Emily Balsamo, CME Group
At a Glance:
- Corn and soybean oil are major inputs to ethanol and biomass-based diesel, respectively
- The strengthening energy application of soybean oil in the United States has spurred interest in Soybean Oil futures, driving open interest and liquidity
Agriculture and energy have intersected for as long as futures have been traded in Chicago, though both energy and agriculture have come a long way since Oats futures, launched in 1877 and considered the first energy derivative, fueled the city’s horses.
A Rich History
Driving development in the late 19th century, the country’s railroads (and thus indirectly the enmeshed coal sector) shaped American agriculture. Before the expansion of the railroad and the necessary growth in Appalachian coal mining, cattle needed to be driven on foot to Chicago, then the center of U.S. meatpacking. After rail proliferation, animals could be moved to packing facilities without the loss of muscle, fat, and life implicit in a long cattle drive, making beef cheaper and more plentiful.
Rail also allowed lumber to be transported by means other than water, enabling the shipping of hardwood and relieving lumberjacks of the mortal threat of logjams. Those railcars that brought cattle and lumber to Chicago could then be filled with grain from the city’s elevators, traded and hedged at the Chicago Board of Trade, to feed the expanding westward human and animal population, writes William Cronon in his book Nature’s Metropolis: Chicago and the Great West.
Biofuel Production Marks the 21st Century
Today, the driving force in the push and pull between energy and agriculture is the rapid development and use of feedstock biofuels. According to the April 2024 WASDE, the USDA estimates that of the 27,200 million pounds of soybean oil consumed in the U.S. in the 2023/2024 crop year, 13,000 million pounds (48%) will be attributable to biofuel production. Of the 15,342 million bushels of corn expected to be produced this crop year, 5,400 (35%) will be used in the production of ethanol. Ethanol production has accounted for the large majority of food, seed and industrial (excluding feed) use of corn in the past decade.
EPA Blending Mandates Influence Ags Markets
In the U.S., policy in the form of the Renewable Fuel Standard (RFS), which sets national blending mandates, drives these markets. In the U.S., soybean oil is the principal input to what is designated by the RFS as biomass-based diesel (BBD), with biodiesel and renewable diesel being the primary fuel types.
While biodiesel and ethanol need to be blended with petrodiesel to operate in unmodified internal combustion engines, renewable diesel can function identically to petrodiesel as a drop-in fuel. Biomass-based diesel fuels are widely considered to emit significantly less carbon than petrodiesel or ethanol-blended gasoline.
Seasonal Volatility
Agricultural volatility peaks in the summer months, when volatilities of other asset classes tend to experience a lull. Agricultural volatility peaks in the summer because the principal crops – corn and soybeans – are in the ground, and thus the slightest zephyr in weather and planting can yield significant headwinds or tailwinds in price in new crop instruments December Corn and November Soybean Complex futures. Volatility tends to peak around the end of June, coinciding with the release of the USDA Acreage report.
According to the CME Group Volatility Index (CVOL), Soybean Oil has been among the most volatile Agricultural products at CME Group in average weekly CVOL since 2021, behind only Lean Hogs and Chicago Wheat. The commodity’s energy application has strengthened traded volume in Soybean Oil futures in the past few years, propelling the product into the contest for third place among most traded Agricultural futures products, overtaking Soybean Meal and Chicago Wheat in Q2 2024. Soybean Oil futures saw an average daily volume (ADV) of around 150,000 in 2023 and are experiencing record average daily volume and open interest thus far in Q2 2024.
The Growing Importance of Soybean Oil
While use of corn for ethanol has found stability in recent years, use of soybean oil for biomass-based diesel is only expected to increase further. Renewable diesel production capacity, in particular, is being rapidly built to satisfy blending mandates under the RFS. While canola and waste and residual oils are the primary inputs to BBD in the European Union, soybean oil continues its dominance in feedstock inputs in the U.S., underlying a robust and liquid derivatives market. As market dynamics evolve in an ever changing world, CME Group continues to provide risk management solutions across the agricultural and energy markets.