About this video

• Video Title: Webinar: Biofuel Quotas & Oilseed Turbulence
• Channel: RaboResearch
• Speakers: Jamil Pakuris, Charles Hart, Andre Payne
• Duration: 52:39

Overview

This webinar discusses the impact of recent U.S. biofuel policies on oilseed markets, specifically soybean oil and canola. The speakers, Charles Hart and Andre Payne, analyze how changes in biofuel mandates, tariffs, and credits influence feedstock demand, pricing, and trade dynamics. They also touch upon market reactions, export volumes, and future price outlooks for these commodities.

Key takeaways

• U.S. Biofuel Policy Impact: Recent policy changes, including proposed blending mandates and the clean fuel production credit, are significantly impacting feedstock demand and pricing for soybean oil and canola.
• Market Segmentation: Policies are leading to increased segmentation in feedstock markets, with a greater emphasis on domestic or regionally sourced materials.
• Tariff Influence: U.S. tariffs on imported feedstocks are altering trade flows, making domestic alternatives more competitive and potentially reducing the use of certain imported oils like Brazilian tallow.
• Soybean Oil Market Dynamics: The soybean oil market is becoming increasingly driven by biofuel policies, with a significant portion of U.S. soybean oil now allocated to biofuel use. Policy uncertainty has contributed to price volatility.
• Canola Market Challenges: The canola market faces challenges from Chinese tariffs and U.S. biofuel policies, impacting export volumes and prices, although Canadian exports have shown resilience in some areas.
• Future Outlook: Confirmation and finalization of proposed biofuel policies are crucial for market stability. Uncertainty surrounding these decisions is a key factor affecting price movements in both soybean oil and canola markets.

Webinar: Biofuel Quotas & Oilseed Turbulence - Key Discussion Points

This webinar, hosted by RaboResearch and featuring analysts Charles Hart and Andre Payne, delves into the complex interplay between evolving U.S. biofuel policies and their significant impact on global oilseed markets, particularly soybean oil and canola. The discussion highlights how regulatory shifts, trade policies, and market dynamics are creating a turbulent environment for these essential agricultural commodities.

I. The Evolving Landscape of U.S. Biofuel Policies and Their Impact

Charles Hart begins by outlining the structure of U.S. biofuel policies and their historical influence on feedstock markets. Biofuel policies affect these markets through two primary channels:

• Total Feedstock Demand: Policies like the Environmental Protection Agency's (EPA) blending mandates directly dictate the overall volume of biomass-based diesel feedstock required. The mandates have seen a consistent upward trend, increasing from 2.43 billion gallons in 2020 to proposed levels of 5.6 billion gallons for 2026 and 5.9 billion gallons for 2027. This rising demand acts as a "rising tide" for all feedstock markets.
• Composition of Feedstock Use: Policies also influence which specific feedstocks are utilized. Historically, the blenders' tax credit encouraged imports without regard to origin. However, newer policies, such as the producer credit and proposed EPA changes, aim to prioritize domestic and North American feedstocks, leading to increased segmentation.

Key Policy Developments and Their Implications:

• EPA Blending Mandates: The proposed mandates for 2026 and 2027 significantly exceed market expectations, driving soybean oil contracts to record highs. The size of these mandates directly sets the ceiling for total biomass-based diesel demand.
• Renewable Identification Numbers (RINs): RINs are the primary driver of biomass-based diesel economics. The EPA's proposed overhaul of the RIN generation scheme, which would grant imported fuels only 50% of the value of domestic equivalents, aims to "put American feedstock producers first." This proposal, if finalized, would create a firm segmentation between U.S. and foreign feedstocks.
• Clean Fuel Production Credit: Replacing the blenders' tax credit, this new credit excludes imported biomass-based diesel and considers feedstock-specific carbon intensities. This further incentivizes domestic production and creates another layer of segmentation.
• Small Refiner Exemptions (SREs): Decisions on SREs reduce the effective size of the EPA's mandate. The EPA's approach to handling backlog applications, including partial exemptions and the use of expired RINs, has aimed to mitigate their impact on mandated volumes. However, the reallocation of exempted RINs remains a point of discussion, with potential full reallocation offering the most bullish outcome for feedstock demand.
• Tariffs: While not strictly biofuel policies, U.S. tariffs significantly impact the use of imported feedstocks. A baseline 10% tariff raises the cost of imports, supporting domestic alternatives. Differentiated rates, such as exemptions for USMCA-compliant products (like Canadian canola oil) and prohibitive tariffs on others (like Brazilian tallow), distort trade flows.

II. Market Impacts: Soybean Oil and Canola

A. Soybean Oil Market Turbulence:

Charles Hart details how these policy shifts have created turbulence in the soybean oil market:

• Lagging USDA Estimates: USDA estimates for soybean oil biofuel use have been revised downwards as the season progressed, reflecting a lag in policy confirmation and the continued presence of imported feedstocks.
• Producer Margins: Biomass-based diesel producer margins have faced pressure due to low RIN prices and rising feedstock costs, further complicated by policy uncertainties.
• Increased Demand Forecast: The USDA's forecast for the 2025-2026 season shows a rise in domestic soybean oil biofuel use, with estimates exceeding 50% of total U.S. soybean oil use for the first time. This signals a structural shift tying prices more closely to biofuel policy developments.
• Crush Volumes and Capacity: U.S. soybean crush volumes have seen consistent year-on-year growth, driven by biofuel demand. This has spurred an expansion in crush capacity, with policy support expected to underpin further growth.
• Price Volatility: Sharp increases in soybean oil prices have been primarily driven by volume-related policy announcements (like the EPA mandates) rather than compositional shifts. Prices have fluctuated within a range of 52-56 cents per pound, with policy uncertainty causing fatigue and testing lower levels.
• Bearish Factors: Significant bearish factors include the ongoing U.S.-China trade relationship impasse, which depresses U.S. soybean exports. Recent Argentine policy changes (temporary suspension of export taxes) have boosted its exports to China, further reducing potential U.S. sales. Additionally, the growth in soybean meal supply, driven by increased crush, poses a risk of stock accumulation, weighing on crush spreads.

B. Canola Market Dynamics:

Andre Payne addresses the specific challenges and opportunities in the canola market:

• Chinese Tariffs: A major factor has been China's imposition of anti-dumping and countervailing duties, including a nearly 76% tariff on Canadian canola seed. This has led China to seek alternative sources, such as Australian canola.
• U.S. Biofuel Policy Spillover: U.S. biofuel policies have also impacted canola, particularly canola oil exports. The uncertainty surrounding the 45Z tax credit and the EPA's proposal to value imported feedstocks at 50% of domestic equivalents could disincentivize Canadian canola oil imports into the U.S.
• Export Performance: Despite tariffs and policy uncertainties, Canadian canola exports have shown resilience. Canola meal exports increased year-over-year, and while canola oil exports saw a slight decline, seed exports remained strong, even increasing significantly. China, historically a major buyer, front-loaded imports early in the marketing year, possibly in anticipation of tariffs.
• Shifting Trade Flows: The Chinese tariffs are forcing Canada to diversify its export markets, with potential growth seen in Japan, Mexico, and the EU.
• Investment in Crush Capacity: Canada has invested heavily in canola crush capacity. This shift towards domestic processing means canola seed exports may become less relevant over time, with a greater focus on value-added products like canola oil and meal for both domestic and international markets.
• Bullish Factors: The primary bullish factor for canola hinges on the U.S. biofuel policy. If the EPA's proposal to discount imported feedstocks is implemented, it would significantly benefit North American products like canola oil.
• Price Outlook: For the November canola contract, the $600 level is seen as strong support due to continued strong export demand and increasing Canadian production. However, upside potential is capped by ample soybean supply from Brazil and potential U.S. export limitations to China, keeping prices in the $600-$675 range.

III. Future Considerations and Market Outlook

Both speakers emphasize the critical role of policy confirmation in shaping market outcomes. The ongoing uncertainty surrounding EPA decisions, tariff negotiations, and trade relations creates a volatile environment. Key factors to monitor include:

• Finalization of EPA Mandates and RIN Proposals: The timing and specifics of these decisions will heavily influence demand and pricing for soybean oil and canola.
• U.S.-China Trade Relations: Any progress or further deterioration in negotiations will directly impact U.S. soybean export potential.
• Argentine and Brazilian Export Policies: Changes in these major South American suppliers can significantly affect global soybean and canola availability and pricing.
• Canadian Harvest Estimates: While current estimates suggest strong production, weather and yield variations could impact supply.
• Sustainable Aviation Fuel (SAF) Policies: While still nascent, the development of supportive frameworks for SAF could become a significant demand driver for vegetable oils in the long term, but current economic viability remains a challenge globally.

In conclusion, the webinar underscores that the oilseed markets are intrinsically linked to biofuel policy developments and international trade dynamics. Navigating this "turbulence" requires close monitoring of policy announcements, trade agreements, and the interplay between various agricultural commodities.