This will be a significant part of the country's grain crop, which totalled 50 million tonnes in 2004.

"There is no doubt that the volumes of grain to be consumed for bioethanol production this year will for the first time provide a significant new outlet which has to be welcomed at a time of a very serious fall in export demand," one trader said.

"But prices so far being offered by some new plants are rock bottom and are often under feed grain prices."

Rye is likely to be the main feedstock. Following the removal of rye from the European Union's intervention subsidy scheme in summer 2004, rye growers have been seeking new markets and suffering low prices.

Initial contracts for 2005 rye deliveries with bioethanol producers were said by traders to be around 76 euros a tonne. But purchase offers direct to farmers were often under 70 euros a tonne and even as low as 65 euros.

Commercial feed rye prices are above 90 euros in most of Germany, although they are around 76 to 77 euros a tonne in the eastern state of Brandenburg, the main centre of overproduction and a major location for bioethanol output.

"A rate of around 76 euros is just about acceptable but when I hear prices offered of well under 70 euros a tonne for farmers, I think this is not high enough to justify farmers growing rye," an analyst said.

"If higher prices cannot be achieved, especially for rye, farmers will start switching to other crops or start looking at set-aside."

"But if German farmers are unwilling to sell, the new plants have the option of buying from new EU members like the Czech Republic and Hungary which have huge surpluses of grain which they cannot sell at home and could easily send to Germany."

"I think cultivation of rye for harvest in 2006 will continue to fall despite the new demand we will see from the bioethanol plants in 2005."

Another trader said: "I see bioethanol as the strategic long term hope for German grain farmers." "Exports are very weak and we are facing ever more competition from cheap grain producers."

"We produce far more than domestic consumption and the EU will not buy millions of tonnes for intervention every year forever."