Earlier this year President Bush called for America to cut its petroleum consumption by 20% over the next decade, largely by using more ethanol which creates less pollution and can be produced using home-grown corn. Already there are numerous subsidies for biofuel producers which have allowed them to significantly increase ethanol production.

In the past 12 months, this has caused the price of ethanol to rise from just over $1/gallon to $1.75/gallon and corn prices to double from $2/bushel to nearly $4/bushel. Currently, corn supplies are at their lowest levels in 34 years.

The most recent CPI report seems to indicate that beef and poultry prices are being affected by higher corn prices. Most of the corn grown in Iowa is used to feed farm animals and make corn syrup for processed foods. The rising price of corn is also resulting in farmers, nationwide, planting more of it and less wheat and other crops. Therefore, rising corn prices could lead to general food price inflation.

The US could reduce these cost pressures by importing more ethanol from Brazil, where sugarcane is used as feedstock. Brazil can produce ethanol for 22 cents a liter compared to 30 cents a liter for corn-based ethanol. However, the US government is unlikely to reduce the high tariffs currently imposed on imported ethanol in deference to America’s powerful farming lobby.

This means that the Bush administration’s emphasis on ethanol as a fuel source is going to put upward pressure on food prices for the foreseeable future. I’m not sure how significant this pressure is going to be, but it’s worth keeping an eye on food prices.