BRUSSELS, BELGIUM — The current debates in the E.U. on biofuel policy continue to generate rumor and speculation, causing considerable uncertainty for biodiesel and vegetable oil companies. 

Amid arguments about biodiesel's economic and environmental impact, Rabobank said on July 29 that it believes that the likely policy result will be a higher than expected cap on first-generation biofuels in the E.U. transport fuel mix. 

A cap of around 7% on first generation biofuels would mean an increase in demand for biodiesel from current consumption levels, and consequently increased vegetable oil demand. There is also the possibility of a 5% cap being implemented, leading to a minimal increase in demand for vegetable oils. In both scenarios Rabobank expects total biodiesel consumption in the E.U. will fall short of the original target for 10% of transport energy to come from renewable sources by 2020.

"Despite tensions, the union between the biodiesel industry and vegetable oil players is about to enter a new phase, with new regulations, new growth outlook and consolidation of supply chains by investors, which will bring opportunities for those companies able to make the relationship work to their advantage,” said Rabobank analyst Paul Bosch.

The implementation of new biofuel policies, along with pressure on biofuel and vegetable oil companies in recent years, will require companies to adapt their strategies. Rabobank expects three major developments to take place:

1.         Increasing control over the supply chain. Taking into consideration the possible changes in biofuel policy, supply chain integration has been a key advantage for E.U. biodiesel producers but will become even more important to increase efficiency, sourcing options and margins. Winning strategies will include further strategic integration with crushing, being active in trade and proximity to logistical infrastructure.

2.         Entering into adjacent industries and new business segments to enhance margins. Examples include capturing the premiums associated with second generation biodiesel or hydrogenated vegetable oil.

3.         Strategic partnerships that leverage on long-term trends. On the vegetable oil supple side, Rabobank expects price advantage will see additional trade flows of palm oil and this can lead to pure trade opportunities or to more structural alliances. These strategic partnerships can be initiated by both sides: palm oil players in South East Asia and biodiesel producers in Europe.