An Overview of the Biodiesel Market: Production, Imports, Feedstocks and Profitability
Production and Imports
U.S. biodiesel production has increased from 343 million gallons in 2010 to 1.278 billion gallons in 2014, an increase of 272% for the five-year period. Biodiesel production during the first ten months of 2015 reached a volume of 1.048 billion gallons, close to the total pace of production during the first ten months of 2014, as shown in Figure 1.
Note: January 2016 data from the Monthly Biodiesel Production (U.S. EIA 2016) published by the U.S. Energy Information Administration (EIA) show November 2015 biodiesel production as 106 million gallons; however, the net imports data are only updated through October 2015. Therefore, Figure 1 only shows the data from January to October for 2015.
While biodiesel production has been surging since 2010, the United States became a net importer of biodiesel in 2013, as shown in Figure 1. Note that the net import figure is imports minus exports. The positive values indicate that imports are greater than exports and the negative values indicate that exports are greater than imports. The United States was a net exporter of biodiesel from 2007 to 2012 and then became a net importer from 2013 to 2015.
Imports increased from 35.8 million gallons in 2012 to 342.4 million gallons in 2013. This significant increase in imports during 2013 coincided with a domestic production of 1.359 billion gallons, historically the United States’ highest. This is likely driven by a number of factors, including demand to satisfy the advanced biofuel and total renewable fuels standards; the biodiesel tax credit; growing access to foreign biodiesel, mostly from Argentina; and favorable blending economics. Note that the blenders’ tax credit was enacted in January of that year and was in place to incentivize biodiesel production throughout the year. This was not the case in some years, such as in 2015, when the biodiesel tax credit was enacted late in the calendar year and made retroactive to fuel produced in that year (Federal Register, 2015).
In 2014, imports decreased year over year to 192.3 million gallons, but the United States remained a net importer of biodiesel with a net import balance of 109.4 million gallons. This drop in net imports was coupled with a reduction in domestic production of approximately 7 percent from 2013 to 2014. This is mainly because of the chilling effects of the uncertainty of the Renewable Fuel Standard (RFS) going forward during 2014. The Environmental Protection Agency (EPA) proposed in November 2013 to keep the 2014 and 2015 biomass-based diesel standard at the 2013 level of 1.28 billion gallons, as shown in Table 1. The United States biodiesel imports from January to October 2015 rose once again, reaching a volume of 259 million gallons, representing an increase of 103% compared with the same period in 2014.
The EPA finalized the volumetric requirements of the RFS for biomass-based diesel for 2014 through 2017. See the final volumes for 2014 through 2017 in Table 1. Compared with the May 2015 proposed volumes, the final volumes increased 0.03 billion gallons for 2015 and 0.1 billion gallons for 2016 and 2017.
Along with the volume requirements, the EPA established the associated annual percentage standards for biomass-based diesel that apply to diesel produced or imported in the years 2014 to 2016. The percentage standards are applied to the volume of non-renewable diesel in each of the years and are used by obligated parties (i.e., producers and importers of diesel fuel) to calculate their individual compliance requirements. The final percentage standards for 2014, 2015, and 2016 are 1.41%, 1.49%, and 1.59%, respectively. In addition, the U.S. spending bill for fiscal year 2016 approved by the federal government in December 2015 included a tax package that retroactively extends the $1 per gallon blenders’ tax credit for biodiesel and renewable diesel for two years (January 1, 2015 through December 31, 2016).
The biodiesel tax credit allows biodiesel blenders to receive a credit of $1 per gallon against their tax liability. In July 2015, the U.S. Senate passed an amendment that changes the biodiesel tax credit from a blender to a producer credit starting in 2016. The economic impact of changing the biodiesel tax credit from a blender to a producer credit has been analyzed extensively by Irwin (2015), and he provides interesting insights on this ongoing debate. This proposed tax amendment has some interesting implications for current biodiesel imports. The current policy provides tax credits for the blending of qualified gallons of biodiesel, no matter whether they originated in the United States or Argentina. Therefore, foreign imports such as Argentinian biodiesel are also eligible for the tax credit, which might create negative impacts on U.S. biodiesel production. As shown in Figure 2, approximately 50% of U.S. biodiesel imports came from Argentina from January to November 2015.
Argentina uses mainly soybean oil as a feedstock for its biodiesel production. Based on a United States Department (USDA)-Foreign Agricultural Service (FAS) Global Agricultural Information Network (GAIN) report (USDA-FAS, 2015a), there are several factors that contribute to Argentina’s biodiesel competitiveness: a large production scale using the latest technology, no-till and biotechnology seed use, and soybean production near industry and ports. In addition, the government of Argentina recently (December 17, 2015) unified the official and parallel exchange rate, creating a nearly 45% devaluation of the Argentine peso, improving competitiveness of Argentina’s exports (USDA-FAS, 2015b).
The European Union (EU) was Argentina’s most important biodiesel export market up to mid-2013; however, at the end of 2013, the EU imposed a high (24.6% on average) countervailing duty on Argentine biodiesel because of dumping allegations. A competitive price spread between the soybean oil and diesel allowed Argentina’s biodiesel exports to the United States to increase during the last part of 2013. For example, Argentina supplied 121.5 million gallons (460 million liters or 20% of Argentina’s biodiesel production in 2013) of biodiesel for heating oil for the United State east coast region (USDA-FAS, 2015a).
According to the USDA-FAS (2015a), in 2014, Argentina’s biodiesel exports were redirected to North Africa to supply the discretionary blending diesel of that market. But in 2015, once again, the emphasis of Argentina’s biodiesel exports was the U.S. market, but this time to generate Renewable Identification Number (RINs) under RFS. In January 2015, the EPA approved a streamlined process for imports of Argentine biodiesel. It is expected that this trend will continue in 2016, but because of strict U.S. traceability and certification systems that have to be followed by Argentine biodiesel exporters, it is expected that biodiesel exports to the United States will grow at a slower pace than that of the previous two years.
The USDA-FAS (2015a) report indicates Argentine biodiesel exports to the United States market incur an estimated extra cost of $0.10 to $0.13 per gallon ($30 to $40 per ton) of biodiesel. This extra cost covers the premium paid to Argentine farmers to produce soybeans on land that has not been deforested after 2007, the cost of segregating the biodiesel, and the added cost of monitoring the whole chain from production until biodiesel is exported. Based on USDA-FAS (2015a) data as of July 2015, there were seven plants in Argentina registered with the EPA that were exporting biodiesel to the U.S. market under the RFS quota.
Biodiesel is sourced from a variety of resources, which we can broadly categorize it into two groups: (1) vegetable oils such as soybean oil, distillers’ corn oil, canola oil, and palm oil; and (2) animal fats and recycled feeds such as choice white grease, tallow, poultry fat, and yellow grease. As shown in Figure 3, soybean oil has been the predominant feedstock, representing on the average 48% of total feedstock inputs in biodiesel production for the last five years. In 2011, soybean oil accounted for 52% of total feedstock usage; in 2014 it dropped to 48%. Based on December 2015 data from the USDA (USDA-ERS, 2015), in the 2014/15 agricultural marketing year, 23% of U.S. soybean oil production was used to produce biodiesel.
In the meantime, the usage of corn oil and yellow grease has increased significantly from 2011 to 2015 (January through November). Usage of corn oil, which is generally known as distiller’s corn oil (DCO), has more than doubled, from 4% in 2011 to 10% in 2015. Also, usage of yellow grease, which is a recycled feed product, has also doubled in the production of biodiesel, from 6% in 2011 to 12% in 2015.
Distiller’s corn oil has become a very cost-effective substitute for soybean oil and all other vegetable oil feedstocks for the production of biodiesel. It is produced at the majority of ethanol plants today. The DCO market was relatively small prior to 2000. The production of DCO, however, has increased over the years, especially since 2008. The main markets for DCO are biodiesel plants, the animal feed industry, and the export market. The EIA’s Monthly Biodiesel Production Report (U.S. EIA 2016) indicates that 970 million pounds of DCO were used to produce biodiesel in 2014 compared with 112 million pounds in 2010. Distiller’s corn oil became the second most popular feedstock choice in the biodiesel industry in 2013, surpassing the usage of canola oil.
Most ethanol plants have widely employed corn oil extraction technology during the last two years. Growing demand from the biodiesel industry in the coming years will send economic signals to ethanol plants to implement improved technology to maximize corn oil extraction yield and quality improvements. Extra revenue from corn oil has become an important part of the coproduct business at U.S. ethanol plants. Corn oil revenue has been critical in times of very low margins, most recently when energy prices plunged in the fourth quarter of 2014.
Price discovery for DCO is not very transparent in the coproduct market. As shown in Figure 4, DCO generally trades at a percentage of the price of soybean oil, but some divergence in the grains markets has created risks that need to be analyzed. The perfectly competitive grains market price discovery process is transparent, but supply and demand of DCO can be manipulated and price discovery is not well understood. In contrast to the grains markets, demand for DCO can be affected just by shutting down one or two major biodiesel plants, meaning the price of DCO can be influenced by a few major players in the biodiesel market.
According to our pricing calculations using historical price data, DCOs are much more closely correlated to yellow grease prices than to soybean oil prices. We used monthly average price data from 2012 to 2015 to calculate the correction coefficient. The simple linear correlation coefficient between DCO and yellow grease is 0.96, indicating a strong positive relationship. The average spread between DCO and yellow grease is $0.03 during the 2012-2015 period.
The biodiesel industry recorded large profits in 2011 and 2013, as shown in Figure 5. These are the only two years in the last six years that the biodiesel tax credit was enacted at the beginning of the year to incentivize production. Note that this year (2016), the tax credit has been in place and is set to expire by December. Do we expect this year to be a profitable year, just like 2013, charting a rebound in the profitability of biodiesel production? We look forward to keeping you updated through this newsletter. An interesting detailed analysis of the profitability of biodiesel production can be found in Irwin (2016).
The biodiesel industry is still a young industry and it’s a small industry compared to the corn ethanol industry. Biodiesel production has been soaring in spite of some of the uncertainty of the RFS going forward and irregular government tax policy incentives. There is now short-term assurance, however, until 2017 because the EPA has finalized the volumetric requirements to meet the RFS. Industry profitability mainly depends on government policy incentives such as the blenders’ tax credit. The cost effectiveness of domestic production has been recently challenged by foreign biodiesel imports, mainly from Argentina, which might undercut U.S. production. Biodiesel imports have increased from 2013 to 2015 and that has fueled the tax credit debate about whether credits should be given to biodiesel producers rather than to blenders. This proposed tax policy shift would effectively limit the United States biodiesel imports.
Hofstrand, D., and A. Johanns (2015), Monthly Profitability of Biodiesel Production, Ag Marketing Resource Center: http://www.agmrc.org/renewable-energy/renewable-energy-climate-change-report/renewable-energy-climate-change-report/december-2015-report/monthly-profitability-of-biodiesel-production/
Decision Innovation Solutions (2015), In-house data collection, Urbandale, Iowa.
Federal Register (2015), the Office of the Federal Register, National Archives and Records Administration, Washington DC, Vol. 80, No. 239, December 14, 2015: https://www.gpo.gov/fdsys/pkg/FR-2015-12-14
Irwin, S. (2015), Implications of Changing the Biodiesel Tax Credit from a Blender to a Producer Credit. farmdoc daily (5):142, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 5, 2015.
Irwin, S. (2016), The Profitability of Biodiesel Production in 2015. farmdoc daily(6):27, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 11, 2016.
U.S. Energy Information Administration (various), Monthly Biodiesel Production Reports. http://www.eia.gov/biofuels/biodiesel/production/
USDA-FAS (U.S. Department of Agriculture, Foreign Agricultural Service) (2015a), Global Agricultural Information Network (GAIN) Report: “Argentina Biofuels Annual 2015.” July 2015. http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Biofuels%20Annual_Buenos%20Aires_Argentina_7-1-2015.pdf
_______ (2015b), Global Agricultural Information Network (GAIN) Report: “Argentina New Government Lifts Currency Controls and Cuts Export Taxes.” December 17. http://gain.fas.usda.gov/Recent%20GAIN%20Publications/New%20Government%20Lifts%20Currency%20Controls%20and%20Cuts%20Export%20Taxes_Buenos%20Aires_Argentina_12-17-2015.pdf
USDA-ERS (U.S. Department of Agriculture, Economic Research Service) (2015), U.S. Bioenergy Statistics. http://www.ers.usda.gov/data-products/us-bioenergy-statistics.aspx