Global vegetable oil futures - namely soybean oil and palm oil - have been highly volatile since mid-2024. As policy shifts in both the US and abroad bring new demand online, recent changes in political landscapes and global trade flows have created a more challenging risk management environment.

Since the inauguration of the Trump administration, the renewable fuels industry has awaited clarity on the 45Z tax credit, which offers up to $1.00 per gallon for reduced carbon intensity (CI) transportation fuels under the IRA. With no credit currently in place, uncertainty has slowed biodiesel production, reducing soybean oil usage for biofuels - a trend reflected in USDA balance sheets.

However, recent Treasury eligibility changes - excluding imported UCO and canola oil due to quality and CI concerns - position soybean oil as the primary feedstock for the US biodiesel industry. This shift could trigger a demand shock if biorefining capacity ramps up quickly, as production is currently running at about 30% of nameplate capacity.

In Southeast Asia, the Indonesian government has accelerated its B40 biodiesel program, mandating a 40% palm oil blend in domestic biodiesel, with full implementation expected this year. The reduction of available palm oil in Indonesia has opened the door for US soybean oil exports, particularly to India, despite the potential for retaliatory tariffs.

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Although the US soybean crushing industry has enjoyed strong margins, challenges extend beyond soybean oil price volatility. Chinese port stocks of soybean meal are at multi-year highs, driven by recent tariffs. Meanwhile, US Midwest cash meal values remain depressed due to oversupply and weak demand, compounded by the historically small US cattle herd. While current demand is subdued, it remains a key factor in long-term risk management.

Jack Cooney, Director of Agricultural Sales at Marex, underscores the necessity of consistent hedging in today's volatile markets: "In this era of unprecedented market volatility, proactive hedging is not a luxury but a necessity," Cooney states. "Commercial players must adopt a forward-looking approach to mitigate risks and secure their bottom line."

Biofuel policy shifts - both in the US and globally - can drive significant demand shocks. As global vegetable oil trade flows continue to evolve, risk managers must anticipate these changes and avoid complacency. As the old adage goes hedge when you can, not when you must.

Marex has one of the largest and most experienced agricultural teams, providing market-leading insight into price action and positioning. Our team includes former physical traders, enhancing our ability to interpret market signals and connect fundamentals with macro trends. With deep liquidity access, comprehensive research, execution, clearing, and credit, we offer an integrated approach to navigating agricultural markets. Our capabilities span all major global agricultural contracts, supported by a robust infrastructure and high-touch service model.

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