An interesting new dynamic has been forming in the US domestic soybean crush industry on the back of growing demand for renewable diesel, which has pushed prices for soybean oil sharply higher in recent months. Soybean oil is the largest source of vegetable oil in the US and is widely used internationally. US annual production rates reached 11.5 million tons per year in the latest 2021/2022 marketing year, double the levels seen in the early 1990s, according to the latest data from the US Department of Agriculture.

Traditional oil refiners have turned their attention to the production of renewable diesel, in part to meet tougher environmental mandates and boost profitability of their operations that have been faltering due to a softening in demand for fossil fuel based refined products.

Soybean crushing is the process of transforming whole soybeans into both soybean meal and soybean oil. Soybean meal is used as a high-protein animal feed whilst soybean oil is a vegetable oil used in various industrial applications such as renewable diesel. The global demand for soybean oil has pushed prices close to record highs in recent months. The front-month Soybean Oil futures price, measured on a 20-day rolling average basis, reached over 62 cents per pound at the end of August 2021, double the level seen 12 months earlier.

These market dynamics have changed the interplay between meal and oil prices, with US crushers increasingly crushing soybeans to meet robust soybean oil demand.

Chart 1: Soybean oil futures prices double in 12 months

Strong soybean oil demand pushes oil crush spreads sharply higher

The front-month Soybean Oil futures price has reached its highest level in over eight years. Because soybean oil and meal prices are co-outputs of the soybean crush, many market participants will typically evaluate soybean oil prices relative to soybean meal prices.

Whilst soybean oil prices have nearly doubled over the latest 12-month period to end September 2021, meal prices have risen by only 23% year on year. This has had a positive impact on the soybean oil’s share of the soybean crush margin.

Soybean Oil futures are priced in cents per pound whilst soybean meal futures are priced in dollars per ton, making a direct comparison between the two quoted prices less-than-intuitive. To overcome this, the industry will typically evaluate Soybean Oil futures as a percentage of the crush spread. This represents the margin for a soybean crusher so that a direct comparison can be made on a revenue basis between selling soybean meal and oil.

Chart 2: Soybean Oil futures rises to just under 50% of the soybean crush spread

When a bushel of soybeans weighing 60 pounds is crushed, the conventional result is 11 pounds of soybean oil, 44 pounds of 48 percent protein soybean meal, four pounds of hulls, and one pound of waste. To compare soybean oil with meal prices, the common method is to convert the Soybean Oil futures price per 11 pounds and convert the soybean meal futures price to the price per 44 pounds which reflect the outputs from crushing one bushel of soybeans.1

At the end of September 2021, the October 2021 Soybean Oil futures settled at $58.79 per hundredweight and October 2021 soybean meal futures settled at $326.20 per ton. These prices indicate that the margin for crushing one bushel of soybeans in October will be ($58.79*0.11) + ($326.20*0.022) = $13.64. A market participant evaluating soybean oil prices compared to meal prices would say that the oil share of the crush margin is ($58.79*0.11)/13.64 = 47.40% With soybean oil prices at current levels, crushers are incentivized to crush for oil due to the relative market share compared to soybean meal. This can be partly attributed to the demand for soybean oil for use.

US carbon intensity reduction targets driving demand for alternative feedstocks

In the US, the Low Carbon Fuel Standard (LCFS) is one of the centre pieces for US greenhouse gas targets for transportation fuels. The policy legislates for the reduction in the carbon intensity (CI) of road transport fuels compared to conventional petroleum-based fuels such as gasoline and diesel. When producers are making decisions around feedstock choice for products like renewable diesel they will look at a range of factors including feedstock availability and the CI of given feedstocks before deciding on which feedstock to use. In simple terms the more sustainable the feedstock as defined under the LCFS the greater the level of the credit that will be assigned to it.

First generation biofuels such as those derived from virgin soybean oil typically have a higher carbon intensity compared to other more sustainable feedstocks such as animal fats or waste oil. Securing sufficient volumes of more sustainable feedstocks, however, can be a challenge. Under the California LCFS, the goal is to reduce the CI of transportation fuels by at least 20% by 2030.2 For this reason, soy-based biofuels have become a popular choice, creating some pressures on the feedstock supply.

Total US production capacity is expected to reach 11.6 million tons per year by 2026, an increase of around nine million tons from the 2021 levels. In the US, several new plants are set to come online in the next few years. Phillips 66, for example, announced in August 20203 that they would begin producing as much as 800 million gallons per year or 2.55 million tons (including existing production) of renewable diesel by 2024 at its California plant. Several different feedstocks will be used but soybean oil will play a key role.

Chart 3: European supply of HVO continues to increase through 2030

European producers boost renewable fuels capacity

Regulations are a key driver of feedstock choice for the bio refiners and the hydrotreated vegetable oil (HVO) producers across the EU. HVO is the equivalent product to renewable diesel manufactured in the US. Europe is currently at the centre of the renewable diesel market, but the US is making huge strides to boost production.

European HVO production is expected to reach around four million tons per year in 2021, which is larger than the current production volume in the US market. However, output is expected to lag behind growth in the US, where several large refiners having announced new capacity additions, over the next few years. Despite this, total European production is expected to reach around 10 million tons per year by 2030.

Chart 4: US renewable diesel supply growth remains robust

The growth of renewable diesel or HVO is expected to play a central role in the global battle against climate change. However, the race to secure appropriate lower carbon feedstocks is likely to intensify amongst the producers which will make the management of price risk even more important in the future. There are existing price risk management tools such as futures and options in soybean oil and other biofuel inputs, but more markets are expected to develop as the many of the world’s leading economies nears their end-goal of net zero carbon emissions by 2050.

References

  1. The Soybean Oil futures price can be interpreted as the price in dollars per hundredweight, so multiplying this price by 0.11 (11 / 100) converts the price of Soybean Oil futures to the price per 11 pounds. The Soybean Meal futures price is the price per ton (2,000 pounds). Multiplying this price by 0.022 (44 / 2,000) converts the Soybean Meal futures price to the price per 44 pounds.
  2. CARB amends LCFS for wider impact https://ww2.arb.ca.gov/news/carb-amends-low-carbon-fuel-standard-wider-impact
  3. August 2020 – P66 announces plan for U.S bio refinery https://www.phillips66.com/newsroom/rodeo-renewed

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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