THE simple logic behind biofuels sounds appealing — a liquid motor fuel that is clean and made from a crop as renewable as next season’s harvest.

Huge investments are chasing biofuel profits, but doubts are emerging about the sustainability of a business that is being promoted on its supposed green credentials.

Commodities that once were thought dull and obscure are being pursued by hedge funds and speculators. Last month, hedge funds piled into Malaysian palm oil futures, driving up the price after signals from Kuala Lumpur that it would set aside six million tonnes of palm oil each year — as much as 40 per cent of the nation’s crop — to produce biodiesel.

Investors have noticed that Europe is setting ambitious targets, but simple arithmetic dictates that there is not enough farmland in the European Union to grow the rapeseed needed to fill all its cars with 5 per cent biodiesel. Sleepy Malaysian plantation businesses have gained a new life and companies are rushing to build biodiesel refineries.

So many applications were received that the Malaysian Government has been forced to cap the number at 30 plants.

Meanwhile, Indonesia says that it will invest heavily over the next five years to promote alternative fuels using palm oil. Last week the Energy Minister outlined ambitious plans.

Indonesia’s crude oil reserves have dwindled; it is now an importer and the price is weighing heavily on an impoverished nation. By 2009-10, Purnomo Yusgiantoro, the Energy Minister, said, “we have plans for six million hectares of development, worth about $20 billion (£10.5 billion)”.

This is of great interest to Genting Berhad, an Indonesian conglomerate, which has a large plantations business. It has asked the Government for a one million hectare allocation of land for palm oil and sugar cane production — and it will get it. “Indonesia is a large country and we have the land in Sumatra, in Kalimantan, in Papua, in other places,” the minister said, “so we can handle a request for one million hectares.”

The plans are ringing alarm bells at the World Wide Fund for Nature (WWF), the wildlife conservation lobbyist, which has raised concerns that biofuel production could be the death knell for the orang utan, already endangered as a result of slash-and-burn farming in Kalimantan, an annual toll of deforestation that every year creates a hideous smog stretching across South-East Asia.

WWF is not against biofuel development, but it wants it to be carefully controlled. Fitrian Ardiansyah, co-ordinator of WWF’s forest programme in Indonesia, said that the risks are great if biofuel development is allowed unchecked in virgin forest.

“There is an increased risk of environmental disaster from fires and drought. We are facing fires in Kalimantan. There is also risk of conflict between communities over land resources and the risk of human-wildlife conflict,” Mr Ardiansyah said.

He would like the Government to restrict development to abandoned land and to increase productivity on existing plantations. The conservation lobby wants the EU to impose mandatory certification of all biofuels used in Europe to ensure that they are genuinely sustainable.

Classifying all biofuels as “renewable” is counter-productive, says Dr Stephan Singer, head of the organisation’s climate and energy policy unit.

Meanwhile, the risks are huge for food manufacturers, according to Mark Lynch, an analyst at Goldman Sachs, who reckons that the rapid expansion of biofuels is bad news for food processors: “We estimate that to achieve a 20-80 biofuels/fossil fuel mix would use at least 87 per cent of current crop land in the UK. Even a more modest 5.75 per cent target would use 26 per cent.”

Last week, Unilever suffered a sharp fall in its share price as investors took fright at signs of profit-margin erosion. The cause of the squeezed margin was additional investment in advertising and promotion as the company tried to push sales forward. The underlying problem was rising costs, including sharp increases in prices for edible oil, which wiped out all the savings the company had made in running the business.

Alan Jope, vice-president of Unilever, finds a curious irony in the emerging crisis over biofuels, which is making the company new friends in unusual places. “We find ourselves on the same side of the fence with NGOs that have been our critics in the past. This is about ethics, it is about public health and it is about sustainable agriculture.”

Crops for fuel bolster agribusiness

AGRIBUSINESS companies are rushing to invest in a new market that links crops and the soaring demand for energy. Biodiesel manufacturers are thought to have used a fifth of the European Union rapeseed crop in 2004, while ethanol production used 1 per cent of EU sugar beet.

British Sugar, part of Associated British Foods, is building a 55,000-tonne ethanol plant in Wissington, Suffolk, that will use sugar beet as a feed stock. Argent Energy operates Britain’s first biodiesel plant at Motherwell, North Lanarkshire, making 45,000 tonnes of fuel from used cooking oil and tallow. On Teesside, Biofuels Corporation aims to make 250,000 tonnes of diesel from vegetable oils. Greenergy is building a plant at Immingham, Lincolnshire, with a capacity of 100,000 tonnes of biodiesel using rapeseed.

The United States Government also backs the industry. It offers huge subsidies for the production of ethanol from corn.

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