The Explosion in Demand for Soybean Oil

 

Have you heard about the anticipated leap in renewable diesel demand? For grain farmers, this is a potential game-changer, as the energy market looks for a significant increase in feedstock (most often soybean oil) to fuel the huge expansion in the renewable diesel market. Are we looking at a permanent price increase for soybeans to meet that continued demand? And does this sentiment remind you, at all, of the ethanol boom? Let’s discuss the sustainability of this increase in demand and what it potentially means to your pocketbook. As with any market opportunity that comes your way, pay attention to what the real possibilities are, the potential risks you face, and strategies to capitalize on the opportunity with an eye to managing risk.

 

Biodiesel Oil: Fueling the West Coast’s Demand for Lower Emission Energy

As reported in a variety of publications, the U.S. Energy Information Administration (EIA) announced in February that renewable diesel could more than double through 2025. (Renewable diesel is derived from renewable oil sources such as animal fat or corn oil, most often sourced from soybean oil.) These expanded capacity estimates are based on investments in eight new renewable diesel refineries that began production in 2022 and early 2023. EIA estimates could even be an understatement of true anticipated demand. Progressive Farmer cites 17 different new or expanding facilities in an article on November 30, 2022.

This expansion stems from two sources of government intervention. First, aggressive emission reduction targets at the national and state levels (especially in California) are driving the desire to find clean energy alternatives to diesel fuel. At the same time, the Inflation Reduction Act of 2022 extends the biomass-based diesel tax credits throughout 2024.

 

Renewable Diesel vs. Biodiesel: What’s the Difference?

Unlike biodiesel, renewable diesel is chemically equivalent to petroleum diesel, while generating about 80% fewer greenhouse emissions. Renewable and petroleum diesel can be blended together at any percent (even at 100% renewable diesel) with no significant changes in engine performance. Renewable diesel can also be transported in petroleum diesel pipelines. In contrast, biodiesel must be blended only from 2% to 20% with petroleum diesel.

(Source: U.S. Energy Information Administration)

 

New Demand in Soybean Oil: Likely Big Impact on U.S. Crop Mix and Price

Industry experts consistently project a significant increase in demand for soybean feedstock to supply renewable energy refineries. For instance, one Progressive Farmer article cites an additional need for 450 million bushels of soybeans over the next several years, while a Farm Progress article cites a projected 600 million increase over 2025/2026. The variability in demand estimates can be attributed to factors such as how quickly production can ramp up and how much demand will actually surge.

Where will that come from? Per the April WASDE numbers, the 2022/2023 U.S. ending stock number for soybeans is 210 million bushels, which is about one half to one third of the new anticipated demand. Meeting this demand in the U.S. will require significant new acreage devoted to soybeans. Consider the incremental 600 million in demand cited by Ed Usset in the previously referenced Farm Progress article. He estimates the U.S. farmer will produce 53 bushels/acre, and thus would require a conservative 11.3 million of additional acres needed to meet that demand. Per analysis here at TFM (Have Planted Crop Acres Peaked in the U.S.?, May 2023), the U.S. has maxed out arable farmland and is instead facing a retraction in acres over the next 20 years. Rather than expanding into new acres, U.S. farmers will instead need to replace other crops—notably corn, wheat, and cotton—resulting in a shift in acreage to soybeans.

It comes as no surprise, then, that industry experts are anticipating a bump in soybean production and prices for both soybean and corn futures. DTN Lead Analyst Todd Hultman says in Progressive Farmer, “It’s as bullish a change in demand as we’ve seen since the ethanol boom, and it might be even bigger. It’s a net positive for farmers overall.” In terms of prices, he sees the potential for a jump in support from $8 to $12 for soybeans, and $3 to $5 for corn as corn acreage is gobbled up by increased soybean planting.

 

Thinking about Implications: How Will Market Players React?

The increase in demand is great news for soybean and corn farmers. However, in a free market, any voids or market advantages are inevitably filled by individuals, companies, or countries that want to capitalize on opportunity. We’ve already acknowledged the U.S. is going to be close to maxing out soybean production capacity. Who will capitalize on the ensuing excess opportunity, and will those changes support or decay prices over the long term?

 

How will Brazil react? 

 

Frankly, the new market expansion will likely accelerate the dominant role of Brazil as a primary supplier of soybeans around the world:

• Even prior to this anticipated boom, Brazil has outpaced the U.S. in soybean production. According to Brazil’s Ministry of Agriculture, Livestock and Supply in 2021, “Brazilian soybean acreage is expected to grow 27% in the next 10 years, reaching 116 million acres.” (FarmDoc Daily, July 12, 2021).

• The advantages of Brazil’s real to the U.S. dollar offer every incentive for Brazil to maintain and expand market dominance. From the same FarmDoc Daily article cited above, “Currencies have played an important role in soybean competitiveness in recent years, as the strength of the U.S. dollar has resulted in higher margins in South America. The Brazilian soybean 2020/2021 crop, for example, produced the highest profits in the nation’s history because of low domestic supplies and the depreciation of the Brazilian real relative to the U.S. dollar.”

• Brazil has the acreage to keep expanding. In 2018, Global Ag Investing estimated that Brazil has 600 million acres of arable land. In contrast, Brazil planted 95 million acres in the 2020/2021 season per FarmDoc Daily, March 30, 2021.

All of these factors combined point to increasing expansion in soybeans to meet global demand and a resulting downward pressure on price in the long term. Thus, the bump in prices we expect to see may reduce over time, much like we saw with the ethanol bump.

 

How will China react?

In the meantime, China has already been busily preparing to weather any market shocks through their continued heavy investment into Brazilian agriculture infrastructure. Their investment allows them to be first in line for soybeans and to limit reliance on U.S. soybean production. Expect continued investment as China continues their strategy to secure their soybean needs.

 

 

 

 

How will Big Ag react?

The ag industry has already shown that it’s willing to do what it can to capitalize on the renewable diesel expansion.

• As mentioned, at least 17 new refineries/crush facilities are being built or expanded – including expansion by Cargill and Ag Processing Inc. (API). There are also fears that big facilities will drive smaller facilities (perhaps closer to you) out of business, potentially influencing local basis.

• There is speculation that the soybean seed producers are looking to develop soybeans that will deliver higher oil output without an impact on protein quality for soymeal. This may lead to a greater demand for specific soybeans, and may affect margin as seed producers charge more for more productive seeds.

• Soymeal production will flourish as soybean oil leads the crush, leading to lower prices on soymeal in the U.S. and greater export capabilities. This will benefit soymeal consumers, such as beef and dairy farmers.

 

How will YOU react?

When opportunities like this arise, the most natural thing for anyone to do is to ignore the risk and the planning necessary to truly capitalize on the opportunity. Here are just a few things for you to consider as this market expands:

• What will your crop mix be over time? How nimble can your operation be in a market that may not be as stable as you’ve known?

• How much should you expand and/or reinvest to accommodate bigger demands? Should you get more storage? More land? More equipment? And if prices fall off eventually like they did with ethanol, have you built a cost structure that can handle changes in price?

• Are there basis advantages you should consider? For instance, will it be more lucrative to ship your soybeans to a crushing facility rather than to your local co-op? Will some areas of the country simply have far better basis because of their proximity to crushing facilities, and does it change your planting mix strategy?

• You can never count on prices to react as you think they should. Are you prepared to manage market risk in a market that may not act in quite the ways you expect as it adjusts a new supply and demand curve?

 

We’re Here to Help

 

The world as we know it is changing, whether you take action or not. With the right planning, mindset, and eye toward capitalizing on opportunity while managing risk, you will take the steps necessary to help ensure that you manage your future. At TFM, we’ve been around for almost 40 years through market disruptions, both good and bad. Through it all, we’re proud in our work to help our clients prepare and prosper, no matter what the markets may bring.

 

If you have questions on how we can help, reach out to one of our consultants at

800.334.9779 or visit us at TotalFarmMarketing.com.

 

 

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