The U.S. government’s efforts to add 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,” says CIBC World Markets.

“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.”

Ethanol is used as an additive to gasoline, and can comprise as much as 10% 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, even with $100 per barrel oil.

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 U.S. 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 5%,” adds Rubin. “As ethanol production rises to nine billion gallons in 2009, food inflation will approach 7%, its highest level in more than 25 years.”

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/soct07.pdf.