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While bio fuels, including bio diesel, appear to have the kind of political support that will ensure their long term place in agricultural demand, there may be a few pot holes along the way. Short, as opposed to long, term prospects for canola products in this market may represent such a hazard. (940 words)

In recent years, and until very recently, growth in demand for fats and oils for the production of bio diesel for the German market has been truly phenomenal and such that it has overwhelmed the wider based international vegetable oil market.

Prior to 2005 Canadian exports of canola oil amounted to a few hundred tonnes per year at most. Starting in October 2005 and until September 2006 between 12,000 and 44,000 tonnes were exported monthly. More than 300,000 tonnes of canola oil, equivalent to 750,000 tonnes of seed were exported to Europe supposedly exclusively for the use in bio diesel. This occurred despite the premium canola expects to command in North American food markets and the European aversion to products processed from genetically modified seed.

Since then exports of canola oil to Europe, in contrast to other destinations, have shown signs of declining. This was in many respects to have been expected as there has been a quite abrupt change in political fortune for the European bio diesel as a result of a swing in German politics.

The extraordinary saga of German bio fuel developments started back in January 2001 with the appointment of Renate Kuenast, co-leader of the German Green Party at that time and former anti-nuclear protester, as German's minister of agriculture.

Following its failure to obtain an absolute majority in a September 1998 federal election, the left of centre Social Democrats under the leadership of Chancellor Gerhard Schroder had formed an alliance with the Green Party. Because of the "unconventional" background of many of the Green Party leaders this proved to be a challenge.

The position of agriculture minister became available when the previous minister of agriculture resigned following an apparent cover up of BSE in Germany. Kuenast's appointment, included responsibility for BSE issues, so it appeared to be something of a poisoned chalice.

Kuenast was, however, able to find commonality between her green environmental constituency and the interests of German agriculture simply through implementing environmental schemes that added to the bottom line of farmers. The senior partner in the alliance was only too happy to pay the piper in such circumstances, as it cemented what was otherwise a somewhat shaky relationship.

One such arrangement was eliminating excise tax on transportation fuel produced from renewable resources including diesel from rapeseed oil. Conveniently the Europe Union(EU) Council in October 2003 had provided a "framework directive" which included measures allowing member states to exempt or reduce excise duties from biofuels.

As German was the only EU member state very directly obligated to environmental interest, it took much fuller advantage of the EU directive than other member states. An industry was born based on a zero fuel tax, effectively worth the equivalent of Can$0.50/L (depending on exchange rates) to the industry. It met the EU renewable energy target at 5.75 percent share for 2010 of the German fuel market for biofuel within three years. And it provided a profitable market for all available rapeseed, rapeseed oil, and virtually any suitable fat or oil produced in the EU. Further, it needed to be fed with palm oil from the tropics, soyabean oil from the US, and canola oil from Canada.

German bio-diesel production capacity reached 2M tonnes by 2006.

The first sign things might to go rancid, however, was after the September 2005 election victory of Angela Merkel's right of centre Christian Democrats. Again a political alliance was necessary but this time the Greens declined and a "grand alliance" of the two largest parties, the Christian Democrats and the Social Democrats, was eventually formed in November 2005.

This alliance was needless to say less tied to environmental issues than its predecessor. Previously, in June of that year, a report mandated under the German Mineral Oil Tax Law determined that the tax concessions overcompensated pure bio diesel production by five cents per litre and biodeisel blends by 10 cents per litre.

After understandably intense and protracted discussion between all those involved, including those who had invested so liberally in bio diesel production, a new German energy tax law was passed in July 2006 which provided for rather immediate increases in tax on biofuels which had been protected previously until 2008. The impact of this began to be felt quite seriously at the retail level after the implementation of tax increases in January 2007. Some reports indicated a 30 percent cut in forecourt sales.

This leaves a very uncertain future for demand, at least in the short term, from the European bio diesel industry. Naturally nothing is certain in the politics which created and destroyed/deferred favourable conditions for this industry.

European production of oilseed rape is expanding encouraged by favourable prices a result of until recently the insatiable bio diesel demand. The EU oilseed rape area is forecast to have increased by 12 percent to 6M hectares and Oilworld projects an almost 17 percent increase in production.

Prices have correspondingly fallen. And while price will ultimately determine what oil is burned on the German autobahns, it may not be the kind of market that Canadian canola needs or wants to compete in.

While biofuels are undoubtedly one way of the future, that future may not be this year. An element of contraction in terms of canola oil demand for European bio diesel seems all but certain.

David Walker
April 17, 2007