CoBank says renewable diesel boom creates opportunities, potential challenges for U.S. soy complex.

March 25, 2024

3 Min Read
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Demand for soybean oil as a feedstock in the production of renewable diesel is rising as the U.S. aims to increase adoption of cleaner burning fuels. Renewable diesel has emerged as the preferred low carbon replacement for traditional diesel, and U.S. production is projected to increase sharply in the years ahead. To meet the growing demand for soybean oil, U.S. soybean processors are ramping up their production capacity, which is expected to increase by 23% over the next three years.

While soybean processors have benefitted from record-high profit margins in recent years, margins are expected to moderate as the market adjusts to the increase in domestic soy crush capacity and growing global competition. Soybean oil prices have come under pressure due to increasing competition from alternative renewable diesel feedstocks including imported vegetable oils, beef tallow and used cooking oil. And persistent weakness in soybean meal prices is likely as surplus grows.

According to a new report from CoBank’s Knowledge Exchange, multiple years of record margins have left U.S. soybean processors well-prepared to weather the inevitable downturn in margins. However, overbuilding U.S. soybean crush capacity, combined with sustained levels of low processing margins could threaten the viability of new, high-cost plants in the long term.

“Legacy processing plants with low debt levels will still find profitability in an environment of sharply lower crush margins,” said Tanner Ehmke, lead grain and oilseed economist for CoBank. “But new crush plants built at substantially higher costs and interest rates will have higher breakeven costs. And destination plants located outside of soybean-growing regions are at greater financial risk due to increased reliance on transportation to acquire soybeans.”

Rising demand for soybean oil for use in renewable diesel will support soybean oil prices. But competition from imported vegetable oils like canola and palm is increasing. Soybean oil remains the most widely used feedstock for biobased diesel production and accounts for roughly 35% of monthly feedstock usage. However, that percentage has fallen from 50% a year ago as usage of competing oils, fats and greases increases. Beef tallow has climbed to more than 20% of total feedstuff usage, while yellow grease and used cooking oil account for 20%.

The expansion of U.S. soybean processing capacity will lead to growing supplies of soybean meal, which could also pressure processor margins. End users of soybean meal in the U.S., chiefly swine and poultry producers, hope to benefit from an abundance of supplies as production climbs. But for soybean processors, the question is whether domestic livestock supplies will be ample enough to absorb the additional soybean meal.

Plentiful feed inputs and steady demand has historically encouraged animal protein production to expand in the U.S. More recently, higher input costs and uncertainty about consumer demand trends have muted expectations for growth. U.S. animal protein production is flattening and still not back to 2019 levels.

“Swine and poultry producers are the top feeders of soybean meal, but the ratios are relatively small and somewhat inflexible,” said Brian Earnest, lead animal protein economist for CoBank. “Given their better long-term growth outlook relative to other sectors, we expect broiler integrators will be best positioned to leverage growing soybean meal supplies. But the opportunity is limited, which means export markets will be increasingly important.”

U.S. soybean meal exports grew in 2023 following the historic drought that reduced Argentina’s soybean crop. Barring similar crop failures in South America, competition for soybean meal export market share will intensify in the years ahead. That means the U.S. will likely need to compete on price in key markets like Southeast Asia.

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