U.S. Biodiesel Industry Update

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Decision Innovation Solutions

By S. Patricia Batres-Marquez  
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322 
http://www.decision-innovation.com/ 
Date: December 30, 2016

Biodiesel production in the United States in 2015 reached a volume of 1.263 billion gallons, declining 1.2% from the 2014 level (1.278 billion gallons) (see Figure 1). Production from January to September 2016 was up 19.7% to 1.128 billion gallons compared with the same period last year (0.943 billion gallons). According to the December forecast by the U.S. Energy Information Administration (EIA, 2016a), 2016 U.S. biodiesel production is expected to increase 20.1% to 1.518 billion gallons/year (99,000 barrels/day) compared with 2015, and EIA projects a 5% biodiesel production growth in 2017 (1.594 billion gallons or 104,000 barrels/day).

The $1/gallon biodiesel tax credit implemented in 2005 has played a role in the development of the biodiesel industry. The tax credit has had extensions, and also has been allowed to expire temporarily, creating uncertainty in the industry. On December 2015, Congress retroactively extended the tax credit for two years, from January 1, 2015 through December 31, 2016. 

Because the tax credit goes to the blender of the biodiesel with a traditional fuel, rather than to the producer of the biodiesel, the tax credit also has encouraged imports of biodiesel. In 2015, U.S. biodiesel imports rose 83.5% to 0.353 billion gallons from 0.192 billion gallons in 2014. Although U.S. biodiesel exports increased 5.9% in 2015 relative to the previous year, the U.S. continued as a net biodiesel importer, with a net import volume of 0.265 billion gallons in 2015. Biodiesel imports during the first nine months of 2016 increased 70.6% to 0.412 billion gallons, compared with 0.242 billion gallons in the same time period in 2015. The January-September 2016 totals surpassed the 2015 import total of 0.353 billion gallons.

U.S. Biodiesel Production, Exports, and Imports

Figure 1. U.S. Biodiesel Production, Exports, and Imports (Million Gallons).

Beginning in 2013, Argentina emerged as the main supplier of imported U.S. biomass-based diesel (biodiesel and renewable diesel) (see Figure 2). At the same time, Argentina’s exports to the European Union (EU) in 2013 were negatively impacted due to anti-dumping duties imposed by the EU on that country. Argentina’s biodiesel production is forecast to increase to a record volume of 0.819 billion gallons (3.1 billion liters) in 2017, due to record domestic demand and an expansion of exports. The U.S. is expected to be the main export destination of Argentina’s biodiesel in 2016 and 2017, to meet growing mandates (USDA-FAS, 2016).

U.S. Biomass based diesel imports by country

Figure 2. U.S. Biomass-Based Diesel Imports by Country (Million Gallons).

Feedstocks

Soybean oil is the main feedstock used in the U.S. production of biodiesel and its use has been increasing in that industry. Based on December 2016 data from the USDA (U.S. Bioenergy Statistics), in the 2006/07 agricultural marketing year, 13% of U.S. soybean oil production was used to produce biodiesel, whereas in 2014/15 that share increased to 24%. Data from the Monthly Biodiesel Production (MBP) report (EIA, 2016b), indicated from January to September 2016, 4.363 billion pounds of soybean oil and 0.916 billion pounds of corn oil were used in biodiesel production. The amount of soybean oil and corn oil used to produce biodiesel increased 21% and 20%, respectively, compared with the same period in 2015, in response to the larger production of biodiesel this year (January to September 2016). Some other feedstocks used in biodiesel production during the first nine months of 2016 were yellow grease (1.022 billion pounds), canola oil (0.860 billion pounds), and white grease (0.408 billion pounds). Yellow grease and canola oil use increased by 9% and 44% relative to the same period in 2015, whereas white grease declined 6%. The variety of feedstocks that can be used in the production of biodiesel gives some flexibility to the industry.

In its December 2016 edition of the World Agricultural Supply and Demand Estimates (WASDE) report, the USDA projected consumption of 6.200 billion pounds of soybean oil to produce biodiesel in the 2016/17 marketing year, up 9.3% compared with the previous marketing year (5.670 billion pounds).

Crude Oil and Soybean Oil Prices

Figure 3 shows the trends of Cushing Oklahoma-West Texas Intermediate crude oil prices and soybean oil crude/de-gummed Central Illinois prices from January 2007 to November 2016. The figure suggests the two series are related for the time period included here. As the main feedstock used in the production of biodiesel, soybean oil prices are associated with crude oil prices. Prices increased for both commodities in mid-2008, then declined at a fast pace. Crude oil prices rose in response to supply uncertainty in several oil exporting countries, along with strong demand growth in several regions—China, the Middle East, and Latin America.

There is an 84% positive correlation between soybean oil and crude oil prices from January 2007 to November 2016. This indicates that while these two price series move together in the same direction over time, there are periods of time where these experience different rates of change.

According to the Short-Term Energy Outlook (STEO) report published by EIA on December 6, 2016, U.S. field production of crude oil in 2015 averaged 9.42 million barrels/day. It is forecast to average 8.9 million barrels/day in 2016 and 8.8 million barrels/day in 2017. West Texas Intermediate (WTI) crude oil average prices ranged from $59.82/barrel in June 2015 to $37.19/barrel in December 2015 for an annual average of $48.69/barrel. WTI crude oil prices from January to November 2016 averaged $42.35/barrel and the 2016 annual average is forecast at $42.90/barrel. EIA projects WTI crude oil prices to recover in 2017 to an annual average of $50.70/barrel. In addition, EIA forecasts Brent crude oil prices to average $43/barrel and $52/barrel in 2016 and 2017, respectively. EIA also indicated the value of futures and options contracts show significant uncertainty in the price outlook. Soybean oil prices may follow adjustments in crude oil prices in 2017.

Curide Oil PRices and soybean oil prices

Figure 3. Crude Oil Prices and Soybean Oil Prices

Figure 4 shows the monthly biodiesel returns over both variable and all costs, as well as Iowa soybean oil price and biodiesel price. The data for Figure 4 is based on the Biodiesel Profitability model by D. Hofstrand (2016). The model uses typical input costs for an Iowa soybean oil biodiesel facility, and assumes a conversion factor of 7.55 pounds of soybean oil per gallon of biodiesel. Soybean oil price variation has a large impact on the level of profitability when soybean oil is the main feedstock, accounting for 87% of variable costs and 80% of total costs, on average. Years in which the biodiesel tax credit has been in place from the beginning of the year show larger returns (e.g., 2011, 2013, and 2016).

Monthly biodiesel returns over variable and all costs and iowa soybean oil price and biodiesel price

Figure 4. Monthly Biodiesel Returns Over Variable and All Costs, and Iowa Soybean Oil Price and Biodiesel Price. 

The Renewable Fuel Standard (RFS) Program

On November 23, 2016, the Environmental Protection Agency (EPA) released the annual applicable volume requirements for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2017, and for biomass-based diesel for 2018. The 2017 biomass-based diesel volume requirement was established in the final rule for “Renewable Fuel Standard program for 2014, 2015, and 2016 and Biomass-Based Diesel Volume for 2017” (Federal Register, 2015). In the Energy Independence and Security Act of 2007 (EISA), Congress required the volume for biomass-based diesel for years after 2012 be at least 1.0 billion gallons, and must be based on a review of the program implementation, coordination of EPA with other federal agencies, and an analysis of various specified factors (EPA, 2016). 

Increasing applicable volumes for biomass-based diesel have been seen since 2013, and have surpassed the minimum requirement. For 2013, 2014, and 2015, EPA established biomass-based diesel volumes of 1.28, 1.63, and 1.73 billion gallons, respectively. For 2016 and 2017 those volumes increased to 1.9 and 2.0 billion gallons. The biomass-based mandate for 2018 is up 100 million gallons to 2.1 billion gallons. According to EPA, with the set volume for 2018, biomass-based producers will be encouraged to manufacture higher volumes of fuels that will contribute to the advanced biofuels and total renewable fuel requirements. At the same time, the 2018 mandate leaves room for investment and expansion of production of other types of advanced biofuels, such as renewable diesel co-processed with petroleum, renewable gasoline blend stocks, and renewable heating oil, and others that are under development.

Because biomass-based diesel is included in the advanced biofuel category, which is itself included in the total renewable fuel category, each gallon of biomass-based diesel used to meet the volume requirements for this kind of fuel also can be used to meet the requirements for advanced biofuel and total renewable fuel. The renewable identification number (RIN) credits generated by biomass-based diesel, termed as D4 RINs, can be used to meet different RFS targets. This gives an advantage to biomass-based diesel’s D4 RINs over those generated by grain-based ethanol—D6 RINs.

Biodiesel and the 2017 Tax Credit

Supported by the Renewable Fuel Standard increased mandates and the biodiesel tax credit of $1/gallon, biodiesel production grew during the first nine months of 2016. EIA annual production projection for 2016 of 1.5 billion gallons indicates a record-high volume that is expected to surpass 2013 production. As we are writing this newsletter, there is no certainty the $1/gallon tax credit will be reinstated in 2017. The negative effect this could bring to the 2016 growth trajectory may be lessened by the larger RFS volume requirements for biodiesel in 2017 and 2018.

Sources

EPA. 2016. Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based Diesel Volume for 2018. November 23, 2016. 

Federal Register. 2015. Renewable Fuel Standard Program: Standards for 2014, 2015, and 2016 and Biomass-Based Diesel Volume for 2017; Final Rule (80 FR 77420). December 14, 2015. 

Hofstrand, D. 2016. Prices and Profitability Models, Agricultural Marketing Resource Center. (Accessed December 2016). 

U.S. Energy Information Administration (EIA). 2016a. Short-Term Energy Outlook. December 6, 2016. 

———,2016b. Monthly Biodiesel Production Report. November 30, 2016. 

USDA-Economic Research Service (ERS). U.S. Bioenergy Statistics Data. (Accessed December 21,2016). 

USDA-U.S. Department of Agriculture, Foreign Agricultural Service (FAS). 2016. Global Agricultural Information Network (GAIN) Report: “Argentina Biofuels Annual 2016.” July 7, 2016.