KANSAS CITY — Despite the recent precipitous drop in soybean oil futures from all-time highs posted just two weeks ago, values remained more than double those of a year ago, and the cash basis on soybean oil, where it is quoted, has never been stronger. The unprecedented strength and volatility in the soybean oil market largely has been the result of intense competition between food and energy sectors for a limited and tightening supply. This competition likely will keep prices elevated for at least the next 12 to 24 months, or until the market adjusts to the new landscape for soybean oil supply and demand, according to a recent study titled “Outlook and Implications of Surging Renewable Diesel Demand Upon the US Soyoil Market” written by Bill Lapp, president, Advanced Economic Solutions.
The food versus fuel debate is far from new in the soybean and corn markets. But the advent of technologies and facilities to produce renewable diesel chemically identical to petroleum-based diesel, with no need to blend, in recent years have proved to be a gamechanger.
Mr. Lapp forecast renewable diesel production will double in 2021 compared with 2020 to about 1.1 billion gallons.
“Beyond 2021, significant capacity expansion and further tightening of California’s emission standards are expected to drive renewable diesel production to 2 billion to 3 billion gallons, more than double the 2021 forecast,” Mr. Lapp said.
Mr. Lapp said the increase in renewable diesel production largely has been driven by the need to meet the requirements of California’s low-carbon fuel standard (LCFS), which took effect in 2011 and aims to reduce the carbon intensity of California’s transportation fuel by at least 20% by 2030. Transportation fuel suppliers are required to meet steadily more stringent carbon intensity targets and receive tax credits for doing so.
“The net result of California’s LCFS has been a surge in investment in renewable diesel capacity in recent years with additional capacity expected in the coming years,” Mr. Lapp said.
“AES estimates that industry capacity will rise by 59% to 1,164 million gallons by the end of 2021,” Mr. Lapp said. “AES has identified eight significant plants that are currently in operation, with annual operating capacity ranging from 5 million gallons to 275 million gallons. By the end of 2022, AES estimates that a total of 17 plants will be in operation, capable of producing more than 2.1 billion gallons.”
Mr. Lapp said when additional announced renewable diesel plants come on stream after 2022, industry capacity to produce renewable diesel may expand to more than 4 billion gallons. At the same time, Mr. Lapp said AES expects that some of the announced projects may not materialize and that domestic renewable diesel capacity may ultimately peak near 4 billion gallons.
Feedstocks to manufacture renewable diesel are fats and oils. And there’s the rub.
Currently about 35% of the feedstock used to produce renewable diesel is refined/bleached/deodorized (RBD) soybean oil.
“Because RBD soyoil is required by food users and more than one third of the renewable diesel producers, a severe availability problem for RBD soyoil has already developed,” Mr. Lapp said.
“AES expects renewable diesel plants currently requiring RBD soyoil will invest in ‘pre-treat’ capabilities over the next 12 to 24 months. This will give these plants the latitude to use a wider variety of fats and oils,” Mr. Lapp said. “However, in the near term, the demand for RBD soyoil for renewable diesel will remain large and continue to trend higher, creating a significant challenge in meeting both food and renewable diesel demand for RBD soyoil.”
Soybean oil futures and cash prices have surged as a result.
Mr. Lapp said with soybean oil prices so high, the current shortfall in supply eventually will be resolved, but it will require two to three years of supply/demand adjustments.
Mr. Lapp divided adjustments into near term, medium term and long term.
In the near term, soybean oil exports already have been declining because of high US prices, while US soybean oil imports have been on the rise. Mr. Lapp also expected reduced use of soybean oil for manufacturing biodiesel, which must be blended with petroleum-based diesel fuel. Many biodiesel plants have closed or reduced operations because they can’t realize profitable production with soybean oil prices so high.
In the medium term, the next 12 to 24 months, renewable diesel plants currently depending on RBD soybean oil as a feedstock will be adding “pre-treat” capabilities to enable them to utilize other fats and oils.
In the longer term, Mr. Lapp said he expects US imports of canola seed and canola oil from Canada to increase. These imports may be used to displace some soybean oil in food use and renewable diesel production. He said he also expected US refiners to expand soybean crushing capacity. Current expansion plans would increase the supply of soybean oil in the United States by 1.1 billion lbs in the next two to three years. And Mr. Lapp suggested in the not-too-distant future, there may be progress in the development of non-food oilseeds that may be used in producing renewable diesel and other fuels.
Other factors that may affect the outlook for the renewable diesel industry included the weather’s impact on soybean production and the possible adoption by other states of low-carbon fuel standards similar to those in California. Additionally, much will hinge on what the Biden administration does in relation to federal renewable fuel standard mandate levels.
“If the Environmental Protection Agency increases the annual renewable fuel obligations from 2020 levels, particularly for advanced biofuels, the federal requirements will drive demand for soyoil and other fats and oils higher, and thus exaggerate the already tight supply of soyoil,” Mr. Lapp said.