The Link Between Oil and Ag

Understand why oil prices impact corn and soybean prices.

In today’s agricultural markets, many fundamental and technical factors drive prices up and down from day to day, hour to hour, and minute to minute. It can be tricky to keep an eye on all of them let alone understand why they matter. The price of crude oil is one such factor. 

“Petroleum is the floor,” says Owen Wagner, Senior Grain and Oilseeds Analyst for RaboResearch. “That’s the best way to think of it; petroleum sets the foundation.” 

Wagner says the price of oil is not a primary driver of corn or soybean prices but rather it helps set a minimum price, and other fundamental factors drive it up or down from there.

Beginning with biofuels

The price correlation between petroleum and corn and soy wasn’t always strong. Experts say it really took off with the advent of the biofuels industry. 

Congress passed the Renewable Fuel Standard (RFS) in 2005 and expanded it in 2007. The RFS sets minimum requirements for how much biofuel must be blended into the nation’s fuel supply each year. As biofuels grew in demand, so did the commodities used in the production process such as cornstarch and soybean oil. 

“From 2006 onward, the relationship wasn’t perfect, but it’s pretty convincing, as one commodity goes up, the other follows,” Wagner says, “and I think it would be naive of us to assume that corn is in the driver’s seat. I mean, it’s petroleum that really makes the world go around…. So that said, it’s really important now. You can’t follow ag commodities without keeping a keen eye on oil prices.” 

Scott Irwin, Chair of Agricultural Marketing at the University of Illinois Urbana-Champaign, says in the early years of the RFS, the correlation between oil prices and corn was particularly strong as ethanol production boomed. “The higher crude oil prices simply meant that ethanol would become more competitive as a substitute for petroleum gasoline, and being a substitute, as the price of crude oil goes up, the demand for corn ethanol would go up and that would feed back into corn,” he says. 

The strength of that connection has waned in recent years, according to Irwin, because ethanol has met regulatory and market barriers that have made it difficult to grow beyond a 10% blend with gasoline in the marketplace. According to the Renewable Fuels Association, analyzing data from the U.S. Energy Information Administration (EIA), the average blend rate in 2022 was 10.39%.

The soy boom

Today soybeans are experiencing a boom similar to what corn experienced in the early years of the RFS, Irwin says.  

In recent years, the production of renewable diesel has expanded and increased demand for soybean oil among other vegetable oils and animal fats. Renewable diesel production capacity was below 50,000 barrels per day for most of the past decade, the EIA estimates. By the end of 2022, capacity rose to 170,000 barrels per day, equivalent to 2.6 billion gallons a year. By 2025, the agency expects capacity will be nearly 400,000 barrels per day. 

Simultaneously, soybean crush capacity is expanding. According to an estimate from the American Soybean Association, the country’s crush capacity is expected to grow by 680 million bushels per year over the next few years.

“The announced 22 new or expanded crush plants would increase crush capacity by 31%,” says Scott Gerlt, chief economist for the American Soybean Association. “However, this is dependent on multiple factors to actually occur. Chief among them is the pace of renewable diesel growth.” 

Outside of the United States, Wagner says soybeans have also benefited from discretionary demand for palm oil for biofuel production in countries such as Indonesia. High oil prices may lead to increased international renewable fuel production from palm oil and therefore lift the value of the vegetable oil complex globally. 

Fight for growth

Last year the RFS blend requirements were not finalized until June. As a result, production of renewable diesel and biodiesel exceeded the requirement. Going forward, Irwin says it will not be sustainable for the industry to continue to outproduce the RFS because of the fuels’ high costs of production. The blending requirements set in the most recent rule through 2025 create consistent but slow growth. Therefore, he expects a diminished relationship between oil prices and soybeans just as corn experienced when ethanol hit its own barriers to rapid expansion. 

“I’m confident that we are nearing the end of the renewable diesel boom if there’s no change in the status quo setting of the [blending requirements] for the RFS,” says Irwin.

Jonathan Martin is the Director of Economics and Market Analysis for Clean Fuels Alliance America, a trade association representing biodiesel, renewable diesel, and sustainable aviation fuel producers. He says with RFS requirements in place, he does expect production to moderate accordingly. Yet, he also sees opportunities for growth. 

Martin says some of the renewable diesel surplus from 2023 was exported, including to Canada, which has its own low-carbon fuel requirements, and that may in some cases still be an attractive option going forward. He also cites the growth of the sustainable aviation fuel industry as a reason for optimism.  “I’m hopeful that 2026 and beyond will be significantly more robust,” he says.

One to watch

Even if the relationship between crude oil and soybeans cools as Irwin predicts, he says oil prices will continue to be a factor for corn and soybeans. 

“The thing I try to watch when crude oil prices go up is, are changes in crude oil prices reflecting something like Saudi Arabia and Russia cutting production?” Irwin says. “That’s a supply side issue. Or is it reflecting unexpectedly strong demand like we’ve tended to see globally and particularly in the U.S. in the last six to eight months? And the latter is good for farm income and crop prices. The former, I don’t think has nearly as much impact. In other words, supply-related increases in crude oil prices have very different implications for the ag sector as compared to demand-driven increases in crude oil prices.”

EDITOR’S TAKE:

Whether the connection is demand driven or supply driven, it appears that the future of agriculture, particularly corn and soybeans, is inextricably intertwined with the price of oil. On one hand it might be a substitute or, on the other hand, a blend or complimentary product. Either way, the price of oil helps set a base price for corn and soybeans. And despite the best efforts of some, the demand for oil, and hence corn and soybeans, is not going away anytime soon. This article does a good job of explaining the relationship and how agriculture benefits. Farmers and ranchers are finding more and more ways to integrate their products into mainstream America. That will continue to pay huge rewards into the future. Put farmers/ranchers at the very top of your prospect list.