Jun 20 / Luiz Fernando Roque

Biofuels in the United States: how the new EPA proposal could impact the entire soybean complex

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New biofuel proposal in the US already affects the soybean complex


Over the last few days, the soybean complex markets have been impacted by the new proposal for mandatory biofuel blending in the United States announced on June 13, with the US Environmental Protection Agency (EPA) proposing a large increase in the volumes of biodiesel and renewable diesel to be blended into fossil fuels in 2026 and 2027.

Although the proposal is still in the early stages of the approval process, the market has already begun to speculate about possible impacts on the supply and demand frameworks for the US soybean complex (soybeans, soybean meal and soybean oil), which has resulted in important movements in futures contracts in Chicago, which tend to continue at least until August when a new stage of the process will come into play.

The EPA's proposal points to an increase in the mandatory volume of biodiesel and renewable diesel blended into fossil fuels from the current 3.35 billion gallons in 2025 to 5.61 billion gallons in 2026, which represents a significant increase of 2.26 billion gallons (+67%). If confirmed, it will be the largest increase ever recorded in mandatory blending in the US, marking a new era in the use of alternative fuels in the North American market.



       US "RVO" Mandate - in billions of gallons and %

                                                                                Source: EPA, Hedgepoint


For 2027, the proposal calls for an even higher blend (5.86 billion gallons), but in this report we will only use the forecast for 2026 to build the scenarios.

As mentioned, the proposal is still at an early stage, and a virtual public hearing is scheduled for July 8 for discussions on the topic. In addition, the EPA will receive opinions and comments on the subject until August 8. After this period, we should have news regarding the progress of the proposal.


US soybean crushing capacity


Soybean crushing capacity currently stands at 69.4 million tons (2550 million bushels) per year in the US, according to April data from the American Soybean Association (ASA).

There are already projects underway and planned for the coming months to increase current capacity, which includes expansions at existing plants and/or the construction of new plants in the states of South Dakota, Kansas, Illinois, Ohio and Louisiana.

Map - Soybean Crushing Plants in the USA

                                                                                                                                                                                                                        Source: ASA, Gordon Denny


The projects, if completed by 2026, should increase US crushing capacity by 5.1 million tons (189 million bushels) per year, from the current 69.4 to 74.5 million tons (2550 to 2739 million bushels) in 2026. In the table below, we summarize the data and also estimate the crushing capacity if only 50% of the expansion is achieved by next year.

US soybean crushing capacity - in million bushels and millions tons

                                                                                                                                       Source: ASA, Hedgepoint


We would like to point out that although current capacity stands at 69.4 million tons (2550 million tons), the USDA's June estimate points to 67.8 million tons (2490 million bushels) of soybeans being crushed in the 2025/26 US season, representing 97.7% capacity utilization. Thus, there is also room for an increase in crushing using the capacity already available.

Scenarios: Soybean


In Soybean Scenario 1, we assume that 100% of the potential growth in soybean crushing capacity will be achieved (+5.1 million tons or 189 million bushels regarding 2025 capacity), which would lead to a potential crush of 74.5 million tons (2739 million bushels) of soybeans in the 2025/26 season, if all capacity is used. This increase in domestic use of soybean for crushing would lead to the need for an increase in soybean imports to maintain stocks. In addition, the greater domestic need, coupled with issues involving the trade war, should lead to a reduction in exports (47.4 million tons or 1740 million bushels), which should fall due to lower availability, less competitive prices and a drop in Chinese demand.

Even so, the sum of all these factors should result in a significant reduction in ending stocks of soybean, which should fall to 4.4 million tons (161 million bushels), which would represent the lowest stocks since the 2013/14 season (2.5 million tons or 92 million bushels).

We believe that, although possible, Scenario 1 is less likely to occur, since we believe it will be difficult for the US to reach 100% of its potential growth in crushing capacity and use it in the first half of 2026.

Scenarios - Soybean Supply and Demand - in million bushels and millions of tons

Source: USDA, Hedgepoint



In Scenario 2, we assume that 50% of the potential growth in crushing capacity will be reached (+2.6 million tons or 95 million bushels regarding 2025), which would lead to a potential crushing of 72 million tons (2645 million bushels), if all capacity is also used.

In this scenario, the need to import soybean is also expected to grow, but less than in Scenario 1. On the export side, exports are expected to fall due to lower availability, less competitive prices and lower Chinese demand, as in Scenario 1. However, in relation to ending stocks, the trend would be for stocks to fall back to 6.1 million tons (226 million bushels) due to a smaller expansion in domestic consumption for crushing regarding Scenario 1.

We believe that this scenario seems more likely to occur, given that the US is more likely to reach 50% of the crushing capacity expansion potential forecast for 2026 in the first half of the year.

In short, both scenarios point to a reduction in ending stocks of soybean in the 2025/26 season if the current proposal to increase the blend of biodiesel and renewable diesel is accepted in full, which tends to bring an environment of higher soybean prices in the new season.

Scenarios: Soybean Oil


Deriving from the soybean crushing scenarios, we designed four scenarios for the soybean oil supply and demand picture, mainly considering the availability and potential use of the soybean derivative for making biodiesel and renewable diesel in the proposed higher blend environment.

In Scenario 1.1, we considered the crushing of soybean foreseen in Scenario 1, which is represented by the first percentage of the header (100% /). In addition, we assume that the share of soybean oil as an input for biofuel production will remain the same as it is today, with no loss or gain in "share" regarding other inputs (other vegetable oils, animal fat, etc.). This consideration is represented by the second percentage of the heading (/ 100%).

In this scenario, with crushing reaching its full potential, there would be a significant increase in soybean oil production, which could reach 14.2 million tons (31.225 million pounds).

In this case, the use of soybean oil to make biofuels should rise to 9.1 million tons (20.152 million pounds). To compensate for this greater demand, we predict a reduction in the use of soybean oil for other purposes (5.9 million tons or 13.000 million pounds for food, feed, others). In addition, with the strong increase in domestic consumption and possible loss of competitiveness to the foreign market (higher prices), we forecast a strong drop in exports (0.1 million tons or 125 million pounds) and an increase in imports to cover part of the use for other purposes.

As a result of these factors, we expect a strong reduction in ending stocks of soybean oil, which should reach the lowest levels in decades (0.3 million tons or 599 million pounds).

As with soybean, we believe that this scenario has a low probability of occurring, although it cannot be ruled out.

Scenarios - Supply and Demand for Soybean Oil - in million pounds

                                                                                                                                                              Source: USDA, Hedgepoint

Scenarios - Supply and Demand for Soybean Oil - in million tons

                                                                                                                                                              Source: USDA, Hedgepoint


In Scenario 1.2, we also consider the crushing forecast in Scenario 1 for soybean, but we take as a basis the loss of 1/4 of the share of soybean oil in the manufacture of biofuels due to possible higher prices, which is represented by the second percentage of the header (/ 75%).

In this scenario, the use of soybean oil for biofuels is estimated at 8.4 million tons (18.589 million pounds). In this case, the use of soybean oil for other purposes should fall less (6.1 million tons or 13.500 million pounds), while imports should grow less. Regarding exports, we maintain our estimate of a strong decline.

As a result, ending stocks are estimated at 0.4 million tons (887 million pounds), still representing a significant drop regarding current USDA estimates.

In Scenario 2.1, we consider the crushing forecast in Scenario 2 for soybean, which is represented by the first percentage of the header (50% /). In addition, we take as a basis the same loss of 1/4 share of soybean oil for biofuel production as in the previous soybean oil scenario (/ 75%).

In this scenario, soybean oil production should reach 13.7 million tons (30.147 million pounds). With the use of soybean oil for biofuels estimated at 8.4 million tons (18.589 million pounds), the tendency is to see a drop in consumption for other purposes (5.9 million tons or 13.000 million pounds), while the need for imports should grow to 0.4 million tons (900 million pounds). In this case, we also estimate a significant drop in exports (0.1 million tons or 125 million pounds).

As a result, ending stocks were estimated at 0.4 million tons (785 million pounds), close to the level estimated in scenario 1.2.

Finally, in Scenario 2.2, we considered the crushing forecast in Scenario 2 for soybean but based it on a loss of half (1/2) of the share of soybean oil in biofuel production, which is represented by the second percentage of the heading (/ 50%).

In this scenario, the loss of share should occur due to a lower availability of soybean oil, resulting in an estimated use for biofuels of 7.7 million tons (17.026 million pounds). Other vegetable oils, such as canola oil and sunflower oil, as well as used cooking oil and animal fats may have a greater share in biofuel production, although it is important to note that the prices of "RINS" credits generated by imported inputs may be "penalized" by the US government, in order to encourage the use of locally produced inputs.

At the same time, the use of soybean oil for other purposes should fall less (6.1 million tons or 13.500 million pounds), while imports should remain in line with current USDA estimates (0.1 million tons). Exports, on the other hand, should continue to fall significantly (0.1 million tons or 300 million pounds).

As a result, we see ending stocks at 0.5 million tons (1.073 million pounds), still a significant drop from current estimates, but at less "tight" levels regarding previous scenarios.

In short, as with soybeans, due to doubts linked to the growth in crushing potential, we believe that the soybean oil scenarios with the highest probability of occurrence are scenarios 2.1 and 2.2, although scenarios 1.1 and 1.2 cannot be ruled out.

Given these scenarios, which point to a drop in stock levels of soybean oil in the US in the 2025/26 season, we understand that the trend for prices is positive for the new season, supported essentially by the strong increase expected for domestic use for biofuels.

Scenarios: Soybean meal


Regarding soybean meal, the strong expansion expected for North American crushing due to the increase in biofuel mandates tends to result in a significant increase in the production and supply of meal in the 2025/26 season. This situation should lead to a strong expansion in US ending stocks, since the increase in supply should not be accompanied by an increase in demand in the same proportion, regarding both domestic consumption and exports. In view of this, we have drawn up two scenarios.

In Scenario 1, which considers the crushing derived from soybean Scenario 1, soybean meal production is expected to grow strongly in 2025/26, and is estimated at 58.6 million tons (64.750 thousand short tons). This increase in production should naturally bring imports to a minimum (0.1 million tons or 100 thousand short tons), given the large supply available locally.

On the demand side, we believe that lower prices should encourage greater use of meal in animal feed, with the soybean by-product potentially gaining ground on other protein sources. Despite this, we don't expect a strong expansion in domestic consumption due to the limitations on herd growth. We therefore estimate domestic use at 38.5 million tons (42.400 thousand short tons).

The growth in supply combined with more competitive prices should also allow for a significant increase in exports, which could reach 17.7 million tons (19.500 thousand short tons). In this sense, we highlight exports as the main variable in defining ending stocks. Competition with soybean meal from Argentina and Brazil is expected to be fierce, but it is possible that the US will increase its share of the export market due, in particular, to the greater competitiveness of its product.

In any case, as a result, in this scenario we expect a strong increase in US ending stocks, which should reach 2.9 million tons (3.220 thousand short tons). If confirmed, these would be the largest stocks in US history.

As with soybeans, we believe that Scenario 1 for meal is less likely to occur, mainly due to the issue of growing crushing capacity.

Scenarios - Supply and Demand for Soybean Meal - in thousand short tons and million tons

Source: USDA, Hedgepoint


In Scenario 2, where the crushing derived from soybean Scenario 2 is taken as a basis, corn meal production is estimated at 56.6 million tons (62.342 thousand short tons), still representing a significant increase regarding the USDA's current estimate. This increase in supply should reduce the need for imports to minimal levels (0.1 million tons or 100 thousand short tons), as in the previous scenario.

On the demand side, the rationale used to construct Scenario 1 is maintained, although the expected growth in domestic demand (38 million tons or 41.900 thousand short tons) and exports (17.4 million tons or 19.200 thousand short tons) should be slightly lower.
In any case, as a result, we also expect a strong increase in ending stocks, which should reach 1.6 million tons (1.792 thousand short tons), still at record levels.

We understand that this scenario is more likely to occur, but we would stress once again that exports will be a decisive factor in defining stocks.

Conclusions


In view of the above scenarios, we conclude that the proposal to increase mandatory biofuel blending in the US has the potential to bring major changes to the US soybean complex, with a significant impact on the formation of prices for soybeans, soybean meal and soybean oil.

If the new proposal is accepted, we understand that the trend points to important reductions in the levels of soybean and soybean oil stocks, while in meal soybean stocks are expected to grow strongly. As a result, soybean and soybean oil prices tend to find support for appreciation, while meal prices tend to come under negative pressure.

Finally, we highlight that, for any of the soybean complex scenarios, the price situation for soybeans, meal and oil will be a decisive factor in consolidating the figures, especially in the variables related to domestic use, imports and exports, as well as crushing margins, which can also affect the volume of crushing and the supply of soybean by-products.


Market Intelligence - Grains & Oilseeds

Written by Luiz Fernando Roque
Luiz.Roque@hedgepointglobal.com
Reviewed by Thais Italiani
Thais.Italiani@hedgepointglobal.com
www.hedgepointglobal.com

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