Reshaping the price relationship between soybean oil and palm oil.

Note: This article was written by the University of Illinois master's student in agricultural and consumer economics, Yu-Chi Wang, and edited by Joe Ganzen. It is one of several excellent articles written by graduate students in Professor Janzen's ACE 527 class in Advanced Agricultural Price Analysis this fall.

Soybean oil and palm oil are among the most popular vegetable oils in the world and are alternatives in many products, including feedstock in the production of biofuels. For many years, soybean oil and palm oil prices have moved together, but since 2020, the close joint movement between soybean oil and palm oil prices has weakened. Prices are now different more often and for longer periods. This change indicates that the types of supply and demand shocks that hit these markets have changed. We suggest that these shocks are becoming less global and more regional or national; total vegetable oil supply and demand are still important, but these are now interacting with region-specific disruptions, especially those related to biofuel policy, that affect one oil more than another.

The aim of this article is to document how the price relationship between soybean oil and palm oil has changed and what this change means for future price dynamics. He first described the global roles of soybean oil and palm oil and the different production systems behind them. We use monthly and daily rates to show how its historical joint movement has collapsed since 2020. We then draw from several recent market episodes to explain soybean and palm price differences and end up with the effects of this on U.S. soybean oil and future biofuel policy.

Overview of global vegetable oil production Soybean oil and palm oil are the world's leading vegetable oils, a position they have held since the 1980s when palm oil surpassed the production of canola and sunflower oils. Figure 1 shows changes in the production of leading vegetable oils over time. Soybean oil has long been the largest vegetable oil in the world, but global palm oil production started to exceed soybean oil starting in the 2004/2005 marketing year. Together, they account for over 60% of the world's edible oil supply. Other vegetable oils such as canola, sunflower and others play an important but mainly supportive role in meeting global demand.
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The soybean and palm production site and the oil extraction process are important differences between the two commodities. Palm oil production is largely concentrated in Indonesia and Malaysia, where production expanded rapidly in the first decade of the 21st century. Palm oil refining, logistics, and trade combine strongly geographically. Soybean oil production is less concentrated than palm oil but is concentrated in large agricultural exporting countries such as the United States, Brazil, Argentina and major importers of soybeans, mainly China. Major exporting countries usually have different forms of biofuel mandates that stimulate local demand for soybean oil or palm oil as raw materials. These mandates usually target locally produced feedstocks. Structural differences in location and policy may help explain why oil markets do not always respond in the same way to changes in demand.

Historical price relationships To the extent that vegetable oils are replaceable and trade costs such as transportation, tariffs, etc., are low, soybean and palm prices should move closely together. To document this correlation over a long period of time, we analyze the monthly index prices tracked by the World Bank in what are called “pink papers.” These prices represent vegetable oils delivered to ports in Northwestern Europe so that location differences are taken into account. Figure 2 shows the historical prices of both soybean oil and palm oil since 2000. While soybean oil was usually priced at a slight premium over palm oil, prices have usually moved closely together during this period. Price increases correspond to other price increases. Episodes such as the 2008 price increase that affected several agricultural and energy prices are common in both series and the gap between prices has remained fairly stable over time. Despite significant changes in price levels, the difference or ratio between soybean oil and palm oil prices has generally been stable, at least until around 2020.

After 2020, soybean oil and palm oil prices start to differ more often and for longer periods. Before and after the price increase in 2022, which coincides with another broad increase in agricultural and energy prices, soybean oil prices rose significantly above palm oil prices. In other cases, soybean oil and palm oil prices seem to be moving in opposite directions. In late 2024, palm oil futures prices had already surpassed soybean prices for the first time since the 1990s. While some shared dynamics remain part of price behavior after 2020, Figure 2 indicates further fluctuations in the underlying economic forces driving supply and demand for vegetable oils. These patterns indicate that the close and expected price relationship seen prior to 2020 has fundamentally changed.To evaluate the dynamics of soybean oil and palm oil prices since 2020 in more detail, we look at daily futures price data. Daily data provides a more accurate look at the timing of certain price movements. To make prices comparable across markets, soybean oil and palm oil prices should be adjusted, as they are traded on different exchanges and are priced in different units and currencies. Soybean oil prices are taken from the Chicago Mercantile Exchange (CBOT) month futures and are quoted in U.S. cents per pound. Crude palm oil prices are taken from the futures contracts of the Malaysian Derivatives Exchange (BMD) and are priced in Malaysian ringgit per metric ton. To put both series on a common basis, soybean oil prices are expressed per ton, while palm oil prices are converted from Malaysian ringgit to U.S. dollars using the MYR—USD daily exchange rate from the Federal Reserve Bank of St. Louis.

Figure 3 shows the near daily soybean oil and palm oil futures prices from January 2020 to November 2025, both in terms of levels and in terms of the price ratio of soybean oil to palm oil. Prices start to vary starting in early 2021. The price-parity ratio almost returns during the rise in commodity prices in early 2022, but there is a second sharp difference as the prices of the two commodities have fallen from the early 2022 highs. In mid-2023, prices are different again with soybean oil prices rising sharply. The price-parity ratio will reach mid-2024, after which palm oil prices exceed soybean oil prices for a while. Soybean oil prices were slightly higher than palm oil prices for much of last year. In general, this period is characterized by more fluctuations in the price ratio and longer and sharper differences in price than seen in past periods.

Why did the price relationship of soybean oil and palm oil collapse? To understand the price differences shown in Figure 3, we consider the narrative explanations accompanying the observed price movement. We highlight three episodes where soybean prices diverged from palm oil prices.

The first takes place over the calendar year 2021. Both soybean oil and palm oil prices are rising sharply during this period, reflecting a shortage of global supplies of vegetable oils. However, soybean oil prices increase more than palm oil prices; at the peak of this difference shown in Figure 3, the price of soybean oil was 68% higher than the price of palm oil. This coincides with an increase in U.S. renewable diesel capacity and production (USDA-FAS, 2024), leading to a stronger increase in demand for soybean oil as a feedstock. Although programs such as the Renewable Fuel Standard and California's Low Carbon Fuel Standard have been in place for years, renewable diesel production has increased rapidly over this period which may have helped drive soybean oil prices higher.

By late 2021, this difference starts to diminish. Palm oil prices are rising as Malaysia is experiencing negative weather linked to the La Niña phenomenon and a shortage of migrant harvest workers after COVID-19 border restrictions (McKeany-Flavell, 2022). Malaysian palm oil production, exports and inventories fall at the end of the year to their lowest levels in several years, which coincides with palm oil prices reaching record or near-record levels. As palm oil prices rise more quickly, the soybean oil premium is narrowing, and by late 2021, prices are again moving together, ending the first cycle of divergence.

The second episode of divergence begins after both prices hit record highs in early 2022. These peaks in Figure 3 occur during a period of extremely tight global supplies linked to the Russian-Ukrainian war and Indonesia's temporary ban on palm oil exports. Indonesia lifted its export ban in late May 2022 and resumed exports, causing palm oil prices to drop sharply. Soybean oil, as a close alternative, is also declining but is falling more gradually. As palm oil falls more rapidly, the price ratio between soybeans and palm oil increases, peaking with soybean oil prices of 113% (more than doubling) palm oil in September 2022.

Towards the end of 2022, this difference starts to diminish. In December 2022, the EPA issues proposed biofuel mandates for 2023 to 2025 that are lower than the market had expected. This announcement may have reduced the expected demand for renewable diesel for soybean oil and is followed by a sharp drop in soybean oil prices (Sterk, 2022). As soybean oil prices fall more quickly and begin to return to the previous decline of palm oil, the two price chains return to a more stable relationship. That marks the end of the second difference.

The third episode of divergence begins in mid-2023, when markets seem more concerned about U.S. weather and the possibility of lower soybean yields due to drought. As of mid-June 2023, about half of the U.S. soybean crop is classified in drought categories and crop condition ratings are falling across much of the corn belt (Purdue Center for Commercial Agriculture, 2023). At the same time, short-term weather forecasts indicate continued dry conditions, and soybean futures are moving sharply higher in a manner consistent with this combination of current poor conditions and the risk of ongoing drought.

Starting around September 2023, soybean oil prices in Figure 3 begin to fall sharply and continue to fall until early 2024. Clean Fuels Alliance America (2024) reports that the generation of renewable fuel identification numbers for biomass-based diesel (RINs) in 2023 significantly exceeded the biomass-based diesel mandate and that RIN values dropped sharply when this excess supply became apparent. RINs are tradable compliance credits used by fuel suppliers to show that they have met U.S. renewable fuel blending requirements. As soybean oil is an important feedstock for biomass-based diesel, this combination of abundant credits and low RIN values is consistent with a lower desire to pay higher prices for soybean oil in fuel uses and may have contributed to downward pressure on soybean oil prices during this period. With soybean oil prices falling more than palm oil prices and the relative return of the price in Figure 3 to a more normal range in mid-2024 marks the end of the third difference.

We discussed that the long-term close correlation between soybean oil and palm oil prices has changed in recent years. Since 2020, the price criteria for leading vegetable oils have varied more often and for longer periods. Joint traffic has weakened and now the two markets follow separate paths more frequently than in the past. Evidence from recent market episodes indicates that this shift reflects a new mix of shocks. Widespread global demand and cost shocks continue to drive both markets, but are now reacting to repeated policy shocks and region-specific disruptions. In this environment, even close alternatives such as soybean oil and palm oil can move away from their historical joint movement pattern.

Our analysis suggests that the U.S. soybean industry may be more isolated from global vegetable oil shocks: palm oil may not play the same role it played before in shaping soybean oil prices. The growth of palm oil production has slowed as plantations in Southeast Asia have reached land limits and a greater share of trees are moving to the older age group. The expansion has largely given way to replanting, so future production gains are likely to be small even if prices remain high (Bloomberg Intelligence, 2024). A larger share of palm oil production now remains in Southeast Asia to meet local demand for biodiesel and food. This means that palm oil has less impact on global vegetable oil prices than in the past, although major changes in palm oil supply and demand are still being transmitted to global vegetable oil markets. At the same time, the U.S. soybean industry is now more vulnerable to domestic biofuel policy shocks. The increasing importance of soybean oil as a feedstock for biofuels in the United States has increased the importance of domestic policy decisions, such as blending incentives and volume commitments, in driving U.S. soybean oil use and price.

Our central conclusion is that there is no longer a single global vegetable oil market signal. Increasingly, farmers, rippers, renewable fuel producers, and policymakers need to monitor both broad global shocks, local shocks, and the specific product. This means tracking not only global demand and total inventories, but also U.S. biofuel policy decisions, biodiesel and export rules in Indonesia and Malaysia, and weather and crop developments in South America and Southeast Asia. Managing soybean oil price risks in this new environment requires paying attention to all of these moving parts, not just the price of a single commodity.

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Source: newherald