Presentation by Dr James Fry, Chairman, LMC International, Oxford, UK to the Canola Council of Canada Vancouver, B.C., March

Transcription

1 Key global trends in agriculture and in oils in particular Presentation by Dr James Fry, Chairman, LMC International, Oxford, UK to the Canola Council of Canada Vancouver, B.C., March

2 Outline of my presentation today If I have one big theme today, it is the unintended consequences of government policies round the world. Few policy-makers can have expected that their drive for biofuels would have pulled arable crops, and none more than oil crops, inside the energy complex. Biofuels bring good news for farmers like you, by boosting demand for oilseeds and grains and allowing your selling prices to follow petroleum prices upwards I explain how biofuels have added to demand for land and made oils virtually part of the petroleum complex. I will end with a discussion of the short term factors that will determine canola prices over the next few months.

3 Before 2002 the world could feed itself without adding land. This has changed.

4 Until 2002, the total world area under grains fell, but that under oil crops rose. Since 2003, the areas needed for both types of crop have risen. 150 Total area change since 1981, million ha Change since 1981 for oil crops Change since 1981 for grain

5 Since 2003, the world has needed almost 10 million ha. more farm land each year. Until 2002, the balance between yield increases and demand growth meant that there was no need for more land to be used for grain and oil crops. Output growth till 2002 from a stable total arable area matched the growth in demand for grains and oils. The area planted to grains actually fell, while that under oil crops rose steadily (by 4-5 million ha./year). Since 2002, the area of oil crops has continued to grow at the same rate of 4-5 million ha./year. What has changed is that the area planted to grains has also started to grow by 4-5 million ha./year. Overall, the world needs 9-10 mn ha./year more land.

6 With demand for new arable land, farming has moved to more remote areas. EU real (inflationadjusted) prices have risen sharply as a result ,500 Real (2011) Price US$/tonne ,000 1,500 1, Wheat Canola Oil (RH Axis) 0

7 What has changed? Biofuel demand

8 In 2000, only sugar cane was used heavily for biofuels. By 2011, 23% of the world s cane, 16% of the corn and 14% of all oils went to biofuels 40% % of world output used in biofuels 35% 30% 25% 20% 15% 10% 5% 0% Sugar cane Corn Total oils Canola oil Soy oil

9 Biofuels have become a major growth market for the world s leading vegetable oils. Non-food uses now account for over 20% of oils demand 160 Million tonnes of vegetable oils Food Biofuels Other non-food

10 Biofuel demand has caused the world s need for oils to grow faster than its need for meal Meals, million tonnes of soymeal equivalent Oils, million tonnes Total meal Total oils

11 Which oils meet the world s needs best?

12 Palm in tree crops and canola and sunflower in oilseeds fare best in meeting the new need for crops that have a high ratio of oil to meal output. 100% Share of crop output after processing 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Palm Soybean Canola Sunflower Oil Meal

13 High oil content is one reason why world palm and canola output have grown fastest of the oils Million Tonnes Average Annual Growth : Palm Oil = 8.2% Canola Oil = 6.2% Soybean Oil = 4.8% Sunflower Oil = 2.8% Palm Canola Soybean Sunflower

14 In terms of world oil yields per hectare, oil palm performs much better than the oilseed crops, among which canola is the star performer. 3.5 Average world oil yield, tonnes/ha Palm Soybean Canola Sunflower

15 Biofuels have created a bias towards high oil-content crops in world supply, but the feedback from price to output is complex. When one examines year on year changes in output of major vegetable oils and fats, one discovers that only two can adapt production rapidly in response to price. Tree crop oils, palm and coconut, have their output determined by planting decisions made years earlier, Soy oil production is a by-product of crushing for meal. Corn and cottonseed oils, like animal fats and yellow grease, are purely by-products from other activities. Canola and sun are the only crops that can adapt their supply rapidly in response to shifts in the prices of oils.

16 What are biofuels doing to oils prices?

17 Until 2006, there was no link between vegetable oil and petroleum prices. (In this diagram, Brent North Sea crude oil is the petroleum we plot.) EU Prices, US$ per tonne Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Brent Crude Palm Oil Soy Oil Rapeseed Oil

18 Since 2007, a price band has linked vegetable oil prices to petroleum prices, with EU prices of oils underpinned by Brent crude prices. 1,600 NW Europe prices, US$ per tonne 1,400 1,200 1, Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Brent Crude Palm Oil Soy Oil Rapeseed Oil

19 The price band has been created by the extreme sensitivity of short run biodiesel demand to the premium of biodiesel over diesel. Monthly biodiesel demand, '000 tonnes Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 US + German Demand Average US & German Biodiesel Premium Biodiesel premium over diesel, US$/tonne

20 The biodiesel tail is wagging the dog of prices throughout the vegetable oil complex Many people think it is remarkable that biofuels, with less than one sixth of global vegetable oil demand, can be the key determinant of prices in the sector. The reason is that biofuel demand can be switched on and off at short notice by changing blending rates in response to swings in the cost of biodiesel vs. diesel as long as the mandate is filled over the year. The resulting swings in biodiesel (and thus vegetable oil) demand are large in relation to the steady growth in the underlying demand for vegetable oils for food. Producers/users hedge biodiesel premia over diesel by trading BOGO (bean oil-gas oil) futures spreads. Their hedging reinforces the price band we have seen.

21 A similar pattern of behaviour occurred in grain prices. We can see that there was no link with petroleum prices prior to the end of Index: Average price = Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Brent Crude Canola Oil Maize Wheat

22 Since 2007, grain prices have broadly followed the lead of petroleum, though inevitably factors such as droughts have had a short run impact. 240 Index: Average price = Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Brent Crude Canola Oil Maize Wheat

23 The lessons to be drawn so far Biofuels have changed the world from one in which yields grew as fast as demand into one in which more land was needed every year, and these new frontiers need rising world prices to offset land freight costs. Biofuel demand has proved very sensitive in the short run to the premium of biofuels over petroleum. This has created a price band, linking agricultural prices to petroleum, with oils the most clear-cut example. Since biodiesel wants only oil, not meal, palm is an ideal crop to meet the need, with canola close behind. NB It does not matter if the extra palm oil is used in biofuel. The oil goes mainly to emerging food markets, which releases canola and soy oils for biodiesel use.

24 The latest twist in the biofuel saga

25 The US provides a boost to oils prices Over the past few weeks we have seen new evidence of the unexpected impact of biofuel policies. The US has three biofuel mandates that matter to oils: for biodiesel, ethanol and advanced biofuels. Till this year, blenders found it cheaper to use ethanol than biodiesel; so, in the advanced biofuel mandate (in which either biodiesel or sugar ethanol can be used) biodiesel made no headway. This has all changed. The mandated use of ethanol is now very close to 10% of US gasoline and E10 is the effective blend wall for most US cars. As a result, the market price of RIN certificates for ethanol meeting the mandate has rocketed, making biodiesel competitive.

26 Since September, the market prices of the RINs (Renewable Identification Numbers) for different mandates have converged, favouring biodiesel. RIN value, US cents per gallon biodiesel Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Ethanol Biodiesel Advanced Biofuel

27 Here you see the convergence since New Year. In fact, since 8 th March, ethanol has become dearer than biodiesel in meeting mandates. 140 RIN value, US cents per gallon biodiesel Jan 15-Jan 28-Jan 10-Feb 23-Feb 08-Mar Ethanol Biodiesel Advanced Biofuel

28 US biofuel policies will provide a short run boost to oils prices, including canola The sudden emergence of the blend wall for ethanol will allow biodiesel to make sales in mandates that it has not yet penetrated. This will boost soy oil use in US biodiesel and the benefits will spill over to canola. At the same time, the US$1/gallon blending credit for palm biodiesel, even though it does not qualify for US mandates, is generating a great opportunity for palm oil. This is boosting offtake of this oil, whose stocks had reached all-time peaks, and is lifting its price. Therefore, the prospect that we face this year is for the unexpected creation of a new source of biofuel demand for oils, and this will be reflected in stronger prices of oils and oilseeds, including canola.

29 Conclusions

30 Welcome to the new world of agriculture, created by biofuel policies 1. Thanks to biofuel policies, arable agriculture has been forced to develop new frontier lands, and this expansion has pulled crop prices higher. 2. Biofuels have become the tail wagging the dog of vegetable oil prices, which are now tied to petroleum. 3. Biofuels have tipped the balance in favour of high oil/low meal oil crops, led by oil palm and canola. 4. In oil yields per hectare, oil palm does best; but in the yield growth, canola has been the world leader. 5. The US ethanol blend wall will boost oils prices and this is reinforced by the biodiesel blending credit. 6. The law of unintended consequences is working in the biofuel sector, to the benefit of canola producers.

31 Thank You Acknowledgements: OPEC, EIA, IMF, Jacobsen, MPOB, Public Ledger, TNS, USDA, World Bank

32 Oxford (HQ) Clarendon House 52 Cornmarket Street Oxford OX1 3HJ UK T F info@lmc.co.uk New York 1841 Broadway New York, NY USA T +1 (212) F +1 (212) info@lmc-ny.com Kuala Lumpur B-03-19, Empire Soho Empire Subang Jalan SS16/1, SS Subang Jaya Selangor Darul Ehsan Malaysia T info@lmc-kl.com Singapore 16 Collyer Quay, #21-00 Singapore T info@lmc-sg.com LMC International, 2013 All 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.