Demand for vegetable oils for food and biofuel use is expected to increase by an additional 23 million tonnes by 2016; however supply is expected to struggle to keep up with this demand, according to a Rabobank report, Finding the Food-Fuel Balance.  Vegetable oil stocks have reached a 38 year low this year due in large part to constraints such as land availability and adverse weather.

Paula Savanti, analyst at Rabobank said:  "The rising demand for vegetable oils has been fuelled by increased consumption in Asia due to rapidly rising incomes, and by the growing vegetable-oil based biofuel industry worldwide.  Demand growth has proven to be resilient to economic crises and higher prices.  This is because vegetable oils are mostly used for food purposes and, while they can be easily substituted among each other, their demand is relatively inelastic.  However, supply growth has been less robust as production has been negatively affected by some adverse weather and land availability remains a significant constraint to production."

For the past four years, the world's stock-to-use ratio for vegetable oils has been on a declining trend and will reach a low of 7.5 per cent in 2013, a level not seen since the mid 1970s.  This decline is largely down to supply’s inability to keep up with rising demand.   Production shortfalls in recent years have resulted in a draw-down of stocks that is unlikely to be reversed in the near future. Going forward, the question is how the balance will be restored.

Although global demand for vegetable oils for food uses will continue to increase, Rabobank's expected annual growth rate for the next five years is 3.3 percent, lower than the 4.7 percent growth rate seen in the previous five years. The reduction is expected to be driven by the biodiesel sector.  In many parts of the world, such as the EU and the US, there is waning support for biofuels as higher vegetable oil prices have combined with relatively low crude oil prices to squeeze margins, and government support proves costly in challenging economic circumstances. 

EU biofuel target

The Rabobank report states that the EU leads in biodiesel production with an estimated 8 million tonnes of biodiesel produced, mainly from domestically grown rapeseed oil. To accomplish the 2020 EU taget of 10% biofuel use in transport an additional 10.2 million tonnes of biodiesel will be needed. Rabobank expects the EU to miss this target which may allow world vegetable stocks to rebuild.

Reference Rabobank Industry Note 334 - Finding the Food-Fuel Balance.

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