According to this story in the Financial Times, strong demand for biofuel feedstocks such as corn, soybeans, and oilseed rape (canola) is encouraging farmers to plant these crops instead of barley, driving up its price.

And what is barley a key ingredient of? Beer.

Jean-Franois van Boxmeer, chief executive of the Dutch beer-brewing company Heineken, warned last week that the expansion of biofuels production was creating structural change in European and U.S. agricultural markets. One consequence, he said, could be a long-term upwards shift in the price of beer.

According to the article, futures prices for European malting barley have risen 85 percent to more than €230 ($320) a tonne since last May. Barley and hops account for about 7 percent to 8 percent of the cost of brewing beer.

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The article continues:

Meanwhile, barley production in America fell to 180 million bushels in 2006, the lowest level since 1936 … This decline is partly due to the fall in the land area used for growing barley, which dropped to about 2.95 million acres — the lowest since records began in 1866.

The rise in barley prices has also been driven by the Australian drought, which cut the country’s crop by two-thirds, and heavy rains in Europe last summer which reduced the quality and yield of the harvest.

The U.S. department of agriculture estimates global barley production will reach 138m tonnes in the year to August, level with 2006 but down 10 per cent on 2005. Global demand for barley has risen 2 per cent to an estimated 145.5m tonnes this year, the fourth year in the last five in which demand has exceeded supply.

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As a result, global stockpiles have shrunk by a third in the past two years and left the barley trade vulnerable to further supply problems this year.

In the U.S., land that was cultivated for growing barley has been given over to corn because of the ethanol demand, said Levin Flake, a grains trade analyst at the U.S. department of agriculture.

The U.S., which in the 1980s was a leading exporter of barley, is now a net importer as barley acreage has shrunk from more than 13m acres in 1985 to 4m this year, said Mr. Flake.

Oh, dear.