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Increased production of corn-based ethanol raises US food prices

Corn-based ethanol production has influenced U.S. food prices this year but not nearly as much as oil prices and weather problems.

Acting USDA Secretary Chuck Conner said ethanol "clearly had some impact" on food price inflation, but the fuel is getting too much of the blame "for what's happening in grocery store aisles."

Heightened ethanol production is a cornerstone of President George W. Bush's energy policy and farmers increased the amount of corn they planted to feed the fuel frenzy. But more ethanol also helped drive up the prices of livestock feed and other corn-dependent food products.

Food prices have increased about 2.7 percent in each of the last three years. But a jump of between 3.5 percent and 4.5 percent is expected this year before retreating a bit to between 3 percent and 4 percent in 2008, Conner said at a conference hosted by the Renewable Fuels Association, which represents the U.S. ethanol industry.

Global weather conditions, including droughts in Australia, as well as rising demand in China and elsewhere drove up wheat prices. And the recent record highs for retail oil prices also add to inflation by increasing the costs of everything from packaging to transportation, Conner said. He did not specify how much each factor contributed to rising U.S. food prices.

Ethanol producers, meanwhile, have taken a hit to their bottom lines in recent months because corn prices remain high, while the price of ethanol has slid by 30 percent due to a supply glut. VeraSun Energy Corp. on Monday said it would halt construction on a biorefinery and producers' stock prices have fallen recently on a weak industry outlook.

Conner said he would prefer if the ethanol price drop did not happen, but said long-term investments and production goals remain in place.

"Margins are very slim right now, but we can handle it," said Neil Koehler, president and chief executive of Sacramento, California-based Pacific Ethanol Inc.

Koehler also blamed the oil industry for not absorbing as much ethanol as it could at a time when crude prices remain above $80 per barrel. Refiners contend they have limited capacity to blend the fuel with gasoline.

Still, ethanol production is booming. Archer Daniels Midland Co., Aventine Renewable Energy Holdings Inc. and other producers added a total of 1.2 billion gallons (4.54 billion liters) of capacity and 15 new plants through March, which matched the total additions in all of 2006, Conner said.

Meanwhile, the government expects U.S. farmers will produce a record 13.3 billion bushels of corn this year, with about 25 percent used for ethanol. But the number of bushels used for livestock feed also will rise slightly to 5.8 billion bushels, he said. (One bushel of corn equals 25 kilograms).

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