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Biden push to cut emissions likely to pressure US soybean oil supply in coming years

Highlights

Biofuel consumption of US soybean oil seen rising

Biodiesel production capacity to reach 5 billion gal/year by 2024

Soybean oil prices bullish on tight supplies, rising biofuel demand

  • Author
  • Asim Anand
  • Editor
  • Richard Rubin
  • Commodity
  • Agriculture Energy Transition
  • Tags
  • United States
  • Topic
  • Energy Transition Environment and Sustainability US Policy

US President Joe Biden's commitment to significantly reduce carbon emissions is likely to pressure US soybean oil supply in coming years as biodiesel production scales up in tune with rising demand for the alternative fuel.

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On the eve of Earth Day, April 22, Biden set a target to reduce US greenhouse gas emissions 50% by 2030. This announcement has boosted the biofuels sector, but also stoked concerns about tight soybean oil supply in coming years.

Demand for soybean oil from the US biofuels industry has been rising markedly since 2020 as crushers and vegetable oil-based biofuel processors have become more confident about the government's commitment towards energy transition. Out of total US soybean oil production of 25.7 billion lb in marketing year 2021-22 (September-August), the country's biofuels sector is projected to consume 11.5 billion lb, the Department of Agriculture said Aug. 12 in its monthly supply and demand report. To put this figure in perspective, in MY 2020-21, the US biofuel sector is estimated to use 9.1 billion lb out of total soybean oil output of 25.2 billion lb, the USDA data showed.

According to average analysts estimates, US biodiesel production in 2021 is forecast at 750 million gallons, up 36% year on year. And for 2022, the output is projected around 2 billion gallons, almost four times the levels seen in 2020. With each passing year, the rate of biodiesel production is slated to rise significantly. According to S&P Global Platts Analytics, US biodiesel production is forecast to reach 4.081 billion gallons annually by 2025, a rise of 760% from 2020 levels.

Anticipating biofuel demand surge, major agricultural trading and food processing companies have already started investing heavily in US-based soybean crushing plants: Archer-Daniels-Midland is investing $350 million in a new North Dakota crushing plant, with a daily capacity of 150,000 barrels, and Cargill is beefing up its soybean crushing plants across the Midwest by investing $475 million into them.

Supply concerns

Analysts expect a very tight soybean oil supply scenario in coming years amid surging demand for vegetable oil-based biodiesel.

"I think the renewable diesel growth in the US will put a strain on available supplies for soybean oil," said Terry Reilly, senior commodity analyst at Futures International.

In the US, almost half of domestic beans output is generally processed into soybean meal and oil. And since nearly 70% of US soybean oil is typically used to produce biodiesel, the projection of nearly 2 billion gallons of vegetable-oil based biofuel by 2022 is likely to put a lot of pressure on US domestic soybean oil supply.

Over the past five years, soybean oil supply has increased by 1.1 million mt, while domestic industrial use has soared by 2.1 million mt, roughly twice the supply increase, according to Pete Meyer, chief grain and oilseed analyst at Platts Analytics. US soybean supply has been erratic by comparison, he said.

The US is going through a "domestication" of soybean demand, led by renewable diesel producers, reducing export potential by anywhere between 100 million and 200 million bushels, Meyer said.

"The bigger impact in our opinion will be on the US soybean oil exports, which we expect to shrink by almost half of the level seen just two years ago," he said.

Platts Analytics sees US soybean oil exports at 1.35 billion lb in MY 2021-22, compared with 2.8 billion lb in MY 2019-20.

Price rally

With tight supplies expected in coming years, US soybean oil futures prices have rallied to new peaks in 2021. For example, the July Chicago Board of Trade soybean oil contract June 8 settled at 72.08 cents/lb, an all-time high level.

Taking a cue from high futures prices, the USDA has also raised its price projection for the vegetable oil. The season-average US soybean oil price for MY 2021-22 is forecast at 65 cents/lb, compared with 57.50 cents/lb and 29.65 cents/lb in MY 2020-21 and 2019-20, respectively, the USDA said.

According to analysts, soybean oil demand and prices are expected to rise further in 2022 as vegetable-oil-based biodiesel demand soar amid domestic biofuel capacity expansion.

The EIA expects US renewable diesel production capacity to rise to nearly 2 billion gal/year in 2022, up 300% from 2020. And by 2024, the EIA forecast capacity will swell to 5.1 billion gal/year.

However, if the soybean oil price continues to soar, as it has been since late 2020, the margins of biofuel processors will likely shrink simultaneously, which might become a stumbling block for the US biodiesel industry.