Biofuels Thrive on Net Zero Carbon Ambitions

AT A GLANCE

• Traditional oil refiners, which historically generated their income from fossil fuels, have turned their attention to renewable diesel.
• Soybean oil is the largest vegetable oil globally and has drawn attention for its use in greater quantities to help meet more stringent environmental mandates.

The stated global ambitions by nations to reduce their use of fossil fuels is seeing a rise in the demand for more sustainable energy sources and biofuels appears to be at the forefront of the change. 

The International Energy Agency (IEA) has stated that the global production of biofuels could reach 300 million tons by 2030, a staggering three-fold increase from current levels. An annual production growth of 3% up to 2025 is expected, the IEA says in its latest biofuels report. Future production growth of 3% falls short of the IEA’s sustainable development scenario where a 10% growth rate will be required to meet the commitments on clean energy, the IEA added.  

The U.S and Europe are widely leading the charge on the production of key biofuels and on the production of even lower carbon feedstocks such as renewable diesel (RD) in the U.S. or hydrotreated vegetable oils or HVO across Europe. Traditional oil refiners, which historically generated their income from fossil fuels, have turned their attention to the production of renewable diesel. Part of this change is being driven by more stringent environmental regulations but also on the softer demand outlook for fossil fuel based refined products. 

Soybean Oil’s Pivotal Role

Soybean oil is the largest vegetable oil globally, and this has drawn the attention of some of the world’s largest refiners to use it in greater quantities to help meet more stringent environmental mandates. Soybean oil is widely used in the U.S and is increasingly being used in the international markets as refiners look for feedstocks at scale to meet the growing challenge to reduce carbon emissions. 

Read More About Soybean Oil Futures

The U.S., China, Brazil and Argentina are the largest producers of soybean oil on the global stage with a total production volume of 46.6 million tons in the latest 2021-2022 marketing year, USDA data shows. 

Chart 1: Global powerhouses in the soybean oil market

The Soybean Crush Spread

The Soybean crush industry is also undergoing significant change, partly to meet the growing demand for RD and HVO, as the oil which comes from the crushing process remains a key feedstock. Soybean crushing is the process of transforming whole soybeans into both soybean meal and soybean oil.

Soybean meal is used as a high-protein animal feed whilst soybean oil is a vegetable oil used in various industrial applications such as renewable diesel or HVO.  Soybean oil when measured as a percentage of the crush spread has risen in recent months and now accounts for around 50% of the crush spread, incentivising the greater production of soybean oil to meet growing demand where possible. Soybean meal supplies have also been rising, leading to some to question what the world will do to process the greater quantities of soybean meal becoming available.

When a bushel of soybeans weighing 60 pounds is crushed, the conventional result is 11 pounds of soybean oil, 44 pounds of 48% protein soybean meal, four pounds of hulls and one pound of waste. To compare soybean oil with meal prices, the common method is to convert the soybean oil futures price per 11 pounds and convert the soybean meal futures price to the price per 44 pounds which reflect the outputs from crushing one bushel of soybeans.

All About Carbon Intensity

The measurement of carbon intensity (CI) of a particular feedstock will drive the choice of which feedstock to use to produce the finished product. In the U.S. the Low Carbon Fuel Standard (LCFS) is a centerpiece of U.S. greenhouse gas targets for transportation fuels. European regulators are increasingly moving towards carbon intensity and greenhouse gas emission targets as a way of reducing the impact of fuel choice on the environment. The latest E.U regulation package, referred to as the “Fit for 55” aims to reduce net greenhouse gas emissions by 55% by 2030 from 1990 levels.

Under the LCFS, producers that deliver low CI fuels to a buyer will typically receive a credit based on the CI of a particular feedstock source that the fuel is made from. First generation biofuels, such as those derived from virgin soybean oil or other equivalent vegetable oils typically have a higher CI compared to other more sustainable feedstocks such as used cooking oils or animal fats.

However, one such issue is around feedstock availability at scale, which is expected to become worse as production capacity increases with refiners chasing the same feedstocks in greater numbers. California has a stated aim of reducing the CI of transportation fuels by at least 20% by 2030. This is one reason why producers have turned to the U.S. vegetable oil markets to procure the required volume of feedstock to help achieve this aim. 

Chart 2: U.S Renewable Diesel supply growth is robust

Vegetable oils look set to play an important role alongside other sustainable feedstocks like waste cooking oils and animal fats as governments gear up for meeting their stated net zero emission targets by 2050. The role of renewable diesel and hydrotreated vegetable oils is going to grow in the coming years and these products alongside existing biofuel markets will contribute to the overall expected production volumes of 300 million tons by 2030.

Sourcing sufficient volumes of lower carbon feedstocks is expected to remain a challenge for both producers and blenders and this may result in greater volatility in feedstock prices. The financial risk management in markets like soybean oil and other related markets is going to be increasingly important to deal with an increasingly volatile price scenario and this will continue to attract new players into the market as they aim to scale up their renewable energy output. 

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Originally Posted on November 4, 2021 – Biofuels Thrive on Net Zero Carbon Ambitions

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