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The effect of crude oil price on animal feed prices by Andrew Wilkinson, Staff Writer, Milling and Grain Magazine

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n his address to the 2015 Agriculture and Horticulture Development Board (AHDB) Conference, Julian McGill from LMC International discussed the importance of biofuels policy as being integral to understanding the high prices in agricultural commodity markets of the past decade. Prior to 2002, the harvested area under cereal grains had been steadily declining. With per capita consumption of maize and wheat remaining relatively flat, yield growth was more than sufficient to meet the increase in demand. This freed up the area that was taken by oil crops, for which per capita demand was growing at a faster rate as vegetable oil and meat consumption increased with higher incomes. In aggregate, the world did not have to increase harvested area. However, since 2002, both the area under oilseeds and grains has increased, placing additional strain upon the global harvested area, and ushering in the commodity cycle from which we are just emerging.

Effects of US ethanol policy since 2002

Mr McGill argued that the crucial change came with the introduction of US biofuels policy. From 2002 the share of maize used as ethanol increased consistently, and by 2010, 15 percent of global maize was used as a bio-fuel. At that point around 40 percent of US maize was being transformed into ethanol and blended with petrol. This large increase in non-food use of maize created huge volumes of additional demand for cereal crops. With yield growth no longer sufficient to meet demand growth, the area under cereal crops had to increase. The reversal in the area under cereals, in turn, put new pressure on the global agricultural system. “Farmers across the globe were now under pressure to meet growth both in food demand and non-food demand.” The implications of increased biofuel demand on the vegetable oil markets was then discussed. While the US focused on maize based ethanol, in the EU, mandates were created based primarily on encouraging the use of vegetable oil based biodiesel. As a result, from about 2005 the share of vegetable oil used as biofuels increased very quickly, reaching 15 percent by 2014. 52 | November 2015 - Milling and Grain

With the EU predominantly using rapeseed oil as a feedstock, by 2010 over a third of all rapeseed oil in the world was being used as biofuels. As a result, this has had a “profound impact on prices and demand”.

The effect of the increasing demand for meat per capita

Rising per capita meat consumption has been increasingly met through the production of animals with high protein diets which has created much higher demand for soybean-meal over maize.” Mr McGill showed how the production of meat has increasingly come from poultry and pigs rather than cattle. The reason for this, he argued, is their lower basal metabolism, which allows them to convert feed into meat more efficiently, and faster rate of breeding. As these species also consume greater volumes of higher protein feed, this has added to the demand for oil crops rather than cereals. This increased demand for protein feed has had a huge impact on demand for soybeans. Soybeans were described as the “gold standard” for animal feed, “containing the highest protein, the best amino acid profile, the best palatability.” As a result, since 1950 the soymeal price, as a percentage compared to the price of maize, has increased as the market has signaled that it needs more soybeans to feed pigs and poultry. He also added that demand for soybean meal “remains healthy as meat consumption continues to rise. Future growth in the consumption of poultry, aquaculture and pigs will continue to create a large demand for soybeans.” He concluded by reiterating the belief that we are currently at “the tail-end of a series of remarkable transformations” in the vegetable oil markets, as pressure for biofuels were the cause of the great commodity cycle of the last decade. The legacy of this period is to leave the vegetable oil price linked to the crude oil price. The weak crude oil price therefore underpins the recent weak vegetable oil prices. Slight optimism was offered regarding the future of vegetable oil prices. Low prices have led to lower fertiliser application on oil palm, which should reduce in palm oil output. In addition, low rapeseed and sunflower prices have also reduced production, all of which should help to support prices over the next year.

Nov 2015 - Milling and Grain magazine  
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