Clean air means healthier corn prices

Tough anti-pollution laws and the stubbornness of President George W Bush's administration have created a shock surge in demand for ethanol and a hike in corn prices.

The corn-based spirit is known in the fuel industry as an "oxygenate"; when added to oil-based products such as petrol and diesel it makes them burn more cleanly. New American emissions laws aimed at reducing inner-city smog have decreed that fuels will have to include such additives.

But ethanol and its alternatives do not come cheap. As well as the added cost of the ethanol itself, fuel companies have to include the considerable expense of transporting the stuff from the farmlands where the corn is grown.

California, although traditionally among the cleanest of the US states, has the largest density of private cars in the country, and recently sought a waiver from the clean-fuel standards, on the grounds that these would impose crippling costs on motorists. The state's Democrat governor, Gray Davis, also claimed that California was able to meet clean-air requirements without the use of additives.

But last week Christie Whitman, the director of the Federal Environmental Protection Agency, announced that California would not be exempted from the federal rules. For ethanol refiners, and the corn-growers who supply the raw material, this was extremely good news. The market had assumed that California would be granted its waiver, and had seen future ethanol demand as low. The price of ethanol has now shot up nearly 10 per cent.

The Bush administration's refusal opens up the Californian market to ethanol sales. Demand there is expected to be about 2.6 billion litres a year, around a third of total US production. That was certainly what the mar-ket believed. Shares of Archer Daniels Midland, America's biggest producer, soared to a high, as did the stock of its smaller competitor High Plains.

As a commodity, corn has seen its price fall steadily since its high in May last year, but that trend has now been reversed. Analysts are predicting that even if farmers bring in a bumper harvest this year, corn futures will soar as ethanol production booms.