Vegetable Oil Demand Rising to Historic Levels

Significant increases seen in oilseed processing capacity.

Published on: Aug 8, 2006

The increasing global appetite for biodiesel and other biofuels is driving demand for vegetable oils to historic levels in world markets, leading to higher prices for vegetable oils relative to meals and causing soybean crushers to reevaluate their business models, according to a new study by Rabobank's Food and Agribusiness Research group.

The confluence of environmental concerns, high energy prices and government incentives which is fueling demand growth is also driving expansion on the supply side, leading to significant increases in oilseed processing capacity.

Speaking at a recent conference on biodiesel and canola in Alberta, Canada, Alejandro Reca, PhD, Executive Director of Rabobank's Food and Agribusiness Research group in the Americas, discussed the dynamics driving the strong demand for biodiesels and predicted that the recent income gains in the global vegetable oil sector would be sustained over the long term.

Worldwide use of vegetable oils is expected to post growth of approximately 5.5% compound annual growth rate between 2005 and 2010, a significant departure from historical rates, reflecting the newly expanded biodiesel application.

"Biodiesel is proving to be a significant demand shifter in the overall vegetable oil industry," says Reca, "but the canola and palm sectors will benefit more proportionally from this growth, thanks to their high oil content and the oils' multiple uses as food and foodstock."

Reca predicts that recent income gains in the global vegetable oil industry would remain strong, since food consumption of vegetable oils should mitigate any potential decline in non-food uses of vegetable oil.

Reca notes, however, that the variance between lower prices for vegetable meals and higher prices for vegetable oils, as well as the increasing competition from DDGs, was causing many soybean crushers to rethink their traditional business models.

Supply and demand drivers

Reca cites several factors driving both supply and demand growth of biodiesel, notably the Kyoto protocols, the U.S. ban on MTBEs and requirement for ultra-low sulfur diesel, and increasing international government interventions in the areas of mandatory contents, tax credits and differential taxes.

Additionally, continued instability in oil-producing regions and the resulting higher oil prices have prompted policymakers and industry to pursue alternative fuels which are cleaner and often produced from locally-grown and renewable commodities such as vegetable oils, which appeal to Western consumers.

Energy and ag markets become more interrelated

"The tremendous opportunities presented by biodiesel today are attracting non-traditional investors to the agribusiness sector, such as financial institutions and private equity firms, as well as traditional energy and agribusiness players," said Dr. Reca. "The result is that our energy and agricultural markets are becoming increasingly interrelated."

Reca notes the significant increase in manufacturing infrastructure as well, with approximately 50 plants currently under consideration for the U.S. market, along with a shift to larger scale plants. Many biodiesel manufacturers are locking in solutions such as supply agreements and off-take contracts to mitigate their long-term risk. He added that many automakers and agricultural machinery manufacturers, with an eye toward the future, are extending their warranties to allow for biodiesels use.

"Today's market conditions create the ideal environment for investment in and promotion of alternatives to petrofuels, and biodiesel in particular is attracting significant support on both the supply and demand side. As a result, the growth in the biodiesel market has economic and commercial implications far beyond just the energy markets, from increasing production and creating new trade flows for vegetable oils, to attracting new investors to the agribusiness sector, and ultimately to increasing the integration of global agricultural and energy markets," concludes Reca.