Competing Commodities with Common Goals

Ethanol production capacity in the United States is growing rapidly, leaving many to wonder exactly how the high demand for ethanol might tighten the domestic supply of available corn, pushing prices per bushel upward. When it becomes more profitable to grow corn than soybeans, farmers read that as a signal to plant more corn, contributing to projected flat or negative soybean production in coming years and potentially affecting the food, livestock and biodiesel industries in different ways. It's important to keep in mind that even though the economic pendulum of supply and demand swings both ways, soybean oil hasn't driven soybean production demand historically. Also soybean oil isn't the only product available to fill the position served by it in the food and industrial markets, in theory; several vegetable oils of comparable quality are suitable for biodiesel production-perhaps more so than soybean oil. The same is not true for U.S. ethanol production and its current reliance on yellow dent. This may have long-term implications on how much domestically grown and crushed soybean oil will play into future feedstock choices made by U.S. biodiesel producers as this industry builds out, and what "immediately substitutable" contenders to domestically produced soybean oil could inch their way into U.S. biodiesel feedstock supplies.

Corn Demand, DDGS and Rising Corn Prices
Billions of gallons of ethanol production capacity are under construction right now, leading to what virtually everyone agrees will be an early domestic ability to produce the 7.5 billion gallons of renewable fuels that refiners will be required to blend into diesel and gasoline supplies by 2012, as laid out in the current federal renewable fuels standard (RFS). With a diesel fuel market roughly four times smaller than gasoline and biodiesel's relatively immature stage of development relative to ethanol, it's clear that biodiesel will satisfy only a small but growing percentage of the RFS.

Ethanol's demand on historically overproduced corn, and the lack of stand-in substitute feedstocks to make ethanol with, has led experts like Chris Hurt, Purdue University agricultural economist, to foresee corn demand this year as depleting surpluses from previous harvests, significantly contributing to higher corn prices and increased production of the grain in subsequent years.

It's not as if any of these circumstances will prompt farmers to consider something they haven't before. "Farmers make decisions every year as far as what to plant," says J. Alan Weber, an economic advisor to the National Biodiesel Board (NBB), who works for Marc IV Consulting. "But I think the ethanol and biodiesel markets will increasingly play into that decision-making process."

As fast as ethanol production is increasing, so too is the presence of distillers grains growing in the feed markets. Distillers grains is the protein, fat and fiber fractions of corn left over after ethanol producers ferment alcohol from the starch. "Part of the problem has to do with the [coproduct] of ethanol production, the DDGS, which is [increasingly being] used as protein feed in rations," says Allen Baker, an economist with the USDA's Economic Research Service (ERS). "It's competing against soybean meal. Those [animal markets] that can better utilize DDGS will have an advantage over those that can't."

Changing Markets
USDA baseline projections and studies by the Food and Agricultural Policy Research Institute, and Promar International, indicate relatively flat or perhaps negative growth in domestic soybean acres planted in the next three to five years. "If the baselines are correct, there will probably be a reduction in terms of harvested soybean acres," Weber confirms. "[The] baseline projections also show increases in acres of corn being harvested, some of which might be at the expense of soybean acreage or some at the expense of other crops."

Historically, the demand for soybean meal as protein in livestock rations has been the major driver in determining at what price per bushel the market commands for soybeans. Therefore, the use of soy oil in the food industry or the production of mono alkyl esters-given that the largest single feedstock used for biodiesel production in the United States is soybean oil-has not driven farmers to plant soybeans. Instead, the vegetable oil's versatile nature as a byproduct resulting from the manufacturing of soybean meal has given way to its proliferation as domestic feedstock of choice for biodiesel producers, especially those situated in the Soybean Belt. Of course, staunch backing from the United Soybean Board, the American Soybean Association (ASA) and the NBB doesn't hurt soybean oil's position in these markets, either.

Increased distillers grains and lower soybean meal prices combined with increasing demand for soy oil from the biodiesel sector-propping up the per-bushel-price on soybeans-could lead to what outgoing ASA president Bob Metz says would be a lowering of overall food prices. "People say if biodiesel production increases, it would cause food prices to rise," Metz tells Biodiesel Magazine. "We say food prices would drop." Metz, who sits on the board of an ethanol plant and is invested in several more, says as oil drives the soybean markets, soybean meal prices would be more reasonable, and therefore, expenses rearing feedlot cattle or dairy cattle, for example, would be less, and beef milk and butter prices, etc., would follow suit.

Theoretical Alleviation
While a sizeable portion of domestic biodiesel is derived from soy oil, biodiesel meeting ASTM D 6751 quality specifications can obviously be made with virtually any fat or oil supply. Naturally, the less one pays for a feedstock is directly related to its quality and the process costs associated with refining that lipid-bearing material into biodiesel.
The same could be said about the relationship price shares with feedstock quality for ethanol production in the United States (i.e., the low-cost feedstock of lignocellulosic biomass and the much higher production costs of cellulosic ethanol technologies, intertwined with the complicating variable of the loss of efficiencies). However, there are far fewer incrementally decreasing economically competitive options available along ethanol's price and feedstock quality curve.

A host of theoretically available, yet only regionally practical, substitutes for soybean oil in the U.S. biodiesel industry could imply a certain amount of elasticity in soybean oil demand from the food and biodiesel industries, but experts say this isn't the case.. The economical competitiveness of these candidate feedstocks is highly dependent on producers' regional access to "alternatives" and the nature of particular procurement arrangements (e.g., a renderer finding more value in biodiesel production from certain types of fats versus selling those fats on the open market, etc.).

"I would say soy oil demand is relatively inelastic," says Mark Ash, a USDA ERS agricultural economist who specializes in oilseeds. "There may be some price substitution, but there are relatively few substitutes for soybean oil." Ash tells Biodiesel Magazine that the food industry could substitute comparable vegetable oils for soy oil rather quickly. "But, companies within the food industry are resistant to changes in formulation," he says, qualifying his hypothesis.

Ash and other experts say there are practical market-driven options available to hedge what could otherwise be a dramatic price hike for soybean oil coupled with an equally drastic reduction in its demand from this industry.

Practical Alleviation
Nearly 50 percent of the soybeans produced in the United States are exported in the form of whole beans, meal or oil, Metz says. Even though the USDA's publication titled Oil Crops Outlook, released June 12, shows U.S. soybean exports increasing in the 2006-'07 marketing year, a different outlook may be in order beyond that as domestic methyl soyate production capacity multiplies.

Naturally, the export market could absorb some of the increasing domestic demand for soy oil. According to Ash and the USDA, the United States is exporting 1.1 billion pounds of soybean oil out of the country this year. The NBB's Weber believes that these exports would be susceptible to penetration by future increases in domestic demand. "As demand for biodiesel increases, the first area to draw on more soybean oil supply would likely be the [more than 1 billion pound] supply being exported," Weber says. This supply may help protect against too rapid or too sharp of an adjustment, helping to hedge off higher prices.

This potential solution to alleviate increases in domestic demand while keeping prices relatively stable by exporting less could eventually lessen U.S. positioning in the world trade markets, Ash states. "There are few places in the world that can grow corn as efficiently as in the United States," he says. "Soybeans, on the other hand, grow well in a lot of different places. There's a large capacity for soybean production in South America, Brazil for example."

Brazil has the ability to vastly increase its soybean production, converting non-rainforest acres currently used for grazing into soybean acres for example. "Brazil could step up production and the United States could export fewer soybeans," Ash tells Biodiesel Magazine. Palm oil production is also increasing globally.

Baker (USDA ERS) says that he has heard quite a few consultants ask, "If biodiesel production is the goal and large quantities of oil are needed to meet that goal, why not exploit oilseed crops with oil content higher than soybeans to meet that objective?" For instance, the oil content of canola doubles that of soybeans. To give this perspective, Ash quantifies the oil output from an acre of soybeans versus an acre of canola. "Canola can average 500 pounds of oil per acre harvested, whereas an acre of soybeans can produce about 460 pounds of oil," he says.

More and more biodiesel producers primarily using soy oil are prepared to use a variety of different feedstocks as the economics tilt in any particular favor. It's quite imaginable that the future makeup of U.S. biodiesel feedstocks may become more diverse compared to what is being used today. "Maybe in five or 10 years, soy oil will still dominate usage in this country, but much of it will depend on where the biodiesel plant is located," Ash predicts. It is foreseeable that soybean oil would still make up a majority portion of the feedstocks demanded by biodiesel plants in the Soybean Belt near large crush facilities, while plants on the East and West coasts would be economically driven to use more locally available sources of fats, oils or greases-or cheaper and available imported feedstocks.

All things considered, skyrocketing soybean oil prices aren't something we're likely to experience any time soon, Ash says. The potential to divert some soybean and soy oil exports to meet the growing domestic demand, the increased competitiveness of non-soy based feedstocks domestically and, for better or worse, the availability of reasonably priced imports from other large soybean producing countries are predicted to keep soybean oil prices in the United States relatively stable.

Ron Kotrba is a Biodiesel Magazine staff writer. Reach him at [email protected]
.com or (701) 746-8385.