The rise of biofuels means expected crude oil price rises are set to push up the cost of key vegetable oil crops, warns Mintec's Liliana Gonzalez


Not many of us expect the price of crude oil to affect the price of the oil we use to fry our food, but the advent of biofuels means this has become a reality.

With analysts expecting crude oil prices to rise in coming months, demand for biofuels is set to rise too, as the currently pricier alternative starts to look relatively more attractive, leaving consumers and suppliers to face considerably higher prices once again.

As with all agricultural commodities, there are several variables that could have an impact, including the weather, exchange rates, economic developments and crude oil prices.

At the moment, crude is at about $70/barrel, almost 50% below the levels seen last year, when prices surged due to factors including speculation fuelled by high demand from developed economies.

The peak and subsequent crash in crude oil meant the key price support to the biofuels market fell away almost overnight. As mineral fuel prices fell, biofuels become uneconomic.

The demand for biofuels is a relatively new factor in the oilseed market and has the potential to prompt price increases in feedstocks such as rapeseed, palm oil and other crops such as maize.

Rapeseed is the oil of choice for most indigenous EU biodiesel production and was estimated to account for 69% of biodiesel feedstock in 2008. Good volumes are expected for European rapeseed this year production is likely to exceed expectations and reach 56.5 million tonnes in 2009/10, which means price pressure on rapeseed will be reduced.

The picture is not as bright for soya. Drought has caused short supply from South America and the US the major producer of soya beans in the world is unlikely to be able to cover the shortage. Furthermore, late maturing crops in the US will result in later soya bean harvesting, which will put pressure on stocks until new crop supply reaches the market.

The harvest of palm oil the world's most commonly produced and internationally traded edible oil is also expected to be smaller than previously forecast, mainly because a lack of rainfall in Malaysia and Indonesia has hampered production.

Vast amounts of palm oil have the potential to be diverted to biofuel production if the price of diesel derived from crude oil is sufficiently high. Such as situation could lead to higher prices in the estimated third of all fmcg products that use this oil.

Demand for vegetable oils could also be increased by governmental factors such as the EU legislation stating that by 2010 5.75% of all transport fuel must be from a renewable source.

If the rising price of crude does contribute to an increase in demand for biofuels and if vegetable oil supply struggles to cope with this extra demand then the food industry and consumers will be facing higher prices.

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