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The Wall Street Journal: Ethanol Push Could Lift Prices For U.K. Wheat

By LISA KALLAL
December 13, 2006

LONDON — Prices for U.K. wheat are likely to rise, and exports shrink, as the government pushes to have more of it converted into ethanol.

The number of wheat-ethanol projects announced for sites around the U.K., together with plans for an existing artificial-sweetener factory to switch to wheat from corn, add up to about 3.4 million metric tons a year of additional demand for the crop, the country’s biggest grain by production.

In the process, U.K. wheat prices could increase to parity with the price of imported wheat, industry experts say. General wheat freight costs alone from Continental Europe to the U.K. could reach £20, or about $39, a metric ton, depending on the inland destination, they calculate.

“If you start adding up all the tonnage, there is an initial feeling that we are going to run out of wheat,” said Alastair Dickie, director of crop marketing for the U.K.’s Home Grown Cereals Authority, a marketing and crop research body funded by the U.K. grain and oilseed industry.

The U.K. typically exports about two million metric tons of surplus wheat a year, or about 13% of the crop. But increased demand from the ethanol sector will account for all or most of this surplus, they say.

The U.K. government has targeted to increase to 5% the level of biofuels blended into road transport fuels by 2010, up from 0.3% in 2005. Any ethanol used in transport fuels is now imported, mostly from Brazil.

A number of wheat-based ethanol plants already are in the works, although some could still be delayed, reduced in size or even canceled. Indeed, many U.K. grain traders question the viability of such large plants at current wheat prices, which are about 20% higher this year compared with last year after weather problems drastically cut world supplies. But some say that could just push farmers to plant more wheat.

In mid-November, Ensus PLC, a renewable-energy firm in northeastern England, said it plans to build a plant to produce more than 400 million liters of ethanol a year from 1.2 million metric tons of wheat, at Teesside in the U.K.’s northeast. Production is expected to start late 2008, and Ensus has long-term contracts to sell all the ethanol produced there to Shell Trading. Ensus is seeking to be the first bioethanol company to list on the AIM market of the London Stock Exchange.

“A plant of this magnitude will redefine the dynamics of the U.K. wheat market,” according to Keith Davies of Glencore Grain, a division of Glencore International AG that has the exclusive contract to supply all the wheat going into the plant.

Mr. Davies says the focus will still be on buying wheat locally for the Ensus plant to minimize road transport, but that some wheat may need to be brought in by boat from other parts of the U.K. Traders say the northern U.K. already has a net wheat deficit, so the new plant will only add to the shortage.

Green Spirit Fuels Ltd. is expected to start construction soon at its first plant in Somerset, in the west of the U.K., with another site to follow in Humberside in the northeast. The company has said it is looking to produce 700,000 metric tons of ethanol annually by 2012.

It expects to use about one million metric tons of U.K. wheat annually for bioethanol production from 2009, and demand would increase significantly after that, said John Waltham, Green Spirit’s planning director.

Smaller wheat-ethanol projects in the planning stage include Vireol PLC, which is mulling production of 150,000 metric tons of ethanol annually. However the firm has yet to announce a timetable, site or contractors. There’s also talk of at least one more plant on the drawing board.

Adding to the demand for nonbread milling wheat is agribusiness giant Cargill Inc., which is expected to finish converting its Manchester sweetener plant to wheat-based production from corn. The plant is forecast to use about 750,000 metric tons of wheat annually.

Write to Lisa Kallal at [email protected]

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