Recent trends in biodiesel prices and production profits
In a post on July 19th of this year we examined the reasons for RINs prices that were "going wild" at the time. We showed that if the RFS renewable (ethanol) mandate exceeds the E10 blendwall then the gap effectively becomes an additional biodiesel mandate due to the nesting provisions of the Renewable Fuels Standard (RFS). Since D6 ethanol RINs are valued as D4 biodiesel RINs in this circumstance, we argued that if one wanted to understand the pricing of ethanol RINs one had to dig into pricing in the biodiesel market. We showed that biodiesel prices had been on a tear relative to diesel prices through mid-July and this was the reason that all RINs prices had been surging. In today's post we explore the impact of the surging biodiesel prices on the profitability of biodiesel production.
We begin by reviewing the latest data on biodiesel and diesel prices. Figure 1 shows the weekly wholesale price of biodiesel and ultra low sulphur diesel (ULSD) at Chicago between from April 3, 2008 through September 13, 2013. Since peaking in mid-July biodiesel prices have fallen by about 50 cents per gallon, while at the same time ULSD prices have risen about 15 cents per gallon. This has substantially lessened blending losses for biodiesel (net of the $1 per gallon tax credit) and explains why D4 RINs prices have been essentially halved since the mid-July peak. The next question is whether the recent downturn in biodiesel prices has dampened the profits of biodiesel producers.
click image to zoom In order to assess biodiesel production profitability over time, we use a model of a representative Iowa plant developed at Iowa State University by Don Hofstrand. The model incorporates these key assumptions:
- 30 million gallon annual biodiesel production capacity
- Plant construction cost of $1.57 per gallon of nameplate capacity
- 50 percent debt and 50 percent equity financing
- 8.25 percent interest on 10-year loan for debt financing
- Plant operates at 100 percent of nameplate capacity
- Plant only processes soybean oil into biodiesel
- Conversion factor of 7.55 pounds of soybean oil per gallon of biodiesel
- 0.9 pounds of glycerin co-product per gallon of biodiesel
- 7 cubic feet of natural gas per gallon of biodiesel
- 0.71 pounds of methanol per gallon of biodiesel
- Other variable input costs of 25 cents per gallon of biodiesel
- Total fixed costs of 26 cents per gallon of biodiesel
This model is meant to be representative of an "average" plant constructed since 2007 to process soybean oil into biodiesel. There is certainly substantial variation in capacity, production efficiency, and feedstock across the industry and this should be kept in mind when viewing profit estimates from the model. However, limiting the feedstock to soybean oil is reasonable since it represents about 60 percent of all feedstock used to produce biodiesel in the U.S.