June 22, 2007
Every morning millions of Americans confront the latest trend in commodities markets at their kitchen table, as rising prices for crops --dubbed "agflation"-- has begun to drive up the cost of grains such as corn and wheat, says the Economist.
The culprit is the growing demand for biofuel feedstocks:
- The amount of corn used to make ethanol in America has tripled since 2000; ethanol distilleries now consume a fifth of the country's corn crop.
- Further, America is only one of 41 countries where governments are encouraging the use of biofuels to reduce oil consumption.
As a result, demand for grains has accelerated:
- During the 1990s, when oil was cheap and biofuels unheard of, demand grew by 1.2 percent a year, according to Goldman Sachs.
- But in recent years, it has increased by 1.4 percent, and over the next decade, Goldman projects, it will rise by 1.9 percent annually.
And with generous government subsidies in place to ensure that biofuels are profitable, any extra grain produced in the foreseeable future will be used to make more of the stuff. For grain prices to fall, Jeffrey Currie of Goldman Sachs says one of the only solutions is for governments to pull the plug on biofuels programs. But with Congress debating whether or not to double its targets for biofuel production, that outcome seems unlikely.
Source: Editorial, "Biofuelled," Economist, June 21, 2007.
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