The cost of everything from tortillas to cereals and cornstarch will rise in Canada because America's policy of subsidizing ethanol to cut dependence on foreign oil has led to rising demand for corn, says a report.

Corn-based staples such as tortillas have become more costly, along with other grains, fruits and vegetables that are pushed aside as farmers cash in on corn, said CIBC World Markets' chief economist Jeff Rubin.

"When you add it all up it's fairly significant because food inflation is already well over four per cent and we would expect it to move higher as more and more corn production is diverted to ethanol as is required under President Bush's plan," Rubin added.

"When you overlay that with the inflationary hit from oil itself, they're going to produce the hottest inflation numbers that we've seen yet this cycle."

The U.S. federal and state governments provide massive subsidies - $8 billion last year - to encourage ethanol producers to expand and corn farmers to supply the crops to help make the fuel.

The growing diversion into ethanol has resulted in a 60-per-cent rise in corn prices in the past two years, Rubin said. Corn prices are more than US$3.60 a bushel in commodity markets.

This affects most food categories, since corn is not only a direct product for human consumption but is a major animal feed whose cost affects meat prices, and derivatives such as corn syrup and cornstarch are ingredients in a vast array of processed foods and drinks.

Canadians can expect their food prices to be squeezed as well since the United States "is a major, major corn exporter to the rest of the world," Rubin said.

He predicts food costs will be rising at a rate of over five per cent next year and seven per cent by 2009 as a result of growing ethanol production, a strong global economy and high oil prices, adding that for poor Americans food already consumes nearly 40 per cent of their spending.