WASHINGTON — Developments in the market for renewable diesel fuel, China’s hog population and Brazil’s potential record-high crop will drive growth in the global soybean market in 2023 and beyond.
These and other factors were detailed in a presentation by Scott Gerlt, chief economist with the American Soybean Association (ASA) in late February during the US Department of Agriculture’s 99th annual Agricultural Outlook Forum. Mr. Gerlt is a former program leader for US crop policy and analysis at the Food and Agricultural Policy Research Institute.
Bio- and renewable diesel
By way of a short recap of the use of soybeans as fuel, Mr. Gerlt outlined the key difference between biodiesel, well-established as a commodity after 15 years in the market, and “the new kid on the block,” renewable diesel. Chief among them, biodiesel typically is blended into fuel ratios up to 20%, whereas renewable diesel, a hydrocarbon, can be used as a 100% replacement for petroleum and pumped directly through pipelines. Plus, production uses the same processes and techniques as petroleum, thus it often is produced by petroleum companies, sometimes in the same facilities.
Data from the US Energy Information Administration on annual production capacity of biodiesel and renewable diesel indicates steady growth from 2010 to present, reaching just under 4 billion gallons between the two in 2021. The early years were dominated by biodiesel production, but its share of capacity has contracted slightly in recent years. Meanwhile, renewable diesel capacity jumped in capacity 50% in 2022 and thought to see a similar expansion this year, according to the EIA. Announced projects total seven billion gallons in renewable diesel capacity.
Another key difference is location, Mr. Gerlt said, noting the proliferation of farmer-supported biodiesel plants clustered in the Midwest, close to the US farm belt and major soybean production areas. Renewable diesel plants are on average eight times larger than biodiesel plants and dot the US map from Louisiana to the Dakotas and parts west to the California coast, he said. About half of 2022 biodiesel production came from soybean oil versus just 14% in renewable diesel, he said. Used cooking oils, fats and greases, along with tallow, comprise 37% of renewable diesel feedstocks as companies try to maximize their returns in California, Mr. Gerlt said. But those inputs can’t easily scale up, so the growing industry is increasingly relying on soybean oil, which can be produced in the volume needed and reduces carbon emissions, he said.
While renewable diesel production trends westward, most US soy crushing plants are also in the US Midwest, Mr. Gerlt said, although more are coming online in the northern Plains where soybean production has increased. The region’s soybean historically have in large part been loaded on rail freight to the Pacific Northwest for export, but additional crushing capacity offers a new basis value driver for farmers to use locally, he said.
Recent Environmental Protection Agency projections changed the outlook for renewable diesel, Mr. Gerlt told the audience gathered in Arlington, Va., for the first in-person Ag Outlook Forum since 2020.
“If this were a movie, (the EIA growth projections) would be the first part of the movie, with the great plot that’s happy,” he said. “Now we reach the sad part of the story, the one that really throws everything in suspense. The EPA for 2022 had raised the biomass diesel volumes under their renewable fuel standards by about 500 million gallons — it was a record — and they indicated they wanted to go that direction. But they released their new proposal on Dec. 1, and it had almost no growth over the next three years. It was a three-year proposal, the first time they have done that and everyone was happy to have some three-year stability in the industry, but then there’s almost no growth.”
The EPA’s proposal for increased blending levels at around 200 million gallons over the next three years falls far short of the billions of gallons of announced expansion. The discrepancy in announced capacity versus the EPA’s assumed crush growth from 2023 to 2025 can be linked to the EPA’s use of the USDA’s 10-year baseline for increases in soybean oil production, Mr. Gerlt said.
“USDA’s 10-year baseline is very good, but it has a certain set of assumptions they are required to put in that includes no policy growth and no increase in renewable volume obligations,” he said. “EPA took assumptions of no increase in the volume obligations and said ‘we can't afford to raise the volume obligations,’ which is a very circular argument and very, very problematic. EPA acknowledged another 200 million gallons from other sources, but that doesn’t include canola oil, which now has a pathway to renewable diesel. It’s just unfortunate that EPA really wasn’t using a forecast, they were using a baseline, which is a very important distinction.”
The EPA’s proposal impacted soybean crushing margins immediately, according to data from the ASA and the USDA’s National Agricultural Statistics Service. The Central Illinois margin had ascended from $1.30 per bu in early 2021 to $4.30 a bu in November 2022, supported in the later months by various factors in global vegetable oil markets. When the EPA’s proposal dropped, the Central Illinois price plummeted $1.50 a bu. Soybean oil prices dropped about 20¢ a lb, causing a rise in soybean meal price, which received additional support from South American drought. Soybean oil’s value as a share of soybean crush — historically around 30% to 35% — had grown to 50% to 55% in 2022, but fell back to 40% on the EPA’s proposal.
The EPA’s Final Rule on renewable volume obligations is due June 14.
“That’s when we’ll hopefully have certainty on it,” Mr. Gerlt said. “The industry in a lot of ways is on hold right now. A lot of the crushing plants are re-evaluating. Some are close to production, and they’re going to come online. Those that can pull back, I think are in wait-and-see mode. There’s been a lot of talk about all of the increase in soybean acres we’ll need, which is oftentimes overhyped. But I think we’re at a question now whether we need more soybeans or not, and I think we’re going to wait and see.”
The ASA uses crop insurance prices to gauge potential planted area for the major crops. The association’s soybean-to-corn price ratio of 2.43 in 2022 is projected to decline to 2.31 in 2023 based on easing soybean prices and corn prices that have edged higher. Also a factor, nitrogen prices for urea fertilizer declined by about 25% year-over-year, Mr. Gerlt said.
“You have a price ratio that slightly favors corn more,” he said, “and you have lower corn input cost, so the economics seem to be showing fewer soybean acres and more corn acres. (USDA’s) Prospective Plantings should come in with more corn acres than soybeans this year, not necessarily what we want to see on the soybean side, but I think the market reality is it’s bidding for some corn at this point.”
Global soybean market
While China’s actions always have been tough to decipher and its direction hard to project, the calculus in 2023 has grown more complex as the world’s leading importer of soybeans allowed stockpiles to decline, imported fewer and crushed fewer soybeans in the past two years. A trade war during the Trump administration ate into China’s soybean imports, as did African swine fever that reduced the country’s hog herd. Herds were rebuilt, perhaps overbuilt, considering lower pork consumption during that country’s extended COVID lockdown period, Mr. Gerlt said, and their imports have declined in 2021 and 2022.
At the same time, “for the past eight quarters, year-over-year pork production in China has been increasing,” he said. “So this is one that really leaves me baffled as we think about the outlook for Chinese pork consumption and what they may want for soybeans. It appears to be less demand for soybean meal, less demand for pork. But pork production has been exploding. They don’t really seem to have the ability to store pork that long. What’s going on? The answer is, I don’t know, but matters a lot as we think about the future.”
Elsewhere in the world market, South American production has declined significantly, especially in Argentina, and many analysts project a larger drop-off than the USDA’s projection, Mr. Gerlt said. Despite the decline, Paraguay’s production has rebounded, and projections are for record-high soybean production in Brazil, even if harvest there was delayed by rain that was helpful in extending a US export window limited on the front end by low Mississippi River levels. But Brazil’s large crop could increase internal demand to find homes for US supplies.
“Brazil’s potential large crop is hanging on world markets,” he said. “We have the forward curve really demanding soybeans now in anticipation of that crop coming online.”