The Effect of Biofuels on Vegetable Oil Markets by David Jackson LMC International, Oxford, UK .
-
Upload
ronnie-annis -
Category
Documents
-
view
217 -
download
0
Transcript of The Effect of Biofuels on Vegetable Oil Markets by David Jackson LMC International, Oxford, UK .
The Effect of Biofuels on Vegetable Oil Markets
by David JacksonLMC International, Oxford, UK
www.lmc.co.uk
To understand prices today, we must go back a bit. We see that before 2007, vegetable and mineral oil prices went their own ways.
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10
US
$ p
er t
on
ne
Brent Crude Palm Oil Soy Oil Rapeseed Oil PKO
Before 2007, there were fairly stable vegetable oil prices, while petroleum prices rose steadily. CPO was often cheaper than crude oil.
0
100
200
300
400
500
600
700
800
900
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
US
$ p
er t
on
ne
Brent Crude Palm Oil Soy Oil Rapeseed Oil PKO
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.
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
US
$ p
er t
on
ne
Brent Crude Palm Oil
Next, we add soybean oil to the picture.
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
US
$ p
er t
on
ne
Brent Crude Palm Oil Soy Oil
Then, we add rapeseed oil to the mixture.
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
US
$ p
er t
on
ne
Brent Crude Palm Oil Soy Oil Rapeseed Oil
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.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
US
$ p
er t
on
ne
Brent Crude Palm Oil Soy Oil Rapeseed Oil Sun Oil
Biodiesel use in Germany and the US, the two largest biodiesel users, is sensitive to vegetable oil and biodiesel price premia over fossil diesel.
140
180
220
260
300
340
380
420
460
500
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Mo
nth
ly B
iod
iese
l D
eman
d,
'000
to
nn
es
-100
-50
0
50
100
150
200
250
300
350
Prem
ium
, US
$ per to
nn
e
US + German Demand Average US & German Biodiesel Premium
• 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.
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!
-200
-100
0
100
200
300
400
500
600
700
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
EU
pre
miu
m o
ver
gas
oil
, $
per
to
nn
e
CPO SBO RSO CPO Average SBO Average
• 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
-20
-10
0
10
20
30
1980 1985 1990 1995 2000
Are
a ch
ange
(million h
ecta
res)
-20
-10
0
10
20
30
Cum
ulative area ch
ange (m
illion h
ectares)
Annual change Cumulative change
Grains are falling; oilseed area risingOilseed are “income elastic”; grains are staples
Growth in world area under grains and oilseeds
-30
-20
-10
0
10
20
30
40
1980 1985 1990 1995
Are
a ch
ange
(million h
ecta
res)
-60
-40
-20
0
20
40
60
80
Cum
ulative area ch
ange (m
illion h
ectares)
Annual grains Annual oilseeds Cumulative grains Cumulative oilseed
Around 2000, things changed!
Crop demand started growing faster than yields and area began rising
-20
-10
0
10
20
30
40
1980 1985 1990 1995 2000 2005
Are
a ch
ange
(million h
ecta
res)
-40
-20
0
20
40
60
80
Cum
ulative area ch
ange (m
illion h
ectares)
Annual change Cumulative change
Growth in world area under grains plus oilseeds+70 m Ha
Since 2000, cumulative area under oilseeds and grains have been rising
-30
-20
-10
0
10
20
30
1980 1985 1990 1995 2000 2005
Are
a ch
ange
(million h
ecta
res)
-120
-80
-40
0
40
80
120
Cum
ulative area ch
ange (m
illion h
ectares)
Annual grains Annual oilseeds Cumulative grains Cumulative oilseed
Growth in world area under grains and oilseeds
Reason: demand for crops acceleratedFeed (livestock) and biofuels end-use sectors were the driving forces
0
50
100
150
200
250
300
350
Grains & Oilseeds Food Feed Fuel
Million tonnes
1990s
2000s
1.5% 2.3%
CAGR
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
New York1841 Broadway
New York, NY 10023USA
T +1 (212) 586-2427F +1 (212) 397-4756
Oxford (HQ)14-16 George Street
Oxford OX1 2AFUK
T +44 1865 791737F +44 1865 791739
Kuala LumpurLevel 2, No 33
Jalan Tengku Ampuan Zabedah B 9/BSeksyen 9, 40100 Shah Alam
Selangor Darul EhsanMalaysia
T +603 5513 5573F +603 5510 [email protected]
© LMC International, 2010All rights reserved
This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any manner, to a third party without the prior written consent of LMC International.
While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client’s own risk.
LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.