Bernanke suggests ethanol tariff cut to help food prices

By Chris Jones

- Last updated on GMT

Related tags: Food prices, Ethanol fuel, Biofuel

The head of the Federal Reserve has suggested that import tariffs
on Brazilian ethanol should be dropped in order to take the
pressure off US food prices.

The remarks, made last week by Federal Reserve chairman Ben Bernanke during a meeting with the US Senate Banking Committee, suggested that allowing Brazilian sugarcane ethanol to enter the country tariff-free "will reduce costs in the United States"​. Bernanke was responding to question from Senator Wayne Allard (Republican-Colorado), who asked about benefits of reducing tariffs in order to contain inflation caused by escalating food prices in the United States. The head of the Federal Reserve said that demand for ethanol produced from corn - the main biofuel crop in the US - was pushing up food prices in the US, although it was hard to assess exactly how great that impact was. And he said that other crops, such as soybeans, were also being affected as farmers switched to more lucrative corn production, in turn pushing up prices for those crops as well. The Brazilian Sugarcane Industry Association (UNICA), perhaps not surprisingly, said it welcomed Bernanke's suggestion that the ethanol be imported free of duties as a move in the right direction. "Bernanke's suggestion favors clean renewable energy, boosts the fight against global warming and defies the distorted logic now in place that taxes biofuels while fossil fuels move unobstructed around the globe, without trade barriers or any other restrictions." ​ Most ethanol made in the US comes from corn and domestic production is protected from Brazil's cheaper sugarcane ethanol by a 54-cent-a-gallon tariff. US corn producers also benefit from government subsidies, while no subsidies exist for Brazilian sugarcane growers, according to UNICA. Despite Bernanke's comments, the jury is still out on the issue of whether demand for corn-based ethanol is in fact increasing prices. One report, published in December by Informa Economics and prepared for the Renewable Fuels Foundation, suggested that only four per cent of the change in food prices was a result of fluctuations in corn future prices. Instead, it said that the rising energy and transportation costs - rather than costs of grains or other raw materials - were the key drivers of the consumer price index (CPI) for food. And, it added, surging global demand for commodities was also contributing to the hike in prices. "It may be politically convenient to blame ethanol for rising food prices, but it doesn't make it factually accurate,"​ the report stated. According to the USDA, ethanol production is expected to top 10 billion gallons by 2009, and while prices have certainly increased as a result of growing demand for biofuels, it remains hard to make a direct link with higher food costs. The Informa Economics report, for example, suggested that commodity raw materials accounted for only 19 per cent of total US food costs, half the level of 30 years ago. And the US government itself remains unconvinced that its attempts to push biofuels have contributed to higher costs, with USDA official arguing that higher oil costs, in particular, have been the biggest culprit. Brazil is a pioneer in the large-scale production and use of sugarcane ethanol, a fuel which it claims is both more cost-effective and more energy efficient than corn, and whose production, importantly, does not distort food prices. Just one per cent of Brazil's entire arable land is set aside for sugarcane for ethanol production, so the country's growers argue that any increase in production would have no effect on overall food prices.

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