Climate change, biofuels and the oilseed complex: implications for global feed markets.

Introduction

The great majority of the main oilseed and cereals crops globally are grown to satisfy food demand, including a sizeable indirect component via consumption of meat and other animal products. Since the 2000s the advent of biofuels has added a variable but significant component to this equation. The first biofuels wave in the 2000s had a rocky trajectory due to associated food price spikes in 2011 and the ‘food versus fuel’ controversy.

Today, governments are under pressure to reduce greenhouse gas emissions in order to mitigate the impacts of climate change, and have established a number of ambitious policies to achieve this goal. In the transport sector, these include electrification of car fleets as well as what we may call a ‘second biofuels wave’ expanding beyond road transport to include aviation and even potentially the marine sector.

In theory, the new biofuels wave is intended to avoid the mistakes of the previous one, with a strong focus on incentivizing ‘waste’ feedstocks and new technologies. However, it is almost certain that a large chunk of the fuel demand implied by these policies cannot be supplied using such feedstocks in an economical fashion, at least in the short term to 2030 or so, which means that policies will likely create spillover demand for vegetable oils.

At the same time, constraints on palm oil means that soybean oil will need to plug the gap (assuming government policies are maintained). With growth in rapeseed and sunflowerseed oil output also growing as fast as (agronomically) possible, this will result in protein meal output growing at a sustained higher rate than underlying meat demand. As a result, we anticipate that feed incorporation practices will change as feed operators are able to make use of plentiful supplies of protein meal.

Food demand and dietary transitions

Before adding in the biofuels component of crop demand, we first cover some relevant trends in food demand as this remains the mainstay of crop demand and is the base to which biofuels demand is added. Getting this base correct is critical for assessing forecasts of crop demand, meal markets etc.

Forecasts of demand for individual crops created in isolation from a broader dietary framework run the risk of implying unrealistic consumption volumes when aggregated, whereas in reality, as people get richer calorific consumption levels off while diets change: they consume fewer carbohydrates and more fat and protein. The fat typically comes from vegetable oil, as well as the fat content in animal products, while protein growth mostly takes the form of greater meat consumption.

Broadly speaking, this means that over time demand for the oilseeds (which supply protein and oil) has been growing and is set to grow much more strongly than for the cereals (which largely supply carbohydrates). For some carbohydrates, demand has even trended downwards at points, though maize is a key exception owing to its role in supplying carbohydrates to animals.

Historically, palm was the mainstay source of oil demand while soybean demand was determined by, and grew at the pace of meat demand given that soybeans are roughly 80% meal and 20% oil. During the first biofuels wave in the 2000s, palm expanded at a rapid pace to satisfy the combined demand from changing diets and biodiesel production.

The second biofuels wave

The second biofuels is likely to reflect substantially different dynamics, given the scale of projected biofuel demand and the inability of palm to satisfy it. It is important to note that biofuels markets are policy-driven, so for forecasting purposes we assume that governments will honour their commitments in terms of financial incentives, penalties etc. in spite of previous experience demonstrating that this does not always happen in ‘crunch’ situations.

While the electrification of car fleets could have wide-ranging impacts on global crop demand via the implications for ethanol demand, this presentation focuses primarily on the impact of biofuels targets such as various state Low Carbon Fuel Standards in the US, Canada’s Clean Fuel Standard, the EU’s Renewable Energy Directive and the Indonesia biodiesel program.

In terms of the technologies used, the second biofuels wave heavily focused on the use of HVO, which unlike FAME diesel has no blending limits and can be used as a drop-in fuel. In terms of feedstocks, government policies are intended to incentivize waste oils in preference to fresh vegetable oils, while further out the hope is for novel technologies to supply the bulk of heavy lifting.

In the near term, however, many of the new technologies being mooted are not cost-competitive, while the supply of waste oils is inherently limited and unlikely to respond to higher demand at the rate needed. This means the new biofuels wave is likely to fall back on the commodity vegetable oils to plug the supply gap until at least 2030.

Growing supplies of protein meal

Beyond a small window of variation in fertilizer and tree husbandry, changes in palm oil output are largely determined by long-term trends in planting and the associated tree stock age profile. Due to slowing growth in plantings during the 2010s – in considerable part due to a backlash against the environmental impacts of the phenomenal growth in plantings throughout the previous decade – the ability of palm to supply growing biofuel demand will be limited in the near term.

This means demand will fall back on the broad-acre oilseeds: soybeans, sunflowerseed and rapeseed. The latter two will see a faster rate of expansion but this rate will limited by agronomic and climate factors. As such, the world will likely look to soybeans to expand rapidly for its oil component, by contrast with soybean’s historical role as a supplier of protein meal with oil as the co-product. As a result, protein meal output will grow at a sustained higher rate than underlying meat demand.

The greater supply of protein meal means it will need to price itself into feed markets. This may partly occur through protein meal increasing its share of overall animal diets, but another likely pathway is for overall incorporation rates of commodity feed to increase, for example in China where historically a lot of pork production occurred under a ‘backyard’ system largely based on food waste.

North America will be at the epicentre of change

A large part of these changes will occur in North America. The soybean crush in the US and the canola crush in Canada are both set to increase dramatically. Notwithstanding some projects being cancelled or paused in the recent high-interest rate environment, the direction of travel remains supported by longer-term fundamental factors.

Thus, the American and Canadian livestock sectors are likely to reap the collateral benefits of the new biofuels wave as demand for the oil component in soybeans and canola leaves the meal component having to price itself into local markets first (though exports will also increase due to the limited capacity of the domestic sector to absorb all the additional meal).

Presented at the 2024 Animal Nutrition Conference of Canada. For information on the next edition, click here.