Analysis: Canola to miss boost from Canada biodiesel

WINNIPEG, Manitoba (Reuters) - Canada’s No. 2 crop, canola, looks to miss out on potential domestic demand from biodiesel until Canada clarifies its fuel mandate and offers new incentives to an already heavily subsidized industry.

Canada has finished selecting biodiesel plant proposals to receive funding from a C$1.5-billion ($1.5 billion) program, aiming to cut greenhouse gas emissions by 17 percent by 2020 from 2005 levels through mandates of 5 percent ethanol and 2 percent biodiesel in conventional fuel pools.

None of the successful proposals are for large-scale plants in Western Canada that would use canola as the main feedstock. Canada has not set a specific start date for the 2011 biodiesel mandate that would require 500 million liters per year of renewable diesel, creating uncertainty for investors.

It’s up to Canada’s environment department to make a regulatory change that sets a start date. The fact it hasn’t yet done so has left the industry impatient, although the environment minister reassured a biofuels conference this week that the government’s commitment is intact.

In the meantime, Canada has slim prospects of turning much of the yellow-flowering crop into biodiesel, even though the canola industry is counting on biodiesel production worldwide to account for 2.5 million tonnes, or 17 percent of its targeted 15-million-tonne harvest by 2015.

Canadian canola already enjoys strong overall demand, with the Chinese appetite for vegetable oil underpinning oilseeds and keeping futures prices near two-year highs. Canola also received the green light this year for its oil to count toward the United States’ much-heftier biodiesel mandate.

But the chance to ease canola’s dependence on sometimes unpredictable export markets is appealing, with crushers like Cargill, Richardson International, Louis Dreyfus and Bunge Ltd expanding domestic capacity.

“You can never have enough demand and this is different demand, it brings in a different buyer,” said Ward Toma, general manager of the Alberta Canola Producers.

Some biodiesel plants are able to use a variety of feedstocks, like animals fats (tallow), soybeans, used oil and canola.

That makes it important to the canola industry that plants build near Western Canada’s canola fields, said Dave Hickling, vice-president of utilization for the Canola Council of Canada.

Canola oil’s premium to competing feedstocks has limited interest in converting it to biodiesel, although canola oil is touted for its performance in cold weather.

Despite the slow start, the Canadian Renewable Fuels Association expects canola-based biodiesel production to increase as crop production grows and the seed produces higher oil content.

It projects Canada will ultimately produce 270 million liters of biodiesel out of 575,000 tonnes of canola seed. That would be about 4 percent of targeted crop production by 2015.

Even that optimistic target, however, lags use of U.S. corn and soybeans for biofuels. Nearly one-third of the 2009 U.S. corn crop went into ethanol production and about 10 percent of U.S. soyoil became biodiesel.

Regardless of the goal, canola produces little biodiesel right now.

“I think the government is very sensitive to that issue (of low biodiesel production from canola) and we certainly have an expectation that we can explore ways to ensure that additional capacity is built out,” said Gordon Quaiattini, president of the Renewable Fuels Association. “The more we can expand the use of canola domestically is certainly critical for us.”

More government funds may become available if money is left over from projects that have been selected, said Paul Duchesne, spokesman for Canada’s natural resources department.

But Ken Ball, commodities futures and options broker for Union Securities in Winnipeg, said the development of a Canadian biodiesel industry isn’t critical for canola.

The Canadian crushing industry is expanding due to forecasts for strong overall canola demand -- including from the developing U.S. biodiesel industry, Ball said.

“It probably doesn’t really matter whether the demand is coming from a crushing plant that’s going to export to the U.S.” or one that crushes it for Canadian biodiesel, Ball said. “It all has to be crushed one way or the other.”

($1=$1.00 Canadian)

Editing by David Gregorio