Economic Impacts of Biodiesel Production on the Soybean Sector ...
ǡ Introduction Soybeanproducershaveenjoyedrecordsettingsoybean pricesthepastfewmarketingyears(Figure1).Whilethe drivingforcesbehindthesenewpricelevelsaremultiͲfaceted andcomplex,theycanbeattributedtobasiceconomic fundamentalsofsupplyanddemand.Thisisfurther complicatedbythefactthatsoybeanpricesarenotonly impactedbythesupplyanddemandofsoybeans,butalsoby thesupplyanddemandforsoybeanoilandsoybeanmeal. MacroͲeconomicfactorssuchastheenergypricebubble, increasedworldͲwidedemandforproteinsubsequently Figure1.U.S.MarketingYearAverage followedbytheglobaleconomicrecession,andthe SoybeanPrices devaluationoftheU.S.dollarhaveallsignificantlyimpacted demandandthuspricesforsoybeans,soybeanoil,andsoybeanmeal. Soybean Price ($ per bushel)
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9.00 8.00 7.00 6.00 5.00 4.00
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Marketing Year
Animportantpositiveforceimpactingsoybeanpriceshasbeentheincreasedbiodieselproductionfor whichsoybeanoilhasbeenthelargestsinglefeedstock.Theamountofsoybeanoilusedforbiodiesel productionhasincreasedsignificantlysincethe2004marketingyear(MY04)1.Thishashelpedsupport thehighersoybeanoilprices,whichinturnelevatedsoybeanpricesreceivedbysoybeanproducers.In therealworld,manyfactorsworktogethertodrivesoybeanpricesanditisnotreadilyapparenthow muchofthepricechangescomefromasinglefactorsuchasbiodieselproduction.Inthispaper,we estimatehowsoybeanproducershavebenefittedinthepastandwillcontinuetobenefitfrombiodiesel productioninthefuture.
AnalysisApproach Therecentsupplyanddemandeventshavenotimpactedsoybean,soybeanmealandsoybeanoilprices inisolation.Theyhaveoccurredeithersimultaneouslyorhavebeenaffectedbyadditionalfactors.Asa result,adirectcorollarycannotbedrawnbetweenasingledemandfactorsuchasincreasedbiodiesel demandforsoybeanoilandincreasedsoybeanprices.Toevaluatetheimpactofasinglemarketforce, allotherforcesneedtobeheldconstant.Thisisaccomplishedbyusingapartialequilibriummodelto evaluatetheeconomicimpactofasinglesupplyordemandfactor–inthiscase,theincreaseinsoybean oildemandforbiodiesel.Apartialequilibriummodelevaluatestheimpactofasingleeconomicevent ononesectoroftheeconomyinisolationofothereconomicsectors.Forthisanalysis,weuseUSB’s partialequilibriummodelcalledtheValueChainAnalysis(VCA)modeltohelpusunderstandtheimpact ofchangesinsoybeanoildemandonoilprices,soybeanpricesandsupply,mealpricesandsupply,and thenultimately,exports.ThissupplyanddemandmodelfocusesontheU.S.soybeancomplex, thereforenotaccountingforchangesinothersectorssuchasotherdomesticoilseeds,corn,ornonͲU.S. 1
ThemarketingyearforsoybeansisfromSeptemberthroughAugustofthefollowingyear.Themarketingyearfor soybeanoilandmealbeginsinOctoberandendsinSeptemberofthefollowingyear. CentrecConsultingGroup,LLC
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markets.Inotherwords,thisanalysislooksattheimpactsofchangeddomesticsoybeanoildemand only,withoutanyotherforcesimpactingoil,mealandsoybeandemand,supplyandprices. InterpretingtheresultsisaugmentedbyunderstandingthebasiceconomicprinciplebehindsoybeancoͲ products–whendemandforonecoͲproductincreases,thepriceoftheothercoͲproductdecreases, witheverythingelseequal.Inotherwords,ifnootherforcesimpactthemarkets,increasesinsoybean oildemandwouldactuallycausemealpricestodecline.Thisinverserelationshipisduetothefixed relationshipbetweenthevolumeofsoybeanscrushedandtheamountofoilandmealproducedfrom thecrush.Ifmoresoybeansarecrushedtomeetincreasedoildemand,moremealwillbeproducedas well.Whenthishappens,simplesupplyanddemandeconomicskickin,andthepriceofmealwill decreasebecauseofitsincreasedsupply. 14.00 13.00
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55
Soybean Oil Price (cents per pound)
12.00
EstimatedProcessed Value(EPV)
Component Prices
50 45 40 35 30 25 20 15 10 '90
'91
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Marketing Year
11.7 11.6 11.5
Component Yields
11.4
10.00
47.8
Pounds of Oil
48.2
48.0
11.3 11.2 11.1 11.0
47.6
Pounds of Meal
$perBushel
SoybeanEstimatedProcessedValue(EPV) isthesumofthemeal,oilandhullproduct valueswhenabushelofsoybeansis crushed.Figure2showshowsoybean priceshaverisenandfallenwithEPVover time,underscoringtheireconomic relationship.
10.9 47.4
10.8 47.2
10.7 '90
'91
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'94
'95
'96
'97
'01
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47.0
Marketing Year 46.8
46.6
9.00
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Marketing Year
8.00 7.00 Processing Margin
6.00 Ifthepriceofoilincreasesandtheother 5.00 pricesandyieldsareheldconstant,EPV Soybeans 4.00 willincrease,implyingthatsoybeanprices '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 willalsoincrease.However,iftheoilprice MarketingYear increaseisaresultofnewoildemand(with Figure2.EstimatedProcessedValue(EPV)vs nocorrespondingincreaseinmealdemand),coͲ SoybeanPrices producteconomicswillmitigatetheimpactofthe EPV/soybeanpriceincrease.Thisisbecauseanincreaseindemandforoilwillincreasedomesticcrush, puttingmoremealonthemarket.Theincreaseinmealsupply,withnonewmealdemand,willcause themealpricetodecline.Thus,duetothesecoͲproducteconomics,EPVandultimatelysoybeanprice increasesmightnotbeashighasonemightexpect.Thisisbecauseonlyonefactorthatimpacts soybean,oilandmealpricesisbeingconsidered. Source:USDAERSandAMS
HistoricalBenefitstotheSoybeanSector
Toanswerthis,thispaperassessesascenariothat assumessoybeanoiluseforbiodieselproduction remainedatthesamelevelforthe2005throughthe 2009marketingyearsasitwasforMY04.Theincrease inbiodieselproductionwasdrivenbyseveralfactors,
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Cents/lb
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BBLbs
Thisanalysisprovidesestimatestoanswerthe questions“Whatimpacthastheincreaseinbiodiesel productionhadonsoybeanandsoybeanproduct pricesandvolumeswithallothermarketforcesheld constant?”and“Howhasthishelpedsoybean producers?”
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MarketingYear Edibleproducts
Methylesters
Otherinedibleproducts
CrudeSBOprice
Figure3.AnnualU.S.DomesticSoybeanOil ConsumptionbyUse Sources:CensusBureau&USDA
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includingtheblenders’taxcredit(ineffectfromJanuary2005throughDecember20092)andthe RenewableFuelStandards(RFS)mandatedbiodieselvolume.Thisscenariodepictswhatwouldhave happenediftheblenders’taxcredithadnotbeeninplaceandRFSmandatedvolumerequirementsdid notexist. Figure3andTable1illustratetheactualuseofsoybeanoilforbiodieselproduction(AKAmethylesters) andotherusesalongwiththepriceofsoybeanoilonamarketingyearbasissinceMY04. Table1.AnnualU.S.DomesticSoybeanOilConsumptionbyUse
MarketingYear
Use(MMlbs)
'04
'05
'06
'07
'08
'09
17,418
17,120
16,147
15,916
14,282
13,698
Methylesters
455
1,331
2,697
3,245
1,917
1,682
Otherinedibleproducts
747
776
464
381
340
281
Crudesoybeanoilprice(cents/lb)
23.8
23.3
31.8
52.7
32.4
35.7
Edibleproducts
PercentofTotal Edibleproducts
94%
89%
84%
81%
86%
87%
Methylesters
2%
7%
14%
17%
12%
11%
Otherinedibleproducts
4%
4%
2%
2%
2%
2%
Sources:CensusBureauandUSDA/ERS
USB’sValueChainAnalysis(VCA)modelisusedtounderstandtheimpactofthereducedsoybeanoil demandonthesoysector,holdingeverythingelseconstant.Basedonresultsfromthismodel,Table2 reportstheestimatesoftheincrementalchangesfromthebasecaseifthedemandforsoybeanoilused forbiodieselproductionhadnotincreasedbeyondtheMY04productionlevels. Table2.EstimatedChangefromBaseCaseofAssumingNoGrowthinBiodieselProduction
MarketingYear ResultingChangein:
'05
'06
'07
'08
'09
Total
SoybeanOilPrice(cents/lb)
(4.2)
(10.3)
(12.5)
(7.8)
(6.8)
SoybeanMealPrice($/T)
16.22
40.10
48.31
30.66
27.60
SoybeanPrice($/bu)
(0.09)
(0.22)
(0.27)
(0.16)
(0.13)
SoybeanAcres(MM)
0.0
(0.4)
(1.1)
(1.4)
(0.8)
(3.7)
(269)
(662)
(834)
(498)
(401)
(2,664)
ProductionSectorReturns (Nominal$MM)
ObservationsonHistoricalScenarioResults Thefollowingarekeyobservationsfromtheanalysisofreducedsoybeanoiluseforbiodieselproduction fromactualsoybeanoilutilizationforMY05throughMY09,holdingeverythingelseconstant:
2
Aretroactivebiodieseltaxcreditextensionwaspassedintolawfor2010inDecember2010.However,this extensioncannotchangeMY09productionlevelsandtherefore,doesnotimpactthishistoricalanalysis. CentrecConsultingGroup,LLC
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December2010
SoybeanOilPrice:
Asaresultofthedecreaseddemand,soybeanoilpriceswouldhavebeen lowerthantheyactuallywereduringtheperiodby4.2centsperpoundin MY05,10.3centsperpoundinMY06,andsoon.
SoybeanMealPrice:
Soybeanmealpriceswouldhaveactuallybeenhighersinceadecreasein demandforsoybeanoilreducesdomesticcrushandthusthedomestic supplyofsoybeanmeal.Thereducedsupplyofsoybeanmealthenputs upwardpressureonsoybeanmealprices.Thehighersoybeanmealprices couldhavecostthelivestockindustryanadditional$1.4billioninMY07 aloneandatotalof$4.8billionfromMY05throughMY09.
SoybeanPrices:
Asustainedreductionof13to16centsperbushelwouldhavebeen realizedbytheendoftheperiod.Notethatthesesustainedreductions applytoallU.S.soybeansandnotjusttothoseusedforbiodiesel production.
SoybeanAcres:
Duetothedecreasedsoybeanoildemand,andresultingdecreasein soybeanprice,feweracreswouldhavebeenplantedtosoybeans.
ProductionSectorReturns:
Thisisanestimateofthechangeinnetreturnstothesoybeanproduction sector.Thus,overthefiveyearperiod,soybeanproducerswouldhave seentheirnetreturnsreducedbyapproximately$2.7billion.
FutureImpactsofBiodieselProductiontotheSoybeanSector Asuccessfulandrobustbiodieselindustrywillcontinuetoprovidesignificantbenefitstothesoybean sector.Inthissection,welookathowthesoybeanindustrycouldbeimpactedifproductionvolumes aredecreasedfromcurrentexpectationsasaresultofchangesinpolicyorotherfactors. Thebiodieselindustryisinitsearlystagesofdevelopment;acharacteristicofthisphaseisits vulnerabilitytoseveraldemandandsupplyfactorsthatcouldputthebiodieselindustryatriskandasa result,negativelyimpactthesoybeanindustryasawhole.Thesenumerousfactorsincludepublic sentimenttowardsbiofuels,thefuelsupplychain’sintegrationofbiofuels,themandatedvolumefor biofuels,policiesprovidingeconomicincentivesforbiofuelproduction(e.g.,theblenders’taxcredit), andthepriceandavailabilityofbiofuelfeedstocks.Policyandregulationshavebeenthelargestsources ofuncertaintyin2010forthebiodieselindustry.Biodieselproducershadbeenwaitingtoseeifthe blenders’taxcreditthatexpiredinDecember2009wouldbeextended,andfortheissuanceoftheEPA’s finalRFS2programregulations,inadditiontorulesfornewfuelpathwaysforgeneratingRINsfor biofuelsproducedthelatterpartof2010.Thereducedbiodieselproductionwitnessedthisyearisa manifestationoftheseuncertainties. However,theunknownsextendbeyond2010.Uncertaintyaboutthecontinuationoftheblenders’tax creditbeyond2011stillexists3.Inaddition,EISArequiresEPAtosettherenewablefuelstandardseach Novemberforthefollowingyear.Theirrulingwillbebasedonthegasolineanddieselprojectionsissued bytheDepartmentofEnergy’sEnergyInformationAdministration(DOEEIA).ThisisinadditiontoEPA beingrequiredtoestablishstandardsforbiomassͲbaseddieselofaminimumof1billiongallonsfor 2013andbeyond.Thisadditionalrulewillbebasedonanalysisoftheimpactofrenewablefuels productionontheenvironment,infrastructure,costsandotheritems. 3
Theblenders’taxcreditisonlyextendedthrough2011.
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December2010
ScenarioDescription BaselineprojectionsforfutureproductionofbiomassͲbaseddieselaredevelopedaspartoftheVCA analysis.Thesebaselineprojectionsincludetheamountoffeedstocksbycategory,includingsoybean oil,usedforbiodieselproduction.Theseassumptionsthenimpactthepriceandquantityproducedand utilizedofsoybeanoil,soybeanmeal,andsoybeansinthebaselineprojections.Changingpolicyor othereconomiccircumstancesalsoaffecttheestimatesoffuturepricesandquantities.Thesebaseline projectionsassumetheRFS2mandatedamountofbiomassͲbaseddieselfuelisproducedinMY11and beyond.Itsubsequentlyassumesthat50%ofthedomesticbiomassͲbaseddieselorbiodieselproduced fromMY11throughMY15willbefromsoybeanoil(Figure4)4. Recenthistoryhasshownthatpoliciessupportingtheproductionofbiodieselareunderconstant pressure.Whatifthemandatesaresoftened?Whatiftheblenders’taxcreditisnotextendedbeyond 2011?Whatifsomeotheroppositionleadstopolicychangesthatreducestheamountofbiodiesel productionfromthesebaselinelevels?Eachofthesewouldputpressureonbiodieselproductionand lowertheestimatedutilizationofsoybeanoilfromtheamountsassumedinthebaseline.Tounderstand theeconomicimpactofreductionsduetothesekindsofissues,agenericscenariowasconstructedthat assumesthatdomesticbiodieselproductionisreducedby25%fromtheprojectedvolumebeginningin MY11.Itisfurtherassumedthat80%ofthereducedproductionwillcomefromsoybeanoilͲbased biodieselandtheremainingreductionimpactstheotherfeedstocks(Figure5)5. 1,200
BiodieselProduction(MMGal)
BiodieselProduction(MMGal)
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Figure4.BaselineEstimateofBiodiesel ProductionbyFeedstockType
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'15
Figure5.ScenarioEstimateofBiodiesel ProductionbyFeedstockType
Theresultisthatsoybeanoildemandwoulddecreasebyapproximately1.5billionpoundsinMY11upto nearly1.6billionpoundsbeginninginMY12(Table3).Modelingtheimpactofthesereductionsdelivers thefollowingestimatedresults:
4
Whilecurrentindustryuseofsoybeanoiluseforbiodieselproductionislessthan50%ofallfeedstocks,industry expectationsarethatsoybeanoilusewillbeatleast50%inatleastintheensuingfiveyears.Thisisconsistent withUSDA’sandFAPRI’sannualbaselineprojectionsinwhichassumptionsaboutbiodieselproductionaremade. Fortheir2010baselines,USDAassumedenoughbiodieselwouldbeproducedtomeetthe1billiongallon mandatedvolumein2012,whileFAPRIprojectsthatbiodieselinexcessofthemandatedvolumewouldbe produced.USDAandFAPRIestimatetheshareofsoyͲbasedbiodieseltobefrom40%to52%,respectively. 5 Thisscenarioisoneofmanypossiblescenariosinwhichdomesticbiodieselproductionand/orthefeedstock sharesarevaried.Sinceitisdifficulttopredictthefuturewithanyaccuracygiventheuncertainties,thisscenariois presentedasjustonepossibility. CentrecConsultingGroup,LLC
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December2010
Table3.EstimatedImpactofReducedBiodieselProduction MarketingYear '11
'12
'13
'14
'15
(1,502)
(1,581)
(1,581)
(1,581)
(1,581)
SoybeanOilPrice(cents/lb)
(9.9)
(10.5)
(10.6)
(10.7)
(10.6)
SoybeanMealPrice($/T)
36.77
36.40
35.50
35.15
34.44
SoybeanPrice($/bu)
(0.21)
(0.28)
(0.31)
(0.33)
(0.33)
SoybeanAcres(MM)
0.0
(0.4)
(0.6)
(0.6)
(0.7)
(2.3)
(688)
(950)
(1,063)
(1,120)
(1,144)
(4,965)
ReductioninSBOdemandfrom baselineassumptions(MMlbs)
Total
Resultingchangein:
ProductionSectorReturns (Nominal$MM)
ObservationsonFutureScenarioResults Keytakeawaysfromtheanalysisofreducedfutureuseofsoybeanoilforbiodieselproductionfromthe baselineprojectionareasfollows.Aswiththehistoricalanalysis,theseresultsreflectonlytheimpactof lowersoybeanoiluse,holdingeverythingelseconstant. SoybeanOilPrice:
Asaresultofthelowerdemand,soybeanoilpriceswouldbelowerthan previouslyprojectedby9.9centsperpoundinMY11to10.6centsper poundinMY15.
SoybeanMealPrice:
Soybeanmealpriceswouldbehigherthanprojectedduetothelower soybeanoildemand,thusreducingdomesticcrushandthedomestic supplyofsoybeanmeal.Soybeanmealpricescouldincreasebyasmuch as$36perton,costingdomesticlivestockproducersanadditional$4.6 billionforsoybeanmealpurchasesoverthefiveyearperiod.Thesehigher mealpriceswouldputfurtherpressureonsoybeanmeal’sdecliningusein domesticlivestockrations.
SoybeanPrices:
Thelowersoybeanoildemandwoulddecreasesoybeanpricesby approximately21centsperbushelinMY11to33centsperbushelsin MY15.NotethatthesesustainedlowerpricesapplytoallU.S.soybeans andnotonlytothoseusedforbiodieselproduction.
SoybeanAcres:
Duetothedecreaseinsoybeanoildemandandresultinglowersoybean prices,feweracreswouldbeplantedtosoybeans.
ProductionSectorReturns:
Thisisanestimateofthechangeinnetreturnstothesoybeanproduction sector.Thus,overthefiveyearperiod,soybeanproducerscouldpossibly seetheirnetreturnsloweredbyapproximately$4.9billioninnominal dollars.
Asnotedabove,theseareestimatedresults,dependentonmanyassumptionsdevelopedforboththe baselineprojectionsandthescenario.TheVCAanalysisevaluatestheimpactofdemandandsupply changes(orshocks)onthesoysectorinisolationofothermarketforcesimpactingthesoybeansector andotheragriculturalsectorssuchascorn.However,U.S.cornandsoybeanproduction,andasaresult,
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December2010
ethanolandbiomassͲbaseddieselproduction,areinterconnected.Differentassumptionscouldbe appliedtothebaselineprojectionstoreflectotherconditionsthatcouldalterthebaselineprojections6. Examplesofalternativeassumptionsincludethemannerinwhichsoybeanproductionisimpactedby soybeanpricechangesandcompetitionfromothercrops.Inaddition,differentlevelsofreduced biodieselproductionand/orreduceduseofsoybeanoilforbiodieselproductioncouldbedeveloped. Thesealternativeassumptionswouldprovidearangeofpotentialeconomicimpactofreducedbiodiesel production.
Summary Biodieselhashadaconstructiveimpactonthesoybeancomplexoverthelastfiveyearsdueto increasedsoybeanoildemandforbiodieselproduction.Inaddition,itisexpectedthatproductionof thisbiomassͲbaseddieselwillcontinuetocontributepositivelytotheU.S.soybeanindustryinthe future.Theanalysisreportedinthiswhitepaperdemonstratestheimportanceofmaintainingahealthy biodieselindustrytomaintainstrongdomesticsoybeanoildemand,strongdemandforU.S.soybeans andultimatelyhighersoybeanprices.Insummary: 9 Historically,thegrowthindemandforsoybeanoilforbiodieselproductiontendedtomaskthe negativedemandimpactsresultingfromtransͲfatlabeling. 9 Greatersoybeanoildemandforbiodieselproductioninthepastfivemarketingyearsincreased demandforsoybeans,ultimatelyleadingtohighersoybeanpricesreceivedbyproducers.When lookingatonlytheimpactofincreasedbiodieselproduction,biodieseldemandforsoybeanoil providedanestimated9to27centperbushelsupporttosoybeanpricesoverthepastfive marketingyears.Thishasresultedinapproximately$2.7billionofadditionalnetreturnstothe productionsector.Thisisinadditiontoothermarketforcesincreasingprices. 9 Theincreaseddemandforsoybeanoilhassubsequentlyincreasedtheproductionofsoybean meal,thusloweringsoybeanmealpricesby$16to$48pertonfromwheretheywouldhave otherwisebeenfromMY05throughMY09. 9 Despitetheblenders’taxcreditonlybeingineffectretroactivelyin2010,soybeanfarmershave stillbenefitedfrombiodieselproductionbyanestimated$400to$500millioninMY09alone. 9 Losingjustaportionofthedemandforsoybeanoilinthefuturecouldhaveanestimatedimpact onsoybeanpricesrangingfrom21to33centsperbushel.Thiscouldnegativelyimpactthe soybeanproductionsectorbyabout$4.9billioninnominaldollarsoverthenextfivemarketing years. 9 QUALISOYͲfundedanalysissuggeststhatdeclinesinsoybeanoildemandfromtransͲfat avoidancewillcontinueforthenextcoupleofyears. 9 Therefore,ahealthybiodieselindustrywiththecapacitytoproduceatleastthemandatedRFS2 volumewillprovidesupporttosoybeanoildemandandultimatelytothesoybeancomplex.
6
Forexample,theDOEEIAissuedfivedifferentcasesorbaselines(reference,highandloweconomicgrowthand highandlowoilpricecases)intheirAnnualEnergyOutlook2010. CentrecConsultingGroup,LLC
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