Biofuels to buoy farm prices in next decade: OECD/FAO

PARIS (Reuters) - The rapid growth of the world's biofuel industry is likely to keep farm commodity prices at high levels in the next decade as it will boost demand for grains, oilseeds and sugar, a major study said on Wednesday.

The study, co-written by the Organization for Economic Cooperation and Development (OECD) and the United Nations' Food and Agriculture Organization (FAO), said biofuels would have a major impact on the agriculture sector between 2007 to 2016.

"Bioenergies have become a key factor in the functioning of agriculture markets," Loek Boonekamp, a senior OECD official, told reporters after the release of the study.

"In the medium term we believe that they could lead to prices on international markets rising quite considerably, at higher levels than what we had predicted in former outlooks and above the average of the last 10 years," he added.

Boonekamp said that farm prices, mainly grains, would likely rise by 20 to 50 percent over the next decade.

He added that although the long-term development of the biofuel sector remained unclear, farm prices would remain high in the coming years even without a sharp rise in biofuel demand because of the recent drop in output in many parts of the world.

Biofuels have become a major issue on global commodities markets over the last years as they are increasingly put forward as politically, environmentally and economically friendly alternatives to fossil fuels.

Made of grain, oilseeds and sugar, the "green" fuels are expected to lower dependence on fossil fuels, cut carbon dioxide emissions -- one of the main causes for climate change -- and raise farm revenues.

The extra biofuel demand, combined with low stocks worldwide due to poor harvests last year and fears of possible damage to the upcoming crops have sent global grain and oilseed prices rocketing to historic highs over the last months.

US, EU DEMAND TO SOAR

In its 2007-2016 agriculture outlook, the OECD-FAO did not expect the rise to reverse soon.

"In a context of generally lower global stocks in recent years, this additional demand (to make biofuels) is expected to underpin prices and lead to price levels for field crops that are on average higher than in past projections," the study said.

It added that grain prices were expected to stay higher than in the past 10 years, which would also have an indirect effect on prices for livestock products due to higher feed stocks.

Ethanol production in the United States, predominantly based on domestic maize (corn), was expected to grow by almost 50 percent in 2007 and, as growth rates decline thereafter, to double by 2016, the study said.

"In consequence, maize use for fuel production, which has doubled from 2003, would increase from some 55 million tonnes, or one-fifth of maize production in 2006, to 110 million tonnes or 32 percent at the end of the projection period," it said.

In the European Union, where biofuel production so far is largely dominated by rapeseed-based biodiesel, ethanol output was expected to rise in the next decade, adding pressure on the wheat and maize markets.

"Use of wheat in particular is set to increase twelvefold and to reach some 18 million tonnes by 2016. Growth in the use of oilseeds (largely rapeseed) and maize is less dramatic, but would still reach 21 million tonnes and 5.2 million by 2016."

However, the study predicted that the share of biofuels in total transport fuel consumption would not exceed 3.3 percent in energy terms, well below the 5.75 percent target fixed by the European Commission.

The report put Brazil as one of the fastest growing biofuel producer and said its ethanol output would reach some 44 billion liters in the next decade, or 145 percent more than in 2006.

The OECD-FAO also said Chinese ethanol production, mainly made from maize, at 3.8 billion liters by 2016, up from 1.5 billion in 2006. Maize use for fuel ethanol should therefore exceed nine million tonnes by 2016, from 3.5 million last year.