Last week we had yet another wild and downright frenetic biodiesel market as the US Biodiesel Industry tries to digest all that it has in front of it at present. RINs–how much should they be? How many are needed? Then, of course, the tax credit; but as I have stated already, I will not even address this phantom possibility until there are some tangible rumblings from Capitol Hill. This market needs to rationalize how it will be managed between counterparties, nevertheless. Then, of course, the HOBO that has come to look similar to most bio traders EKG charts after this past year!
RINS are the story though, as I have said already this year ad nauseam. They are the piece of the overall structure that clearly needs to do the work. The type of oomph it needs to fully break away from the “E” or D6 RIN has started to take place, as the B15 has broken away almost out of the gates in the New Year. The B14, however, is straggling closer to the E14/15 still, which is a bit peculiar given the most recent rumblings of the EPA’s logical plan to use the actual volumes produced and RINs generated in 2014 as the mandate target for the year. Therefore if most took the November 2013 provisional RVO figure of 1.28 billion gallons as their target, then they have quite a bit of balancing to perform in the D4 category. Then look at the D6, whereby the E14 is trading higher than the E15. How long does that persist? And more important, where is the trade on the eventuality?
The B15 are a safe bet at any quantity and certainly at this price, I would suggest. I don’t know what it is, but I get the feeling that the EPA has to understand the torment they have put this industry through and is likely poised to reward it for it’s patience, tolerance, and downright tenacity in fighting to brave the adversity. Adversity that is often a direct result of the very agency meant to be administering the program that supports the industry in the first place! Still the RIN liquidity that has taken place in the past weeks feels heavily weighted toward spread trading vs RVO procurement, so what gives there?
Firstly there appears to be plenty of disconnect in the general chaos that January and February will likely always be for the RIN market, especially once the EPA gets back to an end February reporting deadline. These are the Obligated Party’s RIN accounting months where the balancing takes place for the year, but also for future years in the case of the 20% role provision. This is a complex process these days especially after years like 2013, where all sorts of funky crossovers within the D codes took place to cover unanticipated shortfalls in the D6 and other places. What has grown out of this sort of feeding frenzy that takes place is the hot new thing: RIN spread trading. This is where you mark two lines in the sand between two different RINs in a mixture of either/or vintages and D Codes, then you bet on it getting bigger or smaller. For me, not a gambler by nature and someone who never makes it past the blackjack table at the casino, this is my kind of bio trading. Simply two moving targets, which for biodiesel is rarely the case, so no wonder it has become the hot new trade that everyone seems to be diving into, looking for the anomaly to trade the inconsistency or the anomaly. Plus since the physical market is a bit busted or at least dysfunctional, at least it offers an opportunity to generate PnL, albeit hopefully in the right direction!
Now back to the EPA for a moment as I observe an interesting anomaly myself, one in which US Citizens have to question themselves on something as absolutely inconceivable as every US Biodiesel producer has been forced to contemplate this past year.. The funny thing about these 1.7 billion gallons of actual production is the way the biodiesel market is sort of tiptoeing around it like it is some sort of fragile gift! I mean seriously, as I talk to people their voices start to change, tones soften, and folks tend to guard this likely forthcoming reality with whispers. Now I know people are spooked by the EPA, and the things they don’t do on time and clearly the power they wield in this biodiesel market, so perhaps this fear is healthy. But whispers? Shouldn’t this be spoken with excitement and cheer? I mean what else can the EPA do?
Now I know the situation at hand from the get go is preposterous, but there is no way the EPA can come and do anything else but give the US Biodiesel Industry an RVO of the approx. 1.7 Billion gallons of production, right? The answer is RIGHT folks, so please breath easy. And for the EPA not to use 2014 figures in a logical manner is simply not an option, ye of little faith! So as was the case a few years back when I first started writing about this market, it feels like a January where the D4 RIN is a buy and likely going to go for a pretty good ride for at least the first half of the year, in my view.
Shifting gears a bit, the latest on Argentina appears to be that although the overall production capacity it COULD open up is legitimately 600 million gallons, it is a far cry from what will likely hit US Shores month in and month out. Most importantly, there will definitely be a ramp up to these volumes arriving, starting this Q2 as it looks like today. So a bit contrary to my previous concerns that a wave of Argentine BBLs would hit next month, the reality is far from this, with even a modest amount of gallons likely to get booked for Q2. This point is the starting period to watch. Digging deeper into these trade deals are already in place, headed to other destinations and other markets prior to this US D4 arb opening up. Now sure some stuff will get peeled away from thinner margin deals IF there is a US home that is offering a significantly larger margin. Most of the gasoil discretionary blending these gallons were originally pointed towards can be replaced simply by gasoil in the end, which has gotten a good bit cheaper in recent months too I will add! Still, reality in Argentina is you have a second year with farmers producing a bumper crop and a government that likes to play chess with export duties in order to try to capture as many rapidly devaluing Argentines pesos as possible. Yes folks, the Bio export tax has bounced around just this past year between 15% down to the present 6% while Soybean Oil fetches a nearly 33% export duty. But this too changes, often illogically, or ‘as the wind blows’ so I am told. So just how the Argentine government treats both export tariffs is a fairly critical piece to monitor.
In general this lower 6% type duty in the historical range is not favorable for US producers in that it only widens the present arb for these new imports this US market must now contemplate. However as volumes begin to grow look for the US arb to start picking up some steam as early as Q2. The Argentine government will likely step in to take their piece of the action, which as in times past, results in a healthy increase in the duty.
The key piece on this Argentina development is communicating the prudent changes this must result in, between Cal14 and 15, in that with this new pathway essentially comes the support of a theoretical increase of 600 million gallons of demand or a volume pretty darn close to that between 2014 and 2015 RVOs. As long as this is managed correctly the US market can handle it, but it requires smart, rational, and I will add, timely management of the program by it’s administers.