From the US to Brazil and Indonesia, governments are embracing energy made from plants like soybeans or canola, or even animal fat, to move away from fossil fuels and cut emissions. This has created opportunities for vegetable oils, especially palm oil, an ubiquitous but controversial ingredient found in products like pizza dough, instant noodles, chocolate and shampoo.
Demand is so hot that producers are hunting for used cooking oil and sludge, a waste product from processing palm oil, as feedstocks for biofuels.
These lofty ambitions may face challenges. War and extreme weather are limiting vegetable oil supplies. A severe drought has devastated production in Argentina, the top exporter of soybean oil. In Europe, restrictions on using bee-toxic pesticides will curb planting of rapeseed that relies on the pollinators, while Russia’s ongoing invasion of Ukraine will slash sunflower oil exports.
With growth in vegetable oil production expected to slow, biofuels could push the global market into a deficit in the second half of the year, according to Thomas Mielke, executive director of Hamburg-based Oil World.
Biofuels account for a large share of the vegetable oil market but only a fraction of energy demand, Mielke said. He’s concerned that combined biofuel targets are overdoing what the global market for oils and fats can satisfy.
The US, Europe, Brazil and Indonesia are responsible for most of the biodiesel, renewable diesel and biojet fuel consumption growth. The US uses a mixture of feedstocks such as soybean oil, rapeseed oil, used cooking oil and animal fats. Europe is producing from wastes, residues and rapeseed oil. Indonesia mainly uses palm oil to produce biodiesel, while Brazil relies on soybean oil.This trend is widely expected to benefit palm oil, a product that’s come under scrutiny in recent years amid reports of deforestation and forced labor. With rival oilseeds and vegetable oils being used increasingly in biofuels, some of the demand will spill over to palm, according to James Fry, chairman of Oxford-based agriculture consulting firm LMC International Ltd.
But the palm oil market may not be able to keep pace. Production in Indonesia and Malaysia, which together account for 85% of world supply, are plateauing due to the slow replanting of old and unproductive trees, erratic weather, and as deforestation curbs limit landbank expansion.
Threats to supply, particularly from climate change, will push up agricultural prices and slow the world’s efforts at converting food into fuel, said Dorab Mistry, an influential trader who’s worked in the industry for four decades.
BloombergThe International Energy Agency has warned that swelling demand for biofuels and a looming feedstock crunch, if not addressed, will undermine the potential for biofuels to contribute to global decarbonization efforts.
Biofuel mandates should be flexible and provide room for temporary adjustments in the event of supply shocks, according to Oil World’s Mielke. Given the importance of those policies to the entire oils and fats complex, any changes must be moderate as they can have a devastating impact, he said.
Last year, Russia’s invasion of Ukraine disrupted global sunflower oil trade and boosted demand for palm and soybean oil, sending prices to record highs. Even then, most countries did not ease their biofuel policies, leading to demand destruction in some vegetable oil consumers, mainly from developing nations.
“In periods of supply shortages, the necessary rationing of demand must not take place only on the shoulders of the food consumers,” Mielke said. “This is a lesson we have to learn from last year.”
