Growing biofuels demand raises food prices Options

[dauss]

http://www.ft.com/cms/s/30c58c22-0c76-11dc...0b5df10621.html

Soft commodities are hardening. Corn, wheat, cocoa and coffee prices have all risen strongly in recent months, suggesting consumers will face an extended period of more expensive food.

This year, corn and wheat prices have reached their highest levels for a more than a decade, while coffee prices have hit an eight-year high and cocoa has risen to a four-year high.

Yet while price gains for cocoa and coffee have been driven by adverse weather affecting production during a period of rising consumption, analysts say grains prices are experiencing a structural shift, owing mainly to the growing demand for biofuels.

“Just as energy and metals prices have rallied sharply in real terms, a similar fate awaits grains, which remain significantly below the [inflation adjusted] highs of the 1970s and mid-1990s,” says Michael Hughes of Deutsche Bank.

Recent price strength has sparked fears that consumers could face higher bills, while policymakers are concerned that rising food prices will drive inflation higher. In addition, global food demand is rising strongly, thanks to economic growth.

Predictions for higher prices come in spite of expectations that global grain production will rise 6.2 per cent to a record 1.666bn tonnes in 2007-08, according to the International Grains Council. However, this will not match global consumption – forecast by the IGC at 1.680bn tonnes, up 3.1 per cent on the previous year.

The situation for cocoa and coffee is different from grains. Coffee’s strength has been driven by adverse weather affecting production in Vietnam and Brazil, the two largest producers.

Biofuels are gradually taking over as the main growth driver of agriculture demand. Goldman Sachs says that if government policies are adopted in full, global demand for biofuels could increase from 10bn gallons a year to 25bn gallons by 2010.

Goldman expects the trend rate of growth in demand for agricultural commodities to rise from 1.9 per cent a year between 1997 and 2006 to 2.6 per cent a year between 1996 and 2015.

This is expected to lead to an extended period of high prices. Goldman forecasts that five years from now, corn will trade at $5 a bushel, compared with about $3.50 on Monday, while wheat will rise from $4.50 to $6 a bushel.

I think biofuels are a good idea and a step forward in weening off foreign oil, but it only tackles one part of the growing energy demand. I already posted another article saying the demand for biofuels is taking up land from barley to grow corn and possibly raise beer prices in the future(and no one cared). Look at other countries like Venezula. They can use sugar cane to convert into alcohol(which is a lot more efficient), but due to the subsidy in the US, it makes it unfeasible. I remember my economics professor told us that the subsidy on sugar is so enormous, a company figured out that buying sweetened iced tea mix from Europe, shipping it here and then purifying it to sell it as regular sugar you could not only sell it at a cheaper price, but also have a higher profit margin.

[impala454]

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