Dec 30, 2019
The soybean oil futures curve has appreciated since the beginning of December and has been led by the January contract, which has risen by 13 percent to its highest level in a year. The contraction of vegetable oil supplies in Indonesia, Malaysia, the EU and Australia have helped provide some support to U.S. soybean oil futures.
We believe that congressional reinstatement of the biodiesel blending tax credit was an important catalyst for some of the price action and has the ability to provide future support.
Last week, Congress amended a government spending bill that contained language to renew and extend the $1 per gallon blending tax credit for the biodiesel industry through 2022. The tax credit is also retroactively applied to the last two years. Since the credit was revoked in 2018, 10 plants in the U.S. have closed.
The biodiesel credit was created in 2005 as part of the Renewable Fuel Standard (RFS), which was designed to help farmers and increase U.S. energy independence by promoting support of biofuels. The blending tax credit costs close to $2 billion per year and according to the Department of Energy (DOE) is one of the most costly U.S. energy subsidy programs. The tax credit provides a subsidy to biodiesel refineries that use feedstocks such as soybean oil along with animal fats and industrial greases to produce the fuel.
The latest production data from the DOE showed that during September, the 95 U.S. biodiesel plants produced 142 million gallons of biodiesel. While this figure is down from 164 million gallons in 2018, the nine-month year-to-date total of soybean oil used in biodiesel in 2019 is 6% higher than the same time during 2018. Domestic biodiesel demand continues to be strong, as the monthly ending stocks level has been close to zero since February.
We believe the tax credit is a positive for the U.S. soy producer. Despite strong demand, the estimated biodiesel producer gross margins have been soft to negative for most of 2019. We believe the tax credit provides a financial incentive to increase production, which can be positive for soybean oil demand. We also believe that the positive downstream demand structure for soybean oil can help draw down domestic soybean oil stocks while creating an enhanced demand structure at the crush level. And we believe greater demand for soybean derivatives, meal and oil can support crush margins, which has the ability to be supportive local soybean basis.
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Dec 30, 2019