Friday, March 23, 2007

Biofuel demand makes food expensive


By Nils Blythe
Business correspondent, BBC News, Chicago

Commodity prices are rising in line with demand for ethanol

The corn trading pit of the Chicago Board of Trade is an extraordinary

People yell orders and give frantic hand signals to seal their bargains.

The traders wear garish jackets, so that someone across the floor will
know who he or she is dealing with.

The latest prices of consignments of corn for future delivery are
displayed on giant electronic boards along the walls.

And, although the price fluctuates minute by minute, over the last year
wholesale corn prices have roughly doubled.

A fifth for ethanol

The reason for the surging price is increasing demand from refineries
that are buying corn - or maize as it is sometimes called - to turn it
into ethanol.

The ethanol is then blended with conventional fuels for use in ordinary

"We are using 20% of our corn for ethanol," says Roy Huckabay, executive
vice president of the Linn Group, which advises commodity investors.

"When the energy markets went bananas over the last year, the value of
corn as an energy source sky-rocketed."

Lucrative work

The US Government is promoting the use of ethanol with subsidies.

Nils Blythe interviewing farmer Sam Martin
At the coffee-shop people were talking about doctors quitting and taking
up farming
Sam Martin, farmer

Quick guide: biofuels

And President George W Bush has set ambitious targets for increasing the
use of bio-fuels in future.

Ethanol produces lower greenhouse gas emissions than conventional fossil

But many observers think that the big attraction of bio-fuels for the
Bush administration is that they will reduce America's dependence on
imported oil.

The policy is also making some American farmers very happy.

Sam Martin manages 19,000 acres of land, mainly in Illinois.

He has always used some of the land to grow corn, but is now adding to
the area that he will be seeded with corn this spring.

"2007 should be a wonderful year," he says with an optimism
uncharacteristic of the often hard-pressed farming community.

"At the coffee-shop people were talking about doctors quitting and
taking up farming."

Cheap food no more

But the impact of soaring corn prices on consumers is likely to be less

Corn is used directly by the food industry in things like corn flakes.

It is also widely used for feeding animals like pigs and chickens.

And food companies are warning that high corn prices will feed through
to everyone's grocery bills.

In Mexico, there have been street demonstrations about the rising cost
of tortillas, which are made from corn.

And rising food costs are unlikely to be the only impact of biofuel
refineries buying into the corn market.

In places like Illinois, the price of agricultural land has started to rise.

That will eventually feed into the cost of other agricultural commodities.

Sam Martin puts it succinctly.

"I think that cheap food is history," he says.

Perverse consequences

This trade-off between greener fuels and higher food prices is one of
several difficult issues thrown up by the rapid development of the
biofuels industry.

The world has already witnessed the absurdity of virgin rainforests in
Asia being torn down to make way for palm oil plantations.

Palm oil, like corn, has become hugely profitable because of demand from
biofuel producers.

But the environmental benefits of the biofuels are outweighed by the
loss of the rainforests.

Biofuels can make a contribution to reducing greenhouse gas emissions.

But the processes by which they are produced need to be kept under
constant review to make sure that they do not have perverse consequences.

And that includes forcing up the price of essential foods.


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