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EPA Renewable Fuels Standard Rallies Soybean Oil Prices

Source | Darrel Good, Agricultural Economist - University of Illinois

The price of soybeans rallied about 10 percent from mid-October to mid-November. It came,despite the record sized crop harvested in the United States.

Farmers have been in awe of the soybean market since mid-August. There have been a few reasons for it to rally; a short crop out of South America and a drought constrained supply of palm oil coming from Indonesia for instance. Still, this U.S. soybean crop is big, mighty big in fact. Yet, the price of soybeans has gone higher.

Darrel Good writes about it in this week’s Weekly Outlook. You may read it online at FarmDocDaily.

There are two unusual things about this price rally. Well, one really, but it is driven by the first. The rally has come because the world seems to be short of vegetable oils. Soybean oil is among those. Here’s the important part, soybean oil lead rallies generally do not last. Darrel Good thinks this one might and that it could change the dynamics of the soybean complex. The change is driven by the Renewable Fuels Standard. The RFS did the same thing for the corn market when it began to ramp up ethanol production in the United States more than a decade ago.

The soy complex is made up of three parts; the price of soybeans, the price of soybean meal, and the price of soybean oil. The last two are the products derived from the soybean when it is processed, crushed.

The EPA RFS announcement, made last week, initially resulted in a surge in soybean oil and soybean prices. Increasing soybean oil consumption for mandated advanced biofuels, in this case biodiesel production, this year and beyond may require the domestic soybean crush to be larger than previously thought concludes Darrel Good. He says this could lead to some long-term pricing questions.

Historically, the domestic crush has been driven by soybean meal demand. If it is driven instead by soybean oil demand, this could result in lower soybean meal prices. Soybean meal has a short shelf life. Its price would need to be low enough to for it to be used quickly.

The impact of higher soybean oil prices and lower soybean meal prices on the price of soybeans is difficult to anticipate. However, a “surplus” of soybean meal, says Good, might result in lower soybean meal prices relative to feed grain prices. It could cause the soybean meal to corn price ratio that has ranged from 2.55 to 3.2 in recent years to decline. The historical range is 2.0 to 2.5.

RFS Matters for Biodiesel

The United States Environmental Protection Agency now says it will not update the Renewable Fuel Standard mandates until November. This year’s RFS, no matter when it is released, is really important to the biodiesel industry.


More often than not when the federal government’s Renewable Fuel Standard is discussed people are thinking about corn based ethanol or other feedstocks that can produce ethanol. However, when U.S. EPA finally releases the RFS mandates it may be the biodiesel industry that pays the most attention says University of Illinois Ag Economist Scott Irwin.
Irwin :36 …to find out what happens.
Quote Summary - The industry for which the RFS is really a life or death matter is biodiesel. Because if the EPA would choose to go back to the RFS statutory level mandates, at least for a few years in the short run, it would launch - likely - the biggest boom in biodiesel’s history. But, if they choose to stay on the path of the proposals from 2013 it would cut the knees out from under the industry. The biodiesel industry is waiting on the edge to find out what happens.
This edge made the industry unhappy with the federal government earlier this year when it opened the door for biodiesel imported from Argentina to qualify as an advanced biofuel under the U.S. RFS mandates. Scott Irwin sees this move far more favorably the industry.
Irwin :41 …outside the United States to fill the mandates.
Quote Summary - I favor the position that EPA is likely to move the mandate levels back up near or to the statutory levels this year, or at least by 2016. This would necessitate a tremendous boom in biodiesel production. It would be more than current U.S. production capacity. So, one view of the Argentine biodiesel announcement is that it is a precursor of the statutory requirements and related documentation of enough registered biodiesel both inside and outside the United States to fill the mandates.
It may be, then, that the January announcement allowing Argentine biodiesel to qualify as an advanced biofuel in the United States sets the stage for U.S. EPA to follow the letter of the law as written by congress. It is not possible to do so without additional gallons of advanced fuel from some source.