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How biofuels have transformed markets
Presentation to NIOP, San Antonio, Tx, March 2014
by James Fry, LMC International,Oxford (UK), New York, Kuala Lumpur, Singapore
www.LMC-NY.com
When you look back over the past 18 months, the market has gone through an exceptional test of the price band linking vegetable oil and petroleum prices.
On the supply side, record oilseed crops and all-time peak palm oil stocks, put prices under pressure.
On the demand side, in the two biggest biofuel markets, the EU and US, policy support for biofuels is slipping.
Nevertheless, prices remain historically high, and so we must ask ourselves what is supporting them.
Today, I will explain this paradox and hope that this will help you to make sense of today’s markets; but first, I must set the scene to provide the basis for what follows
Setting the scene
but that under oil crops rose. Since 2003, areas planted to both these major crops have risen.
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Change since 1981 for oil crops Change since 1981 for grain
2002 there has been a reversal of the long run decline in soybean prices (these are EU prices).
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ratio has tended to rise as new soybean areas have had to be developed deep in S. America.
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The soymeal-maize price ratio has risen on average at 0.5% per annum
slowly gained ground on the oil. This reflects the growing competition from palm among the oils
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The soymeal-soyoil price ratio has risen on average at 0.5% per annum
long run trends, we see that today’s EU values are 92% above the trend values (plotted earlier).
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Soybeans Trend
The price was 92% above trend in March 2014
trends, we find that in early March all product prices were far above their trend values.
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were capitalised into land prices round the world
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I have no doubt that biofuel policies, more than any other factor, have created the need for new farm land.
How has this changed the nature of the demand for the main oilseed products, and altered their price behavior?
In the case of oils, the link between their prices and that of petroleum is likely to be direct. For meal, the link is indirect; soybeans compete for land with corn, which is, of course, a major biofuel feedstock. Therefore, the bean price over time has some form of a link to that of corn.
In the next few slides, I will do my best to explain how and why a link has emerged between the prices of vegetable oils and petroleum.
frontiers has driven up major crop prices
Living in the new world of price bands
in 2007, setting all EU vegetable oil prices in a band above petroleum prices, is alive and well.
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Brent Crude Palm Oil Soy Oil Rapeseed Oil
in the spreads over Brent crude. The floor has been tested several times and has held firm.
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CPO SBO RSO CPO Average SBO Average RSO Average
I hope that, after seven years in which the floor to the price band has been defended in the face of all sorts of adversity, you are persuaded that the band is the best starting point for an understanding of price behavior.
Even when palm oil stocks broke all records and distress sales by Indonesian mills were commonplace, the Brent price acted as the floor to the EU palm oil price.
To understand the prices of all vegetable oils today, you should divide them into two totally quite distinct parts:
The first part is the petroleum (crude oil) price;
The second part is the Rotterdam premium for individual
vegetable oils over petroleum inside the price band.
What determines the premium for vegetable oils over Brent crude?
in the opposite direction to Malaysian stocks.
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What defends the price floor for palm oil in the EU when it is tested?
costs keep FOB prices below Rotterdam; export taxes made Indonesian CPO into a cheap fuel.
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Cif Rott FOB Belawan FOB Belawan - export tax
I use EU prices for the price band solely for pragmatic reasons. The first is that the floor emerges exactly when palm oil and Brent prices touch. The second is that Rotterdam is a reference point for all other oils, as well.
In practice, the CPO price floor is defended in S.E. Asia. Freight costs from S.E. Asia to the EU mean that when EU CPO equals Brent crude prices, FOB CPO prices are at a discount (the cost of freight) on Brent in S.E. Asia.
Inside Malaysia and (especially) Indonesia, export taxes reinforce CPO’s discount on Brent at the EU price floor.
There is no doubt that, at the floor to the price band, vegetable oils are cheap liquid fuels in South East Asia.
defended the floor to the EU price band
Something similar happens in the US
soy oil and Indonesian CPO over Brent. Early this year, soy oil was briefly a competitive fuel.
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Indonesian local palm oil Decatur soybean oil
oil prices reveals how SME use becomes viable when the soy oil and crude oil prices converge.
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Minus $1/gallon tax credit SME - Heating Oil
Weak US and EU biofuel use and high stocks leave seed oils needing support from palm prices.
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band at work in corn, thanks to discretionary use of ethanol. This compares USG corn with Brent.
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Brent Crude Corn
The conclusion to be drawn from this examination of the recent behavior of the markets for vegetable oils (and also corn) is that the genie, in the form of the knowledge of the scope for converting agricultural products into fuels, is now out and about, in public.
In future, this knowledge will reinforce the price floor, notably for soy and canola oils in N. America, for soy oil in S. America and for palm oil in S.E. Asia.
Like it or not, oils are becoming part of the petroleum complex. Therefore, an understanding of oils prices in future needs to start from the crude price (Brent works better than WTI) and adds a premium to reflect stocks.
Large seed crops weren’t the only thing cutting US and EU vegetable oils prices
impossible to meet projected biofuel mandates, shown here, which rely very heavily on ethanol.
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E10 blend wall
A key aspect of US mandates as regards biodiesel is that it can be used to meet corn ethanol and advanced biofuel mandates (normally met with sugar ethanol).
The best indication of the competitiveness of biodiesel in the 3 mandates lies in the prices of the traded RIN certificates that users can buy to meet these mandates.
Each RIN corresponds to a gallon of biofuel output that is eligible to meet a mandate. As the blend wall was hit, biodiesel became competitive in the other mandates.
In addition, in 2013 (but not so far in 2014), biodiesel enjoyed another benefit, a blending tax credit of $1 per gallon, and don’t forget that this applied to imported
loser from the biofuel mandate problems
July. In 2014, biodiesel has been competitive as an advanced biofuel but not vs. corn ethanol.
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biodiesel sales by over half a million tonnes in 2013, all outside the D4 (biodiesel) mandate.
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waste oils” (1 tonne, blue, counts for 2, add green) have cut vegetable oil biofuel use ever since 2010.
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So, what does this all mean for prices?
Different reasons (technical and political) lie behind the slowdown or fall in biofuel demand in the US and EU.
However, this coincides with a sharp rise in S.E. Asian biodiesel demand, led by Indonesia, and the emergence of a new form of demand for biodiesel as a cheap fuel in imports into China and in blends into Africa, for example.
Therefore, the geographical balance of biofuel demand is shifting, but changing government policies on biofuels will not affect the future relevance of the price band.
The scope to use oils as cheap fuel is now well known. This is the biofuel genie. Therefore, in future, every time vegetable oil prices fall towards that of Brent crude, their
biofuels will not end the price band
• Thank You
• www.LMC-NY.com
Acknowledgements: EBB, EIA, IMF, Jacobsen, MPOB,
• OPEC, OPIS, Public Ledger, TNS, USDA, World Bank
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© LMC International, 2014All 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
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LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.
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