The feedstock mix of a country’s biofuel industry depends on the dynamics between two main factors: domestic supply and national policies. Therefore, the feedstock mix of major global biodiesel producers varies according to local market conditions.

In the US and Brazil, which produce around 30 percent of the world’s biodiesel, soybean oil is the most used feedstock. In Europe, it is rapeseed oil, and in Southeastern Asia, palm oil is the primary feedstock.

Feedstock costs make up more than 85 percent of biodiesel operating costs, underscoring the importance of understanding the dynamics of the vegetable oil market to navigate the biomass-based diesel industry. The hike in soybean oil price from early June to late July led to negative margins in the Fastmarkets assessment of biodiesel and renewable diesel profitability in the US, with a more severe impact on the biodiesel industry that only managed to recover positive profits because of soaring energy prices that offset some of the high production costs.

Soybean oil pricing trends – what is driving volatility

In 2023, we have witnessed significant volatility in agricultural markets, including the vegetable oil sector.

On the supply side, factors contributing to this volatility include a crop failure in Argentina, the world’s largest exporter of soybean oil, as well as a combination of reduced acreage and adverse weather conditions affecting the current soybean crop in the United States.

On the demand side, concerns about a global economic slowdown and a stressed financial market have further exacerbated market volatility. As a result, soybean oil futures contracts in the Chicago Mercantile Exchange (CME) have seen price fluctuations ranging from a low of 46.20 US cents per pound to a high of 72.65 US cents per pound.

View relevant price data and forecasts by accessing our charts

During the first half of 2023, CME soybean oil futures averaged 56.52 US cents per pound. However, from June until the first week of September, the average increased to 62.94 cents per pound, reaching a high of 72.65 cents per pound following the United States Department of Agriculture’s (USDA’s) assessment that the 2023 US soybean planted area was four million acres below its 87.5-million-acre prediction in its Prospective Plantings report issued at the end of March.

The significant volatility is also evident in Fastmarkets’ assessments of RBD soybean oil prices in Central Illinois, where the year’s highest price is more than 50 percent above the lowest.

Soybean oil production

The crop condition rating assessments from the USDA suggest that a yield reduction is likely, given that the conditions categorized as “good to excellent” reached a five-year low in the latest Crop Progress report issued on September 5, which may support prices in the short term.

However, despite the expectations of tight supply and 2023-24 US ending stocks at the lower end of the historical range, the USDA did not revise its crush forecasts downward. The strong demand for protein meal and vegetable oils has driven crush margins into the upper end of the historical range, and there is little in vegetable oil’s fundamental outlook to suggest that this trend will reverse in the short term. However, farmers just started planting what analysts expect to be a record crop in South America. This could pressure the market, especially contracts with 2023 deliveries, which could drive additional backwardation in soybean oil futures.

In addition to driving the volatility, the increased demand for soybean oil for biofuel feedstock in the U.S. has substantially changed global trade flows, significantly reducing the country’s share of international trade. Additionally, the drought in Argentina, which has reduced domestic crushing volumes, has allowed Brazil to gain substantial market share. The United States has decreased its market share in global trade from 15 percent of total soybean oil exports in 2020 to two percent in the first seven months of 2023, while Brazil has surged from 13 percent to 44 percent during the same period.

Soybean oil pricing forecasts and possible margin outcomes for biofuel producers

Fastmarkets expects the return of trendline yields across South America to allow Argentina to recover its crushing volume to the historical average in 2024. This is because the transition from La Niña to El Niño historically supports growing conditions in southern growing areas of South America, which experienced a devastating drought in 2023, reducing more than 30 million tonnes of soybean production from early expectations in Argentina and southern Brazil.

With this scenario, even though the US will have a reduction of seven million tonnes compared to the previous crop due to drier and hotter-than-average temperatures in the Western Corn Belt (WCB), Fastmarkets expects that the 2022-23 supply from the largest soybean-producing countries will be 13 million tonnes above the volume of the previous season. This ensures a more comfortable global balance, supporting Fastmarkets’ forecast of lower prices across the oilseed complex.

In the 2023-24 season, Fastmarkets expects that more than 52 million tonnes will be added to the market by the largest producing countries, assuming normal growing conditions. The 18 percent increase in supply supports Fastmarkets’ projection for lower soybean oil futures, predicted to drop more than ten cents per pound from the October 2023 contract to the September 2024 contract, representing a 19 percent decrease.

With soybean oil futures trading below 50 cents per pound, biofuel producers can experience significant improvements in their margins since the main component of their production costs could be 15 percent below the average feedstock cost from January 2023 to the first week of September.

Profitability depends not only on costs but also on revenue. Therefore, fuel prices are crucial to biofuel producers’ financial results.

Fastmarkets’ prediction of renewable diesel (RD) revenue, including credits, in September is nine percent below the 2022 average, and yet not offsetting the savings for producers using soybean oil in October 2024.

As a result, RD margins for those using soybean oil as a feedstock in the last quarter of 2023 are projected to rise to about 129 percent of the average profitability during the first eight months of 2023.

While Fastmarkets’ forecasts point to a positive outlook for biomass-based diesel producers’ margins, it is vital to acknowledge the significant influence weather-related factors can have on these predictions.

Weather patterns are hard to predict. Despite indications of improved soybean production in South America, unforeseen weather events like droughts, floods, or temperature fluctuations can disrupt crop yields, driving additional volatility in soybean oil prices.

The biomass-based diesel industry’s profitability depends on the dynamics of supply and demand in the soybean oil market and the impact fluctuations in the fundamentals have on prices.

Biomass-based diesel producers should remain vigilant, monitor market trends, and prepare to adapt hedging and buying strategies as the industry evolves and feedstock fundamentals adjust. Staying informed and making data-driven decisions are essential to navigate the challenges and seize the opportunities presented by a market experiencing profound changes.

View our soybean oil production and renewable diesel margins forecast

The post How soybean oil cost impacts biofuel production and profit margins appeared first on Fastmarkets.

This change in climate patterns holds significant implications for agricultural regions across the globe and its effects will vary from region to region.

In Southeast Asia, particularly in Malaysia and Indonesia, El Niño can seriously damage agriculture, as the warming of Pacific waters disrupts rainfall frequency, leading to severe drought conditions.

NOAA’s expectations of a moderate-to-strong El Niño will put the market’s attention on the region’s weather, especially during late fall-early winter, when conditions are most critical.

View palm oil price and production trends data

Palm oil market and production outlook  

The first four months of 2023 have been challenging for palm oil yields in Malaysia. Below-average production levels and the lowest output recorded in April since 2006 have sustained prices above 3,800 ringgit per tonne, at least in the first quarter of the calendar year.

Palm oil futures moved lower in the broader commodity sell-off during the second half of March, with rising production levels contributing to the weakness and eventually pushing the most actively traded contract as low as 3,200 ringgit.

May was a positve month for palm oil production for the country, with the most robust month-over-month growth since March 2020. The surge in production helped build inventories and raised expectations for an increase in the stocks-to-use ratio, which had dropped below the five-year average.

The impact of El Niño  

Yet, a climate event such as El Niño could reduce yields and production in the coming year.

While production in May was 321,000 tonnes above April and this would normally signal a growth in stocks through the end of the marketing year, the seasonal transition to El Niño could stop the upward trend and again reduce production and inventories.
 
Typically, it takes about six months for changes in weather patterns to impact palm oil production. So, in balance, the 2022-23 season may not suffer the usual decline associated with the drier outlook implied by El Niño. However, 2023-24 yields could decline, potentially reducing the final output.

During the 2015-16 El Niño, the marketing-year average yield dropped from a high of 20.53 percent in 2013-14 to below 20 percent by 2016-17. The level to which it dropped was the lowest since 2003-04, when the yield coincided the end of a period of several years of warmer-than-normal SSTs in the eastern equatorial Pacific Ocean.

In the first months of 2023, Malaysia accumulated almost twice the average cumulative precipitation, providing some soil moisture reserves that might help the palm trees endure the initial decline in rainfall.

However, average yields have fallen from a high of 20.16 percent in 2018-19 to a predicted average of 19.83 percent in 2022-23. A further reduction during 2023-24 could push the average output below Fastmarkets’ current prediction of 19.71. percent.

Palm oil pricing and output forecasts  

Data from the Malaysian Palm Oil Board (MPOB) implied that the number of fresh palm fruit bunches harvested dropped from a record 103,200 bunches in 2018-19 to just 89,500 during the pandemic in 2020-21 before rebounding slightly in 2021-22 to 91,400.

Based on its yield prediction, plantations would need to harvest 97,600 fresh fruit bunches during this marketing year to meet Fastmarkets’ current 2023-23 Malaysian palm oil production forecast of 19.25 million tonnes. However, given the challenges Malaysian plantations have faced in sourcing labor since the pandemic, Fastmarkets’ production outlook may turn out to be too optimistic.

If production and stocks fall below Fastmarkets’ expectations, the spread between soybean oil and palm oil could narrow to a new level.

From December to mid-May, the spread between Fastmarkets’ assessment of RBD soybean oil prices in central Illinois and RBD palm oil at the Gulf has been narrowing from its record level peak (above 50 cents per pound in June 2021). The spread had narrowed to a ten-cent premium for palm oil in March 2022 but widened to more than 42 cents in October before starting to narrow again to a low of slightly less than eight cents at the end of April.

Since then, the spread has widened to almost 30 cents and concerns about drier-than-normal conditions could push it out further in the coming weeks.

Still, if expectations for 2023-24 Malaysian palm oil stocks and production decline in the coming months, the spread could return to a premium for palm oil during 2023-24.

The announcement of El Niño and its subsequent impacts on the palm oil market has shed light on the critical interplay between climate patterns and agricultural sectors. El Niño can significantly disrupt palm oil production, particularly in Southeast Asia.

Malaysia has already faced challenges in the current season, with below-average production levels and fluctuating prices. While soil moisture reserves may mitigate the immediate impact of El Niño, the overall 2023-24 production could decline well below Fastmarkets’ prediction. Traders will remain fixated on the region’s weather conditions, especially in the late fall-early winter when drought conditions typically intensify. In that scenario, it is crucial for market players to closely monitor the progression of weather patterns and employ adaptive strategies to ensure the resilience of the sector and mitigate its risks.

As the world seeks to reduce dependence on fossil fuels and transition towards renewable energy sources, the global demand for biofuel feedstocks continues to increase. With its high oil yield and versatile applications, palm oil can be an essential feedstock for biofuel production and offer an alternative to fossil fuels.

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