A view from Jeremy Ostrander, CEO of AgriVision Equipment & PrairieLand Partners - March/April

In the January Vision, we discussed the pace of change and opportunities that are created with these changes. The last 30 days of the Ukraine/Russia challenges, wild grain markets, and inflation have driven change at an even greater pace. For now, the Midwest agriculture economy is reaping the benefits. Most of us either raise soybeans or support the production of soybeans in some fashion. As more renewable diesel projects are announced, are there enough soybeans grown today to meet demand? The answer is NO! Current forecasts call for higher soybean prices, expanded acreage, and not enough soybean oil to go around. Brought to you courtesy of the West Coast legislators and their renewable low carbon biodiesel initiative, there is change on the horizon. As Midwesterners, we often cringe at the thought of West Coast driven initiatives like Final Tier 4 Emission Engines, getting pushed upon us, but in this case there could be a silver lining. California and a few other states have implemented low-carbon fuel standards (LCFS) to move to decarbonized liquid fuels to meet their goal of reducing carbon emissions. We see crush plant projects popping up all over in the last 12 months, and many are funded by big oil. Why would oil companies get on board, when they have fought so hard against things like ethanol blending in the past? When you look at the LCFS tax credits, “green” investor interests, and twice the EPA RINs being generated, this is a no brainer. So, how will the increased demand ultimately affect us? Soybeans are approximately 20% oil and 80% meal. What a soybean crusher can afford to pay farmers for soybeans is mathematically set by that the 20% oil/80% meal ratio. Historically, soybean oil and soybean meal moved in a rough tandem to the value of soybeans. However, the renewable biodiesel initiatives and other recent world demands have broken that relationship. Where the soybean oil and meal price relationship goes in the future is yet to be seen, but the current demand of soybean oil is positive for the Midwest farmer. What could stop or slow this move? Food inflation is front and center in the current economic situation. The year-over-year CPI inflation rate for fats and oils reached 6.9% in September 2021. This is the highest rate in more than a decade, and includes the sharp run-up around the drought of 2012 and all the increased demand for soybeans from China. These CPI fats and oils prices don’t include the food ingredient costs that go into other manufactured foods. Restaurants are facing much higher price increases for their cooking oils to fry and to make foods. Pet food manufacturers are dealing with double digit price increases in edible oils that go into pet food. Cattle, hog, and poultry feeders are dealing with the same double digit price increases for their feed rations. Same as with foods consumed by people, oils and fats make animal rations more palatable and nutritious, and it’s very difficult to reformulate them without these fats and oils. It’s clear that the consumer is paying a higher price for fats and oils in foods, and through all the ways fats and oils are used in food ingredients. However, can it be said that the renewable biodiesel mandates are the only cause of the increase? Of course, it’s more complicated than that. Both grains and oilseed prices jumped in 2021 due to poor crop production in 2019 and 2020. Also, China switched from avoiding U.S. soybeans in 2018 as a source of imports, and returned as a major buyer in 2020 and 2021. This type of commodity price volatility is part and parcel of the food world. Weather events and trade disputes come and go, and they typically leave the consumer food prices unchanged. But, the low carbon renewable biodiesel mandates are a different issue. They represent a structural change that could permanently change the demand structure and food prices.

Will our current government step in and elevate the food vs fuel debate, or will they continue on the path to lower carbon emissions? The coming months will determine a lot for the future of soybean production. What happens in soybeans, will ultimately affect the corn, wheat, and cotton acres and prices. The pace of change and threat of disruption creates tremendous opportunity. For those that can relate to the March Madness basketball craziness………we will have to stay on our toes and not get caught flat footed. Until next time, have a safe start to spring and enjoy the warmer days that are ahead.