Canada Markets

Why US Clean Fuels Policy May Mean Even Higher Canola Oil Imports

Mitch Miller
By  Mitch Miller , DTN Contributing Canadian Grains Analyst
The renewable diesel industry has been so successful that it had to rely on canola oil imports to cover the supply shortfall resulting from tight soybean oil inventories. This is potentially more so following Friday's short-term 45Z guidance. (USDA data, DTN chart)

While there are many questions left to be answered by the incoming Trump administration's final rule, the United States Department of the Treasury and the IRS felt confident enough to issue short-term guidance on the Clean Fuels Production Credit (section 45Z). Conservation-related details are yet to come, but the guidance did confirm some very important rules.

Particularly important and somewhat expected, used cooking oil (UCO) of non-U.S. origin will no longer be an eligible feedstock. The ruling even went into detail, explaining how palm oil could be mislabeled as UCO and given the difficulty in establishing true authenticity, would no longer be allowed. Considering UCO imports from China have exploded in the past few years -- on pace to exceed 4.5 billion pounds in 2024 -- filling that void may prove interesting.

On the other hand, canola oil was reaffirmed as an eligible feedstock, specifically of U.S. or Canadian origin. The surge in imports during the past three years has been a function of that to date and this suggests more could be expected. If anything, additional imports may come from the elimination of UCO.

With tensions running high right now, I can't stress enough that such an outcome arises from limited supplies of soybean oil and not resulting in soybean oil being replaced. It is the most logical way for the biofuel industry to flourish for the benefit of all North America -- as is often the case in success stories. Keep in mind that the original goal was to increase the reliable supply of domestically produced diesel, lowering prices while supporting the agricultural industry.

Soybean oil's inclusion in biofuel production is a success story in itself. As recently as 2014, only 5.029 billion pounds of soybean oil was used for domestic biofuel production. USDA just reduced the 2024-25 use estimate from 14 billion pounds to 13.6 billion pounds due to tight supplies -- yet still a record.

The problem with increasing soybean crush to satisfy the added demand from the industry is the low oil yield. With less than 20% of a soybean being oil, it is a very inefficient source. The more important issue is the unintended consequence of creating an excess supply of soybean meal. At 80% meal content, oversupply can quickly become a problem.

Regarding the soybean oil supply and demand update released Jan. 10, the USDA did increase its export estimate as expected -- to 1.6 billion pounds from 1.1 billion previously, and 600 million pounds up until the Dec. 10 update. Given total commitments (exports plus outstanding sales) in the first three months of the marketing year total 1.319 billion pounds, the increase was necessary.

The unexpected part was the reduction in biofuel use by 400 million pounds, helping to offset the increase. It is assumed that minimum pipeline levels are approximately 1.5 billion pounds, so the adjustment was necessary if soybean crush was not going to be increased.

That discussion highlights the need for canola oil imports to help feed the biofuel industry. With oil content around 42% in canola and an available supply, it benefits both sides of the border. The one country left out is China. China had imported most of the Canadian crude canola oil available until the U.S. took over in 2021 and supplied UCO to the U.S. for the past few years.

It is well worth noting that ultra-low sulfur diesel futures (trading symbolHO) have increased 20% since the Dec. 6 low. That coincided with a rally in March crude oil futures from $66.55/barrel to $77.58/barrel currently. Given the election promise from the Donald Trump campaign to lower fuel costs, it's highly unlikely there will be much political will to reduce support for the biofuels industry. Such a change would surely result in higher fuel prices while hurting the agriculture sector.

So, if it makes no sense to cut renewable diesel production, there is not enough soybean oil to satisfy industry demands (without becoming a burden on soybean meal) and canola oil has been reaffirmed as the alternate source of choice. Should the market expect imports to decline if tariffs are introduced? In my opinion, they will not. It will simply be a matter of deciding how to split up the cost of any tariff amongst the participants involved. Inauguration Day on Jan. 20 isn't far off, so we should know soon enough.

**

See more DTN coverage on Clean Fuels Production Credit (section 45Z) in the following:

-- "Biden Releases Interim Guidance For 45Z Tax Credit, Leaves Final Rules to Trump," https://www.dtnpf.com/…

-- "Agriculture, Energy Groups Weigh Next Steps on 45Z Clean Fuels Production Tax Credit," https://www.dtnpf.com/…

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

Follow him on social platform X @mgreymiller

Comments

To comment, please Log In or Join our Community .