Low oil content in this year’s crops and changes in the U.S. biofuel mandate could cause soybean oil demand to surge
MINNEAPOLIS, Minn. — A leading oilseed analyst is bearish about soybean prices but bullish about soybean oil prices, which is good news for canola growers.
“If soy oil’s (price) goes up, that’s a huge boon for any oilseed that has higher oil content,” said Bill Lapp, president of Advanced Economic Solutions.
He is forecasting a substantial increase in U.S. soybean oil prices from today’s levels of 26 to 27 cents per pound.
“A 10 percent increase is possible, and I think there’s risk of an even bigger increase, maybe into the lower $0.30s, maybe $0.35 at some point during the 2015-16 crop year,” said Lapp.
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U.S. soy oil stocks are forecast to remain at historically low levels. The U.S. Department of Agriculture forecasts 1.78 billion pounds at the end of 2015-16 and Lapp thinks it will be even less.
However, stocks have been a poor predictor of prices. In early 2007, the United States had more than three billion lb. of inventory and the price was about 70 cents per pound. Today stocks are about half that and the price is less than 30 cents. That’s because soy oil prices are heavily influenced by crude oil prices, which have plummeted to about $45 per barrel from more than $100 per barrel a year ago.
A crude oil recovery to $50 to $60 would have a big impact on soy oil prices.
Lapp expects soy oil supplies to dwindle even more in 2015-16 because of low oil content in this year’s soybean crop and likely changes in U.S. biodiesel policies.
The U.S. Environmental Protection Agency has proposed changes to the advanced biofuel mandate, which by-and-large will be met by biodiesel production.
An EPA decision to stick with its 3.4 billion gallon mandate for next year would substantially increase biodiesel demand and cause soybean oil use to surge because it is the feedstock of choice for most U.S. biodiesel plants.
“That could force an increase of more than 10 percent in the amount of biodiesel we need in the coming year and absorb a significant quantity of the (soybean oil) inventory we have,” Lapp told the recent Oilseed & Grain Trade Summit.
The U.S. Senate’s finance committee has also proposed switching the $1 per gallon biodiesel tax credit next year to a producer’s credit rather than a blender’s credit.
It means biodiesel plants would be able to afford to pay more for the soybean oil they buy. As well, the credit would be available only to U.S. plants, which would stem the tide of imported biodiesel from Argentina. Again, that would be positive for U.S. soy oil prices.
Lapp was also bearish about soybean seed prices, largely because of the large South American and U.S. crops that will rival what was harvested in 2014-15.
New crop U.S export sales are off to their slowest start in seven years with sales commitments for 32 percent of the crop as of Sept. 3, compared to the previous five-year average of 50 percent.
“We do about 80 percent of our soybean exports in the first six months of the marketing year, so if we don’t catch up we could have a significant decline from a year ago.”
The problem is the strong U.S. dollar, which is making U.S. exports uncompetitive in overseas markets. Lapp said the U.S. export program will be 100 to 200 million bu. less than the previous year if the situation does not turn around in a hurry.
Record high global soybean stocks are another bearish factor. Argentina’s farmers hold 39 percent of world stocks, hoarding their crops in response to the government’s punitive export taxes.
Argentina’s general election will be held this month, which could result in new export policies.
“You could see some dynamics there where Argentina suddenly unloads some of those soybeans,” said Lapp.
Some analysts are predicting slumping Chinese demand because of the country’s faltering economy, but Lapp doesn’t believe that will be the case. He is forecasting 79 million tonnes of Chinese imports in 2015-16, up from 77 million tonnes last year.
He is forecasting soybean futures prices of $8.35 to $9.10 per bu. for October-December delivery and in $8.75 to $9.50 for January-March.
The good news is Lapp is long-term bullish on soybean prices because global protein meal demand has grown by 3.6 percent per year over the last 10 years while soybean and other oilseed yields have increased by 1.5 percent per year over the same period.
“We’re going to need more oilseeds in the future,” he said.
