Soy Oil-Biodiesel Supply and Demand

AgMRC Renewable Energy Newsletter
September 2008

 Robert Wisner
 Professor of Economics and Energy Economist
 Ag Marketing Resources Center
 Iowa State University
 rwwisner@iastate.edu
 

View Soybean Balance Sheets (xls)

The soybean oil-biodiesel balance sheet can be thought of as a commodity counter-part to financial balance sheets.  Financial balance sheets focus on the supply and demand for money that is available to a business, an individual, or other institution, and how much will be left after all demands for funds are met.  Important terms in financial balance sheets are assets, liabilities, and net worth.  In commodities, the focus is on available supplies, various sources of demand, and carryover stocks that are left at the end of the marketing year after all demands have been met.

With the rapid expansion in the biodiesel industry, profitability of converting soybean oil to biofuels depends heavily on available supplies and other demands for soybean oil.  Impacts of biofuels demand growth on other users of soybeans also depends heavily on this same information.  To support the expansion in biodiesel production, 2007 U.S. energy legislation establishes government mandates that call for half a billion gallons of biodiesel use in 2009, with additional expansions in future years.  Because of expanding biodiesel use mandates, it is important to examine soybean oil-biodiesel balance sheets from a multi-year perspective.  A multi-year perspective is shown in our latest soybean oil-biodiesel balance sheet.  The soybean oil supply-demand balance in the next several years also will be affected by the expanding ethanol industry, the need for more corn acres, limited availability of U.S. cropland, and strong competition between corn, soybeans, and other crops for the available land.

Current Situation

The dramatic rise in the farm price of soybeans from the under $5.00 per bushel level in the fall of 2005 to early July 2008 forward contract prices exceeding $15 per bushel for summer 2009 delivery is a by-product of the rapid expansion in the biofuels industry here and abroad.  Rising foreign demand for grain and oilseed products also has contributed somewhat to higher prices, although the major factor clearly is biofuels.  Since the 2004-05 marketing year, the volume of U.S. corn processed for ethanol has increased by 1.65 billion bushels or 125%.  Recent USDA projections show another 37% or 1.1 billion bushel increase likely in the marketing year beginning September 1, 2008.  That’s a combined increase of 2.75 billion bushels in four years, and has required shifting of soybean land to corn.  In addition, a 7% increase in use of soybean oil for biodiesel is projected for the year ahead.

Growth in the use of biodiesel is slowing, but our estimates indicate that the industry will have grown by over 600% from 2004-05 to 2008-09.  At that rate, the industry will have increased the demand for soybean oil by the oil-equivalent of 240 million bushels of beans.  During the same period, USDA projected in August 2008 that exports will have declined by 97 million bushels or 9%.  From 2004-05 to 2008-09, USDA projections show a 10 percent or 182 million bushel increase in U.S. corn exports and a 14% or 858 million bushel decrease in corn feed and residual use.  Nearly all of the decrease in corn feeding is projected to occur in the year ahead, because of limited availability of corn.  With no changes in biofuels and Conservation Reserve Program policies, very tight U.S. and world corn supplies appear likely for the next few years.  At the same time, demand for additional cropland for corn and biodiesel use mandates is likely to keep soybean and soybean oil supplies tight.  The balance sheets let you see the details on how soybean oil supplies and demands are changing.  They also show the potential impact on carryover stocks remaining at the end or the marketing year, and on prices with a range of alternative crop yields.