Within the word government is the word “govern.” There are various definitions of govern, one being “to control and direct the public business of a country, city, group of people, etc.,” which best defines the U.S. government’s (Department of Agriculture) involvement in our business of the biofuels industry.
The government’s ability to influence is undeniable. Former president George Bush’s attempt in early 2000 at a pseudo energy policy accelerated ethanol usage initially to replace the cancer-causing MTB (methyl tert-butyl) and to get rid of the corn surplus.
Then came the subsidized biodiesel venture, which ultimately yielded the reformulated diesel using only edible oil. The demand for soy oil was predicted to expand rapidly to the point North Dakota wouldn’t be able to grow enough soybeans to supply the new crushing plants.
That was then, with soy oil reaching 91¢ per pound in 2022. This is now, when it’s reaching a four-year low of 39¢. The outlook for soy oil to become dominate in the crushing price paid for soybeans has gone up in smoke.
Other factors have contributed to the bearish market, including a bigger Brazilian crop than analysts thought six months ago and a perfect growing season for a record crop potentially increasing carryover ending stocks a year from now 750 to 900 million bushels.
With the gorilla (China) in the market largely absent from U.S. demand, the biggest issue is that the use of soy oil, which would help support the price of soybeans, has been largely circumvented by the use of used cooking oil (UCO) – not only from U.S. sources, but also from imports from China and Brazil. The chart shows the dramatic increases over the last few years including the explosion in 2024, eligible in most cases for U.S. government subsidies.
Essentially, the rug is being pulled out from under the U.S. soy oil market as we built infrastructure for crushing soybeans to get the oil to be used as the feedstock for reformulated biodiesel — veggie type using no fossil fuel.
Consequences of Failed Policies
To add insult to injury, the California Air Resources Board (CARB) has proposed significant changes to their Low Carbon Fuels Standard, including a 20% cap on the amount of vegetable oils like soy and canola that can be used for biofuels production.
This follows a list of other failed biofuels policy moves by the Biden administration, surrounding the low blending volumes for biomass-based diesel in the Renewable Fuels Standard and the strict guidelines to comply with and receive tax credits for Sustainable Aviation Fuel under the 40B and 45Z programs.
In a recent article by Reuters, U.S. Secretary of Agriculture Tom Vilsack warned against making a push to prevent U.S. biofuels made with foreign ingredients from being able to reap the benefits of the 45Z tax credit, saying it could hurt American trade. He then stated, “If every country does this, then there’s no trade. If there’s no trade, then what do we do with the 20% to 30% of the crops we are currently selling overseas? What would that do to prices?”
The inability to “govern” with seemingly the lack of proactive thinking is astonishing to me. Once again, we let the government create demand and then when the going gets good, a radical move destroys what we have been led to believe was an honest attempt to help agriculture in the long run.
It is hard to believe any effort to think “what if” escapes policymakers. Surpluses exist in other commodities as well, as we incentivized global competition. It is not that difficult to solve. There is nothing wrong with strategic reserves for food, fiber and energy including biofuels and an end to subsidizing imports of alternative feedstocks to RBD.
The unintended consequences now emerging makes me wonder if they are unintended at all. We (government) might be forced to react and intervene as market prices are dictating that we do so. There is an old saying that says, “If you get in bed with the government, you are going to get more than a good night’s sleep.”
