Increased demand for soybean oil in the US is fueling an important shift in the industry from “crushing for meal” to “crushing for oil”.
In our interview with Mac Marshall, we explore how US producers and crushers adapt to the shift and how this impacts renewable diesel production and margins.
What is driving US soybean crush margins?
To understand crush margins, we first need to fundamentally understand the components of soybeans.
Now, when crushing beans, this results in about 79% meal and 19% oil production, so on a volume basis, meal production is about four times higher than oil.
Historically, the value has been borne by the meal output after crush. Over a long-term basis, meal accounts for about two-thirds of the value for soybean crushing and oil is about one-third. However, in the last two years, we’ve seen an absolute fundamental paradigm shift – in that the market has increasingly realized the value of soybean oil, its diversity, and its applications, not just in traditional food and industrial uses but in emerging biofuel space.
So, how important is soybean oil in the price relationship that determines crush margins today?
Today, that traditional one-third share of value attributed to soybean oil is much closer to 45-48 percent.
This means that meal no longer carries most of the weight or makes up for most of the value, as it has in the past. Both products are, more or less, on equal footing in terms of value contribution to soybean crushers.
Renewable accreditation for soybean oil as a feedstock in the US has meant an increase in domestic demand. How are exports being impacted?
Firstly, we need to look at the California market to understand all the nuances of the question.
The California market, in recent years, has established targets for decarbonization. Right now, the target is to decarbonize the California economy by 20 percent by the end of the decade or by 2030. And one of the pathways that California is looking at in order to achieve its decarbonization targets is through increased use of cleaner-burning fuels throughout the whole life cycle. And one of those is renewable diesel.
Renewable diesel is a drop-in fuel chemically equivalent to petroleum diesel, except that because it’s produced from plant-based sources, including soybean oil, the emissions over the life cycle of producing it are significantly less than traditional petroleum-based diesel.
California’s established a credit system that allows lenders and refiners to receive credit for utilizing bio-based feedstock in the production of renewable diesel.
This has led to increased forward-looking demand in the market of California for renewable diesel, but perhaps more importantly, it’s led to waves of private sector investment to increase crushing capacity in the United States and to increase the volume of soybean oil available for all its diversified applications. And that’s a critical d-bottlenecking that has to happen between bringing the soybeans off the field, of course, that our farmers are planting and cultivating year after year actually to start to place them into that end market, and not just in the energy market but, of course, in the food and other industrial spaces as well.
Biodiesel margins for producers using soybean oil have been trending upward for most of the year. Will the trend continue?
That is very hard to say. In any commodity market, you have trends where prices are going up and where prices are going down, and they’re never driven by one bespoke factor alone.
If we look at oil prices on the whole and go back to the first quarter of 2022, just after the Russian invasion of Ukraine, we see a significant spike in vegetable oil and commodity prices across the board. This is to be explained by a loss of availability out of a key production corridor, added to higher fertilizer prices and against the backdrop of production disruptions in many oilseed-producing countries worldwide.
Because there’s such a confluence of factors that may be at play, it’s hard to predict margin trends in the future, but overall, we’ve seen prices come down over the last couple of months of 2022 compared to the immediate post-war spikes. It’ll be interesting to continue closely watching the trends in the next few months.
What are the challenges facing US soy oil production in the 2022-23 season?
Our harvest in the US is almost complete. So far, we have produced a crop of over 118 million tonnes: our fourth largest on record. I bring this up because this happened despite the drought pressures across the country, so it was great to overcome that and produce a very large volume. After all, the output depends on what happens in the fields, and I think this year was absolutely a success considering the weather-borne headwinds.
Crushing utilization is running at a high capacity rate. We see crushers extract more oil from each bushel they produce. Compared to a couple of years ago, we’re up about three to four percent on oil extraction rates. So as we’re waiting for this incremental crush capacity, existing crushing facilities are working as hard as they can to extract more oil and continue to meet this burgeoning demand from several sectors.
In short, I don’t have concerns about production capacity in the near term. We’ve had a good crop and run rates and are poised for additional future expansion.
