In this interview, we delve into the critical role of forest management, the ongoing push towards recyclability in packaging, and the impact of legislative changes in recycling on producers and consumers with Terry Webber, Vice President of Industry Affairs at American Forest and Paper Association (AF&PA).

Watch the full interview or read the summary below.

How can containerboard producers work with customers to meet their sustainability goals?

Containerboard and other paper-based packaging offer brands and retailers a compelling sustainability story. With high recycling rates and significant use of recycled content, no other material matches their sustainability attributes.

At the AF&PA, we have developed resources to help companies navigate these benefits with their customers. For instance, we’ve created a tool called ‘Design Guidance for Recyclability’, which provides data for packaging designers and consumer brands to better understand how non-fiber elements, such as coatings and additives, impact the recyclability of paper-based packaging. In addition, we also provide access to recycling data to support these efforts.

There is growing consumer demand for sustainable solutions and a lot of this surrounds recyclability. Concerns about the environmental impact of different materials, litter and waste escaping into the environment are also increasing. Paper-based products offer a competitive solution to these issues from a sustainability perspective.

How are North American paper producers leading the drive toward sustainable practices?

Our industry takes a comprehensive approach to sustainability. AF&PA runs a program called ‘Better Practices, Better Planet 2030: Sustainable Products for a Sustainable Future’, which are sustainability goals that target five major areas for the forest products industry. These include:

• Reducing greenhouse gas (GHG) emissions
• Advancing a circular value chain through the production of renewable and recyclable products
• Striving for zero workplace injuries and reducing serious injuries and fatalities (SIFs)
• Advancing sustainable water management throughout manufacturing operations
• More resilient US forests and sustainability of forest fiber

Forest management is a crucial foundation of our industry’s work. It plays a significant role in the supply of raw materials for paper and paper-based packaging production in the US. We take pride in our 2030 goals, which have transitioned our previous 2020 goals. These new goals take a more holistic view of how to advance forest resilience and emphasize third-party certification of sustainable fiber, ensuring our commitment to environmental sustainability.

What should consumers know about the sustainability of the packaging they buy?

Packaging is one of the important components of the overall impact of consumer products and it plays a crucial role in ensuring products arrive safely, undamaged, and unspoiled to consumers.

Despite being often overlooked, from cradle to grave, paper offers one of the most sustainable packaging solutions. This is due to our renewable and sustainable raw material source from well-managed forests, the robust recycling infrastructure and demand for recovered fiber use in packaging, as well as the high recycling rate after their use. It is hard to find a more sustainable material option in the marketplace.

Take a look at what sustainability attributes are important to packaging buyers today.

Are there any legislation changes ahead for recycling?

The trend towards extended producer responsibility is becoming more evident. Four states have already adopted the Extended Producer Responsibility (EPR) legislation for packaging – Maine, Oregon, Colorado, and California – and it’s likely to spread even further across the US market.

Recyclability has become an expectation from a policy perspective. The idea is simple: if a material isn’t easily recycled, collected, sorted and processed, it should not be put on the market. And let’s not forget the final, crucial step of re-manufacturing the material into a new product.

Take Chicago as an example. In July 2023, the city announced that it was adding paper cups to its recycling program. This means paper cups can now be collected, sorted, and processed just like other recyclable materials.

Chicago joins several other major cities, including New York City, Washington DC, Denver, San Francisco, and Seattle, in accepting cups for recycling. While we’re still in the early stages of this initiative, it’s seen as a significant priority for our industry.

Interested in learning more about paper packaging market developments and trends in the industry? Speak to our team today and find out how we can help you stay ahead of the competition.

The post Driving sustainability across the forest products value chain with Terry Webber, AF&PA appeared first on Fastmarkets.

Amid this turbulent backdrop, Laurent Sellier, CEO of Smurfit Kappa The Americas, joins us to offer his insights on exploring the growing trend of box customization, navigating consumer behavior changes, understanding the opportunities in the Central and Latin American markets and many more.

Watch the full interview or read the summary below.

What are the challenges brought about by changing consumer behaviors?

Consumer habits change over time and we have been witnessing many changes in the history of packaging. Probably the most significant one is the move towards e-commerce, which has been taking place over the last decade and accelerated rapidly during the pandemic.

Customers always bring about new demands and requirements. Our duty is to stay close in contact with our customers and understand their needs as they progress towards different channels of distribution.

For instance, e-commerce calls for an unpacking experience, a process that is very different from what we have been used to. We used to produce boxes that were on shelves with all the appeal to the consumer on the outside. Now, we are gearing towards something slightly different: a very neutral box that does not say what it contains but provides an enjoyable unboxing experience for the customer. This calls for different practices, designs and equipment in some cases.

It is about staying in contact with your customers, understanding their needs, accompanying them and being mindful of the trends we see every day.

Will there be more opportunities for packaging box customization?

Customization in box making is a request that we receive more and more from our customers. Technologies like digital printing can help us cater to those needs and be agile when it comes to creating a series of packaging around a theme or for specific events and celebrations that require specific designs.

Some customers have traditional types of approaches in terms of sizing and this largely depends on the types of segments you’re serving. For instance, if you are dedicated to large TVs, the boxes are going to be immense because screens have increased in size quite a lot.

However, particularly in e-commerce, there is a growing request to make sure that the box fits what is being shipped. All e-commerce companies are thinking about this and we are helping them on that route to adapt the size of the box to the product, so you do not have a gigantic box for a tiny product. This trend is happening as we speak.

Will single-use plastic substitution be a key demand driver for fiber-based packaging growth?

Plastic is an extremely useful material and I would not describe the situation as a competition between plastic and other materials. It is more about using materials in accordance with the expected lifetime of the product.

For durable goods, plastic is perfectly fine; it is more problematic when plastic is used for items with a short lifespan. If a plastic item is used for two weeks but takes a century to degrade, that is an issue. That is where fiber-based packaging comes into play.

Fiber-based packaging is renewable, recyclable, highly recycled and biodegradable. These characteristics are fundamental and, in my view, crucial for the long-term success of this material. Given the pressure from consumers for sustainable solutions, I cannot envision a future where paper, particularly in packaging, does not win over other types of materials.

What opportunities and challenges do you see in the Mexican market?

As a company, Smurfit Kappa has been operating in Mexico since 1986 and has been present for an extended period. We appreciate the industriousness of Mexico; it is a phenomenal country in terms of people and education. It is also a very business-focused country. Recent events, particularly the rising tensions between the US and China, have led to a redistribution of manufacturing, and Mexico is playing a vital role in this shift by providing a service more directly linked to the US.

However, Mexico also has a large domestic market, and it would be incorrect to view it merely as a country that manufactures for the US. It has a large population, growing economic power and significant domestic consumption. The combination of a strong domestic market and new opportunities makes Mexico an extremely attractive destination in the region. We have invested more than $450 million in Mexico in the last five years and are planning further investments. This demonstrates how much we believe in the country and how much we enjoy operating there.

How about the rest of the Latin American markets?

Central and South America are also places where we have been present as Smurfit Kappa since the late 1980s. It is a continental opportunity with a large population and a lot of growth. Most of these markets offer increasing political and social stability, making it a desirable place to operate. We have been present in all those countries for a long period of time and it has been one of the key pillars of the Smurfit Kappa group ever since it exists in its present shape.

We have also been acquiring companies in those regions in the last few years. We talked about Mexico earlier but also in Argentina and Brazil last year. As you get to know these markets and develop your understanding and knowledge, you can offer the same service, innovation, and quality-focused approach that we offer everywhere else. The team in the Latin American region, together with the Central American region within Smurfit Kappa, have delivered beautiful performances in the region and have helped our customers flourish in those markets as well.

Learn more about developments in the Latin American packaging markets with Fastmarkets’ Latin American Paper Products Monitor.

What challenges and opportunities are you focused on for 2024?

The general business environment has been somewhat slower than what we have seen in the immediate post-pandemic. 2024 is following 2023 at a somewhat lower pace than what we have experienced in early 2021 and 2022. However, many markets have experienced periods that are a bit slower and periods that are more intense in the past. For the reasons that I have indicated before, I have all confidence that we will return progressively to better days.

Destocking is an element mentioned by many economists and, while the extent of that is unclear, the term destocking by definition has an end to it and we should see a restoration of more normal situation in the markets in 2024.

Moreover, it is crucial to acknowledge the inherent difficulty in predicting the future. With this in mind, our company, led by CEO Tony Smurfit, consistently emphasizes the importance of preparedness. The ability to swiftly adapt and respond to changing circumstances is paramount. When the pandemic struck, we, like everyone else, faced the challenge head-on, organizing the necessary changes with limited time and navigating through the crisis successfully.

Being prepared, agile, reactive, and responsive are all essential qualities in a constantly evolving market. While we cannot control the changes, there is a tremendous opportunity if we proactively prepare our company right.

Learn more about how our containerboard products and services help you stay ahead of the competition. Speak to our team today.

The post Consumer trends on packaging and the importance of preparedness with Laurent Sellier, Smurfit Kappa appeared first on Fastmarkets.

In our interview with Joachim Klein, managing director at StepChange Consulting, we discuss the impact of the current demand situation on the industry, the role of talent management and the potential for mergers and acquisitions (M&A) in 2024. We also touch upon the urgent need for innovation and the opportunities for cost and efficiency improvements.

Watch the full interview or read the summary below.

What is the impact of the current containerboard demand situation on capacities?

The current demand situation is undeniably challenging. There is a general sense of unease about the slow demand, especially with an influx of new capacities entering the European market. This has created a significant concern for our industry.

However, it is important to remember that in recent years the industry has been quite profitable. Even less competitive capacities have been able to generate profits. But the present circumstances are putting these less competitive capacities under pressure.

We can anticipate that with declining margins, some capacities will inevitably fall away. This, in turn, should help to somewhat re-balance supply and demand in the future. So while the current situation is concerning, there is potential for a natural market correction that could stabilize things moving forward.

What is the primary objective for companies running corrugated converting plants in 2024?

The current focus is predominantly on volume. Many are trying to capture some volume due to the demand situation. There is also an inward look in terms of cost reduction and efficiency improvements.

Although strategic topics like sustainability may seem like they are on the back burner, they implicitly remain a need due to their sustainable advantage that makes selling our products easier on the packaging market.

What are the top opportunities for the European markets in the year ahead?

From a European perspective, the first will be M&A and consolidation. Despite the current downturn in demand, decrease in profitability and rise in interest rates, M&A remains an opportunity for any financially sound company with a strong balance sheet and ample cash reserves.

We have seen this through the mega-merger between Smurfit Kappa and WestRock, which will probably drive further M&A activity. It is important to note that the European market is much more fragmented than the US, which can be considered a benchmark despite not being 100% comparable due to the market structure and players in Europe.

The other opportunities are in cost and efficiency improvements. It is crucial to tap into untouched topics, drive change process innovation and make more radical changes due to the economic situation. To achieve the next level of improvement, it is essential to support these endeavors with cutting-edge technologies like AI. This is particularly important when aiming to capture cost and productivity benefits efficiently.

How will the current situation impact talent management and attraction?

Talent management and attraction are crucial to our industry and have always been a focus. However, we are facing multiple challenges at this point. In Europe, for instance, we have an aging workforce. Many individuals have dedicated decades of their lives to this industry, often staying in the same paper mills or converting plants for upwards of 10, 20, or even 30 years. As these seasoned professionals retire, we are experiencing a talent gap.

Our industry has a compelling selling point and we can and do attract talent. However, we must overhaul our existing work models. The next generation of workers is less inclined to work long overtime hours or adhere to outdated shift systems and we are dealing with higher churn rates.

This shift is forcing us to confront an evolving reality and I believe this is an opportunity for the industry to reinvent itself. We need to find ways to do more with fewer resources, to break down traditional boundaries and to leverage technology effectively.

Automation is one answer to these challenges. It is already making headway in areas where there is a shortage of both qualified and unskilled labor. But automation alone isn’t enough. We also need to make jobs in the industry more appealing to future generations. This combination of strategies will not only help us manage the current talent gap but also ensure our industry’s continued growth and success.

Learn more about Fastmarkets’ short-term and long-term forecasts for the European paper packaging industry and how we can help your business excel in 2024 and beyond. Speak to our team today.

The post European containerboard: top opportunities and challenges in 2024 with Joachim Klein, StepChange Consulting appeared first on Fastmarkets.

In your view, what are the top sustainability challenges we are facing in this industry?

The main challenges for the industry are going to be on the regulatory side. In areas where they are looking to introduce a lot of regulations, like the EU, there is the risk that some of these regulations and laws could overlap or contradict. It is critical for us to watch the space carefully and try to be involved, making sure that the positive place that our industry is in gets reflected in the regulations.

Another thing to be aware of is to not get complacent as an industry. We do have a very sustainable product, so the key lies in ensuring we have a sustainable process in place for making the product. This will enable us to continue to be a green and sustainable solution in everyone else’s eyes, not just within the industry.

Learn about the role of the forest in climate change and the emergence of forest carbon credits here.

Can you tell us more about Smurfit Kappa’s sustainability initiatives?

As a company, I think we have matured quite a lot in recent years in terms of sustainability initiatives. We have always been good at making continuous improvements, but what we are moving onto now is being more mature in terms of innovating and taking chances with controlled trials. From a process perspective, this means you trial it out in one mill and, if it works, you copy and paste it to other mills.

Some of our projects include a world-first trial in using hydrogen in our Saillat paper mill in France, experimenting with geothermals in the Netherlands, trialing heat pump technology in Slovakia and operating a digital twin power technology in Townsend Hook paper mill in the UK. The projects have been Europe-focused, but that is because you tend to get more funding support and collaborative projects with governments.

Equally, we are delighted with our big projects in the Americas. As recent as September last year, we announced a 100-million-dollar investment in a biomass boiler in Colombia, which will reduce our carbon footprint by at least six percent.

All in all, we are continuing to improve year on year and looking around corners to see what might be available and understand how we can apply them to our assets.

What are some of the barriers to sustainable packaging?

I believe cost is a potential barrier to sustainable packaging. In a world with high inflation, a more costly like-for-like packaging solution can be a deterrent. We need to try to look at the total cost to our customers and stakeholders and try to show that it is not just a unit cost comparison.

There is also a potential risk of backlash from those in support of anti-virgin packaging materials. This is typically surrounding anti-virgin plastic, but it could also spread to anti-virgin paper. While the industry knows that sustainably managed forests have a very positive part to play in tackling climate challenges, this is something we need to be close to and make sure that virgin material in the paper industry, as well as recycled material, are seen as sustainable packaging solutions.

How can we make the whole supply chain more sustainable?

The whole supply chain could be made more sustainable by having the whole world operate on the same set of standards for this industry. This is much easier said than done, but that is going to be key.

One of the big risk factors for our industry is the perceived risk of virgin material being produced and deforestation. If we had a global supply chain and value chain that operate on the same set of sustainable forestry and forestry management practices, it would mean that wherever you buy a paper-based product in the world, you can buy with confidence that they have been produced with the same standards. That, for me, would be a wish and would make a huge difference to the industry.

Interested in hearing from other leaders in the pulp, paper, packaging and wood products industry? Join us at Fastmarkets’ Forest Products events to uncover more insights from CEOs and other top executives and enjoy the chance to network with your peers in the industry.  

The post What are the top sustainability challenges in the forest products industry? appeared first on Fastmarkets.

Watch the interview and read the analysis below.

What does European graphic paper demand look like in Europe?

The European graphic paper market has been at a point of high price and weak demand for a while and we are seeing an accelerated rate of demand reduction in the market. Coated paper is taking a bigger hit than others, but overall, the demand for all grades of paper is declining at a higher rate than the historic average we have seen pre-pandemic.

This is caused by a number of factors including:

• Inventory destocking: Consumers have stopped putting in orders for paper because of the high levels of stock they currently have to work through.
• Demand destruction: The high prices for paper products are deterring buyers from making purchases.
• Structural decline: The ongoing decline in paper demand as a result of digitalization and other factors since 2008.

How can the industry manage capacity with declining global demand for graphic paper?

Capacity reductions had picked up around the globe in 2020-2021. Managing capacity in a world where demand is declining is not an easy task. There are only a couple of alternatives out there, such as mill closures and conversion to the other grades.

Conversion to other grades comes with many challenges. Firstly, due to the continued global decline in graphic paper demand, the machines that are more suited to the related conversions have already gone down this path in the last few years. This means the machines that have yet to be converted are either less suitable or require more work done for conversion.

Some of the factors to consider include energy integration of the mills, which comes with the complications of the energy challenges we face today in terms of source, supply and price. Although things are a little calmer today than in Q3 2022, we might see the energy prices go up again. Integration of these mills into electricity and energy generation will be very important to consider for conversion.

Also, the markets where these machines are going in to have their own supply and demand balances that need to be taken into account when making the decision for conversion. A lot of the conversions have gone into packaging grades.

More than 6 million tonnes of capacity exited the European graphic paper market between 2020 and 2021. Capacity rationalization will be important to watch for the graphic paper market, especially the capacity closures and their impact on demand and operating rates.

Why are European graphic paper prices high even when demand is low?

Graphic paper prices are high because of trends in supply and demand as well as costs.

Back in the beginning of 2021, we saw a rebound in European paper consumption together with capacity being removed from the market. This continued into the first half of 2022, with the addition of factors including strikes that further contributed to the tightness in the market. All of this created very high operating rates and paper buyers experienced paper supply shortages, which led to the building of inventories.

Along with the upward trend in production cost that had been on the increase since the beginning of 2022, these conditions created good momentum for paper prices to go up.

However, most of the conditions behind rising paper prices are rapidly disappearing. Observations in March had already signaled the turning of graphic paper prices ahead.

Production costs have dropped faster than anticipated as the situation surrounding energy eases prices. Higher rates of inflation had affected consumers’ purchasing power. Buyers are sitting on high inventories and demand has decelerated as they work on destocking.

The high prices also contributed to demand destruction. For example, higher paper prices are helping to accelerate the shift from paper-based advertising to digital. Over 50% of online advertising budgets in Western Europe are expected to go into digital in 2023-27, driven by the preference for online video.

In addition, capacity rationalization is also kicking in, with another 9 million tonnes expected to be removed between 2022 and 2027.

What can we expect as the ‘new normal’ for the European graphic paper industry?

The new normal for the European graphic paper industry would look very similar to what we have now. The changes triggered by the pandemic, including the acceleration of digitization, consumption habits and working from home, are still affecting the industry and will be expected to remain for some time.

In terms of demand, we are going to go back to a state of structural decline. While the rate of decline will perhaps not be as fast as what we are seeing in 2023 and 2024, but we are definitely going into that next trough.

The new normal will also include capacity rationalization from the producers’ point of view. With the global graphic paper industry going into oversupply in the coming years, capacity management will be key to keeping the balance in the European market.

Lastly, the cost competitiveness of the European graphic paper industry is something we need to take into account in the new normal.

Exports for almost every graphic paper grade have been in decline, with the largest drops reported in newsprint and uncoated woodfree sheets. While some of the reductions in newsprint exports are due to the shift in machine conversions to packaging grades, exports in general are under pressure because of:

• High paper prices as the region changed from one of the lowest cost producers to one of the highest.
• Slower economic recovery in China and the US.
• Potential volatility ahead in energy supply and costs, including CO2 emission certificate prices and logistic disruptions with drive shortage, longer lead times and higher transport costs.

These elements behind the production landscape could drastically reduce European producers’ competitiveness and challenge Europe’s position on the global graphic paper market. While the energy crisis has been averted, it is important for European graphic paper industry participants to keep track of the market trends that are signaling the changes behind the scenes.

Keep track of the ever-changing markets

While no one can predict the future, there are many market trends and drivers you can track to keep on top of the changes and mitigate risks that come with volatility.

Planning and anticipating changes can be made easier with the help of our experts at Fastmarkets. With methodologies and pricing processes that align with core IOSCO principles, Fastmarkets has an unmatched product breadth and geographic reach.

Let our forecasts help you make critical decisions and stay ahead of developments in the graphic paper market with our short- and long-term forecasts for major global regions.
Speak to our team today

The post European graphic paper outlook: Demand trends, capacity management and challenges ahead appeared first on Fastmarkets.

In our interview with Eman Abdalla, we explore the challenges faced by the maritime sector and the important role that biofuels and energy policy play in reducing ships’ carbon footprint.

What is the pathway for decarbonizing maritime transportation?

We’re not necessarily 100% sure as to whether biofuels are going to be the answer to decarbonizing shipping or not. We think it’s definitely a short- to mid-term solution that has the potential to be used to reduce the carbon footprint of the existing fleet.

Today, we’re absolutely using biofuels. We [at Cargill] are actually amongst the few that already have a biofuel program. We’re not just talking about trials and pilots.

We’re talking about scale, about a full-fledged program; we’ve supplied biofuels to more than 30 ships, approximately 12 to 13, 000 tonnes of biofuels have been supplied mainly in Rotterdam.

And we’ve also just started a biofuel supply program in Singapore; we’ve supplied two ships successfully without any issues. The good thing about biofuels is that they require zero capital investment and they mean a drop in fuel, so with an existing fleet, you can immediately start using them to reduce your carbon footprint anywhere between 20 to 30 percent.

We are big believers in biofuels – especially biofuels produced from second-generation waste. Cargill has recently built a biofuel plant in Ghent, Belgium, to process waste into biofuels.

The biggest challenge in biofuel production is access to waste oil.

For instance, out of 50 million tonnes of cooking oil being consumed globally, we only recycle 8 million tonnes.

Imagine if we had the logistics, network and setup necessary to collect 50 percent or 75 percent of the consumed oil, then the potential for biofuel output would be much bigger, and it would play a bigger part in decarbonizing maritime transport.

What will this mean in terms of sustainability and cost-efficiency of commodity transportation?

It is going to have a huge and positive impact on sustainability. Because the more biofuels we can use as an industry, the closer we get to reducing our carbon footprint.

In terms of cost, I would say that this is a product of scale. The more we scale our access to waste oil and the more refineries we manage to build to produce biofuels from second-generation cooking oil or waste oils, the better chances we’ll have to reduce cost.

Now, the most significant factor that will also play a role in determining cost and sustainability is an eventual carbon tax.

If International Maritime Organization (IMO) introduces a carbon tax, this will automatically compensate for the additional premium that we are paying today for biofuels.

For example, in Europe, we have subsidies, and we leverage those subsidies quite significantly. If there is a carbon tax, the premium you’re paying for the biofuels will ultimately be netted off by your carbon reductions.

What will be the impact on agricultural commodities supply?

We can’t really generalize. The growth of commodities depends on so many different factors.

Right now, geopolitical factors play an important role, for instance, but usually, all sorts of macro or micro factors may be involved. It tends to vary. But I think, eventually, commodities and the trading of commodities are going to change significantly.

Despite the fact that, up until now, there has been a globalization of the markets and, despite the fact that this may continue, there might be a lot more localization too, when it comes to trading patterns and also when it comes to the deployment of fleets.

As we continue on our decarbonization journey, we don’t think that the answer will be one specific type of fuel or zero-carbon fuel, whether this is methanol or ammonia or hydrogen. The answer will come from a combination of solutions.

That means that different segments and trades will be using ships with different types of zero-carbon fuels. Hence, the ease of trade and flexibility that we enjoy today will not necessarily continue in the future.

That is going to make freight procurement and trading freight a much more complex process.

How are the latest governmental policies supporting the move to decarbonization?

That’s an excellent question. First of all, the maritime sector is a sector that is very challenging to abate.

The IMO faces a huge challenge within a very complex sector. In fact, the maritime industry consists of many sub-sectors that are extremely different in intricacies and in dynamics. For instance, you can’t compare the dry bulk market to the container market, and you can’t compare the tanker market with the cruise market, and so on. So, the IMO must be able to design and roll out policies that can actually apply to all of these different sub-sectors.

Overall, I think we’re definitely making headway.

We have seen the introduction of measures such as the Carbon Intensity Indicator (CII) and the Energy Efficiency eXisting ship Index or Eexi. The CII is more of an operational index, and, while we know that it’s not necessarily perfect and that it may suit certain segments more than others, we need to be pragmatic and acknowledge that this is a good starting point. We hope that, as we proceed in this journey, these policies will be refined and fine-tuned to better adapt to each sub-segment or sub-sector requirement.

The big question is when the IMO is going to deploy a market-based measure that will allow everybody to have a level playing field and make the right investment decisions to promote decarbonization even further.

For more information on the current biofuels market, take a look at our dedicated page for biofuels insights.

The post Decarbonizing maritime transport: Eman Abdalla on the role of biofuels appeared first on Fastmarkets.

In our interview, Seth Meyer, chief economist at the USDA, addresses production challenges, the path to sustainability and food concerns.

What are the latest developments in biofuel blending mandates for major feedstock exporting countries?

I’ll focus on the US, where right now, we’re expecting new policy announcements by the government. In fact, we’re waiting for the EPA to give us 2023 blending and a view of longer-term requirements.

In the legislation framework announced in 2007, a pathway was outlined to 2023, but there haven’t been any major updates since. This doesn’t mean that regulation ends there but that the EPA will reassess its policies.

The USDA is very much involved in discussions with the EPA in order to provide a comprehensive view of the way forward for blending mandates.

Does biofuel demand affect food supply, and how?

I think the answer is yes. There are, in fact, lots of different effects to consider at the moment – whether we’re talking about ethanol, produced from corn, which is also a source of animal feed, or distillers grains which get put back into the feed system, or biodiesel that needs vegetable oils to be produced.

So, yes, I think that there’s some impact on US markets. The solution is perhaps to be found in diversifying the feedstocks. But there’s also an understanding that there are three pillars we’re trying to address here: farm income, climate and food prices for consumers.

So, we’re trying to address all three of these issues, and while we focus on any one issue, in fact, then we neglect the other two.

However, going forward, I think biofuels will be part of the solution [to the energy crisis] and trying to add flexibility [in terms of using diverse feedstocks] will help address the issues we’ve just talked about.

How are blending mandates affecting commodities’ trade flows?

First of all, we need to make a distinction between the impact on consumer food prices in the US and the rest of the world.

In the US, we talk about only 16 cents on the dollar “before the farm gate”. But, yes, commodity price fluctuations do have an impact on food prices. If there’s demand for biofuels, there is an effect on commodity prices.

But I think there’s also an understanding that developing world consumers are much closer to commodity prices and there are concerns about transmitting these high prices to them. There’s a need to also be a reliable supplier.

What would be the most sustainable way to scale biofuel feedstock production?

We talk about a couple of different things: the first one being to add as many different things that have environmental benefits and a diversity of feedstocks so that you’re not relying on any one pathway – and so this provides a little bit of stability in terms of feedstock availability and pricing. In short, we want to have a wide variety of options and, from the US standpoint, sustainable productivity gains.

Let’s think about how to improve productivity, whether that’s productivity at the farm level or at processing, and the amount of different products you can extract from an individual crop with the effects that this could have. In fact, this would have positive effects on the climate, farm income and consumer pricing.

To what extent are inflationary concerns affecting blending mandates?

Again, we talk about 16 cents before the farm gate when it comes to a consumer’s food dollar in the US. But inflationary concerns are more directed at the developing rest of the world when we think about the current food security environment.

In more pragmatic terms, right now, approaches or responses include food aid because we want to ensure people who are most in need have access to food supply. I think there’s a need for such pragmatism to deal with the world’s current food security environment. We’re thinking about the next crop year and what flexibilities we can add for US producers and what we can address with our policies, like crop insurance to allow producers to make a wider variety of production decisions to fit their needs.

While abroad, we’re helping Ukrainian farmers, thinking about cash flow and grain storage as they face a basic problem in the ability to get their crops out. Long term, from a US perspective, we want to have sustainable productivity gains, to do more with the natural resources that we have and do so in a way that doesn’t put more stress on them and maybe even alleviates some.

So, the plan is to use technology to improve productivity and minimize environmental impacts.

For more information on the current biofuels market, take a look at our dedicated page for biofuels prices.

The post Seth Meyer on biofuel blending mandates, food supply and trade flows appeared first on Fastmarkets.

In our interview with Mac Marshall, we explore how US producers and crushers adapt to the shift and how this impacts renewable diesel production and margins.

What is driving US soybean crush margins?

To understand crush margins, we first need to fundamentally understand the components of soybeans.

Now, when crushing beans, this results in about 79% meal and 19% oil production, so on a volume basis, meal production is about four times higher than oil.

Historically, the value has been borne by the meal output after crush. Over a long-term basis, meal accounts for about two-thirds of the value for soybean crushing and oil is about one-third. However, in the last two years, we’ve seen an absolute fundamental paradigm shift – in that the market has increasingly realized the value of soybean oil, its diversity, and its applications, not just in traditional food and industrial uses but in emerging biofuel space.

View our soy oil prices

So, how important is soybean oil in the price relationship that determines crush margins today? 

Today, that traditional one-third share of value attributed to soybean oil is much closer to 45-48 percent.

This means that meal no longer carries most of the weight or makes up for most of the value, as it has in the past. Both products are, more or less, on equal footing in terms of value contribution to soybean crushers.

Renewable accreditation for soybean oil as a feedstock in the US has meant an increase in domestic demand. How are exports being impacted?

Firstly, we need to look at the California market to understand all the nuances of the question.

The California market, in recent years, has established targets for decarbonization. Right now, the target is to decarbonize the California economy by 20 percent by the end of the decade or by 2030. And one of the pathways that California is looking at in order to achieve its decarbonization targets is through increased use of cleaner-burning fuels throughout the whole life cycle. And one of those is renewable diesel.

Renewable diesel is a drop-in fuel chemically equivalent to petroleum diesel, except that because it’s produced from plant-based sources, including soybean oil, the emissions over the life cycle of producing it are significantly less than traditional petroleum-based diesel.

California’s established a credit system that allows lenders and refiners to receive credit for utilizing bio-based feedstock in the production of renewable diesel.

This has led to increased forward-looking demand in the market of California for renewable diesel, but perhaps more importantly, it’s led to waves of private sector investment to increase crushing capacity in the United States and to increase the volume of soybean oil available for all its diversified applications. And that’s a critical d-bottlenecking that has to happen between bringing the soybeans off the field, of course, that our farmers are planting and cultivating year after year actually to start to place them into that end market, and not just in the energy market but, of course, in the food and other industrial spaces as well.

Biodiesel margins for producers using soybean oil have been trending upward for most of the year. Will the trend continue?

That is very hard to say. In any commodity market, you have trends where prices are going up and where prices are going down, and they’re never driven by one bespoke factor alone.

If we look at oil prices on the whole and go back to the first quarter of 2022, just after the Russian invasion of Ukraine, we see a significant spike in vegetable oil and commodity prices across the board. This is to be explained by a loss of availability out of a key production corridor, added to higher fertilizer prices and against the backdrop of production disruptions in many oilseed-producing countries worldwide.

Because there’s such a confluence of factors that may be at play, it’s hard to predict margin trends in the future, but overall, we’ve seen prices come down over the last couple of months of 2022 compared to the immediate post-war spikes. It’ll be interesting to continue closely watching the trends in the next few months.

What are the challenges facing US soy oil production in the 2022-23 season? 

Our harvest in the US is almost complete. So far, we have produced a crop of over 118 million tonnes: our fourth largest on record. I bring this up because this happened despite the drought pressures across the country, so it was great to overcome that and produce a very large volume. After all, the output depends on what happens in the fields, and I think this year was absolutely a success considering the weather-borne headwinds.

Crushing utilization is running at a high capacity rate. We see crushers extract more oil from each bushel they produce. Compared to a couple of years ago, we’re up about three to four percent on oil extraction rates. So as we’re waiting for this incremental crush capacity, existing crushing facilities are working as hard as they can to extract more oil and continue to meet this burgeoning demand from several sectors.

In short, I don’t have concerns about production capacity in the near term. We’ve had a good crop and run rates and are poised for additional future expansion.

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Featuring Selma Hepp, Executive, Research & Insights and Deputy Chief Economist at CoreLogic and Nikolas Scoolis, Manager, Housing Economics at Zonda, who joined us for exclusive interviews earlier this year.

What are the main challenges in the housing market today?

“There are a number of challenges in the housing market today,” said Hepp. She shares the three factors she believes are driving the lack of affordability.

1. Strong lock-in effect. The record low mortgage rates over the last couple of years resulted in 95% of the households with a mortgage to have a mortgage rate that is below 5%. In addition, they would have likely bought a home when home prices were considerably lower. The combination of the two factors suggest that these households have very little incentive to sell their homes and purchase a new one.
2. Low inventory. As there are less people selling their homes, it means there is a continued lack of available homes for sale. This leads to less turnover and velocity in the housing market.
3. Lack of affordability. Unaffordable housing prevents many young households and those with limited incomes from being able to buy a home.

How are increasing mortgage rates changing home buyer power?

Mortgage interest rates have grown throughout this year, with the 30-year fixed rate jumping to its highest rate since 2007 in November at 7.08%, according to Freddie Mac. This has since dropped to 6.49% in December as inflation’s grip eased slightly this fall.

Higher mortgage rates have cooled housing construction and slowed lumber markets this year. Single family housing starts in the US have arrived at its lowest level in more than two years. Housing starts in October slipped 4.2% from the prior month, while permits have fallen by another 2.4%.

“Home buyer power was markedly diminished when mortgage rates increased from around 3% to almost 7%,” said Hepp. “As a result, inflation-adjusted mortgage payment on the same home is now almost 50% higher than was earlier this year.”

“Another way to illustrate the loss of purchase power for a household is to think about how much a household with $100,000 income can afford. At 4%, that household can afford a home priced at about $466,000 dollars, but at 7%, they can only afford a home priced at about $385,000. That’s almost a 20% decline in purchase power for that household.”

What are the main challenges in the housing supply chain?

In addition to affordability, complications brought by supply chain challenges have also contributed to builders’ headaches.

“The biggest challenges for the housing supply chain have been the three Ls: land, labor and lumber,” said Scoolis. However, instead of the logistic challenges faced in the early days of the pandemic with lumber supplies, the nature of the delays has changed.

“The current market conditions suggest the blockers are now moving into delays in the final touch products, such as HVAC and windows,” he said. “Supply chain side delays are pushing delivery dates for houses even further out, from 3-6 months to 6-10 months. This both costs builders more money and results in longer waits for buyers to get their homes.”

What does this mean for the lumber and wood products market?

Economic headwinds caused by the combination of rising interest rates, the highest inflation in 40 years and stock market tumbles have given traders little reason for optimism.

As housing starts drop off to align with cratering home sales, field consumption of wood products has begun to drop rapidly. Sensing the slowdown and the accumulation of inventory upstream, buyers across framing lumber and structural panel markets have largely relied on just-in-time buying, waiting until on-hand inventories dwindle before ordering highly specified tallies that require prompt shipment. For many, those two requirements have been more important than price given the risks of holding rapidly depreciating inventory as the market continues to weaken.

With wood buyers taking a more conservative approach managing inventory and final demand for lumber and structural panels continuing to cool, Fastmarkets believes the unprecedented volatility that has characterized the wood products market since early 2020 is set to subside. Prices will likely see a wider range than pre-Covid levels, but with demand falling into 2023 and supply continuing to increase, this will keep a lid on upside surprises in the market.

Where do we see the housing market heading in 2023 and beyond?

When it comes to the future of the housing market, both Hepp and Scoolis expressed concerns over the challenges brought by affordability.

“The housing market is likely to see some challenging times ahead, especially in the form of high mortgage rates which are expected to level up higher than many forecasts did,” said Hepp. “As a result, the number of home sales in the next two years will likely decline from its 2021 Peak to 2015-2016 levels. Home price deceleration will continue to pull price growth closer to long run average. Nationally, however, we are unlikely to see notable declines in prices on an annual basis, but real prices in 2023 may fall.”

“The problem we are running into is an affordability crisis that could be described as historic,” Scoolis. “In 2023, mortgage rates will stay elevated above 6%, maybe even pushing higher into 7%. We will see the market pull back as the numbers do not reflect optimistically in the long term. While the fundamentals support demand, the challenge will be to navigate these short-term changes first.”

Looking on the brighter side, Hepp suggested that the challenging market conditions could bring more innovation in construction and housing finance, which may open up more opportunities for better affordability in the future.

“The fundamentals of the housing markets are solid and support demand,” added Scoolis. “When you look at the demographics, the Millennials are the largest living generation, Gen X and Baby Boomers are retiring and maybe looking to move to where their kids are having kids, while Gen Z is gearing up to move into the market.”

Want to learn more about the wood products market? Access the Random Lengths Weekly Report to receive the latest prices, analysis, and market coverage of more than 1,600 items of softwood lumber, panels, and other wood products in North America. Speak to our team today to see how we can help you.

The post What are the challenges in the US housing market and how do they affect the wood products market? appeared first on Fastmarkets.

In our interview with Bernhard Dahmen, we explore how producers adapt to the challenges and how the EU government is responding to provide guidance and solutions for more sustainable local production efforts.

What are the immediate effects of rising energy prices on the European feed sector?

The immediate effects [caused by the war in Ukraine] materialized as people reacted to the news and were concerned about price increases. Questions and insecurities around supply chain management arose.

And now the effects are to be felt on logistics because while we’re undertaking huge efforts to support the movement of commodities coming out of Ukraine, unfortunately, the quantity of trains and trucks available in Europe is not sufficient to satisfy all needs.

Moving on to the high energy crisis that the war has brought upon us, this is now having a stark impact on processing plants, which are struggling with such high energy costs. Processes such as drying for feed are no longer viable.

Drying requires electricity and has become too expensive and, as is the case for many products, market prices don’t provide much of a profit.

Therefore many producers in any type of industrial production of agricultural commodities are switching from dried to liquid products.

This switch from dried to liquid is changing the global market.

How are geopolitical decisions affecting energy supply and, consequently, agricultural products?

All geopolitical decisions that have been taken since the war started in Ukraine have affected Europe tremendously. Because, as I said earlier in the panel discussion [at the Global Grain event], we’re now looking at a second crop coming to Europe.

As Ukraine has not been able to export much of its products via vessel, great quantities are being delivered into the heartland of the EU. A lot of these products would normally go to different destinations. We’re getting a second corn crop. A second wheat crop is going to Italy, Romania, Hungary, Germany and Poland. Part of the imports will stay in these countries, and the other part is intended for other destinations.

Which agricultural commodities are most affected by the energy crisis and why? 

All agricultural commodities processed in industrial plants that need a lot of drying are affected.

Due to high energy costs drying becomes less and less economical, and so, as I said before, the industry is still uncertain about this kind of processing. Energy costs are so high, in fact, that a lot of industries are considering processing their products through biomethanation as an alternative. This could reduce some of the types of products available in Europe, for example, gluten.

Wheat gluten is one of the commodities most affected because it requires a lot of energy in order to dry.

Of course, it will continue to be produced to some extent, despite the high energy costs, but it will have a lower value for producers. And here’s where we’ll see an immediate change. Producers will have to vet whether it is more viable to process through biomethanation and save on energy supply or whether to dry products and sell them as a dried co-product or animal feed.

What regulatory steps is the EU undertaking in response to sustainability issues in protein markets? 

The EU has outlined a protein plan to incentivize the growth of protein feed within the EU, for instance, soybeans. Soybean yields are being encouraged in every region.

In addition, there’s a push to have more plants per acreage and to diversify. For instance, our group, Südzucker Group, has now taken on board the planting of fava beans. These are a strong protein source and have a very important function as meat replacers.

These changes are ongoing as the EU is trying to incentivize farmers to plant more and diversify.

So, I would say there’s a lot of effort in planning for sustainability by the EU. Whether or not this will be successful is difficult to say because, in the case of proteins, for instance, much will depend on global prices. But we’re expecting more plans to be outlined by the EU.

How will intensification programs affect crops in the 2022-23 season?  

It’ll be difficult to intensify planting for the 2022-23 season. It is something that moves slowly, I think.

What will bring the biggest impact to European markets in the 2022-23 season is that wasteland can now be used to grow grain. So that means more acreage for people to plant wheat, corn, etc. That may help to have a bigger supply of grains.

When it comes to protein plants, there’s a longer-term plan. Farmers are incentivized to grow new plants or other varieties to make up for our deficiencies in the EU.

If you’d like to find out more about animal feed and protein market trends, join our upcoming Global Grain and Animal feed event in Singapore. Click here for more details.

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