US Soybean Export Council St Louis, Missouri

Transcription

1 The 21 Update to Soybean Meal Evaluation Report for: US Soybean Export Council St Louis, Missouri September 21 Research and analysis to inform your business decisions LMC International Oxford New York Kuala Lumpur George Street 1841 Broadway Level 2, No 33 Oxford OX1 2AF New York, NY 123 Jalan Tengku Ampuan Zabedah B 9/B UK USA Seksyen 9, 41 Shah Alam Selangor Darul Ehsan Malaysia T T +1 (212) T F F +1 (212) F info@lmc.co.uk info@lmc-ny.com info@lmc-kl.com Osa62ny

2 LMC International Develops Unique, Independent Research For 3 years LMC has delivered in-depth, specialist analysis to leading international companies working in agricultural commodities, biofuels, foods and industrial materials, as well as their end-use markets. Our research covers twelve major industry sectors: Biofuels & Biomass Oils & Oilseeds Oleochemicals Grains Sugar & Sweeteners Starch & Fermentation Feed Ingredients Coffee Cocoa Food Ingredients Rubber Tyres Recognised by many of the world s major companies as experts in research, LMC provides the business world with strategic insights unavailable elsewhere. LMC International Ltd, 21. All rights are reserved in all countries. No material may be reproduced or transmitted, in whole or in part, in any manner, without written consent. While LMC International endeavours to ensure the accuracy of the data, estimates and forecasts contained in this study, 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 the study.

3 Table of Contents Contents Introduction 21 updates... I1 Part One: The linkages of petroleum and vegetable oil prices... 1 The role of petroleum in pricing within the vegetable oil and fat complex...1 Vegetable oil price forecasting using the price band...5 Feedstock flexibility in biodiesel...7 Price cycles in the energy sector...8 Petroleum prices to The role played by RINS in determining soybean oil prices today... 1 Part Two: Developments in demand Biofuels accelerate demand for vegetable oils The effect of the recession on the demand for oilseed products How much oil can we consume in food? The US experience Non-food demand for vegetable oils: biofuels Biodiesel Summary of global vegetable oil demand to Global oilseed meal demand to Deriving demand for oilseed meal... 3 A focus upon Chinese demand Translating meat demand into meal demand Forecasting meal demand to Part Three: The rapid growth of the Canadian canola sector... 4 Canola production in the US Part Four: 21 model results Petroleum prices revisited Nominal soybean product and corn prices Real prices for soybean products and their competitors US soybean supply demand balance Developing US soybean and corn forecasts International soybean output Soybean, soybean oil and soybean meal trade Global meal output and demand to Global oil demand to LMC International, 21

4 List of Tables Table 2.1: Projections of real GDP per capita Table 2.2: Population projections Table 2.3: Total food demand for vegetable oils, Table 2.4: World vegetable oil consumption in biodiesel and direct burning, Table 2.5: World vegetable oil consumption, Table 2.6: Meat (poultry and pork) consumption in selected countries, Table 2.7: World oilseed meal consumption, Table 3.1: Summary of supply and demand balances in the Canadian canola sector to Table 4.1: Average annual rates of increase in world market prices of soybean products and corn Table 4.2: World (EU) and US soybean oil prices Table 4.3: Real World (EU) and US soy meal prices Table 4.4: Real World (EU) and US soybean prices Table 4.5: US supply-demand balance for soy products, Table 4.6: US supply-demand balance for soybean products, Table 4.7: US soybean area Table 4.8: US soybean output... 6 Table 4.9: International soybean output Table 4.1: International soybean output Table 4.11: Soybean production and crushing volumes and soybean oil and meal production to 22 in the US, Argentina and Brazil Table 4.12: Major soy producers and consumers, Table 4.13: Major soy producers and consumers, Table 4.14: Supply of protein meals and corn milling by-products, on a soybean meal equivalent basis... 7 LMC International, 21

5 List of Diagrams Diagram 1.1: Vegetable oil and Brent crude petroleum prices, Diagram 1.2: Correlations of monthly Brent prices with major products since Diagram 1.3: Percentage of total annual output used in biofuels for selected crops...3 Diagram 1.4: US plus German biodiesel use vs. the biodiesel premium over diesel...3 Diagram 1.5: Illustration of the price band effect in the vegetable oil complex...4 Diagram 1.6: EU vegetable oil price premia over EU gasoil prices, Diagram 1.7: EU vegetable oil price premia over EU gasoil prices, Diagram 1.8: The use of soy vs. non-soy methyl esters in US biodiesel, Diagram 1.9: The soy oil % of US biodiesel vs. % tallow discount on soy oil...8 Diagram 1.1: Real Brent crude oil price with sensitivity forecasts, Diagram 1.11: US biodiesel and diesel prices... 1 Diagram 1.12: US biodiesel RINs since December Diagram 1.13: US biodiesel premium over diesel vs. the value of the blending credit plus RINs Diagram 1.14: US biodiesel and diesel prices, where blending credits and RINs are taken into account Diagram 2.1: Growth in world meal and major oils consumption, Diagram 2.2: Global food and non-food use of vegetable oils, Diagram 2.3: World demand for leading vegetable oils in food uses, Diagram 2.4: Food oil consumption in selected markets before and during the recession Diagram 2.5: US demand for leading vegetable oils in food uses, Diagram 2.6: USA per capita food oil consumption vs. real per capita GDP, Diagram 2.7: Per capita oil consumption against real per capita GDP, Diagram 2.8: US demand for leading vegetable oils, Diagram 2.9: Oil consumption per capita for selected markets, 21 and Diagram 2.1: Forecast world biodiesel demand for edible vegetable oils to Diagram 2.11: World vegetable oil consumption, Diagram 2.12: Growth in world demand for leading oilseed meals, Diagram 2.13: Aggregate poultry and pork consumption per capita for selected markets, 21 and Diagram 2.14: 29 Per capita GDP for selected economies Diagram 2.15: Per capita consumption of vegetable oil in food and meat (pork and poultry) in selected economies Diagram 2.16: Chinese consumption of oil in food, meal and pork and poultry, Diagram 2.17: Chinese per capita meal consumption vs. real GDP, Diagram 2.18: Brazilian per capita meal consumption vs. real GDP, Diagram 3.1: Canadian canola seed, meal & oil output and crush capacity, Diagram 3.2: Canadian canola oil and meal consumption, Diagram 3.3: Canadian canola oil consumption, food and non-food use, Diagram 3.4: Canadian canola oil and meal exports, Diagram 3.5: Canadian canola area, yield and output, Diagram 3.6: Canadian canola seed, meal & oil output and crush capacity, Diagram 3.7: US canola production from existing and future (new) areas, Diagram 4.1: Nominal world prices of soybean products and corn, Diagram 4.2: Nominal price projections for soybean products and corn, Diagram 4.3: Real (inflation adjusted) price projections for soybean products and corn, Diagram 4.4: Soybean prices with $6 ppb scenario, nominal vs. real EU (World) prices... 5 Diagram 4.5: Real EU (World) prices soybean oil and palm oil at $6 and $8/barrel LMC International, 21

6 Diagram 4.6: World palm and palm kernel oil production at $6 and $8 per barrel Diagram 4.7: Real EU (World) prices soy and rapeseed meal at $6 and $8 per barrel Diagram 4.8: Real EU (World) prices soybean and corn at $6 and $8 per barrel Diagram 4.9: US soybean output, crush and exports (28-22) Diagram 4.1: US soybean meal output, disappearance and exports, Diagram 4.11: US soybean oil output, disappearance and net exports/imports (including oil in biodiesel imports), Diagram 4.12: US pork and poultry meat output and demand, Diagram 4.13: US soybean and corn planted area at $6 per barrel Diagram 4.14: US soybean and corn planted area at $8 per barrel... 6 Diagram 4.15: US soybean output... 6 Diagram 4.16: International soybean output at $6 per barrel Diagram 4.17: International soybean output at $8 per barrel Diagram 4.18: US, Argentina and Brazil soybean, oil and meal output, Diagram 4.19: Summary of soybean trade, 21 and Diagram 4.2: Summary of soybean meal trade, 21 and Diagram 4.21: World soybean exports, Diagram 4.22: Composition of world soybean exports, Diagram 4.23: World soybean meal exports, Diagram 4.24: Composition of world soybean meal exports, Diagram 4.25: World soybean oil exports, including oil in biodiesel exports Diagram 4.26: Composition of world soybean oil exports (including exports of oil in biodiesel) Diagram 4.27: Geographical composition of global meal demand, Diagram 4.28: Geographical composition of global meal demand, Diagram 4.29: Geographical composition of global oil demand, Diagram 4.3: Geographical composition of global oil demand, LMC International, 21

7 Introduction: 21 Soybean Evaluation Update LMC have produced a series of forecasts for USSEC on the future prospects for the US soybean sector, beginning with the Soybean Meal Evaluation to 22 (Project #619, December 26). This original report was supplemented by updates in 27 and 28. The report draws heavily on a comprehensive, integrated model of the global oilseed sector devised for the initial report. Since the agricultural pricing boom of 27 and early 28, the economic world has suffered a severe and deep recession prompted by the onset of the financial crisis in 28. The recession, and the sharp correction in agricultural prices that accompanied it, has raised a new set of question for oilseed farmers. In the background, the links between agriculture and energy have deepened as biofuels have become ingrained, adding another layer of complexity to the task of plotting soybean s future in the vegetable oil sphere. In this 21 update to the soybean meal evaluation, we look closely at how this new constellation of factors have affected the US soy industry, and assess the most likely path for the sector as the world economy climbs slowly out of recession. This latest report explains the robust linkages that have developed with energy markets: these relationships have altered profoundly our view of price forecasting in the vegetable oil arena especially. We also consider how aggregate oil and meal demand have been influenced by lower incomes, and the shifting preferences for certain oils in the increasingly health conscious US market. As the forces applied to the US soybean sector have changed, we have altered the structure of this year s report update to reflect the way the US industry is evolving. The report is, therefore, structured as follows: Part 1: The linkages between petroleum and vegetable oil markets Part 2: The prospects for oil and meal demand to 22 and beyond Part 3: The growth of canola in Canada Part 4: The results of the 21 modelling exercise LMC International, 21 I1

8 Part One: The linkages of petroleum and vegetable oil vegetable prices oil prices The determination of prices in the vegetable oil market has been altered radically by the nowwidespread use of edible oils as biofuels. Although biofuel use accounts for a minority of vegetable oil off-take, the high elasticity of demand in the fuel sector means that the tail is wagging the dog, with biofuel demand effectively determining a price band for oils within which more traditional factors refine the exact price. In this opening chapter, we explain this important relationship in detail, and the implications it holds for vegetable oil price forecasting. The role of petroleum in pricing within the vegetable oil and fat complex Central to our price forecasts for all commodity vegetable oils, including soybean oil, is the realisation that petroleum prices have become a pivotal influence in the vegetable oil and animal fat sector. Diagram 1.1 demonstrates the broadly parallel price movements of petroleum (using Brent crude as the reference) and EU vegetable oils since around the start of 27, when European biodiesel began to consume very large volumes of vegetable oil. The NW EU market provides an effective global clearing center for vegetable oils and many other agricultural products. We therefore adopt the NW EU as our price basis in order to reflect its position as the major price-making market for world vegetable oils. For US prices, which we present in the results of our analysis in Part 4, we deduct established price differentials, which largely reflect freight between the two markets. Diagram 1.1: Vegetable oil and Brent crude petroleum prices, ,6 1,4 1,2 US$ per Tonne 1, Jan-6 Aug-6 Mar-7 Oct-7 May-8 Dec-8 Jul-9 Feb-1 Sep-1 Brent Crude Palm Oil Soy Oil Rapeseed Oil PKO Coconut Oil The strong links between monthly petroleum and vegetable oil prices since 27 are emphasised in Diagram 1.2. The diagram shows the degree to which a range of agricultural commodities have become correlated with petroleum prices in recent years. Sugar s low correlation is due to Brazil s fuel pricing policy. Brazilian mills ability to switch between sugar and ethanol output means that the world sugar price is tied to local fuel ethanol prices, which, in turn, are tied to local gasoline prices. LMC International, 21 1

9 Part One: The linkages of petroleum and vegetable oil prices Brazil s gasoline price has been held fixed since 26, and this explains the absence of correlation between world sugar prices and world petroleum prices. The strong linkages between maize (corn) and petroleum are also important for soybeans, given the close relationships between soybeans/soybean meal and corn, which compete in feed markets and for scarce arable land in the US and elsewhere. We discuss this relationship further later in this report when forecasting soybean and soybean meal prices. Diagram 1.2: Correlations of monthly Brent prices with major products since 27 Sugar Wheat Maize Palm Oil Rapeseed Oil Coconut Oil Palm Kernel Oil Soybean Oil -1% % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% Correlation with monthly Brent Crude Prices since 27 Petroleum prices thus influence vegetable oil and fat prices directly via the link with biodiesel, and also influence oilseed prices indirectly via the competition (in both the choice of crop for planting and as feed ingredients) between oilseeds and feed grains, notably corn, whose prices are increasingly determined by their role as ethanol feedstocks. In order to understand better why the link between vegetable oil and petroleum prices has only emerged recently, we have prepared Diagram 1.3. It shows the proportion of some major crops consumed in the biofuel sector. Rapeseed oil now has the largest percentage of its output devoted to biofuels, with over a third of global production used in biofuels. Soy oil lies next among the oils, with a biofuel share of14%. The average for vegetable oil output worldwide is 12%. It is interesting that this link with petroleum is so strong even though, as Diagram 1.3 reveals, the main outlet for the major oils is still overwhelmingly food. However, the important thing about biofuel use is that it is very sensitive to vegetable oil price changes, and demand responds quickly and dramatically. This means that the smaller proportion of demand is in fact more important for price determination hence, the tail is wagging the dog. Swings in demand in biofuel use are driving vegetable oil prices much more than the more stable development of food consumption. LMC International, 21 2

10 Part One: The linkages of petroleum and vegetable oil prices Diagram 1.3: Percentage of total annual output used in biofuels for selected crops 35% 3% % of World Output used in Biofuels 25% 2% 15% 1% 5% % Sugar Cane Maize Total Oils Rapeseed Oil Soy Oil Other Oils Diagram 1.4 helps to explain this phenomenon. It plots the swings in biodiesel demand in the two biggest markets, the US and Germany, against the average price premium of biodiesel over diesel in the two countries. Diagram 1.4: US plus German biodiesel use vs. the biodiesel premium over diesel 5 3 Monthly Biodiesel Demand, ' tonnes Premium, US$ per tonne Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 US + German Demand Average US & German Biodiesel Premium -1 LMC International, 21 3

11 Part One: The linkages of petroleum and vegetable oil prices The diagram provides clear evidence of an inverse relationship between the two variables. When biodiesel is expensive relative to fossil diesel (because vegetable oils become overpriced), biodiesel consumption falls; conversely, when biodiesel is relatively cheap vs. diesel fuel, biodiesel off-take is higher. This creates the link between the prices of vegetable oil and fossil fuels. In practice, if vegetable oils and hence biodiesel become too expensive relative to petroleum, then biodiesel demand dries up and vegetable oil prices decline until the point where demand is rekindled in the biodiesel sector; conversely, cheap vegetable oils and biodiesel lift demand so strongly that their prices are pulled up rapidly. Diagram 1.4 demonstrates the speed of these responses, creating the price band for vegetable oils against petroleum, as illustrated in Diagram 1.5. Diagram 1.5: Illustration of the price band effect in the vegetable oil complex 1,6 1,4 1,2 US$ Per Tonne 1, Jan-6 Aug-6 Mar-7 Oct-7 May-8 Dec-8 Jul-9 Feb-1 Sep-1 Brent Crude Palm Oil Soy Oil Rapeseed Oil PKO Coconut Oil Crude petroleum sets the floor to the price band, as may be seen from the behaviour of EU palm oil prices in 27 and again in early 29. When European CPO prices equal local petroleum prices, it means that CPO is cheaper than petroleum in SE Asia, making it attractive for some SE Asian diesel users simply to put RBD olein into their tanks, as was widely reported to have happened in both 27 and 29, without the need of a subsidy. Also, the direct burning of CPO, instead of fuel oil, started to occur. A further factor reinforcing the floor to the price band is the existence of very large unutilised biodiesel processing capacities around the world. If it becomes profitable for potential blenders to buy unsubsidised biodiesel to combine with diesel fuel, the potential boost to vegetable oil demand is almost unlimited, and will quickly pull vegetable oil prices back up towards the centre of the band once more. The top of the price band depends upon the extent to which governments are prepared to subsidise biodiesel output. This may occur in several ways: Some governments mandate biodiesel demand, which therefore should not be sensitive to the cost of biodiesel (and hence of vegetable oil prices). LMC International, 21 4

12 Part One: The linkages of petroleum and vegetable oil prices However, there is considerable biodiesel demand that is generated in a price-sensitive manner via tax incentives or buy-out options. Tax incentives reduce blenders costs of biodiesel, while buy-out opportunities mean that, when the biodiesel premium gets too high, users prefer to pay for a buy-out so as not to use biodiesel rather than use it. Together, tax incentives and buy-outs set an upper limit to the price band. Beyond the top of the band, demand for biodiesel is squeezed, pulling prices back within the band. Within the price band, each vegetable oil has to find its price levels relative to the others. The emergence of a price band has revolutionised the way one needs to think about price forecasting in vegetable oils. In the past, it was usual to prepare vegetable oil price forecasts on the basis of changes in supply and demand, as reflected in changes in stocks. Today, the most important element of the price forecasts is the level of petroleum product prices. One major question that remains is to ask which petroleum product is the most relevant in understanding price behaviour. Is it crude oil, as for Brent North Sea crude in the previous diagrams, or is it diesel? Diesel seems more appropriate, in view of its competition with biodiesel as a fuel, and we use diesel (gasoil) in the following analysis. Vegetable oil price forecasting using the price band The emergence of a price band providing a cage around vegetable oil prices means that we must learn to concentrate on the differentials of vegetable oil prices vs. petroleum products if we are to forecast movements in vegetable oil prices in response to price changes in the petroleum market. Diagram 1.6 illustrates price differentials against diesel (using gasoil quotations), plotting EU vegetable oil prices vs. gasoil prices. Diagram 1.6: EU vegetable oil price premia over EU gasoil prices, EU premium over gasoil, $ per tonne Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Palm Oil Soy Oil Rapeseed Oil CPO Average SBO Average LMC International, 21 5

13 Part One: The linkages of petroleum and vegetable oil prices In terms of averages over the period since January 27: Soybean oil averaged $3 per tonne over diesel. This corresponds almost exactly to the $1 per gallon blending credit available to US biodiesel blenders. Palm oil averaged $122 per tonne over diesel, while stearin averaged $111. There is evidence that the prices of oils tend to revert to these averages if they get far above or below them for any prolonged period. Sudden policy changes can cause disruptions, as has been the case recently, with the US Congress failing to renew the $1 per gallon blending credit this year. This caused the soybean oil premium over petroleum product prices to fall as the market waited to see what would happen, but now that it is virtually certain that the credit will not be restored this year, the market is focusing instead on the requirement for US blenders to meet the biodiesel mandate this year and the soy oil premium has moved up. We consider the important developments in soybean oil pricing in the US this year in the final section of this chapter. The credit crisis of September 28 caused price relativities among the main biodiesel raw materials to be unstable for a short while, but by mid-29, the relationships had settled down, but this stability was given a shock by the failure to renew the blending credit in 21. If we focus on the past 12 months (depicted in Diagram 1.7), the importance of some of these developments is evident. A notable feature of the past year was the lower soy oil premium after January 21. As noted earlier, this was due to the failure to renew US blending credits. Since August, as the Russian ban on wheat exports has created upward pressures in agricultural markets, the soy oil premium has moved above the $3 premium average. In our view, this means it has now moved too far, and biodiesel usage should contract. According to our analysis, we believe this will begin to pull down the soy oil premium in the latter part of 21. Diagram 1.7: EU vegetable oil price premia over EU gasoil prices, EU premium over gasoil, $ per tonne Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Palm Oil Soy Oil Rapeseed Oil LMC International, 21 6

14 Part One: The linkages of petroleum and vegetable oil prices Feedstock flexibility in biodiesel Another biofuel phenomenon now beginning to affect vegetable oil prices is the increased feedstock flexibility from some biodiesel producers. At the forefront of this development is Neste Oil of Finland, whose renewable diesel technology allows it to use a wide range of feedstocks, including animal fats, recycled oils and most palm products (with the exception of PFAD, but there are conventional biodiesel producers who have installed the special tanks and piping needed to handle PFAD, bringing this cheap product, too, within reach of biofuel producers). This flexibility enables Neste to purchase the cheapest vegetable oils and fats available at any time. Neste will have well over two million tonnes of renewable diesel capacity in Europe and Singapore on stream by 211; but already the effect of the feedstock flexibility has been to pull the prices of major biodiesel feedstocks more closely together. As a relatively cheap raw material, tallow has benefited from this trend and seen its discounts narrow on higher priced products, such as soybean oil. The irony for processors like Neste is that, by becoming so large, their feedstock flexibility in the end will act to undermine their own competitive advantage, as they bid up the prices of the cheaper oils and fats; indeed, Neste commented upon this narrowing of differentials in its latest quarterly report. In the US, the EU and Brazil, tallow is becoming more widely used as producers learn more about the scope for flexibility in inputs. Diagram 1.8 demonstrates the expanding role of nonsoy oil methyl esters in the US biodiesel market, where such methyl esters, with tallow the most popular, now routinely account for 5-6% of aggregate biodiesel output. Diagram 1.8: The use of soy vs. non-soy methyl esters in US biodiesel, ' Tonnes per Month Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Soy Biodiesel Output Non-Soy Methyl Ester Output Diagram 1.9 reveals the influence of feedstock flexibility on prices. It plots the soybean share in total US biodiesel feedstocks alongside tallow s discount on soy oil, also as a percentage. Since 28, soy oil s share has declined, while over the same period, the tallow discount on soy oil has also narrowed (apart from a seasonal widening as winter approaches, when tallow LMC International, 21 7

15 Part One: The linkages of petroleum and vegetable oil prices cannot easily find outlets in the biodiesel sector). This price convergence is significant for long term price forecasts in the vegetable oil and fats sector. Diagram 1.9: The soy oil % of US biodiesel vs. % tallow discount on soy oil 8% 8% 7% 7% Soy % of US Biodiesel Output 6% 5% 4% 3% 2% 6% 5% 4% 3% 2% US Tallow % Discount on Soy Oil Price 1% 1% % Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Soy % of US Biodiesel Output Tallow Discount as % Soy Oil Price % The links between petroleum and oil and fat markets are now profound and complex. The importance of these links for vegetable oils means that one has to take a view about petroleum prices in order to forecast prices of soybean oil. In addition, as corn prices develop in tandem with gasoline prices via the link with ethanol, soybean and soybean meal prices are also becoming entwined in the energy price net. We have, therefore, prepared our price forecasts, presented in Part 4, under some alternative trajectories of petroleum prices, which we now introduce. Price cycles in the energy sector Petroleum prices to 22 Central to our price forecasts is the realization that petroleum prices have become a strong influence in the vegetable oil sector. Petroleum prices influence vegetable oil and fat prices directly via the link with biodiesel. On account of the importance of this link to energy prices, we have modelled our scenarios under two alternative trajectories of the petroleum price. We term these the $6 per barrel and $8 per barrel energy price scenarios, and describe their assumptions in this section. As energy prices become more central to arable crop pricing, it is necessary to take a view on energy prices when forecasting prices in the oilseed complex. Below, we present our two scenarios for price developments in the energy market to 22, in dollars per metric ton. LMC International, 21 8

16 Part One: The linkages of petroleum and vegetable oil prices Diagram 1.1: Real Brent crude oil price with sensitivity forecasts, Real (28) $ per barrel Real $6 ppb in 215 Real $8 ppb in 215 Diagram 1.1 depicts projections of real (inflation-adjusted) Brent crude prices, in dollars per metric ton, to 22 under our two alternative assumptions regarding the real price level at which Brent crude values will settle when the current energy price cycle is fully played out. These are the $6 and $8 petroleum price forecasts. In each case, we assume that the current energy price cycle will be fully unwound by 215, with prices settling at revised equilibrium levels and following the long term trend trajectory thereafter. The average real price for Brent crude in 29 was $62 per barrel in 29 dollar terms ($451 per metric ton), and for 21 the average has been $76 per barrel ($56 per metric ton). The diagram also demonstrates our view that petroleum prices will climb once more after the current period of subdued demand in western economies. Our reasoning is that the most recent price spike in 27/8 was not sustained for long enough to encourage the necessary investment response in exploration and exploitation of crude reserves, alternative technologies or fuel conservation measures. This price trajectory and continued underinvestment is vital, as it affects our view of agricultural commodity prices also. The fuel price levels diverge as they move towards their alternative equilibria. Our scenarios are explained below: Real $6 per barrel from 215: One assumption is that oil prices settle back after the secondary 212 peak as new energy supplies emerge (including biofuels) and as energy saving measures take effect globally by 215. In this case, Brent crude prices stabilize at $6 per barrel after 215 ($44 per metric ton). Real $8 per barrel from 215: In this higher energy price case, petroleum prices climb steeply in 211, before settling back to $8 from 215 ($586 per metric ton). All of our further scenarios are arranged in sets of two, with each pair of scenarios incorporating one scenario with petroleum prices set according to the $6 per barrel assumption, and one with energy prices corresponding to the $8 per barrel assumption. LMC International, 21 9

17 Part One: The linkages of petroleum and vegetable oil prices Our own belief is that energy prices will eventually fall back to the $6 per barrel level or below, after the current prolonged period of high prices. Over the past 35 years (i.e., since the first oil price shock ), the average crude oil price in 21 purchasing power has been $35-$4 per barrel (the precise value depends on the dollar price index used as a deflator to convert nominal to real prices), though the trend is slowly rising. The role played by RINS in determining soybean oil prices today In the final section of this chapter, we examine in depth another vital pricing phenomenon that has emerged very recently in the US soybean oil market. This is the role played by RINs (Renewable Identification Number) in the biodiesel sector. RINs are tradeable certificates that in total must add up to the US biodiesel mandate. Today, US biodiesel producers, without a $1 per gallon (roughly $3/tonne) subsidy, must rely on RINs to plug the price gap between local biodiesel and diesel prices, as we shall explain. RINs are similar to carbon credits in some ways. With carbon credits, a few countries require firms to reduce CO 2 emissions, but a company that has not reached the mandated reduction may buy credits from another that has made larger cuts than those stipulated by the mandate. In the case of US biofuels, a company that has not reached the mandated biofuel blend may buy RINs from another that has blended more than its mandate requires. Some states have fairly cheap biodiesel (e.g., soybean states like Iowa); others have to bring it in over long distances. It is better all-round for Iowa blenders to do more blending than the mandate specifies and sell surplus RINs to less well placed blenders. The point where the market for RINs clears is where a blender does not mind whether it buys biodiesel or uses diesel and buys RINs, as an alternative way of meeting the mandate. At this point: The biodiesel price = the diesel price + RIN Diagram 1.11 plots US Mid-West wholesale prices for biodiesel and diesel. It is clear that the turmoil over the blending credit caused only a minor narrowing of the gap between them. Diagram 1.11: US biodiesel and diesel prices 6 5 US cents/gallon Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Biodiesel Diesel LMC International, 21 1

18 Part One: The linkages of petroleum and vegetable oil prices Diagram 1.12 shows how biodiesel RINs have moved since December 29, the last time the $1/gallon credit was available. Three RIN values are drawn: current year, previous year and an 8:2 current-previous year mixture. Blenders are allowed to meet up to 2% of the mandate via the use of previous year RINs (unused 29 RINs generated by blending more biodiesel last year than the 29 mandate). Diagram 1.12: US biodiesel RINs since December RINs in US cents per gallon of biodiesel Dec Jan Feb Mar Apr May Jun Jul Aug Sep Current year RIN Prev year RIN 8:2 average Two key points should be noted from Diagram 1.12: First, the 8:2 RIN combination is always cheaper than buying only current year RINs. Second, the cost of RINs, which peaked in July after the failure to renew the credits, has never reached the full value of the lost credits. Thus, RIN values imply that the biodiesel-diesel price gap should be smaller than it was when a $1/gal credit was paid. At first sight, this is what has happened. Diagram 1.13 indicates that the biodiesel premium vs. diesel has fallen a bit since 29, but it has not fallen by as much as implied by the changes in the value of blending credits (which vanished this year) plus the RIN. This means blenders should not want to buy biodiesel in most locations, since it is cheaper for them to buy RINs and stick to diesel than pay the premium for biodiesel. LMC International, 21 11

19 Part One: The linkages of petroleum and vegetable oil prices Diagram 1.13: US biodiesel premium over diesel vs. the value of the blending credit plus RINs US cents per gallon Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Biodiesel Premium Credit plus 8:2 RIN Diagram 1.14 makes the same point in a different way. A blender could buy biodiesel and, until last year, get the blending credit which reduced its cost, or it could use diesel and buy RINs to meet its mandate. Apart from a very brief period in 29, it has been cheaper to opt for diesel and buy RINs. Diagram 1.14: US biodiesel and diesel prices, where blending credits and RINs are taken into account US cents per gallon Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Biodiesel minus Blending Credit Diesel plus RIN LMC International, 21 12

20 Part One: The linkages of petroleum and vegetable oil prices Before March 29, this was no surprise; the famous splash and dash exports to the EU exploited blending credits and caused US biodiesel to be over-priced locally. After the EU imposed anti-dumping duties, the US biodiesel price moved to a virtual balance against diesel. 21 opened with a general view that the credit would be renewed; so a biodiesel premium of over $1/gallon was understandable, but only for a while. By now, in September 21, few people expect the credit to return this year. RIN values have risen, but not enough to pull the curves together in Diagrams 1.13 and There are three possible explanations: People may be expecting the US Congress to restore blending credits in 21 RIN values will have to rise Vegetable oil (and hence also biodiesel) prices have risen too far above diesel. The first seems unlikely at this late stage in 21. Why would Congress take time to restore credits that are not necessary to get the mandate filled? The second is possible, but it is curious that after the jump in RIN values in July, when credits were not restored, RIN values have fallen, not risen. Probably the reason is a mixture of the second and third explanations. RINs will rise as blenders hurry to fill the mandate and the vegetable oil prices will be pulled back closer to diesel prices. This means the previous $3 average for soybean oil over petroleum may be too high without blending credits or the option of EU sales in the market place. However, if the blending credit is restored in full next year (211), then the $3 premium for soy oil over petroleum in EU price terms is likely to be restored. LMC International, 21 13

21 Part Two: Developments in demand In our integrated model of global oilseed, oil and meal balances, the aggregate volume of supply is inextricably linked with demand. However, consumption trends are revealing some interesting directions in a few key markets for oilseed products. A combination of biofuels, the global recession and more health-conscious patterns of food oil and meat demand in several major countries have provided a reason to pause for thought on the future of oilseed product consumption. In this chapter, we reflect on some of the issues shaping demand prospects for oil and meal worldwide over the next decade. Biofuels accelerate demand for vegetable oils Before examining the outlook for demand, it is worthwhile reflecting on the lessons of historical oil and meal consumption. In particular, we should all be aware that the past decade has witnessed a rather dramatic shift in the evolution of oil and meal off-take. As Diagram 2.1 reveals, prior to the year 2, global growth in the demand for meal and for oils and fats mirrored one another very closely, with oil expanding at an average annual rate of 5.4% and meal (measured in soybean meal equivalent terms) at 4.5%. During the past decade, however, oil consumption has accelerated to a staggering 5.7% growth per year, while meal demand has slowed to 3.9% per annum. We have to recognise the role of the recession at the end of the 2s in dampening meal consumption clearly visible in the diagram but this backdrop makes the continued progress in oil demand all the more remarkable. Diagram 2.1: Growth in world meal and major oils consumption, Meal in Soymeal Equivalent (Million Tonnes) Oil (Million Tonnes) Meals, Soymeal Equivalent Oils Although biofuels have added a layer of support to oil consumption, both oil and meal continue to exhibit exceptionally strong demand growth for basic agricultural commodities. The key to this is a robust response in both sectors to increases in population and income. In broad terms, as populations and incomes grow, so does consumption of oilseed products for food. As the very strong growth rates described above indicate, both meal (via demand for LMC International, 21 14

22 Part Two: Developments in Demand meat) and vegetable oil are highly responsive to income changes. In economic terms, both products have a high income elasticity of demand, especially at lower-to-middle income ranges. Our food demand forecasts contained in the model results in Part 4 of this report acknowledge these relationships, and are based upon projections of income and population for most countries worldwide, tempered by differing income elasticities in each country. Nonetheless, non-food uses of oils are becoming an important element in aggregate oil demand. Diagram 2.2 illustrates the magnitude of this phenomenon, displaying the 21% of major vegetable oils that are now utilised outside the food arena, in biodiesel, oleochemicals, animal feed and other industrial processes. This proportion has climbed from only 1% in 2, reflecting the importance of biodiesel today. Before we look more closely at the volumes of consumption forecast for oils in the biodiesel sector, we turn our attention to the effect of the recent recession on vegetable oil and meal demand worldwide. Diagram 2.2: Global food and non-food use of vegetable oils, Consumption (million tonnes) Food Use Non-Food Use The effect of the recession on the demand for oilseed products Diagram 2.2 reveals that, it aggregate terms, world demand for the major vegetable oils continued unabated during the recent global credit crisis and recession. This is true both for food and non-food use. Diagram 2.3, which considers solely food oil consumption, confirms this somewhat surprising observation, breaking the total down for the major oils in metric tons (tonnes). LMC International, 21 15

23 Part Two: Developments in Demand Diagram 2.3: World demand for leading vegetable oils in food uses, Million tonnes /3 23/4 24/5 25/6 26/7 27/8 28/9 29/1 21/11 Palm Oil Palm Kernel Oil Rapeseed Oil Soybean Oil Sunflower Oil Coconut Oil Cottonseed Oil Groundnut Oil Despite this apparently healthy demand picture, the global expansion of oil consumption masks a slowdown of demand in some key markets in the recent years of economic downturn. To identify where oil demand has suffered most in the recession, we have prepared Diagram 2.4 for a selection of the most important oil markets. The diagram compares the average annual growth rate for food oil demand in the peak years prior to the recession with the annual growth rate experienced during the economic slowdown. Diagram 2.4: Food oil consumption in selected markets before and during the recession 1% 8% 6% 4% 2% % -2% -4% India China Brazil South America Annual Growth Rate Prior to Recession Other EU and FSU EU Russia USA Annual Growth Rate During Recession LMC International, 21 16

24 Part Two: Developments in Demand The diagram reveals that: The US experienced the greatest decline in consumption. As we suggest below, this may be because the recession exaggerated an already established stagnation in US oil consumption. Other markets experiencing an absolute decline in demand during the recession were the EU, Russia, the rest of the former Soviet Union (FSU) and South America. The apparent anomalies in China and India where demand actually accelerated during the global recession is explained by two things: Firstly, economic growth continued in both these countries during the economic crisis, albeit at reduced levels. Secondly, the data are consistent with the price sensitive nature of both these markets. The exceptionally high prices of vegetable oils in the boom years prior to the recession slowed demand in China and India, and the subsequent price collapse in late 28 and early 29 stimulated a large consumption response. In these countries, therefore, the positive price effect outweighed the negative income effect for aggregate demand. A similar impact was experienced in many developing countries, and this explains the continued growth in global food oil demand even against the backdrop of recession (Diagram 2.3). The experience of the US in the recent recession introduces a wider debate about potential consumption levels for food oils. We look a little more deeply at the question of how far food oil demand can climb in the next section. How much oil can we consume in food? The US experience Diagram 2.5 is the counterpart for Diagram 2.3, except this time we consider only the US market for food oils in metric tons (tonnes). The US example is characterised by two important distinctions from the global situation: The dominance of soybean oil reflects the local abundance of the oil However, despite the availability of soybean oil, rapeseed/canola oil and palm oil have expanded their market share considerably over the past decade Total consumption of the leading vegetable oils peaked in 27/8, and is currently at the same level as it was in 24/5. LMC International, 21 17

25 Part Two: Developments in Demand Diagram 2.5: US demand for leading vegetable oils in food uses, Million tonnes /3 23/4 24/5 25/6 26/7 27/8 28/9 29/1 21/11 Palm Oil Palm Kernel Oil Rapeseed Oil Soybean Oil Sunflower Oil Coconut Oil Cottonseed Oil Groundnut Oil The pivotal question for the US and the wider oils market is whether US food oil demand will rebound as economic recovery takes hold, or whether the current weakness reflects a wider malaise in the market. In short, has the US reached saturation point in food oil consumption? What happens next in the US may provide some interesting lessons for other countries because the US is perhaps farthest advanced along the oils demand curve, with per capita food consumption higher than any other large market (see Diagram 2.7 later in this chapter). To shed some more light on the US conundrum, we have prepared Diagram 2.6, where we plot annual per capita food oil consumption vs. per capita income in the same year for the US market. Like Diagram 2.5, this illustration suggests that the stalling of US demand was developing prior to the onset of the recession in 28. In fact, part of the small increases observable in Diagram 2.5 from 24/5 to 27/8 is explained by continued population growth in the US Diagram 2.6 removes this population effect. LMC International, 21 18

26 Part Two: Developments in Demand Diagram 2.6: USA per capita food oil consumption vs. real per capita GDP, Per Capita Oil Consumption (Kg per year) Per Capita GDP (' US$/year) Diagram 2.6 reveals that food oil use in the US stubbornly refuses to rise much above 31 kilogram per person per annum, having reached this level first in 22. This observation suggests that we should not expect US food oil demand per capita to expand significantly in the next decade, even as incomes recover. There are persistent factors that continue to suppress growth in US food oil intake, with health concerns and associated regulations paramount amongst these. We have adjusted our US aggregate food oil forecasts (presented in Part 4 of this report) to reflect this situation, but what lessons does this tell us about consumption in other markets? We can look to Diagram 2.7 for some answers. Here we have plotted recent per capita consumption of food oils against income for a wide range of countries, with the trend line indicating how usage expands with rising incomes. LMC International, 21 19

27 Part Two: Developments in Demand Diagram 2.7: Per capita oil consumption against real per capita GDP, Malaysia Per Capita Oil Consumption (kg/year) Indonesia Brazil Argentina China Russia 15 Turkey India Mexico Thailand 1 Ukraine EU Canada Japan USA Australia 5 Philippines Per Capita GDP (' US$/year) The graph show shows us that: Typically, demand continues to expand even at very high levels of income. Nonetheless, as average incomes reach around US$15, per annum, food oil use tapers off, rising at a declining rate. This suggests that the US example may be experiencing a new phenomenon at the leading edge of global experience with oils, with demand eventually stabilising after a period of slowing growth. Another reason for the US anomaly may be its position far above the trend curve. This indicates that US consumption is notably higher than would be expected at its given level of income. By this measure, US food oil use could in fact decline by close to five kilograms per head per year and still be at the typical level for a country of its wealth. Against the arguments for an eventual decline in US food oil consumption is the changing demographic composition of the US population. High oil consumption groups in the US are found among young adults and also amongst some immigrant communities. As the composition of the US population shifts toward a different ethnic and age profile, declining consumption may be partially offset by greater weightings in the higher oil consumption groups. A final observation on the lessons from the US comes from the composition of oil demand. In parallel with the stagnation of oil demand, the US market has witnessed a switching of demand away from those oils perceived as unhealthy towards those regarded as offering improved or at least neutral health benefits. Diagram 2.8 depicts the emergence of palm oil and canola (rapeseed) oil from the pack of vegetable oils trailing soybean oil in the US, in metric tons (tonnes). As soybean oil consumption has declined in the wake of awareness and regulation against trans fatty acids (TFA) in foodstuffs in the US, so palm and canola oil have emerged as the oils of choice where sensibilities are shaping demand patterns. Major food processing companies, fast food chains and individual restaurants have joined the exodus of end users switching their purchasing LMC International, 21 2

28 Part Two: Developments in Demand from conventional soybean oil towards corn oil, cottonseed oil, higher oleic varieties of canola and sunflower oil, and palm oil. Eventually, new high oleic varieties of soybean oil from the leading seed companies will join the competition, perhaps stemming the flow away from soybean oil. Diagram 2.8: US demand for leading vegetable oils, Annual Average Growth Rapeseed Oil = 9.3% Sunflower Oil = 5.2% Palm Oil = 6.4% Soybean Oil = 2.5% Million tonnes / /78 198/ / / /9 1992/ / /99 21/2 24/5 27/8 21/11 Palm Oil Palm Kernel Oil Rapeseed Oil Soybean Oil Sunflower Oil Coconut Oil Cottonseed Oil Groundnut Oil It remains to be seen whether the emergence of healthy alternatives to conventional soybean oil will allow aggregate food oil demand in the US to expand once again. Whether the sectors of the population that have reduced their oil intake will increase it if they no longer perceive a health risk is unknown, but there is little indication as yet that this may be the case. However, the effect of the recession may have masked this phenomenon if it is occurring. In our view, it is unlikely that an increasingly health conscious population will renege on their new lifestyles, and with affluence this sector of the population will expand further. In the US, therefore, we expect only very slow food oil consumption growth in the future, driven by population growth rather than incomes. Will this trend of flattening demand apply equally to other developed countries within the fifteen year horizon (to 225) of our forecasting period? There are several reasons why we do not believe that this will occur, including: As Diagram 2.7 points out, the US is an outlier in terms of demand per capita, even compared with other developed countries. The US has a particular health issue brought about by the dominance of soybean oil in its demand composition (as highlighted by Diagram 2.5). Conventional soybean oil is often partially hydrogenated to provide increased stability, and this has prompted the health concerns described above. In other countries, such as the EU and Canada, soybean oil plays a far less dominant role, and thus the incentive to reduce oil consumption to avoid TFA problems is less pronounced. Although conventional rapeseed and canola oil can also give rise to TFA, processing techniques in other countries differ to the US model. LMC International, 21 21