Biofuel food prices impact summary
- Oil price shocks boost biofuel use, increasing pressure on food prices
- Biofuels rely on crops like vegetable oils, corn, sugarcane and palm oil
- EU biodiesel uses 39 to 44 percent crop feedstocks, US is higher
- About 16 percent of corn and 22 percent sugarcane becomes ethanol
- Policies in EU, Brazil Indonesia drive structural long term biofuel demand
The price of crude oil has been driven up by the war in Iran over the past two months. This oil price shock has forced the world to look for alternatives.
One such alternative is biofuel. More sustainable than fossil fuels, access to biofuels is not hampered by the war and posits an attractive alternative for manufacturers.
This could have spillover effects into food. Many of the commodities used for biofuel production – palm oil, vegetable oil, corn – are also food commodities.
What is biofuel?
Biofuel is fuel derived from biomass – specifically, plant or algae material or animal waste.
Biofuels are seen as sustainable alternatives to fossil fuels, as the carbon dioxide they emit will have been removed from the air by the plants they are composed of while they engaged in photosynthesis (making them, in one sense, carbon neutral).
However, critics are quick to point out that their production will need vast quantities of arable land, making their sustainability credentials weaker than many other renewable energy sources. Industrial production of biofuels may also emit additional carbon dioxide into the atmosphere.
Which commodities are used for biofuel?
Crop-based feedstocks account for around 39-44% of EU Biodiesel production, says Kyle Holland, senior market reporter for commodity analytics platform Expana, although waste-based feedstocks make up the majority.
In the US, the share of crop-based biofuel production is much higher, at 70-80%, although this is falling as waste-based feedstocks grow in popularity.
Vegetable oils remain the principal feedstock for biodiesel globally, explains Holland, although this share varies by region.
After vegetable oils, corn and sugarcane are the next most significant edible feedstocks. Estimates suggest that around 16% of corn production and 22% of global sugarcane production goes into ethanol, which is also used as a biofuel.
Is biofuel demand here to stay?
Demand for biofuels can be directly linked to increases in food prices, as seen in the recent war in Iran.
Since the war started, the price of several commodities linked to biofuels have gone up, according to Stephen Butler, CCO and co-founder of AI commodity price prediction platform ChAI.
“As expected, oil and vegetable based oil commodities have rallied the most because they are viewed as potential substitutes for crude oil. Biofuel commodities, such as corn, sugar, palm oil, and soybean oil, all oil substitutes, have seen price rallies since early March.”
Sunflower oil, rapeseed and palm oil all saw significant price jumps after 28 February, when the war started, according to Trading Economics.
Could such demand increase in the future? While Holland declines to speculate on prices, he does point out that demand, far from falling, may become entrenched due to changing regulations. Unlike the war in Iran, these spikes in demand cannot be described as “shocks”; instead, they will be structural.
“Market participants indicate that further biofuel demand increases appear highly likely given the policy-mandated trajectory already in motion”, says Holland.
Demand will likely grow for biodiesel, renewable diesel and bio jet fuel in particular, according to the International Energy Agency (IEA), with policy frameworks pushing for this expansion.
For example, Brazil last year increased to 15% the minimum requirement of biofuel in fuel blends. The EU’s RED III framework pushed for greater biofuel use. Perhaps most significantly, Indonesia’s B50 plans to remove exportable palm oil from the international markets for use domestically as biofuel.
These policies create structural demand increases across the oilseed market, says Expana’s Holland.
While it is the war in Iran that has put short-term pressure on food commodities used for biofuel, these changes in the regulatory landscape suggest that global demand may soon become entrenched.
