Diesel Crush: Renewable Diesel Could Increase Soybean Acres by More Than 60%

Have you noticed that soy oil is trading at nearly twice the price of one year ago? The start of the runup in soybean prices in the fall of 2020 was mainly driven by higher demand for the soybeans and meal as purchases from China skyrocketed. Since spring, however, the continued rise in soy and other vegetable oils has been for the oil themselves.

Why?

December Soy Oil Futures as of 8/27/21

The California Low Carbon Fuel Standard (LCFS) is very different from the federal Renewable Fuel Standard (RFS) in that (a.) the LCFS increases the required liquid fuel carbon reductions compared to petroleum based gasoline in a linear fashion over time, and (b.) except for having to have the feedstock “pathway” (i.e. the method and/or math behind it) for its carbon dioxide emissions reduction vs. gasoline blessed by a controlling agency, the LCFS is agnostic about the feedstocks used to achieve the required reductions.

As fuel blenders are crunched to meet the increasingly stringent carbon dioxide emissions reduction requirements of the LCFS, they are turning to “drop-in” fuels like renewable diesel, which is chemically different from better known biodiesel, both of which are considered to have a better carbon dioxide emission reduction relative to petroleum-based gasoline than corn-based ethanol. Renewable diesel and Biodiesel differ in that biodiesel is vegetable or food waste oils which are then blended with petroleum derived diesel. Renewable diesel is vegetable or food waste oils refined in a manner similar to petroleum to produce diesel fuel which is chemically indistinguishable from petroleum derived diesel, however it generates less net total carbon dioxide emissions from production to tail pipe. Because of this, renewable diesel has the distinct advantage of “dropping” directly into existing fuel delivery infrastructure systems and end use without any concern for harming engines, the fuel turning into jelly at moderate temperatures, or requiring various new blend rates to be approved by EPA.

Volumes: Rabobank Food and Agribusiness, in an August 17th podcast projected that the currently under construction or planned renewable diesel refining plants could drive a vegetable oil deficit of 35 – 40 billon lbs. by as early as 2024. By comparison, total US soy oil production in the 2019 – 2020 crop year was only 25 million lbs. They further estimate that US soybean acres would need to increase between 55 – 60 million acres to cover the full deficit, a 63% - 68% increase over the 2021 crop of 87.6 million acres. They further report in the podcast that the combined value of announced new oil seed crush facilities in North America announced in the last 12 months is at least $2 billion dollars.

Even if these renewable diesel demand prognostications are true, there are a number of reasons that this full soy acreage increase is unlikely, including:

·       Renewable diesel can be refined from other crop oils as well, such as canola.

·       Additional canola acres could take acreage away from wheat in the Northern plains or the Pacific Northwest, and lower quality ground currently fallowed would then likely go back into wheat production.

·       The higher prices necessary to drive these acres would undoubtedly decrease purchases of raw soybeans and soy oil for current other uses such as exports, however, much as the ethanol boom brought millions of tons of Dried Distillers Grains (DDGS, a byproduct of corn ethanol production) onto the market, a byproduct of the soy oil production will be increased soymeal for animal feed.

·       As demand shifts, we could also see reduced corn-based ethanol demand and acreage shift to soybeans and renewable diesel.

That said, a fraction of these potential increases would force a dramatic reshaping of production acres, geography, and commodity prices. There is a lot of number crunching to do to get a better handle on impacts. Stay tuned! This is post is only an intro!