Investment in new plants to make ethanol from corn is growing so fast in the U.S. that the record-high prices are headed for a "significant correction," said an executive at Kellogg Co., the largest U.S. cereal maker.

"The frenzy around the ethanol and biodiesel industry in the U.S. today is similar to the gold rush or the tech boom," said Alistair Hirst, vice president of global procurement for Battle Creek, Michigan-based Kellogg. "A market correction is a highly likely outcome," he said in London at an International Sugar Organization seminar. "High prices cure high prices."

U.S. ethanol prices reached a two-month high last week of $2.237 a gallon on average, and were at a record $3.9757 on July 3, government data show. Demand is surging because of government mandates and subsidies intended to ease demand for fossil fuels, limit pollution and assist farmers. Global production is forecast to rise to 1.2 million barrels a day by 2011, 79 percent higher than the average production rate last year, according to the International Energy Agency.

The rally in corn and wheat prices, caused by drought and competing demand from the ethanol industry, has boosted costs for Kellogg, which makes Corn Flakes, Rice Krispies, Eggo waffles and Cheez-It snacks. Kellogg estimates higher costs for wheat, sugar and fuel will cut profit by as much as 30 cents a share this year, equal to 11 percent of last year's total.

"The ability to pass on increased production costs to retailers and consumers is often not an option at all," said Hirst, adding that the benefits from the change in the EU sugar policy, which is expected to lead to lower prices, would not come until 2008 or 2009.

Hirst also said the increased output of first-generation biofuels, made from food crops, is eroding soil, depleting water reservoirs, damaging biodiversity in some countries, and driving up the price of crops used for production.

The model of producing ethanol from a number of local plants in the U.S. is not sustainable, Hirst said. A centralized model of large-scale biofuels facilities would be more profitable, as would greater investment into second-generation biofuels, made from organic waste matter, he said.

"Investors who have put money into first-generation biofuel production are unlikely to support this, however," Hirst said.

The "bottom has fallen out" of the markets for byproducts from biofuels production such as glycerine, he said.