Volatile Biofuels Demand Is Reshaping the Price Relationship between Soybean and Palm Oils

by Yu-Chi Wang and Joe Janzen (farmdoc/Successful Farming) ... Soybean oil and palm oil are the two most widely available vegetable oils in the world and are substitutes in many products, including as feedstocks in the production of biofuels. For many years, soybean oil and palm oil prices moved together, but since 2020, the close co-movement between soybean oil and palm oil prices has weakened. Prices now diverge more often and for longer periods. This change suggests that the types of supply and demand shocks hitting these markets has shifted. We suggest these shocks are becoming less global and more regional or national; aggregate vegetable oil supply and demand still matter, but these now interact with region-specific disruptions, particularly those related to biofuels policy, that affect one oil more than the other.

The goal of this article is to document how the price relationship between soybean oil and palm oil has changed and what this change means for future price dynamics. We first describe the global roles of soybean and palm oils and the different production systems behind them. We use monthly and daily prices to show how their historical co-movement has broken down since 2020. We then draw on several recent market episodes to explain soybean-palm price divergences and end with implications for U.S. soybean oil and future biofuel policy.

Soybean oil was long the world’s largest vegetable oil, but global production of palm oil began to exceed soybean oil beginning in the 2004/2005 marketing year. Together, they account for more than 60s% of global edible oil supply. Other vegetable oils such as canola, sunflower, and others play an important but mainly supporting role in meeting global demand.

Palm oil refining, logistics, and trade are strongly geographically clustered. Soybean oil production is less concentrated than palm oil but focused in large agricultural exporting countries such as the United States, Brazil, and Argentina and major soybean importers, principally China.

The first occurs over calendar year 2021. Both soybean oil and palm oil prices rise sharply during this period, reflecting tight global vegetable oil supplies. However, soybean oil prices increase more than palm oil prices; at the peak of this divergence indicated in Figure 3, the soybean oil price was 68% higher than the palm oil price. This coincides with a surge in U.S. renewable diesel capacity and production (USDA-FAS, 2024), leading to a stronger increase in demand for soybean oil as a feedstock.

By late 2021, this divergence begins to narrow. Palm oil prices move higher as Malaysia experiences La Niña-related adverse weather and a shortage of migrant harvest workers following COVID-19 border restrictions (McKeany-Flavell, 2022). Malaysian palm oil production, exports, and year-end stocks fall to multi-year lows, which coincides with palm oil prices reaching record or near-record levels.

The second divergence begins after both prices reach record highs in early 2022. These peaks in Figure 3 occur during a period of very tight global supplies associated with the Russia-Ukraine war and Indonesia’s temporary ban on palm oil exports. Indonesia lifted the export ban in late May 2022 and exports resumed, leading palm oil prices to fall sharply.

In December 2022, EPA releases proposed biofuel mandates for 2023 to 2025 that are lower than the market had anticipated. This announcement may have reduced projected renewable diesel demand for soybean oil and is followed by a sharp decline in soybean oil prices (Sterk, 2022).

The third divergence begins in mid-2023, when markets appear to become more concerned about U.S. weather and the possibility of drought reducing soybean yields.

Clean Fuels Alliance America (2024) reports that generation of biomass-based diesel Renewable Identification Numbers (RINs) in 2023 substantially exceeded the biomass-based diesel mandate and that RIN values declined sharply as this oversupply became apparent. RINs are tradable compliance credits that fuel suppliers use to show they have met U.S. renewable fuel blending requirements. Because soybean oil is an important feedstock for biomass-based diesel, this combination of abundant credits and lower RIN values is consistent with a reduced willingness to pay high prices for soybean oil in fuel uses and may have contributed to the downward pressure on soybean oil prices during this period.

Broad global demand and cost shocks still move both markets, but they now interact with more frequent policy shocks and region-specific disruptions. In this environment, even close substitutes like soybean oil and palm oil can depart from their historical pattern of co-movement.

Our analysis suggests the U.S. soybean industry may be more insulated from global vegetable oil shocks: palm oil may not play the same role it once did in shaping soybean oil prices. Palm oil production growth has slowed as Southeast Asia’s plantations hit land limits and a larger share of trees move into older age. Expansion has largely given way to replanting, so future output gains are likely to be small even if prices stay high (Bloomberg Intelligence, 2024). A larger share of palm oil production now stays in Southeast Asia to meet domestic biodiesel and food demand.

Our central conclusion is that there is no longer a single global vegetable oil market signal. To an increasing degree, farmers, crushers, renewable fuels producers, and policymakers need to watch both broad global shocks and more local, product-specific shocks. That means tracking not only world demand and overall stocks, but also U.S. biofuel policy decisions, biodiesel and export rules in Indonesia and Malaysia, and weather and crop developments in South America and Southeast Asia. Managing soybean oil price risk in this new environment requires paying attention to all these moving parts, not just a single commodity price. READ MORE