Biodiesel developments and concerns

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With ample supplies of reasonably priced feedstocks, a blenders’ tax credit, and fuel industry acceptance of the product, biodiesel producers in 2013 experienced the best profits since late 2011.  Favorable profits led to a sharp increase in production in 2013.   However, unsettled government policy issues cloud the industry’s future for the year ahead and possibly longer, and are causing uncertainty in the industry.   In this article, we provide more detail on these developments and implications for the biodiesel industry.   Biodiesel has advantages over corn-starch ethanol because (1) it is an advanced biofuel and can play a role in helping to meet government-mandated levels of advanced biofuels blending, and (2) it does not have a precise blend wall, although there has been some talk by users that 10% biodiesel and 90% conventional diesel fuel may be a realistic upper limit on the market for now.  A disadvantage of biodiesel is that its production cost per gallon has been relatively high when compared to conventional diesel fuel.  To help make it competitive and feasible to blend with diesel fuel, it has had a $1.00 per gallon tax credit.

click image to zoomBiodieselCosts

Biodiesel Profitability

When compared with other motor fuels, biodiesel has a relatively short history dating back only to the mid-2000s.   Figure 1 shows its estimated profitability in recent years, as well as total costs and total revenue for typical plants using soybean oil as a feedstock.  The data shown in the chart are from the AgMrc model, using soybean oil as the feedstock.  The model is available at:    (http://www.agmrc.org/renewable_energy/biodiesel/tracking_the_profitability_of_biodiesel_production.cfm)
Soybean oil is the most common feedstock for biodiesel although corn oil, animal fats, and small amounts of oil from minor oilseeds also are used.  Costs and profitability vary somewhat, depending on which feedstocks are used in its production. 

As shown in Figure 2, feedstock costs are the largest expense of producing biodiesel, by a wide margin.   Soybean oil feedstock costs declined from a monthly average of $4.26 per gallon in April 2011 to $2.97 per gallon in November 2012.   The reduced cost resulted from a decline in the soybean oil price from $0.56 per pound in April 2011 to $0.39 per pound in November 2013. From mid-November to late January, soybean oil prices declined by an additional 5% to 6%, further reducing the cost of biodiesel production.    Soybean prices declined by a much smaller amount during the same period because of increased demand for soybean meal.  Strong protein meal demand allowed soybean meal to carry a higher portion of the value of soybeans than in a number of previous years.  

click image to zoomBiodieselCosts

U.S. Biodiesel Production Trend

Figure 3 shows monthly U.S. biodiesel production for 2011, 2012, and through October 2013.  Data for the charts are from the Energy Information Administration (EIA) of the U.S. Energy Department. (http://www.eia.gov/todayinenergy/detail.cfm?id=12331)    Due to the lag in data availability, October was the latest production information available in late January when this was written. Production data from earlier years are not available.  

click image to zoomBiodieselCosts

The decline in production in 2012 reflected a combination of the industry’s temporary loss of the biodiesel blenders’ tax credit and high feedstock costs.   Production increased sharply in 2013 with reinstatement of the blenders’ tax credit and a 28% increase in the Environmental Protection Agency (EPA) mandated volume of biodiesel to be blended in the nation’s diesel fuel supply.   Production in July through October of 2013 continued to set record levels, with the industry operating at approximately 72% of monthly capacity.  We calculated an approximate monthly capacity by dividing EIA’s estimated annual capacity by 12 months. 

Price Relationship of Biodiesel to Diesel Fuel

Figure 4 shows monthly average prices for B-100 (pure, unblended biodiesel) FOB plants in the eastern Corn Belt and the U.S. average highway price for petroleum-based biodiesel since April 2007 (1).   The lower line in the chart shows the monthly premium of biodiesel prices over petroleum-based diesel fuel.   As indicated by the chart, biodiesel prices in most months have been well above those for diesel fuel. The two brief exceptions were October 2008 when the biodiesel price was only $0.07 above diesel fuel and December 2012 when it was $0.02 below diesel fuel.  In November 2013, it was $0.12 above petroleum-based diesel fuel prices.   The average price differential over the April 2007-October 2013 period was a $0.69 premium of biodiesel prices over petroleum-based diesel fuel.  Based on this differential and the historical pattern, it looks highly doubtful that biodiesel fuel would be price competitive in the market place without a blenders’ tax credit.  In order for it to be competitive without the tax credit, feedstock costs would need to be significantly less than in recent months   As an average over the time period shown in the chart, soybean oil prices would have needed to be about $0.091 per pound lower to lower the average biodiesel cost by $0.69 per gallon.  That would have required an average soybean oil price of approximately $0.349 per pound.  The reduced soybean oil price would be expected to lower the price of soybeans by $1.05 per bushel assuming soybean meal prices were unchanged.  

click image to zoomBiodieselCosts

At this writing, there are widespread expectations among grain trade analysts that soybean prices will decline substantially by fall because of an anticipated record South American soybean crop to be harvested in late winter and early spring 2014, along with expectations that U.S. soybean acreage will increase considerably.   There is some possibility that soybean prices might decline enough to make price biodiesel competitive without the blenders’ credit.  History raises doubts about that, but prospects for a leveling off or much slower growth in the corn use for ethanol and DGS in the next few years, combined with the upward trend in corn and soybean yields and shifts of some acreage to soybeans hint that biodiesel price competitiveness without a blenders’ tax credit might be possible at times in years of good crop yields.

If the blenders’ credit is not reinstated, government mandated volumes of biodiesel blending would still be expected to keep a large quantity of biodiesel in the nation’s diesel fuel supply.

Trend in U.S. Distillate Fuel Consumption

Unlike gasoline, the nation’s consumption of distillate fuels has continued its upward trend in the last several years, as shown in Figure 5.  Data for the chart are from the Energy Information Administration (EIA) of the U.S. Department of Energy (DOE) (2).   Exact consumption data are not available, but fuel supplied is a close approximation of consumption.  Distillate fuels include No. 1 and No.2 diesel fuel as well as various other fuel oils that are used for heating oil.  The potential market for biodiesel includes home heating oil as well as diesel fuel. The last three years in Figure 5 also show monthly biodiesel production (lower right-hand corner of chart).  Biodiesel production represents a very small portion of the total domestic distillate fuels market. The record monthly biodiesel production of July-October 2013 represented only 0.36% to 0.38% of total monthly domestic distillate fuels distribution.  Alternatively, October 2013 biodiesel production accounted for 2.58% of monthly distribution of distillate fuel that contained 15 parts per million (ppm) or less of sulfur.  This distillate fuel would be a close approximation of distillate fuels used for diesel fuel.

 

Major Issue No. 1 for Biodiesel

The trend in U.S. biodiesel production in 2014 will depend on (1) whether the blenders’ credit is continued and (2) EPA’s mandated volume of biodiesel blending in diesel fuel.  Both of these decisions were not yet settled as this was written in late January.  If these concerns can be ranked in order of importance, the number one concern for biodiesel producers, fuel refiners and blenders, corn and soybean farmers, and the retail diesel fuel industry is whether the biodiesel blenders’ tax credit will be continued in 2014 and future years.  History indicates that it has been essential in maintaining profitability of the industry and in providing a positive return on investment in biodiesel production facilities.  Washington, D.C. contacts expect the tax credit will be continued for 2014, but there is no guarantee of that as this is being written.

Mandated Blending Volume, the Second Major Issue

Annual mandates for the volumes of biodiesel and other types of biofuels to be blended with U.S. motor fuels originated from the 2007 Energy Independence and Security Act (EISA).   The Environmental Protection Agency (EPA) has been assigned to translate these mandates into quantities for individual fuel blenders and to specify the total annual mandate volumes.   Two types of biofuels mandates apply to biodiesel.   First is the specific biodiesel mandate from the EISA that requires 1.0 billion gallons of bio-based diesel fuel per year for biodiesel to be blended in the nation’s diesel fuel supply for the 2012 through 2022 period.  This is a minimum amount to be blended in biodiesel.   EPA is given authority to require a higher blending level if economic conditions make that feasible.   In 2013, EPA’s mandate for biomass-based diesel fuel was 1.28 billion gallons.   EPA has proposed a continuation of this 1.28 billion gallons mandate in 2014 and 2015 (3), and the industry is waiting for an official confirmation of this number.  Last year, the final biofuels mandates were issued on August 7.  

The second type of mandate that may affect biodiesel is the “Advanced biofuels mandate”.  Biodiesel is an advanced biofuel because it reduces carbon emissions by at least 50% from EPA’s base level.  A portion of the advanced biofuels mandate can be met by biodiesel, provided that it is a lower cost alternative than other advanced biofuels.  The 2013 advanced biofuels mandate was 2.75 billion gallons.  For 2014, EPA has proposed that this mandate be reduced to 2.2 billion gallons.  Cellulosic biofuels are projected to fill 17 million gallons of the 2014 advanced biofuels mandate, up from 6 million gallons in 2013.  The major potential sources of advanced biofuels for 2014 are biodiesel and imported sugar-cane ethanol.  A very limited amount of advanced biofuel also is expected to come from other  sources of advanced biofuel production.  Reducing the advanced biofuels mandate from last year could reduce the demand for biodiesel from what it might be with no change in the mandate.  As with other biofuels mandates, EPA’s final advanced biofuels mandate for 2014 has not been announced as this is being written, and may not be announced until much later in the year.

References

1  Source: Economic Research Service, USDA, Bioenergy Statistics, tables 17 and 18

2  EIA, DOE, Monthly Energy Review
 
3   “EPA Proposes 2014 Renewable Fuel Standards, 2015 Biomass-Based Diesel Volume”, November 2013


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