Analyst Insight: What could happen if the UK lost RED II recognition?

• UK feed wheat futures (Nov-24) closed at £199.45/t yesterday, up £1.05/t from Tuesday’s close. The May-25 contract gained £1.10/t over the same period, to close at £207.50/t.
• IKAR increased its Russian wheat crop estimate to 82.0 Mt, from 81.5 Mt. Meanwhile, Germany’s association of farm cooperatives put its latest German wheat crop forecast at 20.34 Mt. This is 5.5% down on the year due to lower planted area, but little changed from the previous estimate in May of 20.31 Mt.
• Paris rapeseed futures (Nov-24) closed at €474.75/t yesterday, up €4.50/t from Tuesday’s close.
• Unfavourable weather conditions for key growing areas in Canada supported gains in rapeseed futures. In addition, there were estimates that export prices for 2024 Ukrainian rapeseed will rise in the autumn from the First Ukrainian Agricultural Cooperative. The cooperative views that markets are currently lower due to a technical correction as opposed to a fundamental change.  
• As US markets were closed yesterday for a public holiday (Juneteenth), this subdued market movements. While abnormally warm weather remains over key maize and soyabean growing areas in the US, rain has been forecasted, which may help to alleviate concerns.

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Presently, under the Renewable Energy Directive (RED II), UK-grown wheat is one of many biofuel feedstocks which can be used to supply biofuel into the EU. Biofuel production in the UK predominantly occurs at the UK’s two main bioethanol plants Ensus and Vivergo, both situated along the northeastern coastline in England, where domestically produced wheat and imported maize are used for biofuel production.

In June 2023, the European Commission announced that it would no longer recognise the UK’s national accreditation body which assesses the assurance schemes (e.g. TASCC (AIC), RTA, SQC) which assure growers in the UK so they can supply wheat for biofuel production. While assurance schemes remain able to assure growers for RED II access, the European Commission is expected to announce how the recognition will be implemented by 01 January 2025. 

Further to this, there is a requirement to ensure that UK greenhouse gas emission data on a NUTS 2 regional basis is approved prior to harvest 2024 to allow this year’s harvest to be used in biofuel production. Presently, the reclassified NUTS 2 codes have been submitted to the European Commission for recognition which is understood to be in process.

There is also the implementation of the EU Union Database for Biofuels to consider. This requires all feedstocks used in biofuel production to be traceable and logged from November 2024. If either of the above are not resolved, then domestically produced feedstocks would not be able to enter the biofuel market under RED II.

Considerable work has been undertaken and resource invested by assurance schemes and industry so that UK growers currently remain able to supply relevant biofuel feedstock under RED II, a market which offers significant support to the UK arable sector and wider agricultural industry.

While domestic wheat prices are, and will continue to be, influenced significantly by the global wheat markets and supply balance, the loss of access for UK-grown wheat to be used as a biofuel feedstock under RED II is likely to weigh on domestic cash prices. This is evidently a longer-term view away from the season specific issues that we see from lower planting for harvest ‘24.

The potential transition from usually trading at an import parity to export parity in response to greater domestic feed wheat availability would likely lead to a depreciation in cash values for export competitiveness, which could pressure net margins on feed wheat production. Pressure on the price of feed wheat may ripple throughout the domestic feed cereals market, where feed barley and feed oats may also lose value to maintain market share in the livestock feed ration.

Take a look at our larger piece of analysis on what could happen if the UK lost red II recognition.

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