What’s Ahead in the FOG Markets?
Rising Tide – What’s Ahead in the FOG Markets Ryan Standard, Fastmarkets / The Jacobsen The following video is a capture from The Jacobsen Fuels & Feedstocks Virtual Conference...
It wasn’t supposed to be this way. Looking back at recent history, bad years in the biodiesel industry were always followed by good ones. Odd numbered years since 2009 were good years to be a biodiesel producer. Even numbered years? Not so much. In 2009, Congress finally closed the loophole that allowed “Splash and Dash” to exist.
Prospects for 2010 did not look as inviting with the loophole closed. However, what really set 2010 back was the $1-per-gallon biodiesel tax credit lapsing in 2009. In fact, every year that the credit has lapsed has been a down year for the industry.
The biodiesel tax credit has had several near death experiences; it was allowed to lapse at the end of 2009, 2011, 2013, and 2014. In 2010 and 2012, the credit was reinstated retroactively and also extended for a year, making 2011 and 2013 very good years for blenders as well as producers who shared in the credit. However, at the end of 2014, the biodiesel tax credit was only reinstated retroactively and not extended through 2015. This left a cloud of uncertainty for 2015, which already had a bad omen hanging over it thanks to a policy misstep and the EPA buckling under pressure when first proposing the 2014 and 2015 RVOs (renewable volume obligations) on November 15th, 2013.
2013 was one of those previously mentioned banner years. The tax credit was in place and biodiesel production had to over-produce in order to meet the overall advanced biofuel mandate that year. The biodiesel mandate was only 1.28 billion gallons, but the industry showed it was able to produce nearly 1.8 billion gallons. So, it came as a shock when the EPA announced that the proposed 2014 and 2015 RVOs would only be 1.28 billion gallons. 2014 looked to be a lean year for producers. The tax credit had lapsed and production margins were narrow. There was still extra work for the biodiesel industry to perform and, despite a proposed mandate of 1.28 billion gallons, the industry was able to push beyond 1.6 billion gallons.
Without the tax credit in place and the proposed biodiesel RVO set at 1.28 billion gallons, the 2015 outlook was gloomy. Hopes were that lobbying efforts and another strong showing in 2014 might be enough to sway what was rapidly becoming a stagnant growth environment for biodiesel. Rumor had it that the EPA recognized their error; even EPA Administrator Gina McCarthy came out and said that she had heard the industry’s concerns, and that the EPA was not able to accomplish what they needed to last year (2014) regarding the Renewable Fuel Standard. They promised they would get the program back on track.
RINs started off the year at a healthy $1 for the B15 vintage, but drifted back down to the mid-seventies during March. The bean oil/heating oil spread (BO-HO) stayed in the 40 to 60 cents range during this time, allowing for difficult but manageable margins for some. The market regained its footing slightly as RINs started to rise into the EPA’s planned 2015 RVO announcement set for on, or before, June 1st.
RINs managed to hit 91 cents on the day of the announcement, May 29th 2015. However, the announcement was less than what many in the biodiesel industry hoped to see, including the NBB. The 2015 RVO was set at 1.7 billion gallons. Many were hoping for something closer to 2 billion. However, the decision to only raise the deflated implied ethanol RVO to just 13.25 billion gallons left the industry with the feeling that big oil had won and ethanol would remain bound by the 10% blend wall argument.
Ethanol RINs quickly decoupled from biodiesel RINs. The 2015 D4/D6 spread which had been as narrow as 10 cents prior to the announcement quickly expanded, reaching a height of 50 cents. Biodiesel proponents may have been disheartened with the RVO, but the ethanol industry was devastated. Margins continued to narrow and the biodiesel industry continued to overproduce.
By August, biodiesel production was 69% of the 1.7 billion mandate. Production needed to only average 131 million gallons per month and was operating at a four-month monthly average of 181 million gallons. RINs continued to decline, as did diesel values and operating margins. B15’s hit a low of 39 cents on September 11th. By this time almost every biodiesel producer was fully counting on the biodiesel tax credit being reinstated for 2015 in order to make them “whole” again. The production economics were bad and getting worse. Many, if not most, were producing in the red.
Biodiesel production slowed heading into Q4, but remained well above the pace necessary to hit the 2015 RVO target. RIN prices picked up as the EPA’s November 30th deadline to finalize the 2014 through 2016 biofuel RVOs approached.
While the EPA’s announcement in May was a disappointment (especially to the ethanol industry), the November announcement hit with mixed reviews in the bio industry, but with fireworks for the ethanol industry. Biodiesel RINs jumped by 10 cents on the day of the announcement, while ethanol RINs surged 19 cents or 44.6%.
The 2015 D4 RVO was increased by 30 million gallons to 1.73 billion, the 2016 and 2017 RVOs were increased 100 million gallons to 1.9 billion and 2.0 billion respectively. The ethanol D6 RVOs were increased 630 million gallons for 2015 and 710 million for 2016. More importantly the implied ethanol volume was 14.5 billion gallons for 2016, which is above the projected 10% blend wall, as well as just 500 million gallons below the original statutory cap on the implied ethanol portion of the mandate.
It appears that the EPA made good on Gina McCarthy’s promise to put the biofuels program back on track. The blend wall appears to be pierced, and ethanol RINs have re-coupled themselves to biodiesel RINs, largely out of fear of what the draw down on D6 RIN stockpiles will be during 2016. The biodiesel tax credit (BTC) has yet to be settled, but Congress has put forth a bill, as of December 8th, to reinstate the tax credit as a blender’s credit for 2015 and extend it as such through 2016.
Rumors before December 8th had been that the tax credit would be reinstated for 2015 as a blender’s tax credit, switching to a producer’s’ tax credit in 2016. This would have been a boon for domestic producers, as it would have given them protection from foreign imports that have been cashing in on the tax credit, as well as claiming 24% of the 2015 mandate. There is still a chance this version could be passed, but as of December 8th, support appears to be behind the BTC extension.
Export and feed demand has stepped in during Q4 and established a floor for the market. For the exporters, this is a late blessing as the Jan- Oct export totals are the lowest on record, which goes back to 1967. The year is likely to end with smallest export volume on record, currently 43,000 MT behind the Jan-Oct period of 2013, which finished the year at 384,180 MT. If the 2015 Jan – Oct numbers are annualized, the 2015 export volume would be just shy of 318,000 MT. Exporters have spent much of the year with quiet phones as interior BFT prices have been much too high relative to palm oil to attract overseas attention. Even Mexico, the stalwart tallow importer of US tallow has cut back their imports by 5.5% compared to last year./