After a number of months in which petroleum prices were so soft that the edible oil markets all but ignored them, on November 23, 2016 the U.S. Environmental Protection Agency (EPA) set the renewable volume obligation (RVO) that commits the petroleum industry to minimums for biodiesel (specifically “Biomass-based Diesel”) usage at 2.12 billion gallons.1 This represents a 6 percent increase over 2017 and is higher than the industry expected. The primary feedstock for producing biodiesel is soybean oil. Other feedstocks include other vegetable oils, animal fat and corn oil from ethanol production.
In reaction to the mandated minimum biodiesel volume, on December 9 the United States Department of Agriculture (USDA) increased its projection of soybean oil usage in biodiesel production for the 2016-17 marketing year by 250 million pounds from its November World Agricultural Supply Demand Estimate (WASDE) report. The December 9 WASDE report further projected a crude soybean oil price range of $0.3450 to $0.3750 per pound. This is 2 cents per pound higher than the November projection and 4.64 to 7.64 cents higher than the price experienced in the 2015-16 marketing year which ended on September 30.2
Note the price reaction of January soybean oil futures since November 23.
Soybean Oil Futures3
The long green line in late November depicts the immediate reaction to the EPA announcement. After gradually drifting lower from late October to the low to mid 34 cent range, prices have since shot up above 37 cents.
Recall from previous Market Updates that we have been observing a gradual tightening of soybean oil stocks for several consecutive WASDE reports. The December 9 WASDE report projected soybean oil stocks on September 30, 2017 at a very tight 1,552 million pounds. This is a mere 25-day supply. We routinely tolerate a 30 to 40-day supply at year’s end, but a 25-day supply will be logistically challenging.
A remedy for soybean oil stocks’ tightness is to increase the domestic crush of soybeans; the supply of soybeans is more than adequate to do that. The challenge is that global soybean meal demand is not adequate to absorb both the crush from the latest vast U.S. soybean crop and the large 2016 and impending 2017 Argentine soybean crush. Argentina has a differential export tax policy that taxes exports of raw soybeans at a higher rate than exports of both soybean meal and soybean oil. Effectively, this is a subsidy for the Argentine soybean crushing industry, and it allows Argentine crushers to have an unfair advantage in competing with U.S. crushers for international soybean product demand.4 Consequently, we cannot expect to be rescued by a higher domestic crush, unless the Argentine crop experiences significant weather problems at the end of their growing and harvest seasons. In Argentina, most soybeans are harvested in February and March.
Last month’s Market Update concluded with the expectation that fully refined soybean oil is likely to trade at 40 to 45 cents per pound this year. Given the November increase in the biodiesel RVO and the December 9 WASDE report, we should modify expectations to the mid to upper 40 cent range for fully refined soybean oil. Since virtually all other vegetable oils base their prices off of soybean oil, expect other oils to experience a similar price increase. Generally, expect all vegetable oils to trade 5 to 10 cents per pound higher than last year.
1 “Final Renewable Fuel Standards for 2017, and the Biomass-Based Diesel Volume for 2018.” https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2017-and-biomass-based-diesel-volume. U.S. Environmental Protection Agency. December 2016.
2 “World Agricultural Supply and Demand Estimates.” http://www.usda.gov/oce/commodity/wasde/latest.pdf. United States Department of Agriculture. December 2016.
3 “Soybean Oils Futures Quotes.” http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/soybean-oil.html. CME Group. December 2016.
4 “Export Taxes on Agricultural Products: Recent History and Economic Modeling of Soybean Export Taxes in Argentina.” https://www.usitc.gov/publications/332/journals/export_taxes_model_soybeans.pdf. United States International Trade Commission. September 2007.