Vegetable oils: Supply stress and biofuel blending mandates drive demand for soybean oil

The major shifts in the vegetable oils market

The most prominent shift in the vegetable oils market emerges as countries that had previously exported in significant quantities are now having to reduce their shipments. The change may be due to geopolitical instabilities, extreme weather affecting crops, or political decisions aimed at controlling inflation.

As climate change becomes more tangible and periods of drought more frequent, major vegetable oil producers struggle to meet export and domestic demand, with yields being challenged and forecasts uncertain.

Following the war, access to Black Sea ports remains challenged (despite recent agreements), and Ukraine, one of the world’s largest exporters of sunflower oil, can now only play a smaller role in the trade game. Importers relying on its supply are having to adapt and look for different partners and solutions.

Thus, the uncertainty underlying production and shipments from one side translates into new challenges when it comes to securing domestic stocks for importing countries. As a result, prices are constantly fluctuating.

The crisis expands to all agricultural commodities, not just oils. A shortage in fertilizer, exported mainly from Russia and Ukraine, may also prompt farmers to look for substitutes for commodities such as corn and wheat with others that require less nourishment. In Canada and the US, for instance, more yields are being devoted to producing soybeans. With optimistic production forecasts, soybean oil may be a good candidate to alleviate the scarcity of other vegetable oils.

However, how much of this will be available for exports is yet unsure. The apparent trend for most countries is to ensure domestic stocks.

Vegetable oils: Global outlook and shifting trade routes  

Edible oils have historically traded at volatile prices. There was a sharp rise following the Covid-19 pandemic, and although prices have come down since, they’re still trending considerably higher compared to pre-pandemic levels. Rising demand and strain in supply will yet have a soaring effect on all prices. Meanwhile, pressure on countries to leverage biofuel feedstocks and comply with renewable mandates will keep demand high.

The forecasts

Palm, sunflower, rapeseed, and canola oil are commodities with scarce availability anywhere.

Canada, a major canola oil exporter, is expected to decrease its exports in the 2022-2023 season and dedicate more yields to domestic crushing.

According to Agriculture and Agri Food Canada’s report in June, the field crop area in the August 2022 to July 2023 season will see an expansion in wheat and durum, rising by 6% and 13%, respectively, while the canola area is expected to fall by 7%. After last summer’s challenging weather conditions, Canadian farmers are devoting less land to canola production for fear of drought and concerns around high fertilizer costs.

On the other side of the globe, the Indonesian government acted to thwart the country’s palm oil exports earlier this spring in order to curb rising food prices and ensure the country’s own supply. In April, it introduced a palm oil export ban. This was then lifted in May when the government began granting restricted permits to palm oil exporters.

Thus, importers have only been able to buy limited amounts of palm oil, used cooking oil (UCO) for waste-based biodiesel production, and waste-based products that are derivatives of palm oil. And as a result, at least for the first half of the year, Indonesia’s exports have been majorly disrupted.

At the same time, Brazil, which up until recent times has been the most prominent soybeans exporter to China, may struggle with its annual output as adverse weather conditions are expected to affect yields and curb the country’s production severely.

According to Fastmarkets Agriculture, Brazil has exported 10.4 million tonnes of soymeal and 1.3 million tonnes of soy oil in the first half of 2022, 46% and 65% higher year-on-year, respectively. However, the country’s 2021-2022 soybean output estimates were recently reduced by 0.2% compared to figures released in early June, the country’s food agency Conab said in its monthly crop estimates report.

It is likely that productivity will be further reduced by the lack of precipitations in the southern region and Mato Grosso do Sul; consequently, exports to China will decrease.

China, on the other hand, the world’s biggest vegetable oil importer, will have to respond to the crisis and figure out a way of securing its domestic stocks. It has historically imported large amounts of sunflower oil from Ukraine, but due to the current conflict in the region, it won’t be easy to import the same quantities.

Of late, the country has resourced to importing more soybeans for crushing into oil from Brazil.

But, if Brazil reduces its production, China will again be impacted.

Click here to access global vegetable oils trade data and forecasts

Increasing soybean oil domestic output  

Demand for soybean oil is on the rise, partly driven by low carbon emission mandates requiring more biofuels blending and partly by the need to make up for the scarce sunflower and other cooking oils.

As it stands, the US is increasing its soybean production.

According to the USDA reported acreage on June 30, soybean acres increased 1.3% to 35.7m hectares, while the corn area was down 3.7% at 36.4m hectares and wheat was up 0.8% at 19.1m hectares compared to the previous period in 2021.

Vegetable oils as feedstocks for biofuels: The case for soybean oil  

When it comes to biofuel blending, at least up until very recently, soybean oil has not enjoyed many regulatory favors. In California, for instance, although it is often used in the blending mix, soybean oil is given less value for Low Carbon Fuel Standard (LCFS) tax credits due to its higher Carbon Intensity (CI).

But producers are beginning to take steps to lower the present soybean oil CI scores as this would improve its value as a renewable diesel feedstock.

Supposing crops are successful and meet production forecasts, it will always be more difficult for governments to ignore new feedstock availability and not to legislate in favor of accredited recognition for soybean oil in biofuel blending. Until recently, concerns around devoting land to crop-based feedstocks have hindered higher blending percentages of these oils. Regulators have been more prone to endorse more sustainable waste-based blending. However, waste-based feedstocks are proving difficult to extract, and there are time pressures to reach net zero targets.

Given the pressures, it is likely that soybean oil will acquire more legislative support, and demand will continue to grow.

Price volatility: Favorable regulation will directly impact the feedstock cost  

Trading for soybean oil happens as part of soybean crush selling and buying. Soybean crush comprehends both soybean oil and meal. As it stands, the primary driver of crush margins is the soybean meal price.

Soybean oil prices have not traditionally driven high margins due to the relatively smaller percentage of the overall value of the products represented by soybean oil and the storability of the oil.

However, rising fuel demand is changing this.

For the first half of 2022, soybean oil profit margins have been increasing, reflecting a new trend.

If regulation supports soybean oil production and blending with tax credits, new pricing assessments will affect future contracts.

Volatility will still be a factor, as rising demand and legislative updates will continue to impact the feedstock cost.

To stay on top of prices and avoid the stark effects of volatility, buyers and importers must watch all vegetable oils market movements closely, assess markets at a local level, and be aware of all that can cause a change in trade flows and affect prices.

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