,” he said, “hardly the kind of market percentage that drives global prices.”

“The unrest in Egypt and elsewhere should underscore our need to develop renewable, domestic alternatives to imported oil,” Hartwig said.

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By: Joe Kamalick
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