By Nao Nakanishi and Niu Shuping
Reuters
Friday, January 26, 2007; 4:48 AM

NANNING, China (Reuters) - Something is afoot in China's top sugar-growing region of Guangxi.

Over the past year, small new farmhouses have sprouted, looking incongruous among the southern region's fields of sugar cane and karst mountains -- similar to those in Guilin, one of top tourist attractions in China.

High prices for the commodity in past few years had encouraged farmers to plant cane to the utmost. It has helped pad the pockets of farmers in an impoverished region left behind by the country's economic miracle.

Now, hope runs high in China for Guangxi's about 30 million farmers to jump on the biofuel fever. Beijing has begun encouraging ethanol made from non-grain crops, such as cassava -- known also as tapioca -- the region's other main crop.

"We are talking about sugar televisions, sugar washing machines and even sugar brides," said Pan Xunxin, an official in Chongzuo, Guangxi's top sugar cane city west of Nanning.

"Sugar is everything for this region. In the past, farmers could not think of anything beyond getting enough food ... It would be good for farmers to have another means to earn money."

But it faces a quandary: how to get enough biomatter to sustain a raft of ethanol capacity envisioned by top grains trader COFCO and top oil producer China National Petroleum Corp.

Biofuels -- energy squeezed from all kinds of living matter, such as sugar, corn or rapeseed oil that burn cleaner -- are fast gaining popularity around the world in an era of sky-high oil prices and serious threats of global warming.

Beijing has already pledged subsidies for designated biofuel plants. It currently grants about 1,300 yuan ($167) a ton -- in line with U.S. subsidies for the biofuel. There are four designated producers in the northeast, which mostly use corn.

"In the coming five years, China would develop ethanol only by using non-grain feedstock such as cassava or sweet sorghum," said an official advising Guangxi's local government.

"To use cassava is more realistic and mature at this stage as we have the technology and production," the adviser said.

Guangxi accounts for a whopping 70 percent of China's annual cassava output of about 9 million tonnes. It is already home to many producers of the cassava-ethanol used for manufacturing liquor, such as Guangxi Xintiande Energy Co. Ltd.

The region even exported ethanol for use in cars in the United States last year, helped by record crude oil prices Food-grade ethanol can be processed into fuel ethanol.

FOUR PLANTS

Local officials said Beijing had given the green light for four 200,000-tonne-per-year cassava fuel ethanol plants in Guangxi, even though the government is currently restricting new projects for fears over-investment might threaten food security.

State-run grains trader COFCO, in charge of constructing two of those four, will invest 860 million yuan ($110 million) to build the first in the southern city of Hepu this year, they said. It had already bought land for a cassava plantation.

And China National Petroleum Corp. had begun feasibility studies ahead of setting up plants in the eastern city of Wuzhou and central city of Laibin in Guangxi, they said.

Beijing wants Guangxi -- roughly the size of Britain -- to house facilities to produce as much as 1 million tonnes of fuel ethanol per year from cassava, the officials said.

But industry officials warned it would not be easy for the raft of new fuel plants to obtain enough home-grown feedstock. Also, Beijing was unlikely to allow imports because subsidies were aimed at helping local farmers.

"The COFCO plant will face a big problem of feedstock," said another industry official in Qinzhou, which is 100 kilometres north of Hepu, where the COFCO plant is located.

"Their plantation is too small and won't be enough," he said, adding there were about 100 starch producers in the area already competing against each other over cassava.

PUTTING THE SQUEEZE ON

Higher cassava prices, coupled with lower oil prices, are were already squeezing margins at ethanol producers.

Privately owned Xintiande, based in the port city of Qinzhou, has already suspended a plan to add 200,000 tonnes of capacity to its current 100,000 tonnes, partly due to tax changes and COFCO's first plant to be built not too far away.

COFCO, on the other hand, has difficulties finding a site for its second plant, they said. CNPC had taken two locations better suited to assuring its raw material supply.

China is already short of tapioca, importing 2.5-3 million tonnes of cassava chips a year from neighboring Vietnam and Thailand, the world's top tapioca exporter. China is also one of the world's top sugar importers despite rises in its output.

Looking ahead, the first official calculated China would need 14-15 million tonnes a year to fulfil the government plan.

He said Guangxi hoped to raise tapioca yield by 50 percent to about 30 tonnes per hectare by 2010, while cultivating barren land for the plant that can be grown on dry soil.

However, not all are that optimistic.

Asked about a possible rise in Guangxi's cassava output, Guangxi Sugar Exchange Chairman Chen Ning told Reuters: "It all depends on the prices. But at present it's more profitable to grow sugar cane than cassava, if possible."

Chen added that if Beijing were to offer support, Guangxi could produce some fuel ethanol also from molasses, a by-product of sugar, currently used for making yeast or paper in the region.