Agriculture and Energy: A Historic Intersection
By Emily Balsamo
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EPA Blending Mandates Influence Ags Markets

In the U.S., policy in the form of the Renewable Fuel Standard (RFS), which sets national blending mandates, drives these markets. In the U.S., soybean oil is the principal input to what is designated by the RFS as biomass-based diesel (BBD), with biodiesel and renewable diesel being the primary fuel types. 

While biodiesel and ethanol need to be blended with petrodiesel to operate in unmodified internal combustion engines, renewable diesel can function identically to petrodiesel as a drop-in fuel. Biomass-based diesel fuels are widely considered to emit significantly less carbon than petrodiesel or ethanol-blended gasoline.

Soybean Oil Production for Biofuel

Seasonal Volatility

Agricultural volatility peaks in the summer months, when volatilities of other asset classes tend to experience a lull. Agricultural volatility peaks in the summer because the principal crops –  corn and soybeans – are in the ground, and thus the slightest zephyr in weather and planting can yield significant headwinds or tailwinds in price in new crop instruments December Corn and November Soybean Complex futures. Volatility tends to peak around the end of June, coinciding with the release of the USDA Acreage report. 

Weekly Seasonal Ag volatility

According to the CME Group Volatility Index (CVOL), Soybean Oil has been among the most volatile Agricultural products at CME Group in average weekly CVOL since 2021, behind only Lean Hogs and Chicago Wheat. The commodity’s energy application has strengthened traded volume in Soybean Oil futures in the past few years, propelling the product into the contest for third place among most traded Agricultural futures products, overtaking Soybean Meal and Chicago Wheat in Q2 2024. Soybean Oil futures saw an average daily volume (ADV) of around 150,000 in 2023 and are experiencing record average daily volume and open interest thus far in Q2 2024.  

soybean oil futures option ADV and OI

The Growing Importance of Soybean Oil

While use of corn for ethanol has found stability in recent years, use of soybean oil for biomass-based diesel is only expected to increase further. Renewable diesel production capacity, in particular, is being rapidly built to satisfy blending mandates under the RFS. While canola and waste and residual oils are the primary inputs to BBD in the European Union, soybean oil continues its dominance in feedstock inputs in the U.S., underlying a robust and liquid derivatives market. As market dynamics evolve in an ever changing world, CME Group continues to provide risk management solutions across the agricultural and energy markets.

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About the author

Emily Balsamo
Emily Balsamo

is a Manager of Commodity Research and Product Development. She is based in Chicago.

 

 

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