US Biodiesel Plant Profitability Soars but Spot Prices Flat Line

Brian Milne - DTN Energy Editor,
April 30, 2018

A gauge assessing the profitability of processing soyabean oil into biodiesel shows production plants in the United States enjoying their best margins in more than three years, as diesel prices climb to three-year highs while soyabean oil values slide to nearly two-year lows.

Based on the assumption that it takes 7.55 pounds of soyabean oil to produce one gallon of biodiesel, producers ended April with a theoretical profit of $0.85 gallon, the widest spread since 2014. The differential between soyabean oil and ultra-low sulfur diesel does not include other operating costs, although provides a benchmark for the number one expenditure for biodiesel producers in the United States, with most plants sourcing soyabean oil for feedstock.

Based on the assumption that it takes 7.55 pounds of soyabean oil to produce one gallon of biodiesel, producers ended April with a theoretical profit of $0.85 gallon, the widest spread since 2014.

Excess supply of soyabean oil plus potential tariffs on U.S. soyabean imports to China amid a trade dispute, with China the world’s largest importer of U.S. soyabean, futures prices of the commodity have been under pressure. In contrast, demand has been strong for diesel fuel as annual growth by the U.S. economy picks up, with diesel in the United States primarily consumed in commercial and industrial sectors.

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index jumped 6.3% in March against year prior, with trucking representing 70.6% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

“While I expect the pace of growth to continue moderating in the months ahead, if for no other reason than year-over-year comparisons will become more difficult as tonnage snapped back in May of 2017, the levels of freight will remain good going forward,” said ATA Chief Economist Bob Costello.

ULSD futures traded on the New York Mercantile Exchange are in backwardation, a bullish market structure in which the futures contract nearest to delivery trades at a premium to deferred delivery. Days of forward supply cover for distillate fuel, which includes diesel fuel and heating oil, slid to a more than three-year low of 29.9 days, according to statistics from the Energy Information Administration.

U.S. distillate supplied to market in 2018 through late April has outpaced the comparable year-ago period by 8.26 million bbl or 1.5% at 4.069 million bpd, EIA data shows, with 1.099 million bpd exported from the United States. U.S. distillate stocks were tallied in late April at a 122.7 million bbl 40-month low.

Biomass-based diesel supply, as determined by the U.S. Environmental Protection Agency’s Moderated Transaction System, has increased in each month in the first quarter compared with the same month in 2017, although the year-on-year advance has slowed despite the profitability gains and implied strong demand pull from the end-user market.

Biomass-based diesel supply has increased in each month in the first quarter

Tariffs placed on biodiesel imports from Argentina and Indonesia likely explain the limited year-on-year increase despite bullish market conditions. The U.S. Commerce Department in 2017 slapped Argentina and Indonesia with tariffs, with import duty deposit rates on biodiesel at 71.45% to 72.28% for Argentina, and from 34.45% to 64.73% for Indonesia. On April 3, the four-member International Trade Commission voted unanimously that the U.S. biodiesel industry had suffered because of dumping by Argentina and Indonesia.

“Biodiesel imports from Argentina and Indonesia surged by 464 percent from 2014 to 2016, taking 18.3 percentage points of market share from U.S. manufacturers. These surging, artificially low-priced imports prevented producers from earning adequate returns on their substantial investments and stifled the ability of U.S. producers to make further investments to serve a growing market,” said the National Biodiesel Board in early April, with NBB the U.S. trade organization for the biodiesel industry.

“The impact of the import duties was dramatic,” said Scott Irwin with the University of Illinois’ farmdoc daily. “From January 2016 through August 2017, the U.S. imported 1.047 billion gallons of biodiesel (and renewable diesel) of which 846 million gallons, or 81 percent, was from Argentina and Indonesia. There have been no imports of biodiesel from these two countries since August 2017, when the import duties went fully into effect.”

As the U.S. biodiesel industry can claim one victory, uncertainty regarding the durability of the Renewable Fuel Standard is another challenge.

The RFS mandates an increasing volume of renewable fuels to be consumed in the U.S. transportation sector, which includes biomass-based diesel. U.S. EPA administrator Scott Pruitt wants reforms for the RFS, with the EPA the administrator of the federal program.

As this worries renewable fuel advocates, realization that the EPA awarded numerous exemptions under the small refinery clause from the federal mandate for compliance years 2016 and 2017 with more requests for waivers for 2018 received by EPA is crushing the value of Renewable Identification Numbers. RINs are used to show compliance with the RFS, with oil refiners obligated parties under the federal program.

“The EPA’s decision to grant upwards of 25 exemptions, with at least one significant waiver in the dark of night to a large and profitable refiner, raises urgent questions as to what else might be going on behind closed doors,” said Kurt Kovarik, NBB’s vice president of federal affairs. “Transparency and certainty are key to maintaining a competitive market for biodiesel, and it is critical we understand the impact any waivers could have on the industry and fuel choice for consumers.”

On April 12, NBB submitted a Freedom of Information Act Request for any records submitted to EPA for a small refinery exemption from the RFS for compliance years 2015 through 2018.

In testimony before the U.S. House Energy and Commerce Subcommittee on April 26, Pruitt told legislators that he received more than 30 requests in 2018 for a small refinery waiver from the RFS obligation.

Early analysis of the EPA action regarding use of the small refinery exemption has caused demand destruction for renewable fuels charges Geoff Cooper, executive vice president of the Renewable Fuels Association, a U.S. lobby group for ethanol, creating “a glut of unneeded RIN credits and sharply lower RIN prices.”

Cooper explains that RINs are not only used to track compliance with the RFS, but also provide a strong incentive for expanding blending demand.

Early analysis of the EPA action regarding use of the small refinery exemption has caused demand destruction for renewable fuels, creating “a glut of unneeded RIN credits and sharply lower RIN prices.”