Economics of Biofuel

Here's something I'm quite sick of hearing from all kinds of people who really should know better, but I have to admit I've made the same mistake. Anyways, here it is:

The argument goes that biofuel, specifically grain-based ethanol, is a Bad Thing for developing countries because it hikes the price of food, causing people to starve.

That was pretty simple. Now, I don't believe in biofuel as an answer to global warming or foreign dependence on oil, or really for any such solution. But the argument that it raises food prices is wrong. At least, in the very short run, it is wrong. This is something I learned in first year economics. So let's see if I can get this right. When prices go up, they don't just stay up. When prices go up due to an increase in demand, suppliers benefit. Suppliers make more dollars per unit sold in a market with increasing prices. So what do they do with the extra money? They invest it (What if they choose not to invest the extra gains? They get out-competed by producers who do go ahead and make those smart investments), and they develop cheaper and more efficient ways to grow crops. They buy new machines, or develop new land, or invest in biotechnology such as disease-resistant crops. The result of this is more supply at lower cost to the suppliers, which results in a downward pressure on prices.

Now, the only negative thing I could think of would be that volatility in the price of fuel will have an effect on the price of food. Because things like global turbulence and wars and stuff tend to throw things like fuel prices into wild fluctuations of peaks and troughs of demand. However, the principle of risk management has taught me that amalgamating the food and fuel markets should actually have a mediating effect on the volatility of both markets, resulting in an amalgamated market that is more stable than either of the two component markets. Thus, food prices should actually remain more stable than before the advent of biofuel. Of course, wars and other international crises could, in some special cases, have an amplifying effect on the volatility of both markets, creating super-waves and super-troughs, but I don't see this as an argument against biofuel, but as something for national governments to watch out for and create contingency plans for, just as they currently have contingency plans in case of food or fuel shortages.