Oil Crops Outlook: Upward Surge in Soybean Oil Prices Continues

The USDA forecast of 2016/17 season-ending soybean stocks remains at 480 million bushels due to unchanged forecasts of production, exports, and crush. The U.S. average soybean farm price for 2016/17 is forecast at $8.70-$10.20 per bushel, versus last month’s forecast of $8.45-$9.95.

Soybeans are drawing more price support from stronger soybean oil values, which are forecast 2 cents per pound higher this month to 34.5-37.5 cents.

Global soybean production for 2016/17 is forecast rising to 338 million metric tons, up 1.9 million this month as higher crops for India and Canada offset a reduction for South Africa. For India, USDA estimates 2016/17 soybean production 1.8 million tons higher this month to 11.5 million based on reports of better than expected yields.

As a consequence, Indian soybean meal exports in 2016/17 could recover to 1.8 million tons. USDA forecasts EU soybean meal imports for 2016/17 down 700,000 tons this month to 20.25 million as processors import more soybeans instead.

Domestic Outlook

Soybean Prices Benefit From Strengthening Soybean Oil Market

USDA forecasts of 2016/17 soybean exports and crush were both unchanged this month at 2.05 billion and 1.93 billion bushels, respectively. So, with production also unchanged at 4.36 billion bushels, the forecast of season-ending stocks remains at 480 million bushels. Although the 2016/17 outlook for soybean supply and use is the same as last month, a higher level for prices is expected.

Soybeans are drawing price support from stronger values for products, particularly soybean oil. In November, central Illinois cash prices averaged $9.74 per bushel, versus the October average of $9.45 per bushel. The U.S. average soybean farm price is forecast at $8.70-$10.20 per bushel, up from last month’s forecast of $8.45-$9.95.

Despite an unchanged forecast for the 2016/17 soybean crush, soybean meal production is seen 200,000 short tons lower this month due to a below-average extraction rate. This month’s supply reduction for soybean meal may be matched by a 200,000-ton decline in 2016/17 exports–to 11.8 million.

Compared to a year ago, December 1 soybean meal export sales commitments were down 12 percent. Canada is among the foreign markets where U.S. export sales of soybean meal are lagging, partly due to an excellent soybean crop there.

Soybean Oil Prices Buoyed by Petroleum Market Gains and RFS Ruling

Since slumping below $30 per barrel in early 2016, U.S. prices for crude oil had rallied to $51 by early December. Crude oil prices have also strengthened with a recent agreement by petroleum exporting countries to reduce production. At least in the short term, the accord may achieve a closer alignment with global oil demand.

Some energy market analysts anticipate that, by early 2017, crude oil prices may top $60 per barrel. As a consequence, these developments brighten the outlook for biodiesel blending throughout the world and support prices for the vegetable oil feedstocks used to produce it.

Also, in late November, the Environmental Protection Agency (EPA) published its final ruling on the 2017 Renewable Fuel Standard (RFS) blending obligations. Compulsory blending of biomass-based diesel in 2017 is set at 2 billion gallons, up from 1.9 billion in 2016.

The EPA ruling also raised the required consumption of advanced biofuel (which biodiesel qualifies as a source) to 4.28 billion gallons in 2017 from 3.61 billion in 2016. On this basis, USDA raised its forecast of 2016/17 consumption of soybean oil for biodiesel this month by 250 million pounds to 6.2 billion, up from the 5.67 billion pounds in 2015/16.

However, the expected gains in the use of soybean oil as a feedstock are less than the implied increase for biodiesel blending. Not all of the required blending must come from domestic production of biodiesel in 2017. Some of next year’s obligation can be met through the exchange of a renewable identification number (RIN), which is assigned to a biofuel when it is produced or imported. EPA uses RINs as an accounting mechanism to monitor RFS compliance.

When the supply of biodiesel exceeds the mandated annual consumption, unused RINs can accumulate from the prior year. A carryover RIN is a tradeable asset and if obligated parties are unable to acquire them through the blending of biodiesel, they can purchase unused RINs to fulfill up to 20 percent of their annual blending requirement.

EPA data for January-October 2016 indicate that the supply of biomass-diesel (2.017 billion gallons) has already surpassed the 2016 blending requirement. By the end of December, this should make more RINs available to use for 2017 compliance. Since the EPA announcement, the stronger demand outlook has sharply raised RIN values.

In addition, some of the blending requirement can and will be fulfilled by growth in imports of biodiesel and renewable diesel. For January-October 2016, EPA reports that imports supplied 27 percent of the biomass-based diesel RINs. By the end of this year, U.S. imports of biodiesel and renewable diesel could approach 800 million gallons–sharply higher than the 538 million gallons imported in 2015.

These circumstances are reshaping the market value of soybean oil, which supplies more than half of the feedstocks used to produce U.S. biodiesel. In November, central Illinois cash prices for soybean oil continued an upward ascent to its highest level since August 2014. November prices averaged 34.5 cents per pound, compared to 33.9 cents in October. This led USDA to raise its forecast of the 2016/17 average price of soybean oil this month by 2 cents per pound to 34.5-37.5 cents.

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