Continued Strength in Oil Prices

Around the world, the forecast for biodiesel feedstock prices is more of the same as consumption threatens to outpace production.
By Ryan C. Christiansen | October 14, 2008
When the metaphysical poet John Donne wrote "No winter shall abate this spring's increase," he was writing about love-but he might just as well have been writing about the price of virgin oil feedstocks. The spring of 2008 was tough on the biodiesel industry worldwide with the markets tallying record-high prices for palm oil in March and soybean and rapeseed oil in June. Consumption continues to nip at the heels of production, with worldwide consumption of major oilseeds expected to be 414 million metric tons in 2008-'09, just under the 418 million metric tons in expected production, according to the USDA Foreign Agricultural Service's "Oilseeds: World Markets and Trade" September report. Still hurting from last spring's fling, what might biodiesel producers expect for virgin oil feedstock prices in the future?

World Vegetable Oil Production and Consumption


Soy Oil at Twice the Price
In June 2008, the price of soybean oil in the United States averaged $1,376 per metric ton, a price that was more than double the average of $684 the previous year, the USDA says. The price of soybean oil has been rising steadily since its low of $507 in 2004-'05. However, the August average for soybean oil fell to $1,120, mirroring a sudden decline in the price of palm oil, the USDA says, which keeps palm oil at an attractive value when compared with soybean oil.

According to the USDA Economic Research Service's "Oil Crops Outlook" report for September, global soy oil production is expected to increase to 38.4 million metric tons in 2008-'09, compared with 37.9 million in 2007-'08. The United States is expected to produce less soybean oil, while China, Argentina and Brazil are expected to produce more. The overall consumption of soybean oil is expected to increase to 37.9 million metric tons in 2008-'09, compared with 37.2 million in 2007-'08.

According to Chad Hart, an agricultural economist at Iowa State University, the United States is on pace to produce the fourth-largest soybean crop on record this year. While that may bode well for the near term, the problem is that there is little room for U.S. farmers to increase their soybean acreage if corn prices remain high, according to John Miranowski, agricultural economist at Iowa State University. "Obviously, for the next planting season, the allocation of acreage will depend on the expected prices of corn and soybeans in the futures market," he says. "Right now, if the corn crop also suffers, I don't see that the price ratio is going to change things. This year, they planted more soybeans than a year ago and relatively less corn and that won't go beyond a 50-50 ratio and so I don't see much, domestically, that's going to increase that, outside of some expansion of acreage into probably less-productive lands."

Due to a dwindling supply of soybeans in the United States, the USDA lowered its forecast for the 2007-'08 soybean crush from 1.83 billion bushels to 1.815 billion, which also lowered 2007-'08 production estimates for soybean oil to 9.5 million metric tons. The USDA predicts there will be little room for expanding the soybean crush in 2008-'09 and processing plants might begin slowing production even sooner. The U.S. soybean crush forecast is slipping to 1.785 billion bushels in 2008-'09 with soybean oil production dipping to 9.2 million metric tons for the same year.

On the export side, Brazil and Argentina are expected to export more soybeans in 2008-'09. Brazil is expected to export 27.5 million metric tons of soybeans in 2008-'09 compared with 25.5 million in 2007-'08. Argentina is expected to export 13.9 million metric tons in 2008-'09 compared with 13.5 million in 2007-'08. Meanwhile, the United States is expected to export less at 27.2 million metric tons in 2008-'09 versus 31.4 million in 2007-'08.

The high cost of soybeans along with a strengthening U.S. dollar are likely to weaken 2008-'09 U.S. export demand, the USDA says. Hart says concerns about general weakness in domestic and international economies will contribute to the erosion of exports.

It is anticipated that soybean oil prices will reach record highs in 2008-'09, the USDA says. Miranowski says a lot depends on what happens to crude oil prices. "If the price of crude oil continues to decline as it has recently, the biodiesel producers are not going to be able to pay as much for the virgin oils," he says. "At the same time, the virgin oils may be in more scarce supply because of the crop outlook.

"I think that a lot of people are much more skeptical than the recent USDA estimates in terms of our soybean yields this fall and that could put significant upward pressure on soybean oil prices," Miranowski says.

Christopher Hurt, an agricultural economist at Purdue University, notes that soybean oil futures dipped to 45 cents per pound at the end of the summer, which means at 7.5 pounds of soybean oil per gallon of biodiesel, the feedstock cost is $3.38 per gallon before the $1 federal biodiesel tax incentive. But the price of petroleum diesel also came down, he says, making biodiesel less competitive.

It is likely that a permanent shift has occurred in price levels for soybeans and so far, the peak price for soybeans in this new era was well above the average price projected for the era, which will see more extreme highs and lows, according to a brief entitled "The New Era of Corn, Soybean, and Wheat Prices." The brief was published Sept. 2 by the Department of Agricultural and Consumer Economics at the University of Illinois, Urbana-Champaign and was written by agricultural economists Darrel Good and Scott Irwin.

From December 2006 through July 2008, the average monthly price of soybeans in Illinois was $9.40 per bushel in a range of $6.21 to $14.10. The low range for soybeans in this new era will be around $8, the brief said.

Good and Irwin said the previous two eras of higher price averages were from 1947 through 1972 and from 1973 through 2006. Each period experienced a structural shift in market conditions that caused average prices to move higher. The first period began in 1947 when price controls were lifted after World War II and the post-war rebuilding effort began.

The second period began in 1973 and included shifts in exchange rate policies, grain purchases by the former Soviet Union, escalating energy prices and more rapid inflation.

The price of soybeans started moving higher in the autumn of 2006 and has remained generally high and well above the average for the previous 30 years. According to Good and Irwin, evidence suggests that prices are establishing a new higher average, attributable to tight global inventories, growing demand and escalating production costs.

Canola Oil on a Steady Incline
In June 2008, the price of canola oil in Europe averaged $1,577 per metric ton, a price that was more than double the average of $770 for 2005-'06, according to the USDA. The price of canola oil has been rising steadily since a low of $359 per metric ton in 1999-'00.

Total world production of canola oil is expected to increase to 19.3 million metric tons, up from 18.3 million in 2007-'08 and 17.2 million in 2006-'07, the USDA says. World canola production is expected to reach a new record of 55.3 million metric tons in 2008-'09, which is 6.5 million more than the previous year, due to yields that are exceeding expectations in the Ukraine and many parts of the European Union and Canada, according to Tom Brooks, market analyst for the Home-Grown Cereals Authority, a division of the Agriculture and Horticulture Development Board, which monitors cereals and oilseeds for the U.K.

Brooks says the EU, which is the largest producer of canola, is forecasted to produce 18.75 million metric tons of seed in 2008-'09 compared with 18.25 million the year before. The EU is expected to produce 8.1 million metric tons of canola oil in 2008-'09, up from 7.6 million in 2007-'08 and 6.5 million in 2006-'07, the USDA says, and while consumption in the EU is expected to reach 8.1 million metric tons in 2008-'09, up from 7.8 million in 2007-'08 and 7.2 million in 2006-'07, EU imports are expected to decrease from a high of 727,000 metric tons in 2006-'07 to 200,000 in 2007-'08.

Brooks says the Canadian canola crop is expected to yield 10.4 million metric tons in 2008-'09, which is around 800,000 metric tons above the five-year average. The expected bumper crop is the result of above-average yields on record acreage, the USDA says. Canada is expected to lead exports of canola, at 1.4 million metric tons in 2008-'09 up from 1.3 million for 2007-'08.

China and India, too, are expected to produce more canola for 2008-'09. The crop in China is expected to yield 11.5 million metric tons, which is below the five-year average of 12 million, Brooks says. India is projected to produce 6.35 million metric tons of canola for 2008-'09, up 1 million metric tons from the previous year.

The Australian canola crop is expected to recover from the drought-reduced yields of recent years and could reach 1.6 million metric tons for 2008-'09, Brooks says.

The demand for canola is likely to remain strong in 2008-'09, especially from the EU biodiesel industry, he says.

Palm Oil Prices Decline
In March 2008, the price of palm oil in Malaysia averaged $1,291 per metric ton, a price that was more than triple the average of $416 for 2005-'06. The price of palm oil has been rising steadily since its low of $235 per metric ton in 2000-'01. However, the August average for palm oil fell to $879 per metric ton, mirroring a sudden decline in the price of soybean oil, USDA says, which makes palm oil an attractive value compared with soybean oil, and which might restore profitable margins to the biodiesel industry in southeast Asia.

Exports of palm oil increased in late summer as importers in India, Pakistan, Bangladesh and China defaulted on or renegotiated prior purchase agreements.

Globally, total production of palm oil in 2008-'09 is expected to be 43.2 million metric tons compared with 41.4 million in 2007-'08, according to USDA.

Approximately 10 percent more palm oil was used worldwide in 2007-'08 than a year before, according to Heike Hintze-Gharres, market analyst with the Home-Grown Cereals Authority. She says palm oil producers in Indonesia and Malaysia were able to meet the higher demand because their output increased sharply in 2007-'08. Indonesia's output increased to 18.7 million metric tons, up 2 million over the previous year, while Malaysia's production increased to 17.7 million metric tons, up 2.4 million. She says palm oil stocks are currently high, which has resulted in declining palm oil prices. Hintze-Gharres says total global production of palm oil is expected to reach 44.6 million metric tons for 2008-'09 and palm oil will remain price competitive.

The USDA says importers around the globe will increase imports to 31.2 million metric tons, up from 29 million in 2007-'08, led by China, India and the EU. Exporters will export 31.9 million metric tons compared with 30.1 million in 2007-'08, led by Indonesia and Malaysia.

Palm oil's favorable price difference over soybean oil should allow for growth in Malaysian exports during 2008-'08, the USDA says.

Ryan C. Christiansen is a Biodiesel Magazine staff writer. Reach him at or (701) 373-8042.
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