US biodiesel faces poor production economics

US biodiesel producers are facing worsening production economics, as evidenced by a deteriorating correlation between the soybean oil-heating oil (BOHO) spread and biomass-based diesel D4 renewable information number (RIN) credits.

Historically, tighter values in the BOHO spread, an indicator of soybean oil-based biodiesel production margins, have applied downward pressure to D4 RIN values, as biodiesel producerschange their credit position, depending on the economics of their operation.

But rising renewable diesel production has swelled the supply of D4 RINS, reducing credit values and making it harder for producers to monetize RIN credits, as the correlation between the two production factors deteriorates.

Regression analysis measuring the effect of the BOHO spread on the next month's D4 price shows a decoupling of the relationship in recent years, with BOHO in the last two years about half as predictive of the change in D4 credit prices as it was in the years since 2016.

The least correlated periods were in the fourth quarter of last year and the first quarter this year. In those quarters, the predictability of the BOHO spread came to 32pc and 34pc, respectively, meaning they were not predictive. The drop coincided with falling credit prices as substantial growth in renewable diesel production oversupplied the D4 RIN market. Unlike biodiesel, renewable diesel draws from a more diverse pool of feedstocks including beef tallow and used cooking oil, making renewable diesel production economics less dependent on soybean oil.

D4 RINs have fallen at a faster rate than BOHO over the last year. D4 credits averaged 58.2¢/RIN in the first quarter, down by roughly two-thirds on the year, while BOHO narrowed by 49pc to 79.64¢/USG in the same period. D4 RIN equivalence, a 1.5x multiplier applied to the RIN value that factors in the amount of generated RINs/USG of biodiesel produced, averaged a 7.66¢/USG premium to BOHO in the first quarter, down from 87.73¢/USG a year earlier, leaving producers less room to profit from producing biodiesel.

D4 RIN equivalence ended the first quarter at a discount to BOHO, averaging 9.6¢/USG less than BOHO from 6 March-31 March, and obligated parties have had trouble recouping production costs using RINs.

Current production fundamentals could force smaller soybean oil-based biodiesel producers to reduce output in the second half of the year, as some producers have not reached purchase agreements for that period, according to market participants.

Some facilities have closed. In March, Chevron REG announced the closure of two biodiesel plants in Wisconsin and Iowa "due to market conditions."

By Payne Williams and Matthew Cope

D4 Prices Vs BOHO Spread $