Geopolitical distress increases demand for soybeans

Even before Russia’s invasion of Ukraine disturbed world markets, the United States Department of Agriculture was forecasting U.S. agricultural exports to rise in 2022 to a record $183.5 billion, up by $8 billion from the November 2021 forecast. Increases were expected in most commodity groups, with oilseeds and products leading the way.

“The soybean futures market is indicating belief in a tight supply situation,” said Jim Mintert, CEO of the Center for Commercial Agriculture at Purdue University. Soybean exports are forecast $2.9 billion higher to $31.3 billion on higher prices and lower global supplies. Soybean meal exports are forecast up $1.3 billion on higher unit values. Total oilseed and product exports are forecast $4.7 billion higher. Poor weather in Brazil and Argentina means that China has been continuing to buy U.S. soybeans because they can’t get enough from South America.

Jim Sutter, CEO of the United States Soybean Export Council, newly returned from the Commodity Classic, said it’s still too early to assess the precise effects the invasion will have on U.S. and international soybean producers. But he’s confident about one thing: demand for U.S. soybeans, soy meal and soybean oil will remain high into the foreseeable future.

Neither Russia nor Ukraine is a big soybean producer, but both are major wheat exporters and Ukraine has made itself into a major corn exporter within a 10-year period. More important for soybean producers, Ukraine is the world’s leading exporter of sunflower oil. If its sunflower exports supplies are disrupted, as seems likely, world veg oil markets will have to adjust.

Renewable diesel

Even before Russia’s invasion, soybean markets had started to disaggregate as specialty varieties were developed that served specific markets. High-oleic soybean oil was originally developed because the oil had a higher shelf-life and higher fry point for food uses. But it is also prized for many industrial uses, including as an ingredient in paints, asphalt, thinners and many other uses.

Soybean oil is also a feedstock for what is emerging as a major green trend in alternatives to fossil fuels: renewable diesel. Formerly called “green diesel,” this product is still often confused with “biodiesel,” but it is created by a different chemical process. Renewable diesel is a hydrocarbon, while biodiesel is a mono-alkyl ester, produced differently.

For soybean producers, the important point is that while traditional biodiesel is only able to be blended with petroleum-derived fuels and hits various blend wall limits, renewable diesel can completely replace petroleum diesel 100%, using the same infrastructure and burning in the same engines with no engine modifications necessary.

In the U.S. market, demand for renewable diesel is being driven mostly by California’s looming fuel emissions standards for vehicles. Because of the size of its population and market, California fuel and emissions standards have the potential for setting de facto national standards. Renewable fuels carry Renewable Identification Numbers, 36-character numbers attached to each gallon of renewable fuel produced. They function as a sort of green currency, allowing companies to reduce their carbon emissions numbers, meet California emissions standards—and satisfy investors and shareholders pressing for climate action. Nowadays these shareholders might include major asset managers and equity funds.

Oil refiners have been forming partnerships with agricultural companies to produce renewable diesel and investing hundreds of millions of dollars. ADM and Marathon Petroleum Corp. announced a partnership last April, finalized in December, on a $350 million soybean processing facility in Spiritwood, North Dakota. The project, expected to be completed in 2023, will produce about 600 million pounds of refined soybeans annually, enough to produce 75 million gallons of renewable diesel.

Chevron U.S.A. Inc. and Bunge North America Inc. have announced a similar partnership, with a definitive agreement signed Feb. 22 on a deal that was announced back in September. The new venture will combine Bunge’s expertise in oilseed processing and farmer relationships with Chevron’s expertise in fuels manufacturing and marketing to create renewable fuel feedstocks. Bunge’s soybean processing plants in Destrehan, Louisiana, and Cairo, Illinois, will contribute to the joint venture, with Chevron providing $600 million in cash. Plans include doubling the combined capacity of these facilities from 7,000 tons per day by the end of 2024. The joint venture may explore opportunities in other renewable feedstocks, as well as in feedstock pretreatment.

Sustainable aviation fuel is another source of demand for veg oils. While it is in early days, it has already been used in Los Angeles Airport since 2016. There are currently seven possible chemical methods for producing it, at least one of which uses veg oils as a feedstock. Other processes use wood residues or sugars.

According to Peter Meyer, Platts Head of Grain, Oilseed, and Advanced Feedstock Analytics at S&P Global, it will take 40 billion pounds of feedstock to supply all the veg oil refining plants in the U.S. that are either under construction or have been proposed. For context, last year the EU countries used 32.5 billion pounds of feedstocks. With the invasion, the EU could potentially lose about 15% of its oilseed imports, Meyer said.

Replacing Ukraine’s sunflower oil

Ukraine is—or was—the world’s major exporter of sunflower oil, producing 46% of all sunflower and safflower oil for export. Russia is the second largest, producing 25% of the world supply. India is the biggest importer of Ukrainian sunflower oil and may have to find alternative sources of veg oil.

Europe is well aware of renewable diesel’s potential as well. As a group, the European Union reached its goal of increasing the share of energy from renewable sources used for transport from under 2% in 2005 to 10.2% in 2020. While collectively the EU countries reached the 10%, it was reached “thanks to overachievement in a handful of countries,” with only half of all countries meeting the goal. Now that leaders of the EU have announced their intention to completely wean Europe off all Russian oil and gas by 2027, the demand for renewables is expected to increase. Achieving that goal, if it is possible, will be a crash project that will require even larger feedstocks of veg oils.

Where will India and Europe turn for veg oil? Russia’s sunflower oil exports have not yet been targeted, but its ability to export any commodities is being constrained by restrictions placed on its banking sector, such as the expulsion of some —not all—Russian banks from the SWIFT banking communications system used for large transactions. European countries were about to ban palm oil imports due to concerns about the ecological impacts of palm oil farming in Indonesia, but now might reconsider. But U.S.-sourced soybean oils will surely be in the mix. Western countries are divided on whether and how to sanction food exports from Russia, since they might hurt consumers in poor countries that depend on Russian wheat.

How will all these pressures affect soybean planting decisions in the U.S.? “It’s too early to know; we’ll have to wait until we see the planting numbers,” said Sutter. Many U.S. farmers may still want to rotate back to corn, whose price is also going up.

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Fertilizer availability and cost are also major concerns, however. Russia and Ukraine are both major exporters of fertilizer. According to Sutter, the U.S. produces more of its own fertilizer than Brazil, so any cutoff or slowdown of Russian and Ukrainian fertilizer exports will affect South American producers more.

The USDA recently announced it will support additional fertilizer production for American farmers to address rising costs, including the impact of Russian President Vladimir Putin’s price hike on farmers, and spur competition, by making available $250 million through a new grant program this summer to support American fertilizer production. But that won’t help with immediate planting decisions.

Will fertilizer worries accelerate the move to no-till practices? “Many farmers will continue to want to utilize no-till, and many of them are getting very good yield numbers,” said Sutter. “There’s certainly nothing in the current situation to discourage them from doing that. And one of the big advantages of no-till is the savings in energy, with fewer passes of fuel-burning farm equipment to apply inputs.”

China has continued to buy American soybeans “counter-seasonally,” said Sutter, even during the peak of the Brazilian export season.

All these pressures seem likely to ensure higher American food prices, but Sutter said American consumers will still be in a much better position than those overseas. “The percentage of our income that we spend on food is still low. I do worry about people in developing markets,” he said.

The growing trend had been for developing and middle-income countries like Egypt and Turkey to build their own crush facilities and import American whole beans to process. “These countries are developing aquaculture and animal feed programs for which American soybeans are a high-quality, reliable source,” said Sutter. “Everything that’s happening in the world reinforces the value of the U.S. as a reliable supplier.”

David Murray can be reached at [email protected].