Biodiesel Outlook

OMAHA (DTN) -- The federal policy roller coaster with the blenders tax credit, along with uncertainty regarding the Renewable Fuel Standard, has led to nearly 70 biodiesel plants idling 600 million gallons of production capacity in the United States in recent years.

Uncertainty has eased heading into 2016.

"History suggests biodiesel volumes exceed RFS standards when the tax incentive is in place, and we expect that to continue," said Anne Steckel, vice president of federal affairs for the National Biodiesel Board.

"But the wildcard there is imports. We are concerned that much of the growth stimulated by these good U.S. policies will come from overseas production and that's obviously not the intent of Congress or the administration."

Chances are a number of plants may restart production as a result of changes to the RFS and a one-year renewal of the $1 per-gallon credit in a federal spending package signed into law at the end of 2015.

Policy uncertainty and lower oil prices have hurt profitability in recent years, Steckel said. However, biodiesel still is cost-effective and profitable with the right policies in place, so it is expected biodiesel market conditions will improve.

"Clearly there will be more stability on the policy front and that will translate into growth and hiring," she said.

"Some of the plants that closed or idled over the last couple of years will be back operating. Some unfortunately won't because it's just too late. We will also likely see expansions at many existing plants. But generally, companies will continue to have a hard time planning for the future without stronger, more forward-looking policy."

Commodity market effects of a resurrected biodiesel industry, however, may be minimal as the current rate of soybean crushing suggests there already is plenty of room in the market to absorb an expected ramping up of biodiesel.

When it comes to biodiesel feedstocks, the U.S. Energy Information Administration said soybean oil accounted for 66% of inputs at biodiesel plants in 2015, followed by canola oil at 19% and corn oil 18%.

The EIA December 2015 monthly biodiesel report shows about 107 million gallons produced in September 2015, or about 16 million gallons lower than in August. Production came from 97 biodiesel plants with a total annual production capacity of about 2.2 billion gallons.

There were 166 biodiesel plants in the United States as of Dec. 8, 2015, according to Biodiesel Magazine, with a production capacity of nearly 2.8 billion gallons. Based on those numbers, 69 biodiesel plants are idled.

DTN Analyst Todd Hultman said because USDA's soybean crush estimate of 1.89 billion bushels in November was already enough to accommodate an increased need for soybean oil, the total soybean crush estimate remained unchanged in December.

"For that reason, I see EPA's new mandate as only slightly bullish for soybean oil, but neutral for soybeans," he said. "The bottom line is that the high previous pace of soybean crush had already been producing enough soybean oil to fulfill the requirements of this new mandate."

The biodiesel industry was on track to produce about 1.313 billion gallons for all of 2015 -- far below the RFS mandate of 1.73 billion gallons and 1.9 billion gallons in 2016. The final RFS also calls for 2 billion gallons in 2017.

As a result, in December USDA increased its estimate of soybean oil used for biodiesel from 5.2 to 5.4 billion pounds for 2015-16. So 5.4 billion pounds of soybean oil for biodiesel requires 466 million bushels of crushed soybeans compared to 449 million bushels of soybeans for USDA's November estimate of 5.2 billion pounds.

About 3.599 billion pounds of soybean oil was used for biodiesel in the first nine months of 2015, up 4.8% from the pace in 2014. That puts soybean oil used on track for 5.032 billion pounds in 2015, Hultman said.

FEDERAL POLICY

Although the updated RFS and renewed tax credit have helped, Steckel said President Barack Obama's administration "missed an opportunity to spark more robust growth and hiring with stronger RFS standards. And Congress missed an opportunity by extending the biodiesel incentive only through 2016 and continuing it as a blenders credit open to foreign fuels."

The NBB will spend much of 2016 pushing Congress to replace the blenders credit with a production credit to benefit only domestic biodiesel producers. Foreign producers are allowed to claim the credit by blending biodiesel in the United States.

The industry, however, faces challenges to changing tax policy for biodiesel in this upcoming presidential election year. Many current presidential candidates -- both Democrats and Republicans -- have expressed support for the RFS and developing biofuels. Whether Congress acts on any proposals in an expected highly politically charged year ahead remains to be seen.

Steckel said foreign-produced biodiesel already is subsidized in its countries of origin and is "frequently undercutting" U.S. producers' ability to compete.

"We believe U.S. energy and tax policy should be focused on stimulating domestic production," she said. "It doesn't make sense for U.S. taxpayers to be supporting foreign fuels, and we think the more Congress understands what's going on, the more inclined they will be to reform the credit as a domestic producer's credit."

Steckel said the industry expects to see more support as lawmakers are educated about the implications of the blender's credit.

"Ultimately the producer's incentive will continue to benefit consumers just as it does as a blenders credit, just with a more cost-effective and streamlined process focused on domestic production," she said.

The U.S. Environmental Protection Agency is set to release another RFS proposal in June 2016.

Recent agency rulemakings would suggest the administration understands the benefits of biodiesel and supports growth, Steckel said, and the industry may be able to expect that to continue.

"The next administration will be charged with administering the RFS, so we are watching closely and are pleased that there are candidates on both sides of the aisle who understand the importance of renewable fuels to the economy, the environment and our national security," she said.

"Biodiesel has been through a very difficult two years, but with the RFS back on track and additional growth expected moving forward, the future looks very bright."

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Editor's Note:

Each year, DTN presents an outlook series on what is expected for the year ahead in various areas of agriculture. This is the sixth story in a series DTN is running that looks at what farmers can expect as the hot topics for 2016 in areas such as farm finance, land prices, ag and the environment, agricultural policy, crop inputs, livestock, transportation and others. We welcome your feedback on what you think the year will be like at talk@dtn.com.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @ToddNeeleyDTN

(ES/SK)

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