U.S. biodiesel production has increased from 343
million gallons in 2010 to 1.278 billion gallons in 2014, an increase of 272%
for the five-year period. Biodiesel production during the first ten months of
2015 reached a volume of 1.048 billion gallons, close to the total pace of
production during the first ten months of 2014, as shown in Figure 1.
January 2016 data from the Monthly Biodiesel
Production (U.S. EIA 2016) published by the U.S. Energy Information
Administration (EIA) show November 2015 biodiesel production as 106 million
gallons; however, the net imports data are only updated through October 2015.
Therefore, Figure 1 only shows the data from January to October for 2015.
While biodiesel production has been surging since
2010, the United States became a net importer of biodiesel in 2013, as shown in
Figure 1. Note that the net import figure is imports minus exports. The
positive values indicate that imports are greater than exports and the negative
values indicate that exports are greater than imports. The United States was a
net exporter of biodiesel from 2007 to 2012 and then became a net importer from
2013 to 2015.
Imports increased from 35.8 million gallons in 2012 to
342.4 million gallons in 2013. This significant increase in imports during 2013
coincided with a domestic production of 1.359 billion gallons, historically the
United States’ highest. This is likely driven by a number of factors, including
demand to satisfy the advanced biofuel and total renewable fuels standards; the
biodiesel tax credit; growing access to foreign biodiesel, mostly from
Argentina; and favorable blending economics. Note that the blenders’ tax credit
was enacted in January of that year and was in place to incentivize biodiesel
production throughout the year. This was not the case in some years, such as in
2015, when the biodiesel tax credit was enacted late in the calendar year and
made retroactive to fuel produced in that year.
In 2014, imports decreased year over year to 192.3
million gallons, but the United States remained a net importer of biodiesel
with a net import balance of 109.4 million gallons. This drop in net imports
was coupled with a reduction in domestic production of approximately 7 percent
from 2013 to 2014. This is mainly because of the chilling effects of the
uncertainty of the Renewable Fuel Standard (RFS) going forward during 2014. The
Environmental Protection Agency (EPA) proposed in November 2013 to keep the
2014 and 2015 biomass-based diesel standard at the 2013 level of 1.28 billion
gallons, as shown in Table 1. The United States biodiesel imports from January
to October 2015 rose once again, reaching a volume of 259 million gallons, representing
an increase of 103% compared with the same period in 2014.
The EPA finalized the volumetric requirements of the
RFS for biomass-based diesel for 2014 through 2017. See the final volumes for
2014 through 2017 in Table 1. Compared with the May 2015 proposed volumes, the
final volumes increased 0.03 billion gallons for 2015 and 0.1 billion gallons
for 2016 and 2017.
Along with the volume requirements, the EPA
established the associated annual percentage standards for biomass-based diesel
that apply to diesel produced or imported in the years 2014 to 2016. The
percentage standards are applied to the volume of non-renewable diesel in each
of the years and are used by obligated parties (i.e., producers and importers
of diesel fuel) to calculate their individual compliance requirements. The
final percentage standards for 2014, 2015, and 2016 are 1.41%, 1.49%, and
1.59%, respectively. In addition, the U.S. spending bill for fiscal year 2016
approved by the federal government in December 2015 included a tax package that
retroactively extends the $1 per gallon blenders’ tax credit for biodiesel and
renewable diesel for two years (January 1, 2015 through December 31, 2016).
The biodiesel tax credit allows biodiesel blenders to
receive a credit of $1 per gallon against their tax liability. In July 2015,
the U.S. Senate passed an amendment that changes the biodiesel tax credit from
a blender to a producer credit starting in 2016. The economic impact of
changing the biodiesel tax credit from a blender to a producer credit has been
analyzed extensively by Irwin (2015), and he provides interesting insights on
this ongoing debate. This proposed tax amendment has some interesting
implications for current biodiesel imports. The current policy provides tax
credits for the blending of qualified gallons of biodiesel, no matter whether
they originated in the United States or Argentina. Therefore, foreign imports
such as Argentinian biodiesel are also eligible for the tax credit, which might
create negative impacts on U.S. biodiesel production. As shown in Figure 2,
approximately 50% of U.S. biodiesel imports came from Argentina from January to
November 2015.
Argentina uses mainly soybean oil as a feedstock for
its biodiesel production. Based on a United States Department -Foreign Agricultural
Service Global Agricultural Information
Network (GAIN) report (USDA-FAS, 2015a), there are several factors that
contribute to Argentina’s biodiesel competitiveness: a large production scale
using the latest technology, no-till and biotechnology seed use, and soybean
production near industry and ports. In addition, the government of Argentina
recently (December 17, 2015) unified the official and parallel exchange rate,
creating a nearly 45% devaluation of the Argentine peso, improving competitiveness
of Argentina’s exports.
The European Union (EU) was Argentina’s most important
biodiesel export market up to mid-2013; however, at the end of 2013, the EU
imposed a high (24.6% on average) countervailing duty on Argentine biodiesel
because of dumping allegations. A competitive price spread between the soybean
oil and diesel allowed Argentina’s biodiesel exports to the United States to
increase during the last part of 2013. For example, Argentina supplied 121.5
million gallons (460 million liters or 20% of Argentina’s biodiesel production
in 2013) of biodiesel for heating oil for the United State east coast region.
According to the USDA-FAS, in 2014, Argentina’s
biodiesel exports were redirected to North Africa to supply the discretionary
blending diesel of that market. But in 2015, once again, the emphasis of
Argentina’s biodiesel exports was the U.S. market, but this time to generate
Renewable Identification Number (RINs) under RFS. In January 2015, the EPA
approved a streamlined process for imports of Argentine biodiesel. It is
expected that this trend will continue in 2016, but because of strict U.S.
traceability and certification systems that have to be followed by Argentine
biodiesel exporters, it is expected that biodiesel exports to the United States
will grow at a slower pace than that of the previous two years.
The USDA-FAS (2015a) report indicates Argentine
biodiesel exports to the United States market incur an estimated extra cost of
$0.10 to $0.13 per gallon ($30 to $40 per ton) of biodiesel. This extra cost
covers the premium paid to Argentine farmers to produce soybeans on land that
has not been deforested after 2007, the cost of segregating the biodiesel, and
the added cost of monitoring the whole chain from production until biodiesel is
exported. Based on USDA-FAS data as of July 2015, there were seven plants in
Argentina registered with the EPA that were exporting biodiesel to the U.S.
market under the RFS quota.
Feedstock Inputs
Biodiesel is sourced from a variety of resources,
which we can broadly categorize it into two groups: (1) vegetable oils such as
soybean oil, distillers’ corn oil, canola oil, and palm oil; and (2) animal
fats and recycled feeds such as choice white grease, tallow, poultry fat, and
yellow grease. As shown in Figure 3, soybean oil has been the predominant
feedstock, representing on the average 48% of total feedstock inputs in
biodiesel production for the last five years. In 2011, soybean oil accounted
for 52% of total feedstock usage; in 2014 it dropped to 48%. Based on December
2015 data from the USDA (USDA-ERS, 2015), in the 2014/15 agricultural marketing
year, 23% of U.S. soybean oil production was used to produce biodiesel.
In the meantime, the usage of corn oil and yellow
grease has increased significantly from 2011 to 2015 (January through
November). Usage of corn oil, which is generally known as distiller’s corn oil
(DCO), has more than doubled, from 4% in 2011 to 10% in 2015. Also, usage of
yellow grease, which is a recycled feed product, has also doubled in the
production of biodiesel, from 6% in 2011 to 12% in 2015.
Distiller’s corn oil has become a very cost-effective
substitute for soybean oil and all other vegetable oil feedstocks for the
production of biodiesel. It is produced at the majority of ethanol plants
today. The DCO market was relatively small prior to 2000. The production of
DCO, however, has increased over the years, especially since 2008. The main markets
for DCO are biodiesel plants, the animal feed industry, and the export market.
The EIA’s Monthly Biodiesel Production Report (U.S. EIA 2016) indicates that
970 million pounds of DCO were used to produce biodiesel in 2014 compared with
112 million pounds in 2010. Distiller’s corn oil became the second most popular
feedstock choice in the biodiesel industry in 2013, surpassing the usage of
canola oil.
Most ethanol plants have widely employed corn oil
extraction technology during the last two years. Growing demand from the
biodiesel industry in the coming years will send economic signals to ethanol
plants to implement improved technology to maximize corn oil extraction yield
and quality improvements. Extra revenue from corn oil has become an important part
of the coproduct business at U.S. ethanol plants. Corn oil revenue has been
critical in times of very low margins, most recently when energy prices plunged
in the fourth quarter of 2014.
Price discovery for DCO is not very transparent in the
coproduct market. As shown in Figure 4, DCO generally trades at a percentage of
the price of soybean oil, but some divergence in the grains markets has created
risks that need to be analyzed. The perfectly competitive grains market price
discovery process is transparent, but supply and demand of DCO can be manipulated
and price discovery is not well understood. In contrast to the grains markets,
demand for DCO can be affected just by shutting down one or two major biodiesel
plants, meaning the price of DCO can be influenced by a few major players in
the biodiesel market.
According to our pricing calculations using historical
price data, DCOs are much more closely correlated to yellow grease prices than
to soybean oil prices. We used monthly average price data from 2012 to 2015 to
calculate the correction coefficient. The simple linear correlation coefficient
between DCO and yellow grease is 0.96, indicating a strong positive
relationship. The average spread between DCO and yellow grease is $0.03 during
the 2012-2015 period.
Profitability
The biodiesel industry recorded large profits in 2011
and 2013, as shown in Figure 5. These are the only two years in the last six
years that the biodiesel tax credit was enacted at the beginning of the year to
incentivize production. This year (2016), the tax credit has been in place and
is set to expire by December.
Conclusions
The biodiesel industry is still a young industry and
it’s a small industry compared to the corn ethanol industry. Biodiesel
production has been soaring in spite of some of the uncertainty of the RFS
going forward and irregular government tax policy incentives. There is now
short-term assurance, however, until 2017 because the EPA has finalized the
volumetric requirements to meet the RFS. Industry profitability mainly depends
on government policy incentives such as the blenders’ tax credit. The cost
effectiveness of domestic production has been recently challenged by foreign
biodiesel imports, mainly from Argentina, which might undercut U.S. production.
Biodiesel imports have increased from 2013 to 2015 and that has fueled the tax
credit debate about whether credits should be given to biodiesel producers
rather than to blenders. This proposed tax policy shift would effectively limit
the United States biodiesel imports.
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