Hey look, it's the food or fuel argument again

In an article published on Monday, the FT blames (subs req'd) the raise of soft commodities on the rise on the demand for biofuels (also known as the sometimes disputed "Tortilla effect").
"Just as energy and metals prices have rallied sharply in real terms, a similar fate awaits grains, which remain significantly below the highs of the 1970s and mid-1990s," says Michael Hughes of Deutsche Bank.

There are serious concerns about food prices rising, which would be considered bad for inflation. In addition, the demand keeps on growing strongly, thanks to the current economical situation.

The article also claims that biofuels are gradually taking over as the main growth driver of agriculture demand. Goldman Sachs says that if government policies (especially in the US and the EU) 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 current $3.50, while wheat will rise from $4.50 to $6 a bushel.

[Source: Financial Tribune]

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