Opinion

Increasing Gas and Energy Prices Will Stifle Oilseed Crushing in Europe, Ukraine and Elsewhere

Sunflower Seed
Australia
Canola Seed & Rapeseed
Uganda
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The energy price index data supplied by the World Bank between January and April of this year has increased by 26% adding to the already bullish trend in 2021. Crude oil has also more than tripled in price looking at the trend from the end of the first quarter of 2020 to the same period in 2021. Brent is up 18% from $83.43 per bbl exactly a year ago. Natural gas also traded up from $5.52, in November 2021 to $6.97, up 26% YoY. It is thus fair to say that gas and energy prices have gone up to peaks not seen before in recent times.

The energy price index data supplied by the World Bank between January and April of this year has increased by 26% adding to the already bullish trend in 2021. Crude oil has also more than tripled in price looking at the trend from the end of the first quarter of 2020 to the same period in 2021. Brent is up 18% from $83.43 per bbl exactly a year ago. Natural gas also traded up from $5.52, in November 2021 to $6.97, up 26% YoY. It is thus fair to say that gas and energy prices have gone up to peaks not seen before in recent times.

The high cost of energy and gas is creating concerns within the oilseeds market. But even in other markets, higher energy cost continues to impede production. "Farmers and food businesses" according to Juan Carlos, a fruits and vegetable market analyst with Tridge, "are struggling to cope with soaring energy costs in all main European agriculture-producing countries. In a lot of countries, he adds, “farmers are already cutting down on production and projecting YoY decreases". 

Oilseed crushing and processing require the use of gas, electricity, and other energy forms. From the de-hulling to the extraction of the oil and transportation to various mills and buyers and can thus not do away with energy usage. Sentiments from market players are suggesting even with a good crop size, crushing may be slower than usual. Crushers may look at other options for disposing of their seeds, considering the cost involved in crushing and the crush margins that may prevail.

Even for crushers that have their own turbines and are thus somehow excluded from the idiosyncrasies of the common power supply lines, they could be an incentive to save that energy and sell on to the national grid. For those that use plants and generators powered by gas and diesel, they’ll consider the trade-off between buying fuel at higher prices which pushes the variable costs up or not cruising to incur only the fixed cost, i.e., their plants and machinery, land et al.

Be that as it may, the crush margins will be another factor which will affect how much crushers reduce or increase their crushing capacity. In Ukraine, sources close to the market also report similar views. The energy price hike amid the crises from the ongoing conflict is causing similar issues in Ukraine-crushing capacity is estimated to reduce by 30%.

Although the energy prices and cost of production have become a global phenomenon and across many countries, nothing is reported in Australia and Canada which are also big oilseed canola producers and crushers. Supply of both gas and crude oil is not expected to go up at least in the near term to help soften the constraints that continue to suppress the oilseeds industry. But rather, more demand for vegetable oil would be coming from the biodiesel sector.

With the Russia-Ukraine war having no clear site of ending, the pressure will remain to force oilseeds crushers to cut down on processing which may in turn push prices up. The advice from Tridge is thus to take cover for the nearby exposure and consider staking layers for the months that follow.

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