Soaring demand for soy renewable diesel will change markets

New low-carbon fuel standards coming online in California and other states and approved and about to be enacted in Canada are creating such demand for soybean oil as a renewable diesel feedstock that it could soon be priced out of the export market altogether.

That’s the scenario laid out by veg oil analysts at IHS Markit in a recent webinar. Paul Hughes, executive director of research and analysis of the agricultural economist team at IHS Markit, led a panel in discussing the new low carbon fuel standard in California, which considers not just the emissions of the fuel additive itself but the amount of carbon used to produce it. California has committed to reducing the “carbon intensity” of all its fuels by 20% by 2030. Analysts Wes Petkau, Emerson Wohlenberg and Mario Lopez explored the pricing implications of the rising demand tide.

Hughes showed charts indicating that while ethanol remains the single largest source of carbon credits, its use has been flat, while the use of other biodiesel types is steadily rising.

While California, with its population of 40 million, is traditionally a leader in these policies, Hughes noted that Canada, with a total population of 37 million and a much larger driving area, has also approved similar standards, although they have not yet been enacted into laws. The state of Washington and province of British Columbia also have similar fuel standards.

Different feedstocks for biodiesel—beef tallow, rapeseed oil, canola oil. sunflower oil and used cooking oil—score differently on this index. Used cooking oil scores highest, but taken as a whole, “The low-carbon standards are a rising tide that is lifting all [oil] boats,” said Hughes.

There is an important difference between biodiesel and renewable diesel. Biodiesel produces fatty acid methyl esters, or FAME, that can only be blended with motor fuel to between 10% and 20%, whereas renewable diesel can be blended up to 100% with other fuels without the gelling issues that affect FAME fuels. Thus, renewable diesel has a lower carbon intensity than biodiesel.

Hughes then showed maps displaying proposed new renewable diesel refining projects, some of which are converted hydrocarbon refining plants. He forecast that renewable diesel processing capacity, currently standing at about 2 billion gallons, would increase four-fold by the end of 2022. “Soybean oil is increasingly being viewed as an energy product,” he said. Soybean oil is the most desirable feedstock overall, and the best alternative for new plants. It is the largest feedstock, making up about 48% of all sources for biodiesel, a percentage that Hughes said he does not expect to decrease.

The domestic demand is such that Hughes said he foresees domestic soybean oil being priced out of the export market altogether, with exports of U.S. soybean oil falling to zero by 2023, and the U.S. becoming a net importer in the near future. While the U.S. Department of Agriculture’s latest World Agriculture Supply and Demand Estimates offered few changes from the previous one, it did adjust its soybean export estimates downwards by 200 million bushels. Jim Mintert, executive director of the Center for Commercial Agriculture at Purdue University, notes that current soybean exports stand at 81% of the projected total for the marketing year, and said he believes the U.S. will meet but not exceed USDA export estimates this year.

The big winner globally will be palm oil, said Hughes, which produces five times the amount of oil per hectare as soybeans and will become the fallback from soybean oil among renewable diesel customers. Palm oil prices are already at all-time record highs, as are the prices of all veg oils, including rapeseed, beef tallow, canola and sunflower. Mac Marshall, vice president for market intelligence at the United Soybean Board, also noted the rise in all veg oil prices in another webinar, although he added that he believes lower sunflower oil prices will “bring down [the price] of the whole veg oil complex.”

Indonesian palm oil stocks are up, said Marshall, although Malaysian palm oil harvests have been affected by COVID-19 outbreaks and restrictions on the movements of harvest workers.

When asked where increased production would come from, Hughes said he didn’t know. But in 2005, he added, he didn’t foresee that Brazil would increase its corn production by two and a half times, and Ukraine by ten times, over the next 10 years in order to meet world demand for ethanol.

“We’re only six months into this price rally,” he said. “In the end, prices will provide the incentives for the increases.”

David Murray can be reached at [email protected].