- Excess supplies and weak demand contribute to an 8% drop in corn and soybean prices
- U.S. mandates for plant-based renewable fuels fall short of expectations
- The Renewable Fuels Standard program creates huge demand for corn and soybeans
- Disappointment among biofuel producers as volume mandates do not meet industry expectations
- Declining gasoline demand and rising electric vehicle market impact renewable fuel demand
- Corn supplies increase as production surpasses usage
- Biofuel demand supports soybean prices despite overall decline
The prices of corn and soybeans have experienced a significant decline, dropping by roughly 8% in the first few weeks of the year. This downward trend can be attributed to excess supplies and disappointing U.S. mandates for plant-based renewable fuels. The ethanol market for corn and renewable diesel market for soybean oil are crucial sources of demand, especially during a year when row crop prices are distressed by abundant supplies.
Renewable Fuels Standard Program
The U.S. government’s Renewable Fuels Standard program, established in 2005 and expanded in 2007, requires a minimum volume of renewable fuels in transportation fuel sold domestically. This program created enormous demand for ethanol and biodiesel, leading to a significant increase in demand for corn and soybeans used for their production. However, the U.S. Environmental Protection Agency (EPA) sets minimum volume requirements for biofuel use based on market conditions, supply availability, and political pressures.
Disappointing Volume Mandates
Last year, the EPA released new standards for renewable fuel use, which were higher than previous years but fell below industry expectations. The volume mandates set by the EPA for 2024 and 2025 were lower than what was proposed, disappointing biofuel producers. Ethanol is blended into gasoline at a 10% concentration, while biodiesel is blended into diesel fuel at concentrations ranging from 5% to 20%. These blending requirements reduce the demand for petroleum. While the federal program expanded demand for ethanol and biodiesel, there is disappointment that the concentration of ethanol in gasoline is too small and that the EPA did not require a greater volume mandate for biodiesel.
Impact of Electric Vehicle Market
The EPA faced challenges in setting volume mandates due to sliding gasoline demand caused by the increasing popularity of electric vehicles. The demand dynamics for gasoline are shifting, with crude-oil input to refineries declining significantly. This decline in gasoline demand poses a challenge for the biofuel industry, as it affects the overall demand for renewable fuels and subsequently impacts corn and soybean prices.
Excess Supplies and Building Stocks
The decline in corn and soybean prices can also be attributed to excess supplies and building stocks. The U.S. Department of Agriculture forecasts an increase in corn and soybean ending stocks for the upcoming marketing years. Corn production exceeds usage, leading to an increase in supplies. On the other hand, soybean crush, the process of converting soybeans into oil and meal, has seen growth due to rising biofuel demand. Despite the overall decline in soybean prices, increased biofuel demand has contributed to a tighter domestic balance sheet, which supports soybean prices.
The decline in corn and soybean prices is driven by excess supplies, weak demand, and disappointing U.S. mandates for renewable fuels. The EPA’s volume mandates for biofuel use have fallen short of industry expectations, impacting the demand for corn and soybeans used in their production. The rise of the electric vehicle market and declining gasoline demand pose additional challenges for the biofuel industry. While excess supplies and building stocks contribute to lower prices, increased biofuel demand supports soybean prices to some extent. Investors looking for long-term price increases in grains may need to wait for further price declines before making their move.