Agricultural Commodity Interdependencies: How Soy and Crude Oil Price Declines Reshape Canola Markets

The agricultural commodity markets are increasingly intertwined, with soybean, crude oil, and canola prices exhibiting complex interdependencies driven by energy costs, biofuel policies, and global trade dynamics. Recent declines in soybean and crude oil prices have created a ripple effect, reshaping canola market fundamentals in 2025. This analysis explores how these shifts are unfolding and what they mean for investors navigating this volatile landscape.

Biofuel Policies: A Double-Edged Sword

The U.S. Environmental Protection Agency's (EPA) Renewable Volume Obligations (RVOs) for 2025-set at 5.61 billion gallons-initially bolstered soybean oil and canola markets by redirecting demand toward soybean oil and canola. However, this support has been undermined by policy shifts, such as the replacement of the $1-per-gallon 40A blending credit with the 45Z production credit, which favors low-carbon-intensity feedstocks over crop-based oils, according to a CME Group analysis. This transition has reduced soybean oil demand, contributing to market instability. Meanwhile, California's 20% cap on vegetable oil in its Low Carbon Fuel Standard further limits growth for soybean oil, exacerbating bearish sentiment, according to the USDA ERS outlook.

Energy Prices: A Cost Driver and Demand Moderator

Crude oil prices, which averaged $67 per barrel in September 2025, according to Financial Content, have since declined to four-month lows, with Brent crude trading around $64–$65 per barrel in late October (Financial Content). Lower energy costs reduce production expenses for agriculture-particularly for transportation and fertilizer-providing indirect support to canola. However, the same energy slump weakens biofuel demand, as cheaper crude makes alternatives like gasoline more competitive. This duality is evident in the soybean oil market, where prices hit $1,306.60 per metric ton in July 2025 (Financial Content), but have since retreated amid waning biofuel incentives.

Supply-Demand Imbalances and Substitution Effects

Global soybean supply has surged, with U.S. production projected at 4.3 billion bushels for MY 2025/26 and Brazil's planting pace reaching record levels (USDA ERS). This oversupply, combined with weak Chinese demand-China's anti-dumping duties on Canadian canola have slashed export volumes-has pushed the soy/canola price ratio to its lowest level since 2012 (USDA ERS). Canola prices, while briefly rebounding on October 7, 2025 (closing at $615.00 per tonne, reported by Financial Content), remain in a long-term downtrend. Substitution effects further complicate the picture: palm oil's price advantage has diverted demand from soybean oil, indirectly pressuring canola markets, according to Expana market data.

Geopolitical and Macroeconomic Uncertainties

Trade tensions between the U.S. and China remain a wildcard. While President Trump's hints at a trade deal briefly lifted soybean prices to $10.27 per bushel in early October, according to a Trading Economics chart, the lack of concrete progress has left markets in limbo. Additionally, Brazil's weakening real and U.S. government shutdown-related data gaps have amplified volatility, with wheat prices plummeting due to oversupply-a trend that could spill over into oilseed markets (Financial Content).

Investment Implications

For investors, the key takeaway is the need to hedge against policy-driven volatility while monitoring energy-price correlations. Canola's short-term resilience-bolstered by easing harvest pressure in Canada and soybean price stabilization-may offer tactical opportunities (Financial Content). However, long-term fundamentals remain bearish, with global soybean stocks at record highs and biofuel demand constrained by regulatory shifts (USDA ERS). Diversification into alternative oils (e.g., palm, sunflower) or energy-linked derivatives could help mitigate risks in this interconnected sector.