Putting a Dampener on Soybean Oil

21 Jun 2023

By Danish Lim, Investment Analyst, Phillip Nova

 

 

The benchmark soybean oil contract for December delivery plunged by -6.77% to 53.95 cents per pound (lbs) as of 9:18 local time.

 

How are prices moving for the year?

As of 21 June 2023, the contract has plunged by -12.76% YTD.

What is the all-time high and all-time low?

 

 

The all-time high for the contract was 72.34 cents per lb on 8 June 2022. The all-time low was 28.40 cents per lb on 13  May 2020.

 

Why are prices moving?

 

 

The Environmental Protection Agency (EPA) disappointed with its new federal quotas for biofuel and renewable diesel that markets say ignores a surge in production and a wave of investment in new manufacturing plants. The quotas mandate how much biofuel can be blended into US gasoline and diesel supply.

 

Set to be finalized later today, the EPA will require the use of 2.82B gallons of biomass-based diesel (generally made from soybean oil and other fats) in 2023. This was just a 2.2% increase over the 2.76B gallons mandated last year. 2024 and 2025 quotas are set at 3.04B and 3.35B gallons respectively. At the same time, quotas for conventional corn-based ethanol have also been reduced to 15B galloon in 2024 and 2025, down from 15.25B originally proposed.

 

The increase in fat-based fuel quotas are well below the increase sought by bio and renewable diesel producers, who were pushing for an additional 500M gallons annually. They highlighted the need for much higher quotas due to recent surges in US production, as well as their planned investments in renewable fuel capacity.

 

Bloomberg Intelligence Chart showing Global Soybean Oil production (white) and US Soybean Oil production (orange) at 58.36M Tonnes and 11.3M Tonnes respectively at the end of 2021

 

Demand is driven by the quota requirements under the US Renewable Fuel Standard. Thus, the latest quota runs the risk of worsening the demand-supply picture, running the risk of overproduction.

Republican Zach Nunn called the reported requirements “inadequate compared to production potential, failing to support farmers, protect our environment or keep up with demand”.

 

Are there other things I should know?

 

 

Darling Ingredients, the top US producer of renewable diesel, plunged by -7.22% during Tuesday’s trading session.

 

Other agriculture players such as Archer-Daniels-Midland Co. and Bunge also fell by -1.85% and -3.03% respectively.

 

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