Biodiesel production remains profitable amid renewable diesel surge

November 22, 2023 | Brock Johnston

Despite initial production profit concerns, a recent analysis shows that U.S. biodiesel producers have weathered the rapid growth of renewable diesel much better than expected.

The analysis, completed by Scott Irwin, an economist and professor at the University of Illinois at Urbana-Champaign, reveals that despite biodiesel production profits taking an estimated average loss of -$0.54 per gallon in 2021, biodiesel producers have netted an average profit of +$0.60 per gallon for 2022 and 2023 to date – marking the most profitable period for biodiesel production since 2007.

The findings combine soybean oil prices from the U.S. Department of Agriculture’s Agricultural Marketing Service (AMS) and biodiesel prices from OPIS, a well-known industry benchmark, to determine biodiesel production profits since 2021 when the renewable diesel market began to scale significantly.

“It goes without saying that this is good news for rural biodiesel plants and our sector as a whole,” says Matt Herman, senior director of renewable products marketing at the Iowa Soybean Association (ISA).

Earlier estimates of biodiesel profits from 2021 to present day solely relied upon AMS data for biodiesel prices, which Irwin showed has since shown to be increasingly inaccurate. When relying on this inaccurate data, previous models estimated a dramatic squeeze in biodiesel profits, approaching -$0.50 per gallon. However, these dire results ran counter to the strong biodiesel production figures over the same period, according to Irwin. In his latest analysis, Irwin says his model, which now utilizes the more accurate pricing data, now agrees with the steady production volumes shown in marketplace data, which one would expect based on now updated profitability estimates.

Since 2021, renewable diesel and other biofuels production capacity has more than doubled in the U.S. Total biofuels production capacity – which includes biodiesel, renewable diesel, ethanol and other biofuels – swelled to 23 billion gallons in 2023, according to U.S. Energy Information Administration data. This represents a 6% increase in total U.S. production capacity from the year prior.

Biodiesel and renewable diesel are both considered low-carbon, diesel replacement fuels produced from renewable feedstocks such as soybean oil, used cooking oil, animal fats and more. Unlike biodiesel, which can be used in diesel engines and equipment in blends of up to 20% without modification, renewable diesel is fully fungible with conventional diesel and can be used in all engines and equipment up to 100%.

Iowa is the nation’s largest biodiesel producer, with the state’s 11 plants producing 349 million gallons in 2022. A strong Iowa biodiesel market helps farmers weather difficult economic conditions and supports Iowa’s thriving agriculture industry. By increasing the value of soybean oil, biodiesel supports 13% of the per-bushel price of soybeans. This equated to $1.78 per bushel in 2022. Biodiesel production provided a market for oil derived from nearly 162 million bushels (28%) of Iowa soybeans.

Looking ahead

In the first eight months of 2022, U.S. biofuel producers consumed 9.2 billion pounds of soy oil. Through the same period in 2023, producers have consumed an estimated 10.5 billion pounds – up roughly 10%.

“This trumpets the strength of rural biodiesel plants, especially in recent years while we’ve experienced a period of serious market expansion,” added Herman. “However, we’re not out of the woods yet.”

The analysis also concludes that strong biodiesel production, in combination with surging renewable diesel production, could lead to a surplus in D4 Renewable Information Numbers (RINs) – or the credit attached to each gallon of biodiesel and renewable diesel produced that serve as proof of compliance with the Environmental Protection Agency’s Renewable Fuel Standard mandates.

A surplus in D4 RINs could threaten to push prices further “off the cliff” than they have in recent months, according to Irwin. This could result in a rapid decrease in RIN prices, dragging soybean oil and soybean prices down with it.

Read the full analysis here.

 

---

Back