Insight Focus
- Recent surge in Brazil’s soybean oil exports partly due to less biodiesel use
- The blending mandate should be 14% but has been cut to 10% on economic and political woes
- Were it not for the ‘perfect storm’ in vegetable oil markets, Brazil would be facing soy crush cuts
The recent surge in Brazil’s soybean oil exports – a result of stronger demand, record-high prices and higher crush margins – has raised some questions about whether the pace of shipments in the first four months of 2022 can be sustained for the rest of the year. Another frequent question, especially from those outside Brazil, is about the impact of this increase in soybean oil exports on the Brazilian biodiesel program.
From January to April 2022, Brazil exported 709k tonnes of soybean oil, the second-largest volume for the period since 1997, when the Brazilian customs started monitoring the exports on a monthly basis. Of the total, 507k tonnes were shipped to India, compared with 118k tonnes a year earlier.
India, the world’s largest importer of vegetable oils, has increased its purchases from Brazil due to tight supplies from other origins such as Indonesia (which has imposed restrictions on palm oil exports), Ukraine (which is unable to export sunflower oil due to the war) and Argentina (which exported less soybean oil in the first months of 2022 due to the low availability of soybeans during its off-season and a recent increase in the export tax on soybean oil and meal).
Benefitting from by red-hot demand and high prices, Brazil is expected to export 1.8m tonnes of soybean oil in 2022, according to Abiove (Brazilian Association of Vegetable Oil Industries). This would be the largest annual exports since 2008, the year in which biodiesel blending became mandatory. And that is not just a coincidence.
A Successful Story Interrupted
Brazil has been blending biodiesel into diesel since 2005, but the mandates started only in January 2008, with 2%. The percentage gradually increased until March 2021, when it hit 13%. But rising prices for soybean oil, the raw material for approximately 70% of Brazilian biodiesel, led the government to reduce the blending mandate to 10% in May last year. In September, it was raised to 12%, but two months later it returned to 10% and will remain at this level until the end of 2022. From March 2023, in theory, the mandate should rise to 15%, as determined by the original law that regulates the biodiesel program, but it is not yet known whether the 10% blend will be extended once again.
The reduction in the biodiesel blending mandate was justified by the Brazilian government as necessary to limit the rise in diesel prices, which would be inflated by expensive soybean oil. In addition to the impact on inflation caused by Brazil’s great dependence on road transportationy, the rise in diesel prices also weighs on the delicate relationship between the government and truck drivers’ unions. Nearly every time they see their profits eaten into by higher fuel prices, truckers threaten to strike as they did in May 2018, when Brazil virtually ground to a halt for 10 days – a nightmare the government is keen to avoid at almost any cost.
In addition to the economic and political woes, the biodiesel mandate cut has been supported by entities linked to the motor fuel and automobile industries, which warned of the potential damage that blends greater than 10% could cause to engines. The vegetable oil industries and biodiesel producers reacted, carrying out a campaign to dispel “myths” about the biodiesel sector. What ended up prevailing, however, were the forces in favor of keeping the mandate at 10%.
Although the reduction in the biodiesel mandate since March last year may have limited the inlfationary impact of rising soybean oil prices on transportation costs, it hasn’t secured a fall in the price of diesel, which continues to be driven by a rally in the crude oil market. According to Brazil’s National Petroleum Agency, diesel average prices at fuel stations rose 70% between Januaryand March. Over the same period, soybean oil FOB prices at the port of Paranaguá increased by 57% in the local currency terms.
Pressured by the mandate cut, Brazil’s biodiesel production ended 2021 at 6.8b litres – 400m litres above 2020, but 1.2b litres down from what the country could’ve produced had the 13% m,andate been in place. For 2022, the expectation is for a further reduction, to about 6.1b litres.
Well Timed Export Boom
If the mandate shoots up to 15% in 2023, as originally planned, Brazilian demand for biodiesel should jump to 9.4b litres. That would limit Brazilian soybean oil exports, which have been on the rise not only because of burgeoning international demand and high prices, but also because the lower mandate has created a domestic soybean oil surplus.
Brazilian crushers couldn’t have been luckier. Were it not for the tight vegetable oil supplies and the extra demand for Brazil’s soybean oil now in 2022, the country could have faced a production surplus (considering that the crushing would remain strong to meet the demand for soybean meal) or, in the worst-case scenario, a reduction in the soybean crush.
For biodiesel producers, who already feel harmed by a recent change in the market (since Nov 2021, producers and distributors have been negotiating contracts between them, without the traditional auctions conducted by the federal government), all that remains is to hope that in the future the government will intervene less in the market, allowing them to plan their production without being haunted by abrupt changes to the law.
