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By Robert Rapier on Mar 15, 2007 with no responses

Energy Heating Up Inflation

I am not quite sure why this was a surprise:

Producer prices unexpectedly jump 1.3%

There were two major culprits identified: Energy and food. However, the food component was also related to energy:

Food prices rose 1.9%, as prices for unprocessed foods rose 11.2%. Fresh fruit prices rose 15.7% and fresh vegetable prices rose 8.3%. Pasta prices rose 4.3%, the most in 11 years. Food prices have been rising rapidly, in part in response to the diversion of corn into the ethanol market as a substitute for gasoline.

Food prices have now risen more than 1% for three months in a row and are running at an annualized rate of 18.1% in that time. Other than a spike in 2004 caused by a drought, that’s the fastest three-month gain since 1984.

Yet I keep hearing from people how this food versus fuel issue is just a myth. I have a feeling that we are going to end up seeing a backlash over this as demand for corn continues to pick up.

China is dealing with the same issue, but they are taking action. From an article last week in China Daily:

China will this year invest more in biomass ethanol projects over maize-based ones because of a lack of grain.

The current maize-ethanol production capacity has far surpassed what the corn output can provide as an important grain resource,” Du Ying, vice-minister of National Development and Reform Commission, said.

“We are researching all kinds of biomass energy options, and others include sorghum ethanol and coal diesel oil projects,” Yang Xiongnian, deputy director of science and technology, education and rural environment department of the ministry told China Daily.

But establishing new maize ethanol projects should be temporarily stopped.”