RFS 20 Years In: Can Peanuts Fuel The Next Vegoil Demand Wave?

Welcome to the Oilseed Impacts newsletter, where I share my viewpoints on the global oilseed landscape.  

This is the 2nd of 8 editions exploring the 8 major oilseeds produced and crushed in the USA.  This week is all about Peanut Oil.  Miss last week’s edition on Cottonseed Oil?  Read it here.

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Peanuts are the highest oil yielding crop in the USA. Its not even close.

Despite this advantage, RFS induced demand growth has largely passed over the peanut oil balance sheet.

Why? On its face, expanding peanuts seems like a no brainer to offset growing biofuel demand.

I gotta tell you, I ended up in a rabbit hole this week. Is there a play to grow more peanuts for more oil? 

It’s worth a conversation, but you’re gonna have to wait til the end.

We have some prework to cover first.

Here’s the outline for today’s conversation:

1. US Peanut Production Dynamics

2. US Peanut Demand

3. Peanut Crush For Oil

4. Potential For Peanuts Grown Specifically For Crush

US Peanut Production Dynamics

Peanuts are a southern crop. Grown generally from Virginia to New Mexico, peanuts fit into Southern crop rotations that include corn, cotton, and soybeans.

Since 2005, acres are up marginally from 1.67 mil to 1.80. Southeast and Midsouth states are seeing the most growth, partially offset by small decreases in OK/TX/NM.

Yields are up substantially in that time, from ~3000 to ~3700 lbs per acre.

It’s important to mention here, that there are multiple varieties of peanuts. Each with their own agronomic and final product characteristics. A shift in variety mix could be driving some of these yield changes. 

An additional explanation could be that the peanut states with less rainfall saw flat to reduced acres, with increased acres in the states with higher annual rainfall. 

All said, 2024 peanut production was 6.45 bil lbs, up 32% from 4.87 bil lbs in 2005. This lands us at a CAGR of 1.47%. That is almost double US population CAGR of .74% in the same time frame.

Remember this, it will come back up in the next section.

US Peanut Demand

Peanuts are primarily a food crop.

USDA characterizes peanut demand for the 24-25 crop year like this:

Exports make up about 20% of Demand, growing steadily from 12% in 2005.  

Americans consume ~7 lbs of peanuts per capita annually up slightly from ~6.5 lbs in 2005.

Per capita consumption and export growth explain why supply is allowed to grow at a rate faster than population.

Food demand is broken up into a handful of categories. Keep in mind, peanuts crushed for oil are NOT in any of these categories. 

Peanut Butter is by far the biggest piece of the food market, sitting at ~58% of the category. This is followed by Candy (16%), Snack Peanuts (16%), and Whole In-Shell (7%).

Multiple factors drive the use and ultimately the value of peanuts. Different varieties carry different traits like size and shape, or number of kernels per shell.  Growing regions, crop year growing conditions, etc also matter. 

As a non-expert in this field, this is how I think about peanut values in simplistic terms:

The larger and more intact a peanut is, the higher its value.

Clean in-shell peanuts and large whole snack peanuts carry the highest premium. From there one moves down the value chain to peanut candy and peanut butter, which are made from splits and broken kernels.

And at the bottom of the value chain are what’s called Oil Stocks. And here is where the crush story picks up.

Peanut Crush For Oil

Oil Stocks are the smallest pieces of the kernel that don’t make grade for peanut butter. Oil Stocks could also include peanuts that have another grade factor that makes them unsuitable for food. Damage, mold, aflatoxin, odor. These are all examples. These Oil Stocks are the feedstock for peanut oil in the US.

Peanut oil crush is owned by the shelling companies. Some Oil Stocks are expeller pressed. Some use hexane. However, only one sheller/crusher in the USA also has its own refinery to make the finished food grade oil. The balance of the market sells a crude product to a different company who refines and markets the finished oil.

Year in year out, Oil Stocks crush makes up 12% of total peanut demand. That percentage really doesn’t change.

That steadiness at 12% of peanut demand cements crush as purely a byproduct activity. If crush margins were driving anything, we’d see crush rates move up and down independent of food/export demand. That just isn’t the case. In fact, we are importing nearly 25% of our peanut oil demand, while at the same time exporting 20% of our peanuts.

Here’s a look at the peanut oil balance sheet for 2024.

Interestingly, peanut oil is a high value vegetable oil. Its frying characteristics are top shelf. Fish and chicken joints, especially across the South, prefer peanut oil in their fryers. 

And nothing says America like nearly torching the garage by plunging a frozen turkey in peanut oil over a propane burner on Thanksgiving.

So, with strong demand driving imports and high prices is there a play to increase peanut crush?

Potential For Peanuts Grown Specifically For Crush

When I started writing this, I assumed my storytelling would stop here. I assumed peanut oil was a byproduct, just like cottonseed. And just like cottonseed I thought it would prove incapable of forming a supply response to macro oil demand factors.

But now I’m not so sure.

The current market structure for peanuts is designed to supply the peanut food market.

But as prices for oil rally, the viability of a peanut crush economy that crushes whole seeds improves.

Consider these points:

1. An expeller crush plant yields 38-39% oil from Oil Stocks. Using whole seed, that yield jumps to 42-43%. 

2. A hexane extractor sees a similar benefit, jumping from 43% to 47-48%.

3. Texas A&M is currently testing peanut varieties with 55-57% oil content.

4. Irrigated peanut fields yield a higher quality peanut and higher yields. But in many places, buyers restrict planting the dry corners of center pivot irrigated fields due to aflatoxin risk. Imagine the overall yield improvement to the grower if those corners could be planted due to reduced aflatoxin concern.

5. A standalone crusher could be 2-4x the size of a typical shelling plant. This type of density increase would improve logistics and equipment utilization across the geography.

6. And there is a chance a whole peanut crush industry would IMPROVE peanut quality in the food space. A bigger crop would yield bigger opportunities to arbitrage high quality peanuts into food lanes.

When you start to stack these potential advantages up, the story gets interesting.

As a thought exercise let’s look at the product value of a few whole peanut crush scenarios.

For Scenario 1 let’s use today’s soybean oil and meal prices and equate them to peanuts. These prices for meal ($282) and oil ($.53) yield a soybean product value of $12.03/bu with an OilShare calculated at 48.4%.

Let’s assume peanut oil is priced at parity to bean oil (today it’s a 20+ cent premium). And assume peanut meal (41% protein) is priced at 90% of soybean meal (47%) on a per unit of protein basis.

Scenario 1 yields product values in the mid $400s per short ton.

For reference peanuts across the South were contracted with growers in the $400-$500 range this season. Mississippi State peanut crop budgets for this season put costs excluding land & management costs at $350-$365/ton.

Current product markets don’t make sense for crush expansion. Growers can’t invest in new equipment to expand acres and crushers don’t have the return to justify new plant Capex.

In Scenario 2 we’ve kept bean product revenue the same, but increased OilShare to 55%. That math brings Oil prices up to $.6017/lb and lowers meal to $246/ton.

Getting closer! In this scenario, a hexane extraction plant is cracking $500/ton in product revenue.

Keep in mind, we are using today’s soybean markets as a reference. Soybean (and corn) prices are below cost to produce today. This will need to be rectified at some point. When it does, these product prices will improve, lifting peanut economics at the same time.

In Scenario 3, we are keeping prices the same as Scenario 2. But we are increasing oil yields to show the effect of commercializing high oil content peanuts. Recall, Texas A&M is developing varieties like this.

Now, with higher oil content varieties, hexane extraction, and a strong OilShare, we have $572/ton in product value. 

Is it enough to put 9 figures into a new plant doing something that’s never been done before? Maybe not. 

Is it enough to get a sheller to invest in doubling or tripling their own crush capacity to increase peanut volume throughout their infrastructure and capture the high-priced oil market that’s currently supplied by imports? Maybe.

And when one makes the jump, do their learnings and successes beget more investment in this space?

Conclusion

As the RFS expands, we need to find new veg oil supplies.

I’m intrigued by the potential of peanuts to be part of the solution.

Their high per acre oil yield, high quality oil, and a growing region that is not already saturated with oilseeds all provide tailwinds.

The question is, will the market provide the right signals long enough to encourage capex and R&D in the space.

What do you think?

What signals does the industry need to see to invest in whole seed peanut crushing infrastructure?

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