Biodiesel mandate, domestic demand could stop Brazilian soybean oil exports: sources

Historically high blending mandates and increasing domestic demand for soybean oil, the largest raw material contributor for biodiesel, could potentially put a halt to the export of soybean oil from Brazil in the coming years, market sources told S&P Global Commodity Insights.

Brazil is currently the second-largest exporter of soybean oil, with marketing year 2024-25 exports projected at 1.4 million mt, down 22.2% from the previous season, despite a rising production trend, according to the US Department of Agriculture.

Soybean oil accounts for 72% of raw materials used in Brazil's biodiesel production in 2024, while in 2023, it contributed 69%, data from the country's association of vegetable oil industries (Abiove) showed.

Brazil's current mandate for biodiesel blending is B14, or 14%, making it the largest in the country's history.

"Next year, it will be raised to B15. Earlier this year, our congress approved a bill that keeps that gradual annual increase, and although it doesn't determine the exact percentages for each year, there is a certain consensus around 25% by 2030," Daniele Siqueira, market analyst at AgRural said.

"We were able to export more soybean oil in 2021 and 2022 because our government reduced the mandate back then, in an attempt to control the impact of high fuel prices on inflation," Siqueira added.

Brazilian soybean oil exports reached high levels amid increasing production and reduced blending mandate, before falling significantly in MY 2023-24.

"Since 2023, the mandate has been increasing again at the expense of our exports. Brazil might stop exporting soybean oil within a couple of years if we don't increase our soybean crushing capacity or start using alternative raw materials," Siqueira said.

However, sources anticipate that the South American country may not have to turn towards a significant volume of imports.

"That [Brazil stopping soybean oil exports] is indeed our expectation, given today's biodiesel mandate growth, but it is expected to be flexible and adjust to prevent significant imports, unlike mandates in the US and EU," Carlos Mera, head of agri commodities markets at Rabobank told S&P Global.

Pressure on prices

Brazil's soybean crush volume in April was 4.8 million mt, a record for the month and consistent with the expectations of analysts at S&P Global Commodity Insights.

The crushed volume was nearly unchanged from last year as well as the preceding month, and the resulting soybean oil production for the month stood at 965,000 mt.

Although "the combination of flooding in Rio Grande do Sul and weak margins during March-April limited the crush potential, we anticipate that the crush will remain at near-record levels throughout the season, supported by the 14% biodiesel blending mandate – the largest in the history of Brazil, and improved margins," analysts said.

Commodity Insights forecasts Brazil's MY 2023-24 soybean crush volume at 55.3 million mt.

However, abundant supplies from South America, alongside an anticipated reduction in exports to meet domestic demand, are expected to lower Brazil's soybean oil prices.

A Platts assessment of FOB Paranagua indicates that prices are soybean oil prices are currently trading at some of the lowest levels in three years. Platts is part of S&P Global Commodity Insights.

"Soybean oil is mainly going to the domestic market to meet the blending mandate, reducing exports. Due to increasing oil and meal supplies in South America, we anticipate pressure on product prices in the coming months," analysts said.

Impact on trade

The stoppage of exports from Brazil, the world's second largest exporter of soybean oil, will have a notable impact on the global trade balance.

India is the largest importer of soybean oil, with MY 2024-25 imports projected at 3.5 million mt, up 18.7% on year, according to the USDA.

In MY 2023-24, India's soy oil imports were estimated at 2.95 million mt, out of which 624,663 mt, or 21.2% were supplied by Brazil alone.

Notably, India accounted for 53% of Brazil's soy oil exports in 2023, and has already made for 58% until May 2024, data from Abiove showed.

Thus, declining prospects from Brazil point to a deficit in supplies to India as an immediate effect, and the latter exploring alternative trade partners in the long term.

Measure on tax credits affects oilseed exports

On June 4, the Brazilian government introduced 'provisional measure 1227' aimed at implementing restrictive measure on the use of tax credits, which is likely to increase the cost of grains and oilseeds' exports, furthering impacting soy oil prospects.

Although valid for the entire export chain of the country, grains and oilseeds are among the most affected, "given their characteristic of lower margins and higher volumes," Geraldo Isoldi, independent commodities analyst, told Commodity Insights.

"For crusher, the industry has USD $11.8 billion in accumulated PIS/COFIN credits, while in the biodiesel sector alone, currently 70% derived from soy, the impact would total USD $2.4 billion," Isoldi said.

"The margins of crushers, currently around 3%, would simply disappear," he added.

Immediately after the announcement of the provision, Brazil's export markets went to a brief standstill.

"The provision halted Brazilian grain and oilseed export market in the first week of June, with very few buyers offering prices in the Brazilian market and redirecting purchases to countries such as China, which according to the USDA, acquired 208,000 mt of US soybeans during the period," Isoldi added.