Shake-up in oil market

e soyabean and edible oil sector in the USA is expected to experience major disruption due to the growth of the country’s renewable diesel market Keith Nuthall

An anti cipated surge in supply and demand for renewable diesel is likely to cause major disrupti on to the American vegetable oil market and industry, notably soya.

With the US government and certain states regarding renewable diesel as a swift way to further reduce carbon emissions and meet Paris agreement climate change targets, the prospects for major additi onal purchases of soyabeans within the US domesti c market are very real.

A note from the EU Energy Informati on Administrati on (EIA) released in July projected that because of planned producing and refi ning capacity projects, US producti on of renewable diesel would rise from 0.6bn gallons/year or 38,000 barrels/day (b/d) in 2020 to 5.1bn gallons/ year (330,000 b/d) by the end of 2024.

Prices are already rising and will probably increase further, causing a major headache for food industry buyers of soyabeans who have already been struggling with infl ati onary pressures that they have been passing on to customers.

The latest data from the US Department of Agriculture (USDA) notes how American soya producer revenues have boomed to US$46bn in 2020, up from US$30bn in 2019.

But without additi onal producti on coming online, or the diversion of US soya exports to the domesti c market, these prices may grow further. Soyabean producti on was up in 2020, but nowhere near the increase in renewable diesel demand – 4.1bn bushels, up from 3.5bn bushels in 2019. Soyabean oil producti on expanded more slowly (25.6bn pounds in 2020, compared to 24.9bn in 2019).

A key driver of this change is politi cal – the current federal and many state administrati ons in the USA are committ ed to fi ghti ng climate change. This has sparked the federal Renewable Fuel Standard (RFS) and the California LowCarbon Fuel Standard (LCFS), with similar rules in Oregon and Washington state, for instance, which favour the use of renewable diesel. While it uses the same soya feedstock as biodiesel, the manufacturing process is completely

diff erent, and it is popular because it can be easily substi tuted for fossil fuels without changing combusti on systems.

Soya supply crunch

This is creati ng the risk of a real supply crunch. Currently in 2021/21, around 50% of the soyabeans grown in the USA are crushed domesti cally to make oil and meal, with the remainder exported as whole beans for crushing elsewhere. In terms of product, 20% of crushed beans become oil and the remainder meal, the vast majority used to feed livestock, especially poultry and pigs within the USA.

Soyabean oil is currently used domesti cally to make edible products, for baking and other food ingredients, plus some industrial applicati ons, such as paint, as well as the burgeoning renewable diesel (and biodiesel) feedstock.

Around a third of domesti c US soya oil supplies is used to make renewable diesel or biodiesel. But that proporti on is expected to grow and that may disrupt the market and the industry.

American producti on could increase through farmers switching to soya from diff erent crops or diverti ng exports to the domesti c market, which would be ready to consume beans through major new renewable diesel plants. An example would be Marathon Petroleum’s refi nery in Marti nez, California, which may produce 730M gal/y (48,000 b/d) in 2023; and Phillips 66’s Rodeo Renewed project in San Francisco, which could make 800M gal/y (52,000 b/d) of renewable fuels by 2024. That would require additi onal crushing capacity in the USA and companies are investi ng in this area.

A major announcement came in August, when Archer Daniels Midland (ADM) announced it would work with Marathon to set up a crushing plant in North Dakota to handle 150,000 bushels/day of soyabeans by 2023. In September, oil major Chevron and commoditi es trader Bunge announced plans to invest US$600M to double the capacity of two Bunge crushing faciliti es, which together currently crush 7,000 tonnes/day of soyabeans.

Commenti ng on the changes, Thomas Hammer, president of the US Nati onal Oilseed Processors Associati on (NOPA) said: “We have never seen anything like it. We’re in uncharted waters. The markets are going to have to deal with this. I don’t know how this will all shake out. It’s the biggest change in 20 years.”

Climate change threat

Technical advancements could also boost yields, but researchers have stressed that the US soyabean sector will have to fi rst contend with climate change, as with other oilseed crops such as this summer’s drought-reduced canola harvest

Photo: Adobe Stock

Shake-up in oil market

in Canada. Climate change could reduce US soyabean yields by 27.9% by the end of this century, claims a 2020 paper in Climati c Change journal. Clever new agricultural techniques could claw back these losses, but they would have to avoid chemical inputs to be sustainable.

If increased US soya crushing producti on and/or export diversion occurs, US processors will have a lot more meal to sell, domesti cally and overseas, which could reduce prices. Whether major food manufactures, such as Nestlé and Mars, would be prepared to see their American soya oil supplies fall, is another questi on – especially as both companies have made public commitments to source sustainably, without promoti ng deforestati on – a potenti al problem in Lati n America and Asia, for instance.

These key food buyers may start looking for new suppliers or nail their own longterm contracts. In additi on, importers of US soyabeans may be nervous about export diversion.

China currently imports signifi cant amounts of US soyabeans for its own processing, including feed for its important pigmeat sector. While the USDA predicts 2021/22 US soyabean exports will be 2.075bn bushels, (down 9% from 202221), any reducti on in supply of this key input could have important consequences for a Chinese government that needs to keep its citi zens happy through reliable food supplies.

A growth in healthy eati ng trends strengthend by the COVID-19 pandemic is expected to benefi t sales of olive oil and canola oil in the USA

A switch to canola?

Another possible switch for US-based food processors would be an increase in canola supplies from Canada. However, the meal by-product is less nutriti ous than soya meal and generally targeted at dairy and beef catt le because ruminant digesti on can deal with the lower quality feed – chickens and pigs fare less well.

In any case, Canadian growers will want to avoid a repeat of this year’s drought-hit harvest. The USDA in August esti mated that Canadian canola producti on would fall to 16M tonnes, down 4.2M tonnes from earlier esti mates.

One reason that the USA looks like a good long-term bet for canola producers is its increasing food oil purchases, with consumers regarding canola as a healthier vegetable oil opti on.

Research released in January by USbased Allied Market Research says canola oil will increase sales by more than any other American segment – with a 2021-27 CAGR of 6.3% (with olive oils also growing fast) “owing to their health benefi ts”, which will “usher a plethora of opportuniti es for players in the near future”.

“Numerous applicati ons of vegetable oil, the growing popularity of fast food, and changes in consumer lifestyle towards more convenient foods in the food service and food processing industries augment the growth…” the report noted.

Healthy eating trend

Another market researcher, Euromonitor Internati onal, has stressed that the COVID-19 pandemic has strengthened healthy eati ng trends that will energise these American edible oil market shift s.

“Organic olive oil has seen a parti cularly strong spike in demand, with forti fi ed/ functi onal vegetable and seed oil also seeing signifi cant growth in 2020,” noted Euromonitor in a December 2020 report. One reason is because COVID-19 has highlighted the health risks of being overweight, notably from poor diets and “this is likely to increasingly inform consumer purchasing decisions when it comes to edible oils. Olive oil is likely to be the key benefi ciary…,” predicted Euromonitor. And with the American Obesity Associati on predicti ng that by 2025, 50% of Americans will be obese (50 pounds over the medium average weight and 60% by 2030), there will be plenty of consumers reminded of the need to buy healthy oils when they look in the mirror. With the USA populati on now exceeding 330M, that will deliver a lot of demand.

Looking at canola oil, which has the rosiest prospects in the USA, US Canola Associati on communicati on director Angela Dansby said sales were being boosted by an appreciati on that “canola oil is among the healthiest edible oils in the world”.

With cardiovascular disease remaining the leading cause of death for US adults, American consumers are increasingly aware that food choices impact health, she said. So, the fact that the American Heart Associati on recommends canola oil “as a heart-smart ingredient” can only boost sales, notably through its low saturated fat and high omega-3 fat content. US canola oil consumpti on more than quadrupled from 2003 to 2019 – from 4.5 to 17.2 pounds (lbs) per person. This will probably att ract more American farmers into this market, given that domesti c supply only delivers 31% of demand at present, with Canadian exports a key supplier. Output growth is expected, said Dansby, in areas such as the Pacifi c Northwest and the Great Plains where this broadleaf crop rotates well with wheat or small grain crops. Canola’s sustainability profi le is also boosted by the fact that canola fl owers produce high amounts of nectar, good for honey producti on.

That said, as with soyabean oil, there may be growing demand for canola oil to be used as a renewable diesel feedstock as well. Dansby noted that canola-based biofuels can reduce greenhouse gas emissions by over 50% compared to conventi onal fuels: “What’s good for the heart is good for the engine; low saturated fat canola oil makes renewable fuel with excellent cold fl ow properti es.”

Canola may end up being caught in the fuel-food market tussle as well. ●