Green-Fuel Push Stirs Food Inflation Fears in Rebound From Virus
(Bloomberg) -- The push to fight climate change with greener fuels is colliding with another challenge facing the world as it struggles to emerge from the pandemic: skyrocketing food prices.
Soaring demand for crops has once again raised the question of whether nations should really depend on ethanol and renewable diesel to save the planet from global warming. Corn, soybeans, palm oil and sugar, which are increasingly processed into biofuels worldwide, are part of a staggering commodities rally that’s making everything from animal feed and noodles to taco shells and chocolate more expensive, putting central bankers worldwide in a tough spot between fighting inflation and seeking to stimulate battered economies.
Projects such as Phillips 66’s conversion of its San Francisco area oil refinery into one of the globe’s biggest renewable fuel plants are helping stoke the price surge at a time when farmers in key growing countries grapple with bad weather, while China gobbles up supplies. U.S. production capacity for renewable diesel will jump almost sixfold by the end of 2024, according to JPMorgan Chase & Co. Meanwhile, costlier food aggravates lingering shockwaves from the coronavirus: increased world hunger and unemployment.
“The entry of legacy petroleum companies has spun this industry on its ear,” said John Jansen, vice president of strategic partnerships at United Soybean Board, which represents about half a million U.S. soybean farmers. “The market has tightened so much the food side was caught off guard.”
Soybean oil, corn and palm oil have all more than doubled in a year, while sugar jumped about 50%, helping push food costs to the highest in seven years. The boom is reminiscent of the China-led commodities supercycle earlier this century, which combined with a biofuels drive in the U.S., Brazil and Europe, helped precipitate the world into a food crisis.
While biofuels emit less greenhouse gases than petroleum products, and don't require drilling and fracking, achieving the net-zero emission goals pledged by several nations would ultimately require phasing out internal combustion engines, which makes even alternative fuels less viable in the long term. Plus, industrial-scale agriculture comes with its own environmental impact.
U.S. oil refiners, looking to gain from federal and state subsidies, have announced sweeping plans to switch to renewable diesel, which is nearly chemically identical to the traditional petroleum product and therefore relatively easy for fossil fuel companies to adopt.
The refiners joining the race include Marathon Petroleum Corp., Valero Energy Corp., HollyFrontier Corp. and Carl Icahn’s CVR Energy Inc. In addition to soybean oil, other feedstocks for green diesel include discarded animal fats, used cooking oil and distillers corn oil, a byproduct of ethanol production.
Also See: Dining-Out Drought Means Less Food Grease to Fuel Biofuel Hopes
If all of the planned refinery projects come online, American renewable diesel production capacity will surge to 4.9 billion gallons a year by the end of 2024, from about 827 million now, JPMorgan analyst Phil Gresh wrote in a note last month. That means the pressure on soy oil prices is likely to continue as U.S. extracting capacity won’t be able to catch up until at least 2023.
The shortfall has crushers like Archer-Daniels-Midland Co. investing in new plants to prepare for a rapidly shifting market.
“In terms of our food versus oil customers, we are staying close to both,” ADM Chief Executive Juan Luciano told analysts earlier this month. The company is building relationships with energy clients while educating food customers on “this new demand that is coming.”
Demand for vegetable oils is growing so fast that North America will go from being a surplus region to facing shortfalls over the next few years, Greg Heckman, chief executive officer of Bunge Ltd., one of the world's top crop traders, said at a virtual conference this week.
Soybean processors have traditionally crushed the seeds for high-protein meal used in feeding pigs, chickens and cattle, while the oil derived from the process is used for cooking, making mayonnaise and salad dressings, as well as all sorts of processed foods like cookies and bread. It’s also the most widely used feedstock in green diesel.
Palm oil, the most consumed edible oil in the world, is processed into biofuel in Indonesia and Malaysia, the two largest producers, as well as in Europe. In the U.S., about 40% of the corn crop is already diverted into ethanol and the global push for renewable fuels could make it move further away from food.
In Brazil, surging prices for ethanol will likely encourage sugarcane growers to use more of their crops to make fuel, which already competes neck-and-neck with sweetener. Oil from canola, primarily from Canada, isn’t currently approved for renewable diesel production in the U.S., but the industry is pushing for it. Farmers who grow food staples like wheat may also be increasingly tempted to convert planting areas to fuel crops.
With the number of renewable diesel plants in the U.S. set to jump from just a handful to 35 over the next three years, U.S. farmers would need to plant another 5 million acres of soybeans, on top of 88 to 89 million now, Dan Basse, president of consultants AgResource in Chicago, said at a webinar this month.
Also See: Global Sugar Shortage Could Get Worse as Brazilians Drive Again
“The interest in renewable diesel, driven in large part by low-carbon fuel standards, is going to change the supply and demand situation we’ve known in the past. That’s for sure,” Thomas Hammer, president of the Washington-based National Oilseed Processors Association, said of the soybean oil market.
Jeremy Baines, president of U.S. operations for Neste Oyj, a Finnish oil refiner and the world’s biggest renewable diesel maker, said more fossil fuel companies are turning to the biofuel as they seek to adapt to the energy transition. “They see the writing on the wall for fossil fuels,” he said.
Neste and Diamond Green Diesel, a partnership of Darling Ingredients Inc. and Valero that’s the No. 1 producer of renewable diesel in the U.S., rely on used cooking oil and animal fats to make fuel.
The National Biodiesel Board argues that “biodiesel and renewable diesel continue to create value for surplus fats, oils and greases, which makes protein more affordable worldwide.”
The race for green diesel doesn’t mean all projects will make it.
“There’s a plethora of announcements out there and while they look good possibly on an Excel spreadsheet, I suspect maybe less than a third of them become a reality after they really get into the engineering and studying of what it takes to really produce this product,” Darling Chief Executive Randall Stuewe said in an interview.
In China, the government is strictly controlling the expansion of corn-based ethanol capacity, saying in a policy document in December that biofuel shouldn’t “compete for food with the people and not compete with food for land.”
The European Union currently limits the use of food as feedstock for biofuels because of climate and environmental concerns. Almost 60% of feedstock for biodiesel consumed in the EU in 2018 was imported, mostly palm oil. Domestic production came mainly from rapeseed, used cooking oil and animal fat.
In the U.S., BlackRock Inc.-backed crop processor Green Plains Inc. aims to be less reliant on ethanol production and transform into a high-tech agriculture powerhouse, squeezing higher value ingredients out of corn. Chief Executive Officer Todd Becker questions the use of edible oils to make fuel, arguing that non-food grade, distillers corn oil is a better option.
"I think the day of reckoning is coming where ultimately when you look at palm oil pricing around the world, and looking at inflation that you are starting to see in these vegetable oils, how much longer will the world allow an oil refinery to build a renewable diesel plant and take food-grade, clean oil and make it into renewable diesel?" Becker said in an interview.
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