Oct. 1 (Bloomberg) -- Merrill Lynch & Co., the third-biggest U.S. securities firm, started two indexes tracking raw materials used in the production of biofuels, as record oil prices spur demand for alternative fuels.

The MLCX Biofuels Index tracks seven commodities including sugar, corn and rapeseed, and holdings are based on production and calorific potential, the New York-based company said in an e- mailed statement today. The MLCX Biofuels Plus Index includes the seven commodities as well as gasoline and diesel.

Governments are encouraging alternative fuels to limit carbon-dioxide emissions from fossil fuels and reduce dependency on oil imports. Crude oil rose to a record $83.90 a barrel on Sept. 20 in New York. The European Union wants biofuels to account for an average of 10 percent of transport fuel by 2020, from 1 percent in 2005.

Merrill's indexes are based on a strategy that buys and sells contracts over 15 days to help reduce losses caused by the so-called contango in the market, the company said.

A market is in contango when prices of commodities close to delivery are cheaper than those delivered at later dates. In such a situation, investors holding futures positions have to pay more when renewing monthly contracts, reducing returns.

Funds that track commodity indexes allow investors to replicate the gains and declines in the prices of a selection of raw materials without owning them. Merrill Lynch is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.

To contact the reporter on this story: Saijel Kishan in London at skishan@bloomberg.net

Last Updated: September 30, 2007 20:16 EDT