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Food Inflation: Something New To Digest?

Friday, 19 Jan 2007 | 1:52 PM ET

Most analysts have been watching the price of oil and how low it will go as a way to measure inflation. But--there may be a new item on the U.S. inflation "menu" to keep an eye on: food. When oil went to high prices this past summer--the ethanol boom sent investors to corn (corn is used for making ethanol). Some economists now say agri-culture might turn out to be a main source of inflation in the months ahead.

Ronald Plain is an agricultural economics professor at the University of Missouri at Columbia. He was on "Power Lunch" to talk about the possibility of a food inflation "binge."

Food Inflation
Increasing demand for corn and freezing weather in California could bring about food inflation, with Ronald Plain, University of Missouri-Columbia Agricultural Economics Professor and CNBC's Bill Griffeth

Plain says that it's natural to assume that food prices will be going up with the cold air blasts hitting California's citrus crop and the Midwest's corn and wheat feed-grain fields. Plain says consumers can expect higher beef prices and fruit prices fairly soon. The stormy winter weather is more than likely to hurt poultry too--as feed prices will rise.

As for oil--Plain points out there's pretty much a direct line between low oil prices and less ethanol production. And conversely--as the price of oil goes up--that will increase pressure on producing more ethanol (and using more corn) and push up the price of corn. Plain says just look at the price of corn in the last two years: now at $4 a bushel from $2. Bottom line-food prices will be going up not only because of oil.

Here's the official definition of ethanol: an alcohol-based alternative fuel produced by fermenting and distilling starch crops that have been converted into simple sugars. Feedstocks for this fuel include corn, barley, and wheat. Ethanol can also be produced from "cellulosic biomass" such as trees and grasses and is called bioethanol. Ethanol is most commonly used to increase octane and improve the emissions quality of gasoline.

FYI: according to the USDA 11% of U.S. corn went into the making of ethanol in 2004. in 2005 it was 14%, in 2006 it was 20% and for 2007--it's estimated to be 25%. The increase of corn use in making ethanol has been driving up corn prices around the world.

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