Biodiesel Production Bodes Well For RIN Prices And Multi-Feedstock Firms

by: Robert Wagner

The EPA recently released Renewable Fuels Standards 2 (RFS2)production statistics for 2013 through February, and they bode well for the biodiesel and renewable diesel industries. The EPA uses a regulatory device called a Renewable Identification Number (RIN) to regulate and implement the quota mechanism to ensure the goals for the RFS2 are met. "Obligated parties", like refineries, need to buy a certain number of these RINs to remain in compliance. They provide the demand for RINs. Biofuels companies generate RINs with each gallon of fuel they produce, and that RIN is either attached to the gallon of fuel, or separated and sold on the open market. They provide the supply. One other important fact is that biofuels companies can carry 20% of their production over into the next year.

For 2013, the EPA has set a quota of 1.28 billion gallons for bio-mass based diesel. Bio-mass based diesel is biodiesel and it gets what is called a D4 RIN (see above linked report). They also set a quota of 2.75 billion gallons for advanced biofuels which get what is called a D5 RIN. Ethanol is considered a "renewable fuel" and gets what is called a D6 RIN. I will not be covering ethanol in this article. Pricing of RINs can be found by visiting the Progressive Fuels website.

In 2012, the biodiesel industry exceeded their 1 billion gallon quota by 14%, which means RIN producers have extra RINs to carry over into 2013. That results in an excess supply of RINs for 2013. On the bright side, it could have been 6% higher to reach the maximum of a 20% carryover, and RIN prices have been relatively strong year to date. Additionally, the quota was increase from 2012 to 2013 from 1 billion gallons to 1.28 billion gallons, which means the carryover is only 11% of 2013 years quota, and producers are likely to maximize their carryover of 20% this year in order to capture the maximum amount of the $1 "extenders" tax credit that passed early this year.

Practically speaking the 2013 quota of 1.28 billion gallons will likely result in a total 2013 production of 1.28 x 1.20 = 1.54 billion gallons if the maximum 20% carryover is reached. If that is the case, the 2012 carryover represents only 9% of 2013 likely production, or less than 1/2 the 20% that is likely to be carried over into 2014.

So far in 2013, data through February shows that essentially 80 million gallons/mo of biomass-based diesel has been produced for a total of 160 million gallons, or 12.51% of the 1.28 billion gallon quota. 2 months is 1/6th of a year, or 16.67% of a year, meaning that so far this year, biodiesel production is lagging full production levels by 16.67 - 12.51 = 4.15%. To reach the quota, monthly production must be 1.28/12 = 107 million gallon/mo.

So far this year, production has lagged 107 million gallons/mo by 27 million gallons/mo. To reach the quota in the remaining 10 months, production will need to be 112 gallons/mo. A substantial increase from February's 80 million gallons. Maximum monthly production in 2012 was 121 million gallons last May, so the capacity does, or at least did, exist to reach the 112 million gallons/mo level. Those numbers however are just to get to the quota, not 120% of the quota.

Through February 2013, we are only 10.435% of the way to the carryover adjusted quota of 1.54 billion gallons. To reach that level, production needs to be 138 million gallons/mo for the remaining 10 months, a monthly level not yet reached in the biodiesel industry, at least not according to the EPA statistics. According to biodiesel magazine, there are 3 billion gallons of biodiesel capacity in the U.S. and Canada, so those levels may be reachable using existing plants, but if those plants didn't produce in 2012 or 2013, much of the idle capacity must be high cost producers, and to get them to produce at full capacity should take higher RIN prices.

Because most biodiesel is produced from soy bean oil (which is a high cost feedstock), I would imagine most of the excess capacity comes from idle soybean oil plants. I currently show soy bean oil biodiesel or SME generating a negative margin (I'll address that in another article). That bodes well for the low cost biodiesel firms that can produce in today's environment because in order to meet the quota, SME effectively has to be made profitable. If the high cost producers can survive, the low cost producers should thrive. This quote is from the linked EPA data above highlighting the dominance of soybean oil in biodiesel production:

Feedstocks - There were a total of 504.7 million pounds of feedstocks used to produce biodiesel in January 2013. Soybean oil was the largest biodiesel feedstock during January 2013 with 300 million pounds consumed. The next three largest biodiesel feedstocks during the period were corn oil (60 million pounds), yellow grease (46 million pounds), and white grease (31 million pounds).

Note on the Feedstocks:

Corn oil use has now exceeded the low cost yellow grease as a feedstock. This addition of a new feedstock is likely to help keep feedstock prices low relative to soybean oil. The projected record production of corn this year may help lower ethanol production costs, which may in turn increase the supply and lower the cost of inedible corn oil. That would bode well for the "flexible feedstock" biodiesel producers that are not dependent upon soybean oil.

Ethanol RINs have also recently reached a record high, partially due to the fact that the previous inedible corn oil/distillers corn oil waste is trading around $0.38/lb, adding new meaning to the saying "one man's trash is another man's treasure." One fly in the ointment is that in the winter, the grade of biodiesel mostly made by the multi-feedstock plants in called FAME. FAME "jells" at a higher temperature than SME, and therefore sells at a discount. As we enter the warmer months, that discount usually shrinks, which will likely drive feedstock prices higher than they are today. The impact on the margins will depend upon if the RINs adjust in price enough to compensate for the higher feedstock prices.

In conclusion, the year-to-date production of biodiesel bodes well for the rest of the year for the biodiesel industry. Current production is below and level necessary to meet the 2013 RFS2 quota, let alone the carryover adjusted quota level. The increased supply of corn oil is beneficial to "multi feedstock" biodiesel firms, and is likely to help keep yellow grease and corn oil prices relatively low. The persistently high price of soybean oil, along with its major role in biodiesel production, should provide support or even boost the price of RINs going forward. As noted above, soybean oil use (300 million lbs) is over twice the amount of the other 3 feedstocks combined. Because corn oil and the greases are derivatives of ethanol and food processing, their supply is essentially fixed and inelastic. That means that soybean oil is the main feedstock to be used to meet the expanded production and quota. Soybean oil is the high cost feedstock of the bunch, and if SME survives, the other biodiesels that use the lower cost feedstocks should thrive.

Multi-feedstock Firms:

Renewable Energy Group (NASDAQ:REGI)


Syntroleum (NASDAQ:SYNM) Note: As of this writing, SYNM is currently not producing and is soon to implement a 1 for 10 reverse split. SYNM also does not produce biodiesel, they produce renewable diesel that is a "drop-in" diesel.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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