Renewable Diesel is Reshaping Supply Chains
For decades the United States has been a top producer and exporter of soy, supplying the world with feedstock used for both human and livestock consumption as well as biomass fuel. Though we haven’t been without competition, we have long been an export giant; until 2023. Last year, the U.S. became an importer of soy products including soy crush and oil. Is it simply draught and South American competition driving the change, or is the global push for cleaner fuel behind the changing supply chain dynamics?
An Agricultural Makeover in the U.S.
We’re seeing a sweeping shift beyond just efficient methods of production in agriculture into a world where practices and systems are filtered through sustainability and regenerative concepts. It’s changing what we farm, how we farm it and what we do with products once they’ve been harvested. Though we might believe the fuel sector is an outlier in this changing landscape, it seems renewable diesel and biofuel are the driving force behind many of the changes we are seeing in global trade.
Things are changing and clean fuel is taking the first wobbly steps into a much larger arena. It’s transition time, but logistically, transitioning to a new model of fuel production is complex. Biofuel and renewable diesel production require new infrastructure, new equipment, and new trade partnerships. The process of conversion is expensive. For a long time, green and clean energy didn’t hold a prominent place simply because it didn’t pencil out as a profitable option for energy companies. But, the last couple of years have turned the tables.
Progress Through Policy
Government policies have set a new precedent, and tax credit incentives that offset extra production costs, energy companies have been able to produce biofuel and renewable diesel and earn money while doing it.
Renewable diesel in particular would probably not exist as a viable option without these policies and tax credits. Though, in its final state, it is remarkably similar to petroleum but without the harmful emissions, its production is a complex and therefore costly process to facilitate. Several petroleum plants have converted portions of their operations to renewable diesel productions or built new facilities thanks to the cash flow generated by the pairing of mandated biomass minimums and financial backing in tax credit.
While policy and funding gave biofuel and renewable diesel their launching pad, it also pitted the two processes against each other. They both need the same feedstocks for production. The boom in demand for canola oil, soybean oil and animal fats has resulted in an influx of imports into the United States of products we formerly exported. Approximately 91% of canola oil produced in Canada is imported for biomass fuel production in the U.S. and Canada plans to increase their crush capacities. Between 2020 and 2023 imports of animal fats and vegetable oils into America increased by $10 billion.
Farmers Follow Suit
Farmers followed the trend and converted cropland for soybean production banking on federal mandated minimums for biofuel and renewable diesel to continue increasing. Despite the push for biomass fuel options, livestock feed was still in demand worldwide and soy based protein options for human consumption was on the rise. Suddenly, demand skyrocketed and farmers were eager to play their part.
But, it hasn’t been only U.S. farmers eager to cash in on the expanding market. Brazil and Argentina have also pushed to increase soy production. Unlike the United States, Brazil has virtually no storage capacity for soybean crush and meal. They aim to sell it as fast as they grow and process it. Any unsold soybean crush is a loss making it possible for them to sell it at a lower price point than American farmers. Their low prices pushed demand for U.S. soybeans down and farmers found themselves with a surplus of soybean crops as even American farmers began purchasing soymeal from overseas With Brazil selling at almost $1.50 cheaper per bushel, big name companies couldn’t pass up the opportunity to acquire livestock feed at what felt like a discounted price.
The United States remained somewhat competitive as demand for soy increased slightly due to drought in Argentina. However, Argentina expected to return to the market at full capacity in coming months and like Brazil, sell at lower price points than the U.S.
Can Soy Recover?
The booming demand for cleaner fuel options prompted soybeans to take center stage, but as the Environmental Protection Agency approves alternative sources animals fats, used cooking oils and canola oil have edged their way in. In fact, demand for canola oil and tallow outweighs demand for soy oil. As of January 2024, 32% of biomass diesel was sourced from soy oil; a significant decline from 44% the previous January.
A fledgling market is expected to feel growing pains. The value of American soy could change if policy shifts increased biofuel mandate minimums. These minimums have been lower than expected and added to over supply. Yet, it was the policy and funding that fostered the soy boom. If supply stays high farmers will be forced to sell for lower than the cost of production.
In order for American soy to increase in value roughly 3.25 million acres of soy crops would have to be eliminated from the market. Argentina or Brazil would have to experience a significant natural disaster or supply chain malfunction to render that many acres of soybeans unusable.
Both scenarios are unlikely in the near future. The American soybean market will stay depressed for a while longer. However, the biomass diesel market is young. It’s still getting its footing and best practices are still unfolding. Soy may yet regain a strong position in the clean fuel market.
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