Steve Kell’s
Market Minute
One of the most remarkable things to watch in the agricultural commodities markets in the 21st century has been the emergence of renewable fuels, and the groundswell of demand for grains and oilseeds as farmers fuel motor vehicles. Ethanol typically carries the headlines in conversations about biofuels, but biodiesel has always been a key component of the market.
Biodiesel, (and particularly soybean oil used to make biodiesel), has been one of the real success stories of renewable fuels in North America.
If we look back to 2002-2003, 0.6 % of the soybean oil produced in the United States was used to make biodiesel. Twenty years later, in 2021-2022 38.9 % of the soybean oil produced in the U.S. was utilized in biodiesel. Over that same period of time, total U.S. soybean oil production grew from 18,430-million pounds to 26,143-million pounds. It’s an incredible success story on two levels because not only is the soybean crush capacity growing, but biodiesel has been consuming an ever increasing portion of the growing soybean oil supply.
U.S. soybean crush capacity has grown by 29 % or 7,713-million lb. over the past 20 years. Over that same period of time, soyoil biodiesel production in the U.S. has grown by 10.221-million lb. Simply reviewing the numbers shows that all of the growth in soybean crush capacity in the U.S. has been driven by renewable fuel demand.
In the United States, the requirement for renewable fuels such as ethanol and biodiesel to be included in the nation’s fuel supply is established by the Environmental Protection Agency, which is a branch of the U.S. Federal government. At a policy level, the way that the EPA articulates the targets for use of biofuels is to establish “Renewable Fuel Standards”, (typically referred to as “RFS”), and these form the policy targets which the blending guidelines and regulations are aimed at achieving as fuel refiners and distributors are expected to reach as they deliver fuel to the American public.
In the first week of January 2023, the EPA revealed its Renewable Fuel Standards targets for 2023 through 2025 and had hearings with fuel industry leaders in order to get feedback on potential renewable fuel regulations for the years ahead. One particularly surprising development in this process is a proposed lowering of the RFS for biodiesel.
In the new proposal, the RFS for biodiesel use in 2023 is 2.82-billion gallons. Followed by a small increase to 2.89-billion gallons in 2024, and then another small increase to 2.96-billion gallons in 2025. For those not familiar with the biodiesel market, those small but steady increases in biodiesel targets look good, but considering that the U.S. used 3.1-billion gallons in 2021, and 3.2-billion gallons in 2022, they represent a shocking cut for a market which has seen consistent growth for two decades. Assuming that the EPA moves ahead with its proposed targets, the biodiesel market will shrink by 12 % between 2022 and 2023.
Beyond the obvious problem (that investors in soybean processing facilities will be swaying between furious and frustrated as their marketplace shrinks due to a regulatory change), there is the bigger problem for farmers. Stalling the demand for soybean oil is going to weigh on the price for soybeans if they have to fight for other markets for oil. Cutting the demand for biodiesel by 12 % isn’t lethal to soybean prices, but it certainly tarnishes one of the shiniest stars in the soybean market: the huge growth in soy-based biodiesel.
I’m not qualified to speculate on the Environmental Protection Agency’s thought processes surrounding dialing back the use of biodiesel, but I would suspect that with nearly 40 % of the United States’ soybean oil production going into fuel for engines, and a serious wave of inflation impacting grocery prices for the American public, it’s possible that they made the decision to flatten the growth curve on vegetable oil based biodiesel. It’s unlikely that the Environmental Protection Agency would see an environmental benefit in fossil fuels over a plant-based renewable, so I’m going to give them the moral high ground and say that this at least looks like a food affordability decision.
Incidentally, for fuel ethanol, (largely made from corn), the RFS targets are still proposed to rise over the next three years from 15 billion gallons in 2023, to 15.25 billion gallons for 2024 and 2025.
Canadian regulators have not shown any intention of adjusting renewable fuel inclusion levels. Our Federal regulations call for 5 % renewable diesel and in Ontario, 10 % ethanol in gasoline. Those guidelines are in place until at least 2024. It’s also important to note that only about a quarter of eastern Canada’s soybeans are crushed for oil in this country. We are a heavily export dependant soybean production region, and in order to remain competitive in the global marketplace, our soybean prices need to stay in line with U.S. values.
Steve Kell is a Simcoe County crop farmer and handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.
