Rising Biofuel Use to Drive Up Crop Prices - Goldman
LONDON - Rising biofuels demand will probably drive up crop prices and is creating growth opportunities for food processing companies, Goldman Sachs said on Wednesday.
The growth in biofuel demand presents a new competitor for food as commercially available biofuels, such as ethanol and biodiesel, use crops that could otherwise be producing food.
"The most likely impact of this competition for resources (between food and fuel) will be upward pressure on crop prices," Goldman said in a research document on biofuels and food.
"There is evidence to suggest that crop prices have already gone up and will rise further on biofuel growth."
"The major concern here is land availability," Goldman added.
The investment bank said its analysis of crop demand suggested, for example, that a 20 percent replacement of biofuel for fossil fuel for transport needs in the EU could require the use of up to 61 percent of current arable land in the EU.
Currently biofuels account for a little under two percent of fuel transport needs.
"The agri-processors appear well positioned to exploit the growth opportunity offered by biofuels, and are increasing investment in this area," Goldman said.
Growth in biofuels demand is creating opportunities for food processors that are investing in biofuels such as German sugar firm Suedzucker, which Goldman started with a "Buy" recommendation.
Suedzucker shares jumped almost five percent on Wednesday on talk that Goldman had rated the company "Buy".
With oil prices off record peaks, the economics of biofuels have become increasingly appealing, particularly when they are sourced using low-cost feedstock, notably from Brazil.
Another argument for biofuels is climate change and the Kyoto protocol, as biofuels help cut carbon dioxide emissions.
Finally, there is the overall background of increasing demand for energy, notably from rapidly industrialising countries with rising populations, such as China.
Goldman Sachs anticipated significant investment in biofuels, particularly from food processors.
But it said the main constraint on biofuel growth would be the availability of land and crops.
"While the issue of biofuels impacting pricing (of food raw materials) may seem to be a distant threat, it could be argued that the impact is already being seen in markets such as rapeseed oil in Europe (for biodiesel production) and the world price of sugar cane (for ethanol)," it said.
Ethanol, the most widely used biofuel, is derived from sugar cane and is used widely in flex-fuel cars in Brazil.
Story Date: 20/7/2006
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