All sectors of the egg industry will feel the adverse effects of the higher costs arising from the growth in the biofuels industry. But while biofuels is one of the main drivers behind the rising commodity prices it isn't the only one, Nan-Dirk Mulder from Rabobank International in the Netherlands said at the recent International Egg Commission meeting in Budapest, Hungary.
He said that other factors driving egg prices higher include:
- More food demand in developing countries,
- Trade liberalisation in the soft commodity trade with some Asian countries,
- GMO-free buying restricted flexibility in purchasing,
- Tightening wheat supplies from major exporters (EU-27, Canada and the Ukraine),
- Concerns about wheat crop prospects in Argentina and Australia,
- Fears of Russian export restrictions,
- A demand push from the EU for corn due to high wheat prices, and
- Low corn production due to weather conditions in southeast Europe.
Mulder forecast that global egg demand will rise during the next two decades to more than 90 million tons. Egg production will expand by 15 metric tons between 2005 and 2015, some 70 percent of which would be in the developing countries. But he warned, "Price increases could reduce this growth. An egg price rise of 20 percent would deflate demand by 0.5 percent, which is equivalent to 300,000 tons a year."
Mulder said that in the long term, fast market growth for egg and meat production in combination with growing biofuel demand would lead to intensified competition for inputs. While it looks as though there will be higher raw material prices with more fluctuations, the use of other products to produce biofuels could reduce commodity market fluctuations. "But in the short term, the price of feed will remain high due to the tight commodity market," he added.
Mulder said the higher cost of producing eggs is likely to be passed on to consumers in developed countries, but it could hamper growth in the developing countries.
The industry is likely to witness more consolidation and internationalization to obtain greater bargaining power and mitigate the risks, Mulder said. He stressed the importance of organizations in the poultry sector participating in the food and fuel debates.
Companies should strive to gain enough bargaining power in the value chain to ensure that the price increases can be passed on to their customers. Mulder said companies should pay more attention to the optimal management of feed ingredients and the better use of biofuel byproducts. Everything possible should be done to mitigate the risks involved with high and fluctuating prices, he said.
Mulder continued that there are two main categories of biofuels: biodiesel and ethanol. Some 80 percent of biodiesel is produced from canola oil but alternative sources include other vegetable oils like palm and soybean, while recycled oils and fats and animal fats might eventually be used. For ethanol, the main ingredients (80 percent) are corn and sugar beets, though other grains are also involved. Mulder holds out the possibility that in the future biomass/cellulose could be used.
Global ethanol production in 2005 amounted to 33 billion litres/8.8 billin gallons (45 percent of which was in the United States) but for 2010 the forecast is 72 billion litres with 55 percent in the United States. The U.S. ethanol goal for 2017 at 136 billion liters/36 billion gallons is five times higher than the current goal of 29 billion liters/7.7 billion gallons. In the United States, current production is 23 billion liters/6 billion gallons from 120 ethanol plants with a further 80 plants under construction. Some 55 million tons (21 percent of national production) of corn is used, yielding a byproduct of some 18 million tons of dried distillers grains with solubles (DDGS). By 2017, corn usage could be about 320 metric tons, which would give some 105 metric tons of DDGS.
In Europe, biodiesel is the more popular biofuel with global production currently at around 3.5 million tons (75 percent in the EU), which was expected to rise to 24 metric tons (40 percent in the EU) by 2010.
Mulder said that the rapid growth in biofuels, coupled with increased financial support for its productionparticularly in the EUwill attract investors from non-agricultural sectors.
With feedstuffs accounting for between 50 percent to 80 percent of the cost of biofuels, feed prices have a serious impact on margins in the biofuel value chain. If corn prices rise by $40/ton, the ethanol price increases by 9 cents/litre and margins decline by 20 percent. Biodiesel costs are $1 a gallon more than conventional diesel.
The good news was that in the long term (2010 to 2020) Mulder foresees that biodiesel production could start to be based on non-food crops e.g. jatropha, while biomass would be used for ethanol production.
To reduce the negative impact of these cost increases, he urges the industry to look closely at the possibilities for reformulating rations and to examine ways in which they could reduce fragmentation in the value chain, increase purchasing power and strengthen their bargaining power to be able to pass these costs on to their customers.