Consultant report

Cross-price elasticities for oils and fats in the U.S. and the EU

Market linkages between oils and fats are essential for understanding the indirect impacts of biodiesel and renewable diesel production. This study was commissioned by ICCT and performed by Fabio Santeramo at the University of Foggia in Italy. It includes an overview of vegetable oil and animal fat markets in the U.S. and EU and a review of previous studies estimating price elasticities for these commodities. A new analysis on price elasticities is then presented using historical data for oil and fat commodities that are commonly used as feedstocks in biodiesel and renewable diesel production (soy oil, palm oil, canola/rapeseed oil, sunflower oil, inedible tallow, and other animal fats). Own-price and cross-price elasticities of supply are assessed with a two-Stage Least Squares (2SLS) regression analysis using past production shocks and commodity consumption as instrumental variables. An own-price elasticity of supply indicates the change in supply of a commodity in response to a change in its own price. A cross-price elasticity of supply reflects the change in supply of one commodity in response to a change in the price of another; as an example, one might expect the supply of oranges to increase if there is a rise in the price of apples, as consumers switch from eating expensive apples to cheaper oranges.

The analysis produces several interesting results. An increase in the price of canola oil in the U.S. leads to an increase in canola oil supply, and the same is true for palm oil. A soy oil price increase leads to an increase in soy oil supply, but to a lesser extent, meaning that soy oil supply is less sensitive to price compared to other oils. Importantly, an increase in the price of soy oil is associated with an increase in the supply of palm oil in the U.S. In the EU, an increase in rapeseed (canola) oil price leads to an increase in the supply of rapeseed oil, palm oil, and sunflower oil, indicating that the markets of these vegetable oils are closely linked.

Staff contact: Stephanie Searle

Alternative fuels