Planes, supply trains and automobiles hold key for oilseeds in 2024
Scroll back your collective memories to this time last year, and the oilseed complex was still being borne aloft by relatively high prices, burgeoning demand expectations and some heinous supply issues that overwhelmed any fears from another huge Brazilian crop loitering in the wings. Broadly the world had come to terms with the outright shock of the Russian invasion of Ukraine and some modest reassurance over ongoing sunflower supply had emerged under the Black Sea Grain Corridor initiative.
Up to that point, Ukraine – its crush industry decimated by relentless infrastructure attacks and genuine question marks over its oil export capacity – had switched to exporting sunseeds over oils, but the return of access to the deep water ports had at least brought some semblance of normality. As the Ukrainian military dug in and pushed back, European efforts to wean themselves off the mighty Russian oil barrel brought fresh impetus to a biofuel space that had already been bolstered by US President Joe Biden’s Inflation Reduction Act.
On both sides of the Atlantic, two giant economies laid out their plans to produce millions of tonnes of sustainable aviation fuel (SAF), driving traders in every form of vegetable oil-related and animal fat-related production into a frenzy over the potential demand outlooks.
With the US targeting 35 billion gallons of SAF production by 2050 – more than twice the current ethanol mandate that soaks up over 10% of the world’s entire corn production – Europe added fuel to the fire with a plan to adopt SAF in 70% of all aviation demand over the same timeframe. Used cooking oil (UCO) was at the tip of the spear, but basic calculations had already established that UCO alone would never account for the volume, firing demand prospects across the wider vegetable oil complex as a result. As the year rolled on, even with Argentina suffering ongoing and persistent drought, Brazil’s huge soybean crop began to tilt the focus away from supply fears, while the lingering doubts over China’s economic recovery post-Covid stubbornly refused to dissipate.
For the twin giants of the complex – palm and soybeans – the assumption that both were lining up in the path of the new biofuels juggernaut suffered a series of challenges, as margins for the US production sector wilted in the face of new capacity coming online.
That and setbacks from the US government took the lustre off the biofuels complex – as mandates for 2023, 2024 and 2025 underwhelmed – before news from Brazil raised the curtain on a whole new feedstock front.
Ethanol and sugar producer, Raizen confirmed it had got backing for its sugarcane-based ethanol as a feedstock to SAF production in August, in a move that kicked open the door to non-oilseed feedstocks in lucrative aviation decarbonisation efforts. That in turn teed up a struggle for the future of corn-based ethanol – which currently does not comfortably fit in the SAF feedstock mix unless married to carbon capture efforts. Nonetheless, it remains a potent potential feedstock in the alcohol-to-jet mix and could drag corn into the upheaval through supply of potentially billions of gallons of corn-based ethanol.
Looking ahead into 2024, some of these themes will spill over from the old year into the new, with some current trends already pointing the way for 2024.
European biofuel premiums have slumped through the latter part of 2023, a combination of oversupply from controversial Chinese used cooking oil-based biodiesels, and poor demand with traders estimating that Europe’s diesel demand is now declining at 5% per year. That is driven by the twin effects of increased electrification of the car fleet and a swing away from diesel and towards gasoline or hybrid powertrains.
With most European mandates still percentage-based, the decline in underlying diesel demand equates to a direct decline in biodiesel demand at a time when competition for feedstocks is only likely to intensify. An EU-backed investigation into the Chinese biofuel flows and a general unwillingness to look at crop-based fuels in the European context could alleviate some of the tensions there but raise questions over the viability of the European sector to compete with its US rival as momentum builds.
Coupling that demand outlook with the physical reality of farmers’ production efforts – where output records have been tumbling around the world – and you have the foundation of a reasonably bearish 2024 ahead. Zeroing in on key elements to watch in the year ahead and there is some familiar factors to consider, along with some uncertainties ahead.
Black Sea corridor
A major swing factor in the year ahead will be Ukraine’s ability to continue to connect its agricultural product to the wider global market. Gingerly, the first signs of the self-proclaimed humanitarian corridor have brought a pick up in export pace, but the onset of winter weather across the Black Sea has made it hard to gauge how significant any restored corridor could be.
For the country’s oilseed crop, an expansion in planted area is likely to bring a bigger sunflower harvest while Russia is expected to harvest its own record 17.5M tonnes sunflower crop. Despite those production forecasts, sunseed could yet buck the bearish trend – as the success of previous export corridors has drained Ukraine’s stock levels, while hot, dry conditions in Bulgaria and Romania have cut production from Ukraine’s neighbours and rivals.
Key will also be the health of demand into the main importing nations of Turkey, India and China.
El Niño
The gradual shift from consecutive years of La Niña patterns, bringing excess moisture to Southeast Asia and Australia and drying out the southern tip of South America, to the opposite El Niño is already potentially bringing an end to the linear progress of Brazil’s soybean expansion. Monsoon conditions across southern Brazil have delayed planting, while hotter, drier weather in the north – uncomfortably hot in some parts – have already seen estimates for 2024 pared back. Some domestic voices are now calling for output in the low 150M tonnes range; still close to a record, but representing a loss of up to 10M tonnes versus initial expectations.
That could alleviate fears of oversupply, but with issues also dogging major waterways, including the Amazon, the Panama Canal, Argentina’s Up River hub and the Mississippi, further dry conditions could also complicate export logistics and make final production figures almost academic. For Indonesia and Malaysia, the move to El Niño is also likely to bring dry conditions and raise the risk of forest fires, cutting back production amid already ageing and declining palm oil plantations.
Regulation
Finally, a staple in outlooks and the unpredictable wildcat in the mixture is the influence of government as ongoing legislative initiatives unfold and with a series of important elections looming through 2024. At the centre of that is the renewed appetite for increasing mandates, with most European nations committing to boosting the use of sustainable aviation fuels to 2% by 2025, before rushing to 20% by 2035, just as multiple countries introduce bans on the sale of new cars with internal combustion engines.
The year ahead should provide the first clear signs of how that move is progressing, but Europe’s biofuel sector is facing a hefty challenge with new capacity coming online as feedstocks are being increasingly drawn to the US. Europe is still to fully square the circle of how exactly to hit increasingly ambitious percentage-based SAF volumes when we are flying more, but the decision to cut out palm oil and any food-based vegetable oils makes the target ever more challenging within the current timeframes.
On top of the waste-based mantra, the European Union has doubled down on tightening its import slate, targeting deforestation in a wide-ranging proposal to wean the bloc off any products from sites that have undergone land use change. Brazilian soybeans and palm are likely to be in the forefront of that legislation, which comes into force on 30 December 2024 and is expected to require segregation of approved inbound EU product flows from those that have yet to achieve certification.
Meanwhile, Brazil is also wrapped up in its own internal debate as the country faces greater pressure to reduce the official moisture level in its soybean exports from 14% to 13%. While it looks relatively innocuous, the effort that a tropical country would need to expend to reduce that single percentage point and bring it into line with international standards would likely put domestic farmers at a disadvantage, and mean more beans needed for each tonne shipped.
Both China and the EU are pressing for the reduction, but any officially sanctioned move would likely result in either formalising discounts for 14% beans or increased costs as farmers attempt to dry out their beans to meet the new standard. The government and industry bodies are consulting on the proposal.
