Biofuel crops will feel effects of slumping oil prices, research shows

Share

The crash in oil prices will be felt at the farm gate as demand and prices moderate for biofuel crops corn and soybean, says a new report from the Organization for Economic Co-operation and Development and the Food and Agriculture Organization of the United Nations.

The rise in production and demand for biofuels was an important driver of prices for corn, soybean and other grains in the past 10 years. The amount of corn being sent to biofuel plants tripled, as adding ethanol to gasoline became a popular and cheap way for policy-makers to combat high oil prices while propping up agriculture.

Growers saw Chicago prices for corn and soybeans rise by more than 200 per cent between 2003 and 2012.

But since then, the main biofuel crops have fallen in price by more than 40 per cent, amid a 50-per-cent plunge in crude oil prices since last summer and two years of large global harvests.

In their annual outlook on agriculture to be published on Wednesday, the two groups say use of ethanol and biodiesel will grow at a slower pace over the next decade amid low oil prices and uncertainty over government policies.

"The level of [biofuel] production is projected to be dependent on policies in major producing countries. At lower oil prices, trade of biofuels should remain small when expressed as a share of global production," the report said.

Amid slowing demand and rising supplies, the price of crude fell to less than $50 (U.S.) a barrel in the winter from $100. A barrel now sells for about $60. The OECD said prices should rise by 3.7 per cent a year to $88 by 2024.

"The policy environment around biofuels remained uncertain, with the absence of a final rule making by the United States Environmental Protection Agency (EPA) for policies in 2014 and 2015, and by the fact that the European Union's 2030 Framework for Climate and Energy Policies adopted in October, 2014, that did not define clear targets for biofuels beyond 2020," the report said.

In the United States, regulators have reduced the amount of ethanol required for use in gasoline while only slightly raising biodiesel targets. In Europe, targets were recently scaled back. In Canada, the amount of ethanol contained in gasoline varies by province from 5 per cent to 8.5 per cent.

Parts of Ontario and Quebec, with relatively warm, wet climates, are Canada's main corn and soybean growing regions. It is estimated ethanol plants consume about half of Ontario's 1.8 million acres of corn.

The lower energy prices that are dampening demand for biofuels are also driving down the cost of producing everything from beef to wheat, the report said. Also weighing on overall prices is rising production due to better growing methods, and, in some regions, stagnant demand.

The exception is meat, which is still seeing rising demand in Asia and Africa, where a growing middle class continues to eat more beef, chicken and pork. The report said this demand for protein will mean the main buyers of corn, soybean and other grains will be livestock producers, not ethanol makers.