Todd's Take

It was two years ago this month that AAA reported retail diesel prices at $5.82 a gallon, a painful predicament for the economy that was brought on by several unexpected factors. COVID-19 led to widespread bankruptcy in the oil patch, followed by a surge of post-COVID demand. Russia's attack on Ukraine in early 2022 and the Western sanctions that followed added to fuel supply concerns that were not helped later in 2022 by OPEC's production cuts.

In early 2022, crude oil prices reached levels not seen since 2008, a time when a new ethanol industry was taking shape to help diversify U.S. fuel supplies. Two years ago, a new renewable diesel industry was also starting to take shape, created to expand the quest for another energy source that would also offer low-carbon benefits.

In June of 2022, U.S. Energy Department (DOE) statistics showed renewable diesel production capacity at 1.95 billion gallons per year and 250 million pounds of soybean oil used to make renewable diesel fuel. This year's most recent DOE data is for March and shows plant capacity nearly doubled, up to 3.86 billion gallons per year with 479 million pounds of soybean oil being used to make renewable diesel. Monthly soybean oil use peaked at 594 million pounds in July 2023, but then fell back as aggressive competition from tallow and yellow grease cut into soybean oil's market share.

In late April 2024, the federal government released guidelines for the new Sustainable Aviation Fuel (SAF) industry. Early hopes that soybean oil would play a role in the new fuel were encouraged by the Environmental Protection Agency's (EPA) approval of soybean oil as a feedstock in December 2023. However, the details of the April guidelines put tallow, used cooking oil and corn oil in the front of the line with lower carbon scores and less burdensome sourcing requirements. New 45Z guidelines will be issued for 2025 through 2027, but the general framework seems to be in place.

Since their bullish peak in the spring of 2022, spot soybean oil prices have fallen by more than half and, at Friday's close of 43.94 cents, are near their lowest level in over three years. A $2 drop in retail diesel prices, increased competition from other feedstocks and a fourth-string position on the SAF bench of eager feedstocks have taken the bullish starch out of traders' hopes for soybean oil.

A year ago at this time, EPA did not help the case for soybean oil prices when it limited the RFS mandate for advanced biofuels to 5.94 billion gallons in 2023 and 6.54 billion gallons in 2024, less than the industry had hoped. The disconnect between policymakers' decisions and investor enthusiasm raised a red flag over future expansion plans.

A recent report from USDA's Foreign Ag Service (see https://fas.usda.gov/…) repeated another common concern that increased crush activity will increase soybean meal surpluses and become a limiting factor for growth among soybean processors.

So far, that hasn't been a problem, thanks to drought in Argentina in 2023, but it soon could. Argentina's 2024 soybean harvest is nearly finished with USDA estimating 1.84 billion bushels of soybean production that will soon be processed and competing with U.S. meal for export business. July soybean meal is currently holding above its 100-day average near $351 a ton, but USDA expects a 6% increase in meal supplies in 2024-25 and a lower average farm price of $330 a ton, down from an average of $380 in the current season.

After all the bearish headwinds and regulatory disappointments soybean oil has encountered the past two years, it remains a bit remarkable that, based on July futures prices, the value of crushed soybeans is currently $1.99 a bushel above DTN's national index of cash soybean prices, the highest crush premium the market has seen since the fall of 2023. Cheaper soybean prices have kept the crush profitable, and the test ahead will be to see how meal demand performs in what looks like a more competitive environment in 2024-25.

Sadly, the concept of energy independence seems to have become lost as the modern U.S. conversation has focused exclusively on carbon scores and ignored the world's more threatening storm clouds. On many levels, it makes no sense for the U.S. to encourage the purchase of used cooking oil from China, the world's largest burner of coal and open supporter of Russia's President Putin, yet that is where U.S. energy policy has landed.

The advantages of domestic biofuels only seem to be politically appreciated when traditional petroleum sources tighten and/or international hostility increases. Policymakers have lost sight of the greater need to have a diversified mix of domestic energy sources from safe parts of the world -- one of the main reasons President George W. Bush signed the Energy Independence and Security Act in 2007.

The reality is the world has always had dangerous elements, and safe, domestic sources of energy will always be needed. Until someone can invent a better wheel, soybean oil remains an important feedstock for a safe, low-carbon fuel, capable of powering heavy vehicle use that electric applications can't match. For rural America and the big jobs this country depends on, renewable diesel remains an important new market for the future growth of this country, and soybeans are likely to remain an important part of the mix. We shouldn't need another energy crisis to keep relearning this lesson.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at Todd.Hultman@dtn.com

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