With the dynamic soybean market situation, I thought it would be interesting to provide some information on European bio-diesel dynamics. As in any market it is many times not what has changed, or what is new, but rather what does the market choose to hear at that time.

Bio-diesel dynamics in the EU are very similar to ethanol dynamics in the US. Over the last several years EU-25 countries have been taxing heavily non-biofuels and mandating increases in bio-fuel usage. The bio-fuel of choice is bio-diesel as a high percentage of cars are diesel in Europe. Bio-diesel plants are popping up all over Europe. Bio-diesel currently represents 80% of the biofuels used in the EU. It really looks like what is going on in the US with ethanol.

A quick side note here. Oilseed crushing margins benefit greatly from destination oil demand and this is what bio-diesel is providing to crushers in Europe. This is something to think about if you have an interest in a soybean crushing plant.

The EU and US bio-fuel programs are different in that EU countries are using taxes on non-biofuels and mandating inclusion instead of providing incentives for use. It is basically the same result but the EU likes to talk about how the US method does not follow WTO guidelines but the EU method does. Many states have established mandates and this is a similarity but it is not what the EU complains about.

My take on the subject is over time the market will try to price itself to nullify an incentive. This has been happening with ethanol as the price has driven down to a point where, even with the incentive, the margin is very slim. Price is decreased and margin is diminished. In the case of a mandate, the market must adjust production to meet the mandated demand.

Production is increased and margin is diminished. The difference is that with a mandate it does not cost the government any money. I am a strong believer in supply side economics but nothing beats having new demand. If you want to protect your ethanol investment, keep after your state to increase mandated usage.



Here is the disclaimer

World vegetable oil fundamentals could be the hardest supply and demand equation there is. Even the largest grain companies in the world, who have the best access to cash markets, just guess at the most important numbers. I wish there was a simple answer or way to explain the economics but honestly there is just not enough information. Supply and demand information from South East Asia is either not available or unreliable. AND this is the information that matters. China is extremely important on the demand side and the palm plantations are the swing on the supply side. The world balance sheet basically is an educated guess at the very best.

If there is one thing I learned from my expose to the process of trying to come up with supply and demand numbers it is that the USDA does as good a job as anyone when it comes to world fundamental analysis. Plus when the USDA numbers come out, the market uses the numbers. The only argument long term is where the USDA numbers end up. The trump card...

What is going on in Europe right now with biodiesel is important. How important is a question and it has to do with what the market wants to hear.

Here are some interesting facts about what is going on in the EU.

The EU 25 is the largest user and producer of bio-diesel

Bio-diesel represents 80% of the biofuels used in the EU

80% of biodiesel is made from rapeseed

Currently a Max 20% of biodiesel can come from soy oil (to protect local rapeseed farmers)

For more details please take a look at the USDA’s Gain report number E36102

Please call anytime with questions

Ron Marshall

(651) 301-9185

ron@marshallag.com