For good or ill, oilseed and grain growers now have their fortunes tied to the energy market, says a renowned international trend watcher.
The rise of biofuels has fundamentally altered the business of agriculture and not just by pushing up market prices, economist James Fry, chair of LMC International, a leading international consulting firm, told attendees at last week’s Canola Council of Canada convention.
Fry said the world was able to feed itself without cultivating more land until 2002, but since then has been adding nine million to 10 million hectares annually to its production base.
Read Also
New crop insurer policy enables easier startup for faba beans
Agriculture Financial Services Corporation updated its normals for faba beans, which may open the door for more Canadian producers to feel comfortable growing the pulse crop in the future.
“There was a tipping point around 2002,” said Fry. “Suddenly the world, which had been in a kind of equilibrium, became a world of more demand for land.”
So far, it’s all been good for oilseed and grain farmers. But watch out, warned Fry.
“The biodiesel tail is wagging the dog of vegetable oil prices,” he said, adding “biofuel demand can be… switched off and on at very short notice.”
And being tied to the energy market also increases volatility.
“If petroleum prices go up, I guarantee the entire complex, oilseeds and grains, will see their prices rise,” Fry said.
“The converse is true as well. If the price of crude oil falls, then the price of these crops will come down. It’s because biofuels are now big enough as an end-user to create this price link.”
The link is particularly strong for canola as more than 35 per cent of the canola and rapeseed oil produced last year was used as biodiesel, he said.
“Of all the major agricultural commodities, your product is the one that is most heavily going into fuel uses on a global basis,” he said.
However, biodiesel may have a brighter future than ethanol, Fry suggested.
Ethanol has run into what’s known as “the blend wall” as car manufacturers refuse to provide warranties for engines using more than a 10 per cent blend, he said.
“To meet the mandates, you’re going to see some switching of demand out of ethanol — where it’s difficult to use much more because of the blend wall — to biodiesel, ” Fry said.
Canola and sunflower oil are well positioned to take advantage of any surge in biodiesel demand because competitors such as palm oil require years to rev up production.
“There are only two oils which can balance the market in the short term,” Fry said.
“If there’s a sudden price spike and people need oil, canola and sunflower are the only annual crops which are primarily driven by oil values.”
