Sizing Up the Soybean Market

New currents are influencing the soybean market-crude oil has a bigger influence than ever before, the relationship with corn is changing, global food and feed demand growth is slowing while U.S. food use declines.
By Susanne Retka Schill | November 13, 2008
Just two years ago, soybean oil accounted for more than 90 percent of the biodiesel produced in the United States. That has changed, thanks to sky-high commodity prices the past year, which prompted some biodiesel producers to turn to lower cost animal fats and waste vegetable oils to reduce their feedstock costs. Stratospheric markets, though, follow the rule of gravity-what goes up must come down. A tapering off from the early summer highs, which at its peak churned out 60-cent-per-gallon soybean oil, dived when the October financial crisis shook all of the commodity markets.

Soybean oil is still the dominant feedstock for biodiesel, although its use has dropped to an estimated 59 percent of the feedstock supply, according to Brad Anderson, senior vice president of Informa Economics Inc. Bruce Babcock, director of Iowa State University's Center for Agricultural and Rural Development, agrees and predicts soybean oil will remain the preferred feedstock for biodiesel. There is not enough waste grease available to make a tremendous amount of biodiesel, he says. Although soybean oil has been high priced in recent months, all the other oils are priced jointly with soybean, and producers aren't going to want to pay transportation costs for those others, Babcock says.

A number of factors have come into play as market observers try to predict longer term trends in the soybean market: the relationship between corn and soybeans is changing, the crude oil market has a stronger influence, and global supply and demand will continue to grow, although that growth is expected to slow.

Imported Crude Oil Prices and Soybean Prices January 2003 to September 2008


Corn Versus Soybeans?
Regarding the changing relationship between corn and soybeans, soybean acres have increased but not at the expense of corn acres. "We're in a new realm," Babcock says. "It's pretty hard to apply what we thought we knew about corn versus beans in the old days." This year, the market was surprised when the October USDA reports showed more soybean acres than expected. Babcock says those came from more double cropping of soybeans after wheat and more soybeans on traditional cotton acres. The increase in acreage more than offset reduced yields. "We were able to squeeze in a lot more soybean acres than we thought we were going to," he says. "That old relationship between corn and soybeans has changed."

To predict what the corn/soybean balance will be over the next few years, one needs to look at the renewable fuels standard (RFS), Babcock says. "For 2009 and '10, we're going to have to look at the number of corn acres needed to hit the RFS," he says. In the United States, corn acreage has historically been in the high 70s, (78 million acres planted in 2006), and soybean acres have run in the low-to mid-70s, Babcock says. "To meet the RFS, you have to plant 10 million more acres to corn," he says. That means corn would have to consistently be in the 88 million to 89 million acre range. To put that into perspective, more than 93 million acres of corn were planted in 2007 and 87 million acres in 2008.

Just as the ethanol industry has eaten up excess corn supplies, the biodiesel industry has soaked up excess soy oil. Traditionally, the soybean crush has been driven by demand for soybean meal. David Asbridge, senior economist with Doane Advisory Services explains that historically, meal has carried the bigger value, and soy oil was 35 percent to 38 percent of the value of the soybean. The oil value rose to 45 percent to 46 percent of the value of the bean when prices were high, indicating the value of soybean oil increased relative to soybean meal. However, soybean demand is still driven more by the soybean meal market. "We actually crush for the meal but the meal isn't very storable," Asbridge says. "You can't crush excess meal and store it, but you can oil. We're coming off record stocks of soybean oil in the United States."

The early expectation was that biodiesel would take the soybean oil it needed and oil exports would decline, Anderson says. "Well, this past year, we had huge soybean oil exports," he says. Under those early expectations for biodiesel, the industry thought the supply of soybean meal would accumulate. Instead, demand for meal continues to drive the crush. "We've seen soy oil stocks build to more than 3 billion pounds and the reason was, we had strong exports of soy meal in the past year," Anderson says.

Nonetheless, even though the crush is still determined mostly by meal demand, the influence of biofuels has soybeans tracking the crude oil market in recent months in much the way that corn has (see chart on page 45). "If you look at what soybean oil prices have done, they basically have tracked whatever biodiesel producers can afford to pay," Anderson says. While Babcock agrees with that influence, he says the RFS will put a limit on just how far corn and soybeans will follow crude oil, should the decline in oil prices continue. "If oil goes to $50, you won't see corn and soybean prices follow," he says.

Trans Fat Impact
Biodiesel has been particularly helpful to the soybean industry in that it became a home for the soy oil that didn't go to the food market after the trans fat labeling law took effect. "The trans fat issue was a big feature of the market when the [U.S. Food and Drug Administration] required the labeling of trans fat on food labels beginning January 2006," says Mark Ash, agricultural economist with USDA's Economic Research Service. "That caused a lot of food manufacturers to seek alternative oils for their products and minimize that trans fat percentage." For the past three years, food use of soy oil has declined about 3 percent annually. "Total consumption is down by close to 1 billion pounds over the past three years for food use," he says. "Methyl ester demand picked up all of that decline." The American Soybean Association says the cumulative 10 percent drop in food use over the past three years amounted to more than 4.6 billion pounds of soybean oil, which has been used to produce more than 600 million gallons of biodiesel. In refuting the food-versus-fuel debate, the ASA points out that at the same time biodiesel has offset the edible soybean demand, ending stocks of soybean oil have more than doubled since 2004 when the biodiesel tax incentive was first implemented. Soy oil now holds a 70 percent share of the edible oil market compared with the 80 percent it had prior to the trans fat labeling change.

Around the World
While the decline in food use for soybean oil in the domestic market appears to be tapering off, global food use of edible oils continues to grow, although the pace has slowed. Anderson says vegetable oil food use has grown by 2 million tons per year for the past couple of years compared with 5 million tons annual growth earlier. "The high prices appear to be slowing growth in traditional nonbiodiesel demand," he says. The world produced 135 million tons of vegetable oils last year, of which he estimates more than 10 million tons were used for biodiesel production. "The reason the world raises soybeans is the demand for meal," he adds. "If we need additional oil supplies in the world, we're getting it from palm oil production."

The global recession sparked by the October financial crisis is expected to dampen the growth in global food demand, but not reverse it. Iowa State University agricultural economist Bob Wisner returned from a meeting in China in the midst of the October financial meltdown. "The view in China on their economy is that it may slow a little, but it is much less sensitive to what's happening here in the U.S. and other areas because there is a tremendous amount of investment going to their domestic infrastructure-residential, industrial construction, road construction, new factories being built," he says.

Break-Even Chart


Jerry Gidel, an analyst and broker with North American Risk Management Services Inc., agrees that China's economy will continue to grow. "China and India were running at 12
percent growth, and if they drop to 6 percent to 8 percent growth, that's still going the right way." Not only will the Chinese continue to improve diets, he says, but feed demand should grow as the country's pork and poultry industries recover from disease-related production losses.
European demand, on the other hand, is expected to decline partly because of high prices and partly due to the anticipated world recession. Biodiesel growth is also slowing because the big biodiesel producer, Germany, has begun adding fuel taxes back into biodiesel, Asbridge says. "It's at 9 cents a liter now, and it's expected to increase until it's back up to 45 cents a liter," he says.

On the supply side of the global equation, analysts are watching developments in South America. Although soybean acres in Brazil have expanded, that growth is expected to wane, Gidel says. The USDA dropped its projections for growth in the acres being planted now to 3 percent, which was down from a 5 percent increase projected earlier. Gidel says one factor that's driving the acreage decline in Brazil is that much of the expansion has been financed by big multinational grain companies. "All of them got clipped back this year," he says, making further expansion less likely. In Argentina, there is a differential export tax structure that favors exporting soybean oil over exporting soybeans, and favors exporting biodiesel over exporting soybean oil, Anderson says. That incentive is driving growth in the Argentine biodiesel industry, with Europe as the target market.

While long-term expansion of soybean supply and demand appears to be in the cards, there is much more uncertainty about the near-term outlook, thanks to the October financial crisis. "Are we going to have a world recession, and what will happen to the value of the dollar?" Babcock asks. "A lot of that will play out in the price of
crude oil."

Crushing Overcapacity
Looming over the supply and demand fundamentals for global oilseed production and the U.S. soybean crop is the overwhelming surplus of biodiesel capacity. The United States biodiesel industry is operating at 35 percent to 40 percent of capacity and the EU at about 50 percent. "We have so much excess biodiesel capacity," Anderson says. "If much of a margin develops in the industry, we'll bring more of that idle capacity into production and the margin goes away. The most efficient, best-run, best-placed plants are the ones that get to operate."

In October, there was a wider window of favorable margins when soybean prices dropped faster than diesel prices, Asbridge says. "It should be a fairly decent time for biodiesel producers. They deserve it after what they've been through in the past year or so."

Looking at the fundamentals, Asbridge says the market went down too fast and too far this fall. "After we get through the harvest season and harvest pressure is off, we'll see the prices moving back up in the winter," he says. "We've got to see corn acres increase next year in the United States. We're anticipating corn prices will move up and pull soybeans up with it."

Susanne Retka Schill is a Biodiesel Magazine staff writer. Reach her at or (701) 738-4922.
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