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Biodiesel boom

A NEW study by Rabobank's Food and Agribusiness Research group finds that the increasing global appetite for biodiesel and other biofuels is driving demand for vegetable oils to historic levels. This is leading to higher prices for vegetable oils relative to meals and causing soybean crushers to re-evaluate their business models.

The confluence of environmental concerns, high energy prices, and government incentives that is fueling demand growth is also driving expansion on the supply side, leading to 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 demand for biodiesels. He predicted that recent income gains in the global vegetable oil sector would be sustained long-term.

Worldwide use of vegetable oils is expected to post growth of about 5.5% CAGR between 2005 and 2010.

“Biodiesel is proving to be a significant demand shifter in the overall vegetable oil industry,” said 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 said Canada is expected to capture at least half of the anticipated 300% increase in production and crushing of canola, with Southeast Asian nations expected to reap the rewards of a more than 500% expansion of palm oil processing.

He also predicted 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 noted, however, that the variance between lower prices for vegetable meals and higher prices for vegetable oils, as well as increased competition from DDGs, was causing many soybean crushers to rethink traditional business models.

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

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

“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 Reca. “The result is that our energy and agricultural markets are becoming increasingly interrelated.”

He noted the increase in manufacturing infrastructure as well, with about 50 plants under consideration for the US 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 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 biodiesel's use.

To obtain a copy of Rabobank's presentation Biodiesel Around the World or to interview Reca, phone Lynne Burns at 212-808-2581 or e-mail [email protected].

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