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A farmer in Shaoyang, Hunan Province checks his harvest of corn in this October 30, 2006 photo. With the application of ethanol gas leading to a bigger demand for corn, corn prices are going up. [newsphoto]

For the first time in China's history, grain prices are rising not due to a poor harvest or increasing demand but because of soaring international oil prices.

To feed the nation's increasing appetite for energy, a huge amount of capital including from overseas is chasing corn, soy and wheat for biofuel production; and pushing up prices to record highs.

Wang Jinmin, a professor in agricultural products economics at the Chinese Academy of Agricultural Sciences, said: "The rise in corn prices is a strong factor driving up the prices of other food products.

"And with its increasing role as a crude-oil substitute and environmentally-friendly energy, prices are unlikely to drop in the long run."

Analysts say that while industrial use only accounts for about a sixth of overall corn consumption, it is expanding at up to 15 per cent a year, fuelled by high crude oil prices.

Official estimates are that annual corn consumption by processing industries would rise to 20 million tons from 16 million tons last year; and reach 40 million tons by 2010. Total consumption is expected to be 125 million tons this year.

Ethanol is the main biofuel produced in China with output hitting 1.02 million tons in 2005 and corn accounted for 76 per cent of the raw material. The others are mainly wheat and sorghum.

The country plans to produce about 6 million tons of ethanol by 2010 and 15 million tons by 2020 in addition to 5 million tons of biodiesel.

In comparison, the United States produced an estimated 15.1 million tons last year, while Brazil the world leader had an output of 16.9 million tons.

Ethanol can account for up to 10 per cent of refined products, whose total production was 48 million tons last year. But the gap between the potential demand of 4.8 million tons and actual output of about 1 million tons last year, is huge.

The markets have been quick to take advantage.

The price of corn in Shenyang, capital of Liaoning Province, stood at 1,400 yuan (US$175) per ton yesterday, a jump of 50 yuan (US$7.5) or 3.7 per cent, within a week.

In the futures market, wheat and corn prices have also seen big boom.

Sources at the Dalian Commodity Exchange said corn prices have jumped 19.5 per cent in the two months ending November, a 10-year high.

In East China's Shandong Province, wheat prices have risen from below 1.4 yuan (US$17 cents) per kilogram in September to 1.6 yuan (US$19 cents).

"We predict that agricultural products will be as hot as petroleum in the future," a futures agent surnamed Wang from the Dalian Commodity Exchange told China Daily.

The National Development and Reform Commission said in June that biofuels would make up 10 per cent of all fuels by 2010, the figure rising to 16 per cent by 2020.

The country's top economic planner also said in August that ethanol-mixed gasoline was being sold in nine provinces.