U.S. Soybean Oil: Biofuel Closes-in as Top User

Posted by David Widmar on May 20, 2024

The USDA’s first 2024/25 marketing year projections estimated that 14.0 billion pounds of soybean oil would be used in biofuel production. The reports also estimated that 14.3 billion pounds of soybean oil would be used for “food, feed, and other industrial uses.” After years of closing in, soybean oil is close to becoming the top user, a feat that would have seemed unlikely a decade ago.

U.S. soybean oil usage trends

During the 2014/15 marketing year, biofuel accounted for just 24% of soybean usage in the U.S. Then, 14.0 billion pounds went to “food, feed, and other industrial uses,” 5.1 billion to biofuel, and 2.0 billion pounds to export markets. 2014/15, however, turned out to be an inflection point. In the subsequent 11 years, growth in biofuel usage of soybean oil increased at an average annualized growth rate of 9.7%.

Over that same decade, “food, feed, and other industrial uses” changed very little (+382 million pounds), and exports significantly contracted (-1.5 billion pounds). In other words, biofuels consumed all the growth in domestic soybean oil production and displaced 75% of export activity.


Figure 1. U.S. Soybean Oil Disappearance, 2011/12 – 2024/25F. Data Source: USDA PSD.

 

The construction and expansion of soybean crush capacity have been hot topics. Figure 2 shows annual U.S. soybean oil production since 2011/12. What stands out is how, at least thus far, the growth in soybean oil production has been surprisingly linear. The growth rate has averaged 673 million pounds annually. Furthermore, there is little annual deviation from the trendline. The R-squared, which is very high (0.98), tells us that the trendline explains 98% of the variability in the data. The r-squared for the corn trendline is 0.81.

As announced and anticipated crush capacity comes to realization, the slope of this trendline – and divisions – will be worth monitoring.


Figure 2. U.S. Soybean Oil Production, 2011/12 to 2024/25F. Data Source: USDA PSD.

 

Soybean oil loses steam

Stemming from state-level policies and renewable diesel, soybean oil prices created economic incentives for those in the business of crushing soybeans. However, soybean oil prices have trended downward since 2022. In recent weeks, prices have been below $0.45 per pound for the first time since 2020. For context, soybean oil prices averaged $0.75 per pound in 2022.


Figure 3. Illinois Soybean Oil Prices, 2010 – 2024. Data Source: USDA AMS.

 

The slide in soybean oil prices has dampened the gross margins for crushers. Reported conditions in Illinois show that gross margins have fallen to $2 per soybean bushel (Figure 4). Gross margins in 2022 – at the peak of soybean oil prices – averaged $3.43 per soybean bushel. However, the average since 2010 was $2.06, and the median was $1.82. This is to say that the gross margins for crushers have largely returned to normal. That said, keep in mind these are nominal dollars, and those gross margins are simply the difference between the revenue from the components sold (oil, meal, and hulls) and the price of soybeans. All other operational and overhead costs come out of the gross margin. While close to the nominal average, it isn’t clear how appealing building or expanding a soybean crush facility is at $2 gross margins.


Figure 4. Reported Illinois Soybean Crush Gross Margin, 2010- 2024. Data Source: USDA AMS.

Wrapping it up

Biofuels have been the only source of growth in soybean oil usage over the last decade. The category will likely overtake “food, feed, and other industrial uses” as the largest user in the next year or two.

The economics of soybean crushing have returned to more normal conditions as soybean oil prices have turned lower. The current situation for soybean crushers is neither frothy nor dire. However, it’s unclear how current gross margins affect the enthusiasm of those looking to build or expand capacity.

Looking ahead, domestic soybean oil production is the data to watch. How will the crush capacity expansion unfold and affect production? When considering future potential, it’s sometimes easy to lose sight of the long-run trend. Soybean oil production has been very consistently increasing over the last 14 years. When and how might new growth affect that trend?

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