CORN has overtaken oil as one of the hottest commodities after soaring 61% over the past 12 months compared with a drop of 1% in crude oil.

The agricultural commodity owes its spectacular rise to strong demand — it is used to produce ethanol, a “green” alternative to petrol - and restricted supply.

Prices leapt to a 10-year high last week following reports that America, the world’s biggest producer of corn (maize) could have another hot and dry summer, which may damage crops at a time when stockpiles are already at their lowest for 12 years.

The US government is committed to cutting dependency on oil by 20% by 2017 - mainly through a fivefold increase in the use of clean renewable fuels. About 20% of America’s maize crop is now set aside for ethanol production, compared with 3% just four years ago - and that figure is set to rise: another 77 ethanol plants are set to come on stream in the next decade John Urbanchuk of global con-sultancy LECG said: “From a cottage industry that produced 175m gallons in 1980, the American ethanol industry has grown to include 113 manufacturing facilities with an annual capacity of nearly 5.6 billion gallons.”

The British government, too, wants 5% of all fuel sales to be biofuels such as ethanol by 2010 — a twentyfold increase on today's levels.

However, corn and ethanol are far from a one-way bet. Companies that produce ethanol soared to record levels last year. Shares in Vera Sun, the second-biggest producer of corn-based ethanol in the US, were trading at 200 times the company’s earnings per share when they listed in America, while shares in Google, the internet search engine, were trading at 50 times earnings.

However, the sector has taken a pounding recently because, as the price of corn has soared, so too has the cost of producing ethanol.

At the same time, the price of ethanol itself has fallen in line with the oil price. Investors in Pacific Ethanol, for example, saw the share price fall 62% to $16.50 from a $44.50 high last year.

Some dissenters question whether ethanol is really as “green” as it seems. David Pimentel of Cornell University and Tad Patzek of the University of Berkeley said corn-based ethanol actually needs 29% more fossil fuel to make than it produces.

Savvy investors could therefore look to Brazil, which produces ethanol from high-yielding sugar cane, which needs far less fossil fuel input than corn.

In Brazil the government is investing millions in sugar cane for domestic and export use. It is already the world’s largest exporter, and by 2010 it plans to more than double ethanol exports from £308m to £667m.

On the domestic front, Brazil has swapped 40% of its petrol consumption for ethanol over the past 30 years.

In 2006 almost 70% of new Brazilian car sales were flex-fuel models - running on a combination of ethanol and petrol, and this is expected to hit 100% by 2011.

Two of Brazil’s largest sugar and ethanol producers, Cosan and Sao Martinho, are listed on the country’s Ibovespa index. Shares in Sao Martinho shot up 8% in one day last week because of strong demand, but you should remember that investing in individual emerging-market stocks is highly risky.

Soft commodities such as sugar and corn have historically been difficult for investors to access, but recently the market has opened up. In late 2006, ETF Securities launched 29 exchange-traded commodity funds (ETCs) to the market.

ETCs mirror the performance of an underlying market or index but investors can buy and sell them during the day as with ordinary shares. The ETCs track a wide range of commodities including corn, sugar, coffee, soy-beans and cotton.

Nik Bienkowski of ETF Securities said: “We have had the most demand for sugar and corn. When the funds launched, there were a couple of thousand trades a day; now it is up to 100,000 and in the past six weeks the sugar ETC has taken in around £8m while the corn fund has taken over £4m.”

Charges on ETC funds are significantly lower than on normal funds; the ETF Securities suite charges investors just 0.49% a year.

Aside from soft ETCs, the easiest way to gamble on soft commodities is spread betting.

Firms such as Capital Spreads and City Index enable you to bet on the future prices of equities, indexes, currencies and commodities but it is a high-risk strategy because you can lose more than your original stake.

WAYS TO TAKE ADVANTAGE

Corn may have soared due to demand for ethanol, but that does not mean you should rush to buy ethanol producers. As the price of corn goes up, so too does the cost of making ethanol. Also, the price of ethanol is linked to oil, which has dropped 2% in the past year. This has squeezed profits at ethanol producers.

- The best way to make money is to track the price of the commodities themselves. You could, for example, buy an exchange traded commodity fund that tracks the price of corn. You can get details at etfsecurities.com or from your stockbroker.

- Alternatively you could try spread betting, although remember you could lose more than your original stake. On Friday, Cantor was quoting a spread of 431.5 to 434 a bushel for the price of corn in March. If you thought the price would rise, you would bet £10 a point above 434. If you thought it would fall, you would bet below 431.5. If you bet it will rise, and it closes at 440 in December, you will make a profit of £60 (£10 times six).

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