By Frank Jack Daniel

MEXICO CITY, May 29 (Reuters) - Mexican farmers are setting ablaze fields of blue agave, the cactus-like plant used to make the fiery spirit tequila, and resowing the land with corn as soaring U.S. ethanol demand pushes up prices.

The switch to corn will contribute to an expected scarcity of agave in coming years, with officials predicting that farmers will plant between 25 percent and 35 percent less agave this year to turn the land over to corn.

"Those growers are going after what pays best now," said Ismael Vicente Ramirez, head of agriculture at Mexico's Tequila Regulatory Council.

The large, spiky-leaved agave thrives on high, arid land and can take eight years to reach maturity. To remove the plants, growers cut them at their stems and often burn the fields to remove the roots.

Tequila, drunk in shots and cocktails around the world, is named after a town in the western Mexican state of Jalisco.

Production of agave, from the lily family, soared in recent years as farmers cashed in on record prices brought about by a shortage of the plant at the start of the decade.

Despite rapid growth in tequila drinking, especially overseas, the over-supply of agave has driven prices for the plant to rock-bottom levels.

Many growers have started to abandon the crop in favor of corn, whose price has rocketed in line with massive growth in U.S. demand for ethanol after President George W. Bush outlined targets last year to use the corn-based fuel as a gasoline alternative.

Agave supply is also being hit this year by disease in the fields, partly due to farmers caring less for the plants after prices dropped.

"The problem that we are going to see, perhaps by mid-2008, is that a lot of agave is sick," Agriculture Ministry official Arnulfo del Toro said. "That will have to be taken out and production is going to drop a lot."

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