Escalating Demand for Soybean Oil Hits Possible Slowdown

Source: By Bob Henderson, Wall Street Journal • Posted: Monday, March 20, 2023

EPA regulations could limit the use of the legume byproduct in biofuel

Soybeans are a source of meal used mostly for animal feed, as well as soybean oil.Photo: Rory Doyle/Bloomberg News

Farmers and refiners are worried that a nascent boom in the market for soybean oil is being stalled by a challenge from an unexpected source: the Environmental Protection Agency.

Prices for soybean oil, a byproduct left over after crushing the beans for animal feed, soared to records last year owing to growing government incentives to make it into diesel fuel. Then, in December, the EPA proposed to mandate less use of biomass-based diesel through 2025 than many had expected, pruning the value of credits the agency issues to makers of biofuels. Soybean oil futures dropped more than 15% in the week after the announcement.

“The numbers came as a bit of a shock,” said Dave Walton, who farms about 750 acres of corn and soy with his wife and son in Wilton, Iowa. Mr. Walton, who manages his exposure to volatile vegetable prices by trading futures and options with an app on his phone, said he had hedged two-thirds of his crop, limiting his losses.

The price of soybean oil has roughly doubled over the past three years, largely because of demand to make fuel for trucks and trains. Futures are currently trading at about $4.23 a gallon, compared with about $2.68 a gallon for diesel.

That difference means companies have little economic motive to make diesel from soybean oil without government incentives, which are aimed at reducing carbon emissions. Those averaged more than $4.50 a gallon last year, according to S&P Global Commodity Insights, for a type called renewable diesel sold into California, which has a low-carbon fuel program that adds inducements to federal ones.

The number has climbed nearly 40% from 2019, driven by a tripling in the value of the credits the EPA issues to promote biomass-based diesel blending, to more than $2.50 a gallon for renewable diesel. Fuel makers who blend in excess of their quotas can sell their extra credits to others, who can submit them to the EPA to fulfill their obligation without blending.

Such sweeteners can make it more profitable for companies to produce green diesel than the conventional kind. The country’s largest maker of renewable diesel is Diamond Green Diesel, a joint venture between the oil refiner Valero Energy Corp. and the agricultural recycler Darling Ingredients. It made a gross profit of $1.45 a gallon making its signature product last year, whereas Valero made about $0.52 a gallon processing crude — in a banner year for oil refiners.

Biomass-based diesel production will likely exceed 3.7 billion gallons this year, according to the Energy Information Administration, up nearly 60% from three years ago. While waste products such as used cooking oil and animal tallow are also suitable raw materials, limited supplies are leading producers to rely increasingly on soybean oil, which furnished 47% of feedstocks last year, according to EIA data.

Crushing soybeans yields meal and oil, which make up about 80% and 20% of a bean’s weight, respectively. The protein-rich meal is mostly used in feed for hogs, chickens and other animals. The oil is used in foods such as salad dressing and, increasingly, fuel for semis. According to the Agriculture Department, about 44% of U.S. soybean- oil production will go toward biofuels this year, up from about 40% last year.

“For decades, oil was the residual product that companies had to figure out a way to get rid of after selling meal, the really valuable stuff,” said Scott Irwin, an agricultural economist at the University of Illinois Urbana-Champaign.

An old rule of thumb, said Mr. Irwin, was that oil made up about a third of a soybean’s value. But oil’s diesel-driven rally had that fraction flirting with 50%, at least until the EPA’s proposal.

Visions of soybean-powered truck fleets prompted the beginnings of a kind of green-oil boom in the Midwest, with bean-crushing plants in place of derricks and drills. Plans were made for 21 new or expanded facilities that would increase the country’s crushing capacity by more than 30%, according to Scott Gerlt, the American Soybean Association’s chief economist.

The EPA news has put some of those projects on pause, said Mr. Gerlt. The agency’s proposal increases annual blending mandates for biomass-based diesel by less than one-tenth of the approximately 3 billion gallons of production increases that could come from refinery-retooling projects and new partnerships between energy and agricultural companies. That mismatch could cut the value of federal credit incentives, wreck those projects’ prospects and kick a leg of support out from under the soybean-oil market.

The EPA’s final decision is due in June. Trade groups are lobbying for higher mandates. Some analysts think many of the planned projects are destined for the dustbin. Others are more optimistic, largely because several other states, including New York, are working toward adopting low-carbon fuel-incentive programs such as California’s.

The soybean-processing industry could end up fine because of growing global demand for protein, said Corey Jorgenson, chief executive of Shell Rock Soy Processing, a crushing plant in Iowa that in January started operations boosted by funding from Phillips 66, which has dibs on the facility’s oil.

“If 80% of what you’re making is protein, the whole story can’t be only about renewable energy or the oil component of the soybean,” Mr. Jorgenson said.

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