North America's love affair with ethanol — produced mainly from corn — is unleashing a surprising surge of inflation through the global food supply chain.

The U.S. Department of Agriculture warned yesterday that record high corn prices, caused in part by the crop's diversion into ethanol production, is likely to produce a sudden drop in the supply of meat.

U.S. farmers will produce 450 million kilograms less beef, chicken and pork this year than last, according to the latest USDA estimates. That represents a cut of roughly one kilogram per person, reversing a long-term trend of rising meat production in the United States.

The impact isn't just being felt in the United States. The biofuels boom is causing corn and soybean prices to start moving in tandem with crude oil prices, the International Monetary Fund warns in its twice-yearly World Economic Report, due to be released today.

"Rising demand for biofuels will likely cause the prices of corn and soybean oil to rise further, and to move more closely with the price of crude oil, as has been the case with sugar," the IMF report said.

The IMF also pointed out that higher corn prices even make corn production more expensive.

Higher corn prices factor into higher energy costs that go into making fertilizer.

Even corn substitutes in the food chain are getting caught in the updraft, forcing up prices of edible oils, meat, dairy and chicken, according to the report.

As a result, the IMF is forecasting that food price inflation is likely to remain high in 2007 and beyond.

Source: Globe and Mail