ANALYSIS-Ethanol no longer seen as big driver of food price

By Sam Nelson

CHICAGO, Oct 23 (Reuters) - Heavy demand for corn from ethanol makers was seen as a key driver of corn futures to record highs in June, but since then the sharp decline of corn along with other commodities shows that belief was mistaken.

Corn is down about 50 percent from its record high in June, even as the amount of the grain used to produce the renewable fuel in the United States remained the same.

"The record high prices were a speculative bubble," said Stewart Ramsey, senior economist for Global Insight, Philadelphia (www.globalinsight.com/)

"We had a lot of reasons for prices to go up and to go up a lot and ethanol use was one of those," he added.

U.S. food prices, which normally rise by about 2.5 percent a year, surged by 4 percent in 2007, the biggest increase in 17 years. World food prices jumped a stunning 40 percent, causing food riots, hoarding and bread lines in some countries.

The government has forecast that U.S. food prices will rise 5.5 percent this year and 4.5 percent in 2009.

Chicago Board of Trade corn futures set a record high $7.65 per bushel for a spot contract at the end of June. By the spot contract's price had been halved to $3.85 per bushel.

The use of corn to produce ethanol in the United States does add to the price of the grain. Analysts, including some in the ethanol sector, say ethanol demand adds about 75 cents to $1.00 per bushel to the price of corn, as a rule of thumb. Other analysts say it adds around 20 percent, or just under 80 cents per bushel at current prices.