Poised for the Best Year Yet
Looking back over the past year, industry stakeholders will say it’s been a tough year for biodiesel. “I think 2015 as an entire energy complex has been challenging,” says Daniel Oh, president and CEO of Renewable Energy Group Inc. Low diesel prices coupled with falling prices for D4 renewable identification numbers (RINs), crude oil and commodities, not to mention uncertainty surrounding regulation and exchange rates, all contributed to the roller-coaster environment the biodiesel industry rode in 2015.
Despite the challenges faced, the National Biodiesel Board’s CEO Joe Jobe says 2015 will likely see at or above record volumes. Harm to the industry doesn’t come in the year’s volumes, but rather in the margins. “At different points throughout the year, we saw some of the worst margins in our industry’s history and they can be directly attributed to policy instability,” Jobe says. “If you’ve been in this industry very long, you’ve seen a lapse of the biodiesel tax incentive before—four times in the past six years—but coupled with not having a final volume for biomass-based diesel or the advanced biofuel category and extremely low ULSD (ultra-low sulfur diesel) prices made 2015 one of the toughest years to-date.” On the flip side, Jobe says he believes 2016 has the potential to be one of the industry’s best years.
Others, such as biodiesel wholesale marketer and distributor Amerigreen Energy Inc.’s Michael Devine, agree. “The industry has still been able to maintain its production to hit the renewable volume obligation (RVO) numbers, so that’s a positive, but it’s been challenging with the negative BO-HO (bean oil to heating oil) spread, the dramatic slide in the price per gallon of distillates, the uncertainty surrounding the RIN markets,” he says.
The RVOs in U.S. EPA’s Nov. 30 release of its final renewable fuel standard (RFS) rule provide industry the opportunity to get back on track with 2016 and 2017 volumes set for biomass-based diesel (1.9 and 2 billion gallons, respectively), and with the agency already working to propose 2018 volumes this spring. Another regulatory factor impinging on the future health of the industry is the availability of the $1-per-gallon tax credit. In December, after months of back and forth on whether the tax credit would be restructured as a producer incentive or reinstated as a blender credit—with both sides of the argument making their compelling cases—a two-year retroactive extension of the blender credit was signed into law. “With [the RFS and tax credit] in place, both can operate as intended, driving the expansion of cleaner-burning, renewable fuels into the marketplace,” Jobe says. Devine adds with both, 2016 will be a “very solid year” for biodiesel blending. “I would not be surprised if it’s the largest production year in the history of the RFS and biodiesel,” he says.
Ramon Benavides, president and founder of development and consulting company Global Renewable Strategies and Consulting LLC, says while many cast efforts on issues around incentives afforded to the industry, GRSAC recognizes that the reductions devastating the petroleum sector are a critical element to the slowdown in U.S. biodiesel. “It is certainly helpful that the RVO has been published and it will eventually bolster the industry, but the conditions afflicting the petroleum sector will weigh heavy on the renewable fuel sector,” Benavides says.
Ultra-low Sulfur Diesel
According to the Energy Information Administration’s short-term energy outlook, diesel fuel averaged $2.71 per gallon (retail price including taxes) in 2015 and is projected to decrease even further to $2.67 in 2016. Lower projected crude oil prices this winter have reduced the forecast residential heating oil price and average household heating oil expenditures. According to Benavides, 2016 will face the challenges associated with blend margin in the diesel market. “We expect heating oil prices to breach the $1-per-gallon level,” he says. “This means that diesel will be priced for a period through Q2 at about 16 cents per pound finished with about 25 cents delivered to market. This implies that the credit and RIN pricing must cover the spread to sustain the industry.”
As of Dec. 7, the U.S. average price of on-highway diesel fuel was $2.38 per gallon, $1.16 per gallon lower than the same time last year. During the week of Dec. 7 in the spot market, ULSD pricing for New York harbor was $1.24, U.S. Gulf Coast was $1.17 and Los Angeles pricing was $1.33.
As far as diesel consumption goes, after increasing by 210,000 barrels per day (bbl/d), or 5.5 percent, in 2014, consumption of distillate fuel, which includes diesel fuel and heating oil, is forecast to fall by 30,000 bbl/d (0.9 percent) in 2015 and to increase by 40,000 bbl/d (1 percent) in 2016. The 2016 growth is driven by increases in manufacturing output, foreign trade and marine fuel use.
The Jacobsen data reporting company published a blog recently acknowledging that many are calling 2015 the end of the commodity supercycle as prices have returned to levels not seen since before the housing bubble run-up in 2006 and 2007. Successive years of good soybean crops, heavy supplies of crude oil and a weak economy have all contributed to the downward grind of the market, according to the Jacobsen. While the RVO along with a tax credit will provide a solid market foundation for the industry that it hasn’t seen in years, a strong dollar will likely continue to keep more commodities in the U.S., which could limit the price of competing products.
According to EIA’s monthly biodiesel production survey for September, there was a total of 795 million pounds of feedstocks used to produce biodiesel during the month. Soybean oil remained the largest feedstock in September with 390 million pounds consumed. During the nine-month period from January to September 2015, the U.S. biodiesel sector consumed 3,599 million pounds of soybean oil compared to 3,433 million pounds for the same period in 2014. Other vegetable oil usage for biodiesel over the nine-month period includes 597 million pounds of canola oil, 753 million pounds of corn oil and 1 million pounds of palm oil. Animal fat feedstock inputs include 141 million pounds of poultry and 330 million pounds of tallow. White grease totaled 434 million pounds for the nine-month period and yellow grease 916 million pounds.
According to USDA’s recent oil crops outlook, soybean oil is priced at around 32 c/lb where it is estimated to remain, if not decrease slightly, in 2016. Abundant U.S. soybean stocks have been seen throughout 2015 and are predicted to continue next year. U.S. season-ending soybean oil stocks for 2015-’16 are forecast to be 2.3 billion pounds—265 million pounds higher in November mostly due to a higher level of beginning stocks. The latest National Agricultural Statistics Service crushings report indicates that Oct. 1 soybean oil stocks (crude and refined) totaled 1.82 billion pounds. The higher soybean oil inventory also confirms that domestic use in 2014-’15—at 19 billion pounds—was lower than expected. The expected growth for 2015-’16 from this lower consumption level prompted a lowering of this year’s forecast of domestic use by 300 million pounds to 19.25 billion. Devine says that the anticipated large bean oil crop will provide more feedstock flexibility for the industry.
In the oil crops outlook, canola oil came in at 38 c/lb and has the potential to decrease to around 35 cents in 2016. In the report, corn oil was priced at 37 c/lb and is estimated to be between 36 and 39 c/lb in 2016. Soybean, canola and corn oil have all decreased in comparison to 2014 pricing. As of Dec. 11, in all reporting regions, white grease was between $16.50 and $19 per hundred weight (cwt), down from $24 to $29 per cwt in 2014. Yellow grease was between $16.50 and $24 per cwt across all regions, compared to $23 to $28.50 per cwt the prior year.
Overall, commodity prices have fallen throughout 2015 for a variety of biodiesel feedstocks. Kurt Lange, CEO of ClearEcos, focuses his business on collecting restaurant oil and grease for the industry amongst other activities. Yellow grease prices have dropped from above 45 c/lb in 2011 to under 20 c/lb in late 2015. “Biodiesel goes down and the value of the yellow grease goes down,” Lange says. “It’s operating at about a third of its high right now.”
The Jacobsen has published several blogs on its website covering the changing supply and demand dynamics in the tallow market and providing a review of 2015. According to the blog, seasonal decreases have become a new normal as biodiesel plants steer away from tallow during the cold winter months and oleochemical plants draw down their inventories. Over the past five years, the market has seen big September drops as cheaper bean oil and decreased Q4 demand drive values lower. The Jacobsen states that tightness should continue into 2016 as livestock farmers continue rebuilding cattle herds. As a result, spot trading will likely continue to be limited, but tallow sellers may see additional competition from vegetable oils and other animal fats that aren’t hampered by low slaughter numbers.
Prior to EPA’s finalized RVO figures, obligated parties stepped in and provided a boost to biodiesel RINs. The 2015 D4 RINs jumped nearly 2.5 cents, trading as high as 57.5 cents on strong volume reported on Nov. 4. This allowed the 2015 D4/D6 spread to expand to 16 cents, according to the Jacobsen. Devine thought the industry was a little surprised to see a decline of the RINs market from the mid-80s down into the 30s after the proposed RVOs were released in spring 2015. “That made it very problematic to create blend margins in many parts of the U.S.,” he says.
According to a farmdoc daily report by economist Scott Irwin with the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign, the price of D4 biodiesel RINs has fallen by more than 50 cents per gallon since mid-June. The first factor contributing to the decline in D4 biodiesel RINs prices is the price of soybean oil, which has fallen about 7 c/lb since mid-June due to improving soybean production prospects in the U.S. and concerns about economic growth in China. Soybean oil prices have led to a decline of more than 60 cents in the price of biodiesel. In turn, the decline in biodiesel prices has been the main factor in narrowing the biodiesel blending margin by about 25 cents. Irwin says, since the biodiesel blending margin, at least in theory, is equal to the RINs value (ignoring time value), it’s puzzling that the decline in D4 RINs prices is slightly more than twice the size of the decline in biodiesel blending margins. He indicates that the most likely explanation for this result is that traders were increasingly believing the biodiesel tax credit would be reinstated for 2015.
Just before the release of the final rulemaking in late November 2015, Devine shared that strength came back in the RIN market, which was supportive for biodiesel blending, however, by and large, it’s been a choppy year. “It’s been difficult to define blend margins,” he says. “We were dealing in the first quarter with RVO uncertainty, now that the biodiesel industry has received positive clarification on that with the finalized EPA ruling, hopefully we see some continued strength in the RINs.” Amerigreen is conservatively projecting D4 RINs to be somewhere in the mid-80s moving into 2016. “The greatest challenge for the biodiesel industry in 2016 may be the price of crude oil,” Devine adds. “It’s always a challenge to create blend margins when oil falls below $40 per barrel.”
In the three trading days following the EPA announcement, the price of D4 biodiesel RINs jumped 20 cents per gallon, or 31 percent, according to a farmdoc daily article entitled “RINs Gone Wild? (round 2)” written by Irwin and Darrel Good. The D6/D4 price ratio rose from 0.66 to 0.97 over three trading days. There was a modest increase of 100 million gallons, or about 5 percent, in the 2016 and 2017 biomass-based diesel mandates in the final rulemaking. Irwin and Good say, while this should result in higher biodiesel and renewable diesel prices, and consequently, higher D4 prices all else constant, the price increase relative to the mandate increase implies an extremely inelastic supply relationship. For this reason, other factors are likely to be at work. One factor the economists believe is the biodiesel and renewable diesel production that will be needed to backfill the conventional gap once the stock of RINs is depleted down to pipeline levels.
According to Progressive Fuels Ltd.’s weekly RIN Recap for Dec. 3-9, the RIN market began to fall for the first time since the EPA announcement of RVO figures. The 2015 D4 RINs came off sharply trading in the mid- to high-70s. According to PFL’s daily report for Dec. 11, the market will continue to trade actively as Q1 approaches with many obligated parties buying to meet RVOs and some last-minute cleanup of some books. The report said RINs had fallen back down to the high-80s plateau the market seemed to have reached in biomass-based diesel.
As of Nov. 10, EPA’s moderated transaction system (EMTS) data shows 2.3 billion biomass-based diesel D4 RINs have been generated. D4 RINs generated by domestic biomass-based diesel producers have reached 1.8 billion, importers have generated 289.3 million D4 RINs and 195.2 million D4 RINS have been generated by foreign producers.
The first half of 2015 was not kind to U.S. biodiesel producers, with net losses averaging 8 cents per gallon, according to Irwin’s July 2015 farmdoc daily article “Mid-Year Update on Biodiesel Production Profits.” This is just a continuation of the pattern that, with a few exceptions, has been in place since January 2014. The release of the EPA proposal in spring 2015 did have a positive impact on both soybean oil and biodiesel prices, but the increases largely offset one another, leaving profits roughly unchanged. Irwin indicated that this suggested the market believed there was sufficient slack production capacity inside and outside the U.S. to fulfill the mandates without having to drive biodiesel profits above break-even levels. Irwin also suggested the delay in market adjustments could be due to uncertainty about the level of mandates that would ultimately be implemented.
Over 2015, production has come from 97 biodiesel plants with capacity of 2.2 billion gallons per year, according to the EIA. In EIA’s September biodiesel production report, for the nine-month period from January to September, biodiesel production was 948 million gallons—up from 917 million gallons in the comparable period in 2014. Sales of B100 over the nine-month period in 2015 was 600 million gallons, and an additional 337 million gallons was sold in blends. According to PFL’s near-market summary in its daily report issued on Dec. 11, B100 soy methyl esters ranged from $2.58 to $2.63 per gallon in Chicago and $2.70 to $2.75 per gallon in the Gulf Coast region. According to the National Weekly Ag Energy Round-up, in October, biodiesel prices reported in Iowa were $2.58 per gallon, down from $3.15 in October 2014.
Production and Its Placement
According to NBB, the RVOs in the final RFS rule reflect modest but meaningful growth over recent years when the U.S. market has hovered around 1.8 billion gallons annually. “We certainly think the biodiesel and overall advanced biofuel standards could and should have been higher,” Jobe says. “The production capacity is there, and we have surplus fats and oils that can be put to good use.”
REG is the largest producer of biomass-based diesel in North America at 432 million gallons of active capacity at 10 facilities. Oh says growth is in the company’s DNA. Even though Oh acknowledges that overall the RVO numbers could have been stronger, he says the direction and the desire EPA and federal government have signaled for is more of what REG does.
Biomass-based diesel volumes through EPA’s EMTS system indicate it will be approximately a 1.8 to 1.9 billion gallon market for 2015, with nearly 400 million gallons of imports. “Imported volumes are a significant concern for NBB as we work to develop our own domestic industry,” Jobe says. “With nearly 3 billion gallons of installed U.S. capacity, we are more than capable of handling future growth, while the EPA streamlined the pathway for biodiesel from Argentina to comply with the RFS.”
According to the Jacobsen blog entitled “Biodiesel and Renewable Diesel Imports 26 percent of EMTS through August,” biodiesel and renewable diesel imports continue to enter the U.S. market at a rapid pace. Biomass-based diesel imports from January through August 2015 were already 96 percent of full year 2014. Most biodiesel import activity originates from Argentina and Indonesia. According to the blog, looking at total U.S. biodiesel and renewable diesel production accounted for in 2015, it is evident that the U.S. is importing a significant amount of the potential 2015 RVO. According to the EPA, total D4 gallons were 1.2 billion through August. Overall, biodiesel and renewable diesel imports account for 26.3 percent of total D4 production through August.
Shifting gears to the markets biodiesel served in 2015, undoubtedly, the largest volume of diesel fuel is used for transportation, and nearly 75 percent of the newest diesel vehicles sold and registered in the U.S. today are approved for levels of B20 or higher, Jobe says. On the heavy-duty vehicle side, where much of the diesel fuel gets used, more than 90 percent of new vehicles are approved for B20 or higher.
“We’ve already seen expansion and interest from partner organizations within the marine, railroad and other off-road markets that haven’t been interested in biodiesel work before because significant volumes weren’t seen in those markets,” he adds.
Looking Back and Ahead
Although the environment REG and other industry participants find themselves in today certainly has challenges, Oh believes, at least for REG, there is a lot of opportunity. “The biggest challenge, which is not unique to biodiesel producers but the entire fuel value chain, is simply the uncertainty,” he says. Notwithstanding the downsides of 2015, Oh foresees the opportunity to overcome some ambiguity with the more robust RVOs and reinstatement of the tax credit.
The biodiesel tax incentive has played a key role in stimulating growth in the U.S. biodiesel industry since its first implementation in 2005. “Biodiesel producers have tremendous capacity for growth and are poised to expand and hire, but the on-again, off-again nature of the tax incentive makes it very difficult to obtain financing and investment, and biodiesel producers are reluctant to make new hires or expand facilities without a reliable tax policy,” Jobe says.
Lange with ClearEcos has been involved in developing a biodiesel plant the past few years, and the environment has made this endeavor a challenge. “As far as 2015 goes, it was tough,” Lange says. “We lost a lot of biodiesel plants. It’s hard to get capital to build a biodiesel plant when the market is the way it is right now. The return on biodiesel has been very low.”
As long as crude oil remains low, it’s probably, ultimately, going to impact all of the other subsidies associated with biodiesel, Lange adds. “If you can’t make a viable, marketable product based upon an economic means, it’s really a risky time to be investing in building a biodiesel plant,” he says.
Looking back at 2015, “one of the things the industry should be proud of is the growing volume and capability of delivering very high-quality, affordable biofuel even with all that volatility,” Oh says. “I think we are going to look back at 2015 and say it was a year that the industry proved its durability and ability to deliver high-quality fuel and high-quality renewable identification numbers.”
Looking ahead to 2016, with finalized RVO figures and a reinstated tax incentive, Devine says, “I think it could be the U.S. biodiesel industry’s best year ever, and then we’ll see what 2017 brings.”
Author: Katie Fletcher
Associate Editor, Biodiesel Magazine