Soybean Oil's Strategic Rebound Amid Biofuel Policy Clarity and Supply Dynamics

The recent extension of the 45Z Clean Fuel Production Credit through 2029 under the One Big Beautiful Bill Act (OBBBA) has catalyzed a strategic rebound in the soybean oil market. By removing indirect land use change (ILUC) penalties from carbon intensity (CI) calculations and prioritizing North American feedstocks, the policy has reshaped demand dynamics, creating both opportunities and risks for investors.

Policy-Driven Demand Surge

The OBBBA’s exclusion of ILUC emissions from lifecycle GHG calculations has significantly lowered CI scores for U.S. crop-based feedstocks like soybean oil, making them more competitive with waste-based alternatives such as used cooking oil (UCO) from China or sugarcane ethanol from Brazil [1]. This shift has directly increased the eligibility of soybean oil for 45Z tax credits, which now offer up to $1.00 per gallon for fuels with the lowest emissions. The U.S. Department of Agriculture (USDA) projects that soybean oil use for biofuel will reach 7.03 million metric tonnes in the 2025–26 marketing year, a 27% year-on-year increase [2]. This surge is underpinned by the OBBBA’s restriction of 45Z eligibility to feedstocks sourced from the U.S., Canada, or Mexico, effectively excluding imported alternatives and boosting domestic demand [3].

Supply Dynamics and Price Volatility

The policy-driven pivot to domestic feedstocks has already impacted soybean oil prices. Since mid-June 2025, prices have risen over 20%, though they remain below the record highs of April 2022 [2]. This volatility reflects the tension between increased biofuel demand and reduced food-grade exports, which are projected to plummet by 73% in 2025–26 [2]. While higher prices benefit farmers, they also raise operational costs for biofuel producers, particularly as competition for limited feedstock resources intensifies. The reinstatement of the Small Agri-Biodiesel Producer Tax Credit at $0.20 per gallon for soybean oil-based biodiesel adds a layer of financial incentive, but scalability remains constrained by supply bottlenecks [1].

Investment Opportunities and Risks

The 45Z tax credit’s transferability—allowing producers without federal tax liability to sell credits on the secondary market—has introduced new liquidity for biofuel companies. This feature, combined with the OBBBA’s emphasis on climate-smart agricultural (CSA) practices, creates opportunities for vertically integrated firms that can both produce low-CI feedstocks and convert them into eligible fuels. For example, companies like Aemetis, which are developing carbon-negative biofuels, stand to benefit from stacked incentives [4]. However, risks persist. The EPA’s delayed finalization of renewable volume obligations (RVOs) and small refinery exemptions (SREs) introduces regulatory uncertainty, which could dampen long-term investment [2]. Additionally, the focus on domestic feedstocks may strain supply chains, particularly if alternative feedstocks like winter cover crops or agricultural residues fail to scale quickly enough [5].

Strategic Considerations for Investors

Investors should prioritize firms with strong ties to North American soybean supply chains and those leveraging CSA practices to reduce CI scores. The reinstated Small Agri-Biodiesel Producer Tax Credit also favors regional producers near soybean-growing hubs, such as Iowa or Illinois. However, caution is warranted for companies reliant on imported feedstocks, as the OBBBA’s restrictions could erode their competitive edge. Long-term success will depend on the ability to navigate policy implementation timelines and adapt to evolving EPA regulations.

In conclusion, the 45Z tax credit expansion has reoriented the soybean oil market toward domestic biofuel production, offering a compelling case for strategic investment. Yet, the interplay of policy clarity, supply constraints, and regulatory delays demands a nuanced approach. As the sector evolves, stakeholders must balance the promise of decarbonization with the realities of agricultural and industrial logistics.

Source:
[1] One Big Beautiful Bill = Big Biofuel Benefits
https://www.agloan.com/one-big-beautiful-bill-big-biofuel-benefits/
[2] USDA boosts soy view on biofuel policy changes
https://www.argusmedia.com/en/news-and-insights/latest-market-news/2709592-usda-boosts-soy-view-on-biofuel-policy-changes
[3] 45Z Clean Fuel Production Credit | Market Intel
https://www.fb.org/market-intel/45z-clean-fuel-production-credit
[4] Driving Change: The 45Z Tax Credit's Impact on Biofuels and Beyond
https://www.geaps.com/news-publications/whole-grain-podcast/driving-change-the-45z-tax-credits-impact-on-biofuels-and-beyond/
[5] Understanding the 45Z tax credit and RFS changes
https://www.fastmarkets.com/insights/us-biomass-based-diesel-and-saf-at-a-crossroads-understanding-the-45z-tax-credit-and-its-ripple-effects/