Use a Long Lens When Looking at Biodiesel Profits

February 27, 2014 08:48 AM
Use a Long Lens When Looking at Biodiesel Profits

Rabo AgriFrinance says biodiesel will fulfill future increases to mandated biofuel production quotas.

Ethanol isn’t the only biofuel in the crosshairs of current policy change — biodiesel could be greatly impacted by changes to the Renewable Fuel Standard (RFS), notes Sterling Liddell, V.P. Food and Agribusiness Research at Rabo AgriFinance.

Currently, adjustments to the RFS at the end of 2013 set up an environment for a stable long-term outlook for biodiesel demand. The industry saw a record level of biodiesel production in 2013 due to the expiration of the one dollar per gallon tax credit on biodiesel production and an anticipated soybean shortage in 2014, notes Liddell.

"As long as the RFS remains strong, biodiesel plants can stay open," he adds. "If the tax credit doesn’t get renewed, there could be serious consequences to profits."

According the Rabobank U.S. Biodiesel Outlook, the U.S. biodiesel industry is expected to remain commoditized with tightening margins and periods of negative returns. The industry players best positioned for success are those focused on becoming the low cost producer, gaining access to multiple feedstock sources, and accessing adequate working capital to withstand volatile margins.

"It’s really a case-by-case, state-by-state situation for biodiesel plant profitability," he adds. Rabo AgriFinance has been researching biodiesel as a potential investment prospect, and recently released a report on the renewable fuel.

A key to the future of biodiesel is the advanced biofuel component of the (RFS), which is primarily fulfilled by biodiesel. While the advanced biofuel requirement could be met using sugar and sorghum-based ethanol, domestic production of both is limited and attaining economically competitive imports is challenging.

Far more significant in supporting biodiesel production is the fact that future increases in the use of ethanol are "constrained as a result of infrastructure." This snag, acknowledged by the United States Environmental Protection Agency (EPA), is generally referred to as the "blend wall." Although the EPA has signaled that it will adjust its original RFS mandate levels during 2014, biodiesel will be less impacted than the other categories

Increases in biodiesel production will bolster demand for soy oil, corn oil, canola oil, yellow grease, and palm oil, along with other, less common inputs. With biodiesel feedstock being split roughly evenly between soy oil and all other sources, the fats and oils sector will benefit from intensified production.


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