Crude Oil Price Trends: Their Impact on Soybean Complex Prices and Biodiesel Economics
AgMRC Renewable Energy Newsletter
Dr. Robert Wisner
University Professor Emeritus and Biofuels Economist
Ag Marketing Resource Center
Iowa State University
After a modest recovery from January lows, crude oil prices have trended downward again this summer and have dropped below the lows of last winter and spring. Lower crude oil prices have caused a downward trend in diesel fuel prices, leading to retail diesel fuel prices in parts of the U.S. that have been below gasoline and E-10 for the first time in several years. Lower diesel fuel prices in turn decrease the price that can be expected for biodiesel. Oil industry analysts and economists do not anticipate a quick recovery in crude oil prices (i). These developments raise important questions for the biodiesel industry and for producers and processors of biodiesel feedstocks as well as users of soybean oil. In this article, we look at what’s behind these developments and their implications for biodiesel firms as well as soybean growers, soybean meal prices, and users of soybean meal.
Crude Oil Developments and Price Trends
Figure 1 shows crude oil production for major producing countries and regions in thousands of barrels per day. Production has declined over time in the Middle East, and increased slightly in Russia. However, the main sources of increased world crude oil production have been the U.S. and Canada. The U.S. has now become the world’s largest producer of crude oil. Prices for crude oil began to turn downward in mid-2014 as the market responded to the rapid increase in North American crude oil production. The downward trend accelerated late in the year as Saudi Arabia announced its intention to increase production, allegedly to reduce prices to unprofitable levels for North American producers and thus bring a halt to the upward trend in production. Prices recovered modestly last spring in response to a sharp drop in the number of operating U.S. oil drilling rigs. Since then, U.S. crude oil production has been steady to slightly higher than a year earlier, rather than declining as some had expected (ii). The U.S. Energy Information Administration predicts U.S. production will decline modestly in the next few months, but an increase in Iran’s production is anticipated with removal of sanctions in the pending U.S.-Iran agreement. In addition, there is concern that China’s economic growth rate is declining and that its petroleum use will stagnate (iii). China is the world’s second largest petroleum user after the U.S.
Diesel Fuel and Crude Oil Price Relationship
Declining crude oil prices have led to a decline in diesel fuel prices. Figure 2 shows the relationship of monthly diesel prices and crude oil prices. There is some variability in the two price series but as the chart shows, they tend to move in the same direction over time. Recent diesel fuel prices have lagged behind the decline in crude oil prices. Crude oil prices at Cushing, Oklahoma dropped to $93 per gallon in January of this year, then increased by approximately $14 per barrel into the late spring, before trending downward into the summer. In late August, these prices fell below $40 per barrel for the first time since early 2009.
Figure 3 shows Chicago Mercantile Exchange crude oil and soybean oil futures prices for the last several months through August 24, 2015. The two prices show significant similarity although short-term movements differ slightly. USDA’s monthly spot soybean oil price series ends in August 2011, when the Census Bureau stopped issuing monthly soybean crush reports. For that reason, we used futures to show the relationship of the two commodities. In the last half-dozen years, biodiesel has become an important link between these two price series. Soybean oil is the dominant feedstock for U.S. biodiesel production, accounting for about 2/3 of the total feedstocks used in recent years.
Biodiesel and Changing Soybean Oil Use Patterns
In the last few years, domestic food use of soybean oil has declined moderately, partly because of tightening regulations for trans-fats. At the same time, the biodiesel industry has emerged and has become an important source of demand for soybean oil, offsetting reduced food use.
Figure 4 shows percentage shares of total soybean oil demand originating from (1) biodiesel, (2) other domestic use, and (2) exports since 2002. U.S. commercial biodiesel production started in the early 2000s and has expanded to about ¼ of total soybean oil demand in the last two marketing years. At the same time, soybean oil consumption for other purposes, largely food, has declined from 88% in the 2002-03 marketing year to 67% in the marketing year just ending. Exports at the same time declined from 11.7% to 9.3%. With these changes, soybean oil use for biodiesel has become a major influence on soybean oil prices and almost certainly will continue to be important in soybean oil pricing in the next several years. Low diesel fuel prices strongly affect the value of soybean oil for use in biodiesel production, thus influencing biodiesel economics as well as the value of soybean meal. Soybean oil exports are less important than in the past but may still be a price influence in years when major foreign oilseed crops are reduced by adverse weather.
Soybean meal historically has been the dominant source of demand for soybeans. Its price and the world supply-demand balance for soybeans are the dominant influences on soybean prices, with market mechanisms pricing soybean oil at a level that will generate enough demand to prevent excessive carryover stocks. In the last few years, soybean oil generally has needed to be priced at levels maintaining or encouraging expanded biodiesel production.
As Figure 5 indicates, soybean oil is the by far the largest expense in producing biodiesel. It accounts for approximately 85% of the total variable cost of producing biodiesel when soybean oil is the feedstock. Soybean’s dominant share of biodiesel’s production expense strengthens the linkage between crude oil, diesel fuel and soybean oil prices.
Biodiesel and Diesel Fuel Price Relationships
Figure 6 shows the relationship of monthly biodiesel and diesel prices since early 2007. During much of this period, biodiesel prices were moderately above diesel fuel prices. The dollar per gallon biodiesel tax credit allowed its prices to be above diesel fuel. However, the tax credit expired on December 31, 2013. That is the point on the chart when biodiesel prices dropped below diesel fuel and have remained at or slightly below diesel fuel most of the time since that date, except for a few months in late spring and summer of 2015. On December 17, 2014 the credit was reinstated and made retroactive, but only for 2014 and was allowed to expire again on December 31, 2014. Thus, since most of the year was already passed, the extension only affected biodiesel/diesel price relationships for the last two weeks of 2014.
Low biodiesel prices have kept profitability low at biodiesel plants since the tax credit expired (iv). In July of this year, the U.S. senate voted to again reinstate the $1 per gallon tax credit, but it has not yet been approved by the House of Representatives. If approved, this could allow biodiesel prices to move above diesel prices and improve the profitability of biodiesel producers. Also, proposed future increases in biodiesel mandates, if approved, could strengthen the relationship of biodiesel prices relative to diesel fuel (v).
Implications for Soybean Meal and Soybean Prices
Soybean meal and oil are co-products produced in soybean crushing plants. Changes in the value of soybean oil affect the cost of soybean meal. For example, with low soybean oil prices, soybean meal prices have to be higher than otherwise to allow processors to recover the cost of the soybeans and a return to cover other costs and provide a profit. Thus, declining diesel and biodiesel prices tend to provide support under soybean meal prices. At the same time, they temper upside potential in soybean prices unless adverse weather alters soybean supply-demand prospects.
i Wisner, R., "Impact of Crude Oil Price Collapse on Corn Starch Ethanol", AgMRC February renewable energy and climate change report
Christopher Johnson, “U.S. oil fall longest in 29 years after China data”, Reuters-London, August 21, 2015; Scott Irwin, “The Real Price of Crude Oil and Gasoline”, FarmDoc Daily, University of Illinois, Urbana, August 19, 2015, and Clifford Krauss and Rick Gladstone, “From Venezuela to Iraq to Russia, Oil Price Drops Raise Fears of Unrest,” New York Times, August. 24, 2015,
ii EIA, U.S. Energy Department, “United States Crude Oil Production-1950 to 2015”
iii Christopher Johnson, Op. Cit.
iv Ag Marketing Resource Center, Biodiesel Profitability
v For details on the proposed mandates see R.Wisner, “Implications of EPA's Proposed 2014 through 2017 Biofuels Mandates,” AgMRC Renewable Energy Monthly Report, June 2015