the effect of biofuels on vegetable oil markets by david jackson lmc international, oxford, uk
TRANSCRIPT
The Effect of Biofuels on Vegetable Oil Markets
by David JacksonLMC International, Oxford, UK
www.lmc.co.uk
Understanding vegetable oil prices
To understand prices today, we must go back a bit. We see that before 2007, vegetable and mineral oil prices went their own ways.
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Before 2007, there were fairly stable vegetable oil prices, while petroleum prices rose steadily. CPO was often cheaper than crude oil.
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Palm oil was actually less expensive than crude oil
Since 2007, a link has emerged between mineral and vegetable oil prices. Here is the link with CPO.
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Next, we add soybean oil to the picture.
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Then, we add rapeseed oil to the mixture.
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We believe that a price band now links oil prices (except sun oil in low crop years) to mineral oil, such as Brent North Sea crude.
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What is the feedback from prices to vegetable oil demand in biofuel?
Biodiesel use in Germany and the US, the two largest biodiesel users, is sensitive to vegetable oil and biodiesel price premia over fossil diesel.
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• We saw that German and US policies create a rapid feedback from vegetable oil prices (and profitability of biodiesel output) to demand for these oils.
• It might be thought that this will end with growing fixed biofuel mandates, cutting the link between vegetable oil prices and the demand for these oils in biofuels.
• However, a new factor is at work. We are finding that the application of mandates is reacting to vegetable oil prices. Examples include Malaysia, Indonesia and Thailand; all these countries reduced mandates that they had announced earlier. At least in part, these changes were in response to price movements.
Biofuel price sensitivity is common. Even where mandates apply, official policies can create a mineral oil-vegetable oil link.
The new link with petroleum prices
Veg oil-petroleum differentials are now crucial to the market. The soy oil premium vs. diesel was low for most of 2010, but is now too high!
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• Until the end of 2009, there was stability in the premia for the main biofuel inputs over diesel prices. The big change from January-July was a narrowing of this differential.
• This was a direct consequence of uncertainties over US biodiesel subsidies, via the US$1 per gallon credit when blending biodiesel with diesel fuel.
• The loss of the credit has lifted the value of RINs (Renewable Identification Numbers)
• Now, the US has decided not to renew the credit this year, and other factors have pulled up soy oil.
The premia for soybean oil over diesel fell from January to July 2010 but has climbed since then. It is now too high.
Conclusions: Demand from biodiesel has become crucial to vegetable oil pricing. But, biofuels are creating another dilemma for policy makers.
Until 2000, global arable area was stable
Crop demand and yields used to grow at similar rates
Growth in world area under grains plus oilseeds
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Grains are falling; oilseed area risingOilseed are “income elastic”; grains are staples
Growth in world area under grains and oilseeds
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Around 2000, things changed!
Crop demand started growing faster than yields and area began rising
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Growth in world area under grains plus oilseeds+70 m Ha
Since 2000, cumulative area under oilseeds and grains have been rising
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Growth in world area under grains and oilseeds
Reason: demand for crops acceleratedFeed (livestock) and biofuels end-use sectors were the driving forces
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Growth in world demand for grains and oilseeds
Demand will be strong, but can supply respond?
There’s enough land
• But, the problems are:
We’re pushing into some environmentally sensitive areas (not all frontiers are the same!)
If the rate of growth of demand exceeds our ability to bring this land into production, it
will place sustained upward pressure on prices
• Much depends on how fast crop yields will grow; there are huge opportunities for ag. input companies
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