Corn May Return to Record on Biofuel Demand, FAO Says

By Aya Takada

Nov. 11 (Bloomberg) -- Corn, down 52 percent from a record, may return to the peak next year on rising demand for its use in fuel and as farmers may cut planting on falling prices and tight credit, a Food and Agriculture Organization economist said.

``We may see some fall in production,'' David Dawe, senior economist at the FAO's Agricultural and Development Economics Division, said in an interview in Yokohama, Japan. ``On the other hand, you have continuing growth in biofuel demand.''

Corn fell to a one-year low of $3.64 a bushel on Oct. 27 as the global credit crisis spurred investors to seek cash. Prices rose to a record $7.9925 June 27 on increasing demand for food, feed and biofuels and as higher oil prices boosted production costs. Wheat and rice also soared, stoking inflation and sparking riots from Haiti to Ivory Coast.

``Investors, now concerned about the dollar's strength and financial market turmoil, may shift their focus back to tight fundamentals for corn next year,'' Kenji Kobayashi, an analyst at Kanetsu Asset Management Co. in Tokyo, said by phone.

The U.S., the world's largest corn producer and exporter, will not change a policy of increasing ethanol output for car fuel even after president-elect Barack Obama takes office, said Dawe, based at the Rome headquarters of the United Nations' FAO.

``Obama has so much on his plate in terms of the economic crisis, health care and energy policy. I would be very surprised if he wanted to pick a battle with farmers,'' Dawe said yesterday.

The U.S. has set a goal requiring fuel producers use at least 36 billion gallons of biofuels in 2022. VeraSun Energy Corp., the second-largest ethanol producer, filed for Chapter 11 bankruptcy protection on Oct. 31 as distillers struggle to make money on higher production costs and lower fuel prices.

Industry Investment

``They may curtail some investment, but generally speaking, the industry will move ahead,'' Dawe said.

Corn for December delivery fell 0.7 percent to $3.8225 a bushel on the Chicago Board of Trade at 2:23 p.m. in Tokyo. Prices gained 2.1 percent yesterday after the U.S. Department of Agriculture cut its domestic crop forecast by 0.1 percent from a month earlier to 12.02 billion bushels.

Corn may become more volatile as it is linked to oil because of its use in ethanol, raising risks for growers, distributors and consumers, Dawe said. The volatility will also affect other crops including soybeans, wheat and rice, he added.

``When prices move up and down a lot, this results in a huge income re-distribution in a short period of time. It's very unsettling to people who are already living at the margins of existence,'' Dawe said. ``In poor countries people sometime spend 40 percent of their income on one single food.''

Governments may increase intervention to prevent volatile food prices from trigg1ering social unrest, Dawe said.

Stockpiles Policy

``The important thing is to use stocks policy judiciously. They do have some role in responding to emergencies and keeping prices stable to some extent,'' he said.

A U.N.-sponsored Food Security Summit in Rome in June pledged to increase spending on agriculture after prices soared.

``Official development assistance to agriculture has declined by 58 percent in real terms in the last 20 years,'' Dawe said. ``It's a serious underinvestment.''

Volatility may also threaten grain trade liberalization as importers seek to curb dependency on overseas supplies, he added.

Japan, the world's largest grain importer, plans a 65 percent increase in spending in the year starting April 1 to fund measures to cut dependence on overseas supplies. The Ministry of Agriculture, Forestry and Fisheries is requesting 302.5 billion yen ($3.10 billion) for the year to boost domestic crop output.

``A lot of governments are very reluctant to open up their staple foods and to completely rely on the world markets,'' Dawe said.

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net