Biofuels subsidies push up the price of beer

Not only is your pint of lager about to get more expensive, the shot of tequila you might want to have afterwards is also going to rise in price. And it's all down to a misguided US government policy.

More evidence was released this morning supporting my decision to launch the Smart Money UK Pint of Lager Index last Friday.

Inflation is going to be a major theme next year and people expecting a long line of interest rate cuts may just have to rethink what is going on.

Manufacturing output costs rose higher than expected in November, boosted by food and energy costs. Indeed, UK factories increased prices at the highest rate since 1991! Prices rose 4.5% year-on-year, compared with the 3.8% gain figure recorded in October. This was ahead of an analysts' consensus view of 4.2%

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The Office of National Statistics also said that petroleum goods prices rose at the largest rate since 2000, coming in at 18.5%. Food prices climbed 6.6%, the biggest rise since 1993.

This situation is being repeated all over the world. China's PPI rose 4.6% on an annual basis in November, compared with a 3.2% gain in October.

Last week China's government said that the prevention of overheating and curbing inflation would be a priority in 2008. It also wants to control lending. China has raised interest rates five times this year and further hikes are expected.

Of course, the economic situation is much worse in the US and a rate cut is likely tomorrow when the Federal Reserve announces its decision. At the moment, it is more concerned with weak fourth-quarter growth and the credit crunch than keeping inflation under control.

US monthly consumer price index (CPI) figures are due out on Friday. The CPI is expected to rise 0.7% month-on-month. Discounting the month in 2005 after Hurricane Katrina smashed though the Gulf of Mexico petroleum rigs; this represents the highest monthly inflation rate since the early 1990s.

Also due out this week is the producer price index (PPI), which is expected to jump by 1.6%, also one of the highest figures ever recorded.

The rush to grow biofuels, encouraged by government subsidies that I believe are unwise, is a major factor in soaring food prices. Last week, the Bavarian Brewers Association said that, with the current spike in barley prices, German beer prices looks set to rise significantly.

In the last two years, the price of barley has doubled to $271 per ton as farmers plant more crops such as rapeseed and corn that can be turned into ethanol or biodiesel. This means that the price of barley malt has soared by more than 40%.

Then there's tequila Mexican farmers are burning fields of blue agave, the plant used to make tequila, and re-seeding the land with corn. This is because US ethanol demand has pushed up the price of corn.

Mexican officials have predicted that farmers will plant between 25%-35% less agave this year to turn the land over to corn. It looks like storing some bottles of the finer tequila brands away for the next few years could be a better investment than the stock market. As supply dips, prices of the fiery spirit will race ahead.

Two weeks ago, the US national Center for Public Policy research said that US food prices were rising at twice the rate of inflation and it laid the blame firmly at the door of Federal policies mandating more food for fuel.

In 2000, the US was using 6% of its cropland for ethanol production. Last year, that share increased to 20%; this year, the figure will rise to a staggering 25%.

Foolish legislation

The energy bill that is currently bouncing between the House and Senate looks likely to be passed. This will require the portion of ethanol-based fuel to rise to 36 billion gallons by 2022, up from the current 7.5 billion gallons mandate by 2012.

So, in terms of biofuels I believe that the cure could potentially be worse than the disease. The rush to biofuels has caused deforestisation, soil acidification, increased fertilizer use and the loss of biodiversity. Food prices are set to rise and rise.

Ethanol production also requires enormous quantities of water, which is a real problem for a country that is already struggling to provide its citizens with ample supplies of the stuff. Everything about the biofuels industry is wrong.

Thankfully, more and more people are coming around to this view. A recent editorial in the New York Times said the following:

'What's wrong is letting politics - the kind that leads to unnecessary subsidies, the invasion of natural landscapes... and soaring food prices that hurt the poor - rather than sound science and sound economics drive America's energy policy.'

I couldn't agree more.

However, I think that biofuels subsidies are here to stay, which means that you need to get ready to make profits from the food inflation beast. Take are look at your portfolio.

If you are not invested in agriculture, don't you think you should be..? After all, you don't want to be poor, do you? Rising food costs hit the poor harder than anyone else and you don't want that to be you.

This article is taken from Garry White's free daily email Garry Writes'.