The Soybean Oil Rally: How Biofuel Policies Are Fueling a Commodity Supercycle

The U.S. soybean oil market is on the cusp of a historic transformation, driven by federal policies that are reshaping demand dynamics in favor of domestic biofuel production. With the Environmental Protection Agency (EPA) ramping up renewable fuel mandates and the Section 45Z tax credit excluding imported feedstocks, soybean oil is emerging as a critical strategic commodity. This article explores how these policy shifts are creating structural shortages, driving CBOT soyoil futures higher, and presents actionable investment opportunities for commodity investors.

The Policy Drivers: Mandates, RINs, and the 45Z Tax Credit

1. EPA Renewable Fuel Standards (RFS):
   The 2025 biomass-based diesel (BBD) mandate of 3.35 billion gallons marks a 19% increase from 2023 levels, with proposed 2026 targets eyeing 5.25 billion gallons. These mandates are legally binding, ensuring inelastic demand growth. Even if finalized at lower levels, the trend toward domestic feedstock prioritization is irreversible.

2. Reduced RINs for Imported Biofuels:
   The EPA's proposed "Set 2" rule slashes Renewable Identification Numbers (RINs) for imported biofuels or those using foreign feedstocks by half. This creates a financial penalty for biodiesel producers relying on imported Chinese used cooking oil (UCO), shifting demand to U.S.-grown soybean oil.

3. Section 45Z Tax Credit:
   The $1.00/gallon tax credit for low-carbon fuels excludes non-North American feedstocks, while prioritizing Climate-Smart Agriculture (CSA) practices. Soybean oil's carbon intensity (CI) score of 40–45 kg CO₂e/mmBTU under the 45ZCF-GREET model qualifies it for credits of $0.20–0.36 per gallon, rising further with CSA adoption.

Structural Shortages: Why Soybean Oil Prices Will Surge

The confluence of policies is creating a perfect storm for soybean oil. Key factors include:
- Feedstock Competition: Biodiesel producers, now disincentivized from using imported UCO, must pivot to soybean oil. With domestic soybean crush capacity strained, spot shortages are inevitable.
- Inelastic Demand: Federal mandates and tax credits ensure demand grows even as prices rise.
- CSA Premiums: Farmers adopting no-till or cover crops can boost tax credits by up to $0.18/gallon, further compressing supply.

Analysts estimate a 15–20% supply gap between 2025 crush capacity and mandated biodiesel volumes, pushing CBOT soyoil futures toward $1.00/lb by mid-2026.

Investment Opportunities: Play the Soybean Oil Rally

1. Long Positions in Soybean Oil Futures/ETFs

• CBOT Soybean Oil Futures (ZL): Direct exposure to price appreciation. Use stop-loss orders to mitigate volatility.
• ETF Alternatives: While no dedicated soybean oil ETF exists, consider the iPath Dow Jones-UBS Soybean Oil ETN (JJOS) for correlated exposure.

2. Equities in Domestic Biofuel Producers

• Renewable Energy Group (REGI): A leading biodiesel producer with a focus on U.S. soybean oil. Its margins expand as soyoil prices rise.
• Archer-Daniels-Midland (ADM): Benefits from both soy crush margins and biofuel production.
• Valero Energy (VLO): Its recent expansion into renewable diesel positions it to capitalize on mandates.

3. Caution: Avoid Soy Export Plays

While soybean exports remain a key income source for farmers, structural shifts toward domestic feedstock use could reduce export demand. Avoid ETFs like Teucrium Soybean Fund (SOYB) or companies overly reliant on export pricing (e.g., Bunge Limited (BG)).

Risks and Considerations

• Regulatory Uncertainty: Final EPA rulemaking for 2026 mandates could delay or reduce targets.
• Overcapacity Risks: New biodiesel plants may overshoot demand, though current capacity constraints mitigate this.
• Global Commodity Volatility: External factors like China's UCO imports or palm oil prices could create temporary headwinds.

Conclusion: A Strategic Bet on Policy-Driven Demand

The combination of EPA mandates, the 45Z tax credit, and reduced RINs for imports has created a supply-demand imbalance that will sustain soybean oil prices for years. Investors should prioritize long positions in soyoil futures and equities in biofuel producers like REGI and ADM. Meanwhile, steer clear of pure soy export plays, as domestic policy tailwinds are the true drivers of this cycle.

The soybean oil rally isn't just a commodity story—it's a structural shift in U.S. energy and agriculture policy. Position early, and ride the wave.

As of July 2025, this analysis assumes the EPA finalizes 2026 mandates at 4.0 billion gallons or higher. Monitor policy developments closely.