We are heading into a new commodity super cycle and energy is the major driver because no one wanted to invest.” This was one of the opening remarks from Dan Basse at the recent annual conference run by R&H Hall, W&R Barnett and Precision Liquid Solutions.
We have had the biggest harvest ever combined with the greatest consumption ever and, yet, we see grains and most other commodities overheating in the short and, possibly, the medium term. We have had huge levels of currency injection aimed at stimulating economies and now we may be facing into an inflationary cycle, Dan said.
Dan is president of AgResource, a markets analyst company based in Chicago. He is a regular presenter at this outlook conference which looks at the potential impact on agricultural markets of major economic and policy drivers.
“Food price increases are happening”, he stated. Grains are well up, meat is up 40% and milk seems set to increase as cow numbers fall in the EU, US and New Zealand to reduce GHGs.
US and world central banks are in an economic quandary as to what to do now. World currencies may become more volatile and inflation can be both a stimulator and an antagonist of economic activity. Most of the world is tuning in to climate change and its associated strategies and future policy decisions will be critical to the balanced development of economies globally.
This all means that policy will be increasingly important. Dan said that the EU’s Farm to Fork policy could make it a net importer of cereals and other foods and this would only increase volatility levels in global markets into the future.
The energy deficit
One of the biggest challenges for commodity prices is the disconnect between the agreed need for change and the pace of delivery of that change on a country and global basis.
While electrification of vehicles is on the agenda for many countries, Dan said that there will still be a huge need for other combustible fuels up to this timeline and long after.
With the US targeting 20% electric vehicles by 2030, there will still be 80% of vehicles needing fuel for internal combustion engines. The target here is about 45% electric vehicles by 2030.
The problem is that there has been little investment in fossil fuels in recent years due to the emphasis on carbon emission reductions and so there may be a real energy problem in the years ahead. This is a global issue and not just US or European. Even electricity generation will need to be fuelled by something and nuclear may have to come on to the table.
The situation now is that renewable fuel resources will have to maximised (liquid and gaseous) to help meet this demand by topping up the fossil fuel supply.
Dan sees the development of renewable diesel as being a very important element of this bolstered supply for the US in the years ahead. This will require an increased production of oilseeds, with soya beans being their major crop.
He expects that this “renewable diesel” will add to soya bean oil demand in the US. This will increase the demand for oils and fats with soya being an important raw material.
This would require a substantial increase in overall production if other traditional home and export markets are to continue to be serviced.
While the transport sector is transitioning to electrification, there will still be a big demand for transport fuels up to 2030 and beyond and Dan sees biofuels as an essential addition to help supply this demand.
The situation is that any increase in soya bean acreage would mean taking land away from other crops and relative price is the major driver of these decisions at farm level.
Increased soya bean production to produce oil would require increased crushing capacity and give more soya bean meal. This would then have to compete with Argentinian product to find space in the export market.
Dan feels that this is likely to result in soya bean meal prices weakening in the months and years ahead.
Dan believes that this growing demand for soya bean oil will add an additional 2Mt to 4.5Mt of meal.
He sees the price of the oil holding strong due to demand but the combined value of the oil and meal will still have to deliver a soya bean price that can attract the additional acres needed as any additional supply would likely have to come from a change in land use.
Feed versus fuel issue unlikely to reappear
Asked if the feed versus fuel debate was likely to be resurrected on the issue of biofuel production, Dan replied that he did not think so.
When the issue of biofuel was in the public domain back in the noughties, there was also a parallel but unrelated price increase in grains and oilseeds. But this time around he feels that the major public need now is to help save the planet and so the debate changes from food cost to carbon reduction.
This will manifest itself in many major decisions. He pointed to the changed EU attitude to palm oil importation and use.
He said that it is likely that the EU may cease palm oil importation due to its association with rainforest destruction and its associated carbon trail. This may mean increased opportunity for crops like oilseed rape and sunflowers in the EU and elsewhere. While food and its cost will remain important, carbon is king for the moment.
Speaking about a possible reaction to renewable diesel in the US, Dan said that its use was not a federal mandated requirement. It is not something that Washington is imposing on states but rather it is an initiative that is being driven by political opinion in a growing number of different states.
Basically, they are trying to reduce fossil fuel usage and carbon emissions by recycling oils and fats, or products produced initially for other purposes.
It is primarily produced from the treatment of waste and residues but can also use vegetable oils when the price is right. It is different to biodiesel as it is hydrotreated at high temperature.
The colourless and odourless fuel has an identical chemical composition to fossil diesel and is often referred to as an “advanced biofuel” or a “second-generation biofuel”.