How soybean oil cost impacts biofuel production and profit margins

Fastmarkets' forecast of future output and prices

According to the Food and Agriculture Organization (FAO), about 70 percent of biodiesel in the world is produced from vegetable oils, with soybean oil being the second most widely used vegetable oil in the biodiesel industry.

The feedstock mix of a country’s biofuel industry depends on the dynamics between two main factors: domestic supply and national policies. Therefore, the feedstock mix of major global biodiesel producers varies according to local market conditions.

In the US and Brazil, which produce around 30 percent of the world’s biodiesel, soybean oil is the most used feedstock. In Europe, it is rapeseed oil, and in Southeastern Asia, palm oil is the primary feedstock.

Feedstock costs make up more than 85 percent of biodiesel operating costs, underscoring the importance of understanding the dynamics of the vegetable oil market to navigate the biomass-based diesel industry. The hike in soybean oil price from early June to late July led to negative margins in the Fastmarkets assessment of biodiesel and renewable diesel profitability in the US, with a more severe impact on the biodiesel industry that only managed to recover positive profits because of soaring energy prices that offset some of the high production costs.

Soybean oil pricing trends – what is driving volatility

In 2023, we have witnessed significant volatility in agricultural markets, including the vegetable oil sector.

On the supply side, factors contributing to this volatility include a crop failure in Argentina, the world’s largest exporter of soybean oil, as well as a combination of reduced acreage and adverse weather conditions affecting the current soybean crop in the United States.

On the demand side, concerns about a global economic slowdown and a stressed financial market have further exacerbated market volatility. As a result, soybean oil futures contracts in the Chicago Mercantile Exchange (CME) have seen price fluctuations ranging from a low of 46.20 US cents per pound to a high of 72.65 US cents per pound.

View relevant price data and forecasts by accessing our charts

During the first half of 2023, CME soybean oil futures averaged 56.52 US cents per pound. However, from June until the first week of September, the average increased to 62.94 cents per pound, reaching a high of 72.65 cents per pound following the United States Department of Agriculture’s (USDA’s) assessment that the 2023 US soybean planted area was four million acres below its 87.5-million-acre prediction in its Prospective Plantings report issued at the end of March.

The significant volatility is also evident in Fastmarkets’ assessments of RBD soybean oil prices in Central Illinois, where the year’s highest price is more than 50 percent above the lowest.

Soybean oil production

The crop condition rating assessments from the USDA suggest that a yield reduction is likely, given that the conditions categorized as “good to excellent” reached a five-year low in the latest Crop Progress report issued on September 5, which may support prices in the short term.

However, despite the expectations of tight supply and 2023-24 US ending stocks at the lower end of the historical range, the USDA did not revise its crush forecasts downward. The strong demand for protein meal and vegetable oils has driven crush margins into the upper end of the historical range, and there is little in vegetable oil’s fundamental outlook to suggest that this trend will reverse in the short term. However, farmers just started planting what analysts expect to be a record crop in South America. This could pressure the market, especially contracts with 2023 deliveries, which could drive additional backwardation in soybean oil futures.

In addition to driving the volatility, the increased demand for soybean oil for biofuel feedstock in the U.S. has substantially changed global trade flows, significantly reducing the country’s share of international trade. Additionally, the drought in Argentina, which has reduced domestic crushing volumes, has allowed Brazil to gain substantial market share. The United States has decreased its market share in global trade from 15 percent of total soybean oil exports in 2020 to two percent in the first seven months of 2023, while Brazil has surged from 13 percent to 44 percent during the same period.

Soybean oil pricing forecasts and possible margin outcomes for biofuel producers

Fastmarkets expects the return of trendline yields across South America to allow Argentina to recover its crushing volume to the historical average in 2024. This is because the transition from La Niña to El Niño historically supports growing conditions in southern growing areas of South America, which experienced a devastating drought in 2023, reducing more than 30 million tonnes of soybean production from early expectations in Argentina and southern Brazil.

With this scenario, even though the US will have a reduction of seven million tonnes compared to the previous crop due to drier and hotter-than-average temperatures in the Western Corn Belt (WCB), Fastmarkets expects that the 2022-23 supply from the largest soybean-producing countries will be 13 million tonnes above the volume of the previous season. This ensures a more comfortable global balance, supporting Fastmarkets’ forecast of lower prices across the oilseed complex.

In the 2023-24 season, Fastmarkets expects that more than 52 million tonnes will be added to the market by the largest producing countries, assuming normal growing conditions. The 18 percent increase in supply supports Fastmarkets’ projection for lower soybean oil futures, predicted to drop more than ten cents per pound from the October 2023 contract to the September 2024 contract, representing a 19 percent decrease.

With soybean oil futures trading below 50 cents per pound, biofuel producers can experience significant improvements in their margins since the main component of their production costs could be 15 percent below the average feedstock cost from January 2023 to the first week of September.

Profitability depends not only on costs but also on revenue. Therefore, fuel prices are crucial to biofuel producers’ financial results.

Fastmarkets’ prediction of renewable diesel (RD) revenue, including credits, in September is nine percent below the 2022 average, and yet not offsetting the savings for producers using soybean oil in October 2024.

As a result, RD margins for those using soybean oil as a feedstock in the last quarter of 2023 are projected to rise to about 129 percent of the average profitability during the first eight months of 2023.

While Fastmarkets’ forecasts point to a positive outlook for biomass-based diesel producers’ margins, it is vital to acknowledge the significant influence weather-related factors can have on these predictions.

Weather patterns are hard to predict. Despite indications of improved soybean production in South America, unforeseen weather events like droughts, floods, or temperature fluctuations can disrupt crop yields, driving additional volatility in soybean oil prices.

The biomass-based diesel industry’s profitability depends on the dynamics of supply and demand in the soybean oil market and the impact fluctuations in the fundamentals have on prices.

Biomass-based diesel producers should remain vigilant, monitor market trends, and prepare to adapt hedging and buying strategies as the industry evolves and feedstock fundamentals adjust. Staying informed and making data-driven decisions are essential to navigate the challenges and seize the opportunities presented by a market experiencing profound changes.

View our soybean oil production and renewable diesel margins forecast

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