Paradigm Shifts: Can We Meet the Challenge?
Updated: Jun 21, 2022
The volume of soybean oil to come from a boom in crush projects under development and expansion is dwarfed by the expected demand from biobased diesel production capacity.
How much soybean oil can we produce and how fast can we produce it? The answer to those questions will have ramifications on the market for years to come. Not only do we live in a time of turbulent and uncertain times, but we also live in very exciting times. As announcements for new renewable diesel projects begin to taper off, notifications of new soybean-crushing facilities seemingly occur on a weekly basis. This requires a fight for acres, manufacturing capacity and feedstock. In the end, the market will decide who wins and loses.
U.S. farmers are growing more beans, but is it enough? According to the U.S. Department of Agriculture, soybean farmers intend on planting 91 million acres in 2022, which would be a record and an increase of 4.4 percent over 2021. Biodiesel and renewable diesel producers have a wide choice of feedstocks to choose from including all types of animal fats, waste greases and virgin oils. Despite having a higher carbon-intensity (CI) score than other oils and fats, soybean oil for biofuel use is very important because of its abundance—roughly 26 billion pounds in 2021, or 3.5 billion gallons. So as the demand for oil grows and the price increases, one would expect that processors would produce more of it. In fact, in order to get more soybean oil into the market, more soybeans need to be produced, fewer exported, and more processing capacity must be built. And that is exactly what is happening. Farmers will not grow more soybeans than corn unless it is profitable to do so. Exporters will not export as many soybeans if the domestic market is demanding them. Processors will not build additional capacity unless the crush margins are attractive.
Crush margins—the difference between the cost of soybeans and the value of the products—are actually quite good for nearby months and projected into the future. Based on July Chicago Board of Trade prices of $17 for soybeans, 80 cents per pound soybean oil and $450 soybean-meal values, both farmers and processors have the potential to make nice profits. Some might call this new pricing scenario a paradigm shift. Whatever it is called, the fact that soybean oil is driving market expansion has never happened before. Soybean oil, which contributes to 20 percent of the product volume in a crush plant, is driving new capacity because it is nearly 50 percent of the value of the total soybean. Seventeen-dollar soybean prices, nearly a record high, are driving farmers to plant more acres. The upward trajectory in planted soybean acres has been occurring for more than two decades, with some states nearly quadrupling production since the year 2000.
Farmers continue to produce more soybeans, but can the production of soybean oil keep up with the insatiable demand from the biofuel industry? There are currently eight or more new U.S. soybean processing plants that have been announced, plus numerous expansions at existing crushing plants that are underway but not publicly disclosed. The crush-plant projects that have been announced will yield an estimated 400 million gallons (3 billion pounds) of additional soybean oil annually to the market in the next two to three years, but will that be enough to meet the demand without adversely affecting the market? Keep in mind that soybeans yield approximately 20 percent oil and 75 percent meal, so there will be a significant amount of high-protein soybean meal entering the market in the next few years. Four-hundred-million gallons of soybean oil sounds like a significant amount, and it will certainly be more than that with existing plant expansions, but from a macroeconomic view, it is a drop in the bucket. Soybean-oil futures recently reached a record 90 cents per pound, yet its use for biofuels shows no slowing down.
Soybean oil used for biofuel, relative to the amount produced, has eclipsed the 40-percent threshold for the first time ever. In other words, 41 percent of all soybean oil produced goes toward biofuel use, and that percentage is increasing. The following chart shows the amount of soybean oil produced annually, the amount used for biofuel, and the percentage of annual production used for biofuel. Note there are two scales on the chart—million pounds and percentage of soybean oil used for biofuel production.
Why so much attention on soybean oil? On average, it comprises more than 50 percent of the feedstock blend used to make biobased diesel fuel. Soybean oil has averaged 55 percent of the feedstock blend over time, except when it spiked to 70 percent during the pandemic. Combined, yellow grease, distillers corn oil, canola oil and tallow do not equate to the amount of soybean oil used for biofuel.
The increase in renewable diesel and sustainable aviation fuel production highlights the critical issue of soybean-oil supply and the ability of the market to adapt. In the next couple of years, it is possible that 2 billion gallons of renewable diesel production will come online—this means another 15 billion pounds of feedstock will need to feed these plants. Even if only half those plants are completed, this is still more soybean oil than is projected to be added in the next few years. Without a doubt, one of three things will happen: Innovative crops will be commercialized with higher oil yields; substantially more acres will be devoted to soybeans and/or canola crops; or renewable diesel capacity expectations will need to be curtailed to more realistic levels. Did I mention this would be exciting?
Author: Pete Moss
President, Frazier, Barnes & Associates