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How Does Crude Oil Price Affect Vegetable Oil Markets?

How Does Crude Oil Price Affect Vegetable Oil Markets?

17 October 2014

ANALYSIS - The fluctuating price of crude oil, including recent falls in price down to around $80 a barrel, are having a direct impact on the oilseed and vegetable oils markets.

Dr Julian McGill
Dr Julian McGill

The advent of biodiesel and the different biofuels’ mandates both in the EU and in the US permanently altered the oilseeds complex by creating the link between vegetable oils and crude oil prices.

Speaking at the HGCA Grain Outlook conference in London this week, Dr Julian McGill a senior economist with LMC International said that despite the waning enthusiasm for biodiesel recently in the EU and the shrinking mandates in the US, the relationship between crude oil and vegetable oils is as strong as ever.

However, now there is too much output and too little demand.

The biofuels market expanded the frontiers of agriculture in many regions but now following years of high prices the growth in output has seen prices reduced as demand is also reduced.

Much of the growth in production was seen in regions of South East Asia, particularly with the growth of the palm oil sector.

In the EU demand for biodiesel was being driven by the political incentives. In all a total of 15 per cent of oil seeds were being used in biodiesel and about a third of rape seed went into biofuels.

Br McGill said the change in production and demand is seeing the areas on the new frontiers of agriculture where there was rapid growth now adjust.

The growth and rise in prices through biodiesel driven by political agendas meant that the value of vegetable oils went up and down according to the Brent crude prices because of the blends with fossil fuel oils.

However, while demand for vegetable oils and the meal by-product for livestock feed ran at the same rate for a long period, eventually the demand for the oils grew faster than the demand for meal.

This then saw a change in the market as the producers of biodiesel started to switch to palm oil, which has no meal residues to dispose of compared to soy.

While it might have been expected to see a drop in vegetable oil production when the political support for the market was reduced, the market itself saw that there was a lucrative outlet for vegetable oils – particularly when the price of crude oil was high.

In the EU support for biodiesel was cut by lower targets, while in the US, the blend wall on mixing biodiesel with diesel means that the mandates have been forced to shrink.

However, the loss of the mandates and political support has not meant a reduction in the use in biodiesel.

In South East Asia crude palm oil prices are at a discount to crude oil so the prices have survived the loss of government support.

In Indonesia there is a tax on crude palm oil that has made it cheap on the domestic market, so that palm oil is used as a fuel and the export tax has meant that stocks of palm oil build up in Malaysia.

The slowdown in demand in the EU for vegetable oils coincided with a sharp rise in demand in South East Asia for biodiesel.

“And every time vegetable oil prices approach that of crude oil, free market biofuel use should create the price floor,” Dr McGill said.

He added that vegetable oils are now part of the petroleum complex.

In Brazil double cropping of soybean with maize helped to expand the frontier, but lower prices have slashed margins and this in turn is affecting yields.

“Biodiesel use remains crucial in defending the price band although the focus is shifting from mandated to discretionary use and from West to East.

“Demand for biofuels expanded the frontier of agriculture and today output exceeds demand.

“The interesting question, looking ahead, is how the recent fluctuations in prices are correcting the imbalance.

“Evidence of reductions in input use will soon be clear from the fertiliser companies and crop yields will be affected.

“Frontier areas into which oil and grain crops have expanded will see cutbacks in plantings.”

Chris Harris

Chris Harris

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