Biodiesel is created from one or a blend of a variety of virgin or waste vegetable oil, animal fats, or algae ‒ which are then chemically treated by the process of transesterification or the creation of methyl ester. Soybean oil is the most commonly used input in the production of biodiesel, summing approximately 70% of vegetable biodiesel input in 2018. For the purposes of meeting environmental regulation, the US government considers domestic biodiesel to be carbon neutral because the process of growing the feed stocks absorbs CO₂.

Biodiesel is typically blended with petrodiesel to a concentration of at least 10% pure biodiesel to 90% petrodiesel, a blend ratio referred to as B10. Preexisting diesel engines can run on pure biodiesel (B100) only with modification. The US Department of Energy estimates that there are 332 fueling stations offering biodiesel concentrations of B20 or higher, with 157 of those stations in the state of Minnesota.

As of January 1, 2021, 75 plants in the United States produced biodiesel, totaling a total capacity of 2,409 million gallons per year. The state with the plurality of biodiesel plants was Iowa, with 10 plants comprising an aggregate production capacity of 460 million gallons annually.

According to the US Energy Information Administration, biodiesel accounted for 30% of domestic soybean oil use as of 2019, while the USDA Oil Crops Yearbook counted 35% of domestic disappearance of soybean oil stocks in 2020 as attributable to methyl ester, as seen in Figure 1 below, with 8,300 million pounds of soybean oil committed to transesterification.

Source: USDA Oil Crops Yearbook

Renewable diesel is a transportation fuel derived from biomass via the process of hydrotreating that is suitable for use in unmodified diesel engines. Renewable diesel is required to be chemically identical to traditional petrodiesel, and unlike biodiesel, need not be used in the form of a blendstock (though it can be blended with biodiesel or petrodiesel). Because it is functionally equivalent with petrodiesel, it is required to meet the US ASTM D975 fuel standard for diesel, and in Europe, EN 590. Corollary to the requirement that renewable diesel be interchangeable with petrodiesel in preexisting diesel engines, there is no perceptible change in engine performance when comparing the use of petrodiesel to that of renewable diesel. Renewable diesel in the form of hydrotreated vegetable oil is known as HVO, and when blended, renewable diesel adopts an analogous nomenclature to that of biodiesel blends: 20% renewable diesel to 80% petrodiesel, for example, is known as R20.  

Significantly less renewable diesel is produced in the United States than biodiesel, creating demand for renewable diesel imports and a relative price premium compared to biodiesel. According to the US Department of Energy, only five plants in the United States produce renewable diesel, comprising a production capacity of 400 million gallons per year. The US Environmental Protection Agency estimated that 900 million gallons of renewable diesel were consumed in the United States in 2019, with the deficit between domestic production and consumption met by imports from Asia via the port of Singapore.

US domestic renewable diesel production is expected to grow significantly in the coming years.  At least six new renewable diesel plants are under construction.  That along with expansions to existing plants represents over 2 billion gallons of additional capacity.

The US Renewable Fuel Standard is a national program requiring that transportation fuel in the United States contain a minimum, and annually increasing volume, of renewable fuels. The program originated with the Energy Policy Act of 2005 and was enhanced by the Energy Independence and Security Act of 2007, at which point starch ethanol comprised almost 100% of the renewable fuel landscape in the United States. It was estimated that in 2020, conversely, ethanol totaled less than 50% of total renewable fuel volume by year, with bio- and renewable diesel comprising an increasing share. Renewable diesel consumption in the United States is concentrated in California, driven by the state’s Low Carbon Fuel Standard.

The European Union unveiled an ambitious piece of climate legislation this past summer called “Fit for 55,” which aims to cut greenhouse gas emissions by at least 55% by 2030, as compared to 1990 levels, and make the bloc carbon neutral by mid-century.

As the prevalence of biodiesel and renewable diesel continue their rise, soybean oil will gain increasing importance as a fuel stock. USDA Chief Economist Seth Meyer stressed at a recent Ag Outlook Forum in Kansas City the impact that renewable diesel is expected to have on the soybean market, calling major oil company investment in the product “politically dynamic.” At the forum, Meyer is reported to have estimated that due to the state’s Low Carbon Fuel Standard, California thirst for renewable diesel is at a level more than double current domestic production, putting pressure on US soybean growers and crushers to meet demand.

Biodiesel and renewable diesel producers are facing challenges in securing feedstocks. Strong demand has pushed prices sharply higher in some of the key feedstocks. US soybean oil prices have more than doubled over the past 12 months. Waste biofuel markets such as used cooking oils and animal fats have also been trading at close to record levels.

Feedstock selection will remain a critical component of the market as more producers bring production capacity onto the market. CME Group lists the global benchmark for soybean oil. The recent strength of Soybean Oil futures prices relative to Soybean Meal futures prices suggests that US soybean crushing is likely being driven more by the demand for soybean oil than in the recent past. 

Soybean oil’s share of the soybean crush margin has recently hit the highest level in over five years, driven in part by this demand for feedstock in the biofuel industry. 

*Rolling 20-day average prices
Source: CME Group

Should growth in renewable fuel demand continue resulting in new demand for feedstocks such as soybean oil, the historical relationship between soybean oil prices and soybean meal prices could trend toward soybean oil. Under that scenario US soybean crushers could increasingly see their crush margins driven by soybean oil rather than soybean meal.