For decades, the global vegetable oil market operated under a simple, unbreakable rule: where soybean oil went, palm oil followed. These two commodities, accounting for the majority of the world’s edible oil supply, were so interchangeable in food and industrial products that their prices moved in a tightly choreographed dance. A supply shock in the soybean fields of Illinois would ripple through to the palm plantations of Malaysia, and vice versa. This predictable relationship formed the foundation of risk management and trading strategies across the agricultural and food sectors. However, beginning in 2020, this long-standing price link shattered, leaving a far more complex and fragmented market in its wake. The primary disruptor was not a traditional agricultural force like weather or disease, but the explosive and often unpredictable demand for biofuels, which has fundamentally rewired the price-setting mechanisms of the entire vegetable oil complex.
The Era of Lockstep Prices
The historical paradigm of the global vegetable oil market was one of remarkable integration and stability, built on the high degree of substitutability between its two dominant players. Soybean oil and palm oil, despite their different botanical origins, share similar functional properties that make them interchangeable in a vast array of applications, from cooking oils and margarines to soaps and cosmetics. This functional parity created a powerful economic force of arbitrage; if the price of one oil strayed too far from the other, large-scale buyers would simply switch to the cheaper alternative, quickly pulling the prices back into alignment. As a result, their monthly benchmark prices exhibited a strong, positive correlation for over two decades. Even through significant market disruptions, such as the global commodity price boom of 2008, the spread between soybean oil and palm oil remained relatively stable and predictable, reinforcing the view of a single, unified global market that responded to a common set of macroeconomic and agricultural shocks. This reliable co-movement was the bedrock principle for anyone involved in the production, trade, or consumption of vegetable oils.
Beneath this veneer of market unity, however, lay crucial structural differences that would eventually enable the great decoupling. Palm oil production is geographically hyper-concentrated, with Indonesia and Malaysia accounting for the vast majority of global output. This makes its supply chain vulnerable to regional weather events, labor issues, and policy decisions within those two nations. In stark contrast, soybean cultivation is geographically dispersed across major agricultural powerhouses in both the Northern and Southern Hemispheres, including the United States, Brazil, and Argentina. Critically, these soybean-producing nations began implementing ambitious biofuel mandates years ago, creating a policy framework designed to foster domestic energy production by incentivizing the use of locally sourced feedstocks. While these policies operated in the background for years, they created a latent, region-specific demand driver that was fundamentally different from the global food-based demand that had historically linked the two oils, setting the stage for a dramatic divergence when biofuel production reached a critical mass.
Signs of a Structural Shift
The clear and undeniable breakdown of this historical relationship began to manifest after 2020, as the price charts for soybean and palm oil started telling two very different stories. The once-reliable correlation gave way to periods of sharp and sustained divergence, where the price of one commodity would surge while the other remained stable or even declined. These were not minor, short-lived fluctuations; the magnitude of the price spreads grew to unprecedented levels, signaling that the fundamental economic drivers acting upon each oil were no longer uniform. The invisible hand of arbitrage, which had for so long ensured price parity, appeared to have lost its ability to bridge the widening gap. This shift indicated that the market had entered a new, more volatile regime, one where regional dynamics could decisively overpower the global forces that had long been the primary determinants of price. The era of a single, integrated vegetable oil market was effectively over.
A granular analysis of high-frequency daily futures data provides a vivid illustration of this new, fractured reality. By converting prices from their native exchanges and currencies into a common unit, a pattern of extreme volatility in the soybean-to-palm oil price ratio becomes evident. A significant divergence emerged in early 2021, followed by a brief return to a more traditional relationship during the broad commodity spike of early 2022. However, this was quickly followed by a second, even more dramatic split in mid-to-late 2022 and another distinct divergence in mid-2023. These repeated episodes were not random noise but a clear pattern indicating a structural break. This new volatility created immense uncertainty for market participants, from farmers deciding what to plant to food manufacturers managing input costs. The old playbook, which relied on using one oil as a proxy for the other in hedging strategies, was now obsolete, forcing a complete reevaluation of how to manage price risk in this fundamentally altered landscape.
Pinpointing the Cause of the Divergence
The primary catalyst behind this historic decoupling was the surging, policy-driven demand for vegetable oils as feedstocks for biofuels, particularly renewable diesel in the United States. The 2021 price divergence served as the first major test case. A rapid expansion in U.S. renewable diesel production capacity, spurred by powerful incentives like the federal Renewable Fuel Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS), created a massive, localized demand shock for soybean oil. While global vegetable oil supplies were already tight, pushing all prices higher, soybean oil’s price rose far more dramatically, at one point reaching a 68% premium over palm oil. The price gap eventually narrowed later that year, but not because U.S. biofuel demand weakened. Instead, a separate regional crisis hit the palm oil market when Malaysia suffered from severe labor shortages due to pandemic restrictions and adverse weather, causing its production to plummet and its price to spike, effectively “catching up” to the already-elevated soybean oil price. This episode demonstrated that two independent, regional shocks could now drive prices more than shared global fundamentals.
The most extreme and illustrative divergence occurred following the commodity price peak in mid-2022. After Indonesia lifted a temporary palm oil export ban, its price on the global market collapsed as supply flooded back. While soybean oil is a substitute and its price also declined, the fall was far more gradual, cushioned by persistent domestic demand from the U.S. biofuel sector. This created the most extreme price spread ever observed, with soybean oil’s premium rocketing to an astonishing 113% over palm oil by September 2022. The subsequent convergence was driven not by global market forces but by a singular U.S. policy event. In late 2022, the Environmental Protection Agency (EPA) released proposed biofuel blending mandates for 2023-2025 that were lower than the industry had anticipated. This news immediately tempered future demand projections for soybean oil, causing its price to fall sharply and realign with the much lower palm oil price. A similar dynamic played out in 2023, when an oversupply of biofuel compliance credits, known as RINs, caused their value to plummet, reducing the premium fuel blenders were willing to pay for soybean oil and once again pushing its price down toward palm oil.
Navigating a Fractured and Volatile Market
The consequence of these shifts is a paradoxical new reality for the U.S. soybean industry. On one hand, it has gained a degree of insulation from global vegetable oil price movements; a production surge in Southeast Asia or a collapse in palm oil prices may no longer automatically drag down soybean oil values. On the other hand, its financial health has become inextricably linked to the volatile and politically sensitive world of domestic energy policy. The price of U.S. soybean oil is now highly dependent on the EPA’s annual blending mandate volumes, the fluctuating market value of RIN credits, and the pace of renewable diesel capacity expansion. This ties the fate of American farmers directly to decisions made in Washington, D.C., and the complex dynamics of the U.S. energy market. Simultaneously, palm oil’s long-standing role as the undisputed global price leader is diminishing. With production growth in Indonesia and Malaysia constrained by land limitations and aging trees, and with a growing share of their output consumed domestically for food and their own biodiesel programs, their ability to dictate global price trends has been significantly curtailed.
This fragmented market has fundamentally complicated the task of managing price risk for all participants. The era when farmers, crushers, traders, and food companies could rely on a single commodity price as a proxy for the entire vegetable oil complex has ended. An effective strategy now demands a far more nuanced and multi-faceted approach. Success requires diligently monitoring a diverse and expanded set of variables that extends beyond traditional global supply and demand metrics. It now includes tracking U.S. biofuel policy developments, analyzing the market for RINs, understanding biodiesel and export regulations in Southeast Asia, and monitoring distinct weather patterns and labor conditions in both the Americas and Southeast Asia. The simple, predictable price co-movement of the past has been replaced by a new environment defined by complexity and regional influences, demanding greater sophistication and vigilance from all who operate within it.
