Over the last three years the strong production in the grain and oilseed sectors combined with a reduction of growth in some economies, with emphasis on China, have pulled fat and oil prices lower by as much as 40%. Bean oil prices dipped as low as $0.2676 in September of 2015, before bouncing back to the $0.3000 level, where they have remained much of 2016.

During the last three years prices have jumped during the summer, particularly in the animal fats market where seasonal biodiesel demand helps to drive up prices. This was particularly evident in 2014, which saw tight supplies in the hog market due to the PED virus and lower cattle numbers after high feed prices forced many to draw down their herds. The tight supplies combined with a blenders tax credit in place since the start of the year helped to push BFT prices above SBO for much of the summer and push CWG, for brief spurts, north of the 100% market as well.
Figure 1.

In November of 2015 the EPA finally announced the long overdue RVO numbers for 2014 – 2016 along with a 2017 RVO for biomass-based diesel. This combined with a retroactive blenders tax credit for 2015 and 2016 had positive vibes reverberating throughout the market, but a crash in oil values quickly spoiled the mood.

Oversupply, and again anemic growth from once-hot economies, had steadily been eroding oil prices for the last few years. Prices took a big tumble from November to January, falling from 1.5106 on the week ending November 6th to a low of $0.9169 on January 22nd.

As growth accelerated in many developing nations after the Asian financial crisis of the late 1990’s, both commodity and energy prices experienced a boom. Prior to this period of growth, energy prices had routinely traded below agricultural products. The high oil prices and comparatively low ag prices helped pave the way for growth in ag based fuel programs as well as incentivizing growth within the oil industry. Now with the supply outweighing demand, oil prices are once again trading below ag products.
Figure 2.

The value of heating oil is shown less the feed value of fat in corn at 300% in terms of US cents per pound.

With oil prices sinking biodiesel producers have been forced to draw some hard lines on feedstock pricing, but continue to produce. In the past, the spread between ags and oil helped put biodiesel into the drivers seat on animal fats, but the sinking prices have created a market floor in which biodiesel may find itself under from time to time. Feed buyers are typically happy to include fat in rations when prices are between 300 and 350% the price of corn, at times as much as 400%. In January of this year, fat prices have dipped into the high 200’s thus keeping feed demand strong at price levels that don’t work in conjunction with biodiesel sales at or below heating oil.

It’s important to note that vertically integrated producers (who don’t need to split a tax credit) with a strong presence in the California market have been helped by the rising LCFS credit, which currently sits at $135/MT. Assuming a biodiesel blend of 50% DCO and 50% YG, the LCFS credit adds as much as $1.33/gal. Combined with the per gallon value of RINS at $1.14 and a $1.00/gal BTC, total credits equal $3.47. Assume a fuel price that’s as low as 30 under heating oil and the revenue side of the equation is still over $4.00 gal. Keep in mind there are a lot of assumptions at work to get this max figure, sources have reported finished biodiesel being sold for under $0.10/gal into the California market.

Smaller producers without an outlet into the California market who may be moving biodiesel at the 30 under mark are seeing a significant difference to that number. The revenue number looks more like a $2.50 assuming a full RIN capture and 50/50 split of the tax credit. Applying some simple algebra using a $0.60/gal operations cost figure and plants need to be south of $0.2500/lb on their feedstocks in order to generate a profit.

Again, looking at the feed vs fuel price, feed buyers are capable of paying more for product than biodiesel buyers are, a rare occurrence over the last several years. In some instance, exporters are as well and higher palm prices in Southeast Asia have raised the arbitrage bar when considering interior pricing.

Once again the biodiesel industry finds itself in a tough position, particularly those without access to sales that will generate LCFS credits. There is the expectation by many that the lower oil prices will pull ag prices lower, but history shows that this isn’t always the case. The WASDE has predicted prices for SBO to fluctuate between $0.2850 – 0.3150 this year and assuming an average of $0.3000 lb, past relationships to soybean oil would put the higher ffa feedstocks in the $0.2100 -0.2400 range and the CWG/BFT prices in the $0.2200 – 0.2800 range. With that stated, bean oil offers some guidance to the market, but has correlated weakly. This is merely a glimpse of what pricing may look like if the WASDE prediction is spot on and prices behave in lockstep with past seasonality.
Figure 3.

Please contact Ryan Standard at 630.797.5046 or [email protected] with any questions, comments or trading.