1. 1 Biodiesel: The implications for soybean and product markets International Oilseed Producer Dialogue IX June 16-17, 2006

2. 2 Objectives & approach The challenge Implications of growth in soy oil demand for biodiesel & other industrial uses? The approach This analysis is based on the global implications for an increase in biodiesel demand. Two factors that will influence the future shape of the U.S. Soy Sector: –Future price of petrodiesel –Extent to which continuing tax breaks or subsidies will continue to be offered in the biodiesel sector.

3. 3 The Impact on Farm Product Markets Our “model” suggests a substantial uplift on vegetable oil prices above historical levels because of increased demand for fuel and industrial purposes Confirms a considerable drop in the price of SBM resulting from the heavy supplies of protein feed ingredients due to increased oilseed crush and the growing production of mid and high protein byproducts of fuel ethanol production. –At reduced prices, more US SBM will be available for export. Demand for vegetable oil in the EU to manufacture biodiesel is an important contributor to increased pressure on global supplies. The main driver in the biofuel scenario is rapid growth in EU demand for veg. oil for fuel. In our biofuel scenario the EU becomes a net importer of 4 oils (soy, rape, sun, palm) and by 2012/13. The net imports will be 8.2 million tons compared to just 4.5 million tons in a baseline.

4. 4 Model assumptions – The demand shock Country/Region Other Brazil US EU Today 2012/3 2000/1 mMT

5. 5 Model assumptions – The demand shock Feedstock Other Soy Rapeseed Palm Today 2012/3 2000/1 mMT

6. 6 The Impact on Farm Product Markets In the U.S. the trade impacts are less striking because of greater ability to generate additional veg oils through domestic production. Projections are that net imports in 2012/13 will be 1 mmt as rape and palm oil imports increase and SBO exports decrease. Brazil and Malaysia will become significant players in the biodiesel market as a result of being low-costs producers of veg oil. Argentina will also become a player. The higher oil prices in the biofuels scenario cause a 10% increase in sunflower area compared to only a 3% increase in soybean area. –Exports of both go up significanty because domestic consumption is reduced by higher prices.

7. 7 The Impact on Farm Product Markets At global level, the following effects are projected on world production by 2012/13: –Soybean production up 3.8 million tons –Sunflowerseed production up 1.7 million tons –Rapeseed production up 1.4 million tons –Palm oil production up 0.5 million tons These are not large effects as about half of the veg oils required for increased fuel and industrial use becomes available as a result of lower food use in response to higher vegetable oil prices. –This has large effects on demand in India and other developing countries. –By 2012/13 world soybean oil consumption as food is 1 mmt lower than in the baseline. –Palm Oil consumption is 1.6 mmt lower For the 4 oils, the need for an additional 5.4 mmt tons for fuel and industrial use is met half by a 2.7mmt reduction in food use and half by a 2.7 mmt increase in world production.

8. 8 Global vegetable oil markets Veg. oil consumption increasing 4-5% per annum Biodiesel adds 2-3 billion lbs annually Impact on vegetable oil prices & trade flows World vegetable oil consumption to 2012/3 (m MT) Consumption Pre-2006 Projected Consumption Post-2006 Biodiesel demand

9. 9 The Impact on Farm Product Markets U.S. soy area holds its own against corn acreage. –Total net returns per acre rise over time for soybeans, whereas corn actually becomes flat. –Wheat and other course grains are the projected losers. –Canola plantings increase 15% from the 2005 level. U.S. soybean production grow steadily to 3.0 billion bushels in 2012/13 –The crush approaches 2 billion bushels by end of the forecast period, up almost 14% from 2005/06. U.S. Farm Price settles to $5.30 by 2008/09 and then rises to $5.59 over the next five years. (This is 13% above the $4.93 per bushel price in baseline projections for 2012/13.) U.S. soybean exports are projected to decline approximately 100 mil. bu. U.S. soybean area is at best holding steady, but Brazil’s increase by almost 5 million hectares and Argentina’s by 3 million hectares. –U.S. soy exports find it difficult to compete with this increased production.

10. 10 What will happen? Assuming: biodiesel remains competitive with diesel (major simplification) Assuming: subsidization continues at current level (simplification) Then, by 2012/13: –Soy oil prices up –Soy oil use in food same –Meal prices down (by 20-25%) –Bean prices at $5.59/bu & return/acre increases ($131) –Soybean area stays same –Soy crush margins increase slightly – more revenue from oil –Animal agriculture sector will benefit –Exports - meal (+40%), beans (-10%), oil (half)

11. 11 What will happen? Overall, a very different environment is in the U.S. soybean sector as a result of rising biodiesel and industrial use: –Total revenue for U.S. soybean farmers is higher than in the baseline by about $2.0 billion at $16.8 billion. –Meal becomes the drag on the market instead of oil. –Oil begins to account for more than 50% of the crush value in the U.S. The upward pressure on veg oil prices from biodiesel demand will raise global food industry concerns. However, the food market will continue to be by far the most important destination for soy oil. Biodiesel positive impact – but the same fundamental challenges remain – don’t get too distracted.