Power Hour: Biodiesel Has Most to Gain from Biofuel Growth

February 28, 2014 08:30 AM

A new report on biodiesel calls for stable demand but one that is highly dependent on government policies. "Profitability will depend upon the actions of the Environmental Protection Agency (EPA) as biodiesel is not yet economically competitive with petroleum diesel and the industry was created by legislation," according to a new report by Rabobank.

Although EPA signaled November 15 that it will adjust its original Renewable Fuel Standard (RFS) mandates, biodiesel will be less impacted than other categories. EPA has yet to issue a final rule. For example, while EPA has proposed to reduce the ethanol mandate for 2014 from 14.4 to 13 billion gallons, the mandate for biodiesel has been increased from 1 billion to 1.28 billion gallons.

Equally important is the advanced biofuel component to the RFS, which was reduced from 2.75 to 2.21 billion gallons. Unlike ethanol, biodiesel qualifies as an advanced biofuel. "In the wake of the announcement, the EPA has signaled a reluctance to force ethanol into the market beyond the blend wall, thus future increases in the RFS will likely come from other sources, with biodiesel chief among them," Rabobank says.

The upshot is that actual production of biodiesel in 2014 will be somewhere between 1.28 and 2.21 billion gallons compared to output in 2013 of about 1.3 billion. Present capacity is 2.1 to 2.7 billion gallons per year, depending on which feedstock processing types and idled facilities are counted.

"Increases in biodiesel production will bolster demand for soy oil, corn oil, canola oil, yellow grease, and palm oil. With biodiesel being split roughly between soy oil and all other sources, the fats and oils sector will benefit from intensified production," the report says.

One issue impacting profitability is the loss of the $1/gal. tax credit at the beginning of 2014. Without the tax subsidy, periods of negative profits and losses would persist, Rabobank says, as was the case from mid-2009 through early 2011. While it could be retroactively applied later in the year, the industry does not believe it will be, the report notes.

"In the future, we expect the biodiesel industry to remain commoditized, characterized by tight margins and periods of negative returns," Rabobank says. "Our view will become more bearish if the tax credit is not renewed during or after 2014." Biodiesel producers best positioned will be low-cost operators and those with adequate working capital to withstand highly volatile margins, Rabobank adds.

"Because demand for biodiesel is enforced by legislation, the normal laws of supply are blurred," the report says. "If the RFS mandate remains codified, losing the $1/gal. tax credit would certainly hurt profit and loss, yet any impact would be offset by the demand for RINs (production credits) needed to grow biofuels over the long term.

As the RFS is crucial to the continued profitability of the biodiesel industry, this legislation is unlikely to be removed in the near future. We believe the biodiesel industry will continue to grow, albeit at a muted rate."



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